Equifax, Inc.

Hello, and welcome to the Equifax second quarter 2021 earnings conference call and webcast. At this time, all participants are in listen-only mode. If anyone should require operator assistance, please press star zero on your telephone keypad. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Dorian Hare, Senior Vice President, Head of Corporate Investor Relations. Please go ahead.

Thanks and good morning. Welcome to today's conference call. I'm Dorian Hare. 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 on the IR calendar section of the News and Events tab at our IR website, www.investor.equifax.com. During the call today, we will be making reference to certain materials that can also be found in the presentation section of the news and events tab at our IR website. These materials are labeled Q2 2021 earnings conference call. During this call, we will be making certain forward-looking statements, including third quarter and full year 2021 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 expectations. Certain risk factors that may impact our business are set forth in our filings with the SEC, including our 2020 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. 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, Doreen, and good morning. Before I address Equifax's strong second quarter results, I want to recognize our 11,000 associates around the globe for their continued hard work and dedication in these challenging times. Our team members are our most important asset, and they play a vital role in helping millions of consumers around the world get access to credit. On July 1, we opened all of our U.S. offices fully and rolled out our new Equifax Flex program, a hybrid working environment that gives our team the opportunity to work from home one day per week. Our 401 program recognizes our learnings from the past year around remote work during COVID, but maintains the core of our Equifax culture of collaboration and teamwork that is optimized by an in-person work environment. We've also resumed in-person meetings with our customers, and I've been energized with the conversations that have taken place so far. It's great to be moving back to a new normal. We had a very strong second quarter and first half, which built off our strong outperformance in 2020. Our team has executed extremely well against the critical priorities of our new Equifax 2023 strategy, which is shown on slide four. We are accelerating new product introductions, beginning to leverage our expanding Equifax cloud capabilities and our highly differentiated data assets. We continue to expand our differentiated data assets both organically and through acquisitions and partnerships. While still in the early days, our new Equifax cloud data and technology capabilities are providing competitive advantages and capabilities that only Equifax can provide. And our customer first initiatives are deepening our relationships with customers and delivering new products and solutions, along with above market Equifax growth. And as always, we remain focused on extending our leadership in security. Our EFX 2023 growth strategy is our compass for the future and drives all of our growth initiatives as we move through the second half and into 22 and beyond. We expect this focus to drive our top line and bottom line in the future. Turning now to slide five, Equifax's financial performance in the second quarter was very strong and outperformed our underlying markets. Revenue at $1.235 billion was the highest quarterly revenue in our history, breaking the record from last quarter. Local currency revenue growth of 23%, and organic local currency growth of 20% were both very strong and some of the highest growth rates in our history. Our U.S. B2B businesses of Workforce Solutions and USIS, which together represent over 70% of our revenue, again drove our overall growth, delivering very strong 25% total and 22% organic revenue growth, despite the headwinds from the mortgage market that declined about 5%. The 5% decline in the mortgage market was about 500 basis points more than our flat expectation we shared with you in April. U.S. B2B organic non-mortgage growth of 20% accelerated sequentially from the 16% we delivered in the first quarter. The 20% organic growth is also a record and reflects the underlying strength of Workforce Solutions and USIS's return to a competitive position. I'll cover the BU level performance in detail in a moment, but at a high level, workforce solutions again led Equifax growth with revenue up a strong 40%. And as a reminder, this is off growth of 53% in second quarter last year and a mortgage market that declined 5% in the quarter. USIS delivered another strong quarter with revenue up 11%, driven by non-mortgage total revenue growth of over 20%, and strong organic revenue growth of 14%. International delivered a very strong quarter of COVID recovery with revenue growth of 25% in local currency. And importantly, all regions internationally delivered growth about 20%. Slightly better than expected, GCS revenue was down 3% in local currency. However, our consumer direct revenue delivered 11% growth in the quarter, its second consecutive quarter in double digits. Second quarter Equifax adjusted EBITDA totaled $431 million, up 20%, with margins of 34.9%. Margins were down 160 basis points versus last year due to the inclusion of the cloud technology transformation costs and our adjusted results in 2021, which were excluded last year. This negatively impacted second quarter adjusted EBITDA margins by 310 basis points. Adjusting for cloud transformation costs of $38 million in the quarter, our margins would have been up a strong 150 basis points. We are getting strong leverage out of our above-market revenue growth. Adjusted EPS of $1.98 per share was up a strong 21% from last year. Again, adjusting for the cloud transformation costs, adjusted EPS would have been up a very strong 36%, reflecting the strong performance and operating leverage of Equifax. During the quarter, we continue to make significant progress with the Equifax cloud data and technology transformation, including an additional 7,700 customer migrations to the cloud in the United States and more than 900 migrations internationally. We remain on track with our cloud transformation and are confident in our plan. We continue to expect the North American transformation to be principally complete in early 2022, with the remaining customer migrations completed by the end of next year. International transformation will follow North America being principally completed by the end of 2023. And as you know, last year we started to ramp up our focus and resources on new products leveraging the new Equifax cloud data and capabilities. In the second quarter, we released 46 new products, which is up almost 2x from the 24 products we released a year ago in the quarter. These new products are increasingly leveraging the new Equifax cloud to deliver better data and decisioning for our customers. Driving NPIs leveraging the new Equifax cloud is central to our EFX 2023 growth strategy, and we continue to expect our vitality index defined as revenue from new products introduced in the last three years to exceed 8%, a big step up from the 5% last year, and a reflection of the strong product focus across EFX. Our first half performance exceeded our expectations, and we are clearly seeing continued strong momentum as we move into the second half. Based on our strong first half results and confidence in the future, we increased our full-year revenue guidance by $155 million to a midpoint of $4.78 billion, which is up 400 basis points to 16% growth. We also increased our full-year adjusted EPS guidance by $0.45 per share to a midpoint of $7.35 per share, which adjusting for the technology transformation costs is up 700 basis points to 19% growth. This includes our expectation that the U.S. mortgage market, as measured by credit inquiries, will decline approximately 8 percent in the year, which is consistent with the guidance we provided in April. In the second quarter, Equifax core revenue growth, the green section of the bars on slide six, accelerated to 29 percent. This is up significantly from the 20 percent core revenue contribution we delivered in the first quarter and 11 percent in the fourth quarter, and well above our historical core growth rates. While our outperformance in the mortgage market continues to drive significant core growth, the contribution from U.S. non-mortgage and international increased significantly in the quarter, reflecting approximately 50% of core revenue growth in the quarter, excluding acquisitions and FX favorability. Turning now to slide seven, our strong second quarter results were broad-based and reflect better-than-expected performance for all four Equifax business units. Workforce Solutions, our largest business, had another exceptional quarter, delivering 40% revenue growth and 58% adjusted EBITDA margins. Again, as a reminder, the 40% revenue growth is on top of 53% growth last year in the second quarter. EWS is cementing itself as our largest and most valuable business and is powering our results, representing 40% of total Equifax revenue in the quarter. EWS verification services revenue of $395 million was up a strong 57%. Verification services mortgage revenue grew 52% in the quarter despite the 5% decline in the mortgage market from increased records, penetration, and new products. Importantly, verification services non-mortgage revenue was up over 60% in the quarter and up over 15% sequentially from the first quarter. Our government vertical, which provides solutions to federal and state governments in support of assistance programs, including food and rental support, grew over 10% in the quarter. Government remains one of our largest non-mortgage segments, representing about a third of non-mortgage verification revenue. We continue to expand our products and solutions in the government vertical and expect our new Social Security Administration contract to go live this quarter, with revenue ramping to a $40 to $50 million run rate in 2022. Talent Solutions, which provides income and employment verifications, as well as other information for the hiring and onboarding process through our EWS Data Hub, had another outstanding quarter from customer expansion and NPIs, growing over 200%. Talent Solutions now represents almost 30% of non-mortgage verification revenue. Building out the EWS Data Hub that leverages the work history in our twin database, with other unique data elements used in the hiring process is a priority for us. Over 75 million people change jobs in the U.S. annually, with the vast majority having some level of screening as a part of that hiring process. Our non-mortgage consumer business, principally in banking and auto, showed strong growth of about 50% in the quarter as well, both from deepening penetration with lenders and some recovery in these markets. Debt management also returned to growth in the quarter. Employer services revenue of $101 million was about flat in the quarter as expected. Combined, our unemployment claims and employee retention credit businesses had revenue of about $64 million, down over 15% from last year. Substantial declines in UC revenue in the second quarter were partially offset by new ERC revenue that began in the quarter as we support businesses in obtaining federal employee retention credit payments. Employer services non-UC and ERC businesses had revenue up over 50% in the quarter. Our I-9 business, driven by our new I-9 Anywhere product, continued to show very strong growth, up over 50%. Our I-9 business is now almost half of employer services non-UC and ERC revenue. Reflecting on the growth in I-9 and the return to growth of workforce analytics, We expect employer services, non-UC and ERC businesses to deliver organic growth of over 20% for the year. Reflecting the power and uniqueness of the twin data set, strong verifier revenue growth and operating leverage resulted in adjusted EWS EBITDA margins of 58%, 160 basis point expansion from last year. Excluding technology transformation expenses, EWS margins would have been up over 240 basis points. Rudy Porter and the EWS team delivered another outstanding quarter in our position to deliver a very strong 2021. Workforce Solutions is our most powerful and unique business and is powering Equifax results with growth substantially above the rest of the company. Turning now to USIS, they had another strong quarter with revenue up 11% driven by strong performance across the business. Total USIS mortgage revenue of 160 million was down about 2% in the quarter, while mortgage inquiries were down five, below the flat expectation we shared in April. John will cover our updated view of the mortgage market shortly. USIS mortgage revenue outgrew the market by over 300 basis points driven by growth in marketing and debt monitoring products. Importantly, non-mortgage revenue performance was up 21%, with strong organic growth of 14%. This performance reflects the commercial focus of Sid Singh and his team and their competitive position in the marketplace. Importantly, organic non-mortgage revenue also delivered strong sequential growth acceleration of 250 basis points from the first quarter's 11%, an important indicator of the continued strengthening of the USIS business. Banking and insurance both grew over 20% in the quarter. Auto and direct-to-consumer were both up over 10%. and telco and commercial were just above flat in the quarter. Financial marketing services revenue, which is broadly speaking our offline or batch business was 59 million in the quarter and up about 14%. The strong performance was driven by marketing related revenue, which is up over 20% in ID and fraud revenue growth of over 15% as consumer marketing and originations ramped up coming out of COVID. In 2021, Marketing-related revenue is expected to represent about 40% of FMS revenue, identity and fraud above 20, and risk decisioning about 35%. The strong growth across our non-mortgage business is encouraging as we move into the third quarter and the rest of 2021. The USIS New Deal pipeline remains very strong and comparable to the strong levels we've seen so far in 2021. We are seeing the highest growth in auto, financial services, and mortgage. USIS adjusted EBITDA margins were 40.3% in the quarter. The decline of 380 basis points from second quarter last year was principally due to the cost related to the cloud transformation, both the cost of redundant systems and the inclusion in our adjusted results of the technology transformation costs, which were being excluded in 2020. Sales and marketing expenses also increased in the quarter. and sequentially to leverage both the stronger U.S. markets and increased NPI rollouts to drive growth. Shifting now to international, their revenue was up a strong 25% on a local currency basis, which is a third consecutive quarter of growth in our global markets. Revenue growth was up over 20% in all of our markets in Canada, Asia Pacific, Latin America, and Europe. Asia Pacific, which is principally our Australia business, had a very strong quarter with revenue up $91 million or up about 21% in local currency. Australia consumer revenue turned positive and was up 23% versus last year and up about 2% sequentially. Our commercial business combined online and offline revenue was up a very strong 26% in the quarter and up almost 18% sequentially. Fraud and identity was up 30% in the quarter following 15% growth in the first quarter. European revenues of 68 million were up 27% in local currency in the quarter. Our European credit reporting business was up about 20% with strong growth in both the UK and Spain. In UK, which is our largest European market, we saw growth of over 25% in consumer data analytics and scores and over 40% growth in commercial. Our European debt management business revenue increased about 30% in local currency off the lows we saw in the second quarter last year during the COVID recession. Canada delivered record-setting revenue of $47 million in the quarter, up about 26% in local currency. Consumer online was up about 26% in the quarter, an improvement of 12 percentage points from the first quarter. Double-digit growth in commercial, analytical and decision solutions, and ID and fraud also drove growth in the Canadian revenue in the quarter. Latin American revenues of $44 million grew 30% in the quarter in local currency, which was the second consecutive quarter of growth coming out of COVID. We continue to see the benefits in Latin America of the strong new product introductions the team has rolled out over the past three years. International adjusted EBITDA margins at 27.3% were up 540 basis points from last year, driven by leverage on revenue growth and continued very good cost control by the international team. Excluding the impact of the inclusion of the technology transformation costs in adjusted EBITDA, margins were up over 750 basis points. Global consumer solutions revenue was down 2% on a reported basis and 3% on a local currency basis in the quarter, and slightly above our expectations. We again saw strong double-digit growth in our global consumer direct business, which sells directly to consumers through Equifax.com, and which represents a little over half of GCS revenue. Direct-to-consumer revenue was up a strong 11% in the quarter, the fourth consecutive quarter of growth. The decline in overall GCS revenue in the second quarter was again driven by our US lead generation partner business. We expect the GCS partner business and GCS business overall to return to growth in the fourth quarter. GCS adjusted EBITDA margins of 22.5% were up just above 170 basis points, which was better than our expectations. Turning now to slide eight, Workforce Solutions continues to power Equifax and is clearly our strongest, fastest-growing, and most valuable business. Workforce Solutions revenue grew a very strong 40% in the quarter, with core revenue growth of 46%. And again, the 40% growth in the quarter was on top of 53% growth in the second quarter last year. This above-market performance is driven by the uniqueness of the Twin income and employment data, the scale of the Twin database, and the consistent execution by Rudy and his team. At the end of the second quarter, Twin reached 119 million active records, an increase of 13% or 14 million records from a year ago, and included 91 million unique records. At 91 million uniques, we now have over 60% of nonfarm payrolls, which makes our twin data set more valuable to our customers by delivering higher hit rates. Beyond focusing on adding the over 50 million nonfarm payroll records not in the twin database yet, we're also focused on adding data records from the 40 to 50 million gig workers and around 30 million pension recipients in the United States marketplace to further broaden the TWIN database. We have plenty of room to grow. We are now receiving contributions from 1.2 million companies across the U.S., up from 27,000 employers a short two-plus years ago. And as a reminder, over 60% of our records are contributed directly by employers that EWS provides comprehensive employer services to, like Unemployment Claims, W-2 Management, I-9, WOTC, employer retention credit, HSA, and other HR and compliance-related solutions. These relationships have been built up over the past decade by the Workforce Solutions team. The remaining 35 percent are contributed through partnerships with payroll providers and HR software companies, most of which are exclusive. The exclusive arrangement with a major payroll processor that we announced on our February call is still on track to become active later this year. We have a dedicated team with an active pipeline of record additions to continue to expand our twin database in the future. And as you know, as we add records to the data set, they're monetized almost instantly with our customer system-to-system integrations interacting with our twin database. Workforce Solutions continues to grow penetration in key existing markets while expanding into new markets. We continue to increase our penetration in the mortgage market. As of the most recent data available at the end of 2020, Workforce Solutions received an inquiry in almost 60% of completed U.S. mortgages, which is up from 55% in 2019. This 500 basis point increase shows a continuation of growth in twin mortgage penetration, as well as the substantial opportunity for continued growth that exists in mortgage, with only 60% of mortgages using twin data today. We're also seeing substantial growth in twin in the non-credit markets of government and talent solutions, as well as increased twin usage within the card and auto verticals. As we discussed in the past, growing system-to-system integrations is a key lever in driving both increased penetration and the increased number of pulls per transaction for workforce solutions. During the quarter, about 75% of twin mortgage transactions were fulfilled system-to-system, which is up 2x from the 32% in 2019. The Workforce Solutions new product pipeline is also rapidly expanding as our teams leverage the power of our new Equifax cloud infrastructure. We plan to roll out new products in Mortgage Town Solutions, Government, and I9 in the second half of the year. New product revenue will increase in 21 and 22 as we begin to reap the benefits of our new products introduced to the market by Workforce Solutions in the past 18 months. Rudy and the Workforce Solutions team have multiple levers for growth in 21, 22, and beyond. Workforce is clearly our largest and most valuable business and will continue to power our results in the future. Workforce Solutions growth rates and margins are highly accretive to Equifax, now and in the future. Slide 9 provides perspective on the tremendous growth Workforce has delivered since 2017 and the increasing impact that the business has on Equifax with its highly accretive revenue growth rates and margins. In 2017, Workforce Solutions revenue in EBITDA made up 23% of Equifax revenue and 27% of business unit EBITDA. For the first half of 21, Workforce Solutions revenue in EBITDA have increased to 40% of Equifax revenue and over half of Equifax business unit EBITDA. In a short four years, Workforce Solutions has more than doubled in size and is now almost 50% in the first half versus the same period last year. It is up almost 50% in the first half versus the same period last year. Our unique twin employment and income assets and the continued expansion of employment-related assets within the Equifax Data Hub provides opportunities for both ongoing outsized growth in Equifax traditional financial markets of mortgage, banking, auto, as well as a substantial growth in new verticals in government, talent solution, and others to come. We expect that workforce solutions will continue to be an increasingly large part of Equifax and power our top and bottom line with our above-market growth and margins. Turning to slide 10, this provides a perspective on the return to growth USIS has delivered since 2018. USIS has delivered strong double-digit revenue growth over the past six quarters. Although the strong mortgage market has advantaged USIS, as shown in the bottom left of the slide, USIS has driven consistent sequential improvement in non-mortgage growth since second quarter last year, with the overall growth in USIS being driven by 18% non-mortgage growth in the first half of 2021. The USIS team is also increasingly leveraging the Equifax Cloud to design and implement new NPIs for customers. The Equifax Cloud, new products, and our unique data assets are making USIS teams more competitive in the marketplace. The USIS team is focused on integrating COUNT into the new Equifax cloud, and we're seeing increased use cases and opportunities with our ID and fraud vertical from the COUNT acquisition. We expect ID and fraud to play a large role in USIS growth in 2020 on and beyond. I encourage you to review the ID and fraud slides in our broader investor presentation, which can be found on our investor relations website following this call. Turning to slides, Slide 11, this highlights the core growth performance in our mortgage for our U.S. B2B businesses, Workforce Solutions and USIS. Our U.S. B2B businesses delivered a combined 25% revenue growth in mortgage in the second quarter, which was 30 points stronger than the 5% mortgage decline we saw in overall mortgage market. The strong R performance was, again, primarily driven by Workforce Solutions with core mortgage growth of 57%. Consistent with past quarters, EWS's outperformance was driven by new records, increased market penetration, larger fulfillment rates, and new products, proof that lenders are increasingly becoming reliant on the unique twin income and employment data when making credit decisions in the mortgage space. USIS delivered 4% core mortgage revenue growth in the second quarter, driven primarily by new debt monitoring solutions and further support for marketing. Our ability to substantially outgrow underlying markets is core to our business model and core to our future growth. I'll now turn the presentation over to John to discuss current trends in the mortgage market and to walk through our third quarter and revised four-year 2021 guidance.