Equifax, Inc.

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

Thanks and good morning. Welcome to today's conference call. I'm John Gamble, Chief Financial Officer. With me today is Mark Begor, 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 full-year 2020 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 and 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 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 fourth quarter of 2019, Adjusted EPS attributable to Equifax excludes accruals for legal matters related to the 2017 cybersecurity incident, costs associated with acquisition-related amortization expense, the income tax effects of stock awards recognized upon vesting or settlement, and foreign currency losses for remeasuring the Argentinian peso-denominated net monetary assets. Adjusted EPS attributable to Equifax also includes legal and professional fees related to the 2017 cybersecurity incident, principally fees related to our outstanding litigation and government investigations, as well as the incremental non-recurring project costs 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 2019 and are expected to occur in 2020 and 2021. 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 accruals for legal matters related to the 2017 cybersecurity incident, costs related to the 2017 cybersecurity incident, and foreign currency losses from the measuring the Argentinian peso-denominated net monetary assets. These non-GAAP measures are detailed in reconciliation tables, which are included in our earnings release and are also posted on our website. I would also like to welcome back Jeff Dodge, who will be rejoining us for the next several months until Trevor Burns returns from his medical leave. Mark and I would like to thank Jeff for stepping back in. It is greatly appreciated, and Jeff has joined us today. Now I'd like to turn it over to Mark.

Thanks, John, and good morning, everyone. If you've been following the news this week, it was another busy week here at Equifax. Before I get into the fourth quarter financial results, let me just spend a few minutes on Monday's Department of Justice and FBI announcement on their indictment of four Chinese military officials for their role in the 2017 cyber attack on Equifax. We're pleased that the FBI and DOJ were successful in identifying the criminals who attacked Equifax and U.S. consumers. Monday's announcement is another positive step forward for Equifax as we close the chapter on the 2017 event. Continuing on the 2017 cyber event, you recall that we took a $700 million charge in the first half of 2019 related to the comprehensive settlement of the most significant legal and regulatory matters facing Equifax. In the fourth quarter, we recorded an additional charge of $100 million related to resolution of all remaining US legal proceedings and investigations arising from the 2017 cybersecurity incident. This charge includes settlements reached in the securities class action and the shareholder derivative litigation, the financial institutions class action, and lawsuits by the states of Indiana and Massachusetts who did not join last year's multi-state attorney general settlement. The charge also includes an estimate to resolve the remaining open U.S. proceedings and investigations. This charge is met of insurance proceeds related to these matters. The matters for which no estimate is included in this charge are the resolution of the review being undertaken by the Financial Conduct Authority in the UK and the Canadian Consumer Class Action litigation. Consistent with prior legal settlement charges related to the 2017 cybersecurity incident, the $100 million net charge is excluded from our fourth quarter 2019 adjusted EBITDA and adjusted EPS. In January, the court granted final approval for the multi-district consumer class action settlement we entered into in 2019. The timing of when the remaining approximately $360 million of the consumer restitution fund will be paid depends on the resolution of the appeals filed related to this case. The timing of that resolution of the appeals is still uncertain. Details on the status of all outstanding legal and regulatory issues will be provided in our 10-K to be filed later this month. Monday's indictment by the Department of Justice and our resolution of the US matters related to the 2017 cyber event allows our team to fully turn the page and focus on our EFX 2020 security and technology transformation and growth at Equifax as a leading data analytics and technology company. Let me move now to our fourth quarter results. We're very pleased with our financial performance in the fourth quarter and strong progress in 2019. The results were broad-based, showed sequential improvement, were above guidance, and were another very positive step forward for Equifax. These results are our strongest since the 2017 event and reflect Equifax's return to a more normal growth mode. Revenue at $906 million was up 10% in constant currency, and up 8% on an organic constant currency basis, and above the top end of our October guidance. We had strong revenue growth driven by our two U.S. B2B businesses, USIS and EWS, that collectively were up a strong 13% overall, with workforce solutions up a strong 22%, and USIS up a very solid 8%. The 22% growth at EWS was its strongest since 2016, and USIS's second half performance was their strongest since 2015. US mortgage market inquiries remained strong with inquiries up just under 21% and consistent with our guidance. International delivered 4% constant currency revenue growth with growth in all regions in the quarter, but with continued pressure from the slowdown in Australia, Brexit uncertainty in the UK, and most recently the unrest in Chile. Global consumer continued their path back to growth, with revenue up almost 3.5%, and as expected, improving revenue growth driven by the recovery of our U.S. consumer business. Adjusted EPS of $1.53 per share was at the top end of our guidance we provided in October. The adjusted EBITDA margin of 35.2% grew nicely, up 200 basis points compared to 2018. While we are seeing increased depreciation and duplicate cloud costs as our transformed systems move into production, these costs were in line with our guidance provided in October. Let me move now to the individual business units. First, USIS. Their revenue was up 8% versus the fourth quarter of 2018 on a reported basis and 5% on an organic basis. Total mortgage revenue was up just over 20%, consistent with the growth of the mortgage market inquiries. Mortgage solutions revenue was up 19% in the quarter, much stronger than prior quarters in 2019 as we lapped the negative impact of the mixed shift from a large mortgage reseller, which occurred in the fourth quarter of 2018. Our non-mortgage revenue growth grew 3% in the quarter, and non-mortgage organic growth was positive again, but up only slightly compared to last year. This was lower than the third quarter and lower than our expectation and reflects the continued choppiness of the USIS recovery that we've discussed over the past two years. We saw continuation of some very positive trends in USIS and feel good about accelerating USIS non-mortgage organic growth in 2020. Online revenue in USIS was up 7.5% on a reported basis and up 4.5% on an organic basis. We saw double-digit growth in mortgage, ID and fraud, insurance, and DataX, as well as in auto and banking and lending. These are all very important verticals for USIS. This growth was principally offset by declines in our telco segment and our direct-to-consumer segment. Direct-to-consumer is the segment in which USIS sells credit files and scores to other credit reporting agencies. This was down due to a one-time sale that occurred in the fourth quarter of 2018 that did not repeat. We expect this segment to return to growth in the first quarter of 2020, and while telco saw a decline in the quarter, we've had very good success with recent customer wins and win backs and see a clear line of sight to growth in telco as we move into 2020. Financial marketing services revenue was up 3.5% in the quarter compared to last year. For full year 2019, FMS delivered 2.5% revenue growth as compared to 2018. While quarterly FMS revenue is still choppy, they delivered growth in three of the four quarters in 2019, which we view as positive. The revenue growth reflects the continuing growing pipeline that we discussed over the past couple quarters in that business. Midsing and the USIS team continue to show accelerating commercial activity through 2019 with good momentum coming out of the fourth quarter and into 2020. Their New Deal pipeline is up 15% at year-end 2019 versus year-end 2018. And New Deals won in 2019 increased over 2018 by almost 25%. And in the fourth quarter, the dollar value of New Deals won with the highest it's been in the past four years. We continue to believe that our differentiated data assets, coupled with our technology investments, will return USIS to its traditional growth mode. The fourth quarter and 2019 results show that they are well down that path. USIS adjusted EBITDA margins of 45.1% were down 240 basis points from fourth quarter 2018, primarily due to increased royalty costs as well as higher development expense and investments in data analytics commercial resources, and new product resources. Shifting out of workforce solutions, they had a very strong quarter with revenue up 22% compared to last year, which was much better than our expectations. Verification services revenue was up an extremely strong 33%, driven by broad-based, strong double-digit growth across mortgage, healthcare, debt management, auto, government, and talent solution verticals. The strong and broad-based verification services revenue growth reflects continued growth in work number active records as well as the rollout of new products, expansion into new verticals, and addition of new customers. EWS and verification services revenue growth, excluding the benefit of the mortgage market, were up a strong 12% and 19% respectively. Rudy, Porter, and the EWS team did an outstanding job in 2019 growing their business and expanding the TWIN database. TWIN has almost 105 million active records at the end of 2019 and over 82 million active unique individuals, up 15% from a year ago. These compared to the roughly 170 million including self-employed individuals in the U.S. nonfarm payroll which gives us plenty of room to grow our database in the future. As you know, these twin records really drive our revenue hit rates for our customers and benefits to U.S. consumers. Our system-to-system integrations with our customers allow us to monetize additions to the twin database as soon as they are added by delivering the higher hit rates to our customers as they access our database in their system-to-system applications. Employer services declined in the quarter 6% and in line with our expectations, primarily due to the expected declines at workforce analytics, our ACA business, as well as our unemployment claims business. The strong verifier revenue growth resulted in strong adjusted EBITDA margins of 47%. Margins were lower in the quarter compared to the prior year, principally due to incremental third-party implementation and royalty costs associated with the twin records expansion, and some higher selling costs. Workforce Solutions is clearly Equifax's best business, and they continue to deliver strong results with significant future growth potential. Shifting out to international, their revenue was up 4% in local currency and almost flat on a reported basis. And this was weaker than our expectations. The majority of the weakness versus our expectations was in Latin America, particularly in Chile, and to a lesser degree in the UK debt management business. Importantly, we saw better than expected performance in Asia Pacific, including Australia. I'm encouraged about the trajectory of the international business given the revenue growth posted in the second half of 2019, despite the continuing economic headwinds in Australia, Chile, and the UK. Asia Pacific, which is primarily our Australian and New Zealand businesses, was up almost 1% in local currency in the fourth quarter, versus fourth quarter, 18, and 1.5% for the second half of 2019. Importantly, in Australia, we saw our consumer and commercial online revenue, which combined represents just under half of Australian revenue, grow about 5% in the quarter. We also saw nice growth in our identity and fraud business and our HR solutions business. We continue to see weakness in our marketing services business, which we expect to continue, but at a lesser extent, through the first half of 2020. I was in Australia two weeks ago with our new leader, Lisa Nelson. She and her team are focused on returning the business to growth in 2020. We expect local currency Australia revenue growth to return to growth in the first quarter and strengthen in the second half of 2020. The Australian business continues to make very good progress with positive data, and by the end of the fourth quarter, we had 80% of positive data from contributors, including 90% of the credit card and mortgage data for Australia. We expect this additional data to be a new lever for growth for the business in the future. Shifting now to our European businesses, which were up 1% in local currency in the fourth quarter and weaker than our expectations, primarily in our debt management business. Importantly, our European credit business was up 5% in local currency, an improvement from the up 1% in the third quarter of 2019, and their strongest performance in 2019. Consumer online and batch, which represents almost 60% of our European CRA revenue, was up 3% in the fourth quarter. Our analytics and scores business and Ignite Interconnect revenue grew double digits in the quarter, and its growth was driven by strength in fintech and financial services. Commercial and ID fraud revenue was weak in the quarter. Our European debt management business declined 7% in local currency, principally in Spain, and our debt management business with the U.K. government did return to growth in the fourth quarter, which was positive. However, we expect the overall debt management business to remain weak through the first quarter of 2020 as the Brexit situation normalizes. Shifting to our Latin American business, they grew a strong 10% in local currency in the fourth quarter of 2019, despite the impact of Chile due to the recent unrest. We saw double-digit constant currency growth in Argentina, Ecuador, Uruguay, El Salvador, and Mexico. and we are seeing growth accelerate as our Latin American businesses benefit from the expansion of Ignite and Interconnect SaaS customer rollouts and strong MPI rollouts in 2018 and 2019. Canada was up a strong 9% in local currency in the fourth quarter and 8% for the full year, reflecting a continued focus on customer innovation and new products. Canada continues to be a very strong growth market for Equifax. International adjusted EBITDA margins at 36.4% were up 400 basis points compared to the prior year. The strong recovery in margin reflects both the return to growth in the quarter and the benefit of the cost actions we implemented in the fourth quarter of 2018 and during 2019, as well as improved income from minority investments. Shifting now to global consumer solutions revenue, that business was up 3.5% on a reported and constant currency basis in the fourth quarter a substantial improvement from the 50 basis point increase in the third quarter of 2019. Global consumer direct revenue, which represents just under half of our total GCS revenue, was down only 1% in the quarter. Double-digit growth across the UK and Canada's combined consumer direct businesses was offset by an 8% decline in U.S. consumer revenue. Although a slightly greater decline in the U.S. than we expected, this still represents a substantial improvement from the double-digit decline in U.S. consumer direct we saw in the third quarter and earlier in 2019. Our GCS partner business increased 6% in the quarter as a result of solid growth with our U.S. partners, our benefits channel, and our Canadian breach business. Our GCS partner team continues to close new logos, and their pipeline has grown nicely from this time last year. GCS adjusted EBITDA margins of 26.9%, increased 580 basis points compared to the prior year, and increased 200 basis points sequentially from the third quarter of 2019. As expected in the fourth quarter, we saw the effect of revenue growth and the benefit of cost-based actions taken earlier in 2019. The GCS team has done an excellent job turning this business around and returning it to growth. Dan Adams, our leader of GCS, retired from Equifax in late 2019 after a 21-year career at Equifax. I want to personally thank Dan for all his contributions to Equifax, including as president of USIS, EWS, and GCS during his career. Dan leaves a tremendous legacy and will be missed. Taking over for Dan is Beth Anderson, who joined us after more than 30 years of experience in financial services. Bev joins us from Wells Fargo, where she was most recently responsible for leading the growth and transformation of their consumer credit card business and operations. I'm really excited to have Bev join my leadership team and to lead the GCF business. Turning now to our technology transformation, in the fourth quarter, we reached some significant milestones in our $1.25 billion ESX 2020 security and technology transformation. As you recall, we launched a three-year program in 2018 to migrate our data and applications to the Google Cloud. We've made significant progress on the implementation of our U.S. data exchanges in the new cloud-based data fabric during 2019, and we have some real momentum as we move into 2020. As of today, initial migrations of the work number, NCTUE, Auto, Target Connect, and our IXI wealth exchanges in cloud-native environments are complete. We expect to begin delivering and production to customers from these migrated exchanges as early as March with complete migration of all data ingestion processes and legacy system decommissioning completed over the next six to 12 months. By the end of second quarter in 2020, we expect to have completed initial migration of our U.S. commercial exchanges, property exchange, and our DataX exchange, and by third quarter of 2020, Initial migration of all U.S. exchanges, including our property exchange, U.S. consumer, or Acro exchange, are both scheduled to be completed. These data migrations to the cloud are meaningful milestones in our technology transformation program. Our Ignite analytics and machine learning platform that includes attribute and model management capabilities integrated with interconnect will be fully available for our customer migrations at EWS by the end of the first quarter and at GCP by the end of the second quarter of 2020. This will include the ability for customers to easily ingest and manage their own data as well as Equifax data in their own Ignite instance. We continue to make strong progress globally in rolling out our Ignite analytics platform with over 150 customers now using Ignite Direct and Marketplace. NDT, our patented explainable machine learning technology, has now been deployed in the Ignite development with over 30 customer models. And a few weeks ago, we were awarded our second US patent for NDT. We're also making progress internationally with our cloud transformation. The initial migration of the Canadian Consumer Risk Exchange and Known Fraud Exchange to GCP and EWS will occur by the end of the second quarter of 2020. with similar progress in the UK, in Australia, and New Zealand on consumer exchanges expected by year end. We're also seeing accelerating progress in the migration of our customers onto our cloud-based interconnect and ignite API framework. This is the common set of services on which we are working to migrate all USIS, EWS, and international customers. By the end of the first quarter of 2020, we expect to have migrated approximately 1,000 U.S. customers with a similar amount in international. This pace will accelerate significantly through 2020, with the vast majority of U.S. customer migrations completed by early 2021. As we've discussed, customer migrations are certainly the most challenging part of our technology transformation to forecast. but we are very pleased with customers' enthusiasm for the benefits of our new cloud-native environment and the accelerating pace of customer migrations. I hope this gives you a sense of the significant progress we are making in our technology transformation that will deliver industry-leading cloud-native technology to our customers. We are laser-focused on execution and have continued good momentum as we move into 2020. Shifting now to new products. This remains a key component of our EFX 2020 strategy and a long-term muscle for Equifax. We have an active pipeline of innovation and new products, and we've launched over 90 new products in 2019, up 50% from 2018, and up from the guidance we gave you in October. As you well know, innovation and new products fuel our growth and are integral to our strategy. Importantly, USIS product launches were up 2x in 2019, and are back to the level that we were seeing in 2016. EWS also had a very strong new product year, doubling their new product launches. Innovation and new product rollouts will get increasing focus from our team in 2020 and 21 as we leverage the unique benefits of our cloud-native data fabric and cloud-based applications to deliver capabilities and new capabilities to our customers. This is a key lever for Equifax growth in the future. In 2019, USIS launched new or enhanced products in marketing, including enhanced email append, DataX pre-screen, and pre-approval of one. In identity and fraud, including our Luminate, new Luminate fraud product suite, and synthetic ID 2.0. And then several vertical specific products in commercial, which allow our customers to take advantage of our broadened commercial lease payment data set with the acquisition of PayNet. In real estate, for lead scoring, a new insight score for personal loans, and for the insurance industry, a new score, the inflection score, which we developed jointly with Verisk. EWS also expanded their product offerings through the addition of new data assets, including education, property, and other data, to augment their unique income and employment data, which is part of their path towards being a data hub that centers around their unique income and employment data assets. EWS's new products included expanded mortgage product offerings, as well as new talent reports to be rolled out to support identification of loan stacking for the personal loan industry. International also had a strong year with new products, increasing launches over 30%, with good distribution across all of our geographies. The strength in international NPIs is driven by over 100 Customer Ignite installations at our international customers. As you can see, we really prioritize our focus and resources on driving innovation and NPI rollouts in 2019, and we plan to invest even further in innovation and new products in 2020 and beyond. NPIs continue to be an increasingly important lever for Equifax growth, particularly as we leverage the new product opportunities in front of us from the cloud transformation. We also recently announced new partnerships with rent reporting platforms, including Isuzu, MoCafe, and Zingo to help develop a more complete picture of a consumer's financial profile from rental data. These rent reporting platforms enable consumers to opt in to include rental payment data as a part of their credit report to allow a more complete picture of their financial history. All three companies, as a part of their credit education initiatives, will also present their users with a free weekly or monthly Vantage score so consumers can track score changes over time. We believe these partnerships are a win for consumers and a new data source for Equifax. And earlier this month, we completed the acquisition of the remaining interest in our India business to take 100% control of that business. We view India as a strategic, long-term market with tremendous potential with our unique data assets and capabilities. Wrapping up and looking back at 2019, we made tremendous progress in executing against our ESX 2020 strategy that we're convinced will return Equifax to market leadership and growth as a leading data, analytics, and technology company. We have strong operational momentum coming out of 2019 with revenue growth in the second half of 2019 at almost double the pace of our first half performance. This second half acceleration, particularly in our U.S. businesses, as well as return to year-over-year growth in EBITDA margins and adjusted EPS, positions as well for 2020 and beyond. Monday's announcement of the DOJ indictment, along with our resolution of the principal remaining legal issues related to the cyber event, is another very positive step forward for Equifax that allows us to close the chapter on the 2017 event and turn our focus fully towards the future growth of Equifax. Our 1.25 billion EFX 2020 cloud native technology transformation has accelerating momentum, and we are now implementing in production major exchanges, as well as our Ignite analytical environment and our cloud native infrastructure. We are also actively migrating customers onto our cloud-based interconnect Ignite API-based platform. And we're equally energized about all the learning that we have about the power of the new cloud-native environment to drive innovation, speed the market, new products and solutions, always-on stability, and the cost and cash savings we've talked about previously. We remain convinced that our cloud investment will be transformational for Equifax and drive our top and bottom line in the future. We continued our focus in 2019 on advancing our already differentiated data assets by adding significant new data capabilities in the U.S. through our PayNet acquisition and in our partnerships with FICO, Yodlee, and UrgentNet. This focus on expanding our data assets will continue in 2020 and beyond. We continue to make big investments in our data security to deliver on our goal of being an industry leader in data security. And last, we have the right team in place for the future of Equifax. Over the last two years, we've brought in strong talent to my leadership team and the broader business. We are all aligned on returning Equifax to growth and market leadership. We're energized by all we accomplished in 2019, the momentum in the business as we move into first quarter in 2020. We know we have a lot of work still in front of us, but our focus is clear around executing our $1.25 billion cloud technology transformation while driving new innovation in products that will accelerate our growth in the future. With that, let me turn it over to John.