Equifax Inc. (EFX) Earnings Call Transcript & Summary

Good afternoon, everybody. Thank you very much for joining us at Stifel's Cross Sector Insight Conference of 2024. I want to welcome you all for being here and welcome CEO and CFO of Equifax, Mark Begor and John Gamble, respectively. Thank you very much for making the trip. We really appreciate it. I think most people in this room probably know what Equifax does. But I would say that I've been covering Equifax for about 1.5 decades. And I would say that the company has morphed a little. Maybe if you could give us like a minute or so about how you think of the business as more from being a credit bureau to -- much more than a credit bureau, just I don't want to take up the whole Q&A session, but maybe just give us the elevator pitch.

Yes. It's obviously -- we're much more diverse than our traditional competitors TU and Experian, particularly given our Workforce Solutions business, which is such a different business. It's now workforce, as you know, is we're approaching 50% of our revenue. It's our fastest-growing business. And it's in markets that were just credit bureaus are not in. Our largest vertical in Workforce Solutions is now government, as we call it, which is where our income data is used to deliver government social services to the 100-plus million individuals in the United States that receive rent support, child care support, food care support. So that's a $700 million run rate business. It's more than 10% of Equifax that didn't exist call it, 7, 8 years ago. So a dramatic change. We've got a $400-plus million business where we sell our data to the background screeners didn't exist, obviously, different than a credit bureau. We have a $400 million business inside of Workforce Solutions that delivers regulated HR solutions to HR managers, unemployment claims, work opportunity, tax credit, W2 management, I9 verifications on an outsourced basis from HR managers, that's not a credit bureau. So identity and fraud is another one that all 3 of the credit bureaus do that, but there's a lot of other participants and a huge TAM for identity and fraud. So when you look at all those businesses, you've got large portions of Equifax that aren't in financial services. And obviously, we're very large in financial services between our credit business in USIS and our income and employment business, which also participates in mortgage, auto loans, credit cards and personal loans. And of course, we have our international business. It's a lot larger than it was certainly 10 years ago. We've added acquisitions like Boa Vista last year that gave us the #2 position in Brazil. And our international business is north of 20% of Equifax today. So a very different company, very different growth drivers, obviously, a faster-growing company. You know from following us, if you go back to as recently as 5, 6, 7 years ago, our long-term growth rate was 7% to 10% with 25 basis points of operating leverage per year. We increased that, as a part of the cloud transformation, as a part of our new product initiative and with workforce growing faster than the rest of Equifax, we increased that from 7% to 10% to 8% to 12% and took the operating leverage up from 25 bps to 50 bps a year. So much different company and much stronger company. Last point, I would make that's a real differentiator, I believe, is how we run the company around innovation. We run the company, and I'm sure you want to touch on it with what we call a Vitality Index around innovation and new products. And our Vitality Index is the percent of our revenue in the last 3 years from new products. So products age out, it takes a year or 2 to get them up to scale and then they become part of the core. Free cloud and free are real extra focus on it. we were doing 5% to 7% of our revenue from new products introduced in the last 3 years. That was our Vitality Index. That's now up to 10% is our goal as a part of the 8% to 12%, but that 10% has been over 13% the last 2 years. And that's an innovative company and an innovative company is more important to your customers, you become a more valuable partner because you're bringing new ideas. But as you know, incremental revenue or new products are very high incremental margins. So it really drives our top and bottom line. So clearly, a very different company and much more than a credit bureau.

Great. Maybe you could talk a little bit on your view of what's going on in the consumer and what you're seeing in terms of say like ADP reported numbers, that their ADP employment report this morning, it was a little bit softer manufacturing, leisure and hospitality, and that impacts a number of things. It impacts credit, it impacts jobs from what you're doing in terms of the background screening. So maybe give us a little bit of a thought of where we are? I don't know if you're able to talk intra-quarter, or are you absolutely don't. But there's -- what are you seeing?

I think broadly, when the consumer is working, which unemployment is very low by historic standards right now, so meaning consumers are working, that's very good for financial services, very good for Equifax. So we're in an environment that I would expect will continue through the end of the year. I don't see unemployment spiking while it's going to tick up, there's still very low levels, which means delinquencies are low. And when delinquencies are low, it means financial institutions still have a lot of confidence to keep originating. They never stop originating, but they'll dial up and down based on risk profiles. We saw that in subprime, which as you know, is a small portion of the U.S. consumer base while subprime consumers are working, they're pressured by inflation, which pressured their ability to pay their auto loans, their credit card. And those delinquencies went up to really starting in '22 when inflation spiked into '23. But outside of that, the consumer is quite healthy. I don't have the facts in front of me, but I believe credit scores today on average are still 20 points or something like that above pre-COVID, meaning you've got a healthier consumer. And when you look forward, certainly through the rest of '24, that's going to be the same. It doesn't change that quickly. Now the one big macro we've had, which you're well aware of is the mortgage market. While the rest of the financial products have really weathered this higher interest rate environment, there's been some pressure in auto around larger payments for big car loans has pressured some activity there, but broadly auto has been pretty resilient because people are enthusiastic about still buying cars, Mortgage has gotten hammered. And as you know, the mortgage market is down by our measure, 50%, from historical normal levels. We use 2015 to '19 as that kind of origination or inquiry levels from where we get revenue of being normal. That's down 50% really in the first quarter and in fourth quarter. And we don't expect that to change until inflation gets under control and rates come down. But the mortgage has really gone from a headwind the last 2 years now that it's down 50%, mortgage activity is going to be a tailwind for us as rates come down in the future. And as you know, we sized that in our February and April calls, to be $1.1 billion of incremental revenue, $700 million plus of incremental EBITDA and $4 a share, which is a lot of earnings power as that market recovers. And it's a much -- we like having a tailwind versus a headwind over the last couple of years, which, as you know, has been quite challenging.

And just out of curiosity and just when you took that 5-year period as a baseline, what makes that a good baseline as opposed to 2010 to '15 or '05 to '19. What do you guys [indiscernible]...

We left out 2021, '22, when there was the refi boom, right, because that was -- it was -- as you know, rates were slashed during COVID that generated a refi boom. So we said let's take that out. And the reason we took the, I would call it, the most recent normal period is because there's growth in economic activity, like housing prices go up, which drives some of that activity. There's larger population, so you can't go too far back in time. There's also changes in how data is used in those environments. What would you add, John? Why we think '15 to '19 is a good baseline?

Well, a, it's a 5-year period. And also we saw reasonable movements in interest rates during that period. We saw some refi spikes during that period. We saw weakness in refi because of movements in rates, so it [ moved ] normal.

It doesn't move 50%.

Yes.

Is it -- you pick what you think is normal. It's way above where we are today, period.

Whatever is the period it's way above where you are today, the question is how much more it would be. And it's, I guess, that's a fair statement. When you talk -- I want to shift a little bit, once you're talking about there because the work number is obviously, the biggest beneficiary of mortgage, I think when the rates go down. And you have just a tremendous market position in the U.S. And for a while, we were talking about international, building a similar type of database and like where are -- I think you were working in the U.K. and Canada, if I remember correctly...

Australia and India. 4 buckets.

Australia and India, 4 markets. Where are we at that point? Are we going to start hearing about Equifax? Are you going to start breaking out some of that?

We're going to keep talking about U.S. because it's just got so much more potential. And I'll just -- maybe for a minute, just remind the potential in the U.S. So our business in the U.S. and Workforce Solutions is about $2.3 billion. We think about a TAM for that U.S. business about $15 billion and a lot of white space for growth. And generally, what we're competing with is manual verifications. We deliver speed productivity and accuracy. But to your point, we've been investing outside the U.S. We want to build businesses and franchises. You won't see that move the Equifax needle or the Workforce Solutions needle. I don't know, John, in '25, '26, maybe even '27, we're adding -- we built out the data sets, and we're adding records from direct relationships as well as partnerships in each of those markets. We have the leverage if we're with a multinational company on a direct basis here. They want us to do income verification for them in Canada, Australia, U.S. -- I'm sorry, Canada, Australia, U.K. and India. And then we have global partnerships with HR software companies and payroll processors. And then there's also local HR software companies and payroll processors in each those markets that we're adding records to. But as far as moving the needle, I don't think you'll hear about it for quite some time. It's small.

It's really the opportunities here in the U.S.

Totally.

And where is the white space between $2.3 billion and $15 billion? Where it is coming from?

So pick government, which is now our largest vertical for the first time in the first quarter, and I think it's going to stay there. Short of that mortgage market recovery. And even if the mortgage market recovers, even to that full level, it's only a matter of time before government passes mortgage again inside of Workforce Solutions. So at the end of the first quarter, we were on a run rate annual basis of, call it, $700 million of revenue in government delivering in the U.S. government social services space. That was up 35% in the quarter, and it's up 50% CAGR over the last 3, 4 years. So very high growth. If you go back to 5, 6 years ago, it was $100 million. Now it's $700 million. That TAM is about $5 billion. So the -- and the TAM is the agencies in the 50 states, and there's generally 10 to 15 different agencies in each state, delivering social services like income support, child care support, rent support, unemployment support, student lending support, all those different services are needs based. So if you make less, you make -- you get more. So you have to verify income. Historically, it's always been done manually. We deliver an instant solution with productivity, it's verified. And so we've had large growth at the state capitals, has been very strong for us. And so the difference between, call it, $700 million and that $5 billion is the manual verification still being done. It's just a matter of time. We put people in the big state capitals. We now have people in the field regionally to really work on those implementations. They're complex. It's government, it's government, so that's complex. And then you add to it the process flow change and the technical integration is complex, but we're having really strong traction there. We're also having strong traction in government at the federal level. You remember in September last year, we extended our CMS contract. That was a previous 5-year contract, we did a new 5-year extension. That's $1.2 billion over 5 years. And then we have a new contract that we didn't have before with USDA for SNAP TANF, which is food stamps. That was a $190 million contract we signed in September over 5 years. So that's rolling into our P&L and being used for the delivery of food support at the state level. So that's an example of big TAM and big growth potential. Talent is another one, $3 billion TAM. We have about a $400 million business, and we call talent is where we're selling our employment history data to the background screeners. One of the attributes we get every pay period is job title, along with company and name. So we have a digital resume on the average American, which is one of the things the background screener has to check, when they do a background screen, is check my work history. They typically would do that manually, call the company to verify it. We do it instantly by delivering that data to them. So you see the opportunity to go from $400 million up to the $3 billion. Employers got a multibillion-dollar TAM. Most of those regulated services are done in-house. So outsourcing those to Equifax, and even in mortgage, a large portion of the mortgage originations are fully manual. They don't use our solution. It's their decision. We deliver a lot of value of productivity, speed and accuracy. Auto, there's an opportunity, many auto loans verify credit and income. We have penetration opportunities there. So penetration is a big opportunity. As you know, records is also a big opportunity to grow the data set.

[indiscernible] other data assets, right? .

Very good point, John.

[indiscernible] talent. We continue to add more and more data assets. The largest one most recently, obviously, is incarceration data, which is used both in government, social services. Obviously, if you're currently incarcerated, you can't -- you shouldn't be receiving social service benefits. And so it's a validation [indiscernible] that's done in government. It's also being used in government housing, right, to validate and ensure people -- it's a requirement in government housing that you not have had certain criminal activity before the [indiscernible] in the government housing. So we can help with that as well. And then we're also building out a wheel of information, we call our wheel of information for talent, where we can provide not only incarceration background, but also your educational background, licensures and medical, around health care, drivers licenses, et cetera, where we can provide a more complete set of data to background screeners so they can do more and more instant verification. So there's opportunities to grow the data assets as well as growing our penetration.

Got it. And the stuff in government, it doesn't with the work number, it doesn't make a difference in administration, right? It's probably [indiscernible]?

Every administration, whether you're on the right or the left, wants people in need to get social services quickly, we deliver that. Second is, both sides want accuracy. There's a lot of fraud with the government social services. Ours is verified. So there's no paced up fraud. You can't document -- create documents. We verify the individual. So it really works in any administration. And it also in economic cycles, let's say there is an increase in unemployment, where people are going to be collecting social services likely because they're going to need those services for support and the scale of social services are quite large in any market. But in the United States, over 100 million people a year received social services. So a huge portion of the population and the average is something like 5 to 7 services per person. And I think as you know, in government, there's a determination upfront when you get each service, but then there's a redetermination 12 months later, you have to make sure you still qualify. But then there's also quite a bit of movement in and out of social services. Someone may have a life event where they're no longer able to work in collecting social services, then their health [indiscernible], they're able to go back to work. They no longer get the social services. So that movement in and out of social services are all verifications that have to happen each time. And with our coverage at the end of the first quarter, we have 3.1 million companies delivering data to us. We just have a lot of coverage.

Great. I want to touch on what is a hot button topic with some of the investors is -- there have been some increased noise by some of the upstarts in income and employment verification, particularly in the mortgage market. And I just wanted to ask you, like what are you seeing there? Are you noticing your customers with the mortgage processors saying, hey, we want to use some of these guys. And talk about what you view as your moat and what is the moat? And how are these guys -- I mean, they're getting some revenue, where does that revenue come from?

Yes. First off, when you think about our record coverage, we cover less than 50% of the working population. So for the portion we don't cover, if a customer is going to use Equifax, they still have to have a manual verification process or use some of these other services outside of Equifax to cover the records we don't have. As you point out, there's probably a dozen different companies, whether it's a consumer-consented data like an Argyle, Applad, Yodlee bunch of companies like that. Our big competitor, Experian, is in the space. Truework is a fintech that's in this space. So there's lots of participants, so there's lots of options for our customers, if they want to use our service or someone else's or be fully manual. They can -- remember before Workforce Solutions in government or in mortgage or any other solution or these other 10, 12 participants all these income verifications were done manually because we didn't exist. So we've been -- we've delivered real value in productivity versus their hourly employee doing it themselves. We deliver value on speed. It could take hours or days or a week to track down multiple employers. Remember, 75 million people a year change jobs. So there's a ton of churn. And if you're trying to verify someone's income over the last 12 months, 24 months, 36 months, it can be one employer, but it can be multiple because they change jobs. And so having that ability for coverage is super important. So we think what we deliver an instant, what we deliver with our coverage allows customers to make a decision of manual versus using ours and lots of them like to use our solution.

And you -- it's taken a long time for you guys to build up that database. I'm -- not in a bad way. I'm saying it's a lot of work. That's what I'm saying. In terms of -- do you think that there's a potential for some of your payroll processors that are usually -- or totally exclusive with Equifax, which is, I think almost all of them except for maybe ADP, to start going on exclusive. Do you think that there is [indiscernible]...

That's really a choice for our partners. I think our partners and its payroll processors, HR software companies, pension administrators. They -- our contracts are generally short term in nature. They have windows for our partners to decide who they want to partner with. Do they still want to partner with Equifax or not. So there's lots of windows for them to test that. We don't see them leaving because we think we have a great integration with them and a great partnership around monetizing the records. And remember, that's only half our records. The other half come from direct relationships with companies where -- and in both cases, we're doing the income employment verification for the company for free, both in partner and in direct. It's one that's a really strong value prop. And if you're an HR manager, and you're not having someone like Equifax or one of the other participants do the income and employment verification for you, you're doing it yourself. So you're fielding calls for mortgage brokers, auto lenders, you're trying to figure out, is that a fraudster. We do that for them securely. We credential who the user is of the data and no data is used without the consumer's consent both to deliver the data or to deliver it in a transaction. So there's a very high level of security and privacy and technology there that we think is quite robust.

So you feel pretty good about the position. That's a...

Yes, we're always focused on expanding it. We want to continue growing our business direct and through partnerships. And we think we've got a great track record of that. Our records were up 10%, both direct and partner in the first quarter in total. And we've got a -- I think we shared we added a couple of big partners in the first quarter that are coming online. One of them larger in the second quarter because of our cloud investment, we're able to integrate that data more quickly. And those integrations are super complex. As you might imagine, we have 50 attributes for every individual. The way our data set looks doesn't look like all of our partners or our customers, our contributors. So we've got to normalize that data. So that technical integration is one we've invested a lot in APIs to make it simple, but it's still complex.

Got it. I want to switch a little bit over to that cloud transition. And maybe, John, maybe this is something for you in terms of like, where are you in that process? And when are we -- it's been going on for a while. It's a very heavy lift. And what are some of the milestones? What percentage of revenue is going to be on the cloud? When do you get to turn stuff off more? And maybe you can walk us through that a little bit.

Sure. And we've talked about this on the earnings calls. We were about 70% complete at the beginning of the year. We expect to be about 90% complete at the end of 2024. In terms of business units, Workforce Solutions, principally complete. They've been done for several years. USIS and Canada, the big -- largest consumer databases that we have, they'll be done this year, and very shortly, right? We expect them to be -- they're currently transacting at high volumes, with their customers through our cloud infrastructure and expect them to be principally complete at the end of this quarter or early in the third quarter. So very excited about those transitions. And as that occurs, it obviously results in cost reductions for us that we'll see come into the P&L third quarter but really more heavily in the fourth quarter, but also starts to release a lot more capability on NPI, right? Mark started talking about NPI. But the more of the data that's in data fabric makes it much easier and very seamless to create multi-data products that have standard identification keys across all of our data assets so that we can bring more products to market faster and drive our NPI even higher. So very exciting time right now in terms of data fabric migration. North America, as we said, principally done this year, a little bit goes into next year, but principally down this year. And then as we look into the rest of the world, Europe is continuing to migrate, a substantial amount of them will be done this year, but still...

Spain will be done. Canada will be done. Much of Latin America will be done this year, and then we'll have Australia and a few others to finish in '25 and a little bit in '26. But 90%, it's a big inflection point for the company. You've been following us since I joined 6 years ago, and we launched this tech transformation, not for the fainted heart, huge lifting exercise, super complex and all encompassing. So you've got teams running the company, growing, adding new products, working with customers and doing a tech transformation, to move to having North America complete which is where we make all our money. 80% of our revenue and more than that of our margins is in North America is a huge accomplishment and one that will allow us to really pivot from running in cloud to leveraging the cloud. It's a really big change for us as we get to the second half. John could touch on it. We talk about 50 basis points of operating leverage per year. As you know, there's a lift because of our cloud cost savings as we complete the cloud in the second half in '25, we're going to get some additional savings.

What about customer conversations? Like now that you're hitting those milestones do the conversations in terms of selling big product change with your customer? I mean what...

They do. So in USIS, we're kind of midway through. We're going to finish this summer. So the customers that are complete in the cloud, it's just a total focus on growth. And it's one where we're delivering always on stability. Many of our customer discussions where we're secondary or tertiary with the cloud. We see aspirations to move up into a more primary position because we're innovating more and we're delivering a better technical stability experience. So that's really positive. The ones that are more complex in the short term, it's harder to get airspace for commercial discussions when you're migrating. And we're migrating customers every week, every Tuesday, we do it. So we're doing these migrations every week. So as we get through the summer and get USIS complete, that team can now pivot fully to commercial focus to share gains against our competitors. The new product rollouts move up to that 10% vitality. We also want to look at leveraging data assets between EWS and USIS, right, which we haven't done before, product integrations, put income information in the credit file, for example, those kind of innovative solutions that only we can do. We're really excited about. All that gets turned -- that [indiscernible] gets turned open in the second half and in 2025. So we're really excited about that. But you're pointing out, clearly, it's challenging to do cloud migrations and grow. So we're excited to move to just growing.

So we should see a new phase from here once you're [indiscernible].

Yes. It's one where we -- you've seen it in EWS. So EWS completed 2 years ago. Their growth rate has been very strong ex the mortgage market impact the last couple of years. Their innovation from vitality versus our 10% goal, they've been over 20% the last 2 years, mortgage 36%, other products like that have really been driving it. We would expect USIS and international to move their Vitality up towards that 10%, they are south of 10% as they complete the cloud, which is going to be good for Equifax.

Also, what you'll see is capital spending comes down, margins go up, free cash flow starts to really increase substantially and puts us in a position as we get toward the end of this year as our debt leverage comes down, following the acquisition of BVS that we're able to start -- really start thinking about returning cash to shareholders as we get into next year.

And that's growing the dividend, and again, likely in line with earnings and then doing a multiyear buyback.

Got it. No, that's very important. In order for people to see. I think it would be like a vote of confidence in the management, we feel like we're done with the lift and when you start to see that. One other question I just want to make sure I got it, just -- last week, there was that CFPB announcing that inquiry into the heightened cost of mortgage rates. And they mentioned a number of companies. It was the credit bureaus, it was FICO, it was one of the mortgage insurance companies, I think what -- on the one hand, I've had discussions with Trevor about this, about jurisdiction, they have jurisdiction there. On the other hand, they are the government. So what -- how should investors view what is going on right now in terms of what -- looking at the risk in the spotlight that's going on there?

Yes. I think there's somewhat of a -- there is a political cycle we're coming into. There's been a focus, I think, in the current administration around the use term junk fees. I think the director used that in one of his speeches at the NBA 2 weeks ago of CFPB. So you got to think through, is there some element politicized here? We believe we deliver real value in the mortgage market. The average mortgage closing costs are $5,000, $6,000. It's a huge ticket transaction for the consumer, and it's a huge ticket transaction for the lender. And the data we provide is in the neighborhood of a couple of hundred dollars in the case of the credit bureaus and FICO, it was a couple of hundred dollars of that $5,000 to $6,000. So we think we deliver a lot of value. We're certainly going to respond to the RFI and make sure that we educate the CFPB around the role that we play and -- the important role we play in supporting access to credit and access to housing through using the depth of data that we have, both on the credit side and on the income and employment side.

Specifically with the work number, as you mentioned earlier, our customers have choice. They don't have to use the work number. They can do it manually, and they always have choice in terms of the products they use.

So you're saying there's choices. They want to use someone else, they're available to use somebody else?

Or they can do manual in the case of income and employment. It's hard to do that in credit. You have to use our data. It's actually, as you know, mandated. The agencies require a 3 credit bureau pull because it provides real access to credit, to housing because not every individual is not in each credit file. There's actually 10 million consumers only in one credit file in the United States, which is really quite remarkable. There's 50 million to 60 million consumers, and many of us in the room probably fit that, if you were to check your credit score, TU, Experian, Equifax, it's 40 or 50 points different. So if you're only pulling the bottom 2, you may get a higher price on your mortgage, which is why the 3B is important. And of course, FICO provides real consistency, which is a required score that's used in every mortgage.

Okay. Great. I want to thank you very much for joining. This is very informative, and I appreciate everybody being here today. Thank you.

Thanks a lot.

Thanks.