Equifax Inc. (EFX) Earnings Call Transcript & Summary

Good morning, everyone. This is Andrew Steinerman, your business information service analyst here at JPMorgan. This is our annual Ultimate Services Investor Conference. This is the Equifax session. This is a quick reminder, on your conference website that you're watching this webinar is our just updated annual -- or quarterly import services data book. You can download it digitally or e-mail us for a copy. So this is a fireside chat session. We're with John Gamble, CFO; IR Director, Dorian Hare, and we will have questions for each of them, and it will be pretty much an interview format. Anyhow, Dorian and John, thanks for joining us here today.

Thanks for having us.

Thanks for having us, Andrew

Okay. So you guys just spent a massive amount of time with a very credible and thorough Investor Day, and we definitely appreciated that. But just for somebody who might not have been at the Investor Day, could you just lay out a long-term framework that was shared with the investors at that day and why this is the most important thing for the company to focus on, and what gives you confidence in this growth algorithm?

Sure. So we indicated that we expect to grow revenue 8% to 12% at 7% to 10% organically and 1% to 2% from acquisitions. And that we also expect to be able to grow EBITDA margins 50 basis points a year. And then that allows us to grow cash EPS very substantially, we think 12% to 16%. So the -- we're excited about the growth algorithm, and we're excited to really be able to put the long-term framework back into place. We haven't had one since 2017. And what you've seen is very nice acceleration in the organic growth rate of the company, up 100 to 200 basis points at the bottom and the top end of the ranges. And really, the strong driver of that is the real acceleration in 2 areas, right? First, obviously, Workforce Solutions, and I'm sure we'll talk more about that, but we're very excited about the huge growth we've been able to deliver in Workforce Solutions over the past 3 to 4 years. And really, the confidence we have in that business is because of the multitude of drivers that it has to deliver consistent long-term growth that we think of 13% to 15%, which is obviously even below the levels we've been delivering recently. And we're excited about their ability to do that through record growth, through growing their penetration, through expanding markets, not just through expanding markets beyond mortgage into talent solutions, into government and expanding in those markets aggressively as well as in other lending markets. So we think they have huge opportunities to continue to grow and lots of levers to deliver that 13% to 15% growth, which is a big portion of the long-term growth being delivered by Equifax. We're also excited in our USIS business about the expanded growth they can deliver through the expansion of their alternative data assets and what we've been able to deliver over the past several years in terms of alternative data growth as well as growth in identity and fraud and moving into e-commerce. And we think those 2 things are -- will help us with the expanded analytics that we have through the completion of our tech transformation, which was obviously the other major initiative that's been going on over the past 3 to 4 years. And as we complete the move to the cloud, to the Equifax cloud and to a real cloud-native infrastructure where we're utilizing really cloud native services from our cloud vendors at Google, that we feel very, very good about our ability to accelerate, the ability to utilize multidata assets and create new solutions and make them easier to buy and faster to deliver. So we think the combination of those things gives us a lot of comfort with our ability to deliver our long-term revenue model. And the very high variable margins we see gives us confidence in our ability to deliver the margin expansion. And over the next 4 years, we're talking about 500 basis points of growth in EBITDA margins. And again, our confidence there is the growth in the business as we just talked about, but also the fact that we expect to see substantial benefits from that transformation over this period. We're going to see a reduction in investment, which was something we're managing well and we expect to execute on, and we talked about it specifically in 2022. But also improvement in our cost of goods sold as we continue to reduce the cost to deliver as we decom existing facilities and increasingly move to cloud-native framework. So we think the growth rate in margin that you're seeing beyond 2022 and even from '21 to '22 is about half driven, right, by the standard growth that we talked about in terms of 50 basis points a year and then the accelerated growth that we're seeing in margins from the effects of -- from the benefits of the cloud transformation. So in summary, that's kind of the high level.

Right. So just go over that 7% to 10% organic constant currency revenue growth, and I know the old number was 6% to 8%, but 7% to 10% is obviously an impressive ambition. How do you want us to hold you accountable to that 7% to 10%? Obviously, you've already given prelimited guidance for '22, you're not going to be within that 7% to 10% in '22. So is 7% to 10% maybe an ex-mortgage number, or is 7% to 10% maybe a CAGR from now until -- to 2025? Just tell me how we should hold you accountable to the 7% to 10%.

I think 7% to 10% is what we call normalized growth, right? So over a cycle, assuming kind of normal economic growth, normal mortgage performance. And obviously, we're in a very different time with mortgage right now as we saw huge growth in mortgage in '20 and then declines in '21 and '22 and likely '23. But we think over a normal cycle with a more normalized mortgage market, we'll deliver that 7% to 10% organic growth. Importantly, next year, right, we've been talking about core organic growth for quite some time. And next year, we're talking about core organic growth of -- in the neighborhood of 11%. And if you think about a normalized economic environment, what core excludes, right, is the mortgage market itself, and then the unusual circumstance we had in the past couple of years with unemployment insurance claims and ERC, right? And well, as you go forward into more normal market, mortgage should not be a substantial driver in a normalized period of movements in the underlying market and UC actually grows slower right, than our business overall. So as we move into the future and we see a more normalized mortgage market, we would expect to see core organic and, let's call it, normal organic, full organic to pretty much -- to come together and look very similar to each other.

Right, right, right. And so just as a reminder for people who don't exactly know what core means, and I know it's well documented in that footnote on the slide hereon. What Core essentially does is it gives Equifax credit for outperformance of mortgage market when mortgage revenues grow faster at Equifax and mortgage market, but it does not, let's say, give credit or hold back just the mortgage market activity itself. And with that in mind, since you put up the slide, what gives you confidence, John, that next year, which really is a critical year, which you gave as a 2022 illustrated guide, that you're going to have that outperformance of mortgage market revenues -- sorry, mortgage market revenues will perform mortgage market activity. And I'm going to give you a specific question. I believe that kind of over the last year or 2, the number of holes during a mortgage application have increased, and that gives more revenue. Do you feel like that kind of increased number of holes during mortgage application process will continue into '22, and then one of the other drivers that will drive outperformance of Equifax's mortgage revenues versus the underlying mortgage market activity.

Sure. And just as a reminder, right, what we talked about on that 11% is that the majority of that is being driven by non-mortgage growth, right? So it's growth in the underlying non-mortgage Workforce Solutions markets as well as USIS and International. So that's -- so we think the bulk of that core revenue growth of 11% is delivered by non-mortgage markets. Within mortgage outperformance, the biggest driver is Workforce Solutions. And what gives us confidence is really kind of the trend of execution we've seen over the past several years in adding records, which is a very substantial benefit to non-mortgage growth as we add more records that obviously, we outperformed the underlying mortgage market substantially, and increasing penetration. And by penetration, what I'm referring to is the number of mortgages that are executed where we see an inquiry to the TWN database. That's continued to grow over the past several years, and also our ability to launch new products, right? We've seen very nice performance in Workforce Solutions over the past several years in new products. So we think those 3 factors actually affect all of the markets that the verification services part of Workforce Solutions serves. And then we have additional confidence really built around the fact that we're seeing very, very good performance not only in our mortgage business and our non-mortgage financial services business, but also in our non-mortgage businesses in EWS. So that's why we feel confident in the 60 -- in the north of 50% of that growth rate that's being driven by non-mortgage. And what I just described also is what gives us confidence that we'll outperform the mortgage market so nicely next year as well.

And just to supplement that, obviously, USIS is going to contribute to that as well. Andrew, and Sid actually came out and said that over time, not necessarily talking about 2022, that our USIS business can outperform the mortgage market by 4% to 6% on average, which we also think is quite impressive. They've been very consistent about outperforming the mortgage market. And so when you put that together, the USIS and EWS combined, our overall guidance for next year, our thinking is that our framework is for 15% decline in the mortgage market. We said that we can grow in mortgage as an overall U.S. B2B business with the USIS and EWS combined.

Let's get back to EWS. Obviously, it's your biggest invest business. In some ways, it's really exciting that not just it's a bigger mix of revenues, but you also took up your medium-term organic growth algorithm compared to the old algorithm. And that's definitely impressive. But I also want to kind of look back to look for is like when you look at over the previous, let's call it, 5 years, you greatly outperformed your old algorithm in EWS massively really. And so maybe the old algorithm was just too low to begin with. And like maybe the algorithm that you just gave on Analyst Day is also on the low side, given, again, EWS organic revenue growth over the last 5 years.

Yes. So in terms of the drivers over the past 5 years, I think what you saw as we move through 2017, 2018, 2019, is we hit an inflection point, right? We got to the point where the size of the database -- we got beyond half of U.S. nonfarm payroll first we approached them. And we got beyond it. And what started to happen is the growth of the database, and therefore, the growth of the -- our ability to work with our customers to build system-to-system integrations, just really accelerated, right? As it got to the point where we could deliver a response to an inquiry half the time, slightly more than half the time, it really became worthwhile first, for the mortgage participants, but then increasingly, for other financial services participants, to build direct integrations into the work number to build this into their workflow. And as that happened, we kind of -- as the multisided model kind of works, right, as we substantially increase the number of participants providing inquiries, it also increase the value of the database for contributors, right? Because if you think about the growth in the database, we continue to be able to add new direct contributors and about 60% of our contributors continue to be direct, right? And as we've continued to add those, if you're a customer, right, if you're a contributor, you want to contribute to the database that's going to have the most inquiries, because what you're trying to do as a company is eliminate the requirement for you to have a call center to validate employment and income for your employees, and they're trying to make that the most effective process you possibly can. As that continues to happen, right, if you're a payroll provider, right, and as we started expanding our partnerships with payroll providers more aggressively, we're also the best partner for them because we have the most expansive database with the most inquiries and their customers, they're able to provide the best service, right, the most offloading of inquiries to a third party if they integrate with Equifax. And then also financially, the royalties they generate are transaction-based. So since the vast majority of transactions come through Equifax today, our percentage of transactions is so much larger than any peer, our ability to deliver a royalty back to those payroll partners is much higher than any of our competitors. So we became the most attractive party to partner with as well as the most attractive party to contribute to. And as the database grew even faster, we became the most attractive party to integrate to if you're a lender. And on top of that, just exciting, what happened is as the database grew so rapidly, not only did current records grow, and we're up to almost 100 million individuals where we have data on the database, but the total records grew dramatically to over 500 million jobs sitting on the work number. And what that did is really make our effectiveness in Talent Solutions substantially improving. We can now provide a much greater employment history on an inquiry than we ever could before; 3, 4, 5, 6 jobs. So our ability, right, to work with background screeners, with our partners in the Talent Solutions business to provide them with a more complete solution on employment income history and then by adding what we did around educational history and then with the acquisition of APRs around criminal, we can provide a much more complete solution to them to make them more effective in their jobs and us to be able to grow that revenue so dramatically as well. So we feel very good about our ability to deliver long-term growth that's very substantial and certainly in that 13% to 15% range in the work number. We agree we've done much better than that over the past several years. But again, remember, this is a long-term target. And we think growing at 15% over the long term for the business this size would be a nice outcome.

Right. And when you say long-term target, you did get, let's just call it, one kind of key point of 2025 EPS, does this long-term algorithm apply past 2025, the overall framework?

Absolutely, yes. We tried to give a scenario to show that executing against the framework, what it would do in the relative near term. And quite honestly, also -- we wanted to show perspective on the fact that our margins we expect to grow so much faster in the near term than over the long-term model, what that would look like over the period at which we'll complete the tech transformation. So we thought it was important to share that information, but the model itself absolutely goes beyond 2025.

Right. So I want to get back to 2025 a little bit, but I just -- I have EWS in my head, One of the things that really stood out to me for Rudy Ploder, who's the President of EWS at Analyst Day was the supply network of how you get the Twin's database rising from many, many sources. But you did just mention, John, that you feel like Equifax is an ideal partner to payroll processes and HR software fronts. And I wanted to dive -- so yes, that's the slide I love. The left-hand side of the slide is just a rich ecosystem. But I did want to dive into the payroll processors as partners, and I know that's HR software as well. And there was a question at Analyst Day about exclusivities with payroll processors. And I definitely heard you just now that, John, you feel like your idea of a partner -- of course the payroll process will make more from us anyhow, because of our coverage, we're kind of the go-to player. And your team responded something like this. I'm reading from the [indiscernible]: "The vast majority, virtually all of our relationships are exclusive." And again, this was about the payroll processes. Obviously, there's 1 payroll processor that just had an Analyst Day and talked about their cloud that's not exclusive on this front. Is that really kind of just the exception to the rule? Because again, when I heard those words, vast majority, virtually all of our relationships are exclusive, that it just sounds like it's a rare exception for payroll processor relationships with EWS to be nonexclusive.

Andrew, I would just be repeating what you just read, right? So it is certainly the exception, and it's a relatively small number of exceptions, where we don't have an exclusive relationship with the payroll partner. And I'd just like to add one thing to the comment, right, which is we not only provide, we think, the best financial outcome for a payroll partner just because of our size and volume, right? But we also think we provide the best solution to their customers, right? I mean we have the most modern tech stack, right, the most complete set of services that the payroll processor can then offer to their customer around employment and income verification. And our level of investment in that tech stack and new solutions related to that, we think, is dramatically higher than anyone else in our industry, right? And it's enabled by our scale. We really accept that. But that is an advantage we have. And tech transformation is something that's been a huge benefit, we believe, to the Workforce Solutions business. The verifications database has made tremendous progress in moving into a GCP cloud-native environment. And because of that, the services they can offer are expanding rapidly. The ease of interface is dramatically better. The interfaces we have with other providers is easier to execute, too. So we think we not only provide the best financial outcome. We think we provide the best solution.

Let's stay on this slide. We talked so much about verification of employment and income. But very often, as you could see the word employment in the middle of this slide, very often, employers are just looking for verification of employment. And it's not always the case that each user is verifying income and employment. Some are verifying both. Some are just verifying one. One of the quotes that stood out to me from Rudy at Analyst Day is that, "We want to move up in the waterfall," was what the phrase he used, "in employment verification during the hiring process." That's a quote from Rudy. So my first question is, isn't Equifax already at the top of the waterfall for employers when verifying employment? I was sort of taken by that quote. Maybe you could dive a little bit more into that.

Sure. Absolutely, right? And it kind of goes to one of my earlier comments, right? So by -- it's kind of the same playbook we ran with mortgage, right? So by building out the depth of the data asset and being able to provide a more complete solution more often, right, we think -- and now, as you see on the slide, adding education certification. And just as an aside, right, the relationship we have with the Financial Student Clearinghouse is unique. Someone can directly go to the National Student Clearinghouse and put in John Gamble and where I went to school and et cetera, and get validation that I went there, right? But it's a unique relationship that just by providing identity information to Equifax, that we can provide all of the education history of an individual. So we -- so we now can provide a solution that provides fairly deep employment history as well as education history, right? So what we think what's happening is the solution we're able to offer, our product, is just much, much better over the past 2 to 3 years in its completeness. And I'm not even adding in Appriss yet, which makes it even better, right? So because of that, we think we've been able to work with our partners, the background screeners, to move to the top of the waterfall, in many cases, because we can respond more completely, more often. And the other thing that we offer is real-time response, right? Getting people on the floor and hired faster is important for their customers, and we're able to do that more completely. So I think what Rudy was talking about is with that more complete solution, we are moving up the waterfall with background screeners. And no, we're not at the top of the waterfall of all of them, right? And because you can see that our revenue in Talent Solutions has been growing beautifully, right, but in terms of our access to that full multibillion-dollar TAM, we're not there yet, right? But what's happening is we are very -- substantially, by improving that product we can offer, making it very advantageous for our customers to move us to the top of the waterfall because they can get instant verified responses from us more and more rapidly. And also the way they're doing it now in many cases is through some type of a BPO activity. And we all know the difficulty with maintaining employees today. So we think we offer not only an effective solution, but also a cost-effective solution and one that's real time, which allows them, we think, to price. The other benefit we think we provide is that in many cases with background screening where the cost of big data is a pass-through, right? So it's passed through to the customer as opposed to something that's embedded in their cost and that they price for themselves.

Yes. So Andrew, when we talk about the top of the waterfall, and John also said similar playbook to mortgage, what we're saying is that we're replacing inefficient processes. So it's the first thing that they're going to do where we'll query the work number. And we did the same thing in mortgage, where you can call up, you can get paystubs for yourself, very inefficient, susceptible to fraud, very similarly inefficient on the hiring side.

Right. No, we understand it's a fully digital process here [indiscernible]. So just talk about waterfalls for income verification with lenders. Like are you finding that Equifax for, let's just call it, verification, but I'm really thinking about income verification for the moment, is by itself in the waterfall? Or have you seen other more plain vanilla players in income verification enter the waterfall of lenders?

So we aren't seeing a meaningful change over the past year, right? And again, we're so -- I think we're so much larger than most. I can't tell you that there isn't any circumstance where that's occurred. But we're not seeing anything meaningful. And again, it's kind of the discussion. Our growth in the database, ability to respond, right, the value of that product is going up so fast, right? We're actually seeing it go the other direction where the percentage of times we're being able to integrate to and get system-to-system response with our lenders is going up, right? So I can't tell you it's never happened, but we're seeing really, really good performance there. We also launched new product where we'll do it manually for you, and we'll give you 1 and 2-day service, right? So we want products so that -- if we don't have it, well, then we'll go get it, and we'll get it to you in 1 or 2 days.

Could you just go back to education verification again. So I totally get, this is a new business for you. I totally get the partnership and what did you want to verify education alongside everything else that you already verified for clients. My question is, when you win this education verification business, do you think it's like Dorian said a moment ago, oh, they were verifying, but they were doing it manually. And so it's just what I would call like newly outsourced process, a newly digitized process. Or do you feel like this is a new business, education verification, and there were other providers, I mean, third-party providers, that were serving these clients, and through consolidation of providers, you're just winning that business from another provider. So is it new outsourcing? Or is it wins from other providers?

So we think it's a new service that wasn't able to be acquired broadly, we believe, from anybody previously because the organization that has, by far, the best coverage, right, on education degrees is the National Student Clearinghouse. So you could get it but it would have to have been through a BPO process where you are going in and validating university by university that what I said it is true. As opposed to us now providing a product, right? And what we're doing is productizing employment, education, criminal backgrounds, licensures and health care. We're providing products that -- increasingly, and you'll see us roll these out over the next year, that are specific to the type of hire, to the industry, right? So we'll provide something different in health care than we're going to provide for something in retail or something in warehouse and distribution, right? So increasingly, what we think it does is give us a more robust solution. Yes, we should be able to get better realization for that, higher revenue per transaction. And also, it puts us at the top of the waterfall, right, because we're able to answer more of the questions they require immediately, uniquely.

So getting back to Sid Singh, who presented -- he's the President at USIS. He talked a lot about alternative data being able to reduce the share of adults that are deemed kind of unscorable, and how alternative data is increasing financial inclusion. I surely know that's part of the organic revenue growth for USIS. My question is, do you feel like the societal good that Equifax is providing here, financial inclusion that is through alternative data, is getting recognized? I'm talking about the societal good that people are getting their first mortgage. They are getting fair credit decisions that were harder in the past when it was just about credit data.

So is it being recognized, right? I think what we're focused on is making it true, right? So we're very focused on how do we work with the financial institutions, right, and to help them use this information in their lending processes so that they can -- and they want to, right? These are good customers, right? So that they can broaden the customer base that they can provide financial services to. And we think we're working very hard to make that the case. I know our government relations team and our VR teams are also certainly working to make sure people understand the value we think it brings, not only to our customers but also to society. And we know it's a real focus of the current administration and administrations passed, right? But I think what we're excited about is, especially now with the acquisition of Teletrack, combining it with DataX, that we can get -- that there's 80 million people that either weren't scorable or were -- had very thin files that we can provide information on so that financial institutions, fintechs, can make better decisions faster and hopefully get them access to credit. And by adding in the scoring -- the capabilities we have by adding scoring off of NCTUE, we can broaden that even more. So we're excited about the opportunity to grow our revenue, right? We're excited about the opportunity to help financial institutions do what they want to do, which is drive that societal good. And we're also obviously very excited about helping to deliver to our goal as a company, which is it's -- if you walk around our offices, it's helping people live their financial best is what we're focused on trying to do. It's what we do throughout the Equifax Foundation. It's what we do through the way we're trying to build out the alternative data assets that we have. So we're excited about the opportunity, and we're excited to invest to do more, and we're excited to co-invest with large financial institutions like yourself.

Right. The one thing that stood out today -- and we're coming towards the end of the year here, is I didn't feel like your 2025 EBITDA margin goals, which drove that $12.75 of EPS was such a high margin goal compared to, let's just say, prebreach levels. It's still expansion. And I know you did say, "Hey, we're still going to grow at least 50 basis points a year past that." But this year's EBITDA margins are way down by redundant cost. Even to some extent, next year's rate were down by redundant cost. Just sort of getting rid of those redundant cost creates a big tailwind to EBITDA margins. So my question is a simple one. Like do you feel like the EBITDA margin that you've laid out very clearly in that 2025 goal might be conservative?

What I can say is that we believe delivering 500 basis points over 4 years would be a very, very good outcome. And we think when we execute against that, right, that we'll be able to deliver growth to our shareholders in terms of EPS. And really importantly, we talked a lot about cash flow, right, and available free cash flow to reinvest in acquisitions, but also to begin returning to shareholders. We think that what that creates is a really nice bundle of opportunities where we can deliver great returns not only to customers, but clearly to shareholders over time. And that's where we're focused. So as we move forward, we know this is a really nice business model. We know we generate lots of incremental margin as we grow faster. And what we'll try to be is really prudent about what we reinvest and what we pass through. But I think 500 basis points in 4 years is pretty good.

And more than after.

Okay. Absolutely. Yes. Absolutely.

Okay. Perfect. John, Dorian, I think this is a great place to end. Thank you for the dialogue. We always appreciate the discussion with you.

Thank you, Andrew.

Thanks for having us. We appreciate it.

My pleasure.