Equifax Inc. (EFX) Earnings Call Transcript & Summary

All right. Good morning, everybody. My name is Manav Patnaik. I'm Barclays' business and information services analyst. Thank you for joining us at our Global Financial Services Conference. Unfortunately, we are virtual again. Hopefully, next year, we will be back in-person. But we're very pleased to have with us today John Gamble, who's the CFO; and Dorian Hare, who heads Investor Relations with Equifax. So John and Dorian, thank you for being here.

Manav, thanks for having us.

Thanks for having us.

Just for the audience, I mean, it's going to be a fire-side chat Q&A that I'll be conducting. [Operator Instructions]. So John, perhaps, just to start off with, just could you help us walk through kind of the guidance that you had set out last quarter and some of the kind of macro assumptions perhaps for the second half of this year?

Sure. So as you know, I think someone in Open Exchange needs to get mute. But the...

Yes. Operator, can you go on mute? We can hear your line. There we go. All right, John, I think you're clear now.

We're good now? Okay. Very good. So yes. So as we talked about at the end of the second quarter, right, we've seen nice recovery across most of the markets, right? So we've seen -- we've talked about the fact that we've seen very nice recovery across USIS. In the second quarter, we saw good growth in banking and lending. Significant growth in auto, across telco, we're starting to see commercial recovery. So embedded in our assumptions and consistent with what we saw in the second quarter, we're expecting to see that continue to -- that continued progress. We saw very nice growth and progress in our International segment. Obviously, international was up very strongly in the second quarter, up 25% local currency, and we're expecting to continue to see nice growth in International as we go through the third quarter and through the second half of the year. GCS, obviously, was down in the second quarter, and we said we expect it to be down again in the third quarter. But as we move into the fourth quarter, we're expecting GCS to kind of return to growth. And obviously, the business has been performing so incredibly strong for Equifax. Our Workforce Solutions business showed very strong growth in the quarter, up 40%. And we're expecting to continue to see very strong growth out of Workforce Solutions as we move through the third quarter and into the fourth quarter. The headwind, obviously, we're seeing, as we talked about on the call in the second quarter is the mortgage market. We expect the mortgage market to be down year-on-year. I think we indicated about 23% in the third quarter and again, in the second half, continued declines in the fourth quarter. So that's the headwind, but even despite that, we're expecting to see, as we talked about, a nice performance in the third quarter and continuing improvements across most of our markets. As we've gone through the third quarter, obviously, there have been a few headwinds that I think you've been talking about. Many people have, obviously. Auto market, a little weaker than expected given the shortages in supply. And for Equifax, we're heavily concentrated in the Northeast. So there's obviously been some -- sorry, in the Southwest and the South. So there's been -- there's obviously been some weather events that would have impacted Equifax. And as you look around the world, we're expecting to see continued recoveries, but as Delta and COVID continue to impact different parts of the world differently, obviously, that impacts the growth rates in certain parts of the world. You're seeing it somewhat across Latin America, a little bit across the U.K. But overall, our performance has been obviously outstanding through the first half of the year with very, very strong growth, reported growth of 26% in the second quarter. And we're very happy with the performance and expect to continue to perform well throughout the rest of the year as we indicated.

Got it. And just on the mortgage exposure, it's roughly 30% of the total company. Can you just help break down that mortgage exposure by the different verticals, Workforce Solutions, USIS and any -- and perhaps, International as well?

Yes. So when we talk about mortgage exposure, we're generally talking about U.S. mortgage exposure and the vast majority of our mortgage exposure really is in the U.S., right? And the mortgage dynamics obviously here are very different. So -- and we have disclosed separately, we disclose each quarter, it's really split heavily between USIS and EWS, both have meaningful mortgage exposure. Dorian, last year, and he can give the numbers if you want the exposure in USIS and EWS to mortgage. USIS was north of 40%. EWS kind of a similar number. So I think as we move through the rest of this year, what's been happening, and Equifax has been able to consistently outperform the mortgage market. And that's really what's been driving the fact that we've substantially outperformed the mortgage market in the first quarter and the second quarter as we did in 2020. Dorian's put up the chart here that shows the level of outperformance. A lot of the outperformance driven by EWS and our continued focus on driving the growth of the database and the expansion of our penetration across EWS as well as continuing to launch new products. So the significant outperformance we've been able to drive through really -- you can look across this chart really over the past 5 years with EWS is driven by continued growth of records, and we've grown records, I think, about 14% year-on-year. Very good strong performance across both NPI and price, so driving higher revenue per transaction in EWS and then also a very strong performance in growing penetration. As we indicated previously, we see something north of 60% of mortgages. We get inquired upon on something north of 60% of mortgages in the market. That's up over 5% really in the past year, and we continue to drive that penetration higher. So by driving record growth, penetration growth, and higher AURs per transaction through both NPI and pricing, we've been able to deliver very nice outperformance relative to the mortgage market in EWS, which has driven our outperformance overall. And we expect to be able to continue to drive very nice outperformance, certainly not at the levels you've seen in the first quarter of 2021 or the second quarter of 2021, but we expect to continue to see very strong outperformance as we go through the rest of this year and into next year.

So in sum, I would just say that last year, it was about 30% of all Equifax, the revenue -- the mortgage revenue. And so we're really been tracking similar to that in the second quarter. It will be similar to that for the full year and that really is just because of what we talked about on this slide, the significant outperformance in the mortgage market. So I think it's certainly quite powerful. The business' performance in mortgage considering that we -- our latest guidance is for that market to decline by 8%, and for the overall revenue for our mortgage businesses to increase by 15% or more over the course of the year.

Got it. And John, just to touch on that outperformance. I think in the good times, when the mortgage market is doing well, I think people can appreciate the outperformance. How sustainable is that level of outperformance when you start seeing kind of the declines in the origination volumes?

So as shown on this chart, even back in 2017 and 2018, when you saw the mortgage market actually declining, we were able to substantially outperform the mortgage market in those periods as well by double digits. You've seen real acceleration in our ability to outperform the mortgage markets because really, as you started getting into 2019 and 2020, you saw an acceleration in our pace of adding new records. And you saw also an acceleration, we believe, in our penetration in the market because, again, and our biggest competitor right now in terms of providing income verifications into the mortgage market is really PayStub. But you've seen acceleration in both of those metrics as well as acceleration in NPI as we got approached and now exceeded 50% of nonfarm payroll in terms of the number of individuals that we received records for, right? So nonfarm payroll is something around $155 million, give or take. And it was several years ago that we got to the point where we had over half of that in our database, we're now up to about 91 million individuals in the database. We believe what happened is that occurred is that really helped to accelerate the pace at which records were added because the database is so large now that if you're a contributor, if you're a company or a payroll provider or the obvious best choice to contribute your records. And then also, it was very beneficial in terms of being able for us to accelerate the pace at which we build integrations, system-to-system integrations with our customers, with mortgage providers because it got to the point where we could provide a response more than half of the time. And as that continues to happen, you saw a substantial increase, and Dorian has the chart up here, and the percentage of transactions that were being transacted system to system and the number of customers that were transacting with a system to system and that's further accelerated in 2021. And those 2 factors we think have really driven an acceleration in our ability to outperform the mortgage market. Additionally, as we added -- as we continue to build the database, and we get to the point, as we said, we were up to about 119 million active contributions every year and approaching 500 million total records in the database. That allows us to provide a lot more history on individuals as well, right? So as we -- and that's what really led to an acceleration in the new products that we've launched over the past several years. And we think all of these things in the ecosystem have built upon themselves to allow us to outperform the mortgage market so substantially in the past several years, and we think at a pace that it should be well above what we saw back in 2017 and 2018 on a sustainable basis.

Got it. And if you're the only game in town, you talked about how you only see 60% of the mortgages that come through. Is that just because you need a sales force to go out there and tell the others that you have this instant verification tool?

Absolutely, right? So what you've seen over the past several years as we've continued to build out the database, we could respond well over half the time. Then we've been able to increase the usage of the database and increase the usage of the database on a system-to-system basis. So that really is what our mortgage sales team does is, we go out, and we consistently work with our customers to increase the number of parties that inquire upon us and within individual customers to get to the point where we see all of their volume. So for example, when we're able to transition someone from accessing the Equifax website to doing the building a system-to-system integration with us, we tend to see an increase in volume on the order of 20%. And that's because at that point, we'll see all of their volume, right? So we continue to make this consistent progress as the database gets bigger, using us becomes increasingly beneficial to any mortgage provider, and we're able to continue to drive our share higher, and then also we're able to drive our share higher with any individual customers.

Got it. Clearly, mortgage has been a strong tailwind for the Workforce Solutions business over the last year or so. Can you just talk about the other verticals in Workforce Solutions? Like what their mix is? And as we look into next year, if mortgage decelerates, what's the outlook for those other verticals?

So our nonmortgage business, and I think we provide some of this information also in our earnings deck, right? If you think about the biggest drivers of our nonmortgage verifications business, the 2 largest, by far, are government, and we'll talk about that. And then also Talent Solutions, which is -- we've seen tremendous growth in this year. But government, as we talked about on the last earnings call, is seeing very nice double-digit growth. And our government vertical is heavily built around helping local, state and federal governments to provide services to citizens, right? So think food assistance, rental assistance, health care through the Affordable Care Act and through the website to sign up for the Affordable Care Act and then also to a degree around unemployment insurance. And so it's those services we provide to government, which, again, as we continue to build out the database continues to grow substantially, that's allowed us to have nice double-digit growth in our government business. Historically, we've been very involved in helping governments sign up individuals for those benefits more rapidly because of the depth of information we have. Many of them, obviously, require information about current employment for current income. Increasingly, what we're seeing is opportunities to provide information to governments to help them fight fraud, right? So not only can we ensure that you're able to sign up for unemployment insurance appropriately, we can also help the government to determine whether or not someone's perpetrating a fraud in the unemployment insurance market. For example, claiming unemployment insurance in both -- in 2 states or working in one state and claiming in another. So we're seeing very nice growth there. An area that we're seeing substantial growth that we've talked about repeatedly this year is our -- is the social securities contract that we signed earlier in the year that went into production in August. So we're excited to see that contract go into production. We should see it grow very nicely into next year, and that we expect that to get to the point of being somewhere between $40 million and $50 million on a run rate basis. So very nice opportunity for growth of government. Another area of substantial growth and substantial opportunity, I think currently the second-largest vertical outside of government in our nonmortgage segment in verifications, is talent solutions. So increasingly, as we talked about with mortgage, as we've built out the database, not only built out current employment information, but historical employment information, and that grew substantially, it made the ability for us to effectively provide an employment history for a person to be much stronger. And starting in about mid-2020, we started building out a suite of products that were more focused and targeted on helping background screeners be able to pull historical and current employment information from the twin database. And because of our ability, our more complete ability to deliver history, we saw really nice growth in those new products really starting in the fourth quarter of last year, as we talked about the great growth we saw in the fourth quarter of this year. And then in the first and second quarter of 2021, as we saw those businesses more than double year-on-year in both the first quarter and the second quarter. Obviously, some of that was related to the recovery that's occurring in the U.S., but a significant amount of that we believe is related to the new product structure we've been able to deliver and also the increasing depth in the work number database we're able to provide. So we're expecting to see -- continue to see very nice growth in Talent Solutions. And obviously, and I'm sure we'll talk about it a little more in a minute here. That was the genesis of the Appriss acquisition, right? So we not only can now provide substantial depth in employment, but also additional information that's used by background screeners once an offer has been made and then prior to someone starting the job in the U.S. The other place we're seeing substantial growth, which is really outside verifications, is in I-9, right? And our I-9 business has seen very nice growth over the past year. And our I-9 business is helping employers remotely verify the citizenship of their entire employee base and also their new hires. And we've built out a solution that's web app based that allows individuals that have been hired to very easily sign up and to use a kiosk or -- location through the Equifax I-9 Anywhere application. And we've seen tremendous growth in that business as we move through 2020, the latter half of 2020 and into 2021 as we continue to build out the customer base that's using the I-9 Anywhere application. And as more and more companies are allowing more and more remote workers and hiring remotely and trying to get people on the floor quicker, we're seeing nice growth in I-9. The benefit we have, obviously, is with our I-9 solution to the extent that you also provide with your payroll file that you're a twin contributor, we're able to provide verifications back to you that to the extent you're audited by the federal government that you can prove that you have done I-9 verifications for your entire employee base. So I'd say, we're seeing really nice growth in government, talent solutions and I-9. UC, obviously, is a business that is a bit more cyclical, obviously, driven by the level of unemployment in the U.S. We have seen that we have an outstanding solution. We think we're the largest provider of unemployment insurance claims validations in the U.S., and we see about 1 in 5 going through our systems. So again, it's been an area that's shown very nice resiliency for us, obviously, during the pandemic. But likely, as we've talked about, we'll normalize as we move through the rest of this year.

Got it. And just to follow up on that, can you just remind us what that normalized for the rest of the year looks like for that particular business?

Sure. Dorian, can you remind everyone what we specifically said about UC revenue in the rest of the year? I don't have the number in front of me.

Yes. So actually, for UC revenue, I mean, the positive thing actually, Manav, as we've been talking about UC is that it certainly is going to be tailing off for the remainder of the year. But at the same time, as we did the acquisition of HIREtech earlier on in the year that actually has been a substantial offset to that. So that was really relatively unexpected coming into the year. So for the second quarter, you did see UC decline. You can see that one point drag on our overall growth rate. But in actuality, this is the guidance that we provided after the second quarter. You actually don't see a full drag just because of that -- those employee retention credits with HIREtech. So that is somewhat an offset. Clearly, by the back end of the year, the unemployment things are going to normalize, and we also want to let investors know the employee retention credits also are not anticipated to be -- to repeat into 2022 to the same degree that we have those in 2021.

All right. Got it. That's helpful, Dorian. John, before I go into the Appriss acquisition, just one more question on workforce. I mean both TransUnion and Experian have been talking about building their own income verification products and suites. But it doesn't sound like you're seeing them in the market. Just curious on any changes in the competitive dynamic that you've seen out there?

So clearly, we certainly have heard the same discussions as you're referencing for both TransUnion and Experian. We know they're both active in the -- and speaking about it publicly and also I think that they have talked about trying to grow those businesses nicely. But to date, we continue to -- as we would indicate, our largest competitor really remains PayStub. And we think the entire ecosystem we built out in terms of the strength of the existing twin database, the unique and in many cases, proprietary system-to-system integrations and the mortgage lenders as well as card participants and auto participants. And the very substantial suite of employer services that we've built out that we provide, not just to employers directly, but also now through the channel to payroll providers and meaning unemployment insurance claims services, W-2 services, Workforce Analytics, meaning Affordable Care Act validation services through the Health e(fx) acquisition, through the HIREtech acquisition, work opportunity tax credit capabilities that Equifax historically provided directly, but through HIREtech, we now provide through the channel to payroll processes as well. We think that entire suite of capabilities makes us extremely attractive in addition to the strength of the Twin database for a direct contributor as well as for a payroll partner. And then as we've said many times in the past, the fact that we see such enormous volume across the Twin inquiries -- across Twin inquiries, many of which we can fulfill, many of which we can't. To the extent someone contributes our records to Equifax, we're able to immediately monetize them. And for a payroll provider, where they're getting a royalty, they immediately monetize those contributions to us as well. So we continue to think we're by far the best partner for a payroll provider or a software company. And by far, the best choice for a company to contribute their records because we can provide the benefit to their employees, which obviously have no cost to the contributor across the entire lending ecosystem substantially more effectively, we think than any competitor currently in the market.

And then I would just emphasize, just add to that, just the history as well. It is just extremely important. John touched upon that earlier, about $480 million total records, including history, right? So not just the current record. It's extremely important for the mortgage market, clearly, and certainly, it's only beginning to leverage that in terms of the growth that you're starting to see in talent.

Yes. That's helpful, Dorian. John, just on Appriss Insights. The first question is, I think you had freezed the acquisition as strongly accretive to Equifax. And I just wanted to -- I was hoping you could just help flesh out strongly accretive to what because, I mean, I think the math suggests it's about 2% or low single digits accretive. So I'm just -- just maybe help us with that comment.

Yes. So I think, Manav, we're going to have to ask you to wait for us to give you some more specifics when we get to our Analyst Day, and we talk more about 2022, right? Because, again, your question is fair, strongly accretive to what. But I think all we're trying to indicate is that we think on an EPS basis, it's going to be accretive as we get into 2022 nicely. And then we can help you understand what Equifax looks like overall in 2022 as we get closer to our -- as we get into our Analyst Day discussion.

Got it. And before just talking about the specific data that Appriss holds, the strategy on Talent Solutions hub that Mark and you have talked about. If I were to put that simply, is that basically owning all the data, all the proprietary data that you can own that the background screeners use without actually being a background screener?

Well, so -- and Dorian, why don't you -- you can put up the chart that shows the -- what data is used most frequently by background screeners. But -- so what -- similar to what we're doing really broadly across if you think about USIS across other businesses, what we're trying to do is just build out the strength of our proprietary data, right? And as this chart shows in -- the most frequently used data in a background screen. Again, this is after hire and before start, right, is criminal data. And then beyond that, you see credit information, SSN validation information specifically, some other criminal information, then employment information and education. And so with the acquisition of Appriss, we think we have, by far, the strongest criminal offering, specifically related to the incarceration data which Appriss has, which is unique to Appriss and that provides a pointer to help a background screener understand where to go look to see whether or not John Gamble has a criminal history. Obviously, you know why credit information. Employment information, we've talked about with the increasing depth of the database that helps basically to provide the history on an individual in terms of their employment. And then we announced recently, a unique relationship with the -- on education with the clearinghouse that retains your education background, and we're the only party that can access that information directly using identity information only. So we think we're in a position now to be able to provide you a background screener your employment history, your educational history, validation of your identity and then also criminal history in a package, right, and our criminal pointer information in a package. And we think that is extremely beneficial to background screeners and that we can do it -- and by building out products that are specific to individual roles. So if you're being hired as a security guard, for example, well, that will be a different set of information that would be required than if you're being hired as a teacher or if you're being hired into the medical industry. Another set of information that Appriss provides is in the medical industry. They have -- we have very strong information in terms of medical employment history and also sanctions history and licensure history. So by having that additional information, we think we can provide more unique solutions into the health care industry that will be targeted specifically for health care and that would sell into background screeners and to some degree in the company. So we think the breadth of information like is the case across most of our -- most of the businesses that we operate by broadening the breadth and through the tech transformation that we've invested in, we should be able to provide unique solutions that are targeted at specific requirements of our customers, in this case, background screeners and companies and the hiring process.

Got it. And those gray bars in there, does that mean those are the areas we shouldn't be surprised to see perhaps further data acquisitions down the road from Equifax?

Well, not necessarily acquisitions, but potential partnerships, right? So the first place we go -- as I mentioned, we just signed a partnership with the National Student Clearinghouse. You can see us potentially sign partnerships around vehicular information, right? So those types of things could occur. Generally, we would start with a partnership before we would go to an acquisition.

Okay. That makes sense. And just talking about acquisitions, generally. I think you've done about 8 that add $300 million in annual revenue now. You said you're going to take a break. So can you just -- does brake mean from bigger acquisitions? Or will you still do tuck-ins? Just talk about what we should expect from a capital allocation perspective?

Yes. So I'd say, over the next 6 months, you'll -- we're going to take a break from certainly substantial acquisitions. And -- but really, the reason is just to focus on integrating, right? So obviously, we started the year with Kount, which is a substantial acquisition for us, where data integration and technology integration is significant, right? Because we have an identity business, Kount has an identity business and getting that information, the technology integrated together is important because it's something that they provide real-time response in e-commerce as well as in workflow and transactional in financial services. So we started there. And then obviously, we've gone through and done a substantial number of other acquisitions, many of them across Workforce Solutions, all of which require integration into our tech transformation. And then obviously, with Appriss, that's a very significant acquisition as well that we're going to want to integrate extremely well while we're completing the tech transformation. So I think the focus here over the next, let's say, rest of 2021, we'll say, and as we get into 2022. The reason we said the pause is really more around making sure we have the right focus and execution in integration. And then -- but we'll continue to be active in the market in terms of looking for opportunities. And to the extent something did come up that was smaller in nature, it's something we would consider, but the focus remains on integration right now.

Got it. And just with reference to the Kount acquisition, I mean, I guess, TransUnion was talking about with respect to the Neustar acquisition, the intersection of ID, marketing and credit. And I guess, Kount gives you the ID, you guys have the credit. Is marketing an area of focus for you? Or how would you characterize what your marketing capabilities are?

Yes. So I think our focus -- and if you think about Kount and you think about Equifax as historically identity and fraud business, we're more specifically focused on, let's call it, transactional identity and transactional fraud identification, right? Similar to what you think about with Equifax in terms of our credit business or our income business, quite honestly, right? So -- and so we're focused on being in the flow. For example, for our e-commerce customers as they board the customer to validate that this is a customer they should transact with to give them a trust score so they can be comfortable with transacting with that customer, but not necessarily as heavily on the marketing end as you might think about perhaps some other companies are going. And we think there's tremendous opportunity for us to continue to grow around transactional fraud and identity validation. We do have some marketing products, right? Some products that you might consider in the marketing realm. So for example, we have an InstaTouch product, very small, something we've talked about over the years as additive in our identity suite of products, where for example, we can help a participant with Kount or with Equifax in the identity flow to the extent that as they're completing a transaction, they want to put someone in a loyalty program. We can help that customer fill out the loyalty application more effectively. We would consider that part of our marketing suite, but we're not as broadly focused on the broader ecosystem that you consider e-commerce marketing. Could we get there someday? I guess it's possible. But I think right now, our focus is around building out the data assets that we've talked about really since the Kount acquisition that allow us to provide an increasing level of trust in the transactional flow, whether it be an e-commerce transaction or an account opening transaction in financial services or telco.

Got it. John, let's end the conversation with just some update on your tech transformation. I'm sure we'll get a full low down at the upcoming Investor Day. But perhaps, what's left in terms of the spend or the migration? Like where are we with that?

Yes. So as we talked about on the last earnings call, right, as we move in -- taking a step back, so our first -- the area we focused on first, obviously, is North America. And as we indicated, North America, which for us is on the order of 80% of our revenue, think.U.S. and Canada as a definition of North America. We're -- we expect, as we move into 2022, to have really the significant majority of the transformation completed, right, and really fully completed as we get through 2022. And by completed meaning customers are not only migrated to the API infrastructure and transactions are being executed across the API infrastructure, but also the back-end systems are fully integrated from that API infrastructure all the way through our ability to transact and bill, et cetera. So -- and we'll complete that entire infrastructure and ecosystem. It will be basically complete as we get into 2022. Certainly, some customers could trail into '23, but we feel very good about the pace of progress we're seeing as we move through the rest of this year, early next year as we see a significant number of customers continue to do their migration. And then also as the back-end systems start to more fully migrate as we move through '22 and slightly into '23. I think international is kind of trailing that by, what -- by say, a year, right? We've indicated we expect to see international principally complete as we get through 2023 and maybe trailing into 2024. But again, as you think about Equifax, given that on the order of 80% of our revenue is North America, really the biggest heavy lift is in North America. We've talked about the fact that you'll see a substantial reduction in our development expense, going from 2021 into 2022, that specifically target that transformation. So as we've indicated, we expect to see our development expense decline from -- by -- on the order of $100 million, down from $150 million this year related specifically to transformation. That's a significant benefit as we go from '21 into 2022. As we've talked about the savings that we're going to generate, as Dorian put up here, the top line is really focused on costs. So that $90 million in savings are the savings we'll generate in cost of goods sold. We're starting to see the savings that we generate from the tech transformation to exceed the incremental cloud costs that are occurring during migration, and that was an important inflection point that we expect to see. We said we expect to see late in 2021 and going into 2022, and we still expect to see that occur. And those savings, we'll start to see those ramp in 2022 as well as getting the savings and development expense. And that's kind of the growth savings that we'll see being driven by our tech transformation as we move into 2022. As a reminder, right, NPI, New Product Innovation, critical for us. We're seeing really nice improvement in our vitality index, meaning the percentage of revenue that's generated from new products that were launched in the past 3 years in 2021 going over 8% relative to the 5% we saw in 2020. And you'll see us really ramp up investment, which we have in 2021, but even further in 2022 to try to accelerate that NPI performance even further. So although we're going to generate nice savings as the tech transformation kind of starts to wind down as we get through 2022. Certainly, a meaningful portion of the savings will get reinvested in new products so we can accelerate growth as we're going forward.

All right. That's great. Well, John, I think we'll leave it there. I'm really looking forward to the Investor Day and the reinstating of the long-term targets. Again, it sounds like it should be a lot of positive commentary to be had. So I appreciate your time, both Dorian and John.

Thanks, Manav.

Cool, Manav. See you.

Bye. Thanks. Take care, guys.

Bye.