Equifax, Inc.

Good day and welcome to the Equifax first quarter 2019 earnings conference call. Today's conference is being recorded. At this time, I'd like to turn the call over to Trevor Burns. Please go ahead.

Thanks and good morning. Welcome to today's conference call. I'm Trevor Burns, Investor Relations. With me today are Mark Begor, Chief Executive Officer, and John Gamble, Chief Financial Officer. Today's call is being recorded. An archive of the recording will be available later today in the Investor Relations section in the About Equifax tab of our website at www.equifax.com. During this call, we will be making certain forward-looking statements, including second-quarter and full-year 2019 guidance to help you understand Equifax and its business environment. These statements involve a number of risk factors, uncertainties, and other factors that could cause actual results to differ materially from our expectations. Certain risk factors inherent in our business are set forth in filings with the SEC including our 2018 Form 10-K and subsequent filings. Also, we'll be referring to certain non-GAAP financial measures, including adjusted EPS attributable to Equifax and adjusted EBITDA, which will be adjusted for certain items that affect the comparability of our underlying operational performance. For the first quarter of 2019, adjusted EPS attributable to Equifax includes costs associated with the realignment of internal resources and other activities, acquisition-related amortization expense, the income tax effects of stock awards recognized upon vesting or settlement, and foreign currency losses from remeasuring the Argentinian peso denominated net monetary assets. Adjusted EPS attributable to Equifax also excludes and accrues for legal matters related to the 2017 cybersecurity incident. Legal and professional fees related to the cybersecurity incident, principally fees related to our outstanding litigation, and government investigations, as well as the incremental non-recurring project cost designed to enhance our technology and data security. This includes project cost to implement systems and processes to enhance our technology and data security infrastructure, as well as the projects to replace and substantially consolidate our global networks and systems, as well as the cost to manage these projects. These projects that will transform our technology infrastructure and further enhance our data security were incurred throughout 2018 and are expected to occur in 2019 and 2020. Adjusted EBITDA is defined as net income attributable to Equifax, adding back interest expense, net of interest income, income tax expense, depreciation and amortization, and also is the case for adjusted EPS, excluding an accrual for legal matters related to the 2017 cybersecurity incident. Costs related to the 2017 cybersecurity incident costs associated with the realignment of internal resources and other activities, and foreign currency losses from re-measuring the Argentinian peso-denominated net monetary assets. These non-GAAP measures are detailed in reconciliation tables, which are included with our earnings release and are also posted on our website. In addition to the non-GAAP measures that we post on our website, we will post, after this call, certain supplemental financial information on our website to better help you understand our business. Included with this supplemental information is historical, actual, and 2019 forecast U.S. mortgage market inquiries. Now I'd like to turn it over to Mark.

Thanks, Trevor, and good morning, everyone. As you can see from our press release this morning, this has been a busy quarter for us, particularly during the past few weeks and days. We're pleased with our start to 2019 with strong progress on our strategic priorities, and our financial results were within the guidance we provided in February. While we are continuing to return USIS to a growth mode, we're executing well against our EFX 2020 initiatives. Before I get into a discussion of our first quarter financial results in the business units, let me spend a few minutes discussing the $690 million charge we took this quarter related to outstanding litigation and potential fines related to the 2017 cybersecurity incident. We delayed our earnings discussion until this morning because we've made significant progress on our legal and regulatory settlements in the past few weeks. As you know, we've been in active discussions for months related to the 2017 cybersecurity incident, and those discussions accelerated in the past month. Importantly, the $690 million accrual we booked includes our estimate of probable losses associated with our global settlement discussions with certain federal and state regulators, as well as the federal class action cases. We recently reached confidential settlement terms in the consumer federal class action cases that upon approval by the court will resolve and dismiss the claims asserted in the consumer cases. The proposed global settlement provides for the establishment of a single consumer redress fund, which was our goal, and certain other non-monetary terms. As we've discussed previously, we believe that consumers are better served through a single consumer fund and a global settlement of the federal and state government investigations together with the consumer class action litigation. We expect to complete definitive settlement agreements with the parties in the coming weeks. While this charge represents our current estimate to resolve many of the significant issues facing the company, we expect to incur additional losses associated with the other claims and litigation related to the 2017 incident. We will continue to work with all parties to bring these matters to closure as soon as possible while balancing the needs of our company, employees, customers, and shareholders. As you know, we prepared ourselves financially for this settlement by strengthening our balance sheet, including suspending our stock buyback and freezing our dividend in 2017. This settlement will not have an impact on our internal investment plans, new product introductions, our $1.25 billion EFX 2020 technology and security program, or our plans to grow and expand Equifax with acquisitions. This is a positive step forward for Equifax as we work to put the 2017 cybersecurity event behind us. Let me now move to our financial results. We're pleased with our start to the year as our first quarter financial results were consistent with the guidance we gave you in February with revenue in the middle and adjusted EPS at the top of the range provided. Revenue at 846 million was up almost 1% in constant currency. Foreign exchange further weakened during the quarter relative to our February guidance, impacting revenue negatively by just under $2 million. During the quarter, U.S. mortgage market inquiries again declined meaningfully down 10%, but were better than our projection of down 13%. Excluding the almost 2% negative mortgage market impact, total constant currency revenue growth was 2.5%, and we were pleased with that. Overall, our combined U.S. B2B businesses, USIS and EWS, performed better than our expectations, both benefiting relative to expectations due to the mortgage market, with U.S. also delivering nice growth in offline revenue and EWS delivering very strong verification services revenue growth. EWS saw weakness in employer services revenue, which impacted overall growth. International revenue was only marginally weaker than our expectations, as somewhat weaker than expected revenue in Australia was mostly offset by stronger revenue in Canada. And GCS was a bit weaker than we expected, driven by lower U.S. subscriber growth. This weaker-than-expected GCS revenue was offset the better-than-expected performance in U.S. B2B. Adjusted EPS of $1.20 per share was on the top end of the guidance we provided in February. In the first quarter, total non-recurring or one-time costs related to the cybersecurity incident and our transformation, exclusive of the accruals for legal matters related to the 2017 cybersecurity incident, were $97 million and consistent with our expectations. This includes $83 million of technology and security spending, $12 million for legal investigative fees, and $2 million for consumer support. We continue to expect 2019 one-time costs related to the cybersecurity incident and transformation exclusive of any legal accruals to be about $350 million. Now for some comments on the business units. USIS revenue was down almost 3% on a reported basis as we expected compared to last year, with USIS up about 50 basis points, excluding the over 3 percentage point negative impact of the mortgage market on revenue. And that 50 basis point increase ex-mortgage was quite positive from our perspective. In the quarter, we also saw a mix shift in our mortgage business with transactions shifting towards our reseller channel. This also negatively impacted USIS revenue by over 1% in the quarter. Adjusting for both of these factors, non-mortgage revenue growth was up almost 1.5%, a positive sign of continued improvement by USIS and was slightly better than our expectations for the quarter. Our new USIS leader, Sid Singh, is driving a new level of energy and accountability with our customers and the USIS team. Inside of USIS Mortgage Solutions was down 23% in the quarter, given the decline in the overall mortgage market and due to the mixed shift with mortgage resellers, which occurred in fourth quarter 2018. Our USIS Mortgage Revenue can be impacted by movements between our Triburial Business and Mortgage Solutions, and selling a single file to a mortgage reseller, which is included in our online business. We manage our mortgage solutions tri-bureau business such that its dollar profit contributions exceed the dollar profit of a single file to the reseller. Mixed shifts had negative impact of over 1% in USIS revenue growth in the first quarter, while USIS operating profit was not materially impacted. We expect the revenue headwind from the mortgage mix shift to continue for the remainder of 2019. Financial marketing service was up about 6% driven by new deal wins. This is the first time we've seen growth in FMS since prior to the cybersecurity incident. While we are encouraged by the growth in FMS this quarter, the timing of closing deals is still not as predictable as it was prior to the cybersecurity incident, which may impact the timing of future revenue It may impact the timing of revenue in future quarters. Online was down 1%, but was up 2%, excluding the mortgage market impact. While online did benefit from the mortgage market mix I previously discussed, this was partially offset by a decline in our direct-to-consumer revenue, which is revenue we generate with the other bureaus. Online was also benefited from continued growth in our telecom and utilities verticals. In terms of customers, we're selling across the portfolio of USIS customers, and we should start to continue to see those benefits from these commercial engagements in the second half of 2019. Our pipeline of new business continues to grow positively. We continue to believe that our differentiated data assets in USIS, coupled with our technology investments, will return the business to its traditional growth mode, but we remain cautious on the pace of the recovery. We are confident in the USIS growth plan for 2019. USIS adjusted EBITDA margins of 42.9% were down 120 basis points from first quarter 18, primarily driven by lower fixed leverage as revenue declined in the quarter and additional investments in security and data analytics to drive new product. Partially offsetting these margin declines, USIS continued to effectively manage their SG&A costs reducing both the dollars and percent of revenue from the fourth quarter restructuring that we did. Shifting now to workforce solutions, they had a very strong quarter with revenue up 9%. Verification services delivered very strong results with revenue up 16%, driven by strong double-digit growth across healthcare, talent solutions, auto, and government. EWS, like USIS, was also impacted by a decline in the overall mortgage market, which negatively impacted revenue by about 2.5 percentage points. Overall EWS revenue, excluding the negative mortgage market impact, grew almost 11%, which we were very pleased with. Employer services declined in the quarter, down almost 4%, driven principally by tax management services given low unemployment levels, and to a lesser extent, workforce analytics and our ACA business, talent solutions, and our I-9 and onboarding businesses. All saw growth in the quarter, which we expect to continue throughout the year. We expect employer services revenue to be down for the full year, consistent with the levels we saw in the first quarter. The strong verifier revenue growth resulted from very strong adjusted EBITDA margins of 49.4%, an expansion in the quarter of 50 basis points. EBITDA margin growth was slightly offset by investments in sales resources to support incremental revenue growth activities. EWS continues to be a great Equifax franchise and positioned for a very strong 2019. International revenue was down 8% on a reported basis. and up 2.5% in local currency, but slightly below our expectations. The slower growth continues to be driven by the weak consumer and commercial lending markets in Australia that started to soften late in the third quarter of last year, and to a lesser extent, the ongoing weak economic condition in Argentina. We expect the Australia and Argentina markets to remain weak through the bulk of 2019, although the revenue growth impacts will begin to lessen in the second half of 19 as we approach the periods of their initial declines in the third quarter of 18 in Australia and the second quarter of 18 in Argentina. Our Latin America businesses grew mid-single digits in local currency in first quarter, despite the continued headwinds in Argentina. Revenue growth was driven by double-digit constant currency growth in Chile and and Ecuador and high single-digit constant currency growth in Paraguay and Uruguay. Our Latin America franchises continue to benefit from the expansion of Ignite and Interconnect SaaS and strong NPI rollouts in both 2017 and 2018. I was in Peru earlier this week meeting with our team and key customers. Our European business in the UK and Spain grew mid-single digits in local currency in the first quarter of 2019. We saw mid-single-digit local currency growth in our European credit operations and low single-digit growth in our European debt management business. I'll be in Madrid and London next week meeting with customers and investors. Canada delivered another strong quarter with high single-digit growth in local currency in the first quarter, consistent with the full-year revenue growth rate of 8% we saw in 2018, reflecting a strong focus on customer innovation and new products. We're excited about the benefits our technology transformation will have in Canada. In the first quarter, we migrated our first Canadian customer into InterConnect in the public cloud. We also completed a small bolt-on acquisition in Montreal, JLR, that brings unique real estate data assets to Equifax in Canada. Asia Pacific, which is predominantly Australia for us, declined 2.5% in local currency in the first quarter, principally related to the weakening we began to see in the third quarter last year in Australia consumer lending, particularly in mortgage and other consumer and commercial credit markets in Australia. Although only one month's data in April, we began to see signs of market bottoming in Australia. We expect second quarter to also see revenue declines, but Australia should return to growth in the second half, particularly with easier comparisons to last year in the second half. Despite the strong headwinds in Australia, we are encouraged by the growth potential. We continue to win top customers, particularly in telco, and we continue to hold a substantial data advantage in the Australian market. As we mentioned last year, the move to positive data in Australia continues to progress well. At the end of April, just over 50% of the consumer accounts have been shared, and we expect to have over 80% by the end of the third quarter of this year. Incorporating positive data will allow us to develop new products for our customers as well as enable new use cases. For example, incorporating positive data into portfolio management solutions we believe provides more predictive outcomes than just using negative data. I'll also be in Australia in the next few weeks to spend time with the team and customers. International adjusted EBITDA margins at 25.3% were down 410 basis points in the first quarter principally reflecting lower margins Australia and Latin America, driven by Argentina. We expect growth in international to improve in the second quarter and improve significantly in the second half. The second quarter will be driven by stronger growth in Canada and Latin America, and in the second half, growth returns to Asia-Pacific with easier comparisons. We believe this improved growth, along with some additional cost reductions taken not only in the fourth quarter but in the first quarter, will significantly improve margins in the second half. Shifting now to global consumer solutions, their revenue declined almost 9% on a reported basis and 8% in local currency basis in the first quarter, and this decline was greater than our expectations. Our global consumer direct business was down about 20% and was just over 40% of total GCS revenue. As we discussed throughout 2018, our U.S. consumer direct business saw revenue declines about 20% as a result of our suspension of U.S. consumer advertising in the fourth quarter of 2017 after the cybersecurity incident. GCF began limited direct marketing to U.S. consumers in the fourth quarter, which continued into the first quarter, and we're starting to see subscriber growth from our restart of marketing, a good sign as we begin 2019. We're also continuing to invest in our new consumer platform and are rolling out our MyEquifax consumer portal and seeing growth in MyEquifax members. We expect to see U.S. subscriber growth as the year unfolds. Our GCS partner businesses, which are almost 60% of total GCS revenue, delivered mid-single-digit growth in the quarter. And ID WashDraw grew double digits in the quarter, which we expect that growth to continue in 2019. We expect GCS revenue to be down in second quarter at levels similar to the first quarter, However, starting in third quarter, as we lap the periods where the consumer direct revenue began to stabilize in 2018, we expect to see revenue to return to flat and begin to grow in the second half as we move through the remainder of the year and into 2020. Adjusted GCS EBITDA margins declined as expected in the first quarter as we saw the effective revenue loss and an increase in advertising. However, margins were up nicely on a sequential basis from fourth quarter 18, reflecting the sequential revenue growth. We expect margins in GCS in the second quarter to remain in the low 20s. However, we expect margins to increase in the second half as we see the benefit from stable to growing revenue driven by our return to consumer marketing and growing partner revenue, as well as some cost actions that we took in the fourth quarter and some additional cost actions we took in the first quarter. Shifting now to our technology transformation, in the last call we laid out detailed plans for our $1.25 billion EFX 2020 technology transformation for 2018 to 2020. We're convinced that our technology transformation will differentiate our products and our ability to deliver them by combining unique data assets, analytics, and leading technology It will also accelerate the speed of our products to market and the ease at which they're consumed and reduce our costs as we move our data and applications to the cloud. We're on plan with our timeline to be completed with most major activities in our EFX 2020 transformation program by the end of next year. We'll be posting after this call, as we did in the first quarter, our quarterly technology plan milestones for 2019 in our investor relations deck. Let me give you some commentary on where we stand with our major technology plan tracks through the first quarter. First, our data fabric is being built on the Google Cloud platform in a virtual private cloud environment utilizing GCP native tooling. Our data fabric will fundamentally make it easier to bring our unique assets together, including customer data, to create new products and solutions for our customers. Our data fabric pattern is now in place at Google Cloud – in the Google Cloud platform. And our USIS, EWS, Canadian, and corporate teams are working actively on migrating the US consumer credit, the work number, and Canadian consumer credit exchanges to our new cloud fabric. Establishing our data fabric pattern at GCP was delayed from our original planning. However, we remain on track to migrate several of our other U.S. and EWS exchanges, including NCTUE, IXI, DataX, I9, and unemployment claims, as well as Ignite to the common data fabric by the end of this year. Beginning in the third quarter, any new data sets will be directly ingested into this new cloud-based data fabric. So very strong progress on this first priority for us in our EFX 2020 transformation. Second, building on the latest suite of interconnect and Ignite cloud-native product offerings, we are using reusable application and cloud-native services to rebuild our customer applications. Over the past year, Equifax has worked to migrate these applications to a virtual private cloud using cloud-native services. We've completed production implementations of Ignite Direct and interconnect in a virtual private cloud in all global regions. We expect to complete the integration of Ignite and Interconnect app services in our VPCs this quarter to allow customers to seamlessly promote attributes and models defined in Ignite, including those driven by machine learning into production on Interconnect. These services should be broadly available by the end of the second quarter. Third, we will migrate customers from legacy decisioning systems, interface systems, and Ignite instances to Ignite and Ignite product suite. Over the course of 2019 and 2020, we expect to migrate the vast majority of our customers to our next generation interconnect and Ignite cloud applications. In USIS, we are on track to migrate approximately half of these customers by the end of this year, with the balance of the customers migrated during 2020. The technology and business teams are focused on deploying standard industry solution sets that will both productize this Ignite and interconnect service and make the migration experience as frictionless as possible for our customers. Last, we'll migrate our global consumer systems and customer and consumer support systems using standard application services and cloud-native services and operate them in the private cloud. Our new consumer system, Renaissance, that will include digital consumer support is in the process of being migrated to a virtual private cloud environment using cloud-native services. We expect to launch the first phase with AWS in the third quarter. Separately, we are deploying Salesforce and an integrated Genesis Google Contact Center AI solution for customer and call center support worldwide. We expect significant deployment of all these systems to be ongoing through the third quarter with consistent quarterly releases thereafter. I hope this gives you a sense of our intense focus and positive progress we have on making our technology transformation that will deliver new cloud-based technology to our customers. We're excited about the strong technology team that Bryson Keller has built in the past nine months, and all of these actions are being executed consistent with our commitment to be a leader in data analytics and cloud-based technology. We continue to be convinced this investment will differentiate Equifax and move us back to a growth and market-leading position. We made good progress in the first quarter and will continue our focused efforts in 2019 and 2020. Shifting now M&A remains an important avenue of growth for Equifax and is one of the key elements of our strategy for the future. Last month, you saw that USIS closed the acquisition of PayNet, a leader in commercial lending data and insights. We're excited to add PayNet and the team to Equifax. Their proprietary commercial leasing and loan data enables commercial finance and lending institutions to improve credit analytics on business credit underwriting and portfolio reviews. PayNet complements our existing commercial database that includes trade line information on short-term loans with longer-term loans and leasing payment data, a very unique commercial data asset. Customer reaction on the acquisition is very positive and integration is proceeding quickly. USIS revenue was not benefited in the first quarter by the PayNet acquisition. We expect the contribution to USIS revenue growth to be about 1.5% in the second quarter from the PayNet acquisition. Next, on new product innovation, That continues to be a key component of our strategy and a core strength at Equifax. We have an active pipeline of new product innovations with over 110 new products at various stages in the funnel, and we expect to launch over 50 new products in 2019, a pace similar to each of the past three years. We're starting to see an increase in new product deployments in USIS. In the first quarter, USIS launched seven new products, which will start to generate revenue later this year, but have greater opportunities for revenue growth in 2020 and 2021. As we have discussed, we expect NPI revenue in 2019 will be below historic levels in the U.S. However, this is a positive sign as U.S. collaborates with customers and returns to a growth mode with their new product integrations. In the first quarter, USIS launched a new insight score for personal loans, which developed in collaboration with FinTechs. is a risk score optimized to help lenders evaluate applications seeking unsecured personal loans. The Insight Score for personal loans uses advanced modeling techniques by combining Equifax's unique data assets from telecommunications utility and trended data using patented explainable machine learning capabilities to cover a broad spectrum of consumer profiles for personal loans. The new Insight Score for personal loans is a win for FinTech companies and consumers as we help lenders develop greater predictive power and improve accuracy when evaluating applicants with thin or no credit files. While M&A and NPI are core to our long-term strategy, we believe partnering opportunities are another avenue to deliver revenue growth at Equifax. As you recall, in March, we announced a strategic partnership agreement with FICO to launch the Data Decisions Cloud, an integrated end-to-end data and analytics suite that addresses key needs across risk, marketing, and fraud to enable financial institutions to meet the needs of consumers faster and more precisely than ever before. While we continue to focus on embedding our Ignite and interconnect platforms with customers, the FICO partnership is an example of using partnerships to extend our reach You'll see more partnerships to extend our distribution as we move through 2019. We also expect to identify additional areas to partner with FICO on as we continue to work closely with them. I'm very energized about what the FICO partnership means for our financial institutions and consumers. So wrapping up, we've made several big and positive steps forward in our drive back to market leadership and growth during the first quarter. First, we're pleased with our continued progress with our global settlement discussions with certain federal and state regulators, as well as the federal class action lawsuits. We expect these settlements to be completed in the coming weeks and include a single consumer fund. We are also pleased to reach confidential terms in the U.S. consumer class action lawsuits. As you know, we've been preparing for this settlement, and we have the financial structure to absorb it while continuing to invest in the growth of Equifax internally and externally and via acquisitions, including new products and our 1.25 billion EFX 2020 investment and security program. This is a positive step forward as we work to put the 2017 cybersecurity event behind us. Second, financially and operationally, we're pleased with our start to the year. USIS has a new level of energy under Sid Singh. The team is on their front feet with customers, with pipelines and commercial activity growing positively. EWS had a very strong quarter and is positioned for a very strong 2019. We are watching our international business closely, particularly with the Australian economy. Third, we continue to invest in strategic acquisitions to expand our data assets, including the PayNet acquisition we announced last week. Fourth, we continue to focus intensely on our EFX 2020 technology and transformation plans that will move our data and applications to the cloud. We believe the investment will deliver speed, growth, and reduce costs and differentiate us from our competitors. We'll continue to share our progress on EFX 2020 during the rest of the year and in 2020. Fifth, we continue to focus on expanding partnerships, and this quarter launched our new strategic partnership with FICO that brings unique data assets, technology, and analytics to our customers to help them grow faster. further expansion of partnerships from Equifax as we move through 2019. And then we also continue to focus on new products with strong collaboration with customers. As I pass the one-year mark at EFX, I'm more confident than ever that we are moving Equifax in the right direction with positive progress on all fronts. We're investing at record levels to make Equifax a market leader in data, analytics, and technology, and security. We know that we still have a lot of work to do. We are excited about the opportunity ahead. John will share more detail, but we're also committing to our prior guidance for 2019. We are confident in our path forward and expect continued positive progress in 2019. With that, let me turn it over to John.