Equifax Inc. (EFX) Earnings Call Transcript & Summary

Thank you for joining. I'm Shlomo Rosenbaum, the business and information services analyst at Equifax. I want to thank you all for coming, which is our CSI conference. It's the first time we've done it in person in 3 years. We're very happy to be back in person and we're very grateful. I want to thank Mark Begor and John Gamble, CEO and CFO of Equifax, for attending.

Thanks for having us.

Really appreciate it.

You have a long history with Equifax. We were just talking about I picked up Equifax in 2009, so it's been about 13 years now. And one of the first companies -- actually, were one of the group of the first companies I picked up when I started picking up the information services space. So I thank you very much for coming. And I figure, we're going to make this -- this is going to be an interactive session. Hopefully, you guys have your own questions. I clearly can -- have a lot of questions for management, and I'm going to throw out a few to just started. But I want to -- I'm going to pull, and please take advantage of the time. We're having the CEO and CFO over here, if you have any questions. First thing I just want to talk, everybody is talking about the economy and what's happening and with interest rates going up and is there concerns about employment, and maybe you could just talk a little bit about what are you seeing from your business. What are the banks and your clients telling you? Like what are they seeing amongst their base?

Yes. First, I think we all know interest rates are having an impact on the mortgage market. We can go deeper on that. But obviously, refis are coming down. And we derisked our outlook for 2022 around mortgage, and we can touch on that, if you want. But to your broader question, from our perspective, the consumer is super strong. And our customers, being the banks, financial institutions, fintechs, insurance, telco, they're super strong, too. So that's a real positive for us. When we think about the second half of this year, I don't personally see an economic event in 2022, if there is one. And just on the consumer, they're all working. If they lose their job, they get another one. There's wage growth happening. They -- their credit scores are up 30 -- 20, 30 points from 2019, meaning they have stronger balance sheets. They use COVID to kind of pay down a lot of their -- keep current on their balances, which drove up their credit scores. If they're a homeowner, they've got a ton of equity in their home now that's untapped. HPA is up 30% in the last 24 months. So there's, I don't know, $9 trillion of untapped equity there, which will have some element of positive on the refi market for cash-out refis. At the low end on the consumer -- and obviously, offsetting all those positives is inflation. And that's had some impact on consumer confidence, but you have a very strong consumer that's working. So that's a real positive. And then if you go to our customers, the financial institutions, they're really strong. Some of the fintechs are struggling now because of where they play in subprime, and that's the consumer that's getting some pressure from the very unprecedented inflation that we're seeing is -- a low-end consumer that is still working is being pressured by inflation. A lot of their wage gains are being chewed up by inflation, so there's some pressure there. And we've seen some small upticks in subprime delinquencies, which is a small portion of the ecosystem. And then just -- as I mentioned, our customers are strong. The financial institutions have really strong balance sheets. They're still marketing. They want to grow their balance sheets. Their balance sheets came down during '20 and '21, and they're working to rebuild them through originations. So from our perspective, it's a very good environment for a data analytics company outside the mortgage refi market, which obviously is having an impact on us, and we're managing that. But we don't see a recession in the second half. It just wouldn't happen that quickly. There's just too much strength.

Okay. And then you talked about like the lower end starting to get pressure. I mean how much of your business is really the -- where we end at this point? I mean the fintechs and the...

BNPLs.

Yes. There -- it seemed to me like for better or for worse, you weren't on the cutting edge of that. And so probably less of there to be an issue. And then there's also -- like the big banks don't really -- that's not really their forte.

They don't play there. No, you're exactly right. It's a space we want to be bigger in. A couple of years ago, we really amped up our resources in fintechs. As you pointed out, one of our competitors is really a leader there, and we've been working to chew into that share to gain some market share. We've got a lot of great assets there. Our differentiated assets are real positive for all of our customers, including the fintechs. The fact we're moving to cloud native is a real asset for us. Of course, Workforce Solutions is used by many of the fintechs, so we're already connected with them. So we want to grow our share there. But as you point out, I would expect in the second half some of the fintechs to dial back some of their originations, which will be a negative. But it's a small piece of our business, and it's a small piece of our competitors, frankly, but it's one we want to be bigger in. The BNPL players are really going to be more of an opportunity, from my perspective. They're a big force in that subprime world. As you know, historically, they've not done credit underwriting. They're moving to credit underwriting, both because they really need to better understand the loans they're extending, even if it's over 5 months and 5 payments. They've got some real exposure. Particularly, they basically play in subprime and millennials, which are thin files. And not understanding that credit is a challenge. So they're moving to credit. And I think as you know, the regulators here and in other markets are pressuring them to do that. So that is more of an opportunity. Net-net, that's not a big part of our business, but it's one we are focused on and we want to be participating in.

Okay. And one last one I'm going to throw in terms of the economy before I kind of open it up a little bit more is you have 2 aspects of your business that seem to me would be leading indicators. One is the batch file where when things start to go bad or clients get nervous, all of a sudden, they want to do all this analysis on their portfolios. And the other one is all this data that you sell to companies like [ Sterling ] where the CEO was just in here for employment. And both of those are usually -- people are like, maybe I don't need to fill all those positions. Maybe I don't need to go ahead...

There's no signs of that right now. As you know, there's -- I think there's double -- there's a record number of open jobs today. So there's still a shortage of workers. So we're not seeing any of that, and I wouldn't expect that to turn like quickly if it's going to turn, meaning not in the second half. And all indications we see is there's really big opportunities for us, and we don't see any pressures there.

And on the batch stuff is...

In the batch, we're not seeing any indications -- any change in behavior. As you point out, when a recession hits, and it's generally when our customers start to see delinquencies rise, they'll dial down on marketing dollars and then increase back book, as you point out, rescoring the book, credit line decreases, collections efforts. We don't see any change in that and don't expect to in 2022, meaning they're going to continue in a normal course from our perspective through the year.

Got it. Great. Okay. I want to just check if there are anybody who have any questions that they want to throw out your opportunity to Mark or John. Got the numbers guy up here, too.

Yes.

Okay. Well, very good. Then I'm going to -- John, let me ask you a question. If you -- clearly, you took the guidance down pretty significantly, not significantly in terms of the whole company, but it was something there -- relative to what you're expecting in the mortgage market, it was a big change. Given what we're seeing with inflation in interest rates, how confident are you that you really brought it down to a level? Like, hey, we don't have tremendous risk from mortgages [ going ]. Well, if we see another 150 basis points increase in rates, is that like, oh, gosh, we got to rethink this again? Or how are you thinking about that?

Well, so what we do is 2 things, right? So yes, we did adjust mortgage, and we'll talk about that, obviously, but we also took up substantially our core revenue growth, which is effectively our non-mortgage growth. And we've taken that...

Which is 75% of Equifax.

Right. And we took that up over 200 basis points since our November Analyst Day and another 100 basis points between February and April. So we think that's a critical thing for people to make sure they understand. And that growth is really driven by really strong performance in Workforce Solutions. Mark just covered it around talent and government and then -- but also really good performance in international. And we saw good performance in USIS online. So we think that, that activity in April was very important and really portends for the ongoing growth opportunity in the business. Now specific to mortgage, what we did -- and we think we substantially derisked the business. Now admittedly, the mortgage market is extremely difficult to forecast, and what we tried to do is pick a level that was at very low levels. So talking about the second half, what we did is we took credit inquiries, which is our measure of the mortgage market. And as a reminder, just -- we, just like our peers, we see every credit inquiry that goes into the market because of the structure of the market. The GSEs require a tri-merge report to be pulled if you're going to sell a mortgage through the GSEs. So we all see those, and 40% down in credit inquiries is actually equivalent to a deeper decline in originations because what happens during rising interest rate environments is people tend to shop more. So they'll apply for more mortgages than they would in their search process, so the number of shopping activity goes up relative to the originations. So credit inquiries down 40% is actually like originations down meaningfully more than 40%. And taking a look at the level of credit inquiries we're talking about for the overall market versus a normal period, say, 2015 to 2019, we're down about 25% from those levels of inquiries, and we're at levels that are lower than anything we've seen in the past 10 years. So we think we substantially derisked it, down 40% this year, off of down 20% last year, so down over 60% versus the highs we saw in 2020, levels 25% below the average and below anything we've seen in the past 10 years. So we think we substantially derisked it. Can you come up with a scenario where things could be worse? Sure, right? But we think we've done it. We took a substantial amount of the risk out of what the market looks like in the second half.

Okay. And I just want to touch on one thing that you mentioned because I think that this is a picture -- this is a point that is kind of a myopic focus right now on mortgage. And if you get past the mortgage, which if things just kind of run their course, you basically comp on that in another -- after 1Q '23. And if you're looking at Equifax' kind of compounder story, which is the way that I look at it, you run through that and then you get to, okay, what is the rest of the business doing without those headwinds? And maybe you could talk a little bit about growth of like 14% outside of mortgage, right? It was like a 14%, 15% somewhere in that range, I believe, in the first quarter. Core growth.

Core growth was over 20%.

Over 20%.

So very strong. And then we guided to 17% for the year, which, as you know, is substantially above our long-term framework of 8% to 12%. So you've got the rest of Equifax performing really above our expectations, meaning we guided up from where we started the year. And it's really broad-based. As John pointed out, international, first quarter was up 10%. USIS online was in that 10% range. And then Workforce Solutions, obviously, very, very strong with all the verticals that it has and all the levers, whether it's records, price, product, penetration. And it's nonfinancial services verticals really powering that 17%. And I think as you pointed out, it sets us up for 2023, which we'll start looking at as we get closer to it. But we're really pleased with how the core of Equifax is performing. It's -- we can't manage an interest rate environment that the Fed is taking up rates where they are as far as a mortgage refi market. But the other thing, I know you know this, you've been around the space long enough, is that the mortgage market doesn't disappear, right? In any economic cycle, the mortgage market stays there. People still moves. They buy houses. There's still some level of refis, particularly cash out. And remember that huge $9 trillion of untapped equity in people's homes today, people are going to go after that. That's a mortgage market. And you go back to kind of '08, '09, the last time we saw a real recession, global financial crisis, our mortgage business in '08 was down 10%, right? So we're laying in something that's significantly different than that. But it doesn't go away. There's a base business there. And we're really pleased, as I mentioned earlier, about just the core performance of the business.

It's really strong. I mean I haven't -- the question that I think about when I think about the strength is we still -- 1Q '22 versus 1Q '21, you still have an opening up benefit over COVID impact orders. And so...

Sure. And we're powering way past that.

Right. So that's what I want to ask you about. Because the new product innovation and the stuff that's really driving the long-term growth, are you able to kind of benchmark against something and say, hey, we're definitely benefiting from the opening up. But look, hey, the pace of what we're doing is...

Well, new products are great example. I think as you know, historically, we did 70, 80 new products per year. Last year, we did 150. We're kind of on that pace for this year. So kind of a doubling of our new product rollouts, which is really quite intentional. As you know, when you look back to our cloud investment we did back in 2018 and we've been executing over the last 4 years, $1.5 billion incremental investment to be the only cloud-native data analytics company and also to bring our siloed data assets in a single data fabric, we did that to get the cost benefits. We did that to get the competitive benefits that will come from being always on and delivering faster data to our customers, which will drive market share, but we really did this to drive new products. And you're starting to see the early innings of that, even though we're only halfway done with the cloud transformation at the end of the year. This year, when we reach the end of the year, we'll be 70% to 80% complete, and you're seeing the early innings of that new product capabilities really take hold. We've added resources. Now we're leveraging the cloud in a single data fabric. So we've close to doubled our new product rollouts, but then the rubber hits the road in our revenue. And as you know, we've taken our Vitality Index up as a part of our long-term guide of 8% to 12%. We have a 10% Vitality Index. And our definition on Vitality is new products introduced in the last 3 years. So this year, we started the year with a goal of 10%. We upped it to 11% in April, and then we actually outperformed in the first quarter. We were 12%. But if you think about a 10% Vitality Index, that's $0.5 billion of new products in our revenue that we introduced in the last 3 years. And I think that's an evidence of the changing Equifax going forward. And when you move from '22 into '23, '24, '25, some of the levers we think about is certainly new products continuing to roll out, completing the cloud, we're going to get those benefits. Workforce Solutions becomes a larger portion of Equifax, which accretes in revenue and margin. And we think the power of Equifax when we get into '23, '24, '25 is even stronger.

Right. Again, if anyone has any questions, I want to make sure that people have a chance to. Okay. Then I'm going to ask you a little bit more about the pace. Historically, when I thought of new product innovation, there's usually little revenue the first year of new products, right? So the step up in pace in new product innovation for that 150 products last year is really going to start more this year and then be much more in full impact in '23. So the step-up of where you've taken, and if you keep the pace up, that's really kind of a snowball effect that we should think about it in '23 and '24.

And that was a big part of our increase in our long-term framework guide. As you know, we took our 7% to 10% historical long-term revenue growth rate up to 8% to 12%, so 100 on the low end, 200 basis points on the high end. And a piece of that is our cloud benefits driving the NPI rollouts, new product rollouts. And we included in there, as I mentioned earlier, a 10% Vitality Index is really helping fuel that increase in revenue growth rate. The other piece is Workforce Solutions, which, as you know, in that 8% to 12% is about a 13% to 15% long-term growth rate. So it's growing faster than the rest of Equifax and very quickly heading towards 50% of Equifax. It's in the mid-40s now. And with it growing faster than the rest of Equifax, plus the new product rollouts, that really gives us the confidence in that 8% to 12%. And I think as you know, back in April and back in November, we talked about a 2025 goal of $7 billion of revenue versus we'll be about $5.2 billion at the midpoint this year. That's that 8% to 12%. But we also reconfirmed our goal of moving from 34% EBITDA margins to 39% or 500 basis points of growth between now and 2025. And the cloud benefits drive about half of that on the cost side. The other half is that revenue accretion that comes into our margins, both from new products and from Workforce Solutions being a bigger piece of the company.

And as you said, if you look back to 2020, that's really when the new product acceleration started, and we started launching a lot more new products. And you're starting to see the revenue benefit of that this year, right? And so that stair step is something you can actually see in our results today.

So realistically, I mean, if you had to -- everyone likes to use the baseball analogy. What inning are we in from benefiting from moving into the cloud and being cloud native?

Early. Second, third inning. Remember, at year-end, we were 50% complete, and we just completed that in the fourth quarter. So we're starting to leverage that. The end of this year will be 70% to 80%. We'll have work to do in '23 and '24, and call it in that time frame will be complete. But you're starting to see us ramp ahead of that in some regards because we put more product resources into Equifax. We started that, as you know, in 2019, '20 and '21, putting more product resources, knowing we're going to have these new capabilities from the cloud, knowing we're going to have a single data fabric, and we've been ramping the new products in some regards in advance of the cloud capabilities. The other chapter of the cloud is really our competitive positioning. By being always on, being in the cloud versus having outages in a legacy environment, which is where we were and where our competitors are. And then second, the speed of data transmission. That's a next chapter for Equifax, meaning in '23 and '24 when we complete the cloud where we believe we're going to get market share gains, moving from secondary to primary because we're always going to be on. Remember, the digital macro, all of our customers' transactions are increasingly between them and a phone, a tablet, a computer. They're digital, and we have to be on for them to be on. And if we're down, their systems are down, they lose the customer. So we've become more valuable as a partner, which we believe is going to move us from secondary to primary position. So that will be an opportunity that we'll start to see more of. So back to your question, we still think of ourselves as early innings of this. We've got to complete the cloud, but we're starting to leverage it. We're starting to see it. And I would argue you're seeing it in our numbers. Having non-mortgage growth of 17% in 2022, you haven't seen in a long time, and that's on top of a strong '20 and '21 non-mortgage growth. So we're starting to see that. Of course, Workforce powers that, but they're all starting to get the benefits from those cloud capabilities and single data fabric. And of course, the rubber is hitting the road on new products. And we've doubled the number and our Vitality is way up.

How much of a difference is the always-on versus...

Huge. It's like going to become table stakes. And what our customers are going to increasingly do is put service level agreements, SLAs, in place with us and our competitors around that always-on, what your service capabilities are, meaning how often you're down, we'll be able to achieve that. You can't get that in a legacy environment. A legacy environment, you keep 2 data centers. One goes down, a lightning strike, there's an electrical problem, there's a computer problem, you switch over to the backup data center. A ton of cost, but that switch is friction. While you're switching, your customer's down. That doesn't work. It's like you -- think about your iPhone. If you have an app on there that doesn't work, you press it, and it just spins. You don't use it anymore. They lose their customers. And I'm in lots of dialogues in the C-Suite with customers who talk to me about how important always on is, and we're delivering that. And as you know, we're the only ones that are going to have that capability. Now our customers will keep investing in more hardening of their legacy infrastructure, our competitors will. That's costly, but you still can't get to [ 99s ].

Got it. Now what's...

Then the other one I would add to it is the speed of data transmission. Same element is -- remember, every time a customer accesses our data or our competitors' data, they come to us to get it, and then they pull it back. So there's friction in that response time, that cycle. The cloud shortens that, takes milliseconds out, which makes us more valuable in response time. Because on the other end, you've got a consumer on their phone that's pressed the button and waiting for the data decision to come back. Shortening that's going to be valuable. So it's another competitive advantage for Equifax. These all pile into the cloud benefits. And of course, you -- back to your question earlier about which inning, we're in the early innings, but we can see it's going to be a great game.

Got it.

A question there.

[indiscernible] as you think about some of the kind of newer underwriting models and scores they've been using across the financial [indiscernible], take it from insurance. On the life insurance side they're using credit scores to do [indiscernible] life insurance policies or the consumer side or the commercial side...

Using alternative data beyond the credit file.

[indiscernible] with the insurance and [indiscernible] on the credit side we've seen the departure [indiscernible] different models that they're using [indiscernible] some of the traditional credit scores [indiscernible].

Adding data to it. It's a huge opportunity. And it's why at our heart, we're looking for more data assets. We believe that we want to have scale data assets our competitors don't have. So that's a big part of our strategy, and we have a bunch today. If you rack up our data versus our competitors, we think we're advantaged big time. And I'll go to the one that's just at the hallmark there is our income and employment data. Nobody else has it, and very valuable. If you think about an underwriting of combining someone's credit score, which is your propensity to pay based on your past practices, did you pay your bills on time, your financial bills on time in the past, is your credit score. And then if you add to it, is Mark working, and how much does he make, it drives up the predictability of that decision. So that's what you're talking about on alternative data. And there's a massive macro. When I think about big macros in our industry, one is digital, everything going online. So you have to be fast. You have to be always on, and you have to really deliver that. The other is the explosion, as you point out, of data. Our customers all want to use more data. Remember your stats class in college. When you add data elements, you drive predictability. The challenge with adding data elements is the friction of doing that. A lot of our customers are legacy-based, so they can take a credit score and a credit file. But when you're adding other data elements, it's very hard for them to do. We believe our cloud investment in our single data fabric where we put all the data together is going to make it easier for them to bring that data in. And what that means, it's really back to the new products. We're rolling out solutions that take data elements. Credit file is kind of a bedrock and most decisioning around risk, adding elements to it. And we're also using our M&A to bring new data assets in. Just in the last 15 months, we've done 11, 12 acquisitions. Every one of them check the box of unique data assets. We bought a company last year in the identity and fraud space called Kount that brought in 32 billion interactions a year of transactions with consumers around identity. So it strengthens our identity business, more signals and very unique to e-commerce data that's very frequent. It happens very, very often because you're shopping all the time, where financial identities [indiscernible] is once a month. You pay your bill once a month. So very powerful. We bought a company called Appriss Insights to add to our Workforce Solutions business that brings incarceration data that's used by background screeners and government agencies when they're offering social services or doing a background screen. They're the only ones that have those connections on that criminal justice data. So we bought another company that has alternative trade line data outside the credit file. We had bought one back in 2018 called DataX. We bought another one called Teletrack. The 2 together have 80 million -- 70 million, 80 million unique individuals in it that either are not in the credit file or are thin files, so it's additive. And as you know, a lot of the customers want to originate those kind of consumers. And this is data that comes from payday lenders, rent-to-own companies, subprime auto lenders that don't report to the credit file, but both companies built up networks of collecting the data. So we have a big strategy about adding to our really scale data sets and then putting it into single data fabric. So instead of siloed data assets, putting it all together, so it's more accessible by us and our customers and then leveraging our cloud capabilities to make it easier to connect. So it's a very big macro for the industry is more data. The challenge is how do you deliver it so it can be actually integrated into a decisioning solution at a bank, at a fintech, an insurance company, et cetera. But that's central to our strategy.

Do you [indiscernible] and how do you guys think about that given where we are in the economy?

Yes. You may know my background. I was a credit card guy for 10 years before Equifax. So I'm -- I understand the credit space. They're going to have real challenges because they don't -- they haven't been doing underwriting, right? They've been doing an identity check on the consumer, then they just offer the credit, the 5 payments on the shoes, the jacket, the shirts, et cetera. And they're seeing pressure, I think. As you know, if you read about it, the few that report are seeing delinquency pressure because they're generally playing in subprime and millennial spaces because they have thin credit files. They're going to start underwriting. They already are. They're going to start using our data, meaning our credit file, in order to do that underwriting. That's a positive for us going forward. They're also being pressured by the regulators. I think you know the CFPB has launched an investigation of that space about their use of credit. And are they offering credit to someone that can pay it back, right? And that's what underwriting is all about. So we see opportunities there. They're also starting to contribute their data. It's very valuable data because it's more trade lines. And very frequent, people have just a 5-month loan, if you will, on a pair of blue jeans. That data is now going to start coming in. And we were one of the first credit bureaus data analytics companies to open up that contribution. And that's happening not just here in the States, but we have a big business in Australia. We're a market leader, same thing. BNPL is big there. They're doing the same thing up in Canada, same thing in the U.K., same thing -- and it's an opportunity for us along with the fintechs.

I want to thank you very much for coming. This is -- really great to see you guys. And...

Thanks for having us. Great to be face-to-face.

Yes, it definitely is. And I think it's really an interesting story. People can get past the, hey, mortgage, mortgage, mortgage. There's a really fantastic growth story that's over there that just needs to be pointed to.

Awesome. Thanks a lot.