Equifax Inc. (EFX) Earnings Call Transcript & Summary

We'll keep going. I'm Jeff Meuler, Baird's information solutions analyst. Pleased to introduce Equifax as the next presenting company. Equifax is the leading provider of employment and income verification and one of the 3 global credit bureaus in addition to a variety of other information solutions. With me on stage, CEO, Mark Begor, who's been CEO of the company since 2018 prior to which he ran several businesses at GE, including its card business, and he was previously on the FICO board; also with me on stage, John Gamble, who's been Equifax's CFO, going on 10 years. And then in the back of the room is Trevor Burns, the Head of IR. We'll launch into it. We'll start with the largest and fastest-growing and highest-margin segment, your Workforce Solutions segment. That includes the employment and income verification business. It's over half of EBITDA now. It's the key EBITDA growth driver of the company.

Let's start with records growth. It's been a significant driver of revenue growth. It's been a good new story. Just talk about like what's driving it, the size of some of the recent wins and the timing for them to onboard and the records pipeline.

Yes, I think what is unique about Workforce Solutions, just framing it again, as you said, it's about half of our revenue, $2.3 billion last year, 50% EBITDA margins. We expect workforce, Jeff, as you know, to grow 13% to 15% over the long term versus 8% to 12% for overall Equifax. And with those 50% EBITDA margins, it's accreting into our overall revenue growth as well as our margins going forward. So an attractive business for us. It has multiple levers for growth, price, product, penetration, typically against a white space of manual verifications we can chat about. And then as you point out, records, quite uniquely, we have the ability to add records. There's roughly $225 million working or income-producing Americans. A lot of them have 2 jobs or more. There's 170 million, I'll round up, of nonfarm payroll. There's another 40 million roughly of self-employed 1099 employees in the United States, and that ranges from an Uber driver to a doctor, dentist, lawyer. So lots of income producing Americans in there. And there's about 25 million, 30 million defined benefit pensioners. So that's kind of the population of records that we're chasing. As you know, we get our records, really, 2 ways. One is through direct relationships with individual employers, where they'll outsource to Equifax some of the regulatory compliance processes we do for them. Unemployment claims, which is when someone gets laid off, you have to fill out the paperwork, so they can collect on inclement benefits. I-9, which is the onboarding of an employee. We do health care validation of their eligibility for government sponsor -- government-supported health care. We do work opportunity tax credit, which is a tax credit for certain employees when they go to work for a company. We do W-2 management for companies. So a wide array of regulatory services. And then as a part of that relationship, we'll do income and employment verification for that company for free. And if we're not doing income and employment verification, the HR manager has a call center as people that are really manning the phones to take those inbounds from a mortgage broker, an auto lender, a background screener, government social service doing that. And that's half our records. We have a dedicated team that's out selling those services to U.S. companies. So we're growing records every month, every quarter as we add those new relationships from our employer business. The other half of our records come through partnerships. I think pension administrators, HR software companies, payroll processors. And we have 60-odd relationships there that we add the same kind of value -- free value-added service for their clients. They can bring along with the payroll processing or delivering a SaaS software solution. They can add to a free service that's income verification of their employees done by Equifax for free. So that's a free value-added service, and then we pay a rev share on those records. So those are -- we have a dedicated team there also looking at all those different partnerships in W-2, 1099 and pension records. And as you point out, we've had very successful growth in both levers over the last 3 years, 4 years, 5 years, adding records. Our records in the first quarter were up 10%, and we've had strong growth over the last almost 5 years from both levers, but principally driven by increased partnerships, more partnerships rolling in, where we have that relationship with an HR software company or a pension processor. So that's been really driving that going forward. We added 2 partnerships in the first quarter, one of them, a larger partner that we telegraphed in April that we expected that to come online in the second quarter. And as you know, the power of adding new record to our data set is because we have so much distribution through different verticals like mortgage, auto, cards, P loans, we sell data into background screeners because we collect the job title, along with the company as one of the 50 attributes every pay period. So we have a digital resume. So we sell the data there. And then we also have a very fast-growing business on the delivery of social services at the government, principally the state level, where all social services are income verified. And because we have so many connections, when we add new records, we're already getting the inquiries for every applicant from our customer. So as we add new records, we're able to monetize them across the multiple sources. So it's a very powerful lever for growth along with penetration price and product expansion.

And I want to talk about those other kind of factors because to me, the profit and revenue CAGRs of the business have been great. Records growth remains good, but the monetization growth per record lately has not looked as good, including in Q1. Let's zoom in on like mortgage outperformance because you have the records growth, you have pricing on top of it. And it looks like they net down to mortgage outperformance that's like less than those 2 combined. So I'm not seeing some of those...

Those are your words, not mine, but go ahead.

Well, no. I mean do you dispute that there's -- that that's not the case. You give us mortgage outperformance. You give us records growth. I have a sense of what I think pricing is doing, so it looks like there's some sort of headwind that's netting against it or maybe we're not seeing -- and I know you're rolling off the ramp of Mortgage 36, but it doesn't seem like we're seeing the product and the penetration factors contributing to growth in the most recent quarter.

So when we think about all the Workforce Solutions businesses, as I said earlier, we expect them to grow 13% to 15% over the long term. So we would expect mortgage to do that. We would expect government. And I hope we talked government a little bit because government was over 35% in the quarter. It's now our largest vertical, to be fair. It's larger than mortgage for the first time in the first quarter. So specifically on mortgage, as you point out, our mortgage outperformance versus the underlying market in EWS in '22 and '23 was in high teens. And that was substantially driven by a very successful product we rolled out called Mortgage 36, where we delivered 3 years' worth of income history to the mortgage originator, and it gives them the ability to approve more consumers more quickly, and there was a big take rate on that. Historically, we didn't do that. So that drove our mortgage outperformance really up almost 2x to what we would expect it typically to be. We would expect over the long term to have our mortgage outperformance in that kind of low double-digit range in line with that 13% to 15%. And in the first quarter, we were south of that. We expected the runoff of Mortgage 36 from a comp standpoint to play through. We still had record growth, as you point out. We had some pure price roll in there. Less product in the quarter and maybe in the first half. We're rolling out some new mortgage products in EWS in the second half. We're looking at rolling out a Mortgage 24. So 24 months' worth of data. We're going to roll out something that looks like a Mortgage 90, so 90 days' worth of data. But basically filling in more solutions that match the wide variety of the consumer that's applying for a mortgage and what their income history is, either changing jobs or if they're an incentive income, that incentive income, if they're a sales commissioned employee that may be up or down in certain months, so you need more history. So we would expect and we gave guidance on that in April that, that kind of high single-digit outperformance from mortgage in the first quarter, we would expect in the second half to move more to that 10%, 11% range. And the driver from first quarter to second half is principally record additions being stronger than we thought. You -- we talked about that large partner that we added in the first -- in the second quarter that we signed in the first quarter. But there'll likely be some impact from product as we continue to roll out products going forward. And so the fourth lever, which we also have opportunity in mortgage for EWS is penetration. Not every mortgage originator uses our solution. All mortgage originators have large manual operations because our hit rates are south of 50%. So they're still manually verifying half. So as we continue to convert a mortgage originator that's fully manual that adds to our revenue growth and our mortgage outperformance.

And first quarter mortgage outperformance was a little lower. And it was just really mixed, right? The mix of our customers moved a little bit toward customers had a little better pricing, they were generally larger, right? So for the rest of the year, we just assume that mix would stay. Movements in mix between larger and smaller players, so affecting our price realization, that happens -- that's happened for years. It just happened to be slightly negative in the first quarter. It's not unusual.

And if we take your TWN mortgage revenue, subtract out the mortgage performance, we get the TWN mortgage inquiries, is that correct?

Yes. And which we consider to be market. That's our proxy for market.

Your credit research team also puts out the credit pulse data. And I know that there's a lag in terms of the full reporting for mortgage.

6 months. Yes.

But if I go back like 3 quarters, it looks like your implied 20 inquiries in mortgage are lagging the credit pulse data in terms of mortgage originations. Just how do you monitor market share in the mortgage market? Are there any sort of like moves back towards manual as people look to save money in a market where they have excess staff?

Yes. We haven't seen any moves like that. We still deliver, obviously, speed. Every mortgage originator, we do business with is trying to shorten the cycle of a mortgage because there's a lot of volatility in that consumer ability to close. Do they lose their job, does their credit score change in that time frame? That's why they want to shorten it up. So speed is very important, accuracy, but we also deliver productivity. If you're going to spend $40 or $50 on an income verification or employment verification with us, if you don't use us, you're going to do it manually and you're getting on the phone to call the company, call Baird and say, "Does Jeff work there?" Getting someone on the phone, then they've got to make sure that they're not a fraudster, right? How do I know you're really not a fraudster, there's just a lot of friction with that. So we haven't seen a move too manual, and we think we deliver a lot of value to the industry, which is why we have the various products that we're rolling out for that vertical as well as all of our others.

And we watch the relationship between credit inquiries and TWN inquiries, right? And they tend to be within 5 to 6 points of each other. Right now, you are continuing to see more shopping or people are having a hard time closing loans, they start, right? And I think that's known in the industry.

And the shopping principally is in a credit rule before they put an application in. We're testing in the market a solution for income for shopping, that someone is working. So we're just testing that. We don't have a solution today. So on the TWN side, for income and employment, we really only participate between application and closing. In the shopping side, we'd like to -- we think there's value in understanding someone's credit score when you're kind of prequalifying someone as a mortgage originator, do I want to spend $5,000 on Mark because I think he can close by adding Mark's working to that equation in the shopping behavior. So we've got that in-market testing now, which would be a new product.

Got it. And then as you mentioned, government within TWN is a really good news story. You've had kind of like 30 to mid-40s growth for a couple of years now, including in Q1.

Yes.

Talk about the contract wins and the timing of them onboarding, and as you get through the redetermination benefit, where should the government growth normalize?

Yes. So just to put some numbers on the table, as I mentioned earlier, government now for us is our largest vertical in Workforce Solutions. And when we talk government, it's really the delivery principally at the state agency level of income verification for social services. There's over 100 million Americans that receive at least one social service. I think the average is 4 or 5 or 6 different social services. So I think rent support, child care support, income support, food support, student lending support, all different services are all needs based and you have to verify income. We think about the TAM of manual verifications that have been done for decades at a state agency level, which is where this is delivered of being something like $5 billion. In the first quarter, our run rate is about $700 million against that $5 billion. So there's another $4 billion plus of manual verifications at those state agencies. And as you pointed out, we've had really strong growth over the last 3 years, and we were up 35% in the quarter -- first quarter but a 50% CAGR the last 3 years. So really strong growth. Clearly, that's not a long-term growth rate. We do expect government because of the macro of primarily that $4-plus billion of manual verifications in the 50 states and the kind of dozen agencies in each state, the ability to penetrate into that as being a huge growth lever. And we expect government to outgrow our 13% to 15%. We haven't given a long-term growth rate, but we expect it to be accretive to 13% to 15% over the long term because of the macros of that market and the value we deliver. We have multiple levers for growth there. So record additions drives higher hit rates, right? So we're growing records. We're already getting inquiries from the clients we have, the agencies. If we have more records, we're delivering more instant verifications for them. We have -- these are generally multiyear contracts in nature. We generally have price escalators every year in those contracts. So we have visibility around what those are. It's also a solution that has multiple transactions. So the first time a family or a consumer goes to get food stamps or rent support or child care support, each service their incomes verified. And as you might imagine, there's a lot of churn in and out of social services. So every time they come back, let's say they're on one of the social services and then their income goes up, they no longer qualify. They come off the social service. And then at some point, they may have a family event and not work and they're getting more social services. Each one of those is a transaction. There's also every 12 months for each service that you're on, a requirement for a redetermination to make sure you still qualify. And that's a redetermination you were talking about. What Jeff was referring to is during the COVID pandemic, the federal government paused the requirement for annual redeterminations when the pandemic was lifted last May, that were put back into place, and there was some level of increase there. My view, when you think about a 50 CAGR or 35 in the first quarter, that was a piece of it. A bigger piece is the state penetration. And the last piece is the new federal contracts, which I'll talk about. So there's annual redeterminations happening for each of the social services. So you've got an ongoing revenue stream. And our price points in government, we've talked before about mortgage, but are in kind of the $5 to $10 to $15 range. And as you imagine, we deliver a ton of productivity versus a government employee doing that verification themselves at pick your hourly rate, $30, $40 an hour with benefits versus an instant verification of $5 to $10 to $15. So big productivity. It also delivers speed and also delivers accuracy. [ Word ] to the source. And then, Jeff, as you pointed out, we had 2 federal contracts. One was an extension, one was a new contract last September that are both benefiting fourth quarter, first quarter and the rest of 2024. One was an extension of our CMS contract for Medicaid services verification. Our new contract was a 5-year contract at $1.2 billion for Equifax and that had a price increase in annual escalators in it. The second contract was a brand-new contract we hadn't had before. And that was with USDA, which is SNAP, TANF, which is the food stamp program. So that was new $190 million contract over 5 years. So that's new in the P&L in fourth quarter and first quarter and benefiting that 35%. So multiple streams of opportunity. And we're pretty confident short of -- we'll touch or maybe not touch it, a mortgage market recovery that's quite substantial and rapid. Government is going to be our largest vertical going forward for as long as we can see as we really move into that $5 billion TAM more aggressively.

We're adding more data assets beyond income, right? So currently, we sell the incarceration records into government. Increasingly, we'll do criminal information into government and then you'll see us broaden that even further.

And then the third of the big 3 is the talent or preemployment screening. I know that there's some challenges because of weaker gross hiring activity for some white collar professionals. But can you just comment on like the Q4 to Q1 year-over-year revenue trend because it's softened. And if we look at the JOLTS data for white collar professionals, we don't see the same slowdown in gross hiring from Q4 to Q1. So just what's going on with that trend? And is there any impact from the pending consolidation of the background screening companies?

No impact from hire rate in sterling. That hasn't happened yet, and we wouldn't expect that to have any impact on us. On the white collar one, as you might imagine, so maybe I'll just size talent, if I could -- and I think it's helped to describe our position there. It's about a $3 billion TAM. This is our math on the manual employment history verifications that are done in other data elements around a background screen. And as you know, pre-Equifax, the background screening industry principally had BPO shops doing manual verifications of your resume for employment history, your education, your credentials of medical or other credentials you have that support the job you're going to have. We're trying to digitize that by being the data provider to the background screeners. We think about that TAM of manual effort of being about $3 billion. Our business today is north of $400 million run rate. So the difference between $400 million and $3 billion is really the additional penetration. So really, to your question of white collar workers, we've got strong penetration with the bigger background screeners, not every background screener does business with us. So when you look at white collar broadly, our customers may have a different mix on it. What we hear from our customers about what's happened in the market last year and this year really post-COVID is there's been a broad tightening of white-collar employment. I think we all know blue-collar employment is red hot. There's more jobs open than people. So there's a lot of activity there. Those are generally a lower price, lower data background screen at the hourly level. And as you might imagine, everyone in the room here, they're going to check 5 years of education or actually check your education and go check 5 years of prior employment where an hourly background screen might just check last job worked. So there's different levels there. I don't know, John, if you want to add to the fourth quarter to first quarter deltas?

No, basically just we saw -- normally, you see a weaker January and February white collar hiring. We've seen it traditionally. We just saw more weakness in January and February than we've seen in prior years. March was a little better. And so we based our run rate for the rest of the year on what we're seeing in March, and that's how we expect it to continue...

But outside of market, Jeff, when you think about -- obviously, there's a macro in the hiring market, whether it's up, down or sideways. I think broadly, it's a robust market. I think everyone in the room knows in the neighborhood of 75 million people a year change jobs. So there's a lot of churn, particularly at the kind of hourly low end level, but there's a lot of job changes happen. They all have background screens. That's why it's a great space. We want to be the data provider to that. So our levers are similar to government. Record additions give us higher hit rates. We have 700 million. We keep every record. We have 700 million jobs and people in our data set over the last 20 years. So we keep them every week, every pay period. We're adding more job titles to our work history. So records drives revenue in that business. We have higher hit rates. Product is a big one, really bring product solutions for the right job. We just rolled out last fall an hourly solution, which is really last job work versus more history. Pricing, we take price up, as you might imagine, there. And then penetration like government, penetrating into the background screeners that are not using our solution. And then as John pointed out, we're really trying to build a data hub to be the data provider of all the data elements that are used in a background screen, employment history, education, job credentials, whether it's medical credentialing data for a doctor, dentist, lawyer, or long-haul truck driving data for someone who's doing a LTL kind of license, all that data we want to be able to provide either by owning it or partnering on it. And then where we'll move to is having products that are job specific where we're delivering all the data elements in an instant decision to our customers, which are the background screeners.

Got it. And then I think structurally, a big part of the reason why investors like to own Equifax is because of the employment and income verification business. But there's also kind of this untapped earnings power at this current point in the mortgage cycle. So recap what the benefit to Equifax will be with market normalization. And I think you give it on a per fulfilled inquiry at current pricing basis. So talk about what you'd expect for a market outgrowth in mortgage to layer on top of that.

So maybe, Jeff, I'll start with -- if you believe -- so the mortgage market by our measures, you can -- everyone in the room can see if you agree or disagree, is down 50% from what we would call normal. That's the mortgage market activity. So think originations or in our world, it's inquiries. That's our revenue, how many inquiries are we getting that are tied to originations. And we use that kind of 2015 to 2019 as being what we call normal as everyone in the room knows, there was a refi boom during COVID when rates were slashed. 2015 to '19 is kind of normal. We're 50% below that from an activity standpoint. So really 2 points. Number one, if you assume mortgage stays at this 50% level below normal forever, Equifax mortgage market grows 8% to 12%. Our mortgage business grows 8% to 12%. And you'll see that in the fourth quarter when we're kind of comping out to a flat fourth quarter 2023 market in fourth quarter 2024. Price, product penetration, records really drives that kind of 8% to 12% outperformance. We already talked about EWS mortgage outperformance in a flat market, we would expect it to grow kind of low double digits. And then depending upon the FICO price increase, USIS could be north of that, like it is this year, if there's a larger FICO price increase to go through. So kind of in a flat market, which we don't think is going to happen over the long term. As rates come down by the Fed and mortgage rates come down, we expect mortgage activity to improve. But flat mortgage market, it's very powerful for us to just continue to deliver. As you point out, there's -- that 50% decline we sized for our investors in the first quarter, February call and April call, there's a chart in our investor deck that it's $1.1 billion of incremental revenue for the market to move back to 2015 to '19 levels. And that's -- as you point out, at today's pricing. Today's pricing, today's product, today's records, really its January's, meaning whenever it happens, we're going to keep growing the businesses from all those levers. And we shared with our investors the $1.1 billion is -- translates into about $700 million plus of incremental EBITDA, very high incremental margins, as you might imagine, on the way down and then also on the way up and then $4 a share. And we also said that when that happens, it's going to drop through. We're not going to reinvest that. We're reinvesting in the core Equifax. When that mortgage market recovery comes, we would expect that to be incremental to our growth rates, incremental to our margin expansion and incremental to our free cash flow, which obviously will be a part of our planned capital allocation to start returning cash to shareholders at the right time.

And can you just comment on the CFPB request for inquiry or request for information. They named kind of FICO and they named TWN pricing as 2 factors, and you just mentioned that those are 2 of the -- like the mortgage market structural outperformance factors for Equifax?

Yes. So 2 weeks ago, Director Chopra, was at an MBA, Mortgage Bankers Association conference here in New York. I wasn't there, but some of the team was. You can read the transcript. He talked a lot about the fact that FICO prices have gone up and credit report prices have gone up. There was also some comments around TWN prices going up. And then he announced, I think, late last week that he's requesting information from the industry around perspectives on market pricing and the impact there. I think as you know, the mortgage origination costs are roughly $5,000 to $6,000 for a consumer. The data costs are a couple of hundred bucks which is what the director was focused on. I think we'll all see where that goes from a path standpoint, but we believe that we're delivering real value to the consumer to allow them to access the mortgage market and to our customers who use it to underwrite a mortgage to give the right pricing to the right consumer that can afford the mortgage. That's the value of the data that we deliver, both on the credit report side and the score side as well as on the income and employment side.

And then just talking international, we were having this conversation earlier, but I think a lot of investors, they think Experian, they think about the Brazil story. They think TransUnion, they think about the India story. What do you want investors to think about when they think about the Equifax international story?

Yes. So against our 8% to 12%, we expect international to grow 7% to 9%. They have been over the last 3, 4, 5 years. So we've been pleased with that growth. As you know, we've made over the years acquisitions when they're available to expand platforms, and we bought Boa Vista last year, which is the #2 in Brazil. Obviously, Experian's got a very strong, very successful business. We think we can compete well with them there in Brazil, which is why we bought Boa Vista, we're bringing in our platforms, our technology. Why we like international, particularly as we complete the cloud, which will be completing in the next -- internationally really in '25, but U.S. and North America this year, which is most of Equifax, is our ability to really continue that 7% to 9% growth rate, expand the margins but also move products around the globe. When we create one product, it's very easy because we're on the same tech stack to move it to other markets. So that's the power of international. You think about our market leadership, we're #1 in Canada. We're #1 in Spain. Obviously, Experian's #1 in the U.K., we're holding our own in the U.K. We're #1 in Australia. We're #1 internationally in every Latin American market, except Brazil, where we're #2, and we're not in Colombia. So Latin America is a very fast-growing market for us. So we like our International business in particular, we think we have an advantage when we complete the cloud versus TU, Experian of our ability to innovate internationally.

And talk about the impact on Equifax and product innovation more broadly, including in the U.S. and EWS from the completion of the cloud transition.

Yes. So as you know, innovation is a big part of what all DNA companies do, TU, Experian, Equifax. We think we're more deliberate about it. We're the only one of the 3 that have a Vitality Index. We've had it for a decade. And I think as the room knows, we measure our innovation through a Vitality Index, which is the percent of our revenue from new products introduced in the last 3 years. Historically, we were 5% to 7% of our revenue. 3 years ago, we set a 10% goal. We thought the cloud as well as adding more product resources would allow us to ramp up our innovation. And again, we believe, from a customer standpoint, if you're innovating more with your customers, you're more valuable partner. If you're bringing new ideas to your customer, you're a more valuable partner. So we set that 10% goal expecting we get there as we complete the cloud as you know, Jeff, we've been north of that 10% in the last 2 years. We are around 13% and 14% almost in the last 2 years, principally driven, as you point out, by Workforce Solutions, that completed the cloud 2 years ago, and they really put the pedal to the metal around innovation. They've been north of 20%, Mortgage 36, products for talent, products for government, really driving very high innovation with 20% of their revenue being from new products in the last 3 years. So that 10% goal is a really important one for the company. we think it makes us a stronger partner to our customers because, as I said, we're bringing more value to them with new ideas to help them grow. And we sell ROI. That's what we bring to our customers, higher approval rates lower losses, higher identity match rates, that's the -- what we bring to our customers.

And then just -- maybe, John, if you can give us a quick sound bites on the back-end loaded guidance. Why should investors have confidence in the $4-plus of EPS in the second half versus like $3.20 in the first half. And then can you hit on free cash flow conversion outlook and capital allocation priorities, how they change?

Sure. So Mark talked about it, right? We're completing the cloud transformation as we move through North America, and that allows us to deliver nice cost reductions starting in the third quarter, but really accelerating into the fourth as we're able to get rid of the redundant costs that we're currently incurring, right? We're running dual systems in North America, principally around our consumer credit businesses. And as those transformations complete, those costs come out of the system. So that's what we're driving to execute to, and that's what's embedded in the guidance. As we move through this year, obviously, we expect our overall leverage to come down. We committed that when we bought BVS, we bring our leverage back down to be consistent with our current credit ratings. We'll certainly be there, we expect by the end of this year. And then with reducing capital spending and growing margins and obviously very nice growth. We expect our free cash flow to grow substantially. It's going to allow us to invest in acquisitions to deliver that 1 to 2 points of growth that we've been talking about consistently, while also now starting to increase the dividend, probably growing at somewhat consistent with earnings and then also starting a buyback. So we feel very good about our ability to start distributing cash to shareholders as we move through this year and get into next.

Perfect. Thank you. We will wrap there for this room. Trevor from the IR team will be available for a breakout in the Aster Suite A now, but please join me in thanking Mark and John for their insights on Equifax.