Equifax Inc. (EFX) Earnings Call Transcript & Summary

Okay. Good morning. Yes, I think we're still in the morning. That's right. Good morning, everybody. Thank you for being here. For those of you who don't know, my name is Manav Patnaik, I'm Barclays' business and information services analyst. But a special thank you to Mark Begor, CEO of Equifax or being here. So Mark, thank you so much.

Thanks for having us. Great to be here.

We'll jump right into Q&A since we've got a short time here. But -- so Mark, maybe I just want to start off with the USIS business. You're taking over responsibility there -- and so just talk to us about kind of what the focus there is going to be in terms of our interim leadership, let's say?

Yes. First off, I want to find a new leader as Manav was pointing out, the leader that's running the business is going to leave Equifax, and so we'll work on finding a new leader. We'll look internally and externally. And in the interim, no change. We're really focused in Equifax and in USIS around completing the cloud. As you know, that's a huge project for us. And workforce is way along in that. USIS is in the final chapters. So they've got a couple of quarters to go. So we want to get the cloud completed. Certainly, their focus on new products is very similar to the rest of Equifax. We've done some meaningful bolt-on M&A inside of USIS and identity fraud with Kount and Midigator. And then also in the differentiated data space, most recently with Teletrac, but we bought DataX and PayNet. So continue to drive those integrations and basically executing the business. So nothing new there, but kind of the normal priorities that we have across Equifax.

Got it. And then can you just talk about how the cloud transformation will kind of help pivot that growth higher? Because I mean, compared to the peers, you would say it's been still a little bit below the peers. But just what is the...

The time frame -- so as you know, in our new long-term growth rate that we rolled out a year ago in November, we're counting on Equifax growing 8% to 12%. Inside of the 8% to 12%, we've got workforce growing 13% to 15%, so north of the 8% to 12%. We've got international at 7% to 9%, and we've got USIS at 6% to 8%. USIS over the last couple of years has been inside of that 6% to 8%. In '20 and '21, our view is they outperformed their peers. As you know, we had a -- and we talked to you about it. We had a product execution issue in FMS around -- in a head of record solution that didn't perform as well as we would like in 2022, which has impacted our growth. But in the quarter -- in the third quarter, their online revenue was up 9%, 6% organically. So that's in the 6% to 8%. What we want to do is get them solidly in the 6% to 8%. And we believe -- I believe that completing the cloud, allowing them to really accelerate their new product rollouts. They're indexing below our 13% for 2023 -- or 2022, where workforce is north of that. So that's going to be a big positive. And just the focus, there's really a big pivot coming at Equifax, where for the last 4, almost 5 years, we've been running the business while building out this cloud transformation. It's a huge project. And so from a bandwidth standpoint, we've had a ton of focus from the team on doing two jobs. Workforce has that most of that behind them, and we're seeing their performance really super strong as they're focusing just on offense, just on growth. New products, M&A, commercial execution, records in their case, all the levers that they have. USIS is a couple of quarters away from being able to do that, too. So I've got a lot of confidence in them operating in that 6% to 8% range. And if you like 8% to 12% and you like EWS at 13% to 15%, which we do. We like international at 7% to 9%. They're in the teens this year. So international performing above that 7% to 9%. We have a lot of confidence in USIS delivering in that 6% to 8% over the long term.

Got it. Just looking in the near term, though, I mean, one of the headwinds still remains mortgage I think the average of MBA, Fannie, Freddie has it down 22%. Our internal guys has it down more at 30%, 33%. So how do you...

I think you've been a leader on that.

Well, I wish I was wrong, but...

You were right.

The -- but just talk to us about the components of outperforming mortgage, first USIS and then potential workforce.

Yes. Yes. So mortgage, obviously, is an impact for Equifax. We over-indexed or have a larger mortgage business than our peers, primarily because of Workforce Solutions. Workforce Solutions, as you know, sells income and employment verification in the mortgage and a big business for us that NCTUE and Experian don't have. Mortgage is becoming a smaller part of Equifax. We want our mortgage business to grow, but we've got a big focus on growing our nonmortgage businesses, which is 80% of Equifax. And our nonmortgage businesses this year will be up 20%, which is well north of the 8% to 12% framework. And when you think about our new products we're rolling out, think about that 10% long term, 13% this year, new products, vast majority of those are in nonmortgage. Think about all the M&A we've done in the last 24 months, all nonmortgage. So we're intentionally focused on taking some of the volatility that comes or cyclicality is a better term from mortgage out of Equifax by investing in nonmortgage. We have a lot of levers to outperform the underlying market in all of our verticals. Inside of mortgage in USIS price, we take price up every year. We've already put price increases out for 2023. They go effective 1/1 in USIS and in the rest of Equifax. So price is an opportunity, new products are another. We continue to focus on new products and uses and in workforce and mortgage, more success in mortgage with where they are in the cloud, but we've had some leverage there. There's some penetration opportunities in our tri-bureau business. As you know, we compete with CoreLogic and a few others in our tri-bureau business. So penetrations and opportunity to outperform the underlying market. And then, of course, we'll probably touch on workforce as more levers than USIS does to outperform the underlying market.

Yes, we can move to workforce now. I mean I think in terms of the leverage, maybe to just take them one at a time. So firstly, if you could just remind us of the how you think about how much current data coverage you have of the opportunity because that's one of the levers, right? Because you have half, if you double -- if you get the other half, you basically double the business.

And just maybe just said, again, the Workforce Solutions, I think for those in the room know that will be about $5.1 billion at midpoint this year. Workforce will be $2.45 billion, roughly $1 billion of revenue. So it's approaching 50% of Equifax. In 2019, it was $970 million. So it's had strong double-digit growth, well in excess of the long-term growth rate we have of 13% to 15%. So that gives us a lot of confidence. Of course, it has 50% EBITDA margins versus Equifax margins are in the 34%, 35% range heading to 39% by 2025. So it's higher top line growth with those 50% EBITDA margins is highly accretive to Equifax, both in the top line and on the margin side. So lever is the first one that is really most unique in Workforce Solutions is the ability to add to our data set. Most data businesses have all the data and they focus on price, product, new verticals, penetration. We have all those levers. Workforce quite uniquely has the ability to add records to its data set records for us are income and employment records that we collect from either individual companies or through partnerships with like payroll processors that we get every pay period. So it's incredibly valuable. Our competitor in Workforce Solutions is primarily paper pay stubs. For 50 years, the industry has used manual verifications of someone's income and employment is how it's been done in most of the verticals. So we're digitizing with instant data, which makes it more valuable. It drives productivity. At the end of the quarter, we had 148 million total active records every pay period. We had 111 million individuals or SSNs. Really, the scale if you think about that, there was 35 million people in our data set with 2 jobs. It's really quite remarkable when you think about the working American and the scale of the individuals that have 2 jobs. So 111 million active individuals in our data set every pay period. The way we think about it is about 210 million working Americans. There's about 100 -- call it, 170 nonfarm payroll, W-2 income. And that's primarily where most of our records are from the 111 million. There's another 20 million to 40 million gig employees in the United States. And gig, you should think about an Uber driver, you should think about a delivery person but also think about a self-employed dentist, doctor. Lawyer, accountant, contractor. There's a lot of self-employed people that are at all mixes of income. So we're going after that 20 million to 40 million. And then there's another 20 million to 30 million defined benefit pensioners in the United States. That's income. So we're going after those records because they're all valuable in all of the verticals that we have. So if you think about 111 million, we have the ability to grow to 210 million. Now it's going to take a long time. That may be a decade or longer to grow that. But we've been growing our records quite substantially in our long-term framework, the 13% to 15% for Workforce Solutions we have 4% record growth in there per quarter. And what's important about record growth is the day we add a record, we're able to monetize it. Because remember, we have system-to-system integrations with tens of thousands of mortgage originators, credit card companies, auto lenders, p loans, background screeners, government agencies, and they're sending every applicant to us. So we're getting inquiries for roughly $5 billion of revenue, and we're delivering 55% hit rate. So that's that $2.4 billion that we have. So when we add new records, very uniquely, it turns into revenue. And in the quarter, our records were up 16%. They were up 21% last year, 20% the year before. So that 16% record growth translates into low teens revenue growth. So a very powerful lever on top of the other levers that we have a price, product penetration, new verticals, underlying market -- it's a very powerful lever for the business.

Absolutely. And I want to get to some of those other components by market, but I think 1 of the things that you didn't mention that's important is the exclusive of the -- some of your data. So talk to us about the current exclusivity and then this other kind of 50% that's out there, are you confident you can get all that exclusive as well because obviously, when you have such a great business, you do invite competition.

Yes. And we can talk about competition, if you want. We think there's a pretty big moat around the business. And when you go to records, the 111 million uniques that we have, the 148 million total, we get them from two places. First, we get them from individual company relationships inside of workforce solutions, we have a very unique business that you wouldn't think about a data analytics business happening. We call it our Employer Solutions business. And we deliver regulatory compliance services to HR managers on an outsourced basis. So they'll outsource to us, their unemployment claims management, their I-9 onboarding verification management, W-2 management, work opportunity tax credit, employee retention credit. And this is about a $400 million business. And as a part of that relationship with the HR manager, we'll also do income and employment verification of their employees for free as a part of those services. So a lot of scale. We've done five acquisitions in the last 24 months to expand our capabilities there. because it's a great business. Companies are outsourcing those activities to us. You may remember, Manav, in the quarter, we talked about a Fortune 100 company that's outsourcing all those activities to Equifax. So we want to contract on that contract alone is $20 million a year. So the scale of that kind of outsourcing and then we get records with it that we can monetize. We think about those as being "exclusive" it's not contractually, but because of the deep relationship we have, there's no reason for that HR manager to want to have someone else do income employment verification for them. The other 50%, we get through partnerships. Think of payroll processors, HR software companies, pension administrators, gig -- kind of partnerships to get gig records. Those are all on a partnership basis, and we generally have a revenue share with that partner. So we'll share in the revenue that we're generating with that partner. The vast majority of those are exclusive. Our intention is for all of them to be exclusive. And the ones we've signed in the last 4, 5 years have generally been all exclusive. So that puts a moat around our ability to grow records. And the ability to drive revenue growth from adding to our data set is a very powerful lever for us going forward.

Another lever that you've used has been pricing. And I think everyone fully appreciates the value, the uniqueness. But at the same time, the customer now wants to see a price increase. And so you've heard a little bit of that pushback. So how do you respond to that?

Yes, nobody likes a price increase. And all of our businesses, whether it's Workforce Solutions or uses or international, we take prices up every year, generally ahead of inflation is how we try to focus our price increases. Workforce has more pricing power than our other businesses. And we try to be balanced about the price because we're delivering real value. It's instant. It's current, meaning every two weeks, we're getting a new record payroll record from the company. So it's a very real time, if you will, with that payroll record. It also delivers productivity because if they're not using our instant verification service, they're doing it manually. So they're calling a company and saying, "Does Mark work there, how much does Mark make." There's a lot of labor involved in that verification. So we think we deliver real value. But that's only one of the levers. Product is a big lever for us as we're delivering richer solutions to the customer. When we think about our long-term framework, we're counting on four points of growth annually from records, four points from price and product. So we've got a lot of levers that are available in the business in new verticals, in penetration in those verticals, system, system integrations versus web access, all drive revenue growth in the business.

Got it. And then the other question we get a lot on because we haven't seen it yet, it's just how -- is there a cyclicality to the business. And maybe you break it out by the different groups you have, obviously, mortgage, talent, government, auto, credit card. Like if we enter a recession next year or the year after that, can you still go through that?

Yes. So this business, and you can start with a data point that's real. In '08, '09, we had the business, it was much smaller than it was less than 20% of Equifax, but it grew mid-teens every quarter through '07,'08, '09. When you think about the levers that it has, we're going to add records, whether the economy is up down or sideways. We've signed three new partnerships in the third quarter. 8 or 10 so far this year, those all come in line in 2023. So record additions will continue to happen. We know what we're doing on price in January because we've already rolled out our price increases. So that's already in line. There's clearly some economic impacts to all the verticals that we're in. We've seen that in mortgage, right? Mortgage volume coming down, we're able to offset a lot of that mortgage decline in Workforce Solutions for more records, from price, from product, from penetration. Remember, even in mortgage, only 6 in 10 mortgages come to Equifax today. The other 4 in 10 are still done manually. Even though we have all that value. We've grown that from 50% to 60% over the last couple of years of penetration. So you have penetration opportunities in all the verticals. In the background screening or talent space, clearly, there'll be some slowdown in the number of background screens being done, product, more records, price and then penetration. We're still very lowly penetrated we're only 20% of the background screening TAM go to government, same thing. Government is actually somewhat countercyclical. If the economy goes down, more people are going to be getting social services, which will help that business. But we're only 20% penetrated in the government TAM. And then come back to employer in a down -- which is where we're delivering these regulatory compliance services. In a downturn, more outsourcing should take place. And I think as you know, very directly if unemployment goes up, our unemployment claims business generally has a lift. We saw that in '20 and '21, in the COVID environment where there were a lot of layoffs, we had a big lift in that business from a revenue standpoint. So there's a lot of resiliency in workforce solutions, and we have a lot of confidence in that -- the ability of that business to grow through an economic event. No question about it.

And the other question around that business that we've gotten and perhaps because of your more recent results is the margins of the business. You had guided to 52% when you came in at 49% and you're guiding a bit lower in the fourth quarter. What is driving that? Like I understand there's growing pains to any of these businesses, but what's the component like?

There's really two. We talked about in the third quarter earnings call. First off, we said we have a lot of confidence in getting back to those 50% plus EBITDA margins going forward. And in '23, we expect that will happen. There was really two factors in the quarter and really in the second half. One was the onboarding of new partners. We invest additional tech and cost dollars when we're bringing on some of those new records and helping them get connected. So that's a piece of it. The second was the business is performing well, and we have some incentive compensation to the commercial teams because they're just delivering so much more strongly than we thought in nonmortgage in the second half of the year -- I'm sorry, in the year than when we started. So that's the other factor there. But long term, we have a lot of confidence in the business being 50% plus EBITDA margins, and there's been a long history of doing that.

Got it. And in terms of M&A broadly, but maybe more specific to Workforce Solutions, I mean, Appriss Insights, a lot of employees to these type businesses. Like what else can we see in here?

I think that's the -- so for M&A, I think, as you know and the group knows and our long-term framework, we want to add M&A that drives our top line 1 to 2 points per year from bolt-on M&A. So the inorganic piece of Equifax. And we've been over-indexed on that last year. We're going to be about in that range in 2022. And I'd expect longer term, to add 1 to 2 points of revenue growth from M&A. The priorities are swim lanes for M&A very disciplined around that, differentiated data. We want to buy data that the other players don't have. Appriss Insights, the incarceration data, no one else has that incarceration data count and the e-commerce identity data is another example that Teletrack very unique data. So differentiated data. Second, in no particular order, strengthen workforce solutions. It's our fastest-growing, strongest business. And you point out where we're going to keep doing it. We bought LawLogix this year to strengthen our employer solutions, we've done five acquisitions, bolt-ons in that space so far in the last 24 months to strengthen our employer solutions business. And then second is around differentiated data, really in that talent hub. And that's where Appriss Insights at. We got that incarceration data that's used by background screeners, it's also used in government. And they're the only source for it. So it's a very unique data set. We'd like to buy other unique data that's used in the background screening space. We're trying to build a talent hub of data that we can sell to the background screeners. Third is around identity and fraud. Identity and fraud is a big, fast-growing TAM. It's a $20 billion TAM around digital identities and verification of those. We've made two acquisitions so far in the last 24 months, they're Kount, which was a big acquisition almost 2 years ago and Midigator a few months ago that really strengthens our identity and fraud. So we want to continue in those three swim lanes.

And then just broadly on the M&A environment, you've always had an active pipeline I presume valuations are coming lower. So -- but the macro is getting worse, too. But is that an opportunity to pick up the pace in M&A?

We're going to stay -- we talked about kind of our strategic priorities around M&A. We're very disciplined financially. All the businesses we've acquired are accretive to our 8% to 12% growth rate. So we want to have revenue accretion and we want to have margin accretion to Equifax growth rate. And that workforce is a tough -- at 50-plus percent EBITDA margin, so accretive to our 34% going to 39%. And so we have seen valuations come down which is allowing us to be disciplined around that, making sure we're doing the right acquisitions. And the other big change is coming from Equifax, as you know, is around our capital allocation. We talked about CapEx is going to come down as we complete the cloud. We believe our EBITDA is going to expand between now and 2025 in the neighborhood of that 500 basis points to 39%, that's going to generate a lot more excess free cash flow. And at the right time, in '24 and '25. Our intention is to return that to shareholders through buyback and dividend as we really accelerate our free cash flow when we complete the cloud.

Got it. We have about 5 minutes left. Any questions in the audience before I continue? Okay. We'll just continue. Mark, maybe just a big picture. As a credit bureau and perhaps have been with the employment income database, you have a unique view into the economy, I suppose. Just any thoughts on -- it sounds like everyone is fearful with a recession, but it hasn't maybe shown up completely yet.

Yes. So everyone is watching CNBC. We're -- that's all people talk about it as a recession. It's hard to see. It's hard to see a recession when people are working and where there's so many open jobs. That's kind of how we think about it. In our world, meaning financial services. If people are working, generally delinquencies stay low. When people start losing their jobs, they can't pay their bills and delinquencies come up. So what I look at and I think what our customers look at is employment levels, and delinquencies. And so far, the only place we've seen delinquency change is not from unemployment, it's really from inflation is in subprime, and that's impacted the fintech space. We've seen some pullback in the last couple of quarters in the fintechs around marketing because there's some pressure on subprime delinquencies because of inflation. They just have less dollars to allocate to the bills that they pay. Broadly, the consumer in the U.S. is very strong. You heard from some of the bank CEOs yesterday that were at the business roundtable talking about that, that their savings are still high. They're spending their savings, but they still built a lot during the COVID environment. During the COVID environment, credit scores went up 15 to 20 points. They're still high. Delinquencies outside of subprime are below, even subprime are still below in 2019. So the consumer is strong. Our customers are also strong. I think the banks have very strong balance sheets. When you think about the last economic event, they had big losses from commercial real estate. They had losses from residential real estate they're really strong still. So we still see an environment that broadly is strong. You think about some other verticals for us like the background screening space, with hiring maybe coming down, there could be some impact there. We have the ability to drive penetration in product, but that could be an area that we've seen some softening elements there. But broadly, when we think about a recession, you think about, at least for the next couple of quarters, it's hard to see, right? A recession doesn't happen overnight. And with employment so strong and there's 1.7 jobs available for the person that's looking for a job. There's still a lot of employment opportunities out there. Now that said, Manav, we're doing scenario planning inside of Equifax like any company would do. If there is an economic event, what might we do from a cost standpoint to tighten our belt. We're a growth company, so we're investing in product and the tech transformation. We won't slow down the cloud transformation, but there's areas where we could tighten our belt on costs, and we're getting ready in case there is an economic event, we don't see it yet.

Got it. And maybe just to end with in credit card specifically, I think we all see the mortgage estimates. I think we all kind of have a sense of auto, but you used to run a big card business before like that seems like the biggest volume mix factor as a recession slowdown. If that gets hit, our numbers could be -- have to be lowered. So in your experience, like does card react that quickly in violent stage.

It does but it doesn't stop, right? In all the verticals you keep originating in an economic event. You just raise your cutoff scores where you're trying to go after the better customers. And that's what a credit card issuer would do an auto lender, a p loan lender. There's a counter -- what counters some of the marketing spend that comes down and the origination spend that comes down is the fact they typically spend more in their back book management. So you'll spend more on collections, you'll spend more on line management meaning taking credit lines down, trying to bring them up for customers that you know are going to be good. In some regards, there's more data. So there's no question that could have an impact going forward. The positive for Equifax is that's meaningful piece of our business, but a smaller piece. We're more diverse now in this economic event than we were before, primarily because of Workforce Solutions. Workforce in the last economic event was 20% of Equifax. Now it's close to 50%. So that's a very different Equifax. Identity and Fraud was a small piece of our business. We think that's recession-resilient or recession growth. That's a bigger piece of our business going forward.

Got it. All right. I think, Mark, we'll leave it there. Thank you so much, and thank you for the audience for joining here.

Thanks a lot. Thanks, Manav.

Thank you.