Equifax Inc. (EFX) Earnings Call Transcript & Summary

Welcome, everyone. I'm Andrew Steinerman, your U.S. business information services analyst, as is Stephanie Yee, the Vice President of my team. This is the Ultimate Services Investor Conference, and make sure you pick up one of these. They're right there, and they're also outside. That's our information services data book, a quarterly primer that we've updated for over a decade for you, and we just did it this past weekend. And yes, this is the Equifax fireside chat. As you can imagine, the general demeanor here is we ask the questions. Mark Begor, CEO; CFO, John Gamble; Trevor Burns, IR. We ask the questions, but we really want you to raise your hand, and you ask your questions. So I'll be looking for your hands. I'll start off the questions. But if you want to jump in, just raise your hand, and you can ask questions as well. Mark, welcome.

Thanks, Andrew. Great to be here.

Could you just start with a general thought on how are consumer credit applications doing and give a comment by the different asset classes and what kind of shape you feel like the U.S. consumer is in.

Yes. Broadly, the U.S. consumer is still quite strong from our perspective. One of the things we spend a lot of time watching is unemployment. And if consumers are working, they generally pay their bills. And if they pay their bills, delinquencies stay low. If delinquencies stay low, then FIs, banks, financial institutions, credit unions, fintechs will keep originating. I think you have to separate the U.S. consumer. While the subprime consumer is working, they've been pressured by inflation. In many regards, that's old news. That started really a year ago. We are almost 4 quarters in to the inflationary environment that's pressured the subprime consumers. We've seen subprime DQs go up, and you've seen a pullback by the fintechs that started a year ago in originations. In core FI, which is big banks, financial institutions, credit unions, medium-sized banks, still fairly normal from our perspective. Now I'll jump to mortgage, if you want me to, just for a minute. I think we all know we've been operating in -- recession doesn't describe it well. But we've been operating in an environment where mortgage originations have declined precipitously over the last 24 months and a continuing decline in the fourth quarter. That's been from the raise in interest rates that have driven up mortgage rates. It's from home affordability. That's had a big impact on our business, and we'll probably touch on that a little bit. But mortgage in the fourth quarter will be approaching 15% of Equifax. Before the decline, it was much larger as a percent of Equifax. And we've had to absorb that mortgage market decline that over the last 24 months, the market impact is a negative $1.4 billion of revenue on us that we've had to absorb. And as you know, our non-mortgage businesses, which are 85%, have been growing quite strongly. Just as a last point on the mortgage. Mortgage today, the way we look at it from an inquiry standpoint versus our historical inquiries, is about 50% below what we would characterize as normal. Normal for us is 2015 to 2019. It was before the refi boom that came with the pandemic, and we're 50% below that, which we've never seen before, meaning purchase volume is down dramatically because of rates, affordability, the shock of rates going up quite quickly. And as you look forward to '24, '25, '26, somewhere in that time frame, we would expect the mortgage market to return to normal, which is that 2015 to '19 level, which obviously will be a positive for Equifax. And then second is, at some point, you would expect the Fed to take rates down when they feel like inflation's been tamed. I think -- I don't know what your expert is saying at JPMorgan, but some of the economists are saying they would expect a rate decrease late next year.

Second half, yes. We're expecting cuts in the second half.

Second half. And as you know, when rates go down, that creates some refi element. So we are in a position now with equity...

Let me say, how quickly? Like if our economists think rates go down second half, when will the refi market come back?

Second half.

Okay.

And then it starts extremely quickly because consumers that took out mortgages over the last 24 months at those higher rates will want to refi those. But you have the unique combination of the market itself, which is primarily purchase being so far down the normal. We would expect in '24, '25, '26, we're not giving '24 guidance, but we'll give that as we get into the first quarter with our year-end results. But there's a tailwind coming of mortgage returning to normal and then at some point, a refi element.

So when you say return to normal, you mean to fully get back to the average of 2015 into 2019? Like I remember, at some point, you guys said, hey -- and this might be more of a John point, hey, to get that -- to that 39% EBITDA margin, we need to get back to 2/3 of that normal level. So just help me dissect these 2 points. One, do you expect to fully get back to normal 2015 to 2019? And John, does that old point still hold that when we get back to 2/3 of normal mortgage, we could get to the 39% margin?

Yes, they're 2 different questions. And I'll do the first half, John can do the second half. So in the first half, generally, markets return to means, right? And we would expect the mortgage market to return over time to that 2015 to 2019 level, meaning people move. They get new -- 60% of U.S. households own their home. When they move, they generally buy a home in that new location when they move. And there's, I think, 7 million families, 8 million families move every year. And there's generally a fairly meaningful element of consumers, homeowners that want to upgrade. They're in a 2-bedroom condo, they want to buy a house with a yard. That has been curtailed. So we would expect that element to return. There's also an element of cash-out refis. There's, I think, $3 trillion of untapped equity in homes today that would come in a cash-out refi. Generally, consumers are less sensitive to rate if they're going around getting cash out of a mortgage by doing a cash-out refi because they're generally paying down a high auto loan, a high student loan or high credit card balances. So the answer is yes. We would expect over time. And then when rates come down, you've got a refi element that's on top of that 2015 to 2019. John, do you want to take the $7 billion, 39%?

Yes, absolutely. And we've talked for quite some time about that. When we get to $7 billion in revenue, and we've said that we expected that to begin 2025, and we did say we would need the mortgage market to recover about 2/3 of what it had fallen, right? But it was -- we were really linking that $7 billion in revenue to the 39% margins. And so I think what we talked about in the last earnings call is given what the mortgage market's done, certainly, those 2 midterm goals, we still are focused on delivering them, but they're going to move out in time. So as you look forward, we still expect to get to that 39% margin level, probably at somewhat higher than $7 billion in revenue because as it's moving out in time, obviously, inflation is going to impact our cost structure overall. But still, we expect to deliver the 39% margins in the midterm as mortgage recovers and as we get to above the $7 billion revenue level that we've been talking about for a while.

Right. And so if we get back to full normalcy, not just the 2/3, margins will be even higher.

Correct. Absolutely.

Yes. Correct.

Okay. John, talk a little bit about the 250 basis points of margin that come from the cloud migration because we're closer to the end of the cloud migration. Is this going to be 250 basis points of margin realized? Or some of that going to end up getting reinvested in growth initiatives?

Well, so we've been talking for quite some time about the fact that we deliver substantial cost reductions related to the cloud, right? We'd indicated that something under 50% of our COGS was tech-related, and we thought we could generate something like 15% type of reductions on that tech-related cost. So not going to get into the specific basis point growth, but yes, we're going to generate those savings. We're making very good progress generating those savings.

That's happening this year.

It's -- some of it's happening this year, and you've seen it in the announcement we made about taking $210 million in cost and capital out in 2023, went $275 million in 2024. Some of it, we will reinvest. But a significant portion, we're expecting to flow through to allow us to continue to drive margins higher. It's how we get to that 39% in the midterm as revenue moves up above $7 billion.

And you're seeing our margins expand in 2023 even with the pressure from a down mortgage market from the cloud cost savings and the fact our non-mortgage businesses are performing so well.

Do you feel like the soft landing premise, which is definitely the base case for our economist who I interviewed over lunch time, is going to be a good environment for Equifax going into next year?

Absolutely. And I've subscribed to the soft landing for quite some time. That's been my -- I'm not an economist. That's not my role. I'm running a company. But I look at an environment with unemployment so low, and it's hard to see a catalyst that that's going to change. If people are working, the economy is going to be good, and that's good for Equifax.

Okay. How about just one recession question? I won't keep on belaboring recession because it just seems like an unpopular subject. But do you think Verifier could grow through a recession?

It has before. [indiscernible]

Smaller company.

Smaller company. It was primarily mortgage-backed then. It's much more diversified. When we think about the verticals of Verifier, you've got half of Verifier that's outside of the financial services market between government and talent. As you know, we have a $0.5 billion government Verifier business, where we verify income and employment for social service delivery by federal, state and local governments. That business was up 50% last year. It's going to be up strong double digits this year. Our talent vertical, obviously outside, has a different macro on the hiring space in a recession. There will be some dampening there but ability for us to grow with new products and penetration. So yes, we expect that business will grow.

Even in a recession.

Absolutely.

Okay. Great. How about record growth? Do you expect kind of over the next 12 months to have a strong year of record growth? And where are those records going to come from?

Yes. And Andrew, as I know, as everyone knows, is referring to our income and employment records. These are payroll records that we collect. And maybe just sizing it of what we have today, we have 160-plus million active records every pay period at the end of the third quarter. Inside of that 160 million is 122 million individuals. The delta is people that have 2 jobs. And if you think about 122 million SSNs or individuals in the United States, that compares to about 220 million working Americans or income-producing Americans. There's about 158 million, 159 million nonfarm payroll or W-2 income individuals. There's 30 million to 40 million 1099 or self-employed individuals. And remember, self-employed is Uber drivers, but it's also doctors, dentists, lawyers, business owners, so really high-income people sitting on 1099. So we're going after those records. And then there's another 20 million, 30 million of defined benefit pensioners, which is an income that they get. As you know, many federal, state and local pension -- defined benefit pensions, people vest out at 50 or 55 years old. That becomes a base part of their income. Many times, they go get a second job that's in the W-2 or 1099 side. So when you think about 220 million versus 122 million that we have, real long runway to add another 100 million records to it. We've been adding records at a very attractive pace, up 10 million year-over-year in the third quarter, up 10%. So very, very strong. And to answer your question, records is clearly a strong lever for growth. We've got a lot of dedicated resources on it, and we would expect to continue to add records in the fourth quarter and going forward. We announced in the quarter, third quarter, we added 4 new payroll partnerships. Those will come online in the fourth quarter and in 2024. And we continue to have a pipeline of both direct record additions through our employer business, which, as you know, we get half of our records there from delivering regulated services to HR managers, and then doing income and employment verification for them for free. So we get records that way. And then we also have them on the partner side, which we've been growing and expanding. So an important lever for growth. And again, why is it important? Because we have system integrations in all of the Workforce Solutions verticals, whether it's mortgage, auto, cards, P loans, and then the nonfinancial services verticals like government and background screening or talent, as we call it, that are hitting our database every day with every applicant that they have.

Yes.

So when we add records, we're able to monetize those new records instantly, meaning this afternoon, and it's a very unique growth lever. We don't have any other businesses like it. There aren't many in the industry where you have the ability to grow through price, grow through product, grow through new verticals, go through penetration in existing verticals. In this case, we also have the ability to grow by adding records. Yes.

Coverage, yes. And so because you have so many records, I know you just said you have these dedicated resources and there's a lot of white space, but is it harder to keep growing at the same growth rates when you have so much scale already? Or does scale make it easier to grow at a high pace?

I would say everything is hard. Nothing's easy, right?

About a lot of things.

We have -- we do have the benefit of having the scale that we can invest in dedicated resources. So we have dedicated resources in our employer business that are outselling our regulated services to HR managers like unemployment claims, management, I-9, onboarding verification, work opportunity, tax credit. That's a $400 million business, so a dedicated commercial team, and we get records there. Then we have a dedicated team that's working with what we call partners in the W-2 space primarily as well as 1099, so dedicated resources there. And then we have dedicated resources around pension, going off the pension. And remember, on pension, you have to go to like pension administrators, who are managing it on behalf of companies, and then there's a lot of direct relationships you have to go after to get those records. So we have the scale. So it's just stepping back. I think, Andrew, you know we've been outgrowing what we would characterize as our long-term growth rate on records for 4 or 5 years. 10% growth is not what we expect over the long term for record growth. And maybe if I could just step back for a minute on Workforce Solutions. If you think about the long-term growth framework for Workforce Solutions, I'll start with Equifax. We expect Equifax to grow 7% to 10% organically over the long term, 8% to 12%, including bolt-on M&A, so 7% to 10%; USIS, 6% to 8%; International, 7% to 9%; Workforce Solutions, 13% to 15%. So take that, call it, 14% long-term growth rate for Workforce Solutions. And if you look at the building blocks for that, you got a couple of points over the long term of market growth. 200, 300 basis points, pick your -- what you think GDP is going to be. Then you've got 200, 300, 400 basis points of record growth. You've got a couple of hundred basis points of pure price, a couple of hundred basis points of product growth by bringing new products to market. And then you've got a couple of hundred basis points, 300, 400 basis points of penetration into the verticals. So that shows you, if you like, call it, 13%, 14%, 15% growth, which we do. The building blocks for that are quite balanced. And over the long term, we have the ability to grow well below 10% record growth and still deliver that high double-digit top line growth at Workforce Solutions.

We do think the size of the exchange makes it more attractive to contributors, right, because of the fact that it has over 160 million current. But really importantly, over 650 million total records, so the historic records. So we're in a position where if you contribute records to the Work Number, our ability to monetize them is substantially better than anybody else's because the exchange is so large, it attracts background screeners, it attracts mortgage underwriters, it attracts government. And because we're really the only one that can deliver the significant amount of trended information that we're moving toward, where 50% of the inquiries that we get tend to be around trended type of products, that contributing to the Work Number database is just a far more effective way for any of our partners to monetize their records and to provide better services to their customers.

Right. And just remind me on the way you cat your unique records around social security numbers. Are those complete records or is those just social security numbers that have multiple jobs? Because like what happens if there's 3 jobs, and you only have 2 for that person? Like are those complete social security numbers or...

Those are the complete records from that -- it's their complete payroll record, which is generally 50 attributes we get for every job someone has, so it's the all 50 attributes. It's the 160 million -- I don't know, 162 million or 163 million, that we actually have active records on 122 million individuals. Those are the SSNs.

So -- right, the 122 million are those complete records.

Yes.

Okay. That's good. And you mentioned 1099s. How are you doing? Is there progress in those records? It just seems like those are harder to aggregate records.

Yes, they are. There's multiple avenues to get self-employed or a 1099. There's some that sit with payroll processors who do some tax management. And as you know, as a self-employed individual, you've got to make quarterly tax payments generally to the IRS. Someone helps you do that. So going to those kind of individuals, whether it's a payroll processor, a tax preparation service, directly to companies that might have contract-type employees like an Uber, a DoorDash, those kind of companies is another place to go get those records. So we've got multiple strategies on 1099. Same with pension. Pension, there's some equivalent. There's pension administrators that manage defined benefit pension distributions on behalf of companies. Some big companies do it themselves. Legacy companies continue to have -- paying out those pensions. And then a lot of the government organizations, whether it's a fire department, a city, a police department, billed at the local level, will be paying out their own pension. So we have dedicated resources in each of the states that are on our government vertical that are also chasing down, adding those kind of records.

So here's a competitive question. So Experian reported this week. They gave their record count. If I remember it right, it was 52 million records versus their fiscal year-end, which was 47 million, so they added 5 million records. Like I thought that was pretty good. Like as they add records and their coverage improves, do they make for a more formidable competitor? Or do you feel like this is a big growing market, plenty of room, not a big deal?

Yes. I think as we understand it, Experian talks about their global records...

I don't think so.

When they talk about it?

I've asked them that.

Okay. That's our understanding. We don't. We only talk about our U.S. records. As you know, there's one big payroll processor that both Experian and Equifax also have. The majority of our records are only Equifax, which is quite powerful. And when they're only with Equifax, it's hard for someone else to get them. But look, Experian is a formidable company. They're a strong operator. We think we've got a very strong market position, given the scale of the records that we have at 122 million, and I think the 53 million would have 2 jobs. So you got to think about the 160 million...

I'm not sure, right.

162 million or 163 million total records, active records that we have. And then the other big asset we have, and John mentioned it, is our historical records. We've been in the space for 20 years. We keep every record. And as John pointed out, in every vertical, we're increasingly selling trended. But when we say trend, think about historical, so last 3 years of Mark's income, last 4 years of Mark's income, selling it in mortgage and other spaces. If you haven't been in the business for a long time, you can't deliver if you don't have those records. We have a total of 650 million, 660 million total records in our data set. That's very valuable. And the portion of our revenue that includes historical or trended data elements has grown from 30% a couple, 3 years ago to 50% today. So if you don't have those historical records, you can't participate in that part of the market. So that's a very powerful element. And then the breadth of our verticals, our distribution in all those verticals is just quite substantial because we've been in it for such a long time. Whether it's government, talent, you can't do without historical records, and then some of the other verticals.

Right. So it sounds like you think there is room, and you guys get all the goals, and there will be other players because this is a good market. Is that a fair summary?

It's a very good market. It's one that we participate in.

Dominate.

We don't use that term.

Sorry.

We have a strong position in it.

A historical position, yes.

Yes. And we think there's a lot of room for us to grow in it.

Right. Right. But do you think a lot about the competitors?

Sure, because you guys always ask me about them.

Occasionally.

We don't hear about them in the marketplace, meaning with our customers. They have some unique records at Experian. That is a small number. Those are valuable to them. Those are records they have that we don't have. We've just got a massive amount of unique records that allows us to compete and grow in the marketplace, and then add the historical element, the scale of our technology and then the breadth of verticals that we're in.

Okay. Moving on to the fraud, anti-fraud space. Talk about your positioning there, Kount, Midigator. Like do you feel like you could add to what you're focusing on? Is this going to be a needle mover for you?

Yes. It's a space that's a priority. For sure. We like the identity and fraud space for the obvious reasons of the digital macro that's happening across the globe with all of our customers moving their customers, whether it's a consumer or a small business online, for applications, for applying for a loan, applying for a mortgage, applying for a credit card, applying for insurance. It's such a huge space. It's about a $20 billion TAM is the scale of the market for identity and fraud, and we've been investing heavily in it. As Andrew pointed out, we made an acquisition a couple of years ago of Kount that was big in the e-commerce identity space. It brought unique data to us. We made another acquisition last year of Midigator that made that larger. And we're looking for more M&A around identity and fraud. It's one of our 3 M&A priorities, and we've got to focus on investing in products. So we're in the throes now of integrating Kount into our cloud capabilities and bringing all of our identity assets together, which allow us to bring new products to market that drive very high performance around identifying identities without a lot of friction, meaning the consumer doesn't feel it when they're in the process. That's very valuable to a customer to have a low friction but high predictability of identifying an identity. So it's a business that's been growing double-digit for us. As you know, over the last couple of years, the TAM is also growing double digits. So it's a great space to be in. And we're going to continue to invest in product as well as in bolt-on M&A going forward in the identity and fraud space.

And our positioning is really around transactional execution. So we help with identity validation, fraud protection and charge-back protection as the transaction is being executed by the customer in e-commerce. And also, we support, obviously, the credit card company in the payment segment. We're not really in marketing, right? So we're not at the very front end of that transaction. Where we are really in across our business, around validating identity and preventing fraud and helping transactions occur as opposed to being on the front end of marketing.

Okay. How's Boa Vista doing? Do you feel like the long-term trajectory is the same as you always anticipated?

Yes. So we acquired Boa Vista in July. I think as you know, those who follow the company closely, it's the #2 credit bureau or data analytics company in Brazil. Experian's business, which is called Serasa there, Experian's Serasa has very strong market position. We believe the market was looking for a strong global #2. So we're very pleased with the team there. We're only in the early days of integrating it. It's a market that is a couple of billion dollar market. So there's room for growth between Serasa and Equifax. And the big banks are looking for us to bring our global products, technology and platforms into the marketplace to really help grow. Boa Vista has some unique data assets in retail data. We own 80% of the company. There's a 20% partner, which is a retail -- association of retailers there. And in Brazil, like many markets around the world, some retailers do their own sales finance or financing. We have unique access to that payment data from their financing activities in Boa Vista, which is an advantage. So we're excited about the acquisition. We've worked on it for a long time, as you remember. And we're pleased to get it closed, and we look forward to growing it going forward. And it adds to our International business. We're very strong in Latin America. We've got a big position in Canada, in Australia. In Spain, we're number one. And in the U.K., of course, we compete with Experian, who's quite strong there in TU.

Talk a little bit about tri-merge, bi-merge. There's an option soon for lenders to switch to bi-merge for mortgages if they want, I guess, is probably the best way to describe it. Do you think lenders will want to switch to bi-merge?

We don't think so. And I'll give you a couple of reasons on it. But maybe just to start, as you remember, the FHFA came out with 2 recommendations about a year ago. One was to give the mortgage originator the option to go from 3B to 2B. Today, it's a requirement to do 3B. And they'd have requirement to do 2B or more, a minimum of 2B. They also came out and said they're going to require both the FICO score and the VantageScore. So I'll start on that side first. That's a good guide. We're going to sell 2 scores instead of one. So that's a good guide when it gets implemented. About a month ago, the FHFA came out and said they were delaying the implementation date to collect more information from the industry. So maybe I'll switch to your question, which was around 3B versus 2B. A couple of reasons why we don't think mortgage originators are going to move from 3B to 2B. Number one is 3B provides more coverage around the consumers. There's 8 million consumers in the U.S. that are only on one credit bureau. So if you only pull 2 and that consumer is applying for a mortgage that's on the third that you don't pull, you can't approve it. So you spend money in marketing, and you're not able to approve it. Second is there's about 40 million consumers -- and many of you in the room probably, I'm one of them, if you check your credit score at Experian versus TU versus Equifax, you likely have a meaningful difference between the 3. It's because there's different number of contributors. We don't all of us have -- every bank doesn't contribute to all 3 of us. So 40 million people have a 30- to 40-point difference in their credit score. Same thing, if you didn't pull the high credit score credit bureau, you might not approve a consumer or they might have to pay more for the loan.

Right. The average just gets more funky with 2 than 3. I get it.

The third is this is a pass-through cost. It's not a COGS for the mortgage originator. If you've gotten a mortgage, you probably know that.

For most lenders.

For most lenders. For the vast majority of them. It's more than most. But the vast majority, it's a pass-through cost and it's on the closing statement, and the consumer pays for that 3B. So there's really no incentive for the mortgage originator to reduce the level of originations. And what's happening now is there's a lot of industry pushback on it. There's actually a congressional pushback. Recently, there was a letter sent that's public from senators and congressmen about -- because remember, these are federally guaranteed mortgages. They're federally guaranteed because the government wants to promote homeownership. So they want consumers that qualify to get approved. And if you're reducing the data elements from 3B to 2B and less people are going to be approved...

That's a good argument.

It doesn't meet the goals of 3B versus 2B. Regardless, 2 points on Equifax. It's a -- mortgage is a lot smaller part of Equifax today than it was. We're heading for 15%. If something does happen here, it would be late next year. And then...

It was delayed until late...

Well, it was delayed. They didn't say when.

Yes, I didn't think so.

They're collecting more data, but there's going to be a long implementation cycle.

That's fair.

And then the last point is, Andrew, you remember that about 6 months ago, we rolled out a new Equifax mortgage credit file that includes cell phone utility attributes that only Equifax has. So we now have a differentiated, more predictable, thicker, richer data set in our credit file than our competitors do. So we're positioned to be -- if there -- as you know, like in shopping behavior, which is the early part of a mortgage cycle, sometimes the mortgage originators will only pull one file. We think we're positioning to be the file they pull because we have better data and richer data in it.

Yes. Last question. When you think about 2024, which products are you kind of most excited about in terms of revenue needle-moving products?

Oh, boy. That's a...

Revenue needle. So you just have to tell me the product.

So -- but it's like this. I've got 3 boys. I love all 3 of them, right? You love all your children. But what excites is that, I think, number one is around the Workforce Solutions products that are coming out in talent, in government, in mortgage. We still have new products coming out. As you know, with the cloud, we unleashed their capability to roll out new products. And as you know, our vitality goal is 10%. Workforce, now that they're in the cloud, is over 20%. So workforce has really unleashed a whole bunch of new products going forward. We're also excited about the ability to continue to deliver trended or historical data in that business and across Equifax. And John, would you add anything around products we're excited about?

I think we're excited about some of the new identity and fraud products that will be coming out next year. Commercial, we expect to continue to perform very, very well. It's product expansion, but it's also customer expansion. Really, the businesses that have performed well this year that you've seen perform better than market, we think, are the businesses that we're the most excited about.

All right. Let's end on that. Thank you, John and Mark. Appreciate it.

Thank you, Andrew.