Equifax Inc. (EFX) Earnings Call Transcript & Summary

Welcome back to Evercore ISI's Sixth Annual Payments and Fintech Innovators Forum. I'm David Togut. I lead the payments processors and IT services research team. Delighted to welcome Equifax. Joining us from Equifax are John Gamble, Chief Financial Officer; and the IR team, led by Trevor Burns and Dorian Hare. Gentlemen, welcome. Glad you could be with us here today.

Thanks for having us, David. We're glad to be here.

Just to start. The #1 investor question we receive on Equifax is how you'll achieve your 2022 guidance for revenue growth of 6.6% to 8.7%, adjusted EPS growth of 11.2% to 15.2% as rising interest rates reduced your 2022 mortgage outlook to minus 21.5% from minus 15% previously. Along with fourth quarter earnings, you have published an extensive slide deck. But looking at the core building blocks, what enabled you to raise your expectation for core organic growth to 13% from 11% previously? And what parts of the core business are performing better than you previously expected?

David, thanks for the question. And obviously, as we move from October when we gave our initial framework for 2022 and until we gave guidance in February, big changes in the mortgage market. And as you said, the reduction in our expectation for the mortgage market to down 21.5% reduced our revenue substantially in the order of $200 million, right? And so what allowed us to recover that was heavily driven by the outstanding performance we saw in the fourth quarter generally and specifically in Workforce Solutions, right? And what we saw in Workforce Solutions is very, very good record growth, up to 136 million active records being contributed by -- at the end of the year. And then also very importantly, really a tremendous performance in signing new payroll partners that will ramp with us in 2022 and again, on an exclusive basis. So they were able to sign, in the fourth quarter, 3 payroll partners that will ramp as we move through 2022 that will also add to record base and allow us to grow our Workforce Solutions, Verifier business more rapidly. So the big change was in Workforce Solutions and in Verification Services. And it's really just a continuation of the tremendous performance we've seen at growing The Work Number record base over the past several years.

Understood. In your 2022 mortgage outlook of minus 21.5%, what trends are you seeing for cash out refinance versus new home purchase volume increase? And how do unit economics compare for these 2 different types of consumer credit report inquiries?

Sure. So the assumption we've made for the down 21.5%, right, if you take a look at purchase versus refinance, I can talk qualitatively about cash-out refis. But if you look at purchase versus refinance, our expectation is you're going to actually see the purchase market grow in 2022. I think that's consistent with most people's view on what's happening with existing home sales and new home construction and new home sales, and on the right-hand side of the chart, what you can see is the strong trend that we've seen through January of this year. We're expecting that to continue and to see nice growth in that part of our business. Refinance, we're expecting to see really significant declines as we move through the year. And it's important to remember, right, that even though we're talking about on the order of 25% declines in the mortgage market in the first quarter, right, and down about -- on the order of 20% in the second half, the down 20% in the second half is off of a 2021 decline in the second half, which was over 20% as well, right? So we're expecting to see substantial declines in refinance. But as you mentioned, a tailwind, a supporting factor around refinance, we do think is a substantial increase in home price appreciations that we've seen over the past several years. And it's at a level that I don't think we've really seen in history. And what you -- if you go back over time, what you've seen is HPA is very, very high and people have a lot of equity in their home. They're willing to refinance at much smaller spreads, positive spreads relative to their existing mortgage. And in some cases, and you've actually already started to see it happen, people are willing to refinance and actually pay a higher rate in order to take more cash out of their home. I think in some data that we saw in the fourth quarter, you actually saw in the order of 35% of the transactions that were executed were at level -- were for mortgages that were -- that were either at very small spreads or, in some cases, negative spreads relative to the existing mortgage that a party had. So we're expecting to see support for refinance as we go through the year from cash-out refis and because of the strong HPA, but we still expect to see significant declines in refinancing as we go through this year.

And then how do your unit revenue economics compare between refinance and new home purchase increase?

Actually, very similar, right? So if you take a look at the relative economics of, for example, a Work Number pull, which is obviously the largest portion of our mortgage revenue across Equifax, the relative economics for us are very similar.

Understood. Just shifting to Employee Workforce Solutions, your highest growth business. The Work Number database now has approximately 70% of private nonfarm payrolls. What's your strategy to add large numbers of Work Number records to increase your hit rate on employment and income verification going forward?

Yes. So it's multifaceted, right? And we'll come at it in 2 different ways. First, you've seen us build capabilities and really execute quite a few acquisitions over the past several years, building out our Employer Services, right? And when I say Employer Services, I'm talking about unemployment insurance claims management, Work Opportunity Tax Credit management, validation that you're in compliance with the Affordable Care Act, employee onboarding, right, I-9 validations and then I-9 auditing support for companies. All of these services, right, are services that require that those customers share their payroll records with us. And as part of -- when we win those services with customers, and in most cases, I think all the services that I just listed, we're the largest provider in the United States. When we're providing those services to a customer and they give us their records to put on The Work Number, we provide the income and employment verification service to that customer for free, right? So we continue to work to build out those services so we can get direct record contributions from large companies and midsized companies. And as a reminder, about 55% of the records we get today are contributed directly, right? The other path we're going down is continuing to broaden our partnerships, right? And we talked about it in the beginning slide a little bit when we talked about the strengthening of our 2022 outlook. We have had done an outstanding job at adding new payroll partners and then also software partners and with the payroll partners, specifically on an exclusive basis, where we're increasingly adding payroll contributed records to The Work Number. And that's been one of the ways you've seen us drive tremendous growth over the past year. So -- and we think what's occurred is given the fact that we're now at about 136 million total records, importantly, over 535 million were current and historic records, that The Work Number has become, by far, the gold standard and the most effective place, if you're a contributor to contribute records and if you're a verifier to pull verification information not only for financing, but also for talent, right, and also for government. Importantly, in talent, what's happened over the past several years and we think is also accelerating the growth of the talent business is now that we have over 535 million total records, we can, in many cases, provide an effective instant resume, right, on someone's employment history. And as that continues to build out, our ability to become the primary source or at least a significant source for background screeners to be able to provide an instant response to their customers on someone's background, validated, is improving dramatically. And that's one of the reasons you've seen our talent solutions business grow by 50% to 100% a quarter over the past year.

Understood. For 2022, what are the most important investments Equifax is making in its largest, most proprietary data sets outside of Work Number database? For example, if we look at IXI, NCTUE, what are the big new investments we should be watching for?

Well, so David, our biggest investments still remain transformation, right? So -- and what we talked about at year-end is that -- and it's going backwards a little bit, right, is that we are now in production, delivering production workloads for TWN; for ACRO,, which is our U.S. credit file; and for Canada ACRO, which is our Canadian credit file, our largest databases in the world. And so those were huge milestones that we passed, right? We had already migrated a substantial number of customers onto our cloud APIs. We've now migrated into production those major data sets. And what you'll see as you move through 2022 is an increasing number of the, we'll call it, alternative data sets. We'll also move on to data fabric at GCP, which will mean they'll be integrated into our solutioning delivery systems, and they'll be able to use InterConnect, right, which is our analytical systems and that deliver scorings straight through to customers. And increasingly, as all of that comes on to fabric, our ability to deliver combined data solutions with combined scores and therefore more and more new products will accelerate. So the investment in 2022 continues to be in transformation. But importantly, we're coming to the end of transformation in North America as we talked about on the earnings call. We expect to have substantially completed the bulk of it by the end of 2022. We'll be completing some customer migrations, but we feel very, very good about where we'll be. And not only in the major assets on credit and TWN but also in the alternative data assets. You mentioned NCTUE is one of them, but also things like DataX, Teletrack increasingly count. So we feel very good about the progress we're going to make this year. And increasingly, you're seeing solutions that are coming from those combined data assets going to our customers, and that actually started in the fourth quarter of last year.

Appreciate that. Employee Workforce Solutions is attracting competition from TransUnion and Experian, who have both announced fairly significant investments in this area. How strong a competitive threat do you think they represent? And what are you doing to continue to extend your lead for EWS beyond adding data?

So we think we have a very comprehensive program to strengthen our position in Workforce Solutions. Now again, we think we have an extremely compelling solution. We believe it's the gold standard with 136 million current records, 105 million individuals at 70% of U.S. nonfarm payroll. There really isn't anybody who's anywhere near -- anywhere close to what we can provide in terms of an instant response to a lender or to a background screener or to a government verifier. So we think we have, by far, the strongest solution, and you can see it in the core growth we're delivering. You can also see it because we continue to be the player that payroll processors want to enter into contracts with on an exclusive basis to get access to The Work Number systems. But more broadly speaking, we have invested heavily in tech transformation. We think we're not only the largest database, the one that's been in the business for the longest. We also think we have, by far, the most modern tech stack. We spent hundreds of millions of dollars modernizing that tech stack. And as I indicated, Verifier is fully on GCP at this point in time. So we feel very good about our technology position. We continue to invest heavily, as we said, in employer solutions so that we can add an increasingly broad swathe of services to employers directly to make it -- incent them to want to give us their Work Number records. And also, we're providing those same services now increasingly through the channel to payroll processors and other companies, think software providers, where we can provide those services in their suites. So we're a broader partner to them, and it increases the benefit of them working with Equifax, not only on those services, but also in record contribution. We've substantially -- we continue to substantially grow the number of system-to-system integrations that we have between The Work Number and Verifiers on the credit side, but also on the talent side and the government side, right? And again, it's just important for everyone to remember that those system-to-system integrations are unique, right? The credit system-to-system informations and income and employment system-to-system integrations are different, right, and the integrations Equifax has built with those verifiers are unique and continuing to grow. And we're to the point now where over 75% of the transactions we execute in mortgage are executed on a system-to-system basis. So we think that entire -- that broad set of activities that we continue to drive forward, we think, makes us by far the strongest player in the industry. And if you're a verifier, we can provide you with the best response, the best security and we feel very, very good about our position. We know Experian has invested. We're not seeing tremendous competition from them at this point in time. We may see it as we go forward. But we also know that we'll have people continue to invest. We're keeping our eye on all of the potential competitors and making sure that we have a very strong position to compete with all of them and continue with the strength that we have. The other thing we've done is we're now offering a suite of solutions as we broaden our products that we call Equifax Complete, where if we don't have the record on The Work Number, through other technology needs as well as a call center we've stood up in Iowa, we'll get you a response within 24 to 48 hours so that you can completely outsource your verification requirements to Equifax. And you'll either get it instantly on The Work Number, and increasingly, that's true, or you'll be able to get it through Equifax Complete through other means. So I think the last thing where we believe we have a very substantial strength relative to all our competitors is everything we do is consistent with the Fair Credit Reporting Act. We only provide information on your income and employment if you've applied for a loan, and you've approved it through that application process. Your information is not used for marketing or other services, right, or other partners, right? It's used in the processes that you've approved through your application for a loan, and we actually audit that to ensure that the people that we've credentialed are acting consistent with their requirements under the Fair Credit Reporting Act as well.

Understood.

The only thing I would add to that is we've also been adding to the capabilities aside from The Work Number, so we've invested, for instance, in the acquisition of Appriss Insights that we closed in the fourth quarter of last year, to be able to have the incarceration and criminal data to add to the suite of products that are addressing both the talent as well as the government verticals, which are growing quite nicely. And we've also signed the exclusive arrangement with the National Student Clearinghouse to further supplement those markets.

Dorian, outstanding point. So we're building -- the data hub which we talked about is being built out substantially. Great point, Dorian.

Appreciate that. Thank you. So last fall, you introduced your long-term financial framework, which calls for 8% to 12% revenue growth, including 1 to 2 points from acquisitions. That's up from 7% to 10% growth previously and 12% to 16% EPS growth, which is above the previous 11% to 14% growth outlook, plus you have a 1% targeted dividend yield. Discuss the biggest drivers of revenue growth by segments? And what do you see as the primary tailwinds and headwinds to your growth outlook?

Yes. So in addition to providing the long-term framework, we also gave a view for what we thought we can deliver not only over 2022, but over the next several years through 2025. And we gave a view that we expect that we should -- to the extent we deliver at just north of the midpoint of that range, we should deliver $7 billion of revenue and 39% margins by 2025, right? And the real driver, the acceleration that you've seen principally in our long-term framework is really driven by Workforce Solutions, right? Workforce Solutions is growing at 13% to 15%, and the reason they're able to outgrow is a, the uniqueness of the database, and it's really all the things we just talked about as we continue to substantially grow The Work Number itself. It allows us to build out more products more effectively as we add more data assets, as Dorian mentioned, in terms of education, health care information, both sanctions and credentials and criminal data. We're able to provide deeper and deeper solutions into talent as well as into government. And we think it's -- those -- the continuing growth of that data asset with extended decisioning, which allows Workforce Solutions to be able to grow at that 13% to 15% and really accelerate Equifax' overall growth. The other real driver of our accelerating growth, we believe, is really NPI, right? And our new product program is being substantially benefited by the work we did over the past several years on tech transformation. And what you've seen is very strong improvement in our new product, our Vitality Index, which is the revenue from new products generated in the current year of new products launched over the past 3 years. We exceeded 9% in 2021, which we think is a strong milestone for us and an important delivery point where we delivered at well above the 8% that was our original guidance for 2021. And we expect in 2022 to deliver over 10%, which is above our long-term framework. So we think the 2 big drivers that will allow us to deliver at these higher growth rates are the continued strong performance and growth of EWS and also the acceleration in our new product program as we complete tech transformation and are able to deliver more multi-data products faster. And in terms of the acquisition program, which also adds new data assets, which accelerates that growth as well, right? I mean we talked about it in the long-term framework, 1 to 2 points from the addition of new companies through acquisitions each year. We continue to focus on adding new data assets. We think we had an outstanding year in adding new data assets and EWS services in 2021, and you'll see us continue to do that as we go through 2022 and into 2023, adding bolt-on acquisitions that build out our data assets that allow us to generate new products faster using the Equifax Cloud.

Just shifting to NPI. Equifax introduced 151 new products last year, and you just highlighted 5 of those on Slide 9. What are the 3 most important new products that will drive revenue and earnings growth this year and next?

Yes. So I don't know if I want to go to specific products, right? But really, our NPI program is built around our ability to deliver products that are targeted specifically at the needs of individual customer sets, right? So the reason why you see us focus on the number of new products as well as on the revenue they generate -- and obviously, the revenue they generate is the focus area that we have as a company -- is because it allows us to work directly with customers to generate new products at an accelerating pace that deliver the benefits that those customers need and then drive them to scale. Obviously, certain products generate much more revenue than others. We've seen, obviously, a very good performance in new products, and we've talked about this all year in talent solutions and in some mortgage products because of the size of those markets. But importantly, the reason why we talk about the 151 products, up from 134, is really the fact that the program is so targeted on delivering products that our customers work with us on to deliver. So we'll make sure that we put focus on products -- on smaller products as well as larger products that support the programs of our customers so that we can build that relationship with customers and extend it, and that will allow us to drive our Vitality Index not only in 2022, but through that large number of new products, we think it will allow us to deliver it more consistently as we go forward in '23, '24 and '25.

Incoming investor question. On mortgage within EWS and Verification Services, could you come back on what you saw happening with the number of pulls to The Work Number during an application before and during COVID? What do you expect will happen to the number of pulls now? Should it come back down or remain at an elevated level? And is the trend different for purchase versus refinancing?

Yes. So generally speaking, right, what we've been seeing over time is that the number of pull -- for a mortgage in which a work number inquiry is made, if there's at least one, right, we've seen fairly consistent performance and slow increase in the number of pulls per transaction on the work number. And it really hasn't been, I don't think, elevated during COVID. There was a little bump in early 2020 that I think we talked about when we talked about our first quarter and second quarter 2020 results. But I'd say, over the past several years, what we've seen is fairly consistent performance in terms of growing the number of Work Number pulls per mortgage transaction where The Work Number is inquired upon. And we expect to be able to continue to do that as we continue to strengthen The Work Number and extend the number of system-to-system integrations, right? So what allows our number of pulls per transaction to go up is principally around extending system-to-system integrations. And generally, when that occurs, we see an increase around the order of 20% in the number of pulls per transaction, when someone transacts with us. And then also, we're continuing to drive new products that make it more attractive for our customers to want to pull from us. We've talked frequently about the fact that we're now bundling products where you can pull multiple borrowers from us through one transaction, you can pull multiple borrowers' Work Number data as well as 4506-T, so their tax return data. So we're making it easier for our customers to transact and move through their approval process faster.

And is that trend different for purchase versus refinancing-related pulls?

Not really. No. I mean, generally speaking, we see a relatively consistent performance across both. They can vary in time, but the trend tends to be the same.

I appreciate that. Open banking is an important growth market for many of our payments and financial technology companies, which Equifax addresses through its acquisition of Kount, focused on global identity fraud and account score for U.K. open banking and data categorization. How is Kount performing compared with your pro formas at the time of the acquisition?

Yes. So we talked about Kount a little bit, I think, on the fourth quarter call, right? We've seen very nice growth in Kount as we've moved through 2021 and accelerating growth as we went into the fourth quarter and moving into the first quarter, right? So we feel good about the integration pace that we're on now. We have very good combined teams that are allowing us to deliver what we call identity foundry, which is a benefit not only to Kount, but also to Equifax traditional customers. And we're increasingly seeing the use of Kount data in products that were being sold to Equifax traditional products around, say, account opening validations, and we're also increasingly integrating Equifax traditional data into Kount products. So we feel good about the pace of what we're seeing in terms of growth of Kount. We saw very nice growth of Kount revenue as we -- in the fourth quarter and as we were exiting the fourth quarter, and we're expecting to see good growth in count as we go into 2022. We don't really give specific line of business level forecasts, right? But we feel very good about the growth we're seeing, and we saw nice growth in Kount in 2021 and expect very nice growth in Kount in 2022.

And we talked about it, David, about being about 20% annualized growth when we did the acquisition in the first quarter, and that really was the performance that we saw in 2021.

Understood. In 2021, you closed 8 acquisitions. Looking forward, which new proprietary data sets and technologies should we expect you to acquire that really fit best with your growth strategy?

I think where you're going to see us go is the same place we've done over the past several years. You're going to see a focus on alternative data assets in USIS, both in consumer and commercial. So we bought PayNet. We bought Ansonia. On the commercial side, you saw us buy DataX and Teletrack. On the consumer side -- and you'll continue to see us buy assets that support identity and fraud, as you just referenced, that support account acquisition as well as our traditional identity and fraud business. And I'd say you'll see us consistently focus around those data assets in USIS. And in Workforce Solutions, you're going to continue to see us buy services that come with records, right? So we'll continue to buy services that extend the services we can offer through employer services. We're going to increasingly buy, and we did it quite successfully in 2021, service providers that are focused on delivering through the channel, and the channel oftentimes being payroll providers, so that we can increase the services we're providing directly to customers, but also through the channel. And then also, we'll continue to acquire companies that just have records that do Verification Services themselves, right? So last year, we bought i2verify that had a specific focus around health care and around higher education. And we acquired them, I believe, in the first quarter of 2021 to add that record capability and that sales team and acquisition team to the Workforce Solutions team. So you'll continue to see us focus there. We'll also acquire international data -- international credit bureaus when they're available. Oftentimes, we're generally focused on trying to find the largest credit bureau in a country if it's a small country or a substantial bureau in a larger country. And you'll continue to see us focus there. And [Technical Difficulty]

David, I think we're still online. I think John is coming back.

Can you hear me?

Okay. Yes.

We can hear you now.

Sorry. I don't know where you lost me. Sorry about that.

You were talking about...

You were talking about new records, new data sources.

Oh, yes. So if you lost me at international, we'll continue...

That's where you were, John. Yes.

You'll continue to see us focused on acquiring international credit bureaus when they're available: Smaller countries, generally the largest in the country; larger countries, again, looking for substantial assets.

What do you see is the greatest business risks facing Equifax? And if you could also talk about the impact of inflation on Equifax, both in terms of revenue, i.e., pricing and then cost structure, labor inflation, for example.

Sure. So I mean, obviously, a big variable for us in 2022 is what's going to happen with the mortgage market. And we gave you our view on where that -- and what we think the mortgage market will do, and that's obviously a big variable. In terms of inflation, right, just starting on the cost side, we're not really a commodities purchaser, right? So I mean, really, the biggest impact of inflation on us is around our workforce, both our direct FTEs as well as the contract workforce we have. And we're a technology company, and so it's really inflation in the workforce around technology. That's been manageable. As we're moving to the cloud, a lot of cloud services, right, continue to come down in cost, right, as the cloud continues to dramatically expand. So we think that's an area where we may be advantaged versus others that haven't moved to the cloud as rapidly as we have. But in terms of inflation, I'd say those are the areas we're going to see at most heavily, really specifically around our FTEs and CTEs, in inflation. In terms of more broadly, the impact on our business, generally speaking, if inflation is driving somewhat higher interest rates, right, when our customers are more profitable, they tend to be more active in trying to add more accounts, right, trying to grow their book of business. And since we transact with our customers around really transactions more than balance levels, when that happens, we tend to see a benefit, right? We've seen it as we've gone through the second half of 2021, that we've seen really strong growth in marketing services, right? And our expectation is that strong growth in marketing services tends to lead to strong growth in online as we move forward. So to the extent our customers continue to grow in profitability, so think financial institutions, think fintechs, we would expect them to continue to be very active. And as they're very active, that should be beneficial to us.

And what about pricing? Do you have the ability to significantly increase prices in this environment when you look across EWS, U.S. consumer credit reporting?

So I think, generally speaking, what you've seen across Equifax, right, obviously, we have -- we generate higher AURs, so average unit revenue per transactions, really based on new product introductions, right, and our ability to deliver more value to our customers as we go forward. So we've done that in Workforce Solutions by deepening our database, right, so that if you were buying mortgage [ 12 ] in 2020 and you're now buying mortgage 12 today, you're getting a lot richer set of data from us. So we have the ability to get price when that occurs. And then we also have added a substantial number of new products in Workforce Solutions that tend to be at higher transaction values because they bundle more and more services. So we've seen AUR growth there. In USIS and in our credit-based businesses, we're able to drive higher AURs again through the same method. As we add more alternative data and can show that by using our alternative data along with our credit data that they can get better decisioning, we can get higher AURs. On a traditional credit pull, generally speaking, right, you see prices decline slightly. We've generally talked about low to mid-single digits. You've seen declines over the years. Our AURs tend to be -- we tend to be able to drive them up because we're able to add new products, and that's why NPI is so valuable, right? And we can get higher pricing because we deliver better decisions. And then also that's one of the ways you can drive share increases, which is one of the things we talked about we believe we'll be able to do as we move through 2022.

Understood. What do you see as Equifax' most underappreciated strengths?

Well, I think you and the analyst community know us pretty well, right? And I just -- what we believe people are focused on, right, and what we focus on, right, is our ability to generate and drive asset growth and record growth in Workforce Solutions and then our ability to take the tech transformation, which we think is highly unique and will give us a substantial advantage relative to our peers starting in 2022 and really going forward and allow that to drive new products, right? And that acceleration in NPI, along with the addition of new data assets, we think is what allows us to deliver the long-term framework that we think is so compelling. And so we're excited about that opportunity. We think people understand that well and are continuing to focus there. I think there's a lot of questions around what exactly is the mortgage market going to do, what could the impact of some other current events have on Equifax. And those are questions people have, which I know they're trying to work through for themselves. But I think long term, we feel very, very good about our ability to deliver at the long-term framework and the benefits of the tech transformation in terms of both revenue and cost as well as the benefits of continuing to substantially grow our data assets not just in Workforce Solutions, but in our credit businesses, we think will also be accretive to our long-term growth.

Understood. John, Dorian, Trevor, thanks so much for being with us here today. We greatly appreciate your insights and your time and look forward to tracking Equifax' growth going forward.

Thank you very much, David.

Thanks, David.