Equifax Inc. (EFX) Earnings Call Transcript & Summary

Good morning, everybody. Thank you for being here at day 2 at our Global Financial Services Conference. My name is Manav Patnaik. I'm Barclays' information services analyst, and I'm pleased to kick off our day 2 at least with Equifax. We have Mark Begor, the CEO, but also John Gamble, who's the CFO. So thank you both for being here.

Thanks for having us.

Mark, maybe I'll just add with the broader macro question for you. Just -- there's obviously a lot of debate in the markets out there around rates and if it's [indiscernible], et cetera. But just the overall dynamics. You guys have a unique view on the credit data, the consumer data. So from your standpoint, maybe your view on where the markets are today.

Should I leave mortgage side?

Let's come back to mortgage.

That's had a huge impact over the last 24 months on us and many others in the space. Broadly, as we talked in the second quarter call a few weeks ago, the consumer -- when they're working and unemployment is still quite low, is quite resilient. I've been in financial services for decades. And if the consumer is working, they generally pay their bills, which helps with their credit score and helps with the delinquencies. And when unemployment goes up, delinquencies will typically go up with it. We haven't seen that. The consumer is -- obviously unemployment is super low. The low-end consumer, the subprime consumer has clearly been impacted by inflation. That's somewhat old news, meaning it started a couple of years ago when inflation started spiking, it's still high, meaning food costs, energy costs, et cetera, are still impacting that consumer. That slowed down by our fintech subprime customers really happened in '22 and '23, and it's kind of flattened out now. So from the consumer standpoint, we still think they're fairly resilient in the fact that they're working. From our customer standpoint, they're still very strong. Strong balance sheets with our traditional customers, which is the most of the market, the banks and financial institutions, fintechs have weathered the subprime storm and are still fairly strong. On the second quarter call, we did talk about some slowing demand by consumers -- not -- we haven't seen a lot of tightening broadly outside of subprime, which already happened. But demand, particularly look in auto, you see the rate impact in mortgage auto rates have gone up, card rates have gone up, P loan rates have gone up. And for the most part, that hasn't been a big impact, but we saw some of that in the second quarter. And we would expect that to -- some impact of softening demand to continue until the rates come down. Of course, there's going to be the bigger impact on mortgage.

Yes. And so maybe just 2 things. First, I think you're right, the low-income consumer is being challenged. That's the old news or has been in the news.

The market's absorbed it.

Correct. Have you seen any signs of that spilling into the middle income? Because consumer conference we had last week, there was some talk of that.

Yes. No. Kind of broadly, we haven't seen it roll into the rest of the consumer base. Again, my long experience is that people are working, it's fine. It works. And when I look out through the rest of this year and into the early parts of 2025, it's hard to see that changing from when -- it doesn't happen overnight, it generally happens quite slowly. So no, we think it's still a pretty good environment. for the data analytics company like that.

And just for perspective, like would you see signs early enough changing? Or do you get data to lag just for the...

We see on the whole environment every month as we get new data, it's happening every week actually as financial institutions are delivering data to us. So we see it very quickly. Now we also see what -- it's happening with our customers. Are they nervous about a recession? I don't hear any comments from our customers about a recession. That's kind of old news from a year ago that was mostly driven by CNBC than what was actually happening with our customers. They're strong. They're focused on growing their businesses. They're always looking for differentiated data, unique solutions in order to advantage themselves.

Got it. And if you can just quickly double quick on auto a little bit because I think I referred to Allied this morning reported and there's been some negative reactions in consumer finance stocks because of that. But just in auto specifically, I know you already talked about a little slowdown in the second quarter. But is that -- any signs of worry, I guess, is more the question?

No. It's in our guidance. We factored that into our guidance that we gave in the second quarter for the second half of the year. And no, I think it's one that we wanted to spike out that it's not a surprise. That's a big ticket transaction. Auto prices have gone up. You're looking at automobiles that are $50,000, $75,000, $100,000 now that being financed. That's a big ticket at the high rates. We do think that will benefit as rates come down, just like mortgage.

Got it. And before we go into mortgage, John, maybe if you could just help us frame in terms of the exposure that Equifax has. Is it 3 lending categories for auto, card, mortgage, P loans, just to help us frame how we should think about sensitivity as well.

Sure. So if you take a look at USIS as an example, right? So and Equifax overall. I'd say for Equifax overall, mortgage is something under 20% of our total revenue, right? And it's been declining over time, obviously, as mortgages shrunk, but also as our nonmortgage has grown substantially. And so -- and we would expect that trend to continue with very strong on mortgage growth. But as mortgage recovers, we might see a little larger participation in mortgage in our overall revenue base, but it's just because of the mortgage market recovery. I'd say, a long-term trend as you're going to see our nonmortgage business likely continue to perform very, very well. We hope relative to our mortgage business. Generally speaking, mortgage is the biggest individual category. I think when you start then moving outside of mortgage, which you need to think about is the next biggest category for Equifax's government, right? So our Workforce Solutions business is very large, and we're seeing very substantial growth in government, and that's a very big piece of our business. And then you're also seeing big growth in Talent Solutions. So what's happened is Workforce Solutions itself is approaching 50% of Equifax revenue. And because of that, right, you're seeing our biggest market segments are actually now outside of traditional financing segments and are more driven around what's in Workforce Solutions as well as mortgage.

Got it. And then, Mark, maybe just before mortgage one more since John mentioned Talent Solution. Do you guys have insight into the job market as well. Those volumes clearly must be coming down. I don't know if it's down more relative to your expectations for the second half, but just any views on what you're seeing in the hiring market there.

Yes. So the hiring market is very much driven by -- in our business, where we're selling data to background screeners, the job growth is definitely one element that drives that. Are there new jobs being created. But there's a bigger driver is around job churn. Lots of people change jobs. 75 million people a year in the U.S. change jobs, that moves down a little bit in economic events, but it's still a big number. And in the case of the 75 million using that as a number, every one of those has a background check. And that's what we're selling data into. So even though actual new job creation is down some, it's still positive, which is a good thing for the economy, the churn in jobs is where our customers, the background screeners get most of their business, and that's where we participate. So I don't think we've seen a change from what we guided in the second quarter for the second half for Talent. But the underlying driver of that business is that job churn. And the second for us is the penetration. That's a multibillion dollar TAM. We've got a roughly $400 million business today that's growing nicely. It's the penetration of really using more of our data in those background screens versus doing them manually, which is predominantly what happens in the industry.

Got it. So maybe now on mortgage. We spoke last week, and it sounded like you were not getting too carried away with the headline numbers that we all see on mortgage apps potential refi. And I think we want to get excited about it. Or maybe just give us some perspective on how it stacks up with your expectations?

Yes. So I think first grounding for everyone in the room, I think they're probably grounded if you've been following Equifax is that John mentioned 20% of our revenue roughly is aligned with mortgage Workforce Solutions, where we sell income and employment data and of course, USIS, where we sell credit data. The market is down at a level that has never happened in history. It's down 50%. There's a great chart on our website that really lays out 2015 to '19 is kind of a normal activity. But if you go back to '07, '08, there's kind of a level of activity that we're now directionally 50% below. We've just never seen that before. The rate shock of rates doubling to mortgage consumers or homeowners -- prospective homeowners in the last 30 months has just never happened in our lifetime. Rates today are at a 20-year high. So the shock of that is really pushed down purchase activity as well as cash out in rate refis to be 50% below historic levels. And we've laid out that as rates come down, we would expect over time, that mortgage activity, in our case, we think about inquiries, there's multiple inquiries per application, whether it's in credit or an income and employment. But in that 90-day process of an application, we think about the inquiry volume, which is what we track because that translates into revenue is 50% below historic levels. And over time, as rates come down, we would expect that to recover and we frame that up of being today's pricing product penetration, record levels -- or hit rates in EWS of being $1.1 billion of incremental revenue coming forward over time, $700 million of incremental EBITDA and $4 a share. So obviously, a huge tailwind. And a real pivot for Equifax over the last almost 2.5 years, we've had a mortgage market declining, it's clearly bottomed. And I think with the expectations of a Fed rate cut, we would expect mortgage activity to start to improve. But for Equifax, we've been comping against negative comps for a negative market declines for, I guess, it's 10 quarters now. Moving to a flat mortgage market, if you want to call it that in the fourth quarter, we really -- we don't have that drag of the negative of mortgage anymore. And our headline revenue is going to be much more powerful as well as the EBITDA that comes from those incremental margins. The other element on mortgage, I think is important. If you think about mortgage, clearly, there's the optionality in Equifax of that market recovery. But let's say the market never recovers, and it stays at this level forever, which is not going to happen, but if it stays at that level, I think, Manav, as you know, in our underlying business, we grow on a flat mortgage market, in EWS and in USIS and EWS, we take price up every year. We're rolling out new products. We're adding records, so our hit rates are going up, and then we also have some penetration to those that are still doing manual -- fully manual verifications of our customers of Equifax yet. We would expect EWS to grow in, let's say, a flat market, never mind the recovery in the kind of double-digit range, low double digit, which is very powerful. In USIS, we have the same ability. We raised price in the credit file from time to time. I think everyone knows there's a big supplier to Equifax T with Experian called FICO that raises historically their credit score cost to us, and then we pass that on with a markup to our customers. That drives mortgage outperformance. There's some element of product in USIS also we're actually testing in the market now that we've completed the USIS cloud work. We're looking at how do we take together the credit file in our income and employment data. And so we're testing in market a solution, which is a mortgage credit file from USIS that has an income flag on it from EWS. We think that's going to make our credit file advantage in the shopping process, where some customers, mortgage originators will only pull 1 or 2 credit files in the shopping process versus all 3 that's done in the application process. So if we have an income flag in there, we're providing more value to that. That's going to drive share going forward. So you have an underlying both businesses are going to have very strong growth, notwithstanding the market going forward, which we think is a real change in Equifax going forward.

Got it. And then just back to the near term, John, I think you had said you had assumed inquiry is down 7% in the third quarter and then flat in the fourth quarter. But just to my initial question, the headlines feel like it shouldn't be a down quarter. Like are we missing some kind of seasonality or just help us bridge that gap?

So the way we would do our forecasting for mortgages, we really run rate things, right? So we took a look at the way we were seeing transactions actually be executing in July. I understand you're asking about headlines you might have seen recently, right? And what we did is we just take a look at that run rate volume and then we seasonalize it. So what happened is obviously, last year, late in the third quarter and into the fourth quarter, you saw a very substantial reductions in mortgage, right? So all we're indicating is that we think now that we're comping over those periods, growth -- if you seasonalize the run rates we were seeing in, let's say, in mid-July that you'll end up with a flat mortgage market in 2024 versus 2023 on an inquiry basis. And that's what the trends were looking like, right? So I know there's been some headlines that indicate there's some strength as you go forward. I don't know that it's really come through an inquiries you get, right? So I think right now, what we're doing is we're just continuing to focus on delivering the outperformance that Mark was talking about. And just keep trying to innovate in mortgage so that we can drive better and better performance, regardless of what the market does.

We think there's some element of consumer psyche. Actually having a Fed announcement, their cutting rates becomes very public, right? And that may start as those cuts happen, stimulating homeowners saying, geez, I want to move from that condo to the 2-bedroom home because I've got -- I need some space, I have 3 kids or 2 kids. That activity is just so depressed on a purchase standpoint, we would expect there's some element of that moving forward as we move into '25 and beyond.

Got it. Just 2 follow-ups to that $4 number, the power of the mortgage. So first, the volume recovery, is that just a matter of when, not if, from your standpoint? I know it's hard to predict the time of the recovery.

We believe that rates are going to come down, not to where they were pre-COVID or during COVID, but they're going to come down to more historic levels, and we think that's going to drive the activity back up. And the $1.1 billion is just really looking at those inquiries, which are down 50% from that 2015 to '19 average. It's never declined like that before. So that recovery at today's pricing, today's product mix, today's records, which we will grow by '26, '27, all those elements and penetration, so that number gets larger as time passes because we continue to outperform with our execution on price, product penetration and record additions.

Got it. And then the -- you mentioned pricing, that $4 on current pricing you said. Can you just talk about your expectations for your own pricing? And then I'm guessing third-party pricing will increase as well.

We don't know about third-party pricing, that should unfold itself soon that typically this time of year when we have those kind of conversations around our credit score partner that generally happens around now. We'll go out with a price increase 1/1 on EWS. We also think about from time to time, doing a credit file increase. We didn't do one this year, because the partner price was so large. What we'll do in 2025, will assess when we get there. But without real visibility when we give guidance for '25 in February with our fourth quarter earnings around what we're going to do with price. But we have, in all of our businesses related to mortgage for sure, annual contracts. So we use the 1/1 as the time to put that in place.

Got it. And John, just on the mortgage outperformance, especially in EWS, I guess, the amount of outperformance has come down over the years. So maybe just help us understand that. Is that partly also because of just a really low volume environment and you think that will pick up when things get better? Or how should we bridge that gap?

Long term, the drivers of mortgage outperformance are the same thing as the drivers of the growth in Workforce Solutions in general, right? So if you think about the major drivers, the first one obviously is record growth. And we would expect record growth to continue to be strong. But in our long-term model, we've assumed, I think, 3 to 4 points of growth per year. That would affect mortgage benefit mortgage like it benefits the rest of the business. The rest -- the next big driver is obviously price, right? So -- and we expect to continue to get price. We've gotten price above the long-term expectation of 3 to 4 points per year consistently. But in our long-term model, we're looking at 3 to 4 points per year. We also think that we'll continue to drive product, right? Now one of the reasons why 2024 outperformance looks a little lower is because we had very high product growth from mortgage 36 in some prior years. But on a long-term basis, again, we think in mortgage will drive on the neighborhood of 300 basis points or thereabouts of growth in -- from new products driving our opportunities up. And then we also think we have opportunities and penetration, right? And penetration should drive volume that we're seeing in the market. But you bring those things together, you're looking at, as Mark said, something like low double digits of types of growth that we should be able to deliver to long term. And that's what we're really expecting to deliver. This year is a little below that, principally because product is relatively low this year because of the very strong product we had in prior years that drove that very, very high growth, right? So we think that's what's really impacting this year. When we look into the second half, we said we expected to see some improvement in the level of outperformance. That's really records, right? We've talked about we had really strong performance in adding new record contributors in the first half of 2024. A lot of those contributors came online, let's say, towards the middle or back half of the second quarter. So that means we're going to see very nice growth, we think, just from records as we go into the second half of 2024, which is going to drive some improvement versus the single-digit levels we talked about in the first half.

Another large one came on, which was announced. Workday made the announcement of our partnership that came on later in the third quarter. And then just on the product side, we've got some new products from EWS mortgage in the market in the second half, a mortgage 90-day solution, a mortgage 24-month solution. And then as I said, we're testing some of those USIS, EWS, the income flag on the credit file, really a 2025 opportunity.

Yes. And I want to move into Workforce and Workday and all that stuff. But before that, maybe just around out this kind of macro view rates coming down on its own, great probably spurs lending, auto, mortgage, et cetera. But if it comes down too much, it's probably because something is wrong with the economy. So can you just help us appreciate how you would frame Equifax's recession resilience in that scenario?

Yes. So clearly, Equifax's recession resiliency has changed dramatically since the last recession. If you go back to '07, '08, '09, Workforce Solutions really is the biggest change in that frame. In '07, '08, '09, workforce grew double digit, principally from records, just the nascency of the business. And then as you know, in every recession at some point in the recession, rates are cut, and then you've got a mortgage lift from refis typically happens. That's what happened in '07, '08, '09. But EWS grew double digit through that time frame. We would expect in the next recession, EWS because it's so much more diverse. Back in '08, '09, we didn't have a government business. Our government business is now $700 million kind of run rate in a $5 billion TAM, huge penetration opportunity. There's going to be more people applying for social services in a recession. So that business will benefit just from activity as well as the continued penetration there. Our employer business, we have penetration opportunities. We'll add records whether the economy is up, down or sideways. We'll keep adding. In some regards, if there's economic pressure that stimulates record additions from a partner standpoint, the ability to monetize. And even from our direct records, which we do directly with companies that HR managers looking for productivity, they want to shut down their call center that's fielding calls from mortgage lenders and auto lenders and have Equifax do it for free for them, that's part of that relationship. And then as you know, inside of our employer business, we have an unemployment claims management business that when there's a recession, people get laid off, we do more UC claims, and you saw that during the COVID pandemic, we had $100 million of incremental revenue over a couple of quarters in the UC claims business. So we think recession resilience, is very strong. We think Workforce Solution grows through a recession. There's no question. That's how we think about the business today and given the multiple drivers that the business has. The other business that's changed is identity and fraud. That's a larger business for us than it was in '07, '08, '09. It's one that we think is quite recession resilient. Meaning the digital macro is not going away, the huge TAM we have there. We think that's quite positive. So we think we're well positioned and add to it our investment over the last 5 years, getting to be cloud native, having a tech structure that's second to none. The benefits from the cloud when I'm not sure when your recession happens, but it's sometime in the future. we're going to be well positioned in order to execute in that environment with a super strong balance sheet with very high margins and cash generation that we think will allow us to continue to navigate through that kind of an economic event.

Even the credit businesses have some offset, right? Because our customers do portfolio reviews, they do more analysis of their own portfolio. They determine how to deal with the existing customer base. So although you certainly see transactions decreased on originations, we do see some offset, not complete, but some offset in portfolio reviews and other batch type of activity.

Got it. And John, while we are at it on the cloud transformation that -- or the tech transformation that's now, I think, complete. Can you just remind us of the financial impacts, I think fourth quarter assumes a full run rate of what's been done, but just help us remind us of what you assume there from cost-benefit perspective?

Yes. So we didn't give an exact number for the fourth quarter, but our U.S. credit business will have completely moved on to the GCP cloud in this quarter actually they've completed, right? So now that that's occurred, we'll see a nice improvement in margins, we think, are in cost base in USIS. That's a real benefit to us. I think we've talked about in the past, Canada. We'll follow that quickly. And so we'll see a benefit as we get into the fourth quarter from Canada migrating on to the cloud. Spain will happen in the fourth quarter. That's another benefit. These are all smaller obviously than the U.S. business, but they start to add up as we go through this year. As we get into 2025, the U.K. will move. We'll see movements in the U.K. in the first half and somewhat into the second half of next year. And then you'll increasingly see more and more of our Latin American countries move and move on to the cloud. So we think we had the biggest movements occur, obviously with USIS a couple of years ago...

With EWS.

Sorry, EWS a couple of years ago, thank you, USIS and just occurring in the third quarter, but we're going to see more in 2025. And then still a few more in 2026 as we get into Australia and New Zealand. So our normal 50 basis points of margin enhancement just from the very high variable margins we get from revenue flow-through as we grow the business 7% to 10% organic faster as the mortgage market recovers. What we should also see, obviously, it's higher growth rates and margins related to cloud cost savings as we get into somewhat 2024, but really nicely in 2025 as we wrap around the execution in 2024 and then still again in 2026.

And maybe just to add on that, Manav, I think you know this, we didn't do the cloud for the cost savings where it's really positive on the cloud cost savings. We did it to change our competitive position. And we really believe we're getting like a catalyst point. We were 80% completed midyear. We'll be 90% by year-end as we completed USIS and stuff in the third quarter. We still have 10% to do -- using your term, we're close to completion. But that pivot that we have that catalyst now of running the company over the last 4 or 5 years while we're doing the cloud and doing the cloud transformation, the organization now fully focuses on growth. And it's a big change that's hard to articulate perhaps in a room like this. But we've had commercial people, DNA people, product people, tech people working full time in the cloud. They weren't able to work on customers, on innovation and product. All organization as we go into 2025, really focused on innovation and growth is really powerful. And we think it's going to drive our ability to innovate even more quickly, driving new products out delivering that always on stability, but also the commercial focus we have where we're not in a commercial meeting with a customer talking about the cloud migration, all we're doing is talking about growth. And that's a big change for us as we finish up the year.

Yes. And John, maybe just to wrap up. Your second half guidance implies kind of a ramp relative to the first half. On the EPS side, you talked a little bit about the margin benefits on the top line, you talked a little bit about the better outperformance in EWS. What are some of the other factors in that second half ramp that you feel comfortable with?

Sure. So we already talked about we're adding records. So nice strong growth in records that obviously is very benefiting AWS. We also have some seasonal benefits that just generally happen every year, right? The government business tends to grow nicely sequentially, third quarter to fourth quarter. It's about -- it's about the fact that Medicare or Medicaid CMS starts to really ramp in the third and fourth quarter.

That's also off a strong underlying growth rate in government, obviously.

Absolutely. We tend to see stronger performance in a lot of our international markets in the fourth quarter and our credit businesses. That tends to be a benefit. We have somewhat similar benefits in terms of seasonality in USIS. Mortgage tends to be weaker in the fourth quarter, but mortgage on a margin basis, right, has relatively lower margins than our traditional credit business and to a degree, some of the Workforce Solutions businesses. So we think all of those things taken together gave us confidence back in July when we gave our guidance.

Got it. Maybe moving on in terms of records. Mark, you alluded to the Workday contract you signed. I mean, you don't typically put out the press release when you signed one. Obviously, it's Workday, but there's a lot of noise around the numbers, et cetera, but I'm guessing it's a sizable contract. Just help us frame it there.

Yes. They're a big company. We wanted to partner with them for a long time. The timing was right for both of us. They made the announcement, I think it was important to them and us, we really value the partnership is just framing for the rest of the group. I think as you know, our records come to 2 ways direct and through partnerships. Half of our records are in direct relationships. From our employer relationships, we're doing regulated services for a company where they outsource to Equifax, things like unemployment claims management, health care, validation HCA. W-2 management, I-9 validation, work opportunity tax credit, they outsource those services and we provide income and employment verification to them for free and then they're able to really outsource that to Equifax. So it's a very strong relationship. That's half our records. The other half come from partners. And those are relationships we have with probably 50 different partners. And Workday is now a new one that we've added that will come online as we speak in -- really in the fourth quarter but into '25 and beyond. Those partnership relationships expand beyond just the income and employment verification. We're increasingly having relationships with partners like a payroll processor where we're not only doing income employment verification of their clients for them. But we're also white labeling our solutions like I-9, unemployment claims, WOTC and using their distribution to get to their clients for that. So another way for both of us to grow. So we have a strong relationship with both partners. Record growth has been super strong. John mentioned earlier that our long-term framework of EWS growing 13% to 15% has 3 to 4 points of record growth in it. We were up 12% in the quarter -- in second quarter. And as you know, we've been double-digit for the last number of years, principally around the partner records, there's been an element of a snowball downhill, as we landed large partners, their peers saw the opportunity to partner with Equifax for the same reason. So that's the reason we've been adding partners think we added 4 in the first quarter, 4 in the second quarter. Obviously, Workday has been announced in the third quarter, and we've got a pipeline of continued record additions. And we changed the organization in December. So the leader who works for me in EWS, Chad Borton, he has a direct report that all that team does now is records. And as you know, records for us are W-2 records, which is nonfarm payroll, there's about [ 100 ] now round up 70 million individuals that are W-2 and remember it can be multiple jobs. You can be working in a warehouse as well as in a restaurant, it's a W-2 job. There's about 40 million self-employed individuals or 1099 gig workers, which isn't the right description. It's really self-employed because it includes doctors, dentists layers architects that are all self-employed. And then there's another 25 million, 30 million of defined benefit pensioners, typically federal, state, local government employees, but also some legacy companies. And that racks up to about $225 million income-producing Americans. And at the end of the second quarter, we had about 132 million SSNs in our database. So still 90 million to go as far as record additions, a long runway continuing to bring those new records in. And what's powerful in our 2-sided model is that when we add new records, we already have the inquiry for that record because we're getting every inquiry for every one of our customers. And we just have higher hit rates, which drives our revenue and their fulfillment. So it's a very big focus of ours and quite unique. There aren't other data businesses where one of your growth drivers is adding data assets and monetizing them so broadly. And if you look at the monetization, if you go back even 5 years ago, the monetization was principally in financial services and principally in mortgage. So think about prime consumers and prime records were more important to us. Our government business is as large as our mortgage business today. And obviously, those are a different demographic that are getting social services, generally lower credit scores lower-income individuals. And what it means is any record we add, we're monetizing now in multiple verticals on the background screening side, 75 million people have changed jobs every year. Most of that 75 million, the majority of it is the lower income consumers that are in and out of the workforce changing jobs and hourly jobs, et cetera, that's another place to monetize. So our ability to monetize records has really grown substantially on the value side.

Got it. And just on the record front, I mean, your database is unmatched and you keep signing these exclusive partnerships. But yes, we get a lot of questions around competition and someone that is dropping up every day and they're reporting high growth rates. So I mean, I guess there's place for more than monthly in the market. There's a lot of records you don't have. So someone has to monetize them. But are you seeing more competition? Just your thoughts on the competitive...

We're not. I think Experian obviously has a business in the space. TransUnion had one, but then has a partnership now with TrueWork. I think they have a minority investment with TrueWork. TrueWork is a fintech. Outside of those 2, there aren't many others that are participating. We think we have the right scale. We're making the right investments in our technology. We have broad distribution because we've invested over time in those different verticals that we monetize in. So we're happy with our ability to continue to grow and our ability to compete in the marketplace. When we think about our biggest competitor, when you think about the space is paper paystubs. If you think about the TAM of $15 billion, about $12 billion of that is in verification and against our roughly $2 billion of revenue in verification, $2 billion versus $10 billion, the $8 billion is paper paystubs whether it's in government, whether it's manual verification of employment and background screening or in the other verticals in financial services where it's either done manually or we don't have the records, there's just huge growth potential for us against paper paystubs and we deliver speed in that solution, we deliver accuracy. And we also deliver productivity because if you're doing it manually, you're getting on the phone and calling Barclays and saying, hey, does Manav work there and then going back and forth to validate that a legitimate person or you do it instantly with Equifax that delivers speed for that solution. And all of our customers, whether it's in background screening, who want to deliver those social services to the recipient that needs them quickly. The background screener who wants to complete that background screen, so their client, the employer can hire that individual or in a mortgage, auto, card P loan process, they all want to complete those processes more quickly. So our instant data is very valuable.

Got it. Maybe we can end with the topic of capital allocation, John, maybe to start with you. I think you said leverage had come down to 2.5x by the fourth quarter. And then I think you guys said free cash flow accelerating next year once you will return to dividends, buybacks. I know you're not giving '25 guidance, but just to frame the acceleration you referred to? And just how should we think about the dividend and the return of the buybacks?

Yes. So you're seeing really actually nice acceleration as we go through this year in free cash flow. I mean we had about $250 million right in the first half in free cash flow, and we should see a nice step up in the third quarter and again in the fourth quarter. And that's driven both by increasing earnings, improving margins, but also obviously, the reduction in capital spending. So I think the completion of cloud as we're talking about is allowing us to generate not only those margins, but also ramp down the spend. So with that acceleration and with our leverage moving towards 2.5x, as we talked about, we think we're nicely within the range we need to be to hold our credit ratings, which is very important to us, which is going to give us a significant amount of not only free cash flow, but leverage opportunity as we continue to grow EBITDA to certainly continue to execute on acquisitions, which is at 1 to 2 points of revenue growth over a year, but also start growing the dividend again and put in a very nice buyback. So we think we have substantial free cash flow to do all of those things. I don't think we've set the specific policy yet, but we'll talk certainly more about that as we get into next year. But I think we're now very close to being able to do that, which we built the company to do, which is to start returning that capital to shareholders while continuing to drive the growth rates we've committed to in the long-term model.

And maybe just to add on that, if you think of capital allocation, we're still going to invest a lot in Equifax. As John pointed out, our CapEx will come down, but the mix of our CapEx changes dramatically in '25, '26, '27 than what it's been in the last 5 years. And even the last 10 years, when you think about our CapEx, and I think our competitors' CapEx looks a lot like our historical CapEx, you have to invest most of your CapEx and maintaining your legacy infrastructure or in our case, moving to the cloud. And as you know, we put an incremental $1.5 billion into our CapEx over the last 5 years. It's now behind us. Going forward, we're going to be predominantly focusing our CapEx on growth and innovation in new products. But that firepower it gives us at a lower CapEx level, we think it's really powerful that Equifax can be really focused on being on offense. John pointed out, part of our capital allocation model is continue to do bolt-on M&A. We're not looking for a third business, fourth business, our fourth business. We're not looking for transformational M&A. We want to continue what we've been doing really over the last 5 years plus years of looking for tuck-ins and bolt-ons that strengthen the core of Equifax. And Manav, I think you know over the last almost 4 years, we've done 14, 15 acquisitions that we funded with our free cash flow. Acquisitions like Kount and Appriss Insights that brought incarceration data, Boa Vista that brought us into Brazil. And we'll continue doing those bolt-ons going forward. And as John pointed out, we expect 1 to 2 points of rev growth per year from bolt-on M&A inside of the 8 to 12 going forward. And that's roughly $0.5 billion roughly of TEV that we'll invest in bolt-on M&A. Some years larger, some lower. We're just lapping out the Boa Vista acquisition that we closed last July. So that's now in our run rate. And we have a pipeline of those bolt-on acquisitions. And then as John pointed out, we've been focused really since I joined Equifax of investing in our tech because we believe it's going to differentiate us for the next decade, but then getting the cash benefits that come from that and the competitive benefits going forward, and then positioning so we can return cash to shareholders through growing the dividend likely in line with earnings and then a multibillion dollar buyback at the right time going forward. And I'll just add one more point on top of that, which we talked a little bit about today. that mortgage market recovery when it happens, that $4 a share of EPS or $700 million of EBITDA, we intend to have a drop-through because we're investing the right amounts in Equifax and as that incremental recovery comes through, that's going to add to our free cash flow quite substantially.

Got it. And maybe in just the last 30 seconds here, to reiterate that point on M&A, right? A lot of shareholders are looking forward to the more well-rounded capital allocation.

We are too.

And I think you said just to confirm, based on your M&A pipeline today, we shouldn't expect any large deals which would which should derail the timing on them.

100%. That's not our strategy. Since the day I joined Equifax when I talk about M&A, and John and I talk about it, we use the term bolt-on M&A as none word. And bolt-on means tuck-ins and smaller acquisitions that are highly accretive. And we have a very deliberate financial criteria in our acquisitions and really 3 swim lanes that we're focused on. So there's a lot of stuff we don't want to do. But what we do want to do is strengthen workforce solutions for obvious reasons. And of the 15 acquisitions we've done in the last 4 years, almost half of those were EWS, identity and fraud, account mitigator, big space for us that we want to grow in and then differentiated data, incarceration data, Teletrack, DataX, PayNet, those kind of acquisitions. And our acquisitions all have very strict financial criteria that we want revenue growth rates that are accretive to our growth rate. Margins are accretive to our margins, and obviously, we're generating shareholder value. So, no. We're not looking for a fourth business. I'm not going to do that.

All right, good to know. All right, we'll end it there. Thank you guys so much.

Thanks, Manav.