Equifax, Inc.

Good day, everyone, and welcome to the Equifax Second Quarter 2019 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Trevor Burns. Please go ahead, sir.

Thanks, and good morning. Welcome to today's conference call. I'm Trevor Burns, Investor Relations. With me today are Mark Begor, CEO, and John Gamble, CFO. 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 equifax.com. During this call, we will be making certain forward-looking statements, including 3Q and full-year 2019 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 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 second quarter of 2019, Adjust the EPS attributable to Equifax excludes rules for legal matters related to the 2017 cybersecurity incident. Costs associated with acquisition-related amortization expense, income tax, effective stock awards, recognizable investing or settlement, certain acquisition costs, and foreign currency losses when we're measuring the Argentinian peso-denominated net monetary assets. Adjusted EPS distributed Equifax also excludes 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 projects to implement systems and processes to enhance our technology and data security infrastructure. as well as 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, appreciation and amortization, and also as the case for adjusted EPS, excluding accruals for legal matters related to the 2017 fabric security incident, costs related to the 2017 cyber security incident, certain acquisition costs, and foreign currency losses for 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. Now I'd like to turn it over to Mark.

Thanks, Trevor. Good morning, everyone. As you know, this is a busy week and quarter for Equifax with Monday's settlement announcement and our focus during the quarter on driving growth operations in the EFX 2020 technology and security transformation. Before I get into a discussion of our second quarter financial results in the business units, let me spend a few minutes discussing the announcement we made on Monday about the legal settlements we made in connection with the 2017 cybersecurity incident. Monday's announcement was a real milestone and pivot for Equifax, which allows us to fully focus on operations, driving growth, and our EFX 2020 technology and data security transformation. The comprehensive resolution we announced is comprised of multiple related settlement agreements with the Consumer Class Action Plaintiffs and the Federal Multidistrict Proceedings, the Attorney Generals of 48 states, Puerto Rico, and the District of Columbia, the Federal Trade Commission, the Consumer Financial Protection Bureau, and the New York State Department of Financial Services, and it resolves the claims and investigations brought by these parties related to the 2017 cybersecurity incident. As you recall from our first quarter earnings call in May, we recorded an accrual of $690 million for expected losses associated with certain legal proceedings and government investigations related to the 2017 incident. Principally as a result of the comprehensive settlement announced on Monday, we increased the accrual by approximately $11 million in the second quarter of 2019, resulting in total charges of $701 million. This amount excludes the costs we have incurred to date offering free credit monitoring to U.S. consumers in 2017, 18, and 19, for which we've already taken charges. Details of the settlement and related costs are available in the 8K we filed on Monday. Importantly, the settlement program establishes a single consumer restitution fund that will be available to pay consumer benefits and legal fees and expenses for and it is in addition to the protections provided by Equifax immediately following the 2017 cybersecurity incident, including free credit monitoring and our lock and alert service. A single consumer fund was a real priority for Equifax and is a win for consumers. The Consumer Restitution Fund will be available to pay for four years of additional free bureau credit monitoring for consumers whose information was impacted by the 2017 breach actual out-of-pocket losses related to the breach, and other consumer benefits such as identity restoration services. Equifax will also be providing free single-bureau Equifax credit reports for up to an additional six years. There are two circumstances in which Equifax could incur costs in excess of the $300 million consumer restitution fund. First, to the extent that more consumers enroll in credit monitoring than contemplated in the consumer fund, Equifax would have to fund this cost. The fund is structured to cover credit monitoring enrollees of up to $7 million. Second, to the extent consumer out-of-pocket losses exceed the amounts available in the fund, Equifax would have to fund the amount of these incremental losses up to $125 million. And as a reminder, We have not identified any instances of data being used for identity theft purposes or the data that was stolen being sold on the dark web. Our expected total $701 million accrual does not include any provision for Equifax incurring incremental costs for either of these two items because we believe that $300 million in the Consumer Restitution Fund will cover the expected costs. The settlement represents resolution of many of the significant issues legal and regulatory issues facing a company related to the 2017 cybersecurity incident, including the consumer class action and investigations by State Attorney General, New York State DFF, and our principal U.S. regulators, CFDB and FTC. There do remain other additional unresolved claims and litigation related to the 27 incident. A listing of these claims can be found in our 10-Q, which we'll file later today. We intend to work with all the parties to bring these remaining 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 program and freezing our dividends in 2017. Our current plans are to finance the settlement payments with existing borrowing capacity under our revolving credit and securitization facilities. As of the end of the second quarter, we had approximately $1.1 billion of borrowing capacity available to us. John will provide more details on the expected timing of the payments and impact on our second half guidance in a few minutes. This is a very positive step forward for Equifax and for our shareholders. The settlement will not have an impact on our $1.25 billion technology and security program, our internal investment plans, new product introductions, payment of our quarterly dividend at the current rate, or our plans to grow and expand Equifax with acquisition. This resolution allows us to fully focus on the future. Let me move now to our results for the second quarter. We were very pleased with our second quarter financial results as revenue was at the top end of our guidance and adjusted EPS was above the ranges we provided in May. These financial results are another positive step forward for Equifax. Revenue of $880 million was up 3% in concert dollar currency and up just over 1% on an organic constant currency basis and the strongest results since the cybersecurity incident in 2017. During the quarter, U.S. mortgage market inquiries were up about 2% compared to the prior year, better than our projection of down 1%, resulting in about $5 million of additional revenue in the quarter versus our May guidance. However, FX further weakened during the quarter relative to our May guidance, impacting revenue negatively by about $2 million. Overall, the strength in the quarter was driven by our U.S. B2B businesses, USIS, and Workforce Solutions. In the quarter, both USIS and EWS performed better than we expected. Both businesses performed extremely well online, with USIS online up 10% in total and 6% organically. And Workforce Solutions verifier revenue was up a very strong 15%. Both businesses grew their non-mortgage online business stronger than we expected, in addition to benefiting from the stronger U.S. mortgage market. In total, our U.S. online business, which includes USIS Online, EWS Verifier, and the GCS partner business, represents half of our total revenue and are expected to grow about 10%. International was weaker than we expected in the quarter, particularly in the U.K. I'll provide some more details on that in a minute. Adjusted EPS of $1.40 a share was above the top end of the guidance we provided in May, given lower than expected corporate expenses and slightly better than expected business unit margins from the stronger revenue growth. In the second quarter, total non-recurring or one-time costs related to the cybersecurity incident and our transformation, exclusive of any accruals for legal matters related to the 27 cybersecurity incident, which I discussed a few minutes ago, or $82 million, and consistent with our expectations. This includes $70 million of technology and security spend and $12 million for legal and investigative fees. We expect 2019 one-time costs related to the cybersecurity incident and our ESX 2020 technology and data security cloud transformation, exclusive of any legal accruals, to be just over $350 million. To the extent we are able to provide to further accelerate data exchange or Cambria Ignite deployments into our cloud data fabric at Google or customer transitions to our interconnect API decision engines at AWS or Google, spending could exceed these levels. Shifting now to USIS. USIS revenue was up 2.5% on a reported basis and down slightly on an organic basis compared to last year, but better than we expected. with USIS revenue, organic revenue up 1%, excluding over one percentage point negative impact from the mixed shift, our mortgage business, and the mortgage market. Importantly, we saw solid single-digit organic revenue growth in our USIS segment for the first time since the cyber incident. This is a very positive sign for USIS. Sid Singh and his USIS team are back in growth mode, and are showing some positive commercial traction and activity. USIS online revenue was up almost 10% on a reported basis and up almost 6% on an organic basis, reflecting solid growth in our government and insurance verticals and double-digit growth in identity and fraud solutions aided by new product sales. This is a very positive sign of USIS recovery in the marketplace. Online organic revenue growth, excluding the favorable impact of mortgage market and mixed shift, was still up over 3% compared to last year. This was the first quarter of positive online organic revenue growth since prior to the breach, a very positive sign as we return USIS to a growth mode. Mortgage Solutions was down 22% in the quarter due to the mixed shift we have discussed previously with mortgage resellers, which occurred in the fourth quarter of 2018. Mixed shift had a negative 2% impact on USIS revenue growth in the second quarter, while USIS operating profit was not material impacted. We expect the revenue headwind from this mortgage mixed shift to continue for the remainder of 2019. Financial marketing services was down 7% compared to last year and was weaker than we expected. As we indicated consistently in our May discussion, our financial marketing services revenue is choppy as the timing of closing deals is still not as predictable as it was prior to the cybersecurity incident. In the first quarter, FMS revenue was up 6% as we closed some large transactions and For the first six months of 2019, FMS revenue will be down about 1%. This six-month view has been relatively consistent for the past several quarters at about flat and much better than we saw in the six months through the third quarter of 2018, where revenue was down about 6%. Looking forward to the second half of 2019, we expect growth in FMS as our strength in sales efforts drive growth off the relatively stable and flat base we have seen over the past nine months. In terms of customers, the USIS team is back on their front feet with growing new deal and new product pipelines, as we saw with the strong online growth this quarter. USIS new deal pipelines are up 2x from January 2018 and up over 30% from December 2019, which is a very positive sign for the second half in 2020. We continue to believe that our differentiated data assets, coupled with our technology investments, will return USIS to its traditional growth mode, but we do remain cautious on the pace of the recovery. USIS adjusted EBITDA margins of 45.6% were down about 200 basis points from second quarter 18, primarily driven by increased royalty costs as well as the continued investments in security and data and analytics to drive new product sales. USIS continues to very effectively manage SG&A costs, while at the same time increasing the percentage of resources dedicated to sales, DNA, and NPI and product development to drive growth. Shifting now to workforce solutions, they had another very strong quarter, revenue up almost 11% compared to last year, and better than our expectations. Verification services delivered extremely strong results with revenue up 15%, driven by strong double-digit growth across healthcare, talent solutions, mortgage, and government. The strong verification services revenue growth reflects the continued growth in work number, active records, as well as new products and further penetration into key markets. EWS has a deep and growing pipeline of new twin contributors that they expect to add to their growing database in the second half of 2019. As you know, twin records are monetized virtually immediately as they are added to our database and increase hit rates on our twin file. Employer services declined in the quarter less than 1%, consistent with our expectations, driven principally by workforce analytics our ACA business, as well as our unemployment claims business. This was as expected with the strong employment market in the U.S. Offsetting the decline in workforce analytics, we saw slight growth in our I-9 and onboarding business. As we indicated last quarter, we expect employer services revenue to be down low single-digit percentage for the full year. The strong verifier growth resulted in very strong adjusted EBITDA margins of 49.3%, an expansion in the quarter of 170 basis points. We expect EWS EBITDA margins to continue to be very strong in the second half. EWS continues to perform very well and is a franchise business for Equifax. Shifting now to international, where revenue was flat in local currency and down 8.5% on a reported basis and below our expectations. Canada continued to perform well, consistent with our expectations. Australia declined in the quarter, as we expected, and we were seeing signs of stabilization in that market. However, the UK performance was much weaker than we expected, and although Latin America showed improved growth, the improvement was less than expected. Asia-Pacific, which is predominantly Australia, declined an expected 5% in local currency in the quarter, principally related to the weakening we began to see in the third quarter of 2018 in Australia consumer lending, particularly mortgage and other consumer and commercial credit markets in Australia. We are beginning to see stabilization in the Australia market following their election a few months ago, but we expect market growth to remain weak through the bulk of 2019, although the revenue growth impacts will begin to lessen in the second half as we approach the period of their initial decline in the third quarter of 2018. As I mentioned, we are seeing some positive signs in the Australia marketplace, including lower interest rates and regulatory actions that have been taken that we believe may stimulate consumer and commercial credit demand in the second half. We are also making very good progress on positive data in Australia, and by the end of this year, we expect to have an excess of 80% of positive data from contributors. Shifting now to Europe, our European business declined 3% in local currency in the quarter, a much weaker performance than we expected. The UK debt management business drove the largest portion of the decline, principally due to the deferral of debt placements by the UK government, which were not received until late June. As these debt placements were received late in the quarter, they did not generate the expected revenue from collection activity in the second quarter, but will deliver revenue in the second half. Our European credit business was down 1%, much weaker than the mid to high single-digit revenue growth we have seen over the last year. Online, which represents about half of credit revenue, grew about 5%, which although reasonable growth, was down from stronger growth we've seen over the past year. Project revenue also declined in the quarter due to timing of some deals that shifted into the third quarter, as well as some customer delays we're starting to see as a result of the Brexit uncertainty. Absence of substantial weakening in the UK economy in the second half, and as the Brexit approaches and hopefully gets resolved, we're expecting to see a recovery in the growth of our European business and U.K. business. Debt management is expected to see growth due to the debt placements from the U.K. government received in late June and expected growth over the remainder of 2019. And our credit business is expected to recover in the second half of 2019 due to solid deal pipelines and a much stronger leadership focus on improved executions. Shifting out of Latin America, our business grew about 7.5% in local currency in the quarter. This has improved from first quarter growth of 5%, but weaker than expected principally in Chile. While we saw high single-digit growth in Chile this quarter, a couple of deals and NPI launches were delayed into the third quarter. We did see double-digit constant currency growth in Argentina and Ecuador this and high single-digit constant currency growth in Paraguay and Chile, which was positive. We expect growth to accelerate in the second half as our Latin America businesses benefit from the expansion of Ignite and Interconnect SaaS rollouts and strong NPI rollouts in both 2017, 2018, and the first half of 2019. Shifting now to Canada, which grew almost 9% in local currency in the quarter, reflecting a continued focus on customer innovation and new products. We expect this growth to continue through the rest of the year. We recently announced that our Canadian leader, Lisa Nelson, will be transitioning to take over our Australia business in about a week. Lisa's done an outstanding job bringing our Canadian business to market leadership through an intense focus on the customer. We're excited to bring this customer-focused leadership to Australia. International adjusted EBITDA margins at 28.6% were down about 190 basis points in the quarter, principally reflecting lower revenue and margins on Australia and the UK, and slower growth in Latin America, partially offset by margin expansion in Canada. Importantly, EBITDA margins were up sequentially 330 basis points, reflecting strong revenue growth in Canada and and improved sequential margin in Australia from the fourth quarter and first quarter cost actions. We expect revenue growth in international to improve significantly in the second half, driven by continued good revenue growth in Canada, accelerated growth in Latin America, and a return to revenue growth in the UK and Australia. We believe this improved revenue growth, along with the full benefit of the cost reductions taken in the fourth quarter of last year, in first half of this year will significantly improve margins in the second half of 2019. We're watching our international business closely, particularly the Australian economy and the UK Brexit impact. Shifting now to global consumer solutions, revenue declined 6.5% on a reported basis and 6% on a local currency basis in the second quarter, which was slightly better than our expectations. Our global consumer direct business was down about 6.5%, and it was just under half of our total GCS revenue. Our U.S. consumer direct business saw revenue declines of 8% versus 2018 in the quarter as a result of the suspension of U.S. consumer advertising in the fourth quarter of 2017 after the cybersecurity incident. As you know, GCS began limited direct marketing to U.S. consumers in late 2018. And we are starting to see subscriber growth from our restart of marketing. And importantly, U.S. consumer direct revenue was up 3% sequentially. We expect to see U.S. subscriber growth increase as we continue advertising and the year unfolds. And our Canadian and U.K. direct businesses both also saw sequential revenue growth. Our GCS partner business, which is about half of total GCS revenue, declined 4.5% in the quarter. due to the timing of some project-related revenue with customers that occurred in the first quarter. We expect partner revenue to return to growth in the third quarter. We expect GCS revenue to be up slightly in the second half as we lap the periods where consumer direct revenue began to stabilize in 2018. Adjusted GCS EBITDA margins declined as expected in the quarter as we saw the effect of revenue loss and an increase in advertising. We expect margins to increase in the second half as we see the benefit from stable and growing revenue, as well as cost actions taken in the fourth quarter of 2018 and first quarter. Our GCS business is making solid progress recovering from a challenging 2018. Now for an update on our EFX 2020 technology transformation plans. As you remember, there are five significant pillars to the cloud transformation, and I'll give you a brief update on each of them. First, we're moving our credit and other data exchanges to a standard data fabric at GCP. In the second quarter, we saw a significant milestone as our data fabric pattern based on GCP native tooling, including our full security stack, was completed in the new GCP cloud format and made available to our business units to begin migrating their data exchanges to this new cloud environment. Our USIS and EWS teams, as well as our Canadian and corporate teams, are actively working on migrating critical data exchanges to our new GCP cloud-based data fabric. Although data fabric was made available slightly behind schedule, we remain on track to migrate several of our US and EWS exchanges, including replicas of the US Consumer Credit Exchange, or ACRO, the Work Number Exchange, NCTU eXchange, I-9, and unemployment claims databases to the common data fabric in the third and fourth quarters of this year. Also beginning in July, any new data sets will be able to be directly ingested into our new cloud-based data fabric. We are at a place where our migrations are now beginning to be tied to new customer workloads so we will continue to update our delivery to align to near-term customer projects. As we discussed, moving from siloed databases, in the U.S., for example, we have close to 50 siloed databases, to a single data fabric in the cloud will enhance the speed and ease of accessing our differentiated data assets for our customers. It will also allow us to add more differentiated alternative data assets to enhance decisioning for our customers. Second, we made very good progress in continuing the integration of our Ignite analytics environment and interconnect interfaces in decisioning production platforms at AWS and soon in the Google Cloud. We've completed initial implementation of attribute services in Ignite with open source production languages so that clients and customers can develop attributes in open source languages and seamlessly deploy into Equifax platforms. We are well on our way to having both online and offline seamless integration completed in the fourth quarter. The integration of Ignite and Interconnect will give Equifax a market advantage around speed and ease of moving from modeling directly to production. Third, we are continuing to migrate customers from legacy decisioning and interface systems onto our cloud-native Ignite Interconnect SaaS product suite. Progress on this effort is now accelerating. For example, USIS continues to deploy the new cloud-native products onto which they will migrate existing customers. Although we are slightly behind schedule on completing these standard patterns and migrating customers, we still expect to complete the migration of a significant majority of our customers by the end of this year and continuing into 2020. Fourth is our network migration. In the second quarter, we achieved another significant milestone, enabling for dual redundant high-speed cloud integrations in the U.S. that will allow us to move traffic securely and directly between our cloud vendors and from our cloud vendors to Equifax to substantially improve network performance and strengthen security. This is a critical step in taking full advantage of the virtual private cloud strategy and enables us to begin to eliminate our legacy technical debt. We will expand the use of this capability in the U.S. over the rest of the year and into 2020, as well as deploying this capability in Canada, Europe, Latin America, and Asia Pacific in the second half. And last, our global consumer systems and customer performance. and consumer support system migrations continue to progress as planned. While many of the support applications are not customer facing, they are expected to significantly enhance the efficiency of our sales organization, as well as the operational effectiveness of our client delivery and call center teams. In the fourth quarter, we launched MyEquifax consumer portal, and we are quickly adding consumer accounts to this new database. The new capabilities will enhance our customer service and allow for low-cost cross-sell of Equifax or partner products to consumers. Last quarter, we started to discuss some of the benefits we expect from the EFX 2020 technology transformation to the cloud. We continue to refine our view of the top-in-line benefits, and John will update you on our current thinking. But we continue to be energized about the benefits that will be delivered by the cloud transformation to both our top and bottom lines. I hope this gives you a sense of the positive progress we are making in our technology transformation that will deliver new cloud-based technology to our customers. We remain committed to strong progress against our milestones in the second half. I also want to give you a quick update on our progress with FICO on the commercial and technology partnership we announced in March called Data Decisions Cloud. Our teams are working extremely well together and making great progress both on the technical integration of our capabilities and the commercial discussions with our joint customers. The first three joint product launches include, number one, Connected Platform, which integrates FICO's decision management solution with Equifax's Ignite decisioning sandbox, interconnect, and Equifax data in a cloud environment. We believe this combined solution will deliver functionality that is not available in the marketplace today. Second, AML Connect will integrate Equifax's differentiated data with FICO's AML and KYC platform to offer a full-service end-to-end compliance offering that we believe will offer best-in-class search match capabilities and insights to the marketplace. And number three, Prescreen Central integrates FICO's marketing solution suite with Equifax's differentiated consumer data to deliver a turnkey direct marketing solution to our joint customers. We're making great progress on the three new product collaborations and expect to identify additional ways to leverage our joint capabilities in our FICO partnership for new product offerings in the future. Shifting the new product innovation, this remains a key component of our strategy and a long-term muscle for Equifax. We have an active pipeline of over 80 NPIs and new products at various stages in the funnel, and we expect to launch about 60 new products in 2019, which is a similar pace from the past three years. While new product introductions primarily came from international markets last year, About 40% of the new products introduced this year are from our U.S. businesses. This is a good sign as we collaborate with customers to bring new products to market. On the M&A front, in May we announced the acquisition of PayNet, a leader in unique commercial lending data and insights. Customer feedback on the PayNet assets is very strong, and integration activities with USIS are proceeding very well. Our USIS data acquisition program Our USIS DataX acquisition from July 2018, which brought a unique set of U.S. near and subprime consumer data, is also performing well and ahead of plan. M&A is an important growth lever for Equifax, and we continue to look for new opportunities to expand our data sets around the globe through M&A. So wrapping up, this was a pivotal quarter for Equifax, in which we delivered several important steps forwards, towards our goal of returning Equifax to market leadership and growth. Number one, Monday's legal and regulatory settlements was a big step forward for Equifax by resolving the significant issues, including the consumer class action, state attorney generals, FTC, CFPB, and New York Department of Financial Services facing us following the 2017 cyber event. This resolution allows us to more fully focus on operating and growing Equifax and driving our technology and data security transformation. Second, second quarter was a solid performance for Equifax operationally. EWS delivered very strong top-line verification growth with expanding margins and is a clear franchise business for Equifax. USIS took another big step towards their recovery with 2.5% growth and 10% online results. We are focused on second half execution in international after a disappointing second quarter results with some macro headwinds in Australia, Argentina, in the UK. Third, we continue to execute on our EFX 2020 cloud technology and data security investments. As we discussed last quarter, we are convinced that our move to the cloud will differentiate Equifax from competition and deliver always-on capabilities, bring speed of new products to market, allow us the ability to move products and technology more quickly across our global platform, and we expect the investment to enhance our revenue growth and deliver double-digit savings to our technology spend and capitalize development costs. And last, we continue to execute on our strategy of adding strategic acquisitions. PayNet's a great example of the kind of bolt-on acquisitions we will look to add to the Equifax portfolio. And we're looking for ways to leverage our differentiated assets and decisioning assets with partnerships like FICO. We know we still have a lot of work to do, but we are energized about the momentum behind our EFX 2020 initiatives, and we expect continued positive operating progress through the balance of 2019. I'm more excited than ever about our future as a market-leading data, analytics, and technology company. John will share more detail, but we remain committed to our prior 2019 guidance adjusted for the financing costs from the settlement payments. With that, let me turn it over to John.