Equifax Inc. (EFX) Earnings Call Transcript & Summary

Okay. Great. Welcome back to the conference, everyone. I think we're ready to kick off our next presentation here. My name is George Mihalos. I'm the fintech and services analyst here at Cowen. And it's my pleasure to welcome back to the conference again this year from Equifax, CEO, Mark Begor; and CFO, John Gamble. Guys, firstly, really appreciate you being here. Thank you, and look forward to doing this in person, next year hopefully.

You and me both, George. Count on it.

That's good to hear. That's good to hear. Before we kick off the festivities here, one last thing for anyone who wants to send in a question, please send it over via the platform, and I will endeavor to get to it.

A lot of stuff to talk about here, guys. So why don't we start at sort of the 10,000-foot level and work our way down. And I guess, Mark, first things first, on a macro level, can you talk a little bit about the environment right now from -- for your FI customers? And I guess, there's sort of been a consensus building around concerns for inflation, prospects for higher rates. At the same time, given stimulus, maybe some concern around tempered loan growth and the like. So just curious, what are you seeing from your bank customers? How are you guys, kind of, helping to manage this, this sort of unique environment?

I would say it's mostly a positive macro for Equifax and our competitors, given the environment. If you kind of spool back to a year ago when we were on the conference last year, it was really an uncertain time. And I think our customers really thought there was going to be some massive challenges with their consumers, that mean there will be high delinquencies coming out of this COVID environment. They put in accommodations, allowed people to defer payments. And then, of course, we both know the stimulus have been so strong here in the United States and in other markets. And then second is the pandemic resulted in people who really couldn't spend money. So what happened is, on the consumer side, a lot of consumers are healthier than they've ever been. FICO scores are up. They've been paying down, making their minimum payments and making their minimum payments. So that's a positive, meaning you've got a stronger consumer, which is helpful for lending. Second is from our customer standpoint is their balance sheets have been reducing because they haven't had the loan growth, meaning in credit cards and mortgages and auto. And they haven't had the utilization of a lot of those products. So that's another positive for our industry, meaning that they have to start growing again. And we were quite confident it was just a matter of when, not if, that we would start to see our customers reinvigorate marketing. You know I was an old credit card guy, so I operated GE Capital's credit card business through the '08-'09 recession. I did what we saw our customers do coming into COVID is really pull back, and I did the same thing. And then once you see some stability, once you see where the consumer is, when you start to see the economy coming back, you have to start originating again, because you got to grow your book. So that's what we saw. I think we talked about it on the first quarter earnings call. We saw that in March and April, marketing spend start to come back. And we expect that recovery to continue as we go forward. And remember, this plays into a couple of big macros that were strong coming into COVID and were only strengthened through COVID. Number one is the power of data, more data, more alternative data. That's been a big macro for 5-plus years in our industry. It's only accelerated. Our customers want to use more alternative data, meaning beyond the credit file, for underwriting their consumers. So that's a very positive thing for Equifax and our competitors is we can bring those solutions with the alternative data to our customers. The second is around digital. Digital has exploded so the value of identity and fraud data, which is -- plays into our account acquisition, is increasingly important. All of these macros were accelerated with COVID and are really positive for us going forward, more data. And our cloud investment also helps facilitate that. I'm sure we'll touch on that through our conversation.

Well, that's great color. Really, really appreciate it. And nice to hear that sort of momentum continuing in the environment continuing to improve. Just on that note around sort of thin file or, kind of, nontraditional consumers, little bit of current events here, right? There are some reports out there about some large banks looking to make more of a push to extend credit to, I guess, what I call more sort of a thin file, nontraditional credit customers. Sounds like they're looking maybe to bypass some of the traditional data that the bureaus have made available. Curious how you guys are thinking about that as an opportunity or threat? And my understanding is you guys are still playing a role in the data. So maybe you can kind of elaborate on that a little bit.

No, 100%. I wouldn't characterize it as them trying to bypass the credit file. The issue is the credit files are thin on that set of customers. So they want to augment the credit file. Or there's a what's called a no hit, meaning the consumer doesn't have a credit file because they don't have any formal financial products. So this is not new. It's something that's been a macro -- a long -- it really plays in that data macro. In this case, targeting the near prime and subprime space. Those customers are very profitable if you can find the right ones with the right data. And our customers want to grow with those kind of data customers. If you think about a lot of the fintechs really are focused on that near prime, subprime space because of the profitability, if with the right level of alternative data, you can identify the right consumer. So our customers have been chasing that for years. We've been investing in it in alternative data in order to help identify who the right customers are because, as we pointed out, the credit files typically doesn't have a lot of history on it. So you have to use alternative data on like rental payments. Or in our case, our NC Plus cell phone utility records. That's a really valuable data asset for a consumer that maybe doesn't have a formal financial product, meaning they don't have a credit card, so there's no payment history in the credit file on the credit card, but they do have a cell phone, and most consumers do. We have a very rich data set on that at most Americans cell phone payment records. And we can deliver that data to our customers that shows that Mark paid his cell phone bill every month for the last 4 years, never missed a payment. That's a valuable indication that Mark's going to pay his credit card bill. Same thing with rental payments. As you know, we bought a company called DataX in 2018, that brings in payday lenders, rent-to-own companies. Again, rich data set for that 40 million to 50 million U.S. consumers that don't have a number of formal financial products. So that's another place that we're investing. And of course, our income and employment data and Workforce Solutions is immensely valuable. If you can add, I paid my cell phone on time, I've made my rental payments on time, the DataX elements, and Mark's working and this is how much he makes. That's a valuable data set to underwrite Mark and say, "Okay, let's give him his first credit card." And then that credit card typically has a higher APR. And -- so that alternative data is very powerful. It's that big macro. And there's an element of positivity in Washington. A lot of the Democrats are quite positive around road to credit or access to credit. And they spend a lot of time talking to Equifax and the other credit bureaus about what are we doing to add more alternative data to our data sets, and we talked about all the things that we're doing there. And then to the financial institutions, the banks, encouraging them to use this data to provide access to those that are less privileged. So that's what prompted, I think, the article 2 weeks ago, I believe, in the Wall Street Journal, was just that focus between what's been happening between the credit bureaus and the banks and -- in Washington. And we have a big focus there. We think there's a big opportunity. And we believe that Equifax has, at scale, differentiated data that is far superior to our competitors, meaning work number. No one else has that. Our NC Plus cell phone utility data, no one else has that. Our IXI wealth data, no one else has that. So we have some real scale data assets that really plays well when you add the cloud capabilities on top of it to really help our customers grow as they use more data in this big macro that's underway.

Okay. That makes sense. So clear as day, it sounds like this is an opportunity that you're not viewing this as much of a threat at all. This is opening something up for you at the end of the day.

No. Just on the threat point, like there's really no one underwriting without using really a traditional credit file. Now the BNPL players that are underwriting a 4 payments on a pair of jeans or a T-shirt or some kind of lower ticket purchase, they're generally doing those and use -- they are using data around identity. So that's where we play in with our data is they have to verify Mark is Mark when they're going to let them make 4 payments on his blue jeans. But they're starting to move up into bigger ticket transactions. You can't do that on a refrigerator or a couch, and they want to go in that direction. So we're talking to all of them about using the credit file and alternative data. And of course, using our identity data around verifying Mark is Mark. So there's a lot of power in the industry that we're playing in.

Okay. Super helpful. Super helpful. Why don't we rewind a little bit to the first quarter, some of the outperformance there. We'll touch on mortgage. I know everyone wants to talk about mortgage and the like. So we'll get there. But Mark, John, maybe one of you can kind of talk a little bit about what was outperforming specifically outside of mortgage. You guys certainly sound more encouraging -- encouraged on the nonmortgage side of the business, both within USIS and also EWS. Maybe talk a little bit about what you're seeing there in those markets outside of mortgage.

Yes. And I'll let John jump in, too. We did -- first off, we expected to see a recovery. And it was hard to figure out when. And we really started to see signs of that late in 2020 as we came into the first quarter. And then, of course, as we talked about it in March and April, we already talked around like card issuers starting to spend more on marketing. And when you look at Equifax over the last 5 quarters, we've clearly outperformed broadly. We've had the mortgage macro as a tailwind, which I'm sure we'll touch on. We've tried to be quite transparent about our outperformance versus mortgage -- mortgage market. I think -- we think that's really powerful. You should expect us to, and we focus on outperforming all of our underlying markets. So we can come back to mortgage, but we've had strong outperformance in mortgage and Workforce Solutions, from records and new products and pricing and penetration and new verticals. And then, of course, in USIS from really pricing and product has really been driving there. So in the nonmortgage side, it was fairly broad-based. It's -- as you know, nonmortgage is close to 70% of Equifax. If you go in USIS, we saw card recovery. We saw auto, which was somewhat bumpy during COVID. And now there's a little bit of pressure from auto as far as inventory. There isn't enough inventory out there. But auto, it was clearly coming back. Personal loans coming back. Marketing, we talked about, coming back. If you go over to Workforce Solutions, those same verticals all benefit Workforce Solutions. And of course, you've got the benefit of records. More records allow us to have higher hit rates in our mortgage business and Workforce Solutions, and in our nonmortgage businesses. And then you go into some other verticals in Workforce Solutions, where we're seeing some strong kind of improvements. Government, which has been fairly steady through social services rollouts. Talent solutions, which really benefits from the hiring macro. A very unique business at Equifax where we leverage the historical data that we have. We talk a lot about our 90 million uniques every pay period in Workforce Solutions with the income and employment data. We have 450 million total records. That work history of where did George work over the last 5 years is very important in the hiring process. There's 70 million people hired every year in the United States or they change jobs. And one of the key verifications that takes place is where did Mark work over the last couple of years. I want to verify his employment, so that's another valuable element. And then international, which has clearly been impacted by COVID, we've seen some markets learn to adapt with COVID. Canada, very strong first quarter. Australia, a fourth and first quarter that was quite strong, same with Canada. So we're seeing some of those markets, although still some challenged markets that are slower recovering, like Latin America. And John, what else would you add to that?

I think you covered it pretty completely, right? There was -- we also saw some recovery in insurance from the U.S., so we had a strong performance in the insurance market. And we saw really nice growth in identity and fraud, not just in the U.S. but in some international markets. So it was really very broad-based.

Great. Yes. That identity and fraud, I think that's going to be a gift that keeps on giving for a long time with everything going on with [ the President ] and the like. So I'm going to queue the drum roll because this is the question we've been getting most consistently since 1Q earnings and we sort of continue to get it. And that's going to be on the mortgage side, the relationship between USIS mortgage revenue and the EWS mortgage revenue, which has been just -- I mean, absolutely stellar. I think if you look over most of 2020, EWS revenue, mortgage revenue was almost 2x around there what you guys did in USIS. When we look at first quarter '21, I mean it was something up like, I think, over 4x. That's what I've got down here. Just curious, what's driving that gap that's expanding here between the 2 growth rates? And is that sustainable? Or is this just a function of what's been going on with COVID to some extent that's allowed you to outperform that much?

Yes, we wouldn't give it a COVID characterization. I think it's a lot of the fundamentals and the uniqueness of Workforce Solutions. You start with, if you want to compare -- first off, I think we've had a strong history of outperforming our underlying markets. That's what data analytic companies do. We do it in nonmortgage, we do it in mortgage. In mortgage, we've got a long history, and we've got data that we shared with you, George, and with our investors around our outperformance through lots of economic cycles, meaning -- and what are the levers that both businesses have? Both businesses have the ability to price -- higher price allows you to grow faster than the market. Meaning in the down market, if you're bringing price up, you're offsetting some of that down market. In an up market, you're growing faster than the market. Product is the second one. And on the product one, we've done some big investments over the last 12 to 18 months around more product people to really leverage our cloud investments. And the cloud investment has really opened up, particularly in Workforce Solutions in the last 12 to 18 months, an ability to roll out products that were just difficult to do in our legacy environment before. And if you think about workforce, that business is only 10 years old. At scale, it's only 2 years old, meaning getting to 50% of the nonfarm payroll, somewhere in that neighborhood. And it was really limited in its ability to do more than that $20 to $30 income and employment report that we sell to our customers that has 50 attributes in it. And you've seen us roll out in the last 12 months close to a dozen new products in mortgage and talent solutions and credit cards. But just in mortgage, since that's your question, we're delivering more value to our customers, meaning more history or more data elements or a co-borrower report. For example, a lot of mortgages are originated by 2 people, and those were pricing instead of $20 to $30 at $150, $175, $200. So you get a combination of price and product really driving margins and revenue in Workforce Solutions. On pure price, we clearly have more leverage there. In the first quarter, we typically roll out a lot of our price increases broadly. And so you're seeing some of that probably in the first quarter. And then -- so that's both businesses have pricing product, where you're bringing new solutions to market that deliver that outperformance. And then if you go over to Workforce Solutions, you've got some very unique levers that only workforce has, records additions. And records were up 10% year-over-year in the first quarter. That's fairly linear, meaning -- because we're getting inquiries from our customers for all of their customers, their consumers, but we only have, today, 60% of the 90 million of nonfarm payroll, roughly 60 -- 50% to 55% to 60% hit rates depending upon the use case. The other 45%, we're not able to fulfill. And as we add records, those get monetized really instantly. So that's -- a record addition is a very powerful ability for workforce. And as you know, there's a long runway between 90 million and 157 million, 158 million nonfarm payroll. And then add in gig economy and pensioners. Those are other areas we're trying to widen the data set. So record additions are clearly a lever for workforce that's quite unique. So more specifically in mortgage, we don't see every mortgage application. There's a lot of customers out there that still do manual verifications. Now we're converting them to using our data set. We see roughly 60% of mortgages and Workforce Solutions. That's growing every year as we grow our customer base. So that's an opportunity. Of the mortgages we do see, close to 1/3 of those revenue we get comes from inquiries that come directly to our website versus system to system. So you've got someone, a mortgage originator or one of their departments is keying into our website, getting credentialed so they can go in, putting in my name, social, date of birth and then pulling down the report. There's a lot of friction with that, there's a lot of slow pace to it. 60% -- more than 60%, in fact close to 70% of our revenue comes from system-to-system integration. So we get a 20% lift in revenue when we move from manual to system-to-system integration. So that's another lift for Workforce Solutions. Then you go to a number of pulls inside of mortgage. We've talked before that the average credit pull in a mortgage application is 4 to 5. You pull it at application, you pull it along the way because the originator wants to make sure that Mark's credit quality doesn't change in that 60-plus days of the application process because they're spending a lot of money processing the application. They want to bail out if I'm not going to be able to close. The same thing is happening with income and employment data, where it's being pulled more often. We're pulled close to 2x now versus that 4 to 5. That's up from 1 a couple of years ago. And we expect that to continue to grow. And with the scale of the data set, that's a big opportunity. So there's just a lot of levers that allow the outperformance. You asked the question is like the first quarter growth rate sustainable? No, that's not the long-term growth rate of Workforce Solutions. But we're energized about how it's been growing in the past, outgrowing its underlying markets. We expect that to continue going forward. We'll give some real visibility at our Investor Day later this year, and we'll roll out our long term framework. And we'll give visibility around what we think workforce's growth rate to be. But we've got a lot of confidence that workforce is going to be growing faster than the rest of Equifax, mortgage, nonmortgage, government, talent solutions, our benefit solutions business, where it provides services to HR managers, all of those businesses have underlying growth rates that are faster than the rest of Equifax. And of course, at margins that are substantially accretive to the rest of Equifax's margins.