Equifax Inc. (EFX) Earnings Call Transcript & Summary

Thanks for joining us. Hi, I'm Ashish Sabadra, and I cover business and information services companies here at RBC Capital Markets. Excited to host Mark, CEO; and John CFO of Equifax.

Given that it's a financial conference, I'll kick it off with consumer lending. I was just wondering if you can talk about the current state of consumer lending and then particularly talk about what's happening with cards and auto.

Yes. So the consumer is still quite strong. I think as you know, it really starts with their working. -- unemployment being so low, wage growth is obviously a positive for the consumer -- the consumer still has a fairly sizable savings from the covid pandemic, that they're burning down but still a net positive from 2019. So that's a positive inflation putting pressure against the lower end consumer. But broadly, with unemployment so low and delinquency is still fairly low. Our customers being the financial institutions are still operating. And as far as originating and operating fairly normally. I think we're all looking on the horizon for when will employment change. Generally, consumers that are working pay their bills and delinquencies kind of hold pretty steady as unemployment ticks up as when delinquencies go up. And when that happens, you'll see banks start to pull back a little bit on originations. We haven't seen that, and we don't expect to see that really for the next couple of quarters. It just doesn't happen overnight is kind of what our outlook is there. On auto, there's been supply constraints that have impacted the ability to sell cars, both new and used. There's been some uptick in kind of subprime delinquencies but really at the lower end of the consumer's spectrum. I don't know, would you add anything else, John, on the consumer?

Kind a little bit of a tick up in card as well in terms of delinquencies, but...

Subprime.

In subprime. But again, overall, very strong.

That's very helpful color. Maybe just switching gears and let's talk about workforce Solutions, the most exciting part of the business. So even on an ex mortgage basis, you've guided to 13% revenue growth this year. Can you just talk about the puts and takes there? What's driving that strong momentum even in this kind of a challenging macro environment?

Yes. Again, you called it a challenging macro environment. It's really -- what's challenging us right now is what happened in mortgage last year and is still happening this year. Outside of mortgage, our markets are fairly normal. We've seen some slowdowns in some of our European Canadian Australian businesses. But broadly, the market is still pretty stable as far as our customers. Workforce is our fastest-growing, largest and most profitable business. I think as you know, it will approach 50% of Equifax as we exit this year. If you go back to 2019, it was around $980 million of revenue. in 2019. This year, it will be $2.5 billion. So a very fast-growing business. Long term, we expect that business to grow 13% to 15% against our 8 to 12 long-term framework, so accretive to Equifax. And I think, as you know, its EBITDA margins are in the 50s versus Equifax in the 30s. So that's highly accretive with that higher growth rate going forward. So your question about what's driving the growth. There's a bunch of levers that the business has. I'll start with records. Very uniquely, Workforce Solutions has the ability to add new data records and grow its revenue. At the end of the quarter, we had 155 million active records every pay period, which is about 115 million SSNs or individuals. The other $40 million is people with 2 jobs. But if you think about $115 million or the $155 million, that was up about 12% year-over-year. That 12% increase in records translates into revenue because we're getting inquiries from our customers for every application they have. And if you think about $115 million, there's about 220 million working Americans. So we have roughly 55% coverage that was up 12%. We were up in the 20s, low 20s in '20 and '21 of record growth. And that record growth is a big lever for Workforce Solutions and quite unique because most of the data businesses have all the data, and they work to price it, new products, new verticals, new solutions. We have all those options with Workforce Solutions, and we have the ability to add records. So records is a big driver for growth. And again, when you think about records being up 12% like last year, -- that's a big driver of the revenue. We take price up every year. Like all of our businesses, workforce has more pricing power than the rest of the Equifax. So price is an element there. Product is a big lever at workforce and other Equifax businesses. And when you think about product, it's new solutions you're bringing to market, generally data combinations or trended data, meaning historical data. For example, in Workforce Solutions, we rolled out in the last couple of months, a mortgage 36 solution that gives 36 months of income history, which is very important. Some consumers or applicants for a mortgage may -- their snapshot today of their income may not represent what their true earnings power is over the last 12 months. because they have a bonus that they're getting maybe last August, that 36 solution picks that up. So instead of a $40 to $50 solution, which is our snapshot that we sell, and we sell our primary solution is that, how much is Mark making today that 36-month solution, we sell at a higher price point, 3x that $150 kind of price point. So that drives our revenue as we're rolling out new products. And on the new product front, I think, as you know, we have a metric we share with our investors and we utilize internally, we call our vitality index, our new product vitality index, that's the percent of our revenue from new products introduced in the last 3 years. We set out a goal in our long-term framework that we reintroduced in 2021, as you remember, of 10% vitality for Equifax going forward. So 10% of our revenue from new products over the last 3 years, that was up from 5% to 7% historically. Last year, it was 13% -- so we're way above the 10%. So new products is a big lever for all of our businesses, including Workforce Solutions. Penetration is a very unique opportunity for workforce also. Workforce Solutions is a fairly new business. When you think about it, it's only been around for 20 years where the credit file -- or the rest of our business is over 100 years old. So the credit file has been around for a long, long time. This business is really scaled and penetration really is around in all the verticals we have, what portion of our customers are using our solution versus manual income and employment verification. Because if you go back 50 years, pre-workforce solutions, 40, 30, 20 years, every mortgage doesn't income and employment verification. A lot of auto loans verify income and employment, particularly in subprime is social services, the government vertical for us. It requires an income verification for rent support, child care support. Those all require income verification. Historically, that's done manually. As Equifax has built up its workforce solutions, twin database on income and employment, we're digitizing those processes. So for example, in mortgage, when penetration 3 years ago, 50% of mortgages were done manually and 50% used our data. Last year, it was 60%. So over the years, we've grown a couple of hundred basis points per year. That grows our revenue, -- if you go into auto lending, it's fairly penetrated in subprime auto. We're growing into near prime auto now. So that's penetration. That's growth opportunities for us. You go into cards, it's fairly small. That's a big growth potential to combine the credit file with income and employment data. P loans are fairly well penetrated. So not as much room there and then go into either talent, which is a background screening space or government, I'll start government first because it's similar to mortgage verification. All social services in the U.S. are income based, meaning you get more services if you make less. So you have to verify that. We can do it instantly. And government is about a $2 billion TAM where we have about 20% market share. Last year, we were up 50% in the revenue in that business as we digitize those social services. And then the last vertical for us around penetration is the background screening space. We call it talent, as you know. That's about a $5 billion TAM. Most of the background screening work on job history is done manually. The background screeners are big BPO operations. We have a digital resume on the average American. We keep every record that we have. We've been doing that for 20 years. So we have 600 million jobs in individuals inside our data set because one of the data elements we get is the company name and the job title. So we have that digital resume. So we're digitizing the background screening space. And today, in that $5 billion TAM, we have something like 15% market share meaning 80-plus percent is still done manually. So penetration is a big opportunity for us. So a bit long-winded quite uniquely, Workforce Solutions has multiple levers to drive their top line growth, which is why our long-term framework for them is 13% to 15% long-term growth versus our 8% to 12% for Equifax. So it's accreting in on the top line margins also.

Absolutely...

We should add really a system to system integration.

Yes, please, John. Yes.

So one of the ways we grow share is by building out system-to-system integrations with all of our customer set. It's something that we've done uniquely because we've been working on it for over 15 years. So one of the moats around the business in addition to all the things Mark described, it's also the fact that we've built these integrations with mortgage lenders with in card, in government, in talent. So we see their transactions real time. And we and some of our competitors have seen that as we continue to build out those system-to-system integrations allows us to grow penetration faster. And that's one of the things that accelerates the growth of the business, especially with historic records, right? It allows us -- it helps us monetize those historic records and new products even faster.

We have roughly 25% of our revenue in most of our verticals has done what we would call through our website. So one at a time, they'll come in. As we move a customer who's doing web access to system to system, as John pointed out, we get a 25% lift in poles because there was no breakage. They're sending every application to us versus just picking which ones they send to us versus what they do manually. So we spend a lot of time converting our customers to systems. I think we're up to, well, 75% roughly of our volume now as system to system.

That's great. That's very helpful. Maybe if I can drill down further on the government side, as you said, very strong momentum on the government front.

Over 50% last year.

About 50%. There was a large social security administration contract that was ramped up. I think yesterday or day before you launched the new product planned inside case monitor. And I was just wondering how should we think about that momentum in that business going into not only '23 but over the next few years because one of the concerns we hear is after such a strong growth profile, could the business slow down. It looks like there's a lot...

So when you think about the TAM, it's a $2 billion data TAM for us, and we're kind of 15%, 20% penetrated there. There's so much penetration opportunity as we add new records. Remember, they're sending every applicant to us. So as we add new records, that drives growth, penetration, as you point out, new products like the one we announced this week drives growth there. And it's really at the federal state and local level. And so it's very multifaceted. You point out we won a contract about 18 months ago with the Social Security Administration that's kind of a $25 million to $30 million a year contract. That was ramping through 2022 and well into '23. But a lot -- most of our revenue is actually at the state level. And what makes the business very complex is that when you go to the state level, each agency is different. There's not one place to go. So if you think about coming here to New York, you're going to have the food stamp agency, you're going to have the rent support agency, the child support agency, the school lending support agency, the unemployment agency, they're all different. So you have to connect with all those. And what we did a couple of years ago is put Equifax Workforce Solutions people in each state capital, which is where they're generally headquartered as well as a government relations person there to really drive the integrations of each of those. The other complexity is most of the state agency infrastructures are legacy and old. So it's challenging to -- sometimes to help them get into the workflow. But the value prop we have of delivering instant data is so powerful in the productivity benefit, so if you've been to any of these social services offices, you think about a wall of people waiting in line to a counter and there's people behind there working for the agency, looking at paper that they bring in to try to verify their income in order to get their social service. When they use our capabilities, which many of them are and more will, they delivered instantly. And that agency wants to send home that consumer that mom with the food stamp capability, not send them home to get more documents sent, and then it also delivers productivity, meaning the line completes more quickly. They can get more people through and they don't need to have as many people manning it because they're using instant data. So really strong value prop there that we see a lot of growth potential.

Other tailwind we have in government is in the Affordable Care Act because when someone signs up for health care through the Affordable Care Act to the Federal portal or some state portals, Equifax is used to validate their income to determine the level of subsidy. If more and more states are starting to move to the federal portal because there are subsidies from the federal government. And when they do that, we get a revenue lift, right? So we're seeing that tailwind as we went through '22. We expect to see more of that tailwind as we go through '23.

That's very helpful color. And yes, as you said, very strong momentum there. Maybe if you could just address one of the concerns that we've heard about just the waterfall and whether EFX is at the top of the waterfall or not, particularly from some of your customers in the mortgage and talent industry. I was wondering if you could help address that concern?

Yes. We don't see any impact from that. I think as you know, there's really only one player that's in the space with some degree of scale, which is Experian. If you think about our $155 million records, we think about them having something like 5 million unique records. So those are valuable records, those 5 million. But we haven't seen any impact where it's changed our market position with a lot of our customers, we give them top of waterfall discounts. But the hit rates we have are just so much higher than they can ever deliver. If you think about $5 million versus $115 million or $155 million, that's just so dramatically different. And I think as you know, our records, we get them through either direct relationships, our employer services business, which is about a $0.5 billion business where we're delivering regulatory services to HR managers, unemployment claims, I-9 verification, W-2 management, ACA management, work opportunity tax credit, all those services get outsourced to Equifax is a part of that $0.5 billion business sitting inside of Workforce Solutions. And then as a part of that relationship, we also deliver income and employment verification to that company for free. And remember, if we're not doing income and employment, they're doing it themselves. So they have to have a call center. They have to authenticate the mortgage originator or the auto lender or whoever is calling. Is this a fraudster -- or is it really someone legitimate, we do that for them, and we validate every user of the data and the data is never used by any of the authorized users without the employee consent. So a really strong value prop there. And then the other half of our records we do through partnerships. And those are long-standing partnerships with payroll processors, HR software companies. So the scale of our data set is really quite substantial.

Yes. And most of your relationships are exclusive with the payroll provider...

That's correct.

Those benefit we have, again, is historic records, right? None of the people trying to enter the market have the depth of historic records. -- we're finding in non-mortgage. We're looking at a situation where we're getting to a majority of the transactions we execute are looking for historic information, and it's something that we're uniquely positioned to deliver and those products are more valuable to our customers.

Absolutely, and as you see more penetration of trended data and as you talked about mortgage 36 products that just...

[indiscernible] a moat around the business. Absolutely. No question because we have the history of the data, which is so valuable. -- close to 25% of our revenue comes from our historical records. If you're in a start-up mode, you don't have any historical records, and when you think about a mortgage solution where you have to have 24, 36 months of history, it's very challenging when you're in a start-up mode to have that kind of data.

Switching gears talking about technology transformation, EFX is the first bureau to have a fully cloud native application...

First and only.

First and only you'll have it. So I was just wondering if you could talk about like how having a cloud fully public cloud infrastructure as well as the data fabric. Obviously, you talked about Vitality Index, vitality index jumped to 14% in the fourth quarter. So that's been a good driver. But can you also talk about how it's helping you go after a greater share of wallet with your existing customer or new wins or even expand the addressable market...

Yes. So we think fundamentally a data analytic company has to be a great technology company. That's something that I believed when I joined 5 years ago. And following the cyber event in 2017, we had an opportunity to either spend a couple of hundred million dollars to strengthen our legacy security or to go to the cloud and have even better security, which we believe we have the best security in the industry and go cloud native. And so we opted to go cloud native. This has not been an easy exercise. It's not for the faint at heart, but it's really going to transform Equifax and how we operate. It's really a new company when we think about it going forward. And we're in the final chapters of completing it, after 4-plus years of work on it and $1.5 billion of incremental spend that's mostly behind us. We finished last year at 70% cloud native of our revenue. The end of this year will be 80%, which means North America, most importantly, U.S., which is where our large businesses are will be cloud native. And then in '24 and '25, we'll finish up internationally. So it will be fully cloud native. And as you point out, the only data analytics company that's cloud-native. The second piece of our cloud transformation that's less visible to our investors. We need to help with that is the fact that we not only took all of our applications to the cloud. And these weren't lift and shift. These were rewritten. So when you think about a company over time, we'll have 5, 7, 10 versions of an application, we rewrote those to 1. So every customer is on the newest version of that, we become more valuable to them. But the second part that we did in the cloud transformation is go to a single data fabric. And managing data at scale and a data analytics company is super hard because there's so much of it. And historically, we and our competitors had their data sit in siloed data assets by different types, credit file, income and employment, like twin, wealth data, we have different data sets that we have. We took all that data as a part of the cloud transformation and put it into a single file. So no more siloed data assets. And we believe that's going to allow us to accelerate our new product introductions, which drive top line and drive incremental margins. So what are the benefits from the cloud? We do this just for cost savings. That's but the cost savings are quite substantial. Think about 20% savings legacy versus cloud. And you're seeing that in 2023, with some of the cost takeouts that we're implementing as a result of moving from legacy shutting down our data centers and shutting down those old applications and moving to the cloud. we announced in February that it will be about $200 million of CapEx and OpEx out in 2023. There will be additional cost saves in '24 and '25 from the cloud savings. But as I said, we didn't do it for cost savings, but it almost pences out just from the cost savings. We really did it to be more competitive. Number one, to manage more data allows us to ingest more data. Second is the ability to deliver in a digital environment, all of our customers' transactions are happening online. And if you're in a legacy environment, you can't deliver [ 99s ] of stability, meaning being always on. The cloud allows you to deliver to [ 99 ]. So we think we're going to be a more important partner that should drive market share to your point, because we're always going to be on. That's a very valuable thing in a digital environment. We already talked about the ability to roll out more new products more quickly. And as you know, I talked about it earlier, we laid out a 10% vitality goal for Equifax over the long term, and that's the percent of our revenue from new products in the last 3 years. As you pointed out, we were 14% in the fourth quarter, 13 for 2022, and we guided that we'll be in that 13% range for 2023, so above our 10%. And, One of the things we're seeing is businesses that inside of Equifax that have gotten to the cloud more quickly are actually north of that 10% and north of that 13%. So Workforce Solutions, for example, has been cloud native in their verification business for almost 2 years. they're almost 2x that 10%, it's meaning north of 20 in Vitality. So it really unleashes the ability to bring data to market in a different way. And of course, new products are accretive to our revenue growth because they're driving new solutions to our customers, and they have very high incremental margins, new products because your data is already paid for with your base load of the business as you're rolling out new solutions. So super important there. And as I mentioned earlier, security. Security is so important in a data analytics business, particularly for a company that was a victim of a cyber attack in 2017. And we believe that you can't have the security of the cloud that you get in the legacy environment. It's just too expensive. And we believe the cloud security is just competitive -- I'm sorry, market leading for us going forward. Did I miss anything?

I think you covered it quite well.

Yes, I think just 20% plus vitality in the Workforce Solutions.

It's a great proof point.

It's a fantastic proof point. Just switching gears, moving to international spending Boa Vista acquisition. I was just wondering what's driving that accelerated growth in Boa Vista? And what can you do to further accelerate growth as post the close of the acquisition?

Yes. So International for us, as you know, is about 20% to 25% of Equifax. We're in 25 countries outside the U.S. We have market-leading positions in Australia, in Canada. We're in the U.K., not market-leading. We're leading in Spain and most Latin American countries we're #1. We're not in Brazil. We've had a 10% ownership and actually just to finish International. International was up strong double digits last year. So above long term, we expect International to grow 7% to 9% inside of our 8% to 12%. So EWS at 13% to 15%, 8% to 12% overall, 7% to 9% for International, 6% to 8% for USIS. So they've been outgrowing their long-term growth rate for Equifax for International quite positively. And Latin America is the strongest grower inside of International. So we've been in a lot of those countries there. We've owned 10% of Boa Vista for a decade, and we've been looking for an entry point to move from the 10% to control. We try to be quite disciplined about getting into that. What we like about Boa Vista is obviously, we have a big competitor that's very successful in Brazil, in Experian and Serasa. A lot of respect for them, very high market share, well above 50%. I think it's close to 70% market share in Brazil. So it's a fast-growing market. It's a big market. It's got a growing middle class and bank consumer base, which is good for data. Those are all the reasons that we liked Brazil. And so we wanted to be in Brazil and want to find the right entry point. What's unique about Boa Vista, it also has a data set that no one else in Brazil has from retail finance. One of the owners of Boa Vista is an association of retailers in the Sao Paulo state, which is where most of the population is and most of the income and consumer base. And they have a very rich consumer database that only Boa Vista has. So that was another attraction for us. And the association is going to stay as a 20% owner of Boa Vista going forward, we'll have 80%. So that was important to us to keep them in there. Boa Vista has been growing in kind of mid-teens, which is very attractive for the last number of years. And we like the business. We feel like we have a very attractive proposal on the table. The Board of Boa Vista has approved the transaction. We're going through some of the regulatory filings, and then there'll be a shareholder vote, and we hope to close -- expect to close the transaction in the second quarter. And it will be very attractive financials for Equifax as far as accretion. And our plan will be is to do what Experian's done with Serasa. And what we do with our other international markets is we'll bring in the Equifax Cloud, our Equifax capabilities, all of our Equifax products to really augment what Boa Vista has, which is very strong on its base and really continue to drive growth going forward.

No, that's great. Maybe just a quick question on margins. You talked about $200 million savings in '23, $250 million, I think you've guided for next year 2024. And if you look at the margins also, right, there's a significant ramp-up in the margins exiting the year at 36%, and you've reiterated your 2025 targets of 39% margins, which is still a steep margin expansion over the next few years.

I'm guessing 36% in the fourth quarter is better than you had in your model in December. And obviously, you weren't expecting us to accelerate a bunch of the cloud cost savings into 2023. Part of that was we spent more CapEx last year and made more progress. And then we did a broader restructuring in the company to really take advantage of some of the cloud benefits outside of technology to really improve the company. And $120 million of OpEx savings this year. Those ramp through the year, as you point out, meaning the reductions of contractors working on tech or some of the FTEs in Equifax that will be coming out. And exiting the year at 36% EBITDA margins is a great jumping off point for '24 as we head towards our 39% goal in '29 -- I'm sorry, '25.

And to get to '25, we -- we've also talked about wanting to get $7 billion of revenue. When we gave that goal back in 2021, right, we talked about needing a more normal mortgage market and what we said normal was, let's say, 2015 to 2019 average market for say, originations. Right now, with the 2023 guidance we've given, we're running 40% below those levels. So we don't need to get below normal, yes. So -- and we don't need to get all the way back to those normal levels in order to deliver $7 billion in revenue. I think what we've indicated is we need to get about 2/3 of that back. And the reason why we don't have to get all the way back to mortgage as we talked about back in 2021 back to those normal levels, because...

Our nonmortgage businesses are really outperforming our long-term framework. Workforce Solutions has been growing faster than their long-term framework of 13 to 15 and our other nonmortgage businesses have been performing exceptionally well, which gives us the momentum to still go after that $7 billion number for 2025.

And you've seen that through the much higher Vitality Index than we talked about back in 2021. The 13% is way higher than anything we talked about initially.

Absolutely. That's very helpful. And maybe just on the mortgage also, right? You've been outperforming the mortgage market. I was wondering if you can talk about what's driving that outperformance? And maybe it just goes back to, as you said, better system integrations, some new product innovations, but how do we think about that sustainability of portfolio mortgage?

As you know, we've been doing it for a long time. And you would expect Equifax and any data analytics company to outperform their underlying markets. That's what DNA businesses do. That's why we get the multiple that we have, that we grow faster than GDP. On our 8% to 12% versus, call it, 2% long-term GDP rate is 4x to 5x to 6x that, which is how we perform. And how do we deliver that? It starts with pure price. We take price up every year. So price, if the market is going down and you're increasing price, you're offsetting a part of that market decline. As the market is going up and you increase price, you're outperforming that underlying market. New products, which we talked a bunch about in this session is another one. Bringing out those new products at those higher price points drives outperformance. Market share, driving penetration, does that. And then with Workforce Solutions uniquely is records. The ability to add records, whether the economy or mortgage market is up, down or sideways, if you're adding records, you're getting higher hit rates, which drives your revenue.

Yes. No, that's very helpful. We'll keep it there. Thank you very much. Thanks, Mark.

Thanks a lot. Thank you.