Equifax, Inc.

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

Thanks, and good morning. Welcome to today's conference call. I'm John Gamble, Chief Financial Officer. With me today is Mark Feedbork, Chief Executive 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'll be making certain forward-looking statements, including fourth quarter 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 will be referring to certain non-GAAP financial measures, including adjusted revenue, 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 third quarter of 2019, adjusted revenue excludes one-time settlements in the third quarter of 2019 with commercial customers. Adjusted EPS attributable to Equifax excludes one-time settlements with commercial customers in 3Q19, costs associated with acquisition-related amortization expense, the income tax effects of stock awards recognized upon vesting or settlement, the foreign currency losses from remeasuring the Argentinian peso-denominated net monetary assets. Adjusted EPS attributable to Equifax also excludes legal and professional fees related to the 2019 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 transformation 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, as is the case for adjusted EPS, excluding one-time settlements with commercial customers, costs related to the 2017 cybersecurity incident, 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. Before Mark discusses our specific operating and financial results for the quarter, I wanted to address the $20 million in one-time commercial resolutions with two USIS commercial customers we recorded in the third quarter. These commercial resolutions related to issues that occurred prior to this year. As these settlements were to resolve commercial disputes, they were treated under GAAP as a reduction to revenue in the quarter. Due to the size and one-time nature of these commercial resolutions, we have excluded them in our adjusted results. As Mark and I discuss results for the third quarter of 2019, we will be discussing revenue excluding these one-time revenue adjustments. Over the next couple of months, Trevor Burns, who leads the Equifax Investor Relations Group, will be taking a medical leave of absence. In the interim, please direct any requests for information or meeting requests to Valerie Robinson at 404- or to Valerie.Robinson at Equifax.com. That's V-A-L-E-R-I-E dot R-O-B-I-N-S-O-N at Equifax.com. Valerie will connect you with me or identify the appropriate Equifax resource to address your inquiry. Thank you for your patience in getting your inquiries resolved during this period of time. Now I'd like to turn it over to Mark.

Thanks, John, and good morning, everyone. We were very pleased with our financial results for the third quarter. The third quarter results were broad-based, showed sequential improvement, were above guidance, and were another very positive step forward for Equifax. Adjusted revenue at $896 million was up 9% in constant currency and up 8% on an organic constant currency basis and well above our guidance. We had strong adjusted revenue growth driven by our U.S. businesses that were up 11% combined, with workforce solutions up 19% and USIS up 9%, our strongest growth for both units in three years. Global consumer revenue was up slightly, its first period of growth in two years. And international also showed 5% constant currency growth with Latin America, Canada, and Asia Pacific, all showing growth in the quarter, but continued to be pressured by the slowdown in Australia and Brexit uncertainty in the UK. U.S. mortgage revenue was much stronger than we expected in the quarter, as U.S. mortgage market inquiries were up almost 20% compared to the prior year. We also saw strength in our U.S. non-mortgage businesses with USIS and EWS, both showing accelerating year-to-year growth, Our adjusted EBITDA margins advanced 90 basis points in the quarter, our first margin expansion in two years. And our adjusted EPS of $1.48 per share was also above the top end of the guidance we provide in July with those better business unit margins from stronger revenue growth as well as a lower tax rate. USIS adjusted revenue was up 9% versus 2018 on a reported basis and 6.5% on an organic basis. Importantly, our non-mortgage revenue grew over 6% in the quarter and 3% organically compared to last year. The 3% non-mortgage organic growth was a positive sign of continued USIS strengthening versus the flattish performance we saw in the second quarter of 2019, but slightly weaker than we anticipated. Online adjusted revenue was up a strong 11.5% on a reported basis, and up 8% on an organic basis, which was also a very positive sign of USIS recovery. In addition to strong growth in mortgage, we saw growth in ID and fraud, as well as auto, insurance, and government. Mortgage Solutions was down 6% in the quarter due to the mixed shift we discussed previously with mortgage resellers, which occurred in the fourth quarter of 2018. partially offset by the positive impact from the stronger mortgage market. We expect the revenue headwind from this mortgage mix shift to decrease in the fourth quarter. New product sales and implementations to mortgage lenders were also deferred as our customers focused on delivering the substantially higher mortgage volume that they had in front of them. Financial marketing services adjusted revenue was up 8% compared to last year and was better than our expectations. The growth in FMS reflects the growing pipeline that we've discussed over the past couple of quarters. As we talked about last quarter, FMS growth is improving, but still choppy, with year-to-date growth of about 2%. As we look forward to the fourth quarter, we expect growth to be at or above the year-to-date growth rate. Sid Singh and the USIS team are laser-focused on growth and in moving to a normal commercial mode with their customers. Their new deal pipeline is up 75% year-to-date, with wins up 35% from 2018 positions, then well for fourth quarter in 2020. Growth in key verticals like banking and lending also is a very positive sign. The third quarter was another positive step forward for the USIS team as they worked to return to a normal growth mode. We continue to believe our differentiated data assets coupled with our technology investments will return USIS to its traditional and historic growth mode. We expect continued growth from USIS in fourth quarter, but we still remain cautious on the pace of their recovery. USIS EBITDA margins of 44.4% were down 180 basis points from third quarter 18, primarily driven by increased royalty costs as well as higher product development expense and investments in commercial resources which we expect to benefit us in the future. Shifting to workforce solutions, they had an extremely strong quarter with revenue up 19% compared to last year, which was better than our expectations. Verification Services was up a very strong 29%, driven by broad-based, strong double-digit growth across mortgage, debt management, talent solutions, healthcare, and government verticals. The strong Verification Services revenue growth also reflects continued growth in work number active records, as well as the rollout of new products. EWS and verification service revenue growth, excluding the benefit of the mortgage market, were up 13% and 20% respectively, which we are very pleased with. As we've discussed in prior discussions, EWS has strong future growth potential as they continue to expand in existing verticals and roll out new products. As I mentioned earlier, EWS continued to substantially grow their twin database, Twin now has over 100 million active records and about 80 million active unique individuals in the United States. These compare to the roughly 165 million individuals in U.S. non-farm payroll. These twin record additions are huge accomplishments for Rudy Podler and the EWS team, which drive higher hit rates for our customers and benefits to U.S. consumers. We expect to continue to grow the twin records in the future. Employer services declined in the quarter 5%, slightly below our expectations, driven principally by workforce analytics, our ACA business, as well as unemployment claims businesses. Offsetting the decline in workforce analytics, we saw slight growth in our I-9 and onboarding business. We expect employer services revenue to decline mid-single digit percentages in the fourth quarter. The strong verifier revenue growth resulted in very strong adjusted EBITDA margins of 48.8%, an expansion in the quarter of 130 basis points. Margin expansion was dampened somewhat by incremental and costs incurred in the quarter by EWS to board some new twin record contributors. We expect EWS EBITDA margins to continue to be very strong in the fourth quarter. Workforce Solutions is a franchise business for Equifax and continues to perform exceptionally well. Shifting international, their revenue was up 5% in local currency, but down on a reported basis by 2% and below our expectations. The majority of the weakness versus our expectations was in the UK, and we expect this to continue in the fourth quarter with some of the Brexit uncertainty. Asia Pacific was up 2% in local currency in the third quarter as we begin to lap weakening in Australia consumer lending and commercial credit markets that began in the third quarter of 2018. Their third quarter performance was also weaker than we anticipated. In third quarter, we saw some nice growth in Australia in our commercial business, and our consumer business returned to nominal growth. Both of these we see as positive signs for the future. We continue to see weakness in our Australian marketing service business, which we expect to continue into the fourth quarter. Overall, Australia revenue was down slightly and slightly weaker than our expectation. While we are beginning to see stabilization in the Australia credit markets, we expect market growth to remain weak over the next several quarters. As a result, we expect Australia revenue to hover around flat over the next couple of quarters. We continue to make very good progress with positive data in Australia, and by the end of the third quarter, we had almost 80% of positive data from Australian contributors. We expect this additional data to be a new lever for growth for our team in Australia in the future. Our European business was flat in local currency in the third quarter and was weaker than our expectations in both our credit and debt management businesses. Our European credit business was up over 1% in local currency, an improvement from the down 1% in second quarter, but still weaker than the mid to high single-digit revenue growth we've seen over the past year. Consumer online and batch, which represents about half of the credit revenue, grew almost 4% in reseller and financial verticals, but this growth was offset by weakness in marketing services and insurance. Our European debt management business declined 3% in local currency, or less than 1 million, principally driven by declines in our business with the UK government, which was impacted by the continued Brexit uncertainty. We expect some limited improvement in our European business in the fourth quarter, principally in Spain. In the UK, our plans reflect continued slow growth from the continuing Brexit uncertainty and its impact on both our credit and debt management businesses. Our Latin America business grew a strong 15% in local currency in the quarter. This has improved from second quarter growth of 8%. We saw a double-digit constant currency growth in Chile, Argentina, Ecuador, Uruguay, and Mexico, and high single-digit constant currency growth in Paraguay. We are seeing growth accelerate as our Latin American businesses benefit from the expansion of Ignite rollouts and Interconnect SaaS rollouts, and strong NPI rollouts from both 2007 and 2018 taking hold in that region. Canada grew almost 6% in local currency in the third quarter, reflecting a continued focus on customer innovation and new products. We expect to see mid- to high-single-digit growth in Canada in the fourth quarter. International adjusted EBITDA margins at 30.9% were up 150 bps in the quarter, principally reflecting higher revenue and margin in Australia and Latin America, and from the cost actions taken in the fourth quarter of last year and earlier in 2019. Margins were lower than our expectation due to weaker than expected revenue performance. We expect international revenue growth in the fourth quarter to be at about similar levels to the third quarter, And we believe this positive revenue growth, along with the full benefit of the cost reductions taken in the fourth quarter of last year and during 2019, will continue to improve margins in the fourth quarter. That said, we're watching our international business closely, particularly as the UK Brexit process unfolds. Global consumer solutions revenue was up about half a percent on a reported basis and up 1% on a constant currency basis in the quarter. a substantial improvement from a 6% decline in the second quarter. This is the first quarter of GCS revenue growth since the 2017 cybersecurity incident. Our global consumer direct business was down 5% and was just under half of our total GCS revenue. Our US consumer direct business saw a revenue decline of 9% versus 2018. We are seeing subscriber additions from the restart of marketing in late 2018 however, at a lower rate given our decision to slow advertising around our announcement of the legal settlements in July. Our Canadian and UK direct businesses both grew revenue in the quarter. Our GCS partner business, which is slightly more than half of GCS revenue, increased 6% in the quarter, which we were pleased with. We expect our partner revenue growth to continue in the mid-single digits in the fourth quarter. During December of 2018, we launched our new MyEquifax membership program for U.S. consumers. To date, we've registered over 2 million consumers, and we expect this base to continue to grow in the coming months, creating an attractive base to cross-sell products and services to those consumers. Adjusted GCS EBITDA margins of 24.9% decreased 340 basis points as compared to the prior year, However, margins increased 200 basis points sequentially from the second quarter of 2019. As we expected in the third quarter, we saw the effective revenue growth and the benefit of cost actions taken in the fourth quarter of 2018 and earlier this year. Margins were also negatively impacted in the quarter by some one-time setup costs incurred during the quarter related to a new multi-year GCS contract. Our GCS business is clearly turning the corner, and we expect continued revenue growth and margin expansion in the fourth quarter and into 2020. Shifting now to our EFX 2020 technology transformation, we achieved some significant milestones again in the third quarter. First, we achieved a major milestone as we began running two data exchanges in production in our new cloud data fabric on GCP. Our U.S. consumer credit database replica, or ACRO, is in production on the data fabric. We're going to receive many benefits from having this database in a cloud format. One of the benefits of this cloud database structure allows us to deliver virtually streaming data and alerts to our customers. During the quarter, we rolled out this market-leading capability to one of our large U.S. customers. This real-time capability is increasingly important to many customers and is only possible on a cloud infrastructure. One of the many benefits we expect to come in the coming quarters as we continue to advance our cloud initiative. Second, an identity validation exchange that manages individual and household data used in our identity products also moved to production on GCP this quarter. This was a full exchange migration with the legacy exchange being sunset in early 2020. We are expecting significant further data fabric and exchange progress in the fourth quarter as the work number, NCTUE, and our auto databases in the U.S. will be in production on our new cloud-based data fabric using standard common native data fabric structures. These are critical milestones for Equifax as the new data fabric capability allows us to easily access and build new products across these data assets with real speed and market leading stability. Also in the fourth quarter, Cambrian will be in production in our data fabric using cloud native structures. We are expecting accelerating progress in the fourth quarter and first part of 2020 as our U.S. consumer and commercial credit, IXI wealth, and tax forms data exchanges will also be in production in our new data fabric using our cloud-native structures. We feel very good about our progress with data exchanges and data fabric as a part of our EFX 2020 technology transformation, and we're clearly accelerating our migrations to our new cloud-based data fabric from legacy infrastructure. Second, we continue to make very good progress in deploying our integrated online service platform that combines our Ignite analytics attribute management and modeling environments with our interconnect interfaces and decisioning production platforms at AWS and shortly also at GCP. A number of new products for both consumer migration and new customers are available on this platform in the U.S. and select international markets today. Product availability will expand continuously with broad product availability in the US expected to be expected in the first half of 2020. Next in the third quarter, we made substantial progress deploying our new network fabric in the US, Europe, and Australia. This new network fabric allows us to move traffic securely and directly between Equifax, our customers, and our virtual private cloud environments on GCP and AWS to substantially improve network performance and stability and strengthen our security. Network performance is critical to allowing our customers and partners to take full advantage of the expanded services I discussed earlier. Our new network will deliver industry-leading performance to our customers. Finally, the strong progress across Data Fabric, Ignite, and InterConnect deployment and product development in network Fabwork are the critical enablers that are supporting the migration of our customers from our legacy decisioning and interface systems onto our new native Ignite InterConnect product suite. We are now seeing good progress in both collaborative planning of customer migrations as well as executing those migrations. Customer migrations will continue in the fourth quarter and accelerate as we enter 2020. We expect to complete the majority of USIS and EWS customer migrations by the end of 2020. And year to date, we have decommissioned five data centers globally, and these decommissionings will continue through the balance of the year and into 2020. As we discussed previously, the benefits and savings we expect to deliver from our cloud technology transformation are driven by our move to a cloud-based infrastructure and a decommissioning of our legacy infrastructure. And as you can see, we're making progress there. I hope this gives you a sense of the positive progress we're making in our technology transformation that will deliver new cloud-based technology to our customers. We are laser-focused on execution and are making good progress with critical milestones achieved in the third quarter and good momentum as we move into fourth quarter in 2020. Shifting now to new product innovation, this continues to be a key component of our ESX 2020 strategy and a strong long-term muscle for Equifax. We have an active pipeline of new products at various stages in the funnel, and we expect to launch about 70 products in 2019 which is up about 15% from last year and up from the guidance we gave you a few months ago. Importantly, USIS product launches are expected to double in 2019 from 2018. We have prioritized our focus and resources on driving NPI rollouts in 2019 and plan to continue this focus in 2020. This is a very good sign as we collaborate with customers to bring new products to market. NPIs continue to be an important growth lever for Equifax. Across both USIS and workforce solutions, we are seeing good progress with our new identity validation and fraud identification products. Instant Touch ID, Twin ID, and Eligibility Advisor are helping commercial and government customers validate the identities of parties with whom they are interacting with through mobile and other digital devices. Our capabilities in identity and fraud will expand substantially in the fourth quarter with the launch of our new Luminate fraud and identity platform. Shifting to the M&A and partnership front, in September, we announced a new strategic partnership with UrgentNet, a leading aggregator of utility data, delivering data from over 6,500 utilities, telecom, and cable providers. This new global partnership empowers consumers and businesses to share their payment data for more complete picture of individual payment history, easier identity verification, and the potential for expanded access to credit. An average U.S. consumer has three to five relationships with their electric, gas, cable, satellite, and telco providers, which adds rich payment data to that provided in the existing credit file. This alternative data partnership builds on our leadership in this space, incorporating Urginet's consumer permission data into our differentiated data assets. Strategic partnerships like Urginet are an important growth level for Equifax, and we continue to look for new opportunities to expand our data sets around the globe. The PayNet acquisition we executed earlier this year is performing very well. with revenue growth accelerating to 15% since the acquisition. We are also seeing the improved coverage and predictability of the combined Paynec and Equifax commercial databases, allowing us to win new business with commercial lending, credit card, and fintech customers. Wrapping up, the third quarter was a very positive step forward for Equifax as we work to move back to our normal growth mode. We delivered broad-based growth with very strong double-digit growth at Workforce Solutions, improved sequential growth at USIS, a return to growth at Global Consumer, and stabilization in international while they operate in some challenging markets. This was a first in over two years that we delivered – a first also in over two years was that we delivered margin expansion while continuing to invest in our technology, security, new data assets, new products, and expanded commercial resources. Overall, we were very pleased to not only meet but exceed our financial commitments, and importantly, we achieved several critical milestones in our EFX 2020 cloud technology transformation. We know that we still have a lot of work to do. We are energized about the positive progress of the business, and the momentum behind our EFX 2020 initiatives. We expect continued positive progress during the balance of 2019 and into 2020. I'm more excited than ever about our future as a market-leading data analytics and technology company. And with that, let me turn it over to John.