Good afternoon, everybody. Thank you very much for joining us at Stifel's Cross Sector Insight Conference in 2024. I want to welcome you all for being here, and welcome our CEO and CFO of Equifax, Mark Begor and John Gamble, respectively. Thank you very much for making the trip. We really appreciate it. I think most people in this room probably know what Equifax does, but I would say that, you know, I've been covering Equifax for about a decade and a half, and I would say that the company has morphed a little. Maybe if you could give us, like, a minute or so about how you think of the business, and it's morphed from being a credit bureau to-
Much more.
much more-
Yeah.
... than a credit bureau. Just, I don't wanna take up the whole Q&A session, but maybe just give us the elevator pitch.
Yeah, it's obviously we're much more diverse than our traditional competitors, TU and Experian, particularly given our Workforce Solutions business, you know, which is such a different business. It's now Workforce, as you know, as we're approaching 50% of our revenue. It's our fastest-growing business, and it's in markets that we're just, credit bureaus are not in. You know, our largest vertical in Workforce Solutions is now Government, as we call it, which is where our income data is used to deliver Government social services to the 100+ million individuals in the United States that receive rent support, childcare support, food care support. So that's a $700 million run rate business. You know, it's more than 10% of Equifax-
that didn't exist, you know, call it 7, 8 years ago. You know, so dramatic change. You know, we've got a $400+ million business where we sell our data to the background screeners. Didn't exist, you know, obviously different than a credit bureau. We have a $400 million business inside of Workforce Solutions that delivers regulated HR solutions to HR managers. Unemployment claims, Work Opportunity Tax Credit, W-2 management, I-9 verifications, you know, on an outsourced basis, you know, from HR managers. That's not a credit bureau. So Identity and Fraud's another one that, you know, all three of the credit bureaus do that, but, you know, there's a lot of other participants in the huge TAM for Identity and Fraud.
So when you look at all those businesses, you know, you've got, you know, large portions of Equifax that aren't in financial services. Now, obviously, we're very large in financial services between our credit business and USIS, and our income and employment business, which also participates as mortgage, auto loans, credit cards, and personal loans. And of course, we have our international business, which is a lot larger than it was, certainly, 10 years ago. You know, we've added acquisitions like Boa Vista last year, to give us the number two position in Brazil, and our international business is north of 20% of Equifax today. So a very different company, very different growth drivers, obviously a faster-growing company.
You know, from following us, if you go back to, you know, as recently as 5, 6, 7 years ago, our long-term growth rate was 7% to 10%, with 25 basis points of operating leverage per year. We increased that, you know, as a part of the cloud transformation, as a part of our new product initiative, and with Workforce growing faster than the rest of Equifax, we increased that from 7% to 10% to 8% to 12% and took the operating leverage up from 25 basis points to 50 basis points a year. So a much different company and much stronger company. Last point I would make that's a real differentiator, I believe, is how we run the company around innovation. We run the company, and you, you...
I'm sure you'll wanna touch on it, you know, with what we call a Vitality Index around innovation and new products. Our Vitality Index is the percent of our revenue in the last three years from new products. So products age out, it takes a year or two to get them up to scale, and then they become part of the core. Pre-cloud and pre our real extra focus on it, we were doing 5%-7% of our revenue from new products introduced in the last three years. That was our Vitality Index. That's now up to 10%, is our goal, as a part of the 8% to 12%, but that 10% has been over 13% the last two years. And that's an innovative company, and an innovative company is more important to your customers.
You become a more valuable partner 'cause you're bringing new ideas. But as you know, incremental revenue or new products are very high incremental margins, so it really drives our top and bottom line. So clearly, a very different company and much more than a credit bureau.
Great. Maybe you could talk a little bit on your view of what's going on in the consumer-
Yeah.
... and what you're seeing in terms of, say, like, ADP-reported numbers, that, you know, their ADP employment report this morning was a little bit softer, manufacturing, leisure, and hospitality. And that impacts, you know, a number of things. It, it impacts credit, it impacts-
Yep.
... you know, jobs from what you're doing in terms of background screening. So maybe give us a little bit of a thought of where we are, you know. I don't know if you're able to talk interquarter or you're absolutely dope, but there's... You know, what, what are you seeing?
I think, I think broadly, when the consumer's working, which unemployment is very low by historic standards right now, so meaning consumers are working, that's very good for financial services, very good for Equifax. You know, so, that we're in an environment that, you know, I would expect will continue through the end of the year. I don't see unemployment spiking. While it's gonna tick up, you know, there's still, you know, very low levels, which means delinquencies are low. And when delinquencies are low, it means financial institutions still have a lot of confidence to keep originating. They never stop originating, but they'll dial up and down based on risk profiles. We saw that in subprime, which, as you know, is a small portion of the U.S. consumer base.
While subprime consumers are working, they're pressured by inflation, which pressured their ability to pay their auto loan, their credit card, and those delinquencies went up. They're really starting in 2022, when inflation spiked, into 2023. But outside of that, you know, the consumer is quite healthy. You know, I don't have the facts in front of me, but I believe credit scores today, on average, are still 20 points or something like that above pre-COVID, meaning you've got a healthier consumer. When you look forward, you know, certainly through the rest of 2024, that's gonna be the same. It doesn't change that quickly. Now, the one big macro we've had, which you're well aware of, is the mortgage market.
Yep.
You know, while the rest of the financial products have really weathered this higher interest rate environment, there's been some pressure in auto around larger payments for big car loans, has pressured some activity there. But broadly, auto has been pretty resilient because people are enthusiastic about still buying cars. Mortgage has gotten hammered. As you know, the mortgage market is down, by our measure, 50% from historical normal levels. We use 2015-2019 as that kind of origination or inquiry levels from where we get revenue of being normal. That's down 50%, really, in the first quarter and fourth quarter, and we don't expect that to change until inflation gets under control and rates come down. But the mortgage has really gone from a headwind the last two years.
Now that it's down 50%, mortgage activity is gonna be a tailwind for us as rates come down in the future. And as you know, we sized that in our February and April calls to be $1.1 billion of incremental revenue, $700 million plus of incremental EBITDA, and $4 a share, you know, which is a lot of earnings power as that market recovers. And, you know, it's a much... We like having a tailwind versus a headwind-
Sure.
... over the last couple of years, which, as you know, has been quite challenging.
And just out of curiosity, when you took that five-year period as a baseline, what makes that a good baseline as opposed to 2010-2015 or 2005-2019? Well, you know, one of you guys-
Well, we left out 2020, 2021, 2022-
Uh-huh.
... you know, when there was the refi boom.
Right.
Right? 'Cause that was, as you know, rates were slashed-
Sure.
... during COVID. That generated a refi boom, so we said, "Let's take that out." And the reason we took the, I would call it, the most recent normal period, is because there's growth in economic activity. Like, housing prices go up, which drives some of that activity. You know, there's larger population, you know, so you can't go too far back in time. There's also changes in how data is used in those environments. What would you add, John, about-
Yeah, I also saw-
... why we think 2015-2019 is a good baseline?
Well, A, it's a five-year period, and also we saw reasonable movements in interest rates during that period. We saw some refi spikes during that period. We saw weakness in refi because of movements in rates.
But it doesn't move-
It looked normal.
It doesn't move 50%.
Right. Yeah.
You know, you pick what you think is normal-
Right.
... it's way above where we are today.
Okay.
Period.
Whatever period, it's way above where you are today.
Correct.
The question is how much-
Yeah.
... how much more it would be.
Correct.
Okay, that's, I guess that's a fair statement. When you talk—I want to shift a little bit once you're talking about there, 'cause The Work Number is obviously the best, biggest beneficiary of mortgage, I think when the rates go down. And you have just a tremendous market position in the U.S., and for a while we were talking about international, building a similar type-
Yep
... of database. And, like, I think you were working in the U.K. and Canada, if I remember correctly.
Australia and India.
Australia and India.
Four markets.
Four markets. Where are we at that point? Are we gonna start hearing about, you know, Equifax? Are you gonna start breaking out some of that revenue?
We're gonna keep talking about the U.S. 'cause it's just got so much more potential. I'll just maybe for a minute just remind the potential in the U.S. So, you know, our business in the U.S. in Workforce Solutions is about $2.3 billion. We think about a TAM for that U.S. business, about $15 billion, and a lot of white space for growth. And generally, what we're competing with is manual verifications. We deliver speed, productivity, and accuracy.
Mm-hmm.
But to your point, we've been investing outside the U.S. We want to build businesses and franchises. You won't see that move the Equifax needle or the Workforce Solutions needle, you know, I don't know, John, in 2025, 2026, maybe even 2027. You know, we're adding. We built out the data sets, and we're adding records from direct relationships as well as partnerships in each of those markets. You know, we have the leverage, if we're with a multinational company on a direct basis here, they want us to do income verification for them in Canada, Australia, U.S. I'm sorry, Canada, Australia, U.K., and India. And then we have global partnerships, you know, with HR software companies and payroll processors. And then there's also local HR software companies and payroll processors in each of those markets that we're adding records to.
But as far as moving the needle-
Mm-hmm.
... yeah, I don't think you'll hear about it for quite some time.
Okay, so that's not-
It's just small.
It's really the opportunities here in the U.S.
Totally.
Where's the white space between $2.3 billion and $15 billion? Where, where-
Yeah.
... does it come from?
So, pick Government, you know, which is now our largest vertical for the first time in the first quarter.
Yep.
I think it's gonna stay there, short of that mortgage market recovery. Even if the mortgage market recovers, even to that full level, it's only a matter of time before Government passes mortgage again inside of Workforce Solutions. So at the end of the first quarter, you know, we were on a run rate annual basis of, call it, $700 million of revenue-
Mm-hmm.
...in Government, delivering in the U.S. Government social services space. That was up 35% in the quarter, and it's up 50% CAGR over the last 3 or 4 years, so very high growth. You know, if you go back to, you know, 5 or 6 years ago, it was $100 million bucks.
Right.
You know, and now it's $700 million . That TAM is about $5 billion, you know, so the... And the TAM is, the agencies in the 50 states, and there's, you know, generally, 10-15 different agencies in each state delivering social services, like income support, childcare support, rent support, unemployment support, student lending support. All those different services are needs-based, so if you make less, you make- you get more, so you have to verify income. Historically, it's always been done manually. We deliver an instant solution with productivity, it's verified. And so we've had large growth at the state capitals, has been very, strong for us. And so the difference between, call it, $700 million and that $5 billion is the manual verification still being done.
Well-
It's just a matter of time. We put people in the big state capitals. We now have people in the field regionally to really work on those implementations. They're complex. It's Government. It's Government, you know, so that's complex, and then you add to it the process flow change and the technical integration is complex, but we're having really strong traction there. We're also having strong traction in Government at the federal level. You remember in September last year, we extended our CMS contract, that was a previous five-year contract. We did a new five-year extension. That's $1.2 billion over five years, and then we have a new contract that, we didn't have before with USDA for SNAP TANF, which is food stamps. That was a $190 million contract we signed in September over five years.
So that's rolling into our P&L and being used for the delivery of, food support, you know, at the, state level. So that's an example of big TAM and big growth potential. Talent's another one, $3 billion TAM. We have about a $400 million business, and we call Talent is where we're selling our employment history data, to the background screeners. One of the attributes we get every pay period is job title, along with company and name. So we have a digital resume on the average American, which is one of the things a background screener has to check when they do a background screen, is check my work history. They typically would do that manually, call the company to verify it. We do it instantly by delivering that data to them.
So you see the opportunity to go from $400 million up to, you know, the $3 billion. Employers got a multi-billion-dollar TAM. Most of those regulated services are done in-house, so outsourcing those to Equifax. And even in mortgage, a large portion of the mortgage originations are fully manual. Right. You know, they don't use our solution. It's their decision. We deliver a lot of value of productivity, speed, and accuracy. Auto, there's an opportunity. Many auto loans verify credit and income. We have penetration opportunities there. So penetration's a big opportunity. As you know, records is also a big opportunity to grow the data set.
Plus, there's other data assets, right?
Great, great point, John.
And talent. We continue to add more and more data assets. The largest one, most recently, obviously, is incarceration data, right, which is used both in Government social services. Obviously, if you're currently incarcerated, you can't - you shouldn't be receiving social service benefits, and so it's a validation check that's done in Government. It's also being used in Government housing, right, to validate, ensure people. It's a requirement in Government housing that you not have had certain criminal activity before they'll allow you into Government housing.
So we can help with that as well. And then we're also building out a Wheel of Information we call our Wheel of Information for talent, where we can provide not only incarceration background, but also your educational background, licensures and medical around potential healthcare, driver's licenses, et cetera, where we can provide a more complete set of data to background screeners so they can do more and more instant verification. So there's opportunities to grow the data assets, as well as growing our penetration.
Got it. And the stuff in Government, with The Work Number, it doesn't make a difference in administrations, right?
It's every administration, whether you're on the right or the left, wants people in need to get social services quickly. We deliver that. Second is, both sides want accuracy. Mm-hmm. You know, there's a lot of fraud with the Government social services. Ours is verified, you know, so there's no pay stub fraud. You can't document... You know, create documents. We verify the individual, so it really works in any administration.
It also, in economic cycles, you know, let's say there is a, you know, increase in unemployment, more people are gonna be collecting social services, likely. Right ... you know, because they're gonna need those services for support. And the scale of social services are, you know, quite large in any market, but in the United States, over 100 million people a year receive social services, so a huge portion of the population, and the average is something like 5-7 services per person. And I think, as you know, in Government, there's a determination up front when you get each service, but then there's this redetermination 12 months later, you have to make sure you still qualify. But then there's also quite a bit of movement in and out of social services.
You know, someone may have a life event where they're no longer able to work and collecting social services, then their health is repaired, they're able to go back to work, they no longer get the social services. So that movement in and out of social services are all verifications that have to happen each time. And with our coverage, you know, of at the end of the first quarter, we have 3.1 million companies delivering data to us. You know, we just have a lot of coverage.
Right. Wanna touch on what is a hot-button topic with some of the investors is there have been some increased noise by some of the upstarts in income and employment verification, particularly in the mortgage market. And I just wanted to ask you, like, what are you seeing there?
Are you noticing your customers, you know, the mortgage processors, saying, "Hey, we want to use some of these guys"? And talk about, you know, what you view as your moat , and what is the moat, and, you know, how are these guys. I mean, they're getting some revenue. Where does that revenue come from?
Yeah, you know, first off, when you think about our record coverage, we cover less than 50% of the working population. So for the portion we don't cover, if a customer is gonna use Equifax, they still have to have a manual verification process or use some of these other services outside of Equifax to cover the records we don't have.
As you point out, there's probably a dozen different companies, whether it's a consumer-consented data, like an Argyle, a Plaid, a Yodlee, bunch of companies like that. Our big competitor, Experian, is in the space. Truework is a fintech that's in the space. So there's lots of participants, so there's lots of options, you know—for our customers, you know, if they want to use our service or someone else's, or be fully manual. You know, they can. Remember, before Workforce Solutions, in Government or in mortgage or any other solution or these other—10, 12 participants, it, all these income verifications were done manually.
Right.
Because we didn't exist. So we've delivered real value in productivity, you know, versus their hourly employee doing it themselves. We deliver value on speed. You know, it could take hours or days or a week to track down multiple employers. Remember, 75 million people a year change jobs, so there's a ton of churn, and if you're trying to verify someone's income over the last 12 months, 24 months, 36 months, you know, it can be one employer, but it can be multiple because they change jobs. And so having that ability for coverage is super important. So we think, you know, what we deliver in instant, what we deliver, you know, with our coverage, you know, allows customers to make a decision of manual versus using ours, and lots of them like to use our solution.
Mm-hmm. And, you know, it's taken a long time for you guys to build up that database. I'm not, not in a bad way. I'm saying it, it's a lot of work.
Sure.
That's what I'm saying. In terms of, do you think that there's a potential for some of your payroll processors that are usually are totally exclusive with Equifax, which is, I think, almost all of them, except for maybe ADP, to start going non-exclusive? Do you think that that's a potential?
Well, that's really a choice for our partners. I think our, our partners, and it's payroll processors, HR software companies, pension administrators, you know, they... Our contracts are generally short-term in nature. They have windows for our partners to decide who they want to partner with. Do they still want to partner with Equifax or not? So there's lots of windows for them to, to test that. We don't see them leaving because we think we have a great integration with them and, and a great, a great partnership around monetizing their records. And remember, that's only half our records.
Right.
The other half come from direct relationships with companies. In both cases, we're doing the income and employment verification for the company for free.
Right.
... you know, both in partner and in direct. You know, it's one that's a really strong value prop, and if you're an HR manager, and you're not having someone like Equifax or one of the other participants, you know, do the income and employment verification for you, you're doing it yourself.
So you're fielding calls from mortgage brokers, auto lenders. You're trying to figure out: Is that a fraudster? We do that for them securely. We credential who the user is of the data, and no data is used without the consumer's consent, both to deliver the data or to, you know, deliver it in a transaction. So there's a very high level of security and privacy and technology there that we think is quite robust.
So you feel pretty good about the position? That's-
Yeah, we're always focused on expanding it. You know, we want to continue growing our business direct and through partnerships, and, you know, we think we've had a great track record in that. Our records are up 10%, you know, both direct and partner in the, in the first quarter in total. And we've got a-- I think we shared, we added a couple big partners in the first quarter that are coming online, one of them larger in the second quarter. Because of our cloud investment, we're able to integrate that data more quickly, and those integrations are super complex. You know, as you might imagine, we have 50 attributes for every individual. The way our dataset looks doesn't look like all of our partners or our customers, you know, our contributors. So we've got to normalize that data.
That technical integration is one we've invested a lot in APIs to make it simple, but it's still complex.
Got it. I want to switch a little bit over to that cloud.
Yeah.
... transition. And, maybe, John, maybe this is something for you in terms of, like, you know, where are you in that process, and when are we-- It's been going on for a while. It's a very heavy lift.
Totally.
And, you know, what are some of the milestones? What percentage of revenue is gonna be on the cloud? When do you get to turn stuff off more? And, you know, maybe you can walk us through that a little bit.
Sure, and we've talked about this on the earnings calls, where we were about 70% complete at the beginning of the year. We expect to be about 90% complete at the end of 2024. In terms of business units, Workforce Solutions, principally complete, they've been done for several years. USIS and Canada, the big, largest consumer databases that we have, they'll be done this year, and
... very, very shortly, right? We expect them to be. They're currently transacting at high volumes with their customers through our cloud infrastructure and expect them to be principally complete at the end of this quarter or early in the third quarter. So very excited about those transitions. And as that occurs, it obviously results in cost reductions for us that we'll see come into the P & L third quarter, but really more heavily in the fourth quarter, but also starts to release a lot more capability on NPI, right? We start. Mark started talking about NPI. But the more of the data that's in data fabric makes it much easier and very seamless to create multi-data products that have standard identification keys across all of our data assets, so that we can bring more products to market faster and drive our NPI even higher.
So very exciting time right now in terms of Data Fabric migration. North America, as we said, principally done this year. A little bit goes into next year, but principally done this year. And then, as we look into the rest of the world, Europe's continuing to migrate. A substantial amount of them will be done this year, but still-
Spain will be done.
Spain will be done this year.
Canada will be done.
Yeah.
Much of Latin America will be done this year, and then we'll have Australia and a few others to finish in 2025 and a little bit in 2026.
2026, yeah.
But 90%, it's a big inflection point for the company. You, you've been following us since I joined, you know, 6 years ago, and we launched this tech transformation, not for the faint of heart. Huge lifting exercise, super complex and all-encompassing. So you've got teams running the company, growing, adding new products, you know, working with customers, and doing a tech transformation. To move to having North America complete, which is where we make all our money, you know, 80% of our revenue and more than that of our margins is in North America, is a huge accomplishment, and one that will allow us to really pivot from running in cloud to leveraging the cloud. You know, it's a really big change for us as we get to the second half. John could touch on it.
You know, we talk about 50 basis points of operating leverage per year. As you know, there's a lift because of our cloud cost savings. As we complete the cloud in the second half in 2025, we're gonna get some additional savings.
Yeah.
... What about customer conversations? Like, now that you're hitting those milestones, do the conversations in terms of selling-
Big time.
-product change with your customer? I mean, what-
They do. So in USIS, you know, we're kind of midway through. We're gonna finish this summer. So the customers that are complete in the cloud, it's just a total focus on growth. And it's one where we're delivering always on stability. Many of our customer discussions where we're secondary or tertiary with the cloud, you know, we see aspirations to move up into a more primary position because we're innovating more, and we're delivering a better technical stability experience. So, you know, that's really positive. The ones that are more complex in the short term, you know, it's harder to get airspace for commercial discussions when you're migrating.
Yeah.
We're migrating customers every week. Every Tuesday we do it. So we're doing these migrations every week. So as we get through the summer and get USIS complete, that team can now pivot fully to commercial focus, to share gains against our competitors, the new product roll-outs move up to that 10% Vitality. We also want to look at leveraging data assets between EWS and USIS, right? Which we haven't done before. Product integrations-
Mm-hmm.
Put income information in the credit file, for example. Those kind of innovative solutions that only we can do, we're really excited about. All that gets turned, you know, that spigot gets turned open in the second half and in 2025, so we're really excited about that. But you're pointing out, clearly it's challenging to do cloud migrations and grow. So we're excited to move to just growing.
So we should see a new phase from here once you're past-
Yeah, you know, it's one where we... You know, you've seen it in EWS.
EWS completed two years ago. You know, their growth rate's been very strong, ex the mortgage market impact, the last couple of years. Their innovation from Vitality versus our 10% goal, they've been over 20 the last two years. Mortgage 36, other products like that, have really been driving it. We would expect USIS and International to move their Vitality up towards that 10. They're south of 10 now, as they complete the cloud, which is gonna be good for Equifax.
Great. Also, what you'll see is capital spending comes down.
Totally.
... margins go up, free cash flow starts to really increase substantially, and puts us in a position as we get toward the end of this year, as our debt leverage comes down, following the acquisition of BVS, that we're able to start, really start thinking about returning cash to shareholders as we get into next year.
And that's growing the dividend, and again, likely in line with earnings, and then doing a multi-year buyback.
Got it. No, that's, that's very important. In order for people to see... I think it'll be like a vote of confidence in the management. We feel like we're done-
Totally.
... with the lift, and, you know, when you start to see that. One other question, I just want to make sure I got in. Just, you know, last week there was that CFPB announcing that, you know, inquiry into, you know, the heightened cost of mortgage rates, and-
Yep.
... they mentioned a number of companies. It was the credit bureaus, it was FICO, it was one of the mortgage, insurance companies, I think.
Yep.
You know, on the one hand, you know, I've had discussions with Trevor about this, about, you know, jurisdiction. You know, they have jurisdiction there, on the other hand, you know, they're the Government.
Sure.
So, you know, how should investors view what is going on right now in terms of, you know, what, looking at the risk in the spotlight that's going on there?
Yeah. You know, I think, you know, there's somewhat of a political cycle we're coming into. There's been a focus, I think, in the current administration around, they use the term junk fees.
Mm-hmm.
I think the director used that in one of his speeches, you know, at the MBA two weeks ago of CFPB. You know, so you got to think through, is there some element of politicization here? You know, we believe we deliver real value in the mortgage market. The average mortgage closing costs are $5,000, $6,000. It's a huge ticket transaction for the consumer, and it's a huge ticket transaction for the lender. And the data we provide, you know, is in the neighborhood of a couple of hundred dollars in the case of the credit bureaus, and FICO, you know, is a couple of hundred dollars of that $5,000-$6,000. So we think we deliver a lot of value.
You know, we're certainly gonna respond to the RFI and make sure that we educate the CFPB around the role that we play and the important role we play, you know, in supporting access to credit and access to housing, you know, through using, you know, the depth of data that we have, both on the credit side and on the income and employment side.
Okay.
Specifically with The Work Number, as you mentioned earlier, our customers have choice. They don't have to use The Work Number. They can do it manually, and they always have choice in terms of the products they use.
Mm-hmm. So you're saying there's choices, they want to use someone else, they're available to use somebody else, and-
Or they can do manual in the case of-
Or they can do manual.
... income and employment.
Mm-hmm.
It's hard to do that on credit.
Right, right.
You know, you have to use our data. It's actually, as you know, mandated.
Right.
You know, the agencies require a three-credit bureau pull because it provides real access to credit, you know, to housing, because not every individual is not in each credit file. There's actually 10 million consumers only in one credit file in the United States-
Wow!
which is really quite remarkable. There's 50 million -60 million consumers, and many of us in the room probably fit that. If you were to check your credit score at TU, Experian, Equifax, it's 40 or 50 points different. So if you're only pulling the bottom two, you may get a higher price on your mortgage, which is why the 3 B is important. And of course, FICO provides real consistency, which is a required score that's used, you know, in every mortgage.
Okay, great. I want to thank you very much for joining. This is very informative, and I appreciate everybody being-