Equifax Inc. (EFX) Earnings Call Transcript & Summary

Good afternoon, everybody. Thanks for joining today. My name is Andrew Nicholas. I'm the research analyst here at William Blair, covering the information services, HR technology and consulting sectors. Before getting started, I am required to inform you that for a complete list of research disclosures or potential conflicts of interest, please visit our website at williamblair.com. With that out of the way, I'm very pleased to welcome Equifax CFO, John Gamble; and Head of Investor Relations, Trevor Burns, to our Growth Stock Conference here. Thank you to both of you for joining.

Thanks for having us.

All right. Great. Well, I just kind of wanted to start with a high-level question here to get everyone kind of familiar with the story to the extent they aren't already. John, if you wouldn't mind kind of giving a brief overview of the firm, the businesses that you run and anything else that you think is kind of important to understand as a level set starting point.

Sure. Absolutely. So as people know, Equifax is an information services company. And I think what makes us different than some of our peers that you think about as our traditional peers like, for example, TransUnion or Experian, is that we have our Workforce Solutions business. And our Workforce Solutions business is approaching 50% of the revenue of Equifax. And what Workforce Solutions is, is a business where we provide income and employment verifications into the financial services industry, into mortgage, obviously, into non-mortgage lending but also increasingly providing income and employment verifications into alternative markets like talent solutions. Think background screening into the government space to help states and federal government get people enrolled into benefits more rapidly and then also in onboarding. So we provide services to help HR managers manage onboarding processes, unemployment insurance claims processes, I-9 and ACA validation processes. And through that, we gather our employment and income records that's allowed us to build out this very unique business that's been growing, delivering outstanding growth over the past at least 5 years, really more like 10 to 15 years. We had our Analyst Day, our Investor Day last November. We came out with a new long-term framework for Equifax. We indicated over the long term, we expect to grow revenue 8% to 12%. Embedded in that is 1 to 2 percentage points of growth from acquisitions, so delivering 7% to 10% organic revenue growth. The businesses we expect to drive that growth in our Workforce Solutions business is our highest growing business at 13% to 15% expected annual growth in terms of organic revenue growth, USIS growing on the order of 6% to 8% and International growing 7% to 9%. So we feel very good about the long-term growth prospects of our Workforce Solutions business but also our more traditional credit business in USIS, where we continue to drive good performance through our ability to deliver alternative data, not just credit data but alternative credit data and alternative asset data that allows us to help our customers' decision more effectively. In our International businesses, we're in 24 countries around the world, where we've delivered nice growth so far in 2022 and expect that to continue into the second quarter, growing on the order of 10% in both the first and second quarter. So we feel very good about those businesses. We've been going through a substantial technology transformation. We invest -- we've invested an incremental $1.5 billion over a 3- to 4-year period, effectively doubling our spend to move our entire infrastructure to cloud native. So we're moving our entire data infrastructure, our data fabric, on to GCP. We've made a tremendous amount of progress in achieving that. We expect to have the -- principally have our North American businesses, which represent about 80% of our revenue in Equifax, move to GCP in 2023 with a substantial amount of that completed as we get through 2022. By early 2020 -- by the end of 2021, about 50% of our revenue is being delivered on cloud native services. We think the migration that we've made to cloud native services and a single data fabric are fundamental to the ongoing investment case of the company in terms of our ability to deliver new products. We think -- we believe that it's a substantial differentiation from our competitors, and we believe it not only provides substantially improved security and world-leading security, but we also think it allows us to deliver new products faster and will, over the next 3 to 5 years, allow us to deliver substantial margin improvement. Also at our Investor Day in November, we talked about, in addition to a long-term model, our midterm model. So by 2025, we expect to be able to deliver $7 billion of revenue, up from the about $5.2 billion this year and to expand our EBITDA margins up to 39%, so up about 500 basis points with about half of that growth being driven by the benefits that we'll get out of cloud transformation. So -- and with that substantial growth that we're seeing in both EBITDA as well as obviously revenue, we're driving a significant amount of free cash flow with a run rate in 2022 currently moving toward $1 billion, and then we expect, obviously, have substantially accelerating free cash flow as we go forward that allows us to fund the acquisitions at 1% to 2% of revenue per year while also starting to, as we move forward, looking into '23 and beyond, returning increasing amounts of capital to shareholders.

So that's a great start. I really appreciate that for those that aren't as familiar. So I want to kind of pick through each one of the businesses here. A lot of them have a variety of growth drivers that I hope to get to. Let's start with kind of the crown jewel, Workforce Solutions. I think understanding the competitive advantage of that business is very -- is helped by understanding how it kind of came to be. So can you talk about the development of your relationships that have led to the twin database over the past decade to 15 years and kind of how that has developed over that time frame and made it into the business that it is today?

Absolutely. So we acquired TALX in 2007, and they actually started building out the twin database a decade before then. And the way that the business was built was we provide -- and I talked about it a little bit in the beginning -- a series of services to HR departments that are important for them to be able to do regulatory requirements that they have as a business. So for example, we're the largest provider of unemployment insurance claims services to companies in the United States. We file about 1 in 3 unemployment insurance claims that are filed or filed using through Equifax. We believe we're the largest provider of work opportunity tax credit services in the U.S. We believe we're the largest provider of services to validate that you, as an employer, are in compliance with the Affordable Care Act and then to deliver 1095 to your employees. We're one of the largest providers of W-2 services in the United States. We think we're the largest provider of remote and fully digital I-9 or citizenship validations in the United States. All of these services we provide to HR departments require that the HR department provide us with their payroll records and -- or else we can't provide the service. And so in addition to providing those services, what we also provide to companies is, for free, we provide income and employment verification. And if you're a company and you're not using someone like Equifax that -- as an employer, the requirement is, since the records we're talking about employment and income records are governed by the Fair Credit Reporting Act, you're required before you give -- before you provide back to a verifier, to a mortgage lender that may be calling you because one of your employees wants to get a mortgage, you're required to validate that it is indeed a mortgage lender that's calling. And also that I, as an individual, have actually applied for a mortgage. And if you don't validate those 2 pieces of information, you're not supposed to respond and provide the information on the employee back to the lender. So the free service Equifax provides is, we allow -- we provide a service where we validate that it is indeed a valid permissible purpose and that it is indeed a lender contacting the company in order to validate my employment and income. And then also I've applied for a mortgage, and we do it digitally. So we validate all this digitally. So we -- your employee can then access the digital lending markets real time on an ongoing basis. About 55% of the records that we have in the work number are generated through this type of one-on-one activity where we're providing services to an employer. They aren't contractually exclusive, but they're practically exclusive. It's incredibly rare that an employer would provide those types of records to multiple parties for a validation service because of the level of confidentiality of the records. Over a period of 10 to 15 years, we built The Work Number through this one-on-one process. And as The Work Number got larger and larger as the multisided model continued to grow, we substantially increased the number of verifiers, think mortgage lenders, think credit card lenders, think background screeners that were accessing The Work Number to validate employment or income. And as that continued to grow, we're able to work -- start working with partners to get partners to consider contributing the records to The Work Number as well to accelerate its growth, as partners think payroll processors. And so starting over a period of 5 or 6 years ago, we started adding payroll partners as contributors to The Work Number. To the payroll partner, it's a very valuable service to their customer because, again, they can now provide to their customer a free service of employment and income verification. So their customer no longer needs to provide that service themselves. It's more secure, and it gives their employees a benefit because they can now digitally interact 24 hours a day with the digital lending environment. And also, if you're a payroll partner, you get a revenue share. We provide a royalty back to a payroll partner anytime a record that they contributed to us is actually utilized in a verification service. And what we've seen now over the past 3 to 5 years is we've substantially accelerated the number of partners that we've been able to sign up to participate in The Work Number. The vast majority of those partners have an exclusive relationship with Equifax, so they only contribute their records to us. And through our continuing to add direct contributors and our growth in partnerships, we've been able to substantially accelerate the growth in The Work Number over the past 3 to 4 years. We're to the point now where, at the end of the first quarter, we had 136 million records. Think jobs contributed to us in every payroll period real time, and that represents almost 105 million individuals. Some people have 2 jobs, which is approaching 70% of U.S. nonfarm payroll. We also have about 550 million total records on The Work Number, think current and historic jobs, where we're now able to provide not only a current snapshot of someone's employment or income, but we're also able to provide their employment history, so think trended data. And obviously, that trended information is incredibly valuable. What we're finding in financing environments, think mortgage as the largest driver, that approaching or exceeding 1/3 of the inquiries or the responses we get include both current and historic information. And for our non-financing markets and which are now growing rapidly, and I'm sure we'll talk about those in a minute, over 50% of the inquiries we get and responses we get are for current and historical information. There are other participants in the industry. Experian is trying to grow a business here, but the number of unique records that we think any competitor has that we don't have access to, we think, is very small. Our expectation is on the order of 5 million to 10 million. Obviously, they could give you the exact number that they have themselves. So given our incredibly strong position with 136 million records that are growing rapidly, we feel like we have a very, very good position and defendable position to be able to continue to grow The Work Number aggressively over time. Over the past 6 months, we've announced that we've signed 4 new payroll partners through exclusive relationships. We'll start boarding those records. Actually, some started in April, and they'll board throughout this year. So we expect to see very nice growth in The Work Number as we move through 2022. And we think we have -- continue to have a very nice runway to keep adding more and more current records to the 105 million individuals I referenced that we have currently on The Work Number, and we expect that to continue to grow. We also have the opportunity to grow other non-W-2-based records as well for income for individuals, which we're now starting to see progress and growing as well. So there are people that have jobs that are contractors that don't get W-2s, get -- think 1099, so think the gig economy. There's also a significant number of people that are retired and receive pension income, and we're increasingly now being able to add information on that gig or 1099 based income and then also pension income onto The Work Number to continue to grow the depth of the database. So we think it's a classic multisided model. We continue to grow the number of inquiries that hit the database. We think we cover the market very, very completely. And as that continues to be the case, we continue to attract more and more contributors as they're trying to get into the network so that they can have their -- the income and employment of their employees verified from -- verified real-time using the multisided model. So we feel very, very good about the business. We think it's growing at an outstanding pace, and we think it has a lot of legs to grow for an extended period of time. Obviously, in the first quarter, grew over 30%; last year, even faster and really, really performing extremely well. I'll just cover one more thing. The -- obviously, a big portion of revenue from Workforce Solutions is mortgage. Currently, about 40% of the revenue related to Workforce Solutions is mortgage. However, Workforce Solutions substantially outgrows the mortgage market itself, right? In the first quarter, we saw credit inquiries decline 25%. Revenue in our Work Number database actually grew in the quarter, outperforming the market by over 25 points, and that's really because we continue to substantially add records. We grew records 19% year-on-year in the first quarter. We obviously can take some price in this business. We've added a substantial amount of new products, which includes that trended information, that historical information I referenced earlier, and we continue to drive up the penetration we have in the mortgage market. Currently, we're at about 60% of mortgages use the Work Number. We think the way -- if someone's not using The Work Number, the way that they're getting income and employment verification is generally paper pay stubs. That's our biggest competitor. But we've seen nice growth in our penetration as well. If you go back 2 to 3 years, we would be seeing closer to 50% of mortgages using The Work Number. Now we're increasing to 60%. Again, we believe the increasing depth of the database, the increasing likelihood of us being able to respond to an inquiry is what not only drives our ability to deliver new products but also drives our penetration much higher. And for example, in mortgage, we're up to about 75% of the inquiries that we respond to or responded to on a system-to-system basis. The nonmortgage markets I referenced that are 60% of the revenue are growing much faster than mortgage, obviously, currently. We have a large business supporting the background screening industry, where we can provide effectively a digital resume. We think we have a little between 10% and 15% share of providing that digital employment history, and that's been growing extremely fast. Think over 50% per quarter for a series of quarters as we continue to build out that in digital employment history and increase the number of background screeners currently using us to pull that information and move us to the top of their waterfall. And we've also continued to build out our data hub, which includes a substantial number of additional data elements used in background screening. Think educational history, incarceration and criminal history as well as licensure and sanction data in the health care business. We also have a very substantial business in government, actually slightly larger than our Talent Solutions business. Our government business, we help states and federal government provision benefits. So we're involved in provisioning benefits related to income -- sorry, related to food security and rental security. About 2/3 of our revenue come from states. We have approximately half the states working with Equifax, and then we also have a substantial contract with the Social Security Administration as well as we have a substantial contract in working with the Affordable Care Act, where, to the extent you sign up for benefits through the Affordable Care Act, they hit The Work Number to determine the level of subsidy you're receiving as part of the health care insurance you bought. So a long answer to your question, but it's really an exciting business. We've driven tremendous amount of growth in the business, and we think we have a long runway.

Yes. So there's -- as you said, it's multisided. I think that one area that I get a lot of questions on is kind of the runway to record growth. You mentioned pension income is something that you're looking to add, gig economy workers. How would you compare the difficulty of getting those records into the database to maybe the more standard employment records that you have? And how should we think about kind of the acceleration of or the pacing of record additions in those markets?

Sure. So again -- and just to take a step back, right, still a substantial number of W-2-based records for us to add. And we're adding them directly, but -- and also, obviously, through signing up new partners, which, again, I think every new partner we've signed in the last 3 to 4 years has been exclusive. We still -- there's still more partners we can add, but even within the partner universe we have, if you think about many payroll processors, they're made up of multiple different payroll applications. And so we're continuing to board records with payroll partners that we currently have relationships with so that you'll see us adding new records from both existing partners as well as from boarding new partners as we go forward. So we think we have plenty of runway still on W-2-based employment, but in terms of, let's call it, contract or gig economy and pensions, what they are, we think they're just different partner sets, right? And we're -- and we don't have as much experience in it as we obviously have with our payroll partners, but in some cases, the payroll partners are indeed the partner we work with to get some of the gig records, and we're continuing to work with some of those partners as well as new partners to build out the same type of relationships we have with payroll providers and in some cases, software companies. Similar -- it's similar with pension records. Pension administrators are just a different partner set, but we're continuing to work with them to try to board the records that they would have onto The Work Number. And the benefit to the parties they support to either the pensioner, right, or to the gig worker is the same as the benefit that we provide to an HR provider or to a payroll provider's customer. If they're on The Work Number, their ability to access digital lending markets is enhanced because the vast majority of inquiries in those digital lending markets hit The Work Number. So they'll be able to -- I'm sorry, immediately have their income validated digitally by the work number, and we think it's a great benefit to the, for example, pensioners that would be being handled by the pension administrator. And so we think we have a real good opportunity to grow those records.

And then there's also the opportunity, which you've talked about in the past, of acquiring records via -- or at least enhancing record growth via M&A in Workforce Solutions specifically. Can you talk a little bit about that and maybe even the M&A strategy holistically?

Sure. So our M&A strategy holistic, I'll just start at the top. We're really focused in a couple of key areas. Again, we're trying to drive 1 to 2 points of incremental revenue growth per year. We're really focused on buying -- adding to our alternative data assets. So again, Equifax historically and today has a broad swath of differentiated data assets, we think, different than our competitors. So obviously, The Work Number is by far the most unique of those, but others are also, for example, we have alternative data assets in credit. We have a company called DataX. We own a company we just acquired last year called Teletrack that have on the order of 70 million individuals -- have records on 70 million individuals that wouldn't necessarily be contributed to a credit file. Think lease-to-own type records. So those are valuable credit records, right? but they're not necessarily in the credit file and that provides alternative information that lets us score more effectively. We're also very interested in growing aggressively in identity and fraud. We're seeing nice growth in our identity and fraud business. We acquired Kount last year that provides identity, fraud and charge back services into the e-commerce space, and we would like to continue to grow that business very nicely. Kount is growing over 20%, grew actually over 30% in the first quarter, and we think we have a real opportunity to continue to grow that business nicely. And it gets us into a new market segment we were never in before. Kount's customers are obviously retailers but also payment processors into the payment space, where we haven't really played before. So it expands our TAM to look beyond our traditional financial services customers, talent customers and government customers into the payment space and working with retailers. And so we're very interested in diversifying our data assets, also very interested in specifically growing Workforce Solutions, so a tremendous amount of investment there in our acquisition strategy. And then also, we're interested, as I mentioned, in identity and fraud and in broadening our international properties. We just bought a small bureau in the Dominican Republic. So those are the areas of focus we have. Over the last year, we bought at least 4 companies that are consistent with what you described outside of Appriss Insights, which was a large acquisition we did last year in Workforce Solutions. And we continue to buy smaller providers, and there's many of them in the U.S. that provide the employer services that I talked about earlier. So we bought a company last year called HIREtech that provides very good work opportunity tax credit services through the channel, working with payroll providers directly, which we weren't doing before. So we now have a channel presence in WOTC. And then we bought -- and we also acquired records. And that's similar for the other 3 to 4 employers. Edge was similar, the other 3 to 4 acquisitions we've done over the past year that allowed us to add services that build out our employer services while at the same time, buying records. And when we get those records, obviously, we can immediately monetize them because, I said, we have already seen the inquiries. We just aren't able to respond if we don't have the record.

Yes. Just looking to increase hit rates.

Absolutely, yes.

That's ultimately the goal. All right. Switching gears a little bit. Obviously, the Workforce Solutions business is, as I referred to earlier, like the crown jewel. But you have a lot of other things going on, many of which you have touched on. But can we talk about the U.S. business, USIS? One of the things that I thought was particularly encouraging in first quarter results was increasing guidance as it relates to nonmortgage growth in that business. Can you talk about what's working there maybe to the extent that the technology transformation is having an impact, some of the higher growth areas within the U.S. business that are worth calling out?

Absolutely. And again, just -- I'll take a quick step back. So we've disclosed something called core revenue growth, which is our revenue growth excluding the impact of the mortgage market and then some benefits in UC that we saw back in 2020, which were onetime in nature. We started doing it back in 2020 when mortgage was a huge tailwind, so people could see what our real growth was, excluding that huge benefit we were getting from mortgage. And in the first quarter, our core revenue growth was 21%. And principally, that's nonmortgage growth plus the outperformance in mortgage of Workforce Solutions. And we're seeing very, very strong core revenue growth. In the first quarter, we guided to 17% for the year. And importantly, I think as you referenced, that's increased 250 basis points from our November guidance. So in November, we indicated 14-plus percent growth that we would be getting out of core revenue growth, and we're now up to about 17%. And that was very important, right, because that strengthening of our nonmortgage of our core revenue growth helped to offset the substantial weakening we've seen in the mortgage market that's occurred over the past 3 to 4 months. Now specific to USIS, we agree. We think there's some really exciting opportunities, particularly as the tech transformation completes. And it's really around us being able to combine more and more of these diverse data assets into new products. One of the major growth drivers for Equifax is what we call NPI, New Product Innovation. We've launched 150 new products over the past year. And we -- as we indicated, we expect our Vitality Index, which is the percentage of our revenue generated in the current year from products that are completely new over the past 3 years, we delivered over 12% Vitality Index, which is higher than our long-term goal of 10% in the first quarter and expect to deliver 11% Vitality Index in all of 2022, so stronger than our long-term model. USIS is certainly a significant player in how we're going to deliver our NPI in 2022 but really, as you think about '23 and '24, right? As USIS completes the tech transformation as all of their assets, the U.S. credit file, the U.S. telecommunications and utilities exchange, these alternative data assets that I talked about is, they're all operating in our single data fabric where we are ingesting through a common data pipe built on GCP tools. The data across all of those exchanges and linking and purposing it so it can be more rapidly used in analytics as well as decisioning, as that completes, our ability to deliver new products that are of higher value to our customers, we think, only accelerates. And we would expect, as you get into 2023, you'll see an accelerating amount of new products and new product revenue from USIS because of our ability to deliver these multi-data solutions even more effectively. The BU that's furthest ahead in our tech transformation and moving on to a fully GCP cloud-native environment is EWS Workforce Solutions, and we've seen the acceleration in their NPI as well. We've seen Workforce Solutions delivers fewer scores, but they deliver more trended information. And we've seen an acceleration in the new products that we're able to deliver out of Workforce Solutions that deliver more and more trended information, which we think is very, very important. The other thing that's going to, we think, benefit USIS substantially is when we're fully GCP cloud native, again, we won't have premise data centers anymore. So we'll be operating like a "born on the cloud" company. We think that drives 2 things. First, response time is up substantially, right? If you think about someone that's operating in a hybrid cloud, they have owned data centers. They have cloud data centers; lots of network hops that are occurring, which slow down not only a performance but also create greater opportunities for disruptions. As we'll be fully cloud-native operating in GCP principally, some in AWS, we think our resiliency will be much higher. And you think five 9s and higher. And we also think that you're going to see substantially improved network performance. So we'll be able to commit to our clients better resiliency and better SLAs, which we think will help us drive higher share across the credit industry.

Great. We have like 1 minute, 1.5 minutes here. I just -- I'd be remiss if I didn't touch on some of the more current environment question. So I know mortgage, there are certain things that are outside of your control and you're growing in excess of the mortgage market. Can you talk about kind of your expectations for that piece, even though it is outside of all of our control? And also anything that you would say about kind of the health of the consumer, the state of the consumer now as it relates to what you're seeing in your business day to day?

I'll try to go quick, 54 seconds. But the -- so in terms of mortgage, we made the assumption, right? We obviously watch mortgage closely. Second half, we may be at something that mortgage credit inquiries, something we see all of that occur in the mortgage industry like our peers, will be down 40%. That's off of down 20% last year. If you take a look at that compared to the average level of credit inquiries you would have seen prior to the pandemic, that's approaching 25% below those levels, and it's at levels lower than anything we've seen in the past 10 years. That includes a substantial reduction we're assuming in refi as well as some weakening, 5% to 10%, let's say, in new home purchase. So we think we have picked a -- we think we have -- we think down 40% is a relatively conservative level, and we tried to de-risk the mortgage market. We also accept the mortgage market is extremely hard to forecast. And given that's the case, obviously, there's variability in the outcomes of mortgage.

Yes. We're running out of time. We'll -- that's the perfect teaser to get you to the breakout room next, which is in Maher, I believe. Thank you to both of you for joining us, and I appreciate everyone in the room for listening in.

Thank you.

Thank you.