Equifax Inc. (EFX) Earnings Call Transcript & Summary

Yes. It's 1 where I would remind you that the NBA represents mortgage originators, not consumers. And consumers are the ones that are really impacted this. There's no consumer advocates that are suggesting IB versus the current 3B. I think you got to put it out of its face of the MBA's view. And as a reminder, something like 6, 7 or 8 loans that are started in the pre-application process don't close. That's breakage costs for the lenders. And that's predominantly been fixed in the prequel by going to a -- and then by the adoption of Vantage with the huge cost savings that come from Vantage, there's another lever where the industry is going to be able to pick up upwards of $1 billion worth of cost savings through that 45% cost savings of the credit file and score from Vantage versus FICO going forward. We think that answers the question for the mortgage industry.

Okay. Let's stick with government, but to better aspects of it within your EWS business, your government business, last quarter, you gave us some new disclosures around the ACV and renewals just -- but can you just remind us of those numbers and just put it into perspective of how we should interpret that?

Yes, just for everyone in the room knows, I think this is our Workforce Solutions business where we use our income and employment data for government social service delivery -- as you know, there's almost 90 million Americans to get some form of social services. That's all needs-based. -- in income verified. So if you make less you get more social services or you qualify. That's delivered by the states, but funded predominantly by the federal government. Almost $1 trillion a year is used in the delivery of social services, think about Medicaid, Medicare, food stamp Snap TANF, rent support, child care support, all kinds of social services. The average recipient gets over 5 different services. So all income verified. This is about an $800 million business for us. It's about a $5 billion TAM. Most of the states -- and I think as I mentioned earlier, the federal government pays for most of the social service dollars. The states distributed and are responsible for doing the verifications under the requirements of each social service of each of the applicants around their income and employment. So very attractive business for us, 1 that we've been growing quite rapidly is Manav points out, -- we had a very attractive kind of 3, 4 months in the second quarter of commercial activity. And what's really changed in the last year or so is the big focus on the current administration around the integrity of government and social services. I mentioned that there's about $1 trillion of payments that go out. The government has quantified just under $200 billion of improper payments. improper payments being someone's receiving the social services that no longer qualify and they should be getting those. That's the $200 billion. And I think everyone knows last July, OB3 was passed inside of OB3, there was all kinds of tax stuff and everything else. There was also some additional requirements, principally around food stamps and Medicaid on the states to increase the income used to verify the eligibility. We've seen a very large increase in our deal pipeline. And in February and again in July, we shared that our new business pipeline, so this is our commercial pipeline and our government vertical doubled year-over-year. And then as you asked at the front end of your question, in July, we shared that we landed in -- really in the second quarter, principally $100 million of new meaning new contracts with new customers. And think about that $5 billion TAM versus the $800 million, we're penetrating into states or at the federal level, in this case, principally states -- so $100 million of new ACV that benefits principally 2027. That's when the contracts kind of start. There's some of that in the fourth quarter, but the vast majority is in 2027. We also shared that we had $200 million of the existing business renewals. It was just a lot and government can be lumpy. You can have -- I remind Manav knows this, but a year ago, April and April 2025, we had a large new contract with Seal Security Administration that we landed. So that was a large contract. So those can happen kind of episodically throughout the year. I think the most important point is that our engagement at the federal and state level has never been higher. -- and having a pipeline that's up 2x year-over-year, those are commercial opportunities that we're working on is a great indicator. And obviously, the $100 million of new ACV is a very positive setup for 2027.

So I guess two follow-ups. Is this something you would give us regularly I guess? And then the $200 million of renewals, how should we think about just retention overall, just to get some perspective on that.

Yes. So the $100 million, are we going to give it to regular, you want everything -- you like most of our investors. So we thought it was large enough that we shared it. Whether we share it every quarter or not, we'll make the right decision on that. But $100 million is quite a bit given the size of the vertical, and we thought it was appropriate to share and their attention is very, very high. Retention levels are very high. You've got very sticky once you get into workflows -- it's unusual for us to have a state that either pauses for funding reasons or any other change like that.

And maybe, John, if you can just keep us grounded here in the numbers. I think you said second half government will be better than the second quarter, but second quarter was, I think, negative -- also said back to growth but -- so just some perspective on maybe some help on what that means? And then I think last week on the deck, you also said expect accelerating growth in '27. So just some framework before we get too carried away there as well.

Sure. I think you covered in your question, right? So back to growth means exactly what it sounds like. We expect to see growth in the second half. And then we expect to see improvements in 2027 relative to what we've been delivering here in 2026. Based on a lot of what Mark already described, $100 million -- $100 million and the renewals, right? So -- so we expect to see a government business that's improving as we go through the rest of this year and then continues to improve in 2027. But given the size of the TAM, we said this quite consistently. I think everyone knows -- I mentioned it earlier, we expect Equifax to grow 7% to 10%. We expect our USIS business to grow 6% to 8% is over the long term. So long term. This isn't this quarter, next quarter, it is next year. So the long term, Equifax 7 to 10 in USIS 6 to 8 international 7% to 9%, EWS low double digit. And we expect government to really be at the top end of that. Given the size of the TAM and the market opportunities, we expect government to be 1 of the larger and fastest-growing verticals inside of EWS and obviously helping power their growth. I don't know if you want to touch on like talent is , it was actually well.

Yes. I mean, I guess, mortgage and government that your top 2 right than talent mix. So you've been posting some pretty good results there. So what's driving that employment base it seem to be that great?

Yes. As Mark points out, the hiring market is still strong, but down. I think it's a remarkable number I think on a normal level, 70 million people a year change jobs. I think we're in kind of the mid-60s probably something like that, 1 million changing jobs every year. And then for us in the background screening industry, each of those job changes result in some form of a background check. And we have a business. I think everyone knows it's our -- I guess, our third largest vertical now is our talent vertical we call talent where we sell data to background screeners to help them do their background checks. And 1 of the core data elements we have is everyone's job title. So when we get payroll data from a payroll company or from a directly from an employer, -- we have almost 6 million companies delivering data to us every pay period. We get over 50 attributes. One of those attributes is an individual's job title. So we have a digital resume on the average American. So we sell that. One of the things that's checked in a background check is your prior employment. So I got the background check was being done in this room, you'd check 5 years or 7 years of employment to make sure your resume wasn't fabricated. Did you really work for Chase City, whatever the company is. So 5 years' worth of 7 years' worth of job history, we can do that instantly because we have that digital record every pay period of the job titles. We also sell incarceration data. You'll remember, I think 4 years ago, maybe it's 5 now. We brought APRs Insights, the only data set on incarceration. And 1 of the checks that's done in a background check is were you incarcerated previously not to deny employment, but to allow the hiring manager and the HR manager to talk about that. So that's another valuable data set that's been growing for us. We have education data. We have a partnership with National Student Clearinghouse -- another thing that's checked in a background check is to make sure your education is accurate that you're not rounding up or changing where you went to school. So we do that check in there. And then we're also rolling out a bunch of new products. So we're adding a new hourly solution. If you think about this room, highly professional financial services jobs, a lot of data is used in your background check. If someone is an hourly worker at a warehouse restaurant, retail, they might check last job work, they might check the last 12 months. We've now got a product just for that. So we've seen some growth there. We've rolled out a product with our incarceration data set that will do monitoring of employee bases for incarceration after employment, right, to make sure that, that's understood if there was some kind of incarceration dependent upon what kind of -- what the job is. So that's been another positive. -- record growth. As you know, we've been growing our records. We were up 10% in the second quarter, 10% for the half and more records result in higher hit rates. So that's benefiting the business. We had some element of price what I missed, John -- and penetration -- just adding new clients, that's about a $5 billion TAM also, and we've got a business that's got a lot of room to grow.

Got it. And John, maybe just -- we got a lot of questions on the margins, so workflow solutions and it's kind of been plus or minus 50 plus, but roughly there. I mean it is like not minus, that's sort of changed. But I guess the point is, I think Mark pointed out rather partnerships, including the payer provider investments. Is that why there's a limit to those margins intentionally perhaps?

So we like the margins at just over 50%, and we've delivered them very consistently for a long time. And we're very specifically investing in Workforce Solutions to expand product sets. Some of them are through partnerships. Some of them are through expanding data Much of the investment also is around expanding the Work -- number database, so we continue to grow it effectively. So we think holding the margins at that level while investing in new products, investing in new sales channels investing to broaden the number of white label employer services products that we bring to our partners, so we can expand those relationships. And build increasing record contributions to Workforce Solutions, we think is the right way to manage the business so that we can deliver the growth rates Mark's talking about. So we like those margins. And I think we're being very specific to make sure we invest to be able to continue to deliver the growth at that margin level.

Got it. And I think just 1 more, Mark. I mean you talked about reinvesting back to manual verification I know a couple of years ago, you guys got out of that business. So just help us appreciate the difference.

Yes. What I'm referring to is that when you think about every 1 of our verticals, whether it's mortgage, auto, card P loan, we deliver dependent upon the demographics at 50-plus percent hit rates. And just remember the data set we have, there's about 250 million income-producing Americans in the United States. We've got roughly 110 million of them in our data set. We're growing that every quarter. So when a customer sends an inquiry to us for a mortgage application, an auto loan, a background screening, government social service verification, we'll deliver back the twin data set, but they may still have 30%, 40%, 50% of their transactions, they have to do something else with to verify the income because we don't have the records. And we've had customers come to us and say, hey, can you do the whole thing? And we did it before. Now we've invested more in tech. It's a place we're investing more to make it more efficient. And in mortgage, in background screening and government. We're rolling out solutions where we can do the complete verification and we would, in essence, do the manual or use some of our AI technology to do it for those records we don't have. And we think that's a real positive value add. So we're in the marketplace talking to our customers about that.

Got it. One last 1 on workforce. Every now and the question around competition keeps popping up. I think since the government introduced that my program and you have steady IQ making noise, experience, you talked about the priority checker to as a minority investment? Question on -- are you seeing any changes?

Yes. We watch the competitors. Obviously, it's a competitive marketplace. Yes, I think it really starts with a record. If you can maintain the records and keep growing your records, that's really a very valuable part of the equation. And -- any way you cut it, our $110 million, we have $170 million active. The delta is people with 2 jobs, really remarkable when you think about our data set. You've got 60 million people that have either had 2 jobs in our data set. It's really remarkable. So records is really a very important area for us that we want to keep adding. We've added in the last 5 years, something like 50 partners -- and remember, we get our records 2 ways. We get them through partnerships, think about payroll, partnerships, hero processors, HR software companies, new area for us is benefit administrators. A newer area for us is pension administrators because remember, when you break down the 250 million income-producing Americans, nonfarm payroll, which is W2, is around 100 -- I'm rounding up a little bit, 170 million people there's $50 million to $60 million 1099 are self-employed individuals. And that's obviously a lot of gig workers, but it's doctors, dentists, lawyers, private equity executives, lots of really high-paid people dentists, et cetera, they're self-employed. And then there's another 30 million defined benefit pensioners. So think about legacy companies like IBM, General Motors, GE that have legacy pension payments to their prior employees, but also think state of New York, City of New York, Fireman teachers, police officers, federal government, federal employees still get defined benefit pensions. That's income. So we have a multifaceted strategy to go after the records. And I think our record additions speak for themselves that we just have a very scaled data set. We continue to add records. We have a dedicated team focused on it. And we're continuing to drive top line growth.

Got it. In the ministry of left, I guess that's touch on capital allocation. I mean there's definitely been a noticeable shift in the balance you've had -- so maybe just remind us your priorities and how we should think of it in the context of leverage as well, please.

Yes. And just to be clear, the capital allocation plan is not new, but it's fairly new. We put it in place last April. Through last April, I think everyone knows we were putting most of our capital towards completing the cloud. we felt that to be a great data analytics company, we had to have the very best technology. We spent a $3 billion incremental in our tech. That's behind us. CapEx is coming down. And last April, a year ago April, -- we announced our capital allocation plan going forward as we substantially completed the cloud and really laid out that our intention is to grow our dividend in line with earnings. So think about kind of mid-teens dividend growth going forward. That's going to be use of our cash. And then our free cash flow and leverage from growing EBITDA, we're going to use for bolt-on M&A and to return cash to shareholders through buyback. And we've been doing a substantial amount of both -- as you know, about 2 months ago, we announced the Mexico acquisition, CirculoCredito. We're super excited about that, a $740 million acquisition, fast-growing Mexican market, very strategic and its connection in the United States. Growing middle class, lots of fintechs. And this business has been growing that we're acquiring kind of 20-plus percent revenue growth rates at mid-40s EBITDA margin. So a very attractive acquisition and -- so we intend going forward to do what I use very clearly, I call bolt-on. Bolt-on acquisitions is how John and I and the Board and the team talk about it, to strengthen the core of Equifax -- and then our excess free cash flow and leverage that comes from growing EBITDA, our intention is to maintain a strong investment-grade balance sheet that excess free cash flow is going to go back to shareholders. And in the last kind of trailing 12 months, we bought back $1.2 billion of stock. We did $500 million in the fourth quarter last year, where we've been told our investors, if we're not doing bolt-on M&A which we're going to be measured about we're going to buy back stock. And then to make our last point on it from the capital allocation plan, we've also been clear, and I said it earlier in our comments, when that mortgage market recovery comes, that's all going to shareholders. Said differently, we're not underinvesting in Equifax because the mortgage market is constrained. We're investing the right amounts today. So when that mortgage market comes back, we're not going to add more people. We're not going to invest more in CapEx we're going to really deliver that through dividend and buyback. And I would add 1 more point. We think we're 1 of the few info services companies that now has an AI productivity goal out there. And maybe that was going to be 1 of your questions that relates to capital allocation because it's going to expand our margins. As we said earlier, our intention is to grow over the long term, 7% to 10% on the top line delivers 50 basis points of operating leverage. We laid out in February as our first step, some of the AI productivity we expect to deliver inside of Equifax. So think about agents taking calls, incentive people, think about agents doing paper processing, from consumers, which we get a ton of. We have a couple of thousand people in our operations center, a lot of productivity there. Technology is our largest workforce. We have a lot of technology coders and operators. We're seeing a lot of productivity there. And then in July, we increased our productivity goal from $75 million to $150 million. And this year, against the 50 basis points operating leverage long-term framework, we set out a guide of 75 basis points, so 25 basis points higher much of that from that AI productivity that we're delivering across Equifax inside of Equifax and at the half, we're 110 basis points. So we're really seeing a lot of momentum around the use of AI, not only for products, models and scores with our customers. but also inside of Equifax. And we believe the fact that we did the big cloud investment in that we have, we think, the most advanced tech in the marketplace, it's enabling us to deploy AI more quickly for growth but also for margins and productivity.

Got it. Well, we're almost out of time. So it's a great place to end. Thank you, Mark and John for being here, and thank you, everybody.

Thank you for having us.