Equifax, Inc.

Greetings and welcome to the Equifax second quarter 2023 earnings conference call. At this time, all participants are on the listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Trevor Burns, Senior Vice President, Head of Corporate Investor Relations. Thank you, sir. Please go ahead.

Thanks, and good morning. Welcome to today's conference call. I'm Trevor Burns. With me today are Mark Begor, Chief Executive Officer, and John Gamble, Chief Financial Officer. Today's call is being recorded, and archival reporting will be available later today in the IR calendar section of the Views and Events tab and our IR website, investor.equifax.com. During the call today, we will be making reference to certain materials that can also be found in the presentation section of the News and Events tab at our IR website. These materials are labeled 2Q2023 Earnings Conference Call. Also, we're making certain forward-looking statements, including third quarter and full year 2023 guidance to help you understand Equifax and its business environment. These statements involve a number of risks, uncertainties, and other factors that could cause actual results to differ materially from our expectations. Certain risk factors that may impact your business are set forth in our filings with the SEC, including our 2022 Form 10-K and subsequent filings. We will also be referring to certain on-gap financial measures, including adjusted EPS and tributary tax, and adjusted EBITDA. which will be adjusted for certain items that affect the comparability of our underlying operational performance. These non-GAAP measures are detailed in reconciliation tables, which are included with our earnings release and can be found in the financial results section of the financial info tab at our IR website. In the second quarter, Equifax incurred a restructuring charge of $17.5 million, or 10 cents per share. Discharges were caused principally incurred to reduce additional ad counts in 2023 as we realign our business functions in advance of completing our cloud transformation. This restructuring charge is excluded from adjusted EBITDA as well as adjusted EPS. Now I'd like to turn it over to Mark.

Thanks, Trevor. Good morning. Turning to slide four, we executed well in the second quarter against the challenging mortgage and hiring markets while delivering on our 2023 financial objectives. We continue to outperform our underlying markets with broad-based 6% non-mortgage growth against a tough 22% comp last year. We continued strong mortgage outperformance in a challenging market and very strong new product growth with a record 14% vitality index. We also executed well against the $200 million cloud and broad-based spending reduction program we announced in February and delivered 350 basis points of sequential margin expansion in the quarter. Globally, with the exception of the U.S. mortgage and hiring markets, we continue to see good consumer demand across our consumer, good customer demand across our consumer, commercial, and government lines of business. However, the U.S. mortgage market weakened relative to our expectations as we moved through the latter portions of second quarter when mortgage rates moved above 7%, which will impact our results in the second half. In the quarter, we delivered adjusted EPS of $1.71 per share and adjusted EBITDA margins of 32.7%, both above the guidance we provided in April. Execution against our cloud and broader spending reduction programs was also very strong and drove the 350 basis points of margin expansion in the quarter. Revenue at $1.318 billion was close to the midpoint of guidance with USIS and international delivering strong quarters, both above our expectations. EWS non-mortgage revenue at up 4% was below our expectations, but off a very strong 52% comp last year, principally due to the weaker hiring market that impacted our talent solutions and onboarding businesses. EWS had outstanding operational execution in the quarter, delivering a new product vitality index of 25% and expanded current twin records by 12% to 161 million records, a growth of 5 million records sequentially. EWS also had strong cost management as they fully operational their new cloud capabilities, delivering adjusted EBITDA margins of 51.5%, up over 100 basis points sequentially, and stronger than our expectations. USIS had an outstanding quarter and delivered almost 6% revenue growth, much stronger than our expectations. Total non-mortgage revenue grew 8%, led by 9% growth in our B2B online and 10% growth in consumer solutions. In adjusted EBITDA margins at 36%, we're also stronger than our expectations, expanding over 300 basis points sequentially. Total U.S. mortgage revenue from both USIS and EWS was down about 13%, or 24 points better than the 37% market decline from pricing actions, new products, records, and penetration. We continue to see stronger than expected consumer shopping behavior in these higher interest rate environments. So the weaker mortgage market we saw in June had a much smaller impact on USIS than in EWS, where their mortgage activity is more aligned with closed loans. International delivered 7% growth in constant currency, also stronger than our expectations, with double-digit growth in Latin America and high single-digit growth in Canada and the UK CRA. International delivered 24.2% adjusted EBITDA margins, up 70 bps sequentially, and stronger than our expectations. New product innovation leveraging our differentiated data assets and new capabilities delivered by the Equifax cloud is also executing at a very high level. Our new product vitality index of over 14% in the quarter was a record for Equifax and 400 basis points above our 10% long-term vitality goal and up over 100 basis points sequentially. This is encouraging for the future and reinforces our long-term strategy of leveraging our differentiated data assets, our new cloud capabilities to deliver new solutions for our customers. We continue to make good progress on completing our cloud transformation. At the end of the quarter, over 70% of North American revenue was being delivered from the new Equifax cloud. We're convinced that our Equifax cloud, single data fabric, and AI capabilities will provide a competitive advantage to Equifax for years to come. As we look to the second half, we expect the weaker than expected US mortgage market that we saw in the latter half of the quarter to continue through the remainder of the year. Our updated guidance is for U.S. mortgage originations to be down about 37% for the year and about 20% in the second half, a reduction of five points from our prior full-year framework. We expect EFX mortgage origination outperforms to continue to be very strong in 2023. We're also expecting to see weaker U.S. hiring market continue for the remainder of the year, impacting workforce solutions, talent, and onboarding businesses. However, we expect to offset the hiring weakness principally from strength in the workforce solutions government business and continued solid performances at USIS and international. EFX non-mortgage revenue growth was up 6% off a very strong 22% comp last year. We expect non-mortgage revenue growth to strengthen in the second half to up 11% and up over 300 basis points sequentially relative to the first half, from continued commercial execution and strong new product rollouts. Our 2023 cloud and broader cost reduction program executed well in the quarter. As we continue to operate more of Equifax in the new cloud environment, we're seeing more opportunities for efficiencies and expect an additional 10 million of spending reductions in the second half. These new actions will deliver additional run rate savings of $25 million next year. So we now expect to deliver spending reductions of $210 million this year and over $275 million in 2024. And as a reminder, the 2023 savings are weighted to the second half and will deliver $65 million of 2024 run rate benefit. We expect the weaker mortgage originations to impact our mortgage revenue by about $40 million in the second half. Despite the weakening in U.S. hiring, we expect to deliver 2023 non-mortgage revenue growth of about 8% from strong growth in EWS government, USIS non-mortgage and international, and stronger NPI growth. This above 8% non-mortgage growth is against a strong 20% non-mortgage growth last year and well within our 8% to 12% long-term growth framework. The net impact of the weaker-than-expected mortgage market of about $40 million is partially offset by positive FX is a reduction of our 2023 revenue guidance at the midpoint by $25 million to about 5.3 billion. The impact of the lower mortgage revenue results in a reduction of our full year 2023 adjusted EPS guidance at the midpoint of 22 cents to 6.98 per share. We remain focused on delivering EBITDA margins of 36% and over $2 in adjusted EPS per share in the fourth quarter. which we believe sets us up well for 2024 and beyond. In June, we received shareholder approval for the acquisition of Boa Vista Services, the second largest credit bureau in Brazil. We're energized to complete this strategic and financially attractive acquisition. We expect the transaction to close in early August and are actively planning for integration and the transfer of our cloud capabilities, global platforms, and products to help accelerate BVS growth. The BVS acquisition will add approximately $160 million of year one run rate revenue in the fast-growing Brazilian market, and we expect the transaction to be slightly accretive to year one adjusted EPS. The guidance we provided for 2023 does not include BVS. We intend to provide more details on our expectations for BVS in 2023 at our October earnings call after we close the deal. Before I cover results in more detail, I wanted to provide a brief overview of what we're seeing in the U.S. economy and the U.S. consumer. Since our April update, outside the challenging mortgage and hiring markets I already discussed, the U.S. consumer and our customers remain broadly resilient. We continue to navigate a higher interest rate environment that's negatively impacting the U.S. mortgage market. Mortgage interest rates have trended upward since April, and we're slightly above 7% at the beginning of July, and we're just under 7% at the end of last week, which is clearly impacting originations. We expect mortgage originations, as I mentioned earlier, the further weekend in the second half with originations down about 37% in 2023 or 500 basis points weaker than our April framework. Broadly, consumers are still strong and working with unemployment at historically low levels, and the market is resilient with roughly 10 million open jobs against 5 million people who are looking for jobs. Inflation is starting to abate at 3% in July, which should mean we are approaching a peak in Fed interest rates. Consumers are spending and borrowing with average credit card and personal loan balances back above pre-pandemic levels. With consumers working and still leveraging pre-cloud stimulus and savings, delinquencies are still at historic low levels and close to 2019 pre-pandemic levels. Subprime DQs are the only areas of stress that we're seeing. We're also seeing credit card and personal loan utilization increases with some delinquency increases in subprime, but more broadly, delinquencies are back at pre-pandemic levels, which as we all know were very low, although they remain significantly below levels we saw in the last economic event in 2009 and 2010. Auto delinquency rates for subprime consumers are above pre-pandemic levels, as well as above levels we saw in 2009 and 2010. We believe there's been some credit tightening by our financial customers, but principally in fintech and subprime. And looking forward, consumers holding student loans will need to resume making payments beginning in October, and we believe removing student loan payment freeze will have a modest decrease on average credit scores. Beyond the weaker mortgage market and slowing white-collar hiring markets, which had a larger impact on EDWS than we anticipated in the quarter. The combination of white collar job reductions and broad hiring freezes has reduced both background screening and onboarding activity. As I mentioned earlier, we expect this to continue in the second half. Turning to slide five, workforce solutions revenue was down 4% in the quarter. Mortgage revenue was down 20, but up about three percentage points sequentially. The decline of 20% compares to a mortgage origination down 37%, as estimated by MBA based on data through May. As I mentioned, overall mortgage market performance in the latter part of the quarter weakened relative to our expectations, resulting in lower mortgage revenue than we expected in our April framework. Strong record growth, the positive impact of 2023 price actions, and strong NPI performance driven by the adoption of our Mortgage 36 solution which is a 36-month trended mortgage product, drove the 17 points of mortgage outperformance by EWS in the quarter. During the quarter, about 50% of twin mortgage inquiries were for products that include EWS-trended or historical information, and of course, these are all at higher price points. In the quarter, Workforce Solutions saw declines in low-margin manual mortgage verification services revenue as some customers moved some of these activities back in-house. And this negatively impacted mortgage outperformance by about 300 basis points in the quarter. EWS had another very strong quarter of record additions with an incremental 5 million records added to the twin database, ending the quarter with 161 million current records, which was up 12%, with 120 million unique records or SSNs, which was up almost 10%. Over the past five years, EWS has doubled the size of the twin database, a strong testament to the record acquisition strategy EWS has executed across the multiple segments of direct employers, third-party payroll providers, HR software management companies, pension administrators, and self-employed individuals. As a reminder, Queen's 120 million unique records represent individuals or SSNs on the twin database, and their 161 million current records represent current active jobs on the database, which means there's close to 40 million individuals in our data set that have more than one job. Including self-employed or 1099 employees and people on defined benefit pension plans, we now cover just over 50% of the 220 million working and income producing individuals in the United States. And through our cloud tech transformation, we're expanding our capabilities to ingest all levels of records, including 1099 based self-employment records. And as a reminder, about 50% of our records are contributed directly by individual employers as they are customers of our expanding employer services business. And the remaining are contributed through partnerships, principally with payroll companies. During the quarter, we signed agreements with four new payroll processors that will deliver records during the rest of the year. The twin database now has 631 million total current and historical records, from over 2.8 million employers in the United States. Increasingly, more of our new products are incorporating current and historical records with about 50% of second quarter verification services revenue coming from products that included historical records. Turning to slide six, Workforce Solutions delivered non-mortgage revenue growth about 4% with non-mortgage revenue now representing over 70% of Workforce Solutions revenue. And as a reminder, EWS non-mortgage revenue was up a very strong 52% in second quarter last year, which was a very tough comp. Verification services non-mortgage revenue, which now represents about two-thirds of verifier revenue, delivered 4% growth both sequentially and versus last year in the quarter, which was below our expectations. This was also against a very challenging 90% non-mortgage growth comp by Workforce Solutions last year. The mis-versus-expectations was predominantly in town solutions from weaker white-collar hiring. Government performed exceptionally well, consistent with the high growth that we had expected, and consumer finance declined somewhat in the quarter. In government, we saw continued very strong growth, with revenue up 21% off over 100% growth last year in second quarter, and revenue also up almost 10% sequentially, driven by strong growth with CMS at the state level new products, and twin record growth. And government now represents about 45% of verifier non-mortgage revenue. We expect to see accelerating sequential growth in our government vertical in the second half, driven by growth from CMS Medicaid redeterminations, ACA open enrollment volume, further state penetration, and pricing from state contract renewals. We began to see incremental volumes from CMS redeterminations in May, and expect to see this accelerate in the second half. This strong sequential growth will also result in accelerated second half EWS growth rates. Talent Solutions was down 6% in the quarter, but up about 1% sequentially. We are comping off a very strong 130% growth last year from record levels of hiring in the second quarter. Also as a reminder, we are currently more heavily penetrated to white-collar workers, including technology, professional services, healthcare, and financial services, which has seen greater reductions in hiring activity and broader hiring freezes than the about 7% decline that BLS is reporting through May. Approaching 70% of Talent Solutions revenue in the quarter was from industries that had negative hiring growth versus last year, with many of those industries having significant double-digit negative growth in the quarter. We are outgrowing the declining market from penetration of our digital solutions with background screeners, strong new product growth, continued expansion of twin records, and favorable pricing. We are also seeing continued customer penetration of our new differentiated educational products. We expect these new products to continue to drive above underlying market talent revenue growth through 2023 and into 2024 and beyond. The consumer lending vertical in workforce solutions, which includes P-loan, card, auto, and debt management, was about flat sequentially, but down 11% versus last year to lower auto volumes with financial services and P-loan declines with fintech lenders, both principally in the subprime space. We expect modest consumer lending sequential growth in the second half, driven by record growth, penetration, and pricing. This will result in revenue growth in second half as we lap 2022 headwinds in the auto and P loan verticals. In total, we expect to see accelerated sequential growth in verifier non-mortgage in the second half, driven by strong government growth, as well as moderate sequential growth in talent and consumer lending. Employer services revenue of $109 million was up 4% driven by growth in our I-9 and onboarding businesses, despite the negative impact of US hiring. In total, our UC and ERC businesses were up slightly. Despite the slowdown in U.S. hiring, we have not seen an increase in UC revenue yet. As a reminder, first quarter employer service revenues were seasonally higher than other quarters due to the Higher Affordable Care Act and W-2 volumes. In the third and fourth quarters, we expect to see overall growth in employer services sequentially from second quarter levels driven by penetration and I-9 onboarding. Workforce Solutions adjusted EBITDA margins of 51.5%. We're up 110 bps from first quarter and in line with our April guidance from strong operational execution. The EWS team continued to perform well despite the macro headwinds from mortgage and U.S. hiring, outperforming their underlying markets from strong record growth, new products, penetration, and price. As shown on slide seven, USIS revenue of $445 million was up 6% and much better than our expectations due to stronger mortgage and non-mortgage performance. USIS mortgage revenue was down less than 1% and outperformed the mortgage market credit inquiries that were down 33% by more than 30 points. The strong pricing environment that we discussed in April, both from the addition of telco and utility attributes to our new mortgage credit solution, and the increased pricing for credit scores drove the very strong outperformance. At $113 million, mortgage revenue was 25% of total USIS revenue in the quarter. Mortgage credit inquiries again outperform MBA's current estimate of originations by about five points from increased shopping behavior. We expect this increased shopping behavior to continue as we move through the remainder of the year. Total non-mortgage revenue of $332 million was up 8% in the quarter with organic growth of about 4% and better than our expectations. B2B non-mortgage revenue of $278 million, which represented over 60% of total USIS revenue, was up 7% with organic revenue growth of 3%. B2B non-mortgage online revenue growth was up 9% total and 3% organically. During the quarter, online revenue had strong double-digit growth in commercial and identity and fraud, with auto approaching 10% growth and telco and insurance growing low single digits. Banking was up slightly, consistent with first quarter, with market volumes at larger financial institutions offsetting declines with smaller financial institutions and fintechs that were more principally focused on subprime. Financial marketing services, our B2B offline business, had revenue of $56 million that was up 1%. Strong revenue growth in fraud and header, as well as risk and account reviews, was partially offset by declines in marketing, principally pre-screened marketing with IXI wealth revenue growth about flat. Pre-screened marketing revenue was at similar levels at first quarters. We continue to see significant weakness from smaller FIs and fintechs in the subprime space, which was partially offset by growth from larger FIs. USIS is using the power of their Ignite platform, along with our proprietary data to enable customers to drive deeper marketing insights and identifying extending offers to better prospects, delivering better marketing performance management. USIS has seen incremental penetration and growing pipeline from our advanced Ignite capabilities. We did see limited growth in our portfolio review business, but have not seen a meaningful increase in our risk-based portfolio reviews that typically pick up during challenging economic times. USIS Consumer Solutions direct-to-consumer business had another strong quarter, with revenue up $54 million, up 10% from very good performances in both our consumer direct and indirect channels. USIS is winning in the marketplace with strong momentum from new solutions and differentiated data in key verticals of identity and fraud, commercial, and auto. We're also in active dialogues with USIS customers about the competitive benefits of the Equifax cloud that will deliver always-on stability, faster data speeds, and Equifax cloud-enabled new products, which is driving a strong active new deal pipeline, which was up from the first quarter. Todd and the USIS team are on offense as they complete their cloud transformation and pivot to leveraging their new cloud capabilities to deliver new products. USIS adjusted EBITDA margins with 36% in the quarter of 340 basis points sequentially, and the strongest USIS margins since the beginning of the mortgage market decline a year ago. EBITDA margins were up sequentially from better than expected revenue performance and good execution against their cloud and broader cost reduction program. Turning to slide eight, international revenue was $290 million, up 7% in constant currency and better than our expectations. Europe local currency revenue was down 2% due to the expected about 16% decline in our UK debt management business. As we discussed previously, our UK debt management business was very strong in the first half last year as the UK government made large catch-up debt placements following COVID debt collection moratoriums. As a result, we expect to see declines in the first half versus last year. We expected to see those declines. However, we do expect to see consistent sequential debt management growth as we move through the second half, and we expect debt management to return to revenue growth later this year. Our UK and Spain CRA business revenue was up 7% in the quarter and a very good performance. This strong performance was driven principally by strong growth within identity and fraud, decisioning, consumer, and direct to consumer. Asia Pacific delivered solid local currency revenue growth of 4% with growth in commercial, identity of fraud, and D2C, as well as continued very strong growth in our India business, which was up 38% in the quarter. Latin America local currency revenue was up a very strong 23%, driven by double-digit growth in Argentina, Uruguay, Paraguay, and Central America from new product introductions and pricing actions. This is the ninth consecutive quarter of strong double-digit growth for Latin America, which we expect to continue in the second half. Canada local currency revenue was up 8%, with broad-based growth in consumer, identity and fraud, decisioning, and commercial growth. In Canada, we recently completed a full migration to our new cloud-based fraud IQ exchange and now have all of our Canadian fraud exchange customers on this new cloud-based solution. International adjusted EBITDA margins of 24.2% were up 70 basis points sequentially and better than our expectations. The improvement was driven by good execution against their 2023 cost reduction plans. Turning now to slide nine, in the second quarter, overall non-mortgage Constant dollar revenue growth of 6% was lower than our expectations, but against a very strong 22% growth last year. USIS and International both delivered stronger non-mortgage growth than we expected. This was offset by the slower growth in EWS non-mortgage that I mentioned earlier in talent non-boarding, despite their very strong growth in their government business. As we look to the second half, we expect non-mortgage revenue growth to grow sequentially in third and fourth quarter, led by very strong growth in the EWS government business and growth in EWS talent and consumer lending from new products. We also expect continued strong performance in USIS and international, resulting in third quarter Equifax non-mortgage revenue growth above 9%, which is well within our 8% to 12% long-term growth framework. Turning to slide 10, new product introductions leveraging our differentiated data in the Equifax cloud are central to our EFX 2025 growth strategy. In the second quarter, we launched over 30 new products and delivered a record 14% vitality index. Our second quarter VI was again led by strong performances in EWS in Latin America. In the second quarter, over 80% of our new product revenue came from non-mortgage products leveraging the Equifax Cloud. Leveraging our Equifax Cloud capabilities to drive new product rollouts We expect to deliver a vitality index of approximately 13% in 2023, which is 300 basis points above our 10% long-term vitality goal index. This equates to about 700 million of revenue in 2023 from new products introduced in the past three years. New products leveraging our differentiated data, Equifax cloud capabilities and single data fabric are central to our long-term growth framework and driving Equifax top line and margins. On the right side of the slide, we've highlighted several new products introduced in the quarter. These new solutions are a testament to the power of the Equifax cloud in driving innovation that can increase the visibility of consumers to help expand access to credit and create new mainstream financial opportunities. We launched a new product this quarter, Talent Report Flex 2.0, a customizable pre-hire employment verification solution that helps solve the challenge background screeners and HR professionals may experience when seeking to verify a candidate's specific employment records. With a unique and first-to-market employer preview option, a list of employer names is now available on the work number using a candidate's SSN. This allows the customization of the employment history report by selecting only the records wanted. With the power of the Equiflex Cloud, we're bringing new solutions to market that meet the needs of our customers. Turning to slide 10, we were very excited to receive shareholder approval for our new Boa Vista acquisition in late June. BVS is the second largest credit bureau in the fast-growing Brazilian market with over a $2 billion TAM. We expect the transaction to close in early August, and Equifax will be able to provide Boa Vista with access to expansive Equifax international capabilities, our cloud-native data, products, decisioning, and analytic technology for the rapid development of new products and services and expansion into new verticals like identity and fraud in Brazil. As a reminder I mentioned earlier, we expect Boa Vista to deliver approximately $160 million in run rate revenue to Equifax and to be accretive to adjusted EPS in the first year. And as I mentioned earlier, Boa Vista results are not included in the guidance we're providing today. We'll provide more detail on Boa Vista's impact in 2023 during our October earnings call after the transaction is closed. Given the size of the transaction, we plan to pause on M&A activity in the second half to focus on integration of BVS and our 21 and 22 acquisitions. And our intention is to use excess free cash flow over the coming quarters to pay down debt and reduce our leverage. Turning to slide 12, we believe that artificial intelligence is fundamentally changing Equifax business capabilities and is becoming table stakes for data analytics companies to manage increasingly large, diverse, and complex data sets within a highly regulated data bringing unique complex challenges around AI explainability. On the left side of slide 12, our large and diverse proprietary database data set is a big differentiator for Equifax, including our income and employment data, traditional alternative credit data, cell phone, utility, and pay TV data, identity and fraud data, and our commercial and wealth data. This proprietary data at scale, heat and length in our new single data fabric, gives us significant advantages in using AI to build advanced models, scores, and products, including identity and fraud solutions, enabled by our best-in-class Equifax cloud-native technology. To date, Equifax has about 70 approved AI patents supporting our AI neuro-decision technology, which we call NDT, an explainable AI, which is critical to ensuring that the correct data is used to make credit decisions that surface by AI models and scores. Equifax will continue to invest in AI as we remain on offense, leveraging Google's Vertex AI capabilities combined with our own Equifax NDT capabilities. We'll be building more predictive and valuable models and scores with our expanding data set and accelerating the speed at which we develop new models, scores, and products to bring more current solutions to our customers. We believe Equifax is uniquely positioned to capture the value of AI going forward. Now I'd like to turn over to John to provide more detail on our third quarter and four-year guidance. We're executing very well against our strategic priorities in delivering revenue growth and expanding margins in a challenging macro environment.