Equifax Inc. (EFX) Earnings Call Transcript & Summary

Hi. Hello, everyone. I'm Heather Balsky, BofA's business and information services analyst. And I'm pleased to be here with the team from Equifax. We have John Gamble, Chief Financial Officer; and Trevor Burns, SVP of Investor Relations. Thank you both for joining us.

Thanks for having us.

I want to kick off with your perspective on the consumer lending environment. At our 2023 conference, we were navigating the banks crisis, rising rates, recession fears. Today, we're talking about a soft landing and an eventual rates cut. What's your perspective on the current operating environment for USIS business outside of mortgages? How is the consumer doing? And what are you hearing from your customers regarding lending standards?

So I think the consumer is continuing to be about as we described over probably the past year, right? I think what we're seeing is generally, credit scores went up over the pandemic and they've stayed up. And we really haven't seen them come down, right? So average scores remain high. The number of people that are prime versus subprime continues to -- has shifted more toward more prime consumers, which we think is -- and it's stabilized there. It hasn't really moved substantially weaker. You have seen, for subprime consumers, right, you've seen increasing levels of debt on their balance sheet. You have seen increasing delinquencies. You've seen it both in auto as well as in card and to the same degree, in personal loans. Probably more significant in auto than you've seen in card. I'd say that probably in the last couple of months, it's kind of stabilized, right? It got to a difficult place and hasn't really gotten much worse -- or it stayed about where it is. So I think generally speaking, what we're seeing is the consumer is relatively healthy, right? The bulk of the transaction activity that we participate in tends to be in those near-prime and prime consumers. We do participate in subprime, probably more heavily in auto, right, than we do in some other areas. So impacting us, we tend to be more impacted by those higher credit bands. And given the fact that people are working and unemployment continues to be at a low level, even if it's ticking up a little bit, it's still at a very low level. We think the consumer is relatively constructive. We've assumed we're going to see a little weakening, right? As we go through the year, we talked about that, about just general economic weakening as we go through the year. Quite honestly, we tend to assume that pretty consistently, given the fact that we've been in a relatively long period of expansion, sooner or later, that's got to slow down a little, right? But we're not seeing it happen yet, right? And generally, our customers are still transacting. Generally, we're continuing to see activity be good. We saw -- you saw -- I think a lot of people talked about auto sales were a little weaker in January than people expected. I think the expectation was that's probably weather-related. We'll see whether that plays out as we go through the rest of the quarter. But overall, I think we still feel relatively good about the health of the consumer and our customers. We talked about, I think, in the fourth quarter that in terms of our batch business where we see more of our marketing, our Prescreen, that was okay, right? It didn't get worse. It didn't get a lot better, right? But it continued to operate the way it had. We're not seeing substantial increases in people doing back book analysis, right? So that would tend to portend weakening. We're not seeing that either. So I'd say we're -- the trends are fine, yes.

That's encouraging. That's great. So the eventual recovery in mortgage issuances, I feel like it's a big topic. It could have a material impact on your business. You've talked about losing about $1 billion in revenue because of what's happened in the market. Walk us through where that $1 billion number comes from.

Well, it's relatively straightforward, right? We're -- it's about a $1 billion mortgage business that we have, and we're at about 50% in terms of transaction levels of what we would see during what we're defining as a normal market. And again, we understand that's all based on our definition of normal, right? And what we did is we took 2015 to 2019, kind of the last 5-year period before we went into the issues we had, obviously, starting in 2019. And there, the level of credit inquiries we're seeing right now is about half that. I think -- but honestly, the level of mortgage originations is similarly about half that level, right? So we're just indicating if we were running at that normal level and then we were seeing the same level of price realization that we're seeing today in our 2014 guidance, then we would be running at levels about twice where we currently are, and that's kind of where you get the $1 billion.

That's helpful. And I think we've all learned that it's really tough to forecast the mortgage market.

We would agree with that.

Yes. It's like one of the facts of life at this point. But how do you think you can recover the sales over the next few years? Have you thought about the revenue opportunity if rates decline, but they're still higher than they were pre-COVID?

So we talked about this a bit on the earnings call, right? We try hard not to forecast rate movements or mortgage market movements because it's just so hard, right? And we saw that in the last 4 years. In some cases, better. In some cases, worse. So what we've done very consistently is we take a look at our current transaction run rates, right? We're not looking at people's guesses on mortgage originations because it's -- they're just -- it's difficult, right? So we look at the actual credit inquiries we're seeing, the actual twin inquiries we're seeing. And then we just assume that's going to continue, right? So that's effectively assuming the mortgage market continues to look just like it does now, right? And to the extent that happens, we think our business performs really well, right? And that we'll execute well, we'll perform much better than that in terms of our mortgage revenue growth. Our non-mortgage performance, we think, should be good. So we should see nice revenue growth, which lets us drive margin expansion, which is such a big part of our plan. So what we're trying to do is make sure that we're preparing ourselves for -- we do believe mortgage will recover. We certainly believe that, and it's coming. The pace of recovery is just so hard to predict. So what we're trying to do is position ourselves so when that recovery comes, that it flows through and we generate lots of incremental income and cash flow because of it, right, to make sure we're positioned so that our technology and our go-to-market allows us to not have to add meaningful incremental expense above variable costs, right, to allow us to generate that revenue and then to continue to move forward. What we are investing in or specifically around mortgage is making sure that we're ready with products. We continue to enhance the products, so as the market recovers, right, we can actually perform better than the market itself, substantially, as we have over time. So that's the way we try to look at it, and we go out of our way not to forecast the mortgage market. And quite honestly, we plan internally in the same way so that we properly constrain costs. We don't constrain new product investment. That's an area that gets everything it needs, okay? But we properly constrain costs so that we can make sure that we generate the incremental margin and EPS that we have talked about getting as the mortgage market recovers.

That's really helpful. And so I think one of the things that I wanted to dig into on the mortgage side is sort of the relative outperformance. And there's 2 parts of the business. There's EWS side, the USIS side. So starting on EWS, it would be great to get your perspective on sort of what's driving outperformance in 2024 when you think about new records, pricing, product, et cetera, and kind of how that -- the relative comparison to what you saw in 2023.

Absolutely. So 2023, the level of outperformance was something like 20 points, right, pretty much. And this year, what we've talked about is a number around 15 or a little bit south of there. We said in the first quarter, we would be somewhat weaker than that, right? So the general drivers, you covered them well, right, of our outperformance is price, records, record tends to be a substantial one as well, and then product, right? And then -- and so those are 3 of the big drivers. There are other drivers that can occur around the way we improve fulfillment rates and things like that, which also can drive record improvement. And we expect that every year, let's call those operational improvements. What we saw in 2023 is it was a really big year for product, right? We launched Mortgage 36 in late third, early fourth quarter of 2022, right? And that was a product that expanded to 36 months the level of information we provided back to mortgage underwriters. It also added filters that allowed them to make sure that those responses met Fannie and Freddie requirements very effectively. So what we saw is a very rapid uptake of that product. And as we said, now we're at that level where about 50% of the inquiries that we get and that we respond to are for trended information, think Mortgage 36. It isn't all 36, but think Mortgage 36. That's substantially higher revenue per transaction for us, and that drove substantially higher outperformance. This year, we're continuing to work new products. We just don't have a new Mortgage 36, right? So I think what we're going to see is a thinner amount of new product generation this year, right, in mortgage. We're going to see very good new product generation overall. We said our Vitality Index is going to be 10% or higher. So we feel very good about our Vitality Index. Just won't be as strong in EWS mortgage. And that's why you're seeing outperformance be less than last year and probably driven more specifically by price and then records and then a little bit of those operational improvements. Long, long term, right, we gave 13% to 15% long-term model that applies both to mortgage and non-mortgage. We've said 2 to 3 points from market growth. So long term, right, what we're looking at is the level of outperformance to deliver our model of somewhere around 11 points on average, right, 11 to 12, right? And we think that's very achievable with price increases in the neighborhood of 4 to 5 points, record growth that delivers 3 to 4 points, right, a little bit -- and then new products that are in those same ranges in any given year, right? Product might be a little more -- might be a little bit better on records, but we think that, that mix is something that we can deliver over the long term. So operating in that 11, 12 -- 10-, 11-, 12-point range, we think, lets us deliver the long-term model very effectively. On each of those components, we accept we've been outperforming them substantially. And we expect to keep doing that, but it isn't necessary to deliver the model we have.

Okay. That's helpful. And I think that sort of especially what's been going on with the refi market, it's had an impact on your relative outperformance. So put in perspective, if and when -- it should happen eventually, the mortgage market rebounds, what that means for your outperformance?

Well, I think just for revenue in general, right, what we see is -- generally speaking, is when the market accelerates, right, what we bring to the market is certainty, high transaction volume, right, and the ability to transact rapidly and scale rapidly with The Work Number. So what we find is adoption can accelerate as markets accelerate, right? So would we think that we should be able to help deliver that with our customers as the mortgage market rebounds, whenever that is, right? Yes, that's something that we'll focus on tremendously, and we think it will help us drive accelerating revenue performance over time.

Okay. All right. That's really helpful. And we've gotten some questions about what's happening with mortgage shopping in 2024 and how that kind of impacts your outlook for EWS relative to USIS for the mortgage market. Can you just kind of help explain that one more time for investors?

So shopping, right, or maybe another way to look at it is people start a loan because they want to acquire a home, and they can't find one, so they don't close, right? So it's -- in some cases, you could call it shopping. In other places, it's just failure to close, right? They weren't able to finish. And what we saw in 2023, obviously, as the market went down substantially, is the inability to close went up substantially, which looks like shopping, which looks like people out there just shopping for a mortgage. And our expectation as we went into this year with stability in the mortgage market, not necessarily recovery, is that, that level of inability to close, right, or shopping would decline, right, and that we'd see more consistent performance between USIS and EWS as opposed to USIS seeing better inquiry performance, transaction requests than EWS. We're going to have to see what happens as we go through the year to see what really happens with mortgage volumes. If they stay kind of where they are, I think -- and we don't see recovery, so it's, let's say, consistent with our guidance, then we would probably expect what we talked about to occur, right, where that shopping behavior is substantially less beneficial to USIS as we go through the year. We're just going to have to see what happens as the market actually recovers here.

That's helpful. And so shifting to USIS. There's been some noise around prequalifications that's impacting 2024, some changes there. Can you walk us through the mechanics of how this impacts what you report -- just generally what's going on, but how it impacts what you report and just all the moving pieces to just kind of better understand the dynamic.

Sure. So -- and I'm going to take it up a level here. So I think the -- I think what you're seeing, right, is that USIS revenue is substantially outperforming underlying market transactions in general, right? And there's a couple of drivers. You just covered them, right? Just so people are clear, we've been disclosing for an extremely long time, I think, over a decade, mortgage credit transactions. And what we disclose is hard inquiries. Those are the inquiries that are occurring during the closing cycle, right? And prequal, what you're talking about, right, is something that's much earlier in the credit cycle, right, and it's a soft inquiry. And what we saw in 2023, I think to a degree in 2022, right, but you started to see those products be pulled more frequently by mortgage participants. It started to benefit us in early 2023, but accelerated a bit through the year, right? And so that does generate some of the outperformance, right, that you see in USIS. So the big drivers are, yes, we get a little bit of price every year in credit, yes. So there's some of that every year, and we've said historically, think 3 to 5 points, right? Prequal has been a benefit, and it's bigger in the math upfront. So if you look at our guidance, it's more outperformance in the first quarter than the year. That's because we have a comparison period where in the first quarter of last year, prequal was relatively low compared to the back half, right? And then also, obviously, one of our partners had a very substantial price increase, and we're their channel. So that price increase flows through our revenue. So what's driving the very substantial increase in USIS revenue relative to mortgage transactions that we disclose is those 3 factors. The biggest factor obviously being the pass-through of our partner's price increase. And then -- but prequal is a meaningful factor, and that is being more beneficial to us in the first quarter than it will be throughout the year, simply because 2023 saw substantial growth during the year. Embedded in prequal is also a score from our partner, right? So that also drove a price increase, right? The increase was in price there as well as well as normalization of pricing around prequal because effectively, it's a trended product. So its pricing looks very similar to the pricing that you would see on a hard pull.

Okay. That's helpful. That's helpful. I want to shift beyond mortgages, but still talk about -- let's go back to Workforce. What are you most excited about in 2024? What do you think are the biggest opportunities to drive growth in that business? And I'll -- yes, let's start there.

Well, the thing that's most exciting about Workforce Solution other than it's just a wonderful business model, right, is -- and its durability is the pace at which we continue to build the database itself, right? So we're just having a lot of success. We had a lot of success in '21, '22, '23. And we expect to see again in '24, adding new records, adding new partners, adding new relationships and driving the size of the database up, right? And as that happens, right, it just becomes a more and more compelling product for our customers, and it creates more and more capability for us to generate new products. And so we feel really good about our ability to generate some very nice record growth in 2024, even though as people ask, gee, you've grown it so much, there isn't as much left, how do you continue to grow? I'm talking specifically about W-2-based records in the comment I just made, but we're also expecting to see nice growth in pension. We think we're going to continue to grow that as well, and that's beneficial to us. And we expect to make progress around 1099, right, or gig workers, people that are not full-time employees. And that's the tougher one. We've always said that, and I think that will continue to be tougher. But we expect to make progress there as well. But database growth is something that we're excited about in 2024. What that allows us to do is we think it's going to allow us to continue to have a -- and I'll do it by segment, very nice growth in government, right? The expansion in government, the growth in the database and our ability to provide better service to our government customers because we can respond to them more frequently per transaction is a big practice that we have in terms of selling. And we think it's going to add substantially to our ability to continue to grow the depth of government customers we have. Also, the large CMS contract we signed and the large contract we signed supporting SNAP, TANF from the federal government also are very beneficial because it creates funding certainty for our state customers. And again, the thing to remember is we have a very large, $600-plus million government business now. The bulk of the revenue goes through the states, right? Much of it is funded by the federal government, but they're the transaction party. So them having confidence in the level of funding is really important to us in the sales motion. So we feel very good about our ability to keep growing government. It's a great business. Again, the thing about government to remember is it's government, right? So it's choppy, right? They're large contracts. They occur in bulk. They're signed annually. So they are choppy. That's true, okay? But we feel really good about the trend we're seeing in government. We feel really good about our ability to continue to add new products and talent. That's going to allow us to outperform the talent market. Again, talent can be choppy as well, right? But again, we think over time, we tend to look over multi periods because that takes the chop out of the water. But we think there, again, the depth of the database, the fact that I think we're 660 million-type of records, right, allows us to build out more and more complete resumes for people digitally immediately, which makes us more attractive top of waterfall and allows us to help our customers create products that are at a higher value for them that they can -- that their customers will accept. Because increasingly, what's happening is the data costs in a background screening relationship with their customer is a pass-through, right? So again, we feel very good there. And we're starting to see the debt market, where we help people with debt, starting to come back a bit after the last several years. We think that's an opportunity that we should see growth. And we continue to see opportunities across the other segments of financing, card, auto, personal loans. They're just a lot smaller for us relative to government, talent and mortgage, right? It's just because the -- those loan sizes are just so small, right? The transaction sizes are just smaller, right? So given the depth of the data that's in The Work Number, the 3 big markets of government, which is now rivaling mortgage, right, in size, but government, mortgage and talent are the places we see a lot of opportunity. And we think there's a lot of opportunity to come. We shared a chart in the earnings deck about the size of the pie. And we think that we have a lot of space to go in the size of the pie. Rental. We get asked questions about rental. Do we participate in rental? We do, right? We participate mostly through the government segment, right? And they're a very large landlord, right? But we expect to be able to expand our participation in rental outside of the government segment, again, as the database keeps getting bigger, right? Because again, it just becomes more and more compelling.

That's helpful. And for EWS specifically, Mortgage 360 (sic) [ Mortgage 36 ], that product had a big benefit in 2023. What are you excited about on the product front broadly for EWS?

So again, I think what we're going to see, broadly for EWS, is more and more products that look like expansion of trended information across multiple segments. And that's what you're going to continue to see. And you'll continue to see us -- I'll use the word customize, it's not exactly accurate, okay, but tailor, let's go with that, products that meet specific customer needs, right, around that trended information that helps them improve the use of our data in their flow more consistently. And because of Fabric, right, I mean, again, an important -- we haven't got there yet, but we always do, right? I mean because of where we are in transformation in EWS, EWS runs on GCP, cloud-native on Fabric, right? So our ability to create these tailored products is dramatically better than it would have been 5 years ago, right? So we can do that. And we're increasingly, in mortgage, for example, trying to move toward products that could be consumed in The Work Number in the same time frame as prequal, right? Maybe much lower price points, not as much data involved in them, right? But how do we participate earlier in the sales cycle? And we're working on that as well. Now again, with The Work Number products, we're often working with our customers and kind of training the market. So the launch cycle is slower, right? But the use cycle is extremely long, right? So these tend to be products that stay in the market for a very long time. So they justify the investment.

That makes a lot of sense. Anyway, it's worth kind of moving to your USIS business and talking about that. You expect to have all your customers on the cloud by the first half of the year. There have been some delays there. What's your visibility on hitting that target? And once you hit that milestone, what does that mean for your USIS business in terms of new product growth and augmenting USIS sales growth?

Yes. So we're making very good progress on moving customers onto -- fully onto Data Fabric. We're in production. They're substantial volume now, so I think what's going on now is just the cadence of migrations. And the cadence of migrations happens every month, in some cases, every 2 weeks, and they're just continuing to happen. We said this before, right? Individual customers move around, right? And that continues to happen. But I think our ability to manage that is very, very good. And what's happening as more and more of the customers have migrated, the benefits that people see by being on Fabric become known, right, and that we tend to get -- the stickiness of the dates gets better, right? So do we continue to expect to be done somewhere around midyear? We do, right? So we're continuing to think we have very good progress, and we feel good about our ability to deliver. And the good news is we're delivering substantial revenue fully on Fabric for our U.S. consumer customers today, right? And that's really where we're focused. Canadian consumer is the same, right? So Canadian consumer, they're actually further ahead in terms of customer migrations than U.S. consumer. Different applications, right, because it's required in our business. The Canadian data can't be co-mingled with the U.S. data, and they're in separate DCP data centers. But they're actually ahead in Canada, and we're feeling good about their ability to get done in the same time frame.

Okay. And then what are -- how does that -- what does that set you up for with regards to new product growth? And kind of when could we start to see new product introductions accelerate?

So it's -- what we saw in EWS, right, is our ability to ideate and create new products with customers rapidly, improve dramatically, right, when the full data asset was on Fabric and the customers were consuming on Fabric. And the second part is very important, right? So we're expecting the same thing. We're already seeing some of that occur because, for example, many of our customers that run on InterConnect or that use Ignite, right, those are running on GCP today, and they've migrated. And we're seeing new products that could -- sorry, InterConnect's our decisioning system and Ignite's our analytical system. It's our Ascend, okay? And we think the capabilities of Ignite and InterConnect are, we think, class-leading now. And I think a lot of it is because it's running on GCP, it's cloud-native. And we're deploying across those assets the Vertex assets from GCP, which we continue to think are working extremely well. We're starting to see more and more customers use those assets as products. And we think that's what we're going to see as we go forward. We're going to see more and more multi-asset products that, in many cases, can be self-configured by our customers. We'll have to deliver them for them, right, but they're doing their own analytics. And we think we're going to continue to see that as we go forward. And that's what we're excited about is that the cadence of product definition and launch will just go faster. We're seeing USIS Vitality Index grow. It's not to 10%. It's not where we want it to be, but we're already starting to see it grow given what's already occurred. And we're expecting to see that accelerate. Not going to see a lot in 2024. You're going to see some, though, but it will be much more in 2025.

Okay. That's helpful. And just curious, you talked a little about the timing. But how important is the macro environment to all of this dynamic and your ability to sell new products in the USIS business?

So it's certainly important, right? I mean, I think what we've seen in terms of new product adoption, if a market is incredibly hot, that tends to impede new product adoption, right? They're very busy. So if a market is extremely weak, it doesn't necessarily impede new product adoption, but it impedes the number of new products people are ready to consume. So I think as long as we're kind of running in the sweet spot, right, between not too weak and not too hot, which is where we are, right, and a little bit of weakness, well, that's okay. Slower than we are, a little bit faster is okay. I feel like we're in a position where our customers are continuing to try to make better use of their capital, and that's what we help them do, right? We help them select better -- select more effectively ways to allocate their capital into lending segments that get them better returns. So we feel like we're running in a kind of an environment right now where we're well positioned to sell effectively. If you did see a substantial weakness, yes, that would be a problem, right? It isn't a giant problem. It's just kind of a deferral, right? And if things got incredibly hot, well, we'd be happy anyway, but you'd probably see less new product adoption.

That's helpful. You talked about managing costs, and you're seeing also some cost savings flowing through this year from your cloud transition. Kind of where are we on that journey in terms of those costs? And are there additional savings as we move beyond 2025?

So we should be generating -- we'll be generating some incremental savings in the back half of 2024 from the U.S. and Canadian migrations and the decommissioning of the legacy assets in those data centers. So we'll see some of that in the latter half of '24, so we'll get the carry-on benefit of that in 2025 as we get through the full year. There will be some -- we'll see some incremental savings in 2025, generally as some of the international assets finish fully migrating, right? And then there are some very small U.S. assets that will migrate also as we move through the rest of this year. So we'll see some of that. So -- but the larger asset migrations are occurring this year. So that's where the bigger savings will come in. But yes, will we see some? Sure, because we're not talking about -- we've long indicated that Asia Pacific, Australia and New Zealand will be the tail end of our migrations, so we'll see some savings there as they occur. But it's a $350 million business, right, so the level of savings just isn't nearly as large.

That's really helpful. And to close things off and thank you for the time. What's the free cash flow growth story for the company this year? And how should we think about conversion trends over the next few years?

Yes. So that's an exciting story for us, right? So I mean, what's happening this year is EBITDA margins are going to expand. So the operating cash flow generation will continue to go up. And we feel very good about the fact that we're going to see very nice reductions in our capital spending as we go through this year. So we don't guide free cash flow, I know that. But the -- but I think we feel very good about the components, right, that are going to drive our free cash flow much stronger will occur this year as we see revenue growth, as we move through this year sequentially, as we see those margins expand, and as you see CapEx walk down, like you saw some in the third, you saw some in the fourth. You're going to see it as we go through this year. We guided, obviously, to lower CapEx, and then you'll see it again in 2025. So we feel very good about what our cash flow is going to look like as we go into this year. We've talked about conversion after dividends being in the mid-80s, I think, historically, and I think that's something that will -- we should be able to deliver as we get further into the future. And that puts us in a very good position, we believe, to be able to -- as we get through this year, where we've committed to delever the balance sheet a bit, and we're going to do that. But as that completes, as we're moving through this year, you'll see the acquisition program restart again. And then we think we'll have very nice capability to return cash to shareholders as we get into 2025. We'd like to start growing the dividend again. It's something that we'd like to start doing, and we'll be looking at that as we move through this year. And we'd like to buy back stock, right? And we think, given what the model looks like, we should have a good opportunity to do that as we move through this year, so long as the mortgage market is flat to better, right? And if we see acceleration in the mortgage market, then the free cash flow story is really, really, really strong.

That's really helpful. And just to kind of really close things off, you mentioned you could potentially, down the road, start looking at M&A again. Where would you be focused?

I think the good news is we're very consistent in M&A., so the focus tends to be around The Work Number, tends to be around employer services and then other places where we can acquire assets that have records or that have services that make direct -- our direct contributors want to work with us more on either unemployment insurance claims or WOTC or I-9 or Affordable Care Act management, and we'll continue to look for those other regulated services that require payroll contribution. So we'll keep doing that. We think that's very important to us. We think we have a great business there that we can make even better. We will -- we want to continue to add assets in USIS, which once they're fully transformed, we'll be able to do more effectively, right, because we'll integrate them faster around alternative data assets. Identity and fraud, we think, are 2 areas that we'll continue to look at. And then internationally, when we can find a large leading bureau or not even large, a leading bureau in a country, that we'll continue to look at those. They're just infrequently available, right? We worked on the BVS acquisition for a very long time before we could come to a resolution. We bought the Dominican Republic a little over a year ago, almost 2 years ago, I guess, and so they're just hard to find. And we know our peers like them, too, right? So -- but we'd like to continue to buy those. I just can't tell you what the pace will be.

Yes. That's fair, that's fair. Well, thank you so much. We really appreciate the time. Thanks, both of you.

Great.

All right. Thanks, everyone.

Thanks a lot.