Equifax Inc. (EFX) Earnings Call Transcript & Summary

Good morning, everyone. I'm Ashish Sabadra, and I cover information services companies at RBC. We are really excited to have Mark, CEO of Equifax; and John, CFO of Equifax, here with us. Mark, thanks for -- and John, thanks for organizing the Investor Day last week. It was very insightful. And thanks for providing us the detailed long-term financial framework and the underlying drivers.

Maybe I'll just kick it off with the discussion of the LTFF, particularly the revenue growth. When I -- my question there was, you provided the organic and reported, but how do we think about the core growth? And the core growth was 21% in 2021, and it's expected to be like 14% in '22. So is it fair to assume that you've baked in conservatism in your LTFF, and we should see a much faster growth in the near and midterm? Thank you, Mark.

Thanks, Ashish, and it's great to be here. I appreciate you including us in the conference this year. And hopefully, next year, we'll be face to face in your conferences. It was a big milestone for us last week to put the new long-term framework in place. And at the Investor Day, we did a very detailed discussion. Dorian just put up the slide that you're referring to. And we felt that the organic revenue growth increase from 6% to 8% to 7% to 10% or 100 basis points on the low end and 200 basis points on the high end was a very strong message to our investors about the long-term growth of Equifax. And when we think about long term, which is more than 2022 or 2021, that's the kind of growth rate we expect Equifax to deliver, and including M&A, 8% to 12%, which is up that same 100 to 200 basis points. And we think that's a strong step forward about a stronger, faster-growing Equifax that's going to deliver higher margins with the margin framework of being up 50 basis points versus 25 in the past. As you point out, we've been outgrowing that framework the last couple of years. And this is intended to be a long-term framework, meaning over the long term, which is, for us, 5-plus years. And we think it's a very strong message to our investors that we're going to be growing faster in the future with higher margins, and I'm sure we'll touch on it, higher free cash flow. And in the near term, we've had some real success in the early days of our cloud and new product initiatives that are really driving our core growth for our top line growth broadly. Workforce has obviously been exceptionally strong over the last couple of years, from record growth, new products, new penetration, more poles. So that's been driving our near term, meaning '21 and '22, total and core growth. So we think this is a great framework for Equifax going forward and a strong step and a strong commitment of Equifax to share with our investors that we've got the capabilities to grow faster going forward, from the cloud, from our cloud capabilities, our differentiated data, our new product focus and increasing new products. And then, of course, the bigger role Workforce that's playing is it's a bigger part of Equifax today than it was in the past.

Yes, John?

In a normalized market, then our core growth -- our organic core growth would look something like our long-term organic growth, right? So once we get to more normal markets, they'll start to converge.

That's very helpful color, Mark and John. And absolutely, as you pointed out, there are a lot of great things that have happened over the last several years. So one thing, in particular, I do want to focus on is the cloud and NPI. That's driving 200 to 300 basis point of incremental growth, that 150-plus NPI, annually going forward. Can you just elaborate where you think you could see business segments or growth areas where we could see potentially higher contributions from the NPI?

It's really going to be across Equifax. It's broad-based. Dorian just put the slide up we showed last week that you're referring to, I think, Ashish, that you've seen our NPIs accelerate. You also see us increasing our Vitality Index, which is revenue from new products introduced over the past 3 years, growing from 5% last year to 8% this year, and with a long-term goal of in that 10% range, which we think is a big message. Where is it going to come from? All the businesses are going to participate. We're going to the Single Data Fabric, which really drives multi-data solutions. And our cloud applications really allow us to do things we weren't able to do before. And you're seeing that out of Workforce Solutions, accelerating their new product rollouts, using more historical or trended data, which is very valuable in -- for a lot of customer solutions, where instead of having -- requiring, where does Mark work today, they want to know where did I work and how much do I make over the last year or 2 years or 3 years. And of course, we price those at higher price points because of the more value in that historical data. In USIS, you're seeing multi-data solutions of combining our different data assets. You're seeing solutions coming out from our alternative data. As you recall, we bought Teletrack earlier in the third quarter. That really adds alternative data. We now have 70 million records on Americans' payment history that's, for the most part, outside of the credit file. So very, very [ great ] value from alternative data with near-prime, sub-prime, unbanked consumers. And then the other area you're going to see more and more new products coming from Equifax is around identity and fraud, which really ties into our Kount acquisition, where we're really playing into that big macro of digital and a fast-growing identity space, with more consumers interacting in really everything they do, whether it's financial services, insurance, telco, e-commerce, digitally. Meaning, they're ordering things online or accessing their account online, you have to verify who the individual is. And then the last area I'd mention on new products is going to be in the government and talent verticals that are new verticals for us. Talent is in the hiring process. And we're leveraging the work history from Workforce Solutions in their TWN database. As you know, we have a 0.5 billion historical records, which equates to -- we have 4.5 jobs on the average American, and 75 million people a year change jobs. So that background screening data element is where we're playing into that. And Appriss, our criminal justice data acquisition that we completed a few weeks ago, brings a very unique data set around has someone been in prison in the past, which is used in the hiring process. And then government's another place where we're investing in new products because the growth in social services' support to Americans, and those are generally income- or means-based. So our data provides that instant verification that someone qualifies, either they're not working or at a different income level, and they can get the services that they should receive based on what their income is. So broad-based. And I think you know the cloud really accelerates our ability to do new products. The Single Data Fabric brings all our data together, keyed and linked. And then we've also resourced it. We've really ramped up the number of people and resources that we are investing in, in order to really drive new products and really drive that going forward.

Very helpful color. A lot of good points you brought up, and we would love to get into more details on those. But before I do that, I just had a quick question on the margins as well in the LTFF, long-term framework. Obviously, a very strong 500 basis point of margin expansion from...

Well, for 4 years.

4 years, that's right, and we're going to see a big step up in '22. Question was, as we think about from '22 to '25, the 300 to 350 basis points, is there -- could we potentially see another step-up from '22 to '23 as we come -- as we complete the cloud migration? Or how should we think about that trajectory for the next 3 years?

Well, we've laid that out. Actually, Dorian put the slide up. You can see it here. We showed this on the Investor Day last Wednesday, that we've previously talked about the 175 to 200 bps next year margin enhancement. That's coming from cloud benefits, the cost savings that we're getting and also from our top line. And then we laid out a goal of, in 2025, being $7 billion of revenue and having 39% margin. So you can see the 300 and 350 that happens over the next 3 years, which we think is quite substantial. And then longer term, the long-term framework, we said we're -- have an expectation of growing 50 basis points per year margin long term, which is up from 25 in the past. In the past, we talked about 25 basis points, and now we're talking long-term 50. But of course, there's some catch-up happening here from the cloud benefits and our NPIs in top line growth in the -- between now and 2025.

Yes. No, that's very helpful. And maybe just drilling down further on the EWS. As you mentioned, Mark, it has been a phenomenal growth driver in terms of number of records. It's very impressive on how many records you've added over the last several years. A question we get from investors always is, how do we think about the record growth going forward? Is it driven by signing up one employer at a time or just adding more payroll providers that may not have shared their employment records so far? Or also, how do you go beyond the core traditional employers and go, as you mentioned, into the pensioner -- people who are on pensions and other gig economy contractors, all of those things?

Yes. It's really all of the above. In our core record growth, and Dorian put a slide up that shows our 125 million active records at the current time and 97 million uniques, that compares to the 154 million nonfarm payroll. So there's a lot of room between 97 million and 154 million. As you know, 60% of our records come from our partnerships with individual companies, where we're providing different employer services to them, to the HR manager, whether it's I-9 verification, unemployment claims, W-2 management, HCA management, just a whole suite of compliance kind of services that we provide to the HR manager. And by providing those services, we receive records. And we deliver an income and employment solution verification to that company's employees and to the HR manager for free, meaning we don't charge the company for that. And remember, if we're not doing that for the HR manager, they have to do it themselves, meaning they have a small call center that are fielding calls from a mortgage broker, an auto lender, trying to verify someone's income and employment. When Equifax does it, they offload that. They get productivity, but they also get security and privacy because we're verifying those that are using the data. So that's 60% of our records. And we do, as you point out, really add those every week. As we grow our Employer Services business, we're able to bring new records in. And as you know, we made 3 acquisitions this year that strengthen our capabilities around Work Opportunity Tax Credit and HCA benefits in order to even get stronger in the record additions and in the core business of delivering those services to the HR manager. The other roughly 40% is through partnerships with payroll processors and software companies and others that have access to data because they're doing it on an outsourced basis, generally processing payroll for a company. And just as a reminder, most companies process their own payroll, way over 50%. But those that do process it, payroll processors, we have partnerships with them, where they provide our income and employment service to their clients for free. And then we get the records, and then we pay a revenue share to the payroll processors. So that's been an area that's been growing for us, particularly in the last couple of years. There's still a long runway of companies we don't have, but we're talking to all of them. Those relationships are generally exclusive. Most of our relationships are exclusive. And we think about the individual companies as being exclusive, although they're not contractual. Because of the strength of our relationship, we've been doing income and employment or unemployment claims or I-9 for companies for a decade or 20 years. So there's long relationships there. And then beyond the nonfarm payroll, we're also focused on the gig economy. As you pointed out, it's really widening the TAM of records to collect, and we're starting to find ways to do that. That will be from individual companies that are doing driving services, like an Uber or Lyft or whatever or delivery services, where they're processing the payroll, software companies that are helping process that payroll for a gig economy -- company. And then pensioners is the other data set that we're going after. So a lot of runway here. And now for the last couple of years, we've been growing records kind of in low double digits. Through the third quarter, we're up 12% in records. And in our long-term framework for Workforce Solutions, we were clear that we expect record additions to continue in a very meaningful way going forward that will really fuel their growth. Because as a reminder, we're getting inquiries to our business, to Workforce Solutions, for the full population of consumers that a company has, whether it's a mortgage originator, an auto company or whoever. And because of our 97 million records, we have kind of high-50% hit rates. And as we add records, we can monetize them really instantly or quite quickly because we're already getting the inquiries.

And this is an area of the tech transformation that's really accelerated, right? If you think about the fact that we're now a fully cloud-native TWN database as we move forward, and as they complete their transformation with very modern APIs, we've made it much easier for companies to integrate with us directly, to integrate with us through software companies and very easy for payroll companies to board, right, relative to what they could do with another supplier, right? So not only are we the obvious place to go, as Mark indicated, we've made it extremely easy to do business with us and to integrate with us very effectively and quickly.

Very helpful color, Mark and John. And actually, that was going to be my next question, but I think you might have already answered it, is just if you could talk about the competitive environment there and the moat around the business. If you could just provide some more color on that front.

Yes. Our scale is a big advantage. We have a very large business. For the most part, we compete against paper pay stubs, that's our biggest competitor, or digital pay stubs. There's a lot of labor involved for a company that's trying to verify income and employment that way. We can verify an instant verified decision in nanoseconds, which is really very, very valuable. And Dorian put a chart up that talks about the benefits of our business. I think you know, Ashish, that TU and Experian, in particular, and a few fintechs have talked about trying to get into the space. We think it's quite challenging, given the scale of our day records. At close to 100 million, 60% of those we've accumulated over a decade of individual relationships with companies in delivering these services. And then the payroll processor arrangements that we have, the vast majority of those were exclusive. And that's the way we want them to be, and our intent is for them to all to be exclusive going forward. We've also invested a ton in the technology. It's not for the faint at heart. We've put a couple of hundred million in the business in the last few years incrementally. And we've also put over $1 billion in the business over the last decade, building out the capabilities at scale. And then the last part of our moat is the system and system integrations we have. Those are different than the credit file, meaning they're unique integration. So if you're trying to start up an operation, you can sell the data through your website, which we do quite a bit of business that way, where a customer will come to our website, get credentialed or authorized and then put in my name, social, date of birth and address and then pull down the increment employment report and pay for it. There's a lot of friction in that, meaning labor costs if you're a mortgage originator, versus an instant decision and a system-to-system integration that we can offer. And we have thousands of system and system integrations that have been built up over the years. Our scale is, I think, a really big deal and one that we think about. Now that said, we're on offense. We're investing in the business organically. We're investing in the technology. We talked about the M&A that we've done, 3 bolt-on acquisitions around the core Verifier and Employer Benefits business and, of course, the Appriss acquisitions. Acquisition makes Workforce Solutions much stronger.

Absolutely. Absolutely. And then switching gears, talking about digital identity. As you mentioned, identity is a large $19 billion addressable market. Kount was such a great acquisition. I was wondering if you could talk more about your identity offering. But also, are you predominantly focused on fraud? Or is there an opportunity to also leverage the assets that you have for helping your customers with marketing?

Yes. For the most part, we're not really -- we have a marketing business, but our identity business is really focused on verifying the identity of the consumer when they're interacting with the company. So that will be used in marketing elements but not for outbound marketing, meaning you're verifying Mark is Mark before they access their website. Identity and Fraud is a big TAM. It's a $19 billion TAM growing at 20%. So it's a very, very big space and one that we want to keep growing in. As you pointed out, we made the Kount acquisition earlier this year that brought very unique e-commerce data at scale that we didn't have. And what's really valuable in Identity and Fraud is having the signals around an individual, having more data. And if you go to our financial services side and our credit bureau side, we have a lot of signals around people's payment of their bills. We know every month they're paying a bill, that they're at that address, that they have that cell phone number. If they're paying it digitally, we have information on that. We have their cell phone payment records. So another signal that we have. We have their income and employment records, that they're being paid every 2 weeks, and they have that. So those signals are very valuable. And we've got a very attractive identity business today in USIS that leverages those differentiated data elements, and that's now stronger with the Kount acquisition. And Dorian put up some of the scale of data elements that we have between Equifax and Kount. And Kount brought those e-commerce records, which are more frequent. Most of us are doing things online to shop, check in for an airplane flight, you name it, a couple of times a day. So it's much more frequent, it's much more current and there's more of them. So the combination of the 2, between Equifax and Kount data, just really makes us stronger. And this is an area where you'll see a lot of new products coming out from Equifax as we ingest their data into our Single Data Fabric, and we have these multi-data solutions that are going to drive higher predictability. And then second is we'd like to do more M&A here in order to build out in the identity space. We think it's a place that we can be very strong in and one that we want to continue to invest in organically and inorganically.

Yes. And it's definitely an area which is growing really fast, plus with the data and the assets that you have a very strong moat around that business. Just switching gears and talking about USIS. You mentioned the opportunity with unbanked, underbanked customers. Can you talk about that opportunity and how big that could be?

Yes. It's a fast-growing space. It's not new. It's something that our customer has been focused on for quite some time. If you think about the unbanked consumer or the thinly banked consumer, if you could identify that consumer and give him the right financial product, it's generally a high-margin product for our customers. And Dorian brought up our -- some of our data assets. So you can see that there's a big population of unbanked and underbanked in the United States, something like 60 million, 70 million people that are not in the credit file. And we're building out data in order to really help our customers access that part of the population. Between DataX and Teletrack, the recent acquisition that we made, we have 70 million records or individuals in that data set that are outside, for the most part, their credit file and has payment records from like payday lenders, rent-to-own furniture companies, sales finance companies, auto dealers that are doing sub-prime, very unique payment data that can help in a traditional bank offer them a traditional financial product, generally at higher margins than their other products. And then our NCTUE database has payment records for 225 million Americans, basically everyone's cell phone record -- payment record, so another payment element. We're also building out rental data. Do you pay your rent check on time, if you don't own a home yet? These are all valuable data assets in order to provide access to credit for these kind of customers. So we see some very positive growth opportunities going forward. DataX, we bought in 2017; Teletrack, just this year. And of course, NCTUE is a data set that we've been managing for many years. And we want to keep growing our alternative data assets.

Yes. No, that's helpful. And maybe just to segue into my next question would be leveraging this alternate data assets for fintech customers. So historically, and this is prior to your tenure, I believe Equifax didn't have as much presence with the fintech customers.

Correct.

Obviously, with technology transformation, that's changed. So can you just talk about how you've -- the technology transformation plus alternate data has helped you gain greater access to fintech customers? And then maybe, if I can just add BNPL on top of it, if you could help explain how the BNPL credit decisioning differs and what the role that you play in that process.

Yes. The fintech space and add BNPL to it is a fast-growing space, $600 million, $700 million in the United States, bigger globally, growing at 20% versus traditional financial customers, growing high single digits, meaning the credit bureaus, our data market. So it's a fast-growing space. And as you point out, we didn't have the emphasis on it before I arrived 4 years ago. We ramped that up. We've got more resources on it. And we think we have a lot of levers to really participate more strongly in fintech. It starts with our cloud transformation, being cloud-enabled than most fintechs are. It allows us to connect to them more quickly. So it's a very positive kind of relationship. Second is our differentiated data. Most fintechs are looking for more data and more alternative data. And we talked about that, really, in the last question around our focus on alternative data. And a scalable alternative data is really a big deal. The other lever we have is Workforce Solutions. Many of the fintechs, particularly those doing p loans, auto loans, are using -- and mortgage fintechs are using our income and employment data. So we're already connected there. And so we already have a relationship there. So we've added resources, has become a bigger priority. And then the last piece is around Identity and Fraud. And that's broadly a solution set that we bring to fintech, but in the BNPL players, it's kind of core. They've got to verify the individual before they offer that for-payment product for a purchase of a jacket or something. The identity is a big deal. And as they move into bigger-ticket transactions, like a refrigerator or a TV, they're increasingly underwriting that consumer with credit data from -- or alternative data from Equifax because it's -- or the other credit bureaus because they have more credit exposure, which is really important. And we're also starting to see them contribute data. We're in dialogues with them about getting data elements to bring into our alternative data sets. So it's an area of focus for us. It's one we want to be bigger in. As you point out, our competitors are larger than us today, but we are focused on gaining some ground there in a fast-growing space.

And internationally, if you think about Canada, think about Australia and looking at BNPL, several players started there. And our position with BNPL players and fintech players broadly outside the U.S. is actually very strong. So as they globalize, it helps us not only internationally, but also in the U.S.

That's very helpful color, John. And maybe that's a great segue to my next question around international. Again, here pretty strong long-term financial framework of 7% to 9% growth, but it's modestly lower than your prior guidance. Again, is that baking in conservatism as we see the benefit of this technology transformation, all the incremental data element? Could we see that growth accelerate as well going forward?

Yes. We are pleased with our International business. It's a place that we're investing in. We've got a new leader that came on board. Dorian just put up the long-term growth rate. As you point out, it's down a little bit from the past. But still, 7% to 9%, we think, is a very attractive growth rate. Some of the regions growing above that range, some growing slightly below it, depending upon the competitive nature of it. And it's a place that we want to keep investing in. The ability to complete the cloud transformation in the next couple of years in international will advantage them from a top line and a margin standpoint. And then the ability to move products around the globe is a big deal. To move products between the United States and our international markets more easily by being in the cloud is a positive going forward.

Yes. And maybe just a follow-up question here would be, we haven't really talked about free cash flow. But on the -- at the Analyst Day, you talked about the solid free cash flow generation plus your ability to take on more -- like get into the 2 -- stay in the 2.5x leverage. So how should we think about use of cash? And is that -- could be a catalyst also to further accelerate growth as you buy growth accretive acquisition or acquisitions which have huge revenue synergies with the core business?

Yes. And as you know, M&A is core to our strategy. We've talked about 100 to 200 basis points of top line from M&A. We're above that in 2021. We leaned into M&A a little bit stronger, with close to $3 billion of M&A in the past 9 months or 12 months. So we believe that the right M&A -- bolt-on M&A can be highly accretive to our top line and our margins. And that's really our criteria around M&A. We want it to be growing faster than Equifax, with margins that are above Equifax's average. Back to your free cash flow point. As you point out, our free cash flow is accelerating in 2021. We'll be in the $640 million range next year, step up to $800 million. And you see, as we can get out to 2025, we get $1.4 billion-plus of free cash flow. As our top line accelerates, our margins expand and our CapEx comes down. And then we're delevering the company. So there's another $0.5 billion. So there's a sizable amount of cash to continue to invest in bolt-on M&A. And then at the right time, we've been clear that we'll come forward with returning cash to shareholders, when the time is right, around buyback and growing the dividend. So it's a really very different Equifax going forward in the past with the acceleration of our free cash flow, driven off our top line and margin growth.

And if you look at free cash flow before dividends -- this is obviously showing after dividends. But if you look at before dividends, we should be over 100% of adjusted net income. So I think we're getting into the levels where we're delivering very, very strong free cash flow conversion: 2022, good; and once you get beyond 2022, very good.

Absolutely. That's a lot of cash then to be deployed, which is great news. And then maybe just -- I know we are on top of the 30 minutes, so any closing comments, Mark and John?

First off, thanks again for having us. Last week was a big move forward for Equifax. We've wanted to have that Investor Day for quite some time. COVID really put it on the shelf for a bit. But we're energized about the future. I closed the conference -- the meeting talking about our energy for the future, our big commitment that we made around the faster growth in the top line, increased margin growth and, of course, higher free cash flow and the ability to, at the right time, return cash to shareholders. But I also talked about the fact we're just getting started. I remind ourselves, and I try to remind investors, we still haven't completed the cloud transformation. So while we're seeing the early days of the benefits, we haven't really seen all of the benefits that we're going to receive. Those are going to come in '22, '23, and we think are going to be quite substantial going forward. So we're really energized about the future going forward, and thanks for having us today.

Thank you. And absolutely very exciting story going forward, so thank you. Thanks, Mark. Thanks, John.

Thank you.

Thanks a lot.