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spk22: Greetings and welcome to the Equifax third quarter 2022 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the call over to Trevor Burns, Senior Vice President, Head of Corporate Investor Relations. Thank you. You may begin.
spk01: Thanks, and good morning. Welcome to today's conference call. I'm Trevor Burns. With me today are Mark Begor, Chief Executive Officer, and John Campbell, Chief Financial Officer. Today's call is being recorded, and our recorded recording will be available later today in the IR calendar section of the News and Events tab at our IR website, www.investor.equifax.com. During the call, we'll 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 Q3 2022 earnings conference call. Also, we'll be making certain forward-looking statements, including fourth quarter and full year 2022 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 that may impact our business are set forth in filings with the SEC, including our 2021 Form 10-K and subsequent filings. We will also be referring to certain non-GAAP financial measures, including adjusted EPS attributable tax credits 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 can be found in the financial results section of the financial info tab at our IR website. Now I'd like to turn it over to Mark, beginning on slide four.
spk06: Thanks, Trevor. Equifax delivered another very solid quarter with continued execution against our EFX 2025 strategic priorities in a challenging economic environment. Third quarter revenue of $1.244 billion was up 2%, or 4% in constant currency, and was above the high end of our guidance, driven by strong non-mortgage revenue growth in the quarter. This strong revenue performance was well above our July framework and delivered despite a more negative FX environment than we expected, which at 200 basis points, or 29 million, was a 5 million or about 50 basis point greater headwind for FX than we expected when we put out July guidance. Adjusted EPS of $1.73 per share was also stronger than our July guidance. We are continuing to significantly outperform our underlying markets as we navigate the challenging economic environment and mortgage market decline. Our global non-mortgage businesses, which now represent over 78% of total Equifax revenue, were very strong, with 20% total and 13% organic non-mortgage constant currency dollar revenue growth, stronger than we expected when we provided guidance in July and stronger than our 8% to 12% long-term growth framework. We're now tracking to 20% non-mortgage constant dollar growth in 2022, which is up about 100 basis points from our July guidance. The outperformance was again led by outstanding performance at Workforce Solutions that delivered 40% total and 20% organic non-mortgage revenue growth. USIS B2B non-mortgage grew 9% online and 5% total, which is about consistent with second quarter but weaker than we expected. International delivered a record quarter up a very strong 17 percent constant dollar growth and 15 percent organic constant dollar growth, well above our expectations. Equifax total mortgage revenue was down 30 percent, about as expected, and outperformed the underlying market decline by over 10 points from pricing, new twin records, penetration, system-to-system integrations, and new products. The U.S. mortgage market, as expected, weakened substantially in the third quarter, with originations estimated at down 50% in the quarter, which was about nine points weaker than our July guidance. As a reminder, Workforce Solutions' mortgage revenue is more closely tied to originations. USIS mortgage credit inquiries were down 41% in the quarter and better than our expectations from increased shopping activity, despite the weaker-than-expected mortgage originations. We're continuing to see Higher than normal levels of shopping, which continued throughout the quarter, intends to benefit USIS credit file pulls. Combined, the negative mortgage market impact on Equifax was about as expected as the more negative market impact from originations on EWS was offset by the less negative impact on USIS from increased shopping activity. We saw a continued weakening of the mortgage market as we moved through September and into the first few weeks of October as mortgage rates continued to rise to their highest level since 2008. We now expect mortgage originations to decline over 60% in the fourth quarter versus our July framework of 48%, and USIS credit inquiries to decline over 50% versus our July guidance of 46%. John will talk about our updated mortgage framework in a minute. Third quarter adjusted EBITDA totaled $405 million and was flat compared to last year. Adjusted EBITDA margins of 32.5% were slightly below our expectations for the quarter, principally due to higher sales and marketing expenses driven by our outperformance in non-mortgage verticals. John will walk you through our margin performance in the third quarter and expectations for fourth quarter later in the presentation. We continue to make significant progress executing the EFX Cloud data and technology transformation. We're now approaching 70% of North America and 60% of total EFX revenue being delivered from the new EFX Cloud. Our focus for the remainder of 2022 and 2023 is accelerating full customer migrations in North America to enable decommissioning of our applications and data centers. Our new EFX cloud infrastructure is delivering always-on capabilities and faster new product innovation with integrated data sets, faster data delivery, and industry-leading enterprise-level security. We're convinced that our EFX cloud and single data fabric will provide a competitive advantage to Equifax for years to come. We're in the early days of leveraging our new EFX cloud infrastructure and single data fabric and are seeing acceleration of innovation and new product rollouts. Our new product vitality index of 14% in the quarter is a record and over 500 basis points improvement from our 9% vitality index last year and well above our 10% long-term goal for vitality. As a reminder, our vitality index is the percentage of revenue derived from new products launched in the past three years. Our strong momentum on NPI rollouts leveraging the new EFX cloud allowed us to raise our full-year Vitality Index outlook for 2022 for the second time this year from 11% to 13%, which is up 300 basis points from our long-term framework and from the framework we started earlier this year. This strong NPI performance gives us momentum into 2023 as most new products reach commercial maturity in years two and three. In third quarter, we continue to execute our bolt-on acquisition strategy, completing two acquisitions, LawLogix, which will further strengthen workforce solutions onboarding and I-9 solutions, and Mitigator, which will strengthen count and broaden our identity and fraud franchise. These are our 11th and 12th bolt-on acquisitions since January 2021 and align with our M&A strategy to strengthen workforce solutions, our largest and fastest-growing business, add unique and differentiated data, and expand in the fast-growing identity and fraud market. Bolton acquisitions that broaden and strengthen Equifax are strong levers for future growth and are central to our long-term growth framework to add 100 to 200 basis points annually to our revenue growth from strategic Bolton M&A. Our guidance for 2022 revenue of just under $5.1 billion is essentially unchanged from the framework we provided in July. With third quarter revenue, third quarter revenue is stronger than our July guidance by about $25 million. Our current guidance reflects a decline in fourth quarter from our prior implied view by about $25 million from the weaker mortgage market and FX. The continued weakening in the U.S. mortgage market is negatively impacting fourth quarter revenue by about $45 million, and negative FX is impacting revenue in the fourth quarter by about $15 million. Partially offsetting this $60 million negative impact is stronger non-mortgage revenue in Workforce Solutions International and the acquired revenue from LawLogix and Mitigator. The strong 20% constant dollar non-mortgage growth in 2022 gives us great momentum as we look to 2023 and a bottoming of the mortgage market in the coming quarters. Our guidance for adjusted EPS of 754 share is down about 13 cents from the midpoint of our July guidance. As our third quarter adjusted EPS was about 8 cents per share stronger than our July guidance, this results in a reduction in the fourth quarter from our implied EPS of about 21 cents a share, or about $33 million in pre-tax income. The most significant drivers of this reduction in EPS are, first, the $45 million reduction in higher-margin fourth-quarter mortgage revenue due to the weakening mortgage market, which more than drives this level of reduction in pre-tax income, and, second, higher interest expense. These negative impacts were partially offset by stronger non-mortgage growth and the addition of acquisition-related non-mortgage revenue from LawLogix and Mitigator. And again, John will provide details on fourth quarter and full-year guidance shortly. We were very pleased with our continued very strong constant dollar non-mortgage revenue growth of 20% total and 13% organic, which is well above our 8% to 12% long-term framework, and our ability to outperform the underlying mortgage market as shown by our third quarter results. Turning to slide five, a critical deliver of our strategic priorities is the continued expansion of our addressable market, data sources, and revenue. Equifax is much more than a credit bureau today, and our addressable TAM has expanded 3X to over $45 billion. Over the past several years, we've expanded into faster-growing markets outside financial services and mortgage. These faster-growing markets include identity and fraud, talent management, government, and employer services verticals. This has accelerated our growth outside of financial services and mortgage and increased the resiliency and diversity of EFX by broadening our revenue streams, including markets that are expected to deliver future growth at levels above our traditional markets. As shown on the slide, since 2019, we've grown our total non-mortgage business by over $1.1 billion, with a combined CAGR since 2019 of 12%, which is at the high end of our 8% to 12% long-term growth framework. In 2022, we expect non-mortgage revenue to represent over 75% of total Equifax revenue. In the fourth quarter, it will be well over 80%. Also since 2019, we've grown our non-credit bureau-based revenues by $1.5 billion, or a very strong CAGR of about 30%, to over half of Equifax's total revenue. This is led by our $2.4 billion workforce solutions business, which is up $1.4 billion since 2019 at a very strong CAGR of about 35%, but also supported by strong double-digit growth in identity and fraud from count and mitigator, as well as strong growth in debt services. We've also completed 12 acquisitions since 2021 that are all in the non-mortgage space and are delivering strong, double-digit growth. Workforce solutions strong above market growth in verticals like employer solutions, talent, and government, our expansion into identity and fraud, and our focus on new product investments, coupled with our bolt-on acquisitions focused on non-mortgage priorities, will continue to accelerate the growth of these non-credit and non-mortgage revenue streams at Equifax. Turning to slide six, in third quarter, Equifax core revenue growth, the green section of the bars, grew a very strong 16% reported and 19% in constant currency, which was consistent with our July guidance. Constant dollar core organic revenue growth of 14% in the quarter was also substantially above the organic growth in our long-term financial framework of 7% to 10%. Non-mortgage constant dollar organic revenue growth of 13% drove three quarters of the organic constant dollar core growth in the quarter. Core mortgage outperformance predominantly in EWS drove the remainder of core organic constant dollar revenue growth. We continue to expect strong core revenue growth of 17% total and 19% in constant currency in 2022, which again is well above our 8% to 12% long-term growth framework. and 300 basis points higher than the core growth for 2022 provided last November at our investor day. This strong constant currency growth is driven by stronger non-mortgage revenue growth of 20% total and 13% organic due to broad-based performance across workforce solutions and strength in international. As detailed on slide 7, U.S. mortgage revenue was down about 30% in the quarter. This compares to third quarter mortgage originations of down of down 57% as estimated by mortgage industry third parties and USIS credit inquiries that declined 41%. As a reminder, in a rising rate environment, we believe consumers tend to rate shop more frequently, creating a favorable variance between mortgage credit inquiries and originations that benefits USIS credit file pulls from shopping. In the third quarter, we saw mortgage credit inquiries perform on the order of 16 points better than the change in the estimated mortgage originations. USIS revenue declined 35% in the quarter, about six points better than credit inquiries. However, twin income and employment is typically pulled later in the mortgage application process and at closing. As a result, EWS does not benefit as much from the upfront shopping trend that occurs in a rising rate of environment as twin inquiries are more closely aligned with completed mortgage originations. Twin mortgage revenue declined 28% in the quarter. EWS core mortgage revenue growth that was up a strong 14% in the quarter and when adjusting for the 16-point negative spread between mortgage inquiries and originations was up a very strong 30% and consistent with prior quarters. Overall, Equifax mortgage revenue outperformed USIS credit inquiries by 11% or 11 points in the quarter and outperformed estimated mortgage originations by a strong 27 points in the quarter. This reflects the strength of our U.S. enterprise mortgage sales and operations team that bring the combined USIS and EWS products and solutions to market in this challenging mortgage macro. Turning to slide eight, Workforce Solutions delivered another outstanding quarter with 32% core revenue growth, driven by very strong non-mortgage, non-UC, and ERC growth of 62%. As a reminder, non-mortgage revenue is now about 70% of Workforce Solutions, and a big workforce solutions driver for future growth from their fast-growing talent and government verticals. Workforce solutions above market, 32% core growth in the quarter, continues to be driven by very strong performance on twin record additions, new products and pricing, system-to-system integrations, and greater penetration. Their market outperformance is very strong, particularly in a period of declining market transaction volumes for mortgage. We expect to see continued very strong core growth in fourth quarter from Workforce Solutions. Rudy Ploter and the Workforce Solutions team continue outstanding execution across their key growth drivers, detailed on the right-hand side of the slide. Over the past 12 months, we've signed 10 new agreements with payroll processors in the U.S., including three new agreements in the third quarter that will be added to the twin database over the next several quarters. These new partnerships, along with continued growth in our direct contributors through our employer services business, are delivering continued strong growth in the TWIN database, with current records up 16%, reaching 146 million current records in the third quarter. There are 111 million unique individuals in TWIN deliver very high hit rates and represent over two-thirds of the 165 million U.S. nonfarm payroll. And as a reminder, about 50% of our TWIN records are contributed directly from individual employers that we have long relationships with. The remaining are contributed through partnerships principally with payroll companies. In addition to traditional W-2 wage earners, we estimate there are approximately 30 to 40 million gig workers and 20 to 30 million pensioners in the US who will also bring valuable income and employment insights to lenders, background screeners, and government agencies. We recently signed an agreement with a payroll processor to gain access to their pensioner records and we have an active pipeline with other companies to acquire new pension records to the TWIN database. We're in the very early innings of collecting records on these 50 to 70 million gig and pensioner records, but expect to make significant progress as we move through 2023 and beyond. TWIN record additions will continue to drive workforce solutions revenue growing forward from higher hit rates, and we have the ability to double our records in the future to the roughly 220 million total W-2 gig and pension recipients in the United States. This is an incredibly powerful lever for future growth at Workforce Solutions and a key driver of their 13 to 15 percent long-term growth outlook. Turning to slide nine with some more detail on Workforce Solutions, they really had an exceptional quarter delivering revenue of $559 million. Revenue was up a strong 9% with overall organic revenue growth of about flat overall, despite the significant 28% decline in EWS mortgage revenue in the quarter. Non-mortgage revenue was up a very strong 40% and is now 70% of workforce solutions. Verification services revenue of $455 million was up 13%, more than offsetting the 57% decline in estimated mortgage originations. Non-mortgage verticals now represent over 60% of verifier revenue and delivered 72% total and 30% organic growth. The Insights business, which we acquired late last year, continues to perform very well, driven by strong performance in their largest verticals, Risk Intelligence and Justice. Risk Intelligence helps background screeners analyze people's risks via background checks and continuous monitoring. Justice Intelligence helps channel partners assist law enforcement agencies in their investigations. Talent and government solutions, which now represent almost 40% of verifier non-mortgage, had outstanding quarters. Talent solutions delivered 110% total and over 50% organic growth in the quarter from record growth pricing and strong new product rollouts. We also saw strong growth in the government vertical with revenue up 90% total and 44% organic, driven by strong penetration at the state level. The EWS government vertical is benefiting from penetration, pricing, record growth, and leveraging a strong product portfolio, including insights data, at the federal, state, and local level across the United States. The continued expansion of Workforce Solutions Data Hub through our new Total Verify solution is driving very strong growth in the fast-growing 5 billion talent and 2 billion government markets. Our Total Verify solution is enabling our customers to access multi-data solutions derived from an unparalleled set of differentiated information assets spanning employment, income, education, incarceration, health credit credentialing, and identity. As of the third quarter, EWS has over 580 million total records in the TWIN database, both current and historic, that provide both current and previous employment information on individuals, allowing us to increasingly provide an instant digital resume or employment verification on both current and historical job histories. The non-mortgage EWS consumer lending business, principally in card, auto, and consumer finance, and led by our U.S. enterprise sales teams, also showed good growth with revenue up 18% in the quarter. Employer services revenue of $104 million was down 7% due to the expected decline in our unemployment claims and employer retention credit businesses. We expected total UC and ERC revenue to be down about 20% in 2022, driven by the lower jobless claims and ERC transactions as the COVID federal tax program runs out. Employer services revenue, excluding UC and ERC, was up a strong 29% in the quarter, driven by broad-based double-digit growth in our I-9 and onboarding, HealthyFX, and our tax credit businesses. We are increasingly seeing the ability to deliver bundled packages of our differentiated employer services solutions to customers. In the third quarter, we signed a large multi-year agreement to provide a broad suite of EWS solutions, including I-9, W-4, tax services, and other HR solutions to a large multinational company with annual guaranteed workforce solutions revenues approaching $20 million with total annual revenue opportunities with the agreement of over $30 million. Workforce solutions adjusted EBITDA margins of 29.5% were lower than our July guidance and the over 50% margins we expect from EWS on an ongoing basis. The main drivers of the lower than expected margin was negative mix due to lower mortgage revenue, higher sales and marketing costs principally due to very strong non-mortgage revenue growth and costs to add the new trend contributors I talked about earlier. The decline in EBITDA margins versus last year was driven by similar factors including negative product margin mix as higher margin mortgage declined as a percentage of revenue and was replaced with verifier non-mortgage revenue and revenue from the most recent acquisitions, which at this point have lower margins than verifier overall. And second, increased marketing and sales expense from both investments to drive NPI and driven by our extremely strong non-mortgage sales and record acquisition performance. And then last, as I mentioned, costs related to onboarding new twin contributors. We expect these same factors to impact EWS margins in fourth quarter as we see further declines in mortgage revenue with EWS EBITDA margins of about 48.5% in fourth quarter. As we look to 2023, we expect to see EWS margins return to above 50% as product and pricing initiatives expand profitability, and we see additional savings from their cloud transformation. The strength of EWS and uniqueness and value of their twin income and employment data in employer services businesses were clear again in the third quarter. Rudy Ploder and the EWS team delivered another above-market quarter with 9% revenue growth and 32% core growth and are well-positioned to deliver a very strong 2022 and continue above-market growth in the future. As shown on slide 10, USIS revenue of about $397 million was down 9% and slightly better than our expectations. USIS mortgage revenue was down about 35% and was also better than expected, with a 41% decline in credit inquiries versus the 46% we had expected. At $97 million, mortgage revenue is now about 25% of total USIS revenue. B2B non-mortgage revenue was $250 million, which represents over 60% of total USIS revenue, and was up 5% with organic revenue growth of 3%. This was below the low end of the 67% growth we discussed in July. Importantly, B2B non-mortgage online revenue growth remained strong at 9% total and 6% organic, a sign that lenders continue to originate. During the quarter, we saw double-digit growth in commercial and telco and solid single-digit growth across financial services, auto, and insurance, offset by a decline in our direct-to-consumer business. Count, which provides unique identity and fraud solutions, continues to execute very well, developing joint solutions leveraging both Count and Equifax data, with 2022 global revenue expected to exceed 20%. The recent acquisition of Mitigator will continue to strengthen our identity and fraud franchise and growth. The weakness relative to expectations in the quarter was again in financial marketing services, our B2B offline business that had revenue of $51 million, down 8%, and lower than our expectations. As we discussed in previous quarters, the principal driver of decline in FMS services was our fraud and data services vertical, where we provide header data principally to providers of identity and fraud services, and to a much lesser extent in our risk management and portfolio review business, where we provide data and analytical services to financial institutions, to evaluate the health of their existing portfolios, or in some cases, portfolios they're acquiring. As we discussed in prior quarters, we expect the declines in these businesses to continue through the fourth quarter with improvements in 2023 as we introduce new products leveraging unique and differentiated data assets available through the new Equifax single data fabric. We also saw a decline in batch marketing services where we provide data and decisioning principally to financial institutions for prescreeners as well as delivering our IXI data for marketing activities as some customers cut back on originations. We had seen high single-digit growth in marketing services in the first half, so this is the first signs of any pullback in marketing. For fourth quarter B2B non-mortgage, we expect online to continue to be strong with growth rates above third quarter from commercial execution, as well as progress in pricing and new product rollouts that overcome a somewhat slower growth in financial services. We expect financial marketing services to continue to be weak, down over 10%, with declines across header risk and marketing continuing in the fourth quarter. Overall, for B2B non-mortgage, we expect fourth quarter organic revenue growth to be about the levels we saw in the third quarter. USIS consumer solutions business had revenue of $50 million, down 1% in the quarter, but up 2% sequentially. We expect fourth quarter revenue to grow again sequentially with positive growth rates in the fourth quarter. USIS adjusted EBITDA margins were 34.1% in the quarter and slightly below our expectations, principally due to continued investments in sales resources focused on non-mortgage growth. International revenue as shown on slide 11 was up $288 million, up a very strong 17% on a local currency basis and 15% on a non-organic constant currency basis. We're seeing broad-based execution from our international businesses. Europe local currency revenue was up 24%, principally driven by over 75% growth in our UK debt management business. We've seen significant increases in debt placements from the UK government over the past several quarters. Our European CRA revenue accelerated in the third quarter with revenue of 7% and above our expectations, driven by broad-based product execution across our B2B online products and identity and fraud, slightly offset by lower consumer revenue. Asia Pacific, which is principally our Australia and New Zealand business, delivered local currency revenue of 6%, driven by strong growth in our commercial and identity and fraud businesses, and to a lesser extent, growth in consumer. Latin America local currency revenue was up a strong 34%, driven by double-digit growth in Chile, Argentina, Uruguay, Paraguay, Ecuador, and Central America. The team's new product introductions over the past three years and pricing actions continue to drive strong growth across all product lines. This is the third consecutive quarter of double-digit growth for Latin America. Canada local currency revenue was up 12% and above our expectations. We saw growth in commercial, analytic solutions, decisioning, and identity and fraud revenue, which was partially offset by some one-time revenue in the quarter from mortgage volume declines. Consumer revenue also returned to growth during the quarter. We expect mid single-digit revenue growth from Canada in the fourth quarter. International adjusted EBITDA margins at 26.8% were down 210 basis points sequentially and above our expectations given strong revenue growth. EBITDA margins were up slightly versus last year, but up about 150 basis points adjusting for the loss of equity income from the Russian joint venture that we sold. As shown on slide 12, we had a very strong new product quarter with Vitality Index at 14%, which was our highest Vitality Index ever, and it was over 500 basis points above last year's results and 400 basis points above our 10% long-term growth framework for Vitality. We've delivered about 80 new products so far in 2022, leveraging our new EFX cloud capabilities. We now expect to deliver a Vitality Index of 13%, in 2022, up 200 basis points from our previous guide of 11%, which equates to over 650 million of new product revenue in the year. The growth in our 2022 Vitality Index is principally coming from workforce solutions, which is encouraging as they are further along in completing their cloud transformation. It's positive to see the strong NPI results in the early innings of the Equifax cloud. New products leveraging our differentiated data, our new Equifax cloud capabilities, and single data fabric are central to our long-term growth framework and driving future Equifax top-line growth. This week at the annual Mortgage Bankers Association Conference, we will showcase a new offering that delivers telecommunications, pay TV, and utilities attributes alongside the traditional mortgage credit report to help streamline the mortgage underwriting process. Delivering telco, pay TV, and utilities attributes to mortgage lenders alongside the traditional credit reports will also help expand access to credit and help create greater home ownership opportunities for U.S. consumers. The use of these expanded data insights can also provide visibility to millions of credit-invisible consumers, those without traditional credit files, and enhance the financial profiles of thin, young, and unscorable consumers as they complete their first mortgage applications. This new offering leveraging the Equifax Cloud will provide powerful new insights that help to automate, save time and resources, and streamline the first mortgage process for every applicant, creating more opportunities for consumers to secure a loan. And Equifax is the first and only in the industry to offer these unique insights to the mortgage industry. Turning to slide 13, we outlined the 12 strategic bolt-on acquisitions we've completed since January 2021, You expect we'll deliver over $450 million of principally non-mortgage run rate revenue. As you know, our 8% to 12% long-term growth framework includes 1% to 2% of annual revenue growth from strategic bolt-on M&A aligned around our three strategic priorities. First, expanding and strengthening workforce solutions, our fastest-growing and most profitable business. Second, building out our identity fraud capabilities. And third, adding unique data assets. And with that, I'll turn it over to John to provide more details on the mortgage market in our fourth quarter and full year 2022 guidance.
spk23: Thanks, Mark. As Mark mentioned and is shown on slide 14, our guidance reflects an expectation that the decline in the U.S. mortgage market will steepen in the fourth quarter with mortgage originations declining over 60% and mortgage credit inquiries declining over 50%. This is a significant reduction from our expectations in July. And as Mark referenced earlier, this expectation of a further weakening of the mortgage market negatively impacts 4Q revenue by almost $45 million. 3Q mortgage revenue was 21.9% of total Equifax revenues compared to 29.5% and 24.7% in 1Q22 and 2Q22 respectively. In 4Q, we expect mortgage revenue to be about 16% of total Equifax revenues. The rapidly changing and unprecedented macro environment makes forecasting the impacts on the U.S. mortgage market incredibly challenging. We will continue to be transparent with you about changes in the mortgage market and the impacts on our business. EBITDA margins at 32.5% were slightly below the level of at or below 33% we discussed in our July guidance. Mark discussed the main drivers in HBU. Partially offsetting these items were lower corporate and corporate technology expenses. Slide 15 provides our guidance for 4Q22. We expect revenue in the range of $1.165 to $1.185 billion, reflecting revenue down about 6.3% year-to-year at the midpoint of our guidance, or down about 3.7% on a constant currency basis. 4Q22 EBITDA margins are expected to be about 31.5%. We're expecting adjusted EPS in 4Q22 to be 145 to 155 per share, compared to 4Q21 adjusted EPS of $1.84 per share. As Mark shared earlier, the decline in our 4Q22 guidance as compared to implied levels we shared in July is driven by the significant reduction in our expectations for the U.S. mortgage market in the fourth quarter. 4Q22 revenue in our current guidance relative to our implied view in July is down about $25 million. Mark covered this earlier as a $45 million decline from the weakening U.S. mortgage market and $15 million decline driven by FX are partially offset by revenue from the acquisitions of LawLogix and Mitigator and stronger non-mortgage revenue growth. 4Q 2022 adjusted EPS and our current guidance relative to our implied view in July is down about 21 cents per share or about 33 million in pre-tax income. This decline is driven by the impact of the decline in the U.S. mortgage market on revenue of $45 million which, given high variable margins, drives a pre-tax income decline that exceeds the total variance level. Strong core revenue growth, both from the acquisitions of LawLogix and Mitigator, as well as stronger organic growth, are delivering improvements in pre-tax income. However, these improvements are being offset by the higher marketing, sales, and G&A expense that we referenced earlier and higher interest in other expenses. Reflecting the above are expectations for the BUs in the fourth quarter as follows. EWS revenue is expected to have an about 3% or greater decline. Continued strong non-mortgage organic revenue growth is expected to offset the bulk of the impact on EWS mortgage revenue of the expected over 60% decline in mortgage originations. EWS EBITDA margins are expected to be about 48.5% in the quarter. USIS revenue is expected to have an about 7.5% or greater decline, reflecting the greater than 50% assumed decline in the U.S. mortgage and credit inquiries. B2B non-mortgage revenue growth is expected to improve from the levels we saw in the third quarter, and B2B online continuing with high single-digit growth. U.S. IS EBITDA margins are expected to approach 36%. International continues to deliver a strong year and is expected to deliver constant currency revenue growth of up to 8.5%. down from the third quarter as we lap growth from our UK debt management business. International EBITDA margins are expected to be up sequentially, approaching 29%. The declines in both revenue and adjusted EPS in 4Q 2022 year to year are also principally driven by the significant decline in the U.S. mortgage market and the significant impact of FX. Looking at revenue, at the midpoint of our guidance of $1.175 billion, revenue is down about $78 million. FX is negative about 35 million or 2.6% year-to-year. So on a constant currency basis, revenue is down about $43 million. The impact of the decline in the U.S. mortgage market using originations declines for EWS and credit inquiries declines for USIS is negative about $185 million or almost 15 points. Excluding these factors, effectively constant dollar revenue growth excluding the impact of the U.S. mortgage market Revenue is up over $140 million, reflecting predominantly the very strong non-mortgage growth, principally in EWS and international, and also in U.S. B2B online, and strong outperformance in mortgage relative to the overall market, predominantly in EWS. Looking at adjusted EPS at the midpoint of our guidance of $1.50, adjusted EPS is down about $0.34 a share. Below operating income items, principally higher interest expense and the loss of equity income from our Russia JV, as well as the impact of FX, explain just over half of the decline in adjusted EPS. The remainder of the decline is principally driven by the reduction in constant currency revenue of about $43 million. Slide 16 provides the specifics on our 2022 full-year guidance. We expect revenue of approximately $5.1 billion, and adjusted EPS is expected to be $749 to $759 per share. For the full year of 2022, we expect capital expenditures to be over $550 million, Capital expenditures are above the levels we expected in July as we maintained capital spending at first half 2022 levels in the third quarter to continue the pace of migration of major exchanges to our cloud infrastructure. We expect to bring down capital spending in 2023 consistent with the completion of the migration of the major North American exchanges. We believe both our fourth quarter and full year guidance is centered at the midpoint of the revenue and adjusted EPS ranges we provide. As you As you consider the first quarter of 2023, we wanted to provide some general perspective on our current thinking on the U.S. mortgage market for the quarter. Using our current view of mortgage credit inquiries in the fourth quarter as a base, we currently expect mortgage credit inquiries to be down about 50% year-to-year in the first quarter of 2023. As we move through 2023, the year-to-year compares get substantially easier, particularly in the second half. Now I'd like to turn it back over to Mark. Thanks, John.
spk06: Turning to slide 17, we have some very unique macros in our industry and EFX growth levers driving our performance in 2023 and beyond. The acceleration of the digital macro across every industry is expanding the use of identity data, signals, and solutions to drive better decisions across new and existing verticals. Equifax is well positioned to take advantage of the accelerating digital macro through our EFX cloud investments and our recent acquisitions of Insights, Count, and Mitigator. Although we've been impacted by the significant declines in the U.S. mortgage market, We believe we have unique levers at Equifax to deliver strong future growth, including workforce solutions above market growth and margins, and our expanded focus on new data assets like Insights, USIS non-mortgage growth, and count and mitigator identity and fraud growth. Our new EFX cloud driving competitive NPIs, top line, and of course, cost savings in 23 and beyond. NPIs leveraging the EFX cloud and our expanded resources and focus on new products, and Volt on M&A to broaden and strengthen Equifax. These attractive market macros along with the broad EFX growth levers and our strong core and non-mortgage outperformance in the past few years gives us confidence in our ability to deliver above market growth in the future. In the event we do see further economic weakness driven by slowing consumer demand, we believe Equifax is well positioned for continued growth. As we shared with you in July, turning to slide 18, the new Equifax is a much different and more diverse business than we were in the last recession. We are more resilient and better positioned for stronger revenue and earnings growth in challenging economic environments. During the 08-09 global financial crisis, Equifax performed very well and exhibited the resiliency you would expect from a data analytics businesses. In 2009, we saw only a 6% decline in total revenue. Importantly, EWS grew throughout the global financial crisis and showed substantial growth of 17% in 2009. We believe that Equifax We believe that Equifax's business mix today is much better positioned for a potential economic event than in 2009. First, strong EWS growth has increased their relative size in Equifax from 16% of revenue in 2009 to almost 50% today, with margins over 50% and over 15 percentage points higher than the Equifax average. EWS is benefiting from strong growth levers that are not directly tied to economic activity, including record growth, penetration in new and fast-growing verticals like talent and government, system-to-system integrations, deploying new, higher-value products, as well as measured price actions, taking advantage of the scale of the twin database. Second, completion of the Equifax cloud will deliver cost savings in 2023 and beyond that we expect will drive about half of our targeted 500 basis point margin expansion from 2022 to 2025. The cloud migration cost savings are independent of any economic event and driven solely by our execution. And then last, we're leveraging the new Equifax cloud to accelerate new product rollouts with a goal of 13% vitality in 2022, which is over $650 million of annual incremental revenue from Equifax. As a reminder, NPIs rolled out in 2021 and 2022 will drive top-line growth in 2023 and beyond as they mature in the marketplace. Today, we believe about 54% of our global business is recession-resilient or counter-cyclical and will grow in a recession. This is a big change and a strong position compared to Equifax and the 08-09 global financial crisis, where only about 37% of our businesses were either recession-resilient or counter-cyclical. The meaningful revenue growth and workforce solutions, U.S., Mortgage and identity fraud since 2009, as well as cloud transformation cost savings, position Equifax very well if there's an economic event or recession in 2023 and beyond. Wrapping up on slide 19, Equifax delivered another strong and broad-based quarter driven by 13% organic and 20% total non-mortgage constant dollar growth that more than offset the 41% decline in the mortgage market. reflecting the broad-based strength of Equifax in this challenging economic environment. This is our seventh consecutive quarter of double-digit core growth and our sixth consecutive quarter of double-digit non-mortgage growth. Against the declining mortgage market, Equifax is resilient, on offense, and investing for future growth. Against the unprecedented 37% mortgage market decline in 2022, we expect to deliver constant currency revenue growth of over 5% due to the breadth and strength of our underlying businesses. More importantly, our core revenue growth of 17% and non-mortgage constant currency growth of 20% are both well above our 8% to 12% long-term framework and reflect the strength of the underlying Equifax business model. This strong momentum positions us well in 2023 and beyond. EWS continues to deliver above market growth and is our largest, fastest growing, and highest margin business. Workforce solutions above market revenue growth over the past three years is powering Equifax growth as they approach 50% of our revenue. And new products leveraging the new Equifax cloud are also driving growth. Our 13% vitality from NPIs in 2022 will drive growth in 2023 and beyond. And we're in the early days of leveraging the new Equifax cloud to drive innovation, new products, and expect to deliver strong vitality in the future. Our 12 bolt-on acquisitions since January 21 have expanded our capabilities and are delivering strong top-line growth and will deliver synergies in 2023 and beyond. And then lastly, we're in the final chapters of completing our new Equifax cloud data and technology transformation that will deliver top-line growth and cost benefits in 2023 and beyond as we complete the cloud and leverage our new cloud capabilities in single data fabric. Even in this uncertain economic environment, Equifax continues to be on offense and reinvesting in the new Equifax cloud, new products, data and analytics, and bolt-on M&A to drive future growth. We continue to be confident in our long-term growth framework of 8% to 12% total revenue growth and 7% to 10% organic revenue growth with ongoing expansion of margins of 50 basis points per year. We also remain focused on delivering on our 2025 goal of $7 billion in revenue and 39% EBITDA margins that we set at our investor day a year ago. Our ability to deliver non-mortgage growth of 20% in 2022 that is well above our long-term growth framework gives us confidence in the future. We remain energized about our performance in 2022 in a challenging mortgage macro, and even more energized about the future of the new Equifax, a faster-growing, higher-margin, cloud-native data analytics company. And with that, operator, let me open it up for questions.
spk22: Thank you. We will now be conducting the question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. We ask that you please limit yourself to one question and one follow-up question. One moment, please, while we poll for your questions. Our first questions come from the line of Manav Patnik with Barclays. Please proceed with your questions.
spk10: Thank you. Mark, I was hoping just on slide 17 where you gave us some of kind of the leverage, the 23, I think, you know, I was hoping you would touch on some of the macro trends you're seeing in the card and auto verticals, you know, just some perspective on, you know, where we are today in those categories relative to, you know, pre-COVID or history and some of the, you know,
spk06: the the trends you're seeing there whether they're you know decelerating or staying the same or any color around those would be helpful yeah we talked a bunch manav good morning about uh mortgage so i we're happy to talk more questions on that you know maybe if you step back uh you know kind of where we are with the consumer and our customers you know the consumer continues to be exceptionally strong um you know their credit scores are still up from 2019 they're working We haven't seen real changes in delinquencies except at the subprime level. There's some small changes, but even there, delinquencies are lower than they were in 2019. So you've got consumers that have had wage growth. Employment is low. So it's a very good environment for the consumer, which really impacts the verticals you talked about. And then our customers are still very strong. There's no question about that. You know, you think about the last economic event we had in the global financial crisis, you know, you had both traditional financial institutions, banks and, you know, fintechs that really had balance sheet problems. That's not the environment we have today. So, you know, similar to our dialogue that we had in July and back in April, you know, we see a strong consumer continuing, you know, through the fourth quarter and into 2023. And the same thing with our customers. So with regards to, you know, kind of activity around originations and some of those verticals, not a lot of change. There's still some challenges in auto around supply chain, you know, availability. I think there's expectations that's going to get better in the coming quarters, but, you know, it's still hard to find a car, you know, particularly at certain models that you want to get, you know, which is resulting in auto, you know, being down some from a year ago. But, you know, again, kind of at our expectation. No real change in cards. I think we mentioned in our comments that we've seen a little bit of weakening in some marketing, but I wouldn't call that a trend. Broadly, our customers are still focused on originations. Card volume is very, very strong. Card originations is very, very strong. And again, you go back to you've got consumers that are very strong. I think everyone is watching very closely, both us and our customers, you know, when will there be a change in delinquencies? You know, and as you know, my history, I ran a card business for a decade at G Capital, and that was what I watched. And, you know, the minute you see delinquencies start to move, you think about, you know, changing your originations going forward. We just haven't seen that yet, you know, with employment being so high and unemployment being so low.
spk23: If you just look at non-mortgage online, organic growth rates in the third quarter, right? We saw Telco was up double digits. FI insurance and auto were up mid to high single digits. Yeah, which is very strong.
spk10: Got it. And then just on the workforce solutions, you know, two-thirds of non-farm payroll data now in your database. It sounds like you've, I think, been closing that gap maybe faster than we had expected. Just some thoughts if it's the same case versus your internal expectations. But the question is, you know, how much of that is really, you know, locked in exclusive per se, like, you know, just so that, you know, competition isn't, isn't the worry here.
spk06: Yeah, I think Manav, a couple of points on that. You know, we're increasingly looking beyond non-farm payroll, as you know, you know, adding in the gig economy as well as the pensioners. And, you know, when we think about our 146 million records and 111 million uniques or individuals in our data set, there's about 200 plus million, 210, 220 million total working Americans and pensioners. So there's a long runway for us between W-2, traditional employees, self-employed. And remember, self-employed, we think about gig workers of being Uber drivers, DoorDash, et cetera. But think about self-employed doctors, self-employed lawyers, self-employed accountants, self-employed contractors. It's a large population. And then that pension sector, base is quite large. And we mentioned in comments earlier that we've been starting to add pension records and gig records, and we signed an agreement with a company that does pension payroll, if you will, for various companies where we're going to do the income and employment verification for them. So we have the ability to double our data set over a lot of years going forward. And I think, as you know, we've talked to you before that, you know, we've got a 13 to 15% long-term growth rate for workforce solutions that sits inside of Equifax's 8 to 12% growth rate. And we've got three to four points of that from record growth in the 13 to 15. So, you know, there's no question we've had above expectation record growth, you know, over the last, it's not new, it wasn't last quarter, you know, it's really been for, you know, three or four years. A lot of that has been you know, from many of the payroll processors that you go back three or four years ago, you know, we're not contributing our records and now they are. And as well as continued growth from our core records, which are from individual companies. So with regards to, you know, the competitive position we have, we feel very good about it. You know, the agreements that we've signed are on an exclusive basis since, you know, in 2022. And, you know, since I've been here, it's a right relationship between our partners and, And Equifax, they want it and we want it. And, you know, when we think about half of our records coming from individual companies, you know, those are from long-term relationships where we're providing those broad suite of services, whether it's I-9, W-2 management, unemployment claims, work opportunity tax credit, HCA benefits, you know, all those solutions, you know, to companies. We also do income and employment verification for them as a part of that relationship for free. So that's a very sticky relationship from our perspective. And you probably heard in my comments earlier that Workforce Solutions is really doing a much better job going to market with the full suite of employer solutions we have. And we signed a contract with a large multinational that's going to, once it's implemented, it'll be $20 million a year of Equifax revenue. We're providing all those employer solutions services to that multinational. Of course, we're also doing their income and employment verification. So we're quite energized about our progress of adding new records to the data set. I think, as you point out, it's certainly been above the long-term framework. And broadly, it's been quite positive for us. And maybe a last point that you're well aware of, as you know, the day we add the records, we're already able to monetize them because we're getting inquiries from our customers either through system-to-system integrations or through their access to our website for all of their applicants. So the day we add another record, it's monetized either in a mortgage application, a credit card application, a personal loan, an auto loan, in a background screen, or in a government social services. So we've got various verticals that are looking for more records. And we already have them in our order book. We just can't fulfill them until we grow the data set. So it's a very powerful growth lever for workforce solutions.
spk10: Got it. Thank you.
spk22: Thank you. Our next question has come from the line of Ashish Savadra with RBC Capital Markets. Please proceed with your questions.
spk11: Thanks for taking my question. One of the questions we are getting is more around if we use the the fourth quarter EPS and annualize that, it implies for next year a significant decline in earnings. I understand there are some puts and takes here. Obviously, there was a discussion around cloud benefits coming in 2023, but I was wondering if you could help us parse what are some of the headwinds, puts and takes in the quarter which may not exist going into 2023, and what are the tailwinds as we think about 2023? Thanks.
spk06: Yeah, I'll start and then John can jump in. Obviously, you want to start with revenue. We expect to have attractive non-mortgage growth next year. We're clearly going to have, John talked about it, a grow-over challenge in the first half of next year, meaning that the mortgage market will be down versus first quarter and second quarter of 2022 based on where current trends look. We don't have an outlook yet, but there was a strong mortgage market in the first quarter and it started declining in the second and more rapidly in the third. So that's clearly going to be a part of our outlook going forward. You also have our new product rollouts will be a positive for us. That vitality index being above 10% gives us momentum next year to drive the top line with those new solutions. As I commented earlier, The new products we're rolling out this year, the 80 products we've rolled out so far, most of those aren't really in the revenue in a meaningful way in 2022. They really mature in 23 and in 2024. Last point I would make is that we've made a number of acquisitions in the last 25 months or 20 months, actually. And those acquisitions are obviously in our run rate revenue, but the synergies that we expect to get typically kick in in years, you know, two and three. You know, so meaning in 22 and 23, we're going to get benefits from acquisition growth that we have, you know, going forward. John, maybe add to that and maybe talk a little bit about some of the margin stuff.
spk23: Absolutely. So as Mark already really covered, right, so non-mortgage revenue growth, both from NPI but also from new product and also, very importantly, from pricing. will absolutely benefit us if we go into next year. Generally speaking, I think most people know a lot of new products and mortgage and other verticals that we serve actually tend to get launched at year end, and pricing actions tend to happen at year end. So we tend to get a nice benefit as you move from fourth quarter to first quarter every year, and it's done very consistently. We also expect to have, as Mark mentioned, improved cost position as we move into next year. As we continue to migrate more and more of our major systems to the cloud, we start to be able to decommission more systems, and we're starting to see savings as we move through 2023. That's certainly a benefit. Some of the marketing and sales incremental costs we talked about this quarter that would affect us next quarter are really driven by the fact that we're performing so very strongly this year. right, that we're paying compensation appropriately at very high levels into those organizations because they're substantially outperforming. Obviously when you get into a new plan year, those things all reset. So we think there's certainly cost opportunities that will help margin, but also for us the fact that we're driving very strong non-mortgage growth with new product and pricing And obviously that flows through at extremely high margins is real benefit to us as we go into next year. So again, we're not providing guidance yet as we didn't in this call, but we have a lot of levers that can help strengthen 2023.
spk06: Maybe the last one. Maybe just the last one is that we commented that there's some, you know, unusuals or things that are going to work out in workforce solutions margins in the third and fourth quarter, you know, from the mix of mortgage and some additional costs associated with our sales and marketing that
spk11: we made the comment that we clearly expect workforce to be back at 50 plus percent margins in 2023 which will be a obviously a positive too very helpful color and maybe just a quick follow-up on EWS the expectation for revenues to be down three percent it's a significant moderation from nine percent growth obviously mortgage is a headwind there and maybe some of the acquisitions are anniversary but I was wondering if you could help parse how we should think about organic, verifier, non-mortgage growth as we head into fourth quarter and next year. Thanks.
spk23: Sure. I think we talked about it. We talked about organic revenue growth for EWS, and we said it was about 20%. Negatively impacting that is almost 15 points from reductions in UC and ERC. So if you exclude UC and ERC, we're seeing organic growth across workforce solutions of approaching 35%. It's a very good number. Very strong in the third quarter, right?
spk06: And well above their 13% to 15% long-term growth rate.
spk23: And so even as we look into next quarter, when we compare the 20% that they delivered this quarter, we expect to have very strong performance again next quarter, also in non-mortgage. So, again, we think EWS non-mortgage revenue growth has been really outstanding and continues to grow.
spk11: Thank you. Thanks for the call.
spk22: Thank you. Our next question comes from the line of Andrew Steinerman with JP Morgan. Please proceed with your questions.
spk00: Hi, John. I just want to verify that we have some figures here. And just for these questions, if it's okay, let's put aside core when I ask these mortgage questions. So I think we know mortgage as a percentage of total third quarter revenues. I think that's 22%, the inverse of the 78% on the first quarter. Just please verify that. And the second thing I want to make sure that we have non-mortgage organic revenue growth? And I think that's 13%. I think that's what you gave on slide four. And if you could just make a comment about fourth quarter, what's implied in terms of non-mortgage organic revenue growth?
spk23: Yeah, so I believe both of the numbers you quoted were in the presentation. So yes, I think they're correct. And in terms of non-mortgage growth, right, we're expecting non-mortgage growth to continue to be strong, right? Mark talked about the fact that For the full year, we're continuing to expect 20%, and we're expecting a strong fourth quarter. Not quite probably as strong as the third quarter, so somewhat below the third quarter, but still a very strong number, and we're expecting to see the strength that you've been seeing all year continue.
spk00: Okay.
spk23: Thank you, John.
spk22: Thank you. Our next questions come from the line of Kyle Peterson with Needham & Company. Please proceed with your questions.
spk12: Hey, good morning, guys. Just wanted to follow up on the margin a little bit. Maybe if you guys could run us through some of the puts and takes in the 4Q step down. Is really most or all of that just mortgage and lower volumes kind of running through and the full quarter's impact of that? Or there's no other cost inflation or anything you guys are seeing material in your business?
spk06: No cost, really, inflationary impact. It's really the mix of the loss of that mortgage revenue is just such high margin. And I think we also talked about some costs from sales and marketing and onboarding, some twin contributors. But the majority of it is the margin mix from the mortgage.
spk23: Absolutely. The step down in 4Q from 3Q is really driven by lower revenue in general, but it's driven by lower because mortgage is lower. And obviously, mortgage has a very high variable margin. So that's the driver.
spk12: got it that's helpful and then you know just a quick follow-up on on international obviously the constant currency trends have looked you know really good for you guys i know fx is is kind of a problem for you guys and a lot of companies but a little surprising to us that uh you know i guess with all the you know recessionary fears and such you know are you guys seeing any you know slow down or or caution especially in you know parts of europe and such um with your clients or are you has at least through October so far, have those trends still held up and been pretty stable and healthy?
spk06: Yeah, as you know, Europe for us is primarily UK, but also Spain is where, you know, where we participate. And, you know, while inflation is a challenge, they're still working, right? You know, and so we really haven't seen any meaningful change in, you know, what's happening with our customers. You know, everyone on, you know, is worried about inflation, but You know, when you've got people working, they're generally going to pay their bills. They're also going to spend money. And, you know, they operate. And as you saw from our comments, our U.K. business, which is most of Europe, you know, had a very good quarter. I think it was up 7%. So, no, we haven't seen it yet, even, you know, with all the inflation fears. Got it. It's helpful. Thanks, guys.
spk22: Thank you. Our next questions come from the line of Kelsey Zhu with Autonomous Research. Please proceed with your questions.
spk15: Hey, Mark. Hey, John. For EWS, for this quarter, when I look at non-mortgage verifier revenue, it seems to be down a little bit sequentially. Can you just help us understand a little bit in terms of what's going on there? Is it the consumer lending keys? Is it talent or government or other verticals?
spk23: Yeah, so EWS non-mortgage in Verifier, but broadly, right, was very strong, right? So again, the growth rates we're talking about are extremely high. We think government and talent continue to perform very, very well. If you're just looking at growth rates, obviously, as you move through the year, comps get tougher because we grew very strongly in 2021. But overall, as we take a look at talent solutions, I think we graved the growth rates. Yes, they're slightly lower, but also driven by comps. Government very strong. I think we saw very good performance in kind of commercial in the non-mortgage finance segment, which again was very strong. So we feel very good about the trajectory and the trend and continuing very strong non-mortgage growth rates there.
spk15: Gotcha. And just a quick follow-up on EWS margin. With the current mortgage environment, I'm trying to figure out what's sort of like a new normal for EWS margins. Should we basically be thinking about that as in line with what we've seen this quarter or even Q4, so kind of in the 49% range?
spk06: No, we said in our comments, and hopefully you heard it, that we clearly expect margins at EWS to return to that 50% plus level in 2023. You know, we view the this mortgage mix as being a challenge in the third and fourth quarter, you know, that'll definitely impact their margins as well as some of the additional costs and sales and marketing and twin contributor onboarding, you know, in the third and fourth quarter. I think we talked about nine or is it nine or 10 additions of new contributors, 10 additions of new payroll processors that are adding records. You know, there's generally some incremental costs, you know, when those get added and our non-mortgage growth is so high, we're, having some additional sales and marketing costs in EWS. But to be clear, you know, we expect EWS margins over the long term to be at that 50% plus rate versus where they are this quarter and next quarter.
spk15: Thanks, very helpful.
spk22: Thank you. Our next question has come from the line of Andrew Jeffery with Truist Securities. Please proceed with your question.
spk19: Hi, good morning. Appreciate all the detail and color as usual, guys. John, just a question for you on overall consolidated EBITDA margin progress. I think you touched on some of the potential tailwinds next year. But, you know, given the challenges, especially early in the year with mortgage, you know, and thinking about margins being, you know, flatter, maybe up a little, and that's my number, not yours, you know, and then a bit of an improvement in 24, it just seems like a heavy lift to get to 39% by 25. Is there a step function that we need to be thinking about? I'm just trying to understand that.
spk06: John, you should jump in, but remember a big piece of that path to 39 is the cloud transformation completion. We get the meaningful impact on cost takeout, and we telegraphed before, and every quarter we talk about it, that roughly half of that lift from our margins last year to the 39 is from cloud execution, and that's in our hands. We know how to do it. It's not economic related. We're going to You know, whether the economy is up, down, or sideways, we're going to complete the cloud, and, you know, that plugs in. You've got, you know, workforce solutions growing faster than the rest of Equifax, you know, at their 50% plus EBITDA margins. You know, that accretes in margin, you know, between now and 2025. You've also got our new product rollouts, our non-mortgage growth, you know, that we expect to deliver, you know, is also going to deliver, you know, margin expansion over that time frame.
spk23: Yeah, that's cool. As we get to 2025 and the framework even we laid out last November, right, we indicated we expect the markets that we're in to be somewhat normal. So we were expecting kind of a normal non-mortgage market, and we're expecting the mortgage market itself to move back toward more normal levels, right? So a big part of, in addition to the cost takeout related to tech transformation, which Mark already referenced, a big part of the mortgage increase is related to that revenue growth. And clearly, we do need, in order to deliver those levels, we do need to see some recovery in the mortgage market and having it move back toward more normal and then obviously some normal non-mortgage markets. And given the fact that we're performing so well in non-mortgage growth, it gives us comfort that we have a path there to that $7 billion. But we do need to see some recovery in some of the markets we're serving, particularly mortgage.
spk19: Okay. I get that. That's helpful. Thank you. And then, Mark, your comments in USIS about Mortgage shopping being a tailwind. I appreciate that. I just wonder, as rates really have blown out here and the 10 years yield is up again today, remarkably, how long can that persist? Does there just come a point where rates and accordingly housing affordability reaches a level where you're just not going to see that kind of behavior? And is that something you're contemplating as you think about you know, the ultimate 23 guidance you offer us?
spk06: It's not. You know, it's just our view is and what we've seen and we continue to see it is that at these higher rates, consumers just spend more time, you know, shopping around. And when they do that shopping, USIS benefits, you know, from that credit pull that happens in the shopping process. And we do not expect that to change. I think your question maybe is a little bit different around, you know, at these high rates, you know, are people going to still buy houses? And at these high rates, are people still going to do some level of refis, which there's some. It's obviously down a bunch, but it's more cash-out refis to access the multi-trillion dollars of untapped home equity in the U.S. And as you know, the mortgage market doesn't disappear. It's certainly declined further and more rapidly than we've expected. As you know, we've revised our mortgage guidance three times this year because We couldn't forecast where the Fed was going to take these rates, and I don't think anybody can except higher from where they are now. We're actually getting better at forecasting out a couple of months, meaning inside the quarter. But as you get out past a quarter, looking out with what's happening with the volatility of where rates are going, it's more challenging. So we'll certainly take all of these factors in place when we put out our 2023 guide in February. and have a clearer view, hopefully then, of what the mortgage market's going to look like. But, you know, there's no question the mortgage market's going to bottom at some point. And it doesn't go, obviously, to zero. There's going to be an area where people still move. And even at this interest rates, and it's happened before in the U.S., you know, people still buy homes. So, meaning they buy homes and get mortgages. So there's that level of floor. I think we're all struggling with where it is. And, you know, we'll have a better view you know, in a few months of what that looks like for 2023. And as John talked earlier, you know, first and second quarter, we're going to have, you know, tougher comps against, you know, a very strong mortgage market in first quarter this year. But as we get to third and fourth, we'll start, you know, comping more towards what should be, you know, a floor until, you know, we get past whatever economic event we're in here. Appreciate it. Thank you.
spk22: Thank you. Our next questions come from the line of Kevin McVey with Credit Suisse. Please proceed with your questions.
spk09: Great. Thanks so much. Hey, obviously a lot of uncertainty on mortgage, but with the inquiry guidance in Q1, is there any way to think about what percentage of revenue mortgage could be in the first quarter? And then any way to think about how you think that'll progress over the course of 23, just as a percentage of revenue more broadly?
spk06: I think, Kevin, as we talked a few minutes ago with Andrew, we're not doing any guidance on anything on 23 right now. We're focused on the fourth quarter, and we'll certainly give that guidance when we get to likely our February fourth quarter earnings discussion.
spk09: Okay. And then, Mark, you talked within EWS, obviously EWS, kind of the relative outperformance is kind of records, penetration, system-to-systems, direct integration, pricing. Is there any way to ring-fence the contribution across each one of those? Like, is it primarily the records growth that drives it, or just so we get a sense of across those five buckets, or is it kind of evenly distributed?
spk06: Yeah, I wouldn't say even, but they're all important. There's not one that's disproportionate. You know, look, record additions are very attractive and very unique for the workforce solutions business because, again, you know, it drives revenue, you know, day two after you add the records. And as you, you know, 16% record growth in the quarter, you know, and we've driven records up double digit for the last number of years, you know, that's certainly a positive. We take prices up every year, you know, so that's something we'll do in January, you know, with all the verticals in Workforce and across Equifax. New products, we talked about Workforce Solutions is indexing you know, kind of north of our 14% in the quarter and our 13% guide for the year of new product introductions. That's very attractive, you know, for workforce. And, you know, we've talked in prior meetings about, you know, continuing to drive system-to-system integrations. And, you know, penetration is a big opportunity in workforce. You know, if you think about the credit file, it's very highly penetrated in all financial services verticals. Workforce, you know, is not. Even in mortgage, there's still – 40 odd percent of mortgages that we don't see that are still done with paper pay stubs. You know, we only do, you know, roughly one in 10 roughly background screens. You know, in government, you got a $2 billion TAM and we've got a $300 million roughly business there. So there's a lot of government penetration opportunity. So you can see each of them are attractive and very valuable, which is, you know, why we have a lot of confidence in workforce solutions, 13 to 15%. you know, long-term growth rate.
spk09: Great.
spk22: Thank you. Thank you. Our next questions come from the line of Shlomo Rosenbaum with Steeple. Please proceed with your questions.
spk04: Hi. Good morning. Thank you for taking my questions. Hey, Mark, can you talk a little bit about the NPIs and whether there's been any kind of change in, you know, strategically about how you approach that? we're seeing is, you know, much higher NPI, like 14%, but we're seeing the numbers of new products, you know, obviously much lower than we saw last year. Is there some kind of strategy that you have in terms of less shots on goal but more higher percentage shots of goal? Or does that just vary year per year and we really can't look that much into the numbers of NPI like we used to?
spk06: No, numbers are important, obviously. I think just maybe spooling back to kind of two years ago when we really ramped up our, new product resourcing. We brought in a chief product officer. We've got more of a cadence around it. We did that intentionally in advance of our single data fabric and in advance of our cloud capabilities because we were convinced that the cloud, which again, we still have to complete, we're well down the road, and a single data fabric will allow us to bring things to market we couldn't do before. Use the example of the product we rolled out this week at the Mortgage Bankers Association. of taking our telco utility cell phone data and embedding it in the credit file. That's a very sophisticated product. It's going to drive higher hit rates, higher approval rates, higher originations for our customers. And it's something that only Equifax can deliver. So that multi-data solution is a big part of our new product capabilities. The second area is really leaning more into our trended data, our historical data. Workforce Solutions now gets, what, 40% of revenue from historical records? Almost 50. Almost 50 now. So you think about how they've changed that in the last couple of years through their new product capabilities. And think about a mortgage solution that shows historical income data on a consumer back a year, two years, three years, four years that helps in the underwriting process. We sell that at a higher price point. Think about in the talent vertical, you know, a history of job employment that's required. You know, as you know, we have 500 and I think 60 million total records now in the twin database. And that's, you know, well over five and a half jobs on the average American. So that, you know, that multi-data as well as historical solution. I think the other thing that's quite encouraging I mentioned in my comments earlier is that, you know, workforce solutions that's further down the road in the cloud is delivering well north of the 14 vitality they're one of the big drivers of that guide up for the year on new products and you know that's what we wanted to see that's what we expected to see and i think the good news is we're seeing it meaning as we get further into the cloud we're able to deliver those new solutions to our customers and i think as you know uh new products are also very high um obviously they drive incremental revenue growth but they're very high incremental margins you know you're thinking 70 80 percent kind of incremental margins on new products. It's why we're driving the initiative, but it also makes us more valuable to our customers. We're bringing them solutions that help them solve problems and either drive their top line, their bottom line, or both in a very positive way. So it's a big focus of ours, and it's one that's central to our long-term growth strategy. And you remember back in November, In our investor day, you know, we talked a bunch about that being one of the factors of increasing our long-term growth rate to the 8 to 12 was our expectation, and now you're seeing it, of our ability to deliver that 10% vitality in our long-term growth rate.
spk23: And just a clarification, the almost 50% I quoted is a verifier revenue.
spk06: Yeah, from historical records.
spk04: Just to clarify then, I understand it's important. What I'm just trying to understand is the difference between the 14% and the amount of NPI that's coming in. That's kind of the block.
spk06: That's what I'm trying to get at. Sure. You used the term shots on goal. Do you want to have more shots that go in or more shots on goal? We want both, right? You have a bell curve with any new product portfolio you put in place. You're going to have some products that are screaming winners. know that really hit the mark with our customers and some that are less successful you know and then there's also maturity cycle to them as i mentioned you know we'll roll out products in the second half of this year that you know won't deliver any revenue in 2022 but they'll start maturing in 23 24 25 you know that's really what you have from a cycle standpoint so to answer your specific question you know we're looking to have more and obviously having more that deliver larger revenue and I think we're just getting better at that, primarily because we're really being quite deliberate around collaborating with our customers. You know, instead of creating a product we think the market wants, we're creating a product that we know a customer wants because we're collaborating with them. And then once it works with one customer or two, then we productize it to take it out to the rest of our customer base.
spk04: Okay, that's helpful. Thank you. And then just one just for John. I thought that the ARDSO would improve sequentially this quarter because I thought that that billing system conversion would be behind you. Is that something that we should still be thinking about for the fourth quarter, or is there something just, you know, is this level of ARDSO just, you know, by the mix of revenue more natural?
spk23: So the conversion you're talking about, so part of transformation, as you said, removing financial systems to the cloud as well, And the major movement of financial systems, including billing systems, actually runs through October, right, a little bit in November. So some of the level of elevated DSOs we saw in the second quarter did continue into the third quarter. It's related to that system migration, and we expect to see substantial improvement as we move through the fourth quarter.
spk04: Great. Thank you.
spk22: Thank you. Our next question has come from the line of Craig Huber with Huber Research Partners. Please proceed with your question.
spk03: Yes. Hi. Good morning. My first question, your APRIS acquisition, can you maybe just tell us how the integration has been going here in the last year? And I'd be curious what the pro forma organic year-over-year revenue growth was in the third quarter for the acquisition and what was it maybe for the 12-month period too? Yeah.
spk06: Yeah, so the APRIS Insights Acquisition, as you know, is our incarceration data business. We're really pleased. We bought it really just a year ago, so it's 12 months in, and the integration is progressing very positively. We talked about some of the joint solutions that we're already bringing to market, putting their data into our total verified data hub, and we've got new products in the pipeline, both on you know, enhancing their solutions with their data, but also combining their data with some of the other data that's used either in the talent or in the government verticals to, you know, deliver a single poll with, you know, either employment data plus the incarceration data or employment education and incarceration. So, you know, we've seen really positive opportunities there. As far as growth rates, you know, it was growing, you know, kind of mid-teens when we bought it, and it still is. You know, we're very pleased with the growth of the business.
spk03: Okay, great. My other question is, you talked on this call and prior ones about the health of the U.S. consumer being quite strong versus pre-pandemic 2019 levels. I'm curious, are you saying that you, with all the data you look at, that it's not materially getting worse versus three and six months ago, the U.S. consumer?
spk06: Absolutely not. No, they're still strong, and there really hasn't been a change in 2022 about, you know, around the consumer. As you know, employment has unemployment has gone down and employment has gone up, you know, since the beginning of the year. So that's good for consumers. Wage growth is up, which is good for consumers. And that helps their balance sheet. Obviously, inflation is a bad guy, you know, and it is hurting, you know, lots of consumers. But even with inflation, you know, consumers, you know, are still out there spending, you know, and traveling and doing all the things that, you know, they do in their lives. So the credit scores are up 15 points from 2019. That hasn't really changed. You know, they're in good shape. It You really have to watch employment and unemployment. That's where things generally change with a consumer. Obviously, inflation is challenging, particularly for the lower-income demographic, but the rest of the population is doing okay. Great. Thanks a lot.
spk22: Thank you. Our next questions come from the line of Andrew Nicholas with William Blair. Please proceed with your questions.
spk20: Thanks. Good morning. In the international business, how much of the recent strength would you attribute to share gains versus end market strength at the country level? And to what extent would you say the cloud transformation is already paying dividends in terms of growth and vitality index there?
spk06: yeah um so i would add a couple things to the list i wouldn't call it you know it's obviously end market in 2022 is stronger than 2021 as they you know the international markets came out of the pandemic earlier this year um but uh you know the the end markets aren't you know like in latin america the end markets are always strong just because the underlying growth there um but i wouldn't say there's been a change in the end markets um you know our team's executing well so there is some commercial Strength there, new products are a big deal as far as bringing new solutions, new products to market. For example, we're bringing our account identity and fraud solutions to a lot of our international markets. So we're starting to get some traction there, which is helping our international platforms. Cloud isn't really a benefit to them yet. They're further behind the North America intentionally in cloud with the exception of Canada. So their cloud benefits are really going to be more in 23 and really actually more in 24 as they complete the cloud. What would you add to international, John?
spk23: Just in debt management. I mean, they're growing very fast, right? I don't know if you'd call that share or not, right? But what it is, we have certain large customers that we have very high positions with that are growing very fast, right? And principally the UK government. So that's driving a nice piece of growth, obviously, in the UK.
spk20: That's helpful. Thank you. And then for my follow-up, John, maybe a question for you, just a quick cleanup item. Corporate expenses ticked down pretty significantly on a sequential basis. Could you speak to the driver there and how sustainable kind of that new level is? It's obviously ticked down quite a bit here, a couple quarters in a row. Just want to make sure I understand the dynamics driving that. Thank you.
spk23: So if you're just doing sequential, third versus second, right, the big drivers were corporate technology spend and also tech transformation spend. Some of that was just good cost management. Some of that is around tech transformation, and that can move between BUs and corporate, and we saw some of that in the third quarter as projects complete in corporate or teams move between corp and the BUs. You can see expenses come down in corporate. We had a little bit of that in the third quarter. We also saw some good cost management and some sequential declines across corporate expenses in general, and we did see some lower expenses specifically related to to compensation and variable compensation broadly because we took the year down. So I'd say those were the big drivers. I think we expect to be at lower levels of expense than last year substantially, right, which you've seen all this year. Probably in the fourth quarter you're going to see some of those expenses tick back up again because we'd expect to see some more investment in technology and corporate technology So some of the benefit we got in the third quarter we'll give back because we're spending more on transformation. So for example, Shlomo's question around financial system transformation, some of that's occurring in the fourth quarter. So hope that helps.
spk20: It does. Thank you very much.
spk22: Thank you. Our next questions come from the line. It's Jeff Mueller with Barrett. Please proceed with your questions.
spk05: Yeah, thank you. Good morning. mark any additional perspective you can provide on what you're hearing from customers on the pre-screen and marketing activities starting to pull back just given the health of the consumer at this point and uh and bank balance sheet health so we just love to kind of like square those two points yeah as i said earlier jeff you know broadly the consumers
spk06: unchanged from second quarter. And so our bank balance sheets are very strong. So there's no change there. So don't take whatever you heard earlier as some message around that we're seeing big pullbacks. What I will tell you is every time I meet in the C-suite or with CROs, we're all talking about, because we all watch CNBC, we all watch what's happening with inflation, we all see what's happening with interest rates, when will it have an effect on consumers? you know, and when will it have effect on ability to pay and delinquencies. And again, my view of someone who's been around financial services for, you know, multi-decades, it all starts with employment, you know, and that's the indicator that we watch, I watch, and then after that is delinquencies. But, you know, we're seeing it's still a strong job market. I think there's not quite two, but there's 1.7 jobs open for anyone who's out of a job now, something like that, you know, so it's still very vibrant. And, You know, we don't see indications of what I would call pullback, you know, but everyone's watching it. It's clearly a conversation in every meeting. Got it. Appreciate the perspective.
spk05: And then within TWIN, 16% records growth is great. As you said, way above the long-term framework to drive a really good growth model. But growth accelerated year over year. The comp doesn't look tougher. Sequential growth seemed just okay, considering you're still onboarding partners and nonfarm payrolls are growing. So any perspective on that figure? And if you can confirm if there was any partner record attrition, thanks.
spk06: Yeah, there's some levels it's, it's very de minimis of what I would call churn inside of the records, but obviously they're generally growing when you're up 16%, you know, so there's, it's not something that we see. And there is, you know, obviously it changed some changes in employment with some of our partners. As you go through the year, there's a seasonality as you might imagine, uh, you know, where there's hiring in some industries, think about retail warehouse, you know, related to the holiday season, uh, you know, that we see increased employment, which results in increased records for us, you know, call it in the second half of the year, and then a change in the first half of the year when some of that, you know, comes, some of that holiday hiring, you know, comes out of the system. But, you know, broadly, you know, we are seeing, obviously, at 16%, strong record growth inside of the twin set.
spk23: I'd say it's generally true that we're seeing, it's actually been a very good year, both in terms of signing new partners, but also direct contributors, right? So I think we feel like in terms of the execution of the team and on building new contributors, it's really been an outstanding year. Yep, got it. Thank you.
spk02: Thanks.
spk22: Thank you. Our next questions come from the line of David Toga with Evercore ISI. Please proceed with your questions.
spk18: Thank you and good morning. Just bridging to some of the earlier questions on revenue, but focusing specifically on EWS, if we take your fourth quarter 2022 revenue growth guide of down at least 3% and kind of think through your commentary on Q1 mortgage credit increase being down 50% or so year over year, how should we think about the starting point for EWS revenue in 2023?
spk06: Yeah, again, we don't want to get into 2023 guidance. We gave you our fourth quarter guidance. It's too early to talk about 2023. And I think we talked about, you know, obviously mortgage for sure in the first half will be a challenge, you know, because of the strong mortgage market in the first quarter last year. But we, in some of the previous questions, talked a bunch about, you know, what are the positives, if you will. You know, having the non-mortgage total growth of 20 and organic growth of 13 is You know, that's momentum coming out of 2022 into 2023 that, you know, is obviously going to be important to us. We talked about the fact we do pricing actions typically on 1-1. So that's going to be a positive, you know, for us in 2023. The new products that we talked about, the acquisition synergies and growth, you know, going into 2023. What else would you add, John? Yeah, Mike.
spk23: We covered it in the earlier question. I think it's a pretty good list, right? So specific to EWS and specific to Verifier, records growth was obviously outstanding so far this year.
spk06: Well, 16% records growth carries through until next year. And I think we talked about 10 new partners being signed up, three in the quarter. Those won't go online in the fourth quarter. Those will be additions that will happen in the in 2023 that will drive records. And, of course, we're out there, you know, working to add more records that will help EWS.
spk18: Understood. Just as my follow-up, the 38% organic non-mortgage growth at Workforce Solutions in Q4, talent up 50% organic, government up 44% organic. How should we think about the runway for growth for both talent and government in 2023? Are these types of growth rates sustainable or have they peaked?
spk06: Yeah, we're not giving growth rate outlook for 2023. That's not the intention of this meeting yet. But when you think about those two verticals, I talked about it earlier, you think about talent as a $5 billion TAM where we have a ton of penetration opportunity because we're only doing 1 in 10 or 2 in 10 background screens. So that's an opportunity there. And then in the government, very similar. Government, that's about a $2 billion TAM for that kind of verification of income. and employment in some cases. You know, we've got a $300 million business, so there's a lot of growth potential there. And add on top of it kind of the core workforce solutions growth levers outside of penetration, you know, of adding more records is going to drive hit rates in both businesses, whether it's, you know, for background screening or government social services. You know, you add in our new products, pricing changes that we're going to do early in the year. System-to-system integrations drive revenue for us in both of those verticals. So those are the kind of growth levers the team's going to work on and is in flight on, as well as the momentum that we have coming out of the year, which is quite strong.
spk23: Over the longer term, we have a 13% to 15% long-term growth rate. So obviously the growth rates we're delivering today in those specific verticals are well above that. So we would expect over time we're going to have very good performance in those verticals, but growth rates over time we would expect in general in non-mortgage are going to converge more down toward our long-term model.
spk18: Understood.
spk22: Thank you. Thank you. Our next question has come from the line of Tony Kaplan with Morgan Stanley. Please proceed with your questions.
spk13: Thanks very much. Just looking ahead, how should we be thinking about your ability to pass on price increases in EWS versus prior years if we do have an economic slowdown? Does that impact pricing? Do you temper inflation? you know, what you're trying to push through and just maybe if you could ground us on how we should be thinking about like a normal pricing baseline for EWS for price increase.
spk06: We don't see any real change in not only EWS, but across Equifax about what we're going to do in price in 2023. And like, it's already happening, you know, so it's, it's, it's not going to, you know, we're already in flight talking to customers about what our, Plans are around price for 2023 because most of the pricing goes into effect 1-1. Workforce, as you know, is a very unique solution that delivers really unique value to our customers. So we have more pricing power there or flexibility. But we're always balanced about price, whether it's good or bad economic times. But I would say broadly, we don't think about pricing being different if there's an economic event. And again, an economic event hasn't happened yet. you know, outside of the mortgage macro, you know, the economy is quite good. Our non-mortgage business is very strong. Our customers are strong. The consumers are strong. So, you know, we're kind of doing what I would characterize as kind of a normal process in January.
spk13: Great. And then you've talked for some time now about getting the gig and pensioner records. Have you been having success in getting those? And is there a different process for, you know, getting gig records versus W2 records? Are they harder to get because it's more maybe fragmented outside of ride sharing? You know, just how is the update on the process and how your success is and how different it is? Thanks.
spk06: Yeah, there's still a bunch of runway in W-2, which you heard, and we're penetrating that, you know, which is most of our records today are W-2. So that 16% growth is primarily in that set. And there's still, you know, another 40, 50 million records to get there. And then if you go to gig, you know, it is more dispersed. And, you know, we've got a number of strategies underway to go after those records, which are, you know, equally valuable. And, you know, we've got some traction around pensioner records. As I mentioned, we've signed, you know, a big partner, to bring some records in. We're also getting records directly from, you know, large kind of legacy companies that do their own pension or payroll processing or pension or payment processing. So, you know, we're working on all those avenues and, you know, we've got dedicated teams on them. And, you know, our expectation is to continue to add records from all three areas, you know, as we move through the fourth quarter and into 23 and beyond. And, you know, what's energizing for us is the opportunity to still double the data set. You know, with 111 million uniques and, you know, call it 210 million or thereabouts total employed or pension payment recipients in the United States, you know, we got a long runway to add new records to the twin data set. And again, I mentioned this a couple of times, I know it's not lost on you, Tony, that we're already getting inquiries on those, right? So we get inquiries on the half of the records we don't have. So it's just a matter of adding them to drive our revenue growth.
spk13: Perfect, thanks.
spk22: Thank you. Our next questions come from the line of Simon Clinch with Atlantic Equities. Please proceed with your questions.
spk07: Hi, everyone. I was wondering if I could just go back to the verification services revenues. And something I've been sort of tracking has been some non-mortgage revenues on a sort of per average record basis. And, you know, since the pandemic, that's just been moving up steadily pretty much every quarter since then. It's ticked down for the first time. And I was wondering, is there anything in particular about in terms of that kind of structural opportunity on a revenue per record basis going forward? If we, you know, should it be capped out at any particular time or is there anything we should read into that?
spk06: Yeah, no, we've been growing revenue for record quite meaningfully, you know, and again, the way you should think about it and the way we think about it is, you know, as we get into new verticals, you know, like talent and government, you know, or even I would characterize, you know, cards and, you know, as a newer vertical, autos underpenetrated, you know, all of those verticals, as we add those new revenue sources, the records become more valuable, right? Because we're you know, monetizing that same record multiple times when someone applies for a mortgage and then a credit card and then an auto loan or a P loan and then they apply for a new job or then they have to get government social services. You've got, you know, multiple avenues to monetize that record. So it's a, you know, it's part of the power of the business.
spk23: The only thing I'd add, right, and you know this, Simon, right, is that the, obviously the different verticals we have have very different price points and very different product structures. So So you can see mixed changes in any given period when you're taking a look at transactions and records and revenue. So just make sure you keep that in mind as you're running your analytics.
spk07: Understood. Okay. Thank you. And just as a follow-up, we talked a lot about how the mortgage revenue declines are really impacting margins, very high incremental margin. I just wanted to just confirm again that should mortgages ever rebound? Should we just assume that it carries that kind of 80% incremental margin on the way up as well? Is there any reason not to assume that? And then longer term, is there any reason why the non-mortgage revenues shouldn't carry the same kind of incremental margins as the mortgage business does today?
spk23: So are you specifically talking about Verifier?
spk07: Yes, sorry, in Verifier.
spk23: Okay. Yeah, so variable margins or the contribution margins for mortgage, obviously, yeah, going in, coming out should be very similar. Whether or not we reinvest some of the incremental profit generated would be a different discussion, right? But they certainly should be similar in terms of the contribution margin of both. Generally speaking, the margins across verifier are similar. They can be somewhat different depending on the relative price point. and the volumes relative to the price point, so you can see some higher cost for different, kind of to your earlier question, but broadly speaking, yes, the margins for the products across verification services are relatively similar.
spk07: Okay, so it's just a question of reinvestment. Okay, thank you.
spk22: Thank you. Our next question has come from the line of Seth Weber with Wells Fargo. Please proceed with your questions.
spk24: Oh, hi. Good morning, guys. I just wanted to ask about the sequential improvement in USIS EBITDA margin that you guys are forecasting for the fourth quarter. It looks like revenues have kind of flattish sequentially. Is that just some of the sales and marketing expenses or or going out, or it doesn't seem like mix is really changing a lot. So just if there's any color on the 200 basis points of uptick, 3Q to 4Q.
spk23: Yeah, so sequentially, generally, we see a little bit of an uptick. Certainly, we definitely see an uptick in non-mortgage revenue, generally, in USIS in the fourth quarter. So we'd expect to see some of that, and that tends to draw very high variable margins. And given that, we expect to see a little more leverage on some of the OPEX. That's all.
spk24: Okay. I mean, I'm just trying to understand, you know, over the last, you know, prior to the second quarter, the business was sort of high 30% margin. So I'm just trying to think through if there was any reason why you wouldn't get back to that level, you know, relatively quickly next year. It sounds like you're moving back in that direction.
spk06: So relatively quickly, you know, obviously the mortgage market decline is weighed on that.
spk23: Very heavily, right? So, obviously, as we get into 2023, we'll give you a better view as to what we expect 2023 USIS margins to do. Right.
spk24: Okay. And just a clarification, you guys talked about a couple times you referenced M&A synergies expected over the next couple of years. Is that revenue synergies or expense synergies or both, or just how should we think about that?
spk06: Both. Yeah, you know, when we do these bolt-on acquisitions, you know, part of our strategy is to bring in unique data assets that we can combine with other Equifax data assets in order to drive new solutions to market. And that generally takes time. We've got to integrate the business, integrate their data set into our single data fabric, and that usually takes, call it, a year and change. And then we can start bringing those to market, and then those drive the top line and the bottom line.
spk24: Got it. Okay. Thank you, guys. Appreciate it.
spk22: Thank you. Our next question has come from the line of Faiza Awe with Deutsche Bank. Please proceed with your questions.
spk08: Yes. Hi. Good morning. Thank you. I wanted to talk about EWS margins again. And I'm curious, when you first gave the margins earlier this year, I think you talked about 54%. And I just want to understand, is the deceleration from that to where we are today entirely mortgage-related? Or is there anything else in the underlying business that has impacted that change?
spk23: The biggest driver in margin degradation by far is the impact on revenue and the very high variable margins we get from mortgage. So that's the biggest driver. We have talked about some increased expenses. We talked about some marketing investments and things we're making this year to drive NPI, which have been very successful. But generally, overall, the biggest driver in the movement has been related to the to the reduction in revenue related to mortgage.
spk08: Okay, got it. And then just as we think about those margins, I appreciate, you know, I know you're not providing 23 guidance, but I appreciate you giving us a, you know, EWS margin outlook of about 50%. I'm curious if you can give us you know, just not numbers, but just holistic thoughts around how we should think about the, I guess, the quarterly cadence. I mean, I'm thinking we should build through the course of the year. Is there anything you can say about 1Q margins, given that you did provide, you know, an outlook for mortgage inquiries for the first quarter? Sure.
spk06: Yeah, you know, we're not ready to talk about 2023 guidance. We did want to make you clear that, you know, first quarter is going to have a tough comparison given the fourth quarter exit and the strength in the first quarter last year. And then on EWS, you said about 50%. We actually said over 50% just to be accurate. But, yeah, we'll be ready to give 2023 guidance, you know, when we get into 2023. Perfect. Thank you.
spk22: Thank you. Our next question has come from the line of George Tong with Goldman Sachs. Please proceed with your questions.
spk02: Hi, thanks. Good morning. You mentioned that non-mortgage growth in 4Q will be strong, but not as strong as 3Q. Can you discuss data points that you're seeing in the bank card and auto lending sectors that suggest an incremental moderation in strength in those categories?
spk06: I don't know if you were listening, George, but we got that question from earlier that we're not seeing any change. The non-mortgage growth rates that we're talking about are very, very high, and we expect them to still be very strong in the fourth quarter.
spk23: And we did give a view of international in the fourth quarter. International was outstanding in the third quarter, still going to be very strong in the fourth quarter, but its growth rate is somewhat lower, and obviously international, their revenue is as virtually all non-mortgage.
spk02: Okay, got it. As you look at the mortgage category, certainly there was a significant amount of refinancing activity that was pulled forward in the 2020 and 2021. To what extent does this pull forward structurally lower the medium-term mortgage revenue growth outlook for Equifax?
spk23: Obviously, we're seeing the impacts of that right now since refinances has dried up predominantly, right? So what's left is just cash out refis, and we're actually now starting to see substantial growth in HELOCs, right, replacing even some of the cash out refis. So I think we're living through, obviously, the impact of that dramatic reduction in refinance right now. We gave a view of first quarter mortgage, but again, in terms of giving a view as we go forward, which is kind of for us, 2023 would be midterm, it's just a little bit earlier. Unfortunately, you're just going to have to wait until until we get into the first quarter for us to give our 2023 guidance.
spk02: Well, it really wasn't a 2023 question, more like a medium-term, longer-term question, since you've in the past given longer-term guidance targets before.
spk06: I don't know what you mean by medium-term, longer-term. Do we expect the mortgage market over the long-term to return to a more normal level? Absolutely. No question about it. Is that what you mean?
spk02: Well, medium term, so I guess over the next two to three years or two to four years.
spk06: What's going to happen with the economy in the first year or two of that cycle? And then at the tail end, you said two to four? You get out to four years? With my expectation, you'd get back to a more normal level, but I don't know what's going to happen with the economy. I don't think you do either, George. Got it. Okay.
spk02: Helpful. Thank you.
spk22: Thank you. Our next questions come from the line of Heather Volsky with Bank of America. Please proceed with your questions.
spk16: Hi, thank you for taking my question. I wanted to just clarify, well, two questions. One, I wanted to clarify the benefit you see next year from the cloud transformation. You said half the 500 basis points, so is that a gross or net 250 basis point benefit flowing through And also, does that include sort of rolling off some of the additional costs? Is that just savings, or is that also rolling off the costs from the implementation? And then the other question, totally separate, but just on the talent solution side, you talked about sort of the white space there, just sort of what can get you further penetrated in the background check industry. Thanks.
spk23: So on transformation, the savings are related to all costs related to transformation, both the lower COGS as well as the lower investment levels. And then also, they're going to be more back-end loaded than front-end loaded, right? Because you get the savings as all customers migrate and you can actually decommission systems. So we'll start getting savings in 2023, as we said, and we feel good that that's going to happen. But the bigger savings happen as you get into 24 and 25. So you should think about that type of a cadence. What was your second question again, Heather? Sorry.
spk14: Just on the cloud transformation, the 250 basis points, is that the flow through this year or into next year?
spk06: No, I think as John said, and we've said consistently not only in this call and prior calls, the 250 is really between 22 and 25. And if that passed the 39% EBITDA margins in 2025, that's our goal. That happens, you know, over 23, 24, and 25. That's not a 23 change.
spk23: And I think more of that would be back-end loaded, as I just said, right, because it happens as systems actually decommission. So we'll see some in 23, yes, but you're going to see more of it in 24 and 25.
spk14: Thank you very much.
spk22: Thank you. Our next question has come from the line of Sarinder and Finch with Jefferies. Please proceed with your questions.
spk21: Good morning. I'd like to start a question regarding your long-term framework. Can you maybe talk about, is that intended to be like a rolling three-year measurement period or like a five-year period? And then maybe when we think about something like EWS non-mortgage, which continues to grow well above that framework, how often do you revisit the framework such as that and maybe some of the factors that underpin it? For example, at some point, whether it's three years, five years out, you know, the W2 records within the TwinDip database will mature. So how do we think about some of those longer-term drivers of the business?
spk06: Yeah, I think, as you know, we put this in place a year ago, and I believe that was the first change in Equifax's long-term framework in like five or six years, or maybe longer. You know, the old framework was 7 to 10. We moved to 8 to 12, 100 basis points on the low end and 200 on the high end. It was intended to be a long-term framework, and We could all talk about long-term, but let's say five years plus, meaning we expect the company to grow in that range, short of economic events. Those are something you can't put in a long-term framework, but 8% to 12% growth. For workforce in particular inside of the 8% to 12%, and we talked about this already this morning, we have an expectation of them growing 13% to 15%. That's their long-term framework inside of our 8% to 12%. meaning they're going to be highly accretive and grow faster than the rest of Equifax. That's something that we expect. As you point out, they've been outgrowing that 13 to 15, which sits inside of our 8 to 12, which is good news. In our eyes, that gives us confidence in the 13 to 15 over the long term. Of course, the 13 to 15 is made up of record additions. It's made up of new product rollouts. It's made up of penetration. And they've got uniquely a lot of penetration opportunities in all of their verticals because, you know, our income and employment data is still a fairly new data asset, you know, in the scheme of data assets. The credit file has been around for 70 years. Income and employment data has been around in a digitized way only for, you know, 15. So, you know, we've got a lot of confidence, you know, in the 13 to 15 for workforce and because of all of their growth levers, but also because they've been outgrowing that 13 to 15 for the last three or four years. And your question, I think you also asked a question about when will we revisit this? You know, it's just, it's actually not even 12 months old. Our investor day was, I think, on November 7th last year. You know, so we're very confident and comfortable with what it is today after, you know, almost 12 months. And you know, at the right time if things change, you know, we would look at it again. But, you know, we see no reason to change it and we still have a lot of confidence in it.
spk21: That's helpful. And then maybe as a follow-on, when we think about the contribution of new products to revenues as measured by the Vitality Index, so is that intended to be all growth on top of the existing revenue base or is there some cannibalization of revenues that we need to consider or maybe the play between the two? How should we think about the actual measurement of that and what it means from a modeling perspective.
spk06: Yeah, you know, I think in our long-term framework, John, we talked about new products in November last year adding one to two points.
spk23: Yeah, and we said lethality 10%.
spk06: Yeah, and that translated into, you know, that was one of the drivers of us bringing up our long-term growth rate from 7 to 10 to 8 to 12 was The increased new product rollouts is going to be a factor of that change in our long-term growth rate. And then add to it workforce solutions growing faster than the rest of Equifax, approaching 50% of Equifax. That's accretive to that growth rate if they're growing 13 to 15. And then the average for our long-term is 8 to 12. That's accretive. And then we believe the cloud completion and cloud competitiveness also is a factor in that change from 7 to 10 to 8 to 12. I don't know if that's helpful.
spk23: And our vitality index is supposed to represent truly new products, right? I mean, certainly even new products can cannibalize an existing product, but they're not supposed to be tweaks, right? We don't tweak a product and call it a new product. It needs to be a product that's substantially different or substantially new to Equifax.
spk21: So this would be clients generally buying these on top of whatever existing products they're buying?
spk06: Yeah, there's clearly that it'll replace, you know, some products, but they're generally, as John pointed out, you know, unique additions, you know, and use the example I shared this morning of, you know, the mortgage credit file that we've been delivering to the marketplace for, you know, 70 years in some fashion. You know, we rolled out a new solution that's going to be our file plus this telco utility cell phone data that's going to differentiate our mortgage credit file. That's a new product. You know, some customers will only buy the new product. Some will continue to buy just the credit file. You know, that's really, so is there some cannibalization? You know, could be, but there's also should be. We expect share gain, meaning our credit file is more valuable than our competitor's credit file because of the addition of that unique data to it. That's very helpful. Thank you.
spk22: Thank you. There are no further questions at this time. I would now like to turn the call back over to Trevor Burns for any closing comments.
spk01: Thank you, everybody, for your time today. If you have any follow-up questions, feel free to reach out. Thank you.
spk22: Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.
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