Equifax Inc. (EFX) Earnings Call Transcript & Summary

All right. Good afternoon, everybody. Thank you for joining us here at our TMT conference. I'm very pleased to have with us today Equifax's C-team here, Mark Begor, who's the CEO; and John Gamble, who's the CFO. I have a bunch of prepared fireside chat questions here that we'll be running through. [Operator Instructions]

So with that out of the way, Mark, let's just get started right away. You just had the much anticipated Investor Day, which I thought went very well. The new long-term framework is obviously very refreshing to see. And so I just wanted to start there. And specifically, the biggest change in the long-term framework was the Workforce Solutions business, right? It went from what was 9% to 11% to -- I think you said 13% to 15%. And so just -- my question is more to help us appreciate that 13% to 15%. I understand you have the mortgage tailwinds. You have the dynamics of COVID that helped kind of the income verification, so the last 2 years were phenomenal. But just help us appreciate 13% to 15%, like how sustainable are the drivers there going forward?

Yes. And so Manav, thanks for having us. And as you pointed out, we finally had our Investor Day a few weeks ago. We've been working on that for quite some time. We really wanted to do it kind of when COVID started almost 2 years ago but paused it for the appropriate reasons. And it was a big milestone for Equifax after the cyber event in 2017 and the last 3-plus years of rebuilding our cloud investments, the M&A that we've done, our Single Data Fabric. So we were energized to move forward. And as you know, on the Investor Day, we talked about the new Equifax, a faster-growing, higher-margin, higher cash-generating company going forward. And we did take the framework up quite meaningfully, 100 basis points on the low end from 7% to 8% on top line growth and then 200 basis on the high end from 10% to 12%. And that's a reflection of the cloud benefits that we expect to have going forward. We think that between the cloud and the Single Data Fabric, that's going to add a couple of hundred basis points to our long-term growth. And then as you point out, workforce being a bigger piece of Equifax is very meaningful inside of that long-term framework because workforce is growing above that framework and, obviously, with much higher margins, as you point out, the 12% to 15%. Both Equifax and workforce have been outgrowing that new framework, the new higher framework in the last really 24 months in '20 and '21, which is part of the confidence we had of putting in a stronger long-term framework going forward. And I talked about across Equifax cloud and the Single Data Fabric and our differentiated data assets really gives us that confidence to increase the framework to that 8% to 12%. And the Workforce Solutions, which has been way outperforming in the last couple of years, is why we increased the Workforce Solutions long-term framework. And as you know, workforce, we said in the investor call that we expect it over time to approach 50% of Equifax, both through their core growth and through some of the M&A that we're doing. Most of our M&A in 2021 is in workforce. Of course, Appriss being a very large acquisition, but some of the other bolt-ons in the core of the benefit solutions business. And the levers for workforce are really quite unique and quite powerful. And I'll cycle back to kind of 2 years ago. We believe there was an inflection point for Workforce Solutions, call it, 2 years ago when we went north of 50% of nonfarm payroll. As you know, at the end of the third quarter, roughly now, we have about 125 million total active records every pay period. So that's individuals or SSNs, I should say. And then there's 97-or-so million uniques. And a lot of people have 2 jobs, so that's 25 million, 26 million, 27 million additional records that we have. And so think about the 97 million versus 160 million roughly nonfarm payroll, add gig economy and pensioners on either side, you get to something that's a runway for us that's north of 200 million records where we're at 100 million. So a lot of room to grow. And as you know, through the third quarter, we were up double digits on the additions of records being up 12%. And record additions are very unique. Most data businesses have all the records. And as we're able to add records, as you know, we can monetize them instantly. So that translation of record additions, whether it's up 5%, 6%, 7% or in our case, 12%, becomes one element that drives their revenue quite meaningfully. It's almost linear because remember, we're getting the inquiries from our customers for every applicant. We're able to fulfill kind of high 50% of what we see from them. As we add new records, we're able to monetize those and increase our revenue. And then the other levers at workforce are quite meaningful. We have pure price being the uniqueness of that data set and, increasingly, value of the rich set of data that it has both historical. Remember, we have 0.5 billion total records, and we're able to sell that trended data in many use cases, whether it's in mortgage, 24 months of records for someone who maybe has seasonal income, so they have to look more historical. Or in the talent hub, which is the new vertical in Workforce Solutions, where we're using it in the hiring process. That historical records are very valuable. Product is another big deal at workforce and at Equifax. We are investing heavily in new product capabilities. The last 2 years, you've seen us do that, people and resources. The cloud facilitates that. And although we're still in the early days of cloud, and we're not complete with the cloud, we will be soon. We're starting to see the benefits of that. And our new product introductions have ramped up. Workforce is at the higher end of that. If you think about workforce for a decade, they basically sold a single report for the most part that was how much is Mark making today and where does he work along with another 48 attributes. We have about 50 different attributes. So a very valuable product. We're now able to have historical data, where we now have products that show 12 months, 6 months of historical data that solve customer use cases. So that product lift, as you know, we're selling some of those products at much higher price points. Think $30 for the traditional kind of what's happening today report versus that historical data at $150, $175, $200. So leveraging that, that's driving their business. And then you get the new verticals and penetration and usage inside of the verticals. And I'll just touch briefly, you know this, but moving Workforce Solutions beyond financial services is a real strategy of ours into talent, which is the hiring process. As you know, 75 million people a year get new jobs. All of those new jobs require some level of background check. Now we're not doing the background check where we're providing the data to the background screeners. And that historical data, where we have an average of 4.5 jobs in our database on the average American, because of that 500 million records we have. So in the talent space, which is about a $5 billion TAM, growing well in excess of Equifax's growth rate, the TAM is, and we are in that talent solution. And then you add to it Appriss that we acquired in October with the incarceration data. Very valuable in that talent space and some of the other data assets like university degrees with our exclusive relationship with National Student Clearinghouse. So we'll continue to build out that growth driver for workforce. And the last one is government. As you know, we have a big business and a growing business in social services, eligibility and then redetermination. It's about a $2 billion TAM here in the United States where our data is used. Most social services are income verified and income based, meaning you have a certain level of services based on your income, and we're able to do that instantly. So that's a business that's been growing quite rapidly. So workforce has a wide array of levers. So back to your question about our confidence in the long-term growth rate for workforce at that 12% to 15%, we've got a lot of confidence in that because they're outgrowing it today substantially, and they've had a history of growing quite strongly. And then you look at the levers that they have, the runway in records, the runway on product, which is really just a -- we're a couple of quarters into rolling out new products. New verticals like talent and government and our benefit solutions vertical where we're doing I-9 verifications at a much more rapid rate. Those are all really powerful for workforce. And of course, workforce is growing faster than the rest of Equifax, accretes into our overall top line and their margins, as you know, in the mid-50s, are very accretive to our overall margin growth rate. So it's a very powerful business for Equifax, one that we're very heavily investing in organically through technology, the cloud, the Single Data Fabric and inorganically through M&A. We've already done 4 acquisitions, the largest being Appriss and it's one of our M&A priorities going forward to continue to strengthen our largest business.

Got it. So 2 quick follow-ups, one for you, Mark, and one for John from that. So just on the M&A front and maybe more specifically to talent solutions. I mean, obviously, with Appriss, I think you said that was a pro forma $270 million business. You sized the TAM at $5 billion. To attack that TAM though, like realistically, does that mean you're going to be looking at a lot more data assets to acquire? Is that what the M&A agenda will be?

We'd like to. We think that's a great space for us. First off, if you think -- let me just restate what our M&A priorities are. It's differentiated data, Appriss checks that box, incarceration data no one else has, so very valuable. Kount in identity and fraud check that box, the very unique identity data that Kount has from e-commerce. So differentiated data. Number two, a priority is to strengthen Workforce Solutions, both the core, think about HIREtech, i2verify, Health e(fx), acquisitions we made to strengthen our benefit solutions business. And remember, we deliver those services to HR managers, whether it's -- and they outsource to us unemployment claims, work opportunity credit, W-2 management. All of those different services, they also get us records. So strengthening the core workforce is a priority for us for M&A. And then as you point out, strengthening the talent hub. And Appriss was a big move for us around incarceration data. We also got medical credentialing data. Think doctors, dentists, nurse licenses. And we'd love to do more there. And if we can buy it, we will. If we can do it through partnerships like National Student Clearinghouse in education data, we'll certainly do that. So it's going to be a combo to build out that talent hub. And what our goal is and you'll see us do that in 2022 is more partnerships to bring data in and then where we can find M&A to buy it. But we're going to productize that. Today, our productization is really around the data set, meaning like the historical work history or the incarceration data or the education data. We're going to move to a productization around job category because each job category has different data needs. And our goal will be to -- the base -- the backbone of our talent business is our work history because every background screen requires some level of where did Mark work before. It might be the last job. It might be the last 2 jobs. It might be the last 24 months. It varies. And so really productizing those by job category with the other data elements and having an instant turnkey solution, that instant element because if we can provide it instantly, it's a ton of value to the background screener and the company, the hiring manager, because they can complete that transaction with one click as opposed to collecting it all in numerous ways. And so that's really what our goal is around M&A for workforce. And then I'll add to it the other area. So it's differentiated data, strengthen workforce solutions, both core and in the talent solutions hub, and then third is identity and fraud. We view that as a big TAM, $19 billion, growing at 20-plus percent. Big market in identity with a digital macro, and account acquisition moved us into that much more strongly. We'd like to do more there, whether it's biometric or other differentiated data like Kount has from e-commerce. That would be the third area for us around M&A.

Okay. Makes sense. And John, what I wanted to follow up was, obviously, Mark talked a lot about the fast growth and the high incremental margins at Workforce Solutions. Broadly beyond that, the cloud transformation, the tech transformation obviously should help margins. So I know you did raise the long-term framework from 25 basis points margin expansion to 50, but 50 still feels light. So just help us understand how you took that framework and how to interpret that 50 basis points.

Sure. And I think it's important also to keep in mind that we talked about we're going to be increasing our margins by 500 basis points over 4 years, right, so through 2025. And that's the framework we talked about, right? And the 50 basis points a year really reflects what Mark talked about, the leverage we get out of Workforce Solutions and their high margins, plus the high variable margins we have on our growth as well as the fact that we get a lot of leverage on SG&A. So across those 3 areas, we think that will let us be confident in delivering at least that 50 basis points a year. Beyond that, as you take a look over the period that we're talking about over the next 4 years, maybe half of the growth we're talking about in margins is from the standard margin growth that we just talked about. And another half of it is related specifically to the cloud, right? So there's really 2 areas that are driving our margins higher in the next several years related to the cloud. One is we're investing less in the cloud, as Mark said. We're moving toward completing our cloud transformation. So the level of incremental investment is coming down. And we're also starting to now see the benefits of moving to a more efficient infrastructure. And specifically, that occurs as we decomm the old systems. So as we substantially move our clients onto our new cloud-based systems, you start to see improved cost of goods sold for us, and that also drives higher margins. So the reason we were comfortable talking about a 500 basis point improvement over 4 years, which we really think is very substantial, is because of the fact that we're not only getting the leverage we get out of the business on an ongoing basis. But we're also going to drive substantial leverage to cloud migration over that time period.

Okay. That makes sense. Mark, just to wrap up the M&A topic a bit, just a question on international. I know in the new long-term framework, you lowered that 100 bps, and that's more kind of a mix effect, which I think I understand. But just curious if looking at the international geographic expansion is part of the plans, Experian talks very positively about Brazil. I know you guys have a JV in there. Should that be something we should be expecting from Equifax?

Yes, we'll be opportunistic internationally. If we can find a market where there's a stand-alone credit bureau that we can move into, we'll make those acquisitions. You've just seen us do that in Latin America over the last couple of years. And of course, we did the big Australian acquisition, Veda, a number of years ago. There aren't a lot of those out there, but we would definitely look to do that. We're investing in the cloud. International will follow, North America, although Canada will be done next year. But the other markets will follow in '23 and into '24. And we'll get leverage from a cost standpoint and margin standpoint as well as the top line benefits that we expect internationally. But we like our international business. We have a new leader, as you know, who took over the business in July. Lisa Nelson was leading our Australia business. And prior to that, our Canadian business. So she really understands the international footprint and operating that way. And we would like to be bigger international and it's a big business for us.

Got it.

Not really through acquisitions, but one of the areas you're going to see hopefully accelerated growth rate is through the growth of Workforce Solutions, The Work Number, internationally, right? So we're making those investments and they are meaningful investments in our major markets to grow our Workforce Solutions business internationally, which we think is beneficial to the long-term growth there as well.

That's a great point, John. As you know, Manav, we're -- we have workforce in place. We launched these kind of pre-cloud transformation in Australia, Canada and India. So we've been building those over the last 3 or 4 years. And now that we have a cloud stack that we've invested hundreds of millions of dollars in Workforce Solutions, we're going to take that global and look for other markets to expand workforce into.

Got it. And just quickly on that then, if the U.S. workforce business is maybe middle innings or less, where are we with the international opportunity?

On workforce?

Yes.

We're early innings. We're -- I don't want to get so far and early and just say we're doing warm-ups in the batting cage, but we're -- we see a lot of opportunity. And the scale of workforce and now the capabilities near the leverage we have is the multinational relationships we already have with those direct company relationships we have, which 60% of our records. That's an easy addition when we go into international markets because they want us to do the same service for them in their international markets. And then you got global payroll processors. There's some of those out there that are software companies. And then you have just the depth of technology and capabilities we have allows us to really operate there.

Makes sense. Just coming back to the U.S. then, obviously, there's clearly some new variants and a lot of uncertainty there. But can you just talk about the USIS, the recovery? You did up that long-term framework 100 basis points, too. So can you just talk about the distinguishment there between just kind of the recovery that you should see post-COVID versus organic efforts internally?

Yes. We're pleased with Sid Singh who's been leading the business for a couple of years now, and he's really changed it commercially. So you start with that. So it's a different organization. It's more product led, more commercially led, Sid's a commercial product kind of leader, so that's really positive. We've retooled our commercial team. We've talked a lot with you and investors about the growing pipeline we have there. And then the second one is the cloud. They're going to be more competitive in gaining share with customers. If we're tertiary or secondary, we're going to be a stronger competitor with our cloud capabilities to move up to primary or move up to secondary because we're just going to be a better partner around stability, around speed of data, access around the depth of our data. And then Workforce Solutions -- I'm sorry, USIS, they have data that our competitors don't have. Their depth of data is just wider and deeper. And alternative data is really a big deal with our customers today. The credit file is a very valuable asset for all 3 of us. It's the additional data elements, whether it's our cell phone utility data, towards our alternative data, DataX and Teletrack, where we now have 80 million data elements on individuals that really mostly aren't in the credit file, very valuable for that near-prime, sub-prime unbanked consumer that our competitors don't have the depth of scale. Our wealth database is another asset for Sid. And then you add The Work Number, which as you know, USIS is the commercial arm for Workforce Solutions in the United States to all of the financial services customers. So the ability to bundle and really leverage that commercial relationship is very positive for us. So we're quite optimistic. The core of that upgrade, if you will, in the long-term framework is really around all of those capabilities, the differentiated data assets, the new cloud capabilities, which we're really early innings in. But we're seeing real traction when we talk with customers about it. And then the new product focus, combining those data elements, which we can do now with the cloud is really a big deal. And then if you look at USIS performance non-mortgage, which we share with you on a quarterly basis, they've outperformed that framework the last 24 months. Now there's some element of COVID recovery in there, but there's also an element of all of the levers that I talked about, our differentiated data, the new leadership and commercial focus, early innings of cloud, new product rollouts starting to really take hold in USIS. So we've got a lot of confidence in that business going forward because of the unique assets that we have. At the gut of that or the heart of that is the differentiated data we have, our competitors don't have and the cloud capabilities.

I think we also feel really good about identity and fraud as an area where we'll see outsized growth in USIS.

That's -- yes.

And also commercial, right? So -- because I think that's a place where we've done acquisitions, we've invested heavily, and we think that has an opportunity to grow. And it's an asset we have that not all of our peers have. And identity and fraud is a place where, with the addition of Kount and e-commerce data, we think we have unique data, as Mark said. So both of those should drive better growth and support the additional 100 basis points of growth.

Got it. And John, maybe just on the commercial part. Maybe if you can talk a little bit about that. I mean, obviously, you have Dun & Bradstreet out there that's been the big clear day. Is that what you're referring to with commercial? Or is there something more niche on your end?

Well, so it's that market generally, right? But again, we're more focused around the SMB market and smaller businesses. And so when we acquired PayNet, they had very unique leasing data. We acquired Ansonia that has unique commercial data as well. So by combining that data together, we think we can offer products and solutions into the small, medium and also larger companies, but small and medium market, that allows that business to grow faster than maybe what you traditionally see with someone from like Dun & Bradstreet, right? So we feel good about the data assets we have, which are indeed unique. And those leasing assets from payment are very unique as well as the combination in many cases when for a small proprietor, the credit standing of the individual, the owner is valuable in determining the credit standing of the business itself. So we think it's that combination with our consumer credit data and also the unique assets we have in commercial, the same Equifax formula, which we think is going to allow us to perform well in commercial.

Got it. Okay. Mark, the payment sector broadly has been not doing as well this year because they've been plagued by this narrative of disruption from the fintechs and so forth. And we get the question often if buy now, pay later is going to disrupt the credit card market and, therefore, one of your key markets. And obviously, Upstart has ballooned into the company that it is, and it sounds like PMs are giving them a lot of credit for disruption there. But just how do you look at the fintech market out there? I know more often than not, they're your customers so it's a good thing. But do you see any signs of disruption?

Well, if I was a credit card issuer, which I was for a decade, right, when I ran GE Capital's credit card business, I'd be worried about that disruption. And most of them are launching their own BNPL solutions, either as a feature on the card or as another product offering. For Equifax, more financial services, I think about BNPL as having some penetration into card share, but it's a lot of debit replacement or cash replacement. It's really where you're seeing that with millennials buying a pair of jeans and putting it on 4 payments with one of those companies. For us, more financial services activity is a good thing, whether it's in fintech or BNPL. And we're talking to all of them. They all use identity data, some from us, some from others. So that's an opportunity because you have to verify the individual even if they're doing a pair of jeans. And they all are talking to us about wanting to go into bigger ticket transactions. You're not going to do a -- without a credit underwriting, a 4-payment plan on a $2,000 couch without any credit work done. So that's going to happen over time, and we're starting to see that. As you know, we were late to fintech. We're not late to BNPL. We've been working since I joined 4 years ago to catch up on BNPL with -- I'm sorry, with fintech with more people, more resources. And we have -- what we have are really valuable assets in that space. We have differentiated data, which they want, alternative data when they're going into those thin-file credit customers, whether it's the cellphone utility payment data, rental data or our scale alternative data outside of the credit file from DataX and Teletrack. Those are valuable data assets and second is the cloud, our cloud capabilities. And the third is we've ramped up our resources in that space, and we're picking up, we believe, share in fintech and BNPL. And we also have a great calling card as many of the fintech players, as you know, use our income and employment data whether they are a personal loan player. I was on a call this morning with a big P loan fintech customer that uses our twin data, and we're working to get them to use our credit data also. So it's an opportunity for Equifax that we're definitely focused on. It's inside of Sid's business.

Got it. And we have only a few minutes left. So maybe I'll ask you a question maybe you don't get too often, and that's the Global Consumer Solutions business. Obviously, it's shrunk in size, but you lowered the growth rate there as well. Is that an important part of the strategy going forward?

Yes, it's definitely a part of our strategy. We want to be in it. We get 25 million, in the United States a year, inbounds from consumers getting a credit report, a credit score, a credit file or wanting to fix an error on their credit file. So we have that traffic. So the ability to monetize that, we think, is a business we want to be in. As you know, on Investor Day, we announced to you, our investors, that we're going to integrate GCS into the other 3 business units. So we're going to go from 4 business units down to 3. The U.S. direct-to-consumer business is going to go under USIS. One of our competitors operates that way, as you know. The Canadian business is going under Canada, the U.K. business under the U.K. And we think that's a better way to go going forward. There'll be more synergies between the USIS, Canadian and U.K. businesses going forward. We want to stay in the business. And I've also been clear, we're never going to have a business that's as big as Experian's in direct-to-consumer. They've got a real franchise there. It really is a very valuable business for them, one that we respect a lot. But we think we can have a good growth business that's going to grow inside of our framework, also generate margins that are attractive going forward. And we think this integration into the 3 business units was the right move, and we'll have that completed by year-end and operate in 2022 with just the 3 business units.

Got it. All right. Well, Mark, we're right about on time here, so I'm going to stop there. But it looks like, obviously, there's a lot more good yet to come from Equifax. So looking forward to tracking that next year.

Thanks very much. Appreciate you having us.

All right. Thank you.