The Equifax Second Quarter 2023 Earnings Conference Call has begun, and Trevor Burns, Senior Vice President and Head of Corporate Investor Relations, is introducing the call. Mark Begor, Chief Executive Officer, and John Gamble, Chief Financial Officer, are also on the call. The call is being recorded and materials related to the call can be found on the Investor Relations website. Additionally, the call will include forward-looking statements and non-GAAP financial measures, with information on the latter being available on the Investor Relations website.

Equifax reported strong financial results in the second quarter, with adjusted EPS of $1.71 per share and adjusted EBITDA margins of 32.7%. This was supported by 6% non-mortgage growth, strong new product growth with a record 14% vitality index, and a $200 million cloud and broad-based spending reduction program. USIS and International both delivered strong quarters, above expectations. However, the U.S. mortgage market weakened in the latter portion of the quarter due to mortgage rates moving above 7%.

Equifax reported strong non-mortgage revenue growth, with USIS reporting 6% growth and EWS 4%, and both better than expectations. USIS was able to outperform due to consumer shopping behavior in higher interest rate environments. International revenue grew 7% in constant currency, with double-digit growth in Latin America and high single-digit growth in Canada and the UK CRA. New product innovation and the Equifax cloud delivered strong operational execution, with adjusted EBITDA margins of 51.5% for EWS and 36% for USIS.

Equifax's new product vitality index of over 14% in the quarter was a record for the company and 400 basis points above their 10% long-term vitality goal. Their cloud transformation is progressing and over 70% of North American revenue is now being delivered from the new Equifax cloud. U.S. mortgage originations are expected to be down 37% for the year and weaker U.S. hiring market is expected to continue through the remainder of the year. EFX non-mortgage revenue growth was up 6% in the quarter and is expected to strengthen in the second half to up 11%. The 2023 cloud and broader cost reduction program executed well in the quarter.

Equifax is expecting to reduce spending by $210 million this year and $275 million in 2024, with additional savings of $25 million for the next year. Despite a weaker than expected mortgage market, the company is still expecting to have 8% non-mortgage revenue growth. This has resulted in a reduction of the 2023 revenue guidance by $25 million to $5.3 billion and a reduction of the full year 2023 adjusted EPS guidance by $0.22 to $6.98 per share. Equifax is also planning to acquire Boa Vista Serviços, the second largest credit bureau in Brazil, and expects the transaction to close in early August.

The BVS acquisition is expected to be slightly accretive to year one adjusted EPS and will add approximately $160 million of year one run rate revenue in the Brazilian market. The U.S. economy and consumer remain broadly resilient, with unemployment at historically low levels, and consumers are still spending and borrowing. Inflation has started to abate, and delinquencies are at pre-pandemic levels. Mortgage originations are expected to weaken in the second half, but subprime DQs are the only areas of stress.

In the quarter, credit card and personal loan utilization increased, although delinquency rates remain significantly lower than during the last economic event in 2009 and 2010. Auto delinquency rates for subprime consumers are higher than pre-pandemic levels. Mortgage origination was down 37%, resulting in a 20% decline in mortgage revenue for EWS. Despite this, EWS out-performed the market due to record growth, NPI performance driven by the adoption of Mortgage 36 Solution, and positive pricing actions. White-collar job reductions and hiring freezes have reduced background screening and onboarding activity, which is expected to continue in the second half.

Workforce Solutions saw a decline in low margin manual mortgage verification services revenue in the quarter, negatively impacting mortgage outperformance by 300 basis points. EWS had a record quarter of additions to the twin database, ending the quarter with 161 million current records and 120 million unique records, representing 50% of the 220 million working and income producing individuals in the US. The records are contributed directly by employers and through partnerships with payroll companies, and EWS is expanding capabilities to ingest 1099 based self-employment records.

In the second quarter, the twin database grew to 631 million records from 2.8 million employers in the US. Workforce Solutions' non-mortgage revenue grew 4%, and Verification Services' non-mortgage revenue grew 4% sequentially and year-over-year. Government revenue was up 21% year-over-year and 10% sequentially, driven by strong growth in CMS and new products. Government now represents 45% of Verification Services' non-mortgage revenue, and is expected to continue to grow in the second half due to Medicaid re-determinations, ACA open enrollment, and state contract renewals.

Despite the slowdown in US hiring, Talent Solutions revenue was down 6% in the quarter but up 1% sequentially due to strong new product growth. We expect to see accelerated sequential growth in verifier non-mortgage, driven by strong government growth, as well as moderate sequential growth in talent and consumer lending. Employer Services revenue of $109 million was up 4% due to growth in I-9 and onboarding businesses. We expect new products to continue to drive above market talent revenue growth through 2023.

In the second quarter, USIS revenue of $445 million was up 6%, with mortgage revenue down less than 1% and outperforming the market by more than 30 points. Non-mortgage revenue was up 8%, with organic growth of 4%, and B2B non-mortgage revenue was up 7%, with organic growth of 3%. The strong pricing environment and increased shopping behavior drove the outperformance.

USIS had a strong quarter with double digit growth in commercial and identity and fraud, low single digit growth in telco and insurance, and slight growth in banking. Financial Marketing Services had 1% growth, while pre-screen marketing saw similar levels to the first quarter due to declines from smaller FIs and FinTechs. USIS consumer solutions direct-to-consumer business had a 10% increase in revenue. USIS is winning in the marketplace with strong momentum from new solutions and differentiated data.

USIS adjusted EBITDA margins were 36% in the quarter, up 340 basis points sequentially and the strongest USUS margins since the beginning of the mortgage market decline a year ago. USIS is in active dialogue with customers to discuss the competitive benefits of the Equifax Cloud, which is driving a strong new deal pipeline. International revenue was up 7% in constant currency, with Europe local currency revenue down 2% due to expected declines in the U.K. debt management business. U.K. and Spain CRA business revenue was up 7% in the quarter, driven by strong growth in identity and fraud decisioning consumer and direct-to-consumer.

Equifax reported 6% non-mortgage constant dollar revenue growth in the second quarter, which was lower than expected but still strong compared to the 22% growth from last year. Growth in USIS and international was stronger than expected, while EWS non-mortgage growth was slower due to Talent and non-boarding. Equifax expects non-mortgage revenue growth to grow sequentially in the third and fourth quarter, with growth in EWS government business, EWS talent and consumer lending, and continued strong performance in USIS and international. This should result in third quarter Equifax non-mortgage revenue growth above 9%.

Equifax introduced over 30 new products in the second quarter, leading to a record 14% Vitality Index. The majority of new product revenue came from non-mortgage products leveraging the Equifax Cloud. Equifax expects to deliver a Vitality Index of 13% in 2023, which translates to about $700 million of revenue from new products. Talent Report Flex 2.0, a customizable pre-employment verification solution, was also launched this quarter. This solution provides employers with a list of employer names to customize the employment history report. The Equifax Cloud will be used to bring new solutions to market to meet customer needs.

Equifax received shareholder approval for the Boa Vista acquisition in late June, which is the second largest credit bureau in the Brazilian market. The transaction is expected to close in early August and bring in approximately $160 million in run rate revenue and be accretive to adjusted EPS in the first year. Equifax plans to pause on M&A activity in the second half to focus on integration of Boa Vista and other acquisitions, and use excess free cash flow to pay down debt. Artificial intelligence is becoming a necessity for data analytics companies to manage large, diverse, and complex data sets, and Equifax has a large and diverse proprietary data set which is a big differentiator.

Equifax is investing in AI and Google's Vertex AI capabilities, and has 70 approved AI patents to support its AI NeuroDecision Technology (NDT) and Explainable AI. For its third quarter and full year guidance, Equifax expects to see accelerated sequential growth in verifier non-mortgage and moderate sequential growth in talent and consumer lending. Despite the slowdown in U.S. hiring, the company's UC and ERC businesses have seen slight growth.

USIS revenue of $445 million was up 6%, with mortgage revenue down less than 1% and outperforming the mortgage market credit inquiries by more than 30 points. B2B non-mortgage revenue was up 7%, with organic growth of 3%, and online revenue had strong double digit growth in commercial and identity and fraud. Workflow Solutions adjusted EBITDA margins of 51.5% were up 110 bips from first quarter. The strong pricing environment drove the outperformance, and the increase in shopping behavior is expected to continue throughout the rest of the year.

USIS had a strong quarter, with revenue up $54 million in their consumer solutions direct-to-consumer business, an increase of 10%. Banking was up slightly, with market volumes at larger financial institutions offsetting declines with smaller financial institutions and FinTechs. USIS saw limited growth in portfolio review business, but not a meaningful increase in risk-based portfolio reviews. The Equifax Cloud is driving a strong active new deal pipeline, which was up from the first quarter.

USIS experienced a strong quarter with their EBITDA margins up 340 basis points sequentially. International revenue increased 7% in constant currency, with Europe local currency revenue down 2% due to expected declines in their UK debt management business. Asia Pacific local currency revenue grew 4%, and Latin America increased 23% due to new product introductions and pricing actions.

The second quarter of the year showed strong double digit growth for Latin America, 8% growth in Canada, and 24.2% adjusted EBITDA margins. Non-mortgage revenue grew 6%, lower than expected, while USIS and international delivered stronger growth. Equifax expects non-mortgage revenue to grow sequentially in the third and fourth quarter, with third quarter growth above 9%. Over 30 new products were launched in the second quarter, 80% leveraging the Equifax Cloud, and the Vitality Index was at a record 14%.

Equifax is leveraging its Cloud capabilities to roll out new products and plans to reach a Vitality Index of 13% in 2023, which could generate $700 million in revenue. New products, such as Talent Report Flex 2.0, leverage the Equifax Cloud to provide a customizable pre-hire employment verification solution. Recently, Equifax also acquired Boa Vista, the second largest credit bureau in Brazil, with a $2 billion TAM.

Equifax expects to close the transaction with Boa Vista in early August, which is expected to bring in $160 million in run rate revenue and be accretive to adjusted EPS in the first year. They plan to pause on M&A activity in the second half to focus on integration and use excess free cash flow to pay down debt. Equifax's proprietary data sets, combined with their cloud native technology, gives them advantages in using AI to build advanced models, scores, and products, including identity and fraud solutions.

Equifax has invested in AI technology such as NeuroDecision Technology and Explainable AI in order to make credit decisions. Despite this, the mortgage and housing markets in the second half of 2023 are not expected to improve from the levels seen in late June and early July. Credit inquiries in the first half of 2023 were down about 39%, 8 percentage points better than the 47% decline in mortgage originations. In the second quarter, this spread narrowed to 5 percentage points.

Workforce Solutions mortgage revenue is expected to be down about $40 million in the second half of 2023 due to the reduction in mortgage originations relative to April guidance. This is a result of the elevated impact from mortgage shopping and application activity that does not result in a closed loan, which is expected to continue at about 5 percentage points. Mortgage credit inquiries are expected to be down 31% for the year, with second half credit inquiries being down about 14%, and third and fourth quarter credit inquiries being down about 23% and 4% respectively. Mortgage originations are expected to be down 37%, with second half originations being down just under 20%. USIS mortgage revenue did not change significantly.

In the second quarter, Equifax exceeded its adjusted EBITDA margin and adjusted EPS guidance and delivered well against its 2023 spending reduction plan. For the third quarter, Equifax expects total revenue of between $1.32 billion and $1.34 billion, with non-mortgage revenue growth of over 9%, and adjusted EBITDA margins to increase by 75 basis points. Corporate expenses are expected to be about flat with the previous quarter. BVS will be discussed at the October earnings call.

Business unit performance in the third quarter is expected to be up 7.5% in Workforce Solutions and USIS revenue, with EBITDA margins flat sequentially for Workforce Solutions and down 100 basis points for USIS. International revenue is expected to be up 4.5% in constant currency, with EBITDA margins up 250 basis points. Full year revenue guidance is lowered to $5.3 billion due to a lower mortgage market, with mortgage revenue expected to decline 13%.

Constant currency revenue is expected to grow above 8% in 2023 and over 11% in the second half of the year, with adjusted EBITDA margins improving to 33.5% in the third quarter and 36% in the fourth quarter. The company is reducing its adjusted EPS guidance for 2023 to the range of $6.85 to $7.10 per share, driven by the loss of high margin Workforce Solutions mortgage revenue. Total capital spending for 2023 is expected to be slightly over $550 million, with capital spending in the third quarter declining by $15 million. The company is still focused on delivering their midterm goal of $7 billion in revenue with 39% EBITDA margins, despite market conditions being significantly different than when they first discussed the goal in November 2021.

Despite a challenging macro environment, Equifax was able to deliver a solid quarter with adjusted EBITDA margins and adjusted EPS above guidance. This was due to the breadth and depth of their businesses and execution against their 2023 cloud and spending reduction program. Workforce Solutions experienced a 4% revenue decline due to mortgage and hiring macros, but were still able to deliver due to a strong 21% growth in the previous year. The mortgage market is expected to deliver $7 billion in revenue in 2025, but will require two-thirds of the lost volume to achieve this goal.

Equifax had a very successful quarter, with record additions to their twin payroll provider, a strong NPI vitality index, and EBITDA margins higher than expected. USIS had strong non-mortgage growth and EBITDA margins up 300 basis points. International had 7% local currency growth and EBITDA margins up 70 basis points. The Equifax Cloud Data and Technology Transformation is in progress, which will allow for further new product launches and legacy system decommissioning.

Equifax is executing well on its 2023 cloud and spending reduction plan, which will yield $210 million in savings this year and $275 million in 2024. The company is aiming for 36% adjusted EBITDA margins and $2 per share in adjusted EPS in the fourth quarter. They are also expecting to close the BVS acquisition in early August. Despite a weaker than expected mortgage market, they are lowering their full year revenue guidance by $25 million to $5.3 billion at the midpoint, and their full year 2023 adjusted EPS at the midpoint will be down $0.22 per share. Equifax is excited to be entering the next chapter of their business, leveraging their new cloud technology, data assets, Single Data Fabric, and market leading businesses to drive growth, expanded margins, and free cash flow.

John Gamble answered the first question, stating that the mortgage revenues for the second quarter were 21% of total revenues. He then went on to explain that there would be strong sequential improvements in EWS revenue growth for the third and fourth quarters, driven by government and Talent business growth, as well as new product and penetration in consumer lending. He also mentioned that mortgage originations had declined substantially throughout the year, but that there would be better growth rates in mortgage in the second half of 2023 compared to 2022.

Mark Begor and John Gamble of Equifax discussed their confidence in reaching their 36% margin goal by the end of the year. They attribute this confidence to their cost program, which includes an additional $10 million in cost savings this year and $25 million next year, as well as good visibility on revenue growth in their non-mortgage business. Additionally, they assume a reasonable level of performance in the mortgage market in order to reach their goal.

Mark Begor and John Gamble discussed the changes in the competitive behavior and volume assumptions of the Talent Market. Begor noted that mortgage originators have been moving manual verifications back from Equifax in-house, which has had an impact on revenue. Gamble added that the market is weaker than the 10% they mentioned in April, and that white collar employers are more impacted from hiring freezes and layoffs. Manav Patnaik asked for clarification and received it.

Mark Begor explains that higher mortgage rates and a shortage of housing stock has caused consumers to pull back from making home purchases. He believes that when rates stabilize, activity will increase, but does not expect rates to decrease in the near future. He notes that purchase volume is currently 40% below historic levels, excluding the refi boom of 2020-2022.

John Gamble and Mark Begor both believe that the mortgage market will return to normal levels in the near future, and that Equifax will be well positioned to benefit from a potential refinance window in the future. They also believe that they have continued to perform above the market in the first and second quarters, and will continue to benefit from a faster growing mortgage market.

Equifax's Workforce Solutions is seeing an acceleration of growth, particularly in the government vertical, due to an increase in Medicaid re-determination activity, ACA volume, and more penetration at the state level. This business, which is approaching $500 million, is in a total addressable market of $3 billion, and Equifax is working to convert current manual activity around verifications for various social services to automated solutions.

Mark Begor explains that Checkr participates in all employment types, but their current customer base over indexes to white collar jobs. They recently introduced a new pre-employment verification service targeting the hourly workforce and have seen positive traction in the 30 days since its launch. This new solution is expected to not only drive penetration with their existing customers, but also allow them to grow their business.

In the Talent vertical, Talent Solutions has seen positive growth in their education solution, which is used in white collar job hiring. They have also acquired an insights business that provides incarceration data and have rolled out two new solutions in the past few weeks to provide more flexibility to employers. These new products are expected to drive growth in the Talent vertical, which has a $4 billion TAM.

Mark Begor explains that companies have been announcing layoffs and hiring freezes for the past nine months, which has had an impact on the business. However, the company has been able to outgrow this impact through pricing, new products, and new customers in the background screening space. In addition, the company has identified additional cost savings which have offset some of the weaker volumes this quarter. Finally, Begor states that there are still more efficiency levers they can pull in the event of a prolonged period of weaker volumes and revenue per share.

The executives discussed how their cost-cutting efforts have already led to improved margins in the third and fourth quarters. They also mentioned that further efficiencies and margin expansions are expected as they complete their cloud investment in the next two years. Finally, they clarified that these cost-cutting actions are not related to revenue decline, but rather are part of a long-term plan they have been discussing for years.

Mark Begor explains that the decline in the mortgage market has had a huge impact on Equifax's business, but that it will eventually recover. Despite this, Equifax has been able to continue to grow in other areas, such as their talent and government verticals. These new verticals have been successful even during uncertain economic times.

Equifax is a product-led organization that is leveraging their differentiated data and cloud capabilities to create new solutions with higher price points. This is resulting in an increase in margins and the company is expecting to have significant excess free cash flow to return to shareholders in the future. Additionally, the company is seeing a soft landing in the economy due to low inflation and unemployment. Mortgage underwriters are also moving employment and income verification in-house.

Mark Begor and John Gamble discussed how customers had requested lower pricing for manual verification efforts, which they declined to do as it was low margin. They noted that this had impacted their mortgage outperformance by 300 basis points. Begor also noted that they had not seen any impact on their instant verification side, where their revenue and margin is, and Gamble mentioned that their competitors were growing their manual business. Finally, Meuler asked how much revenue they generate from manual verification, to which Begor replied that it had impacted their outperformance by 300 basis points.

Mark Begor and Jeff Meuler discussed the revenue growth of Equifax's competitors and the vitality index of the company. Begor noted that Equifax's pre-cloud and pre-10% goal vitality index was 5-7%, which he believes is a large number. In response to Craig Huber's question, Begor highlighted the company's ability to leverage their differentiated data and cloud capabilities to bring new solutions to market, noting that all of their products deliver ROI.

Equifax is delivering a solution to help customers originate more consumers, lower their losses, and increase their marketing hit rates, resulting in a 14% vitality in the quarter. This includes a 36 month solution of historical data for mortgage customers, a mortgage credit file with 14 NC+ attributes, and talent solutions. This is expected to drive top line and margin expansion in the future.

Mark Begor discussed the potential of a recovery in the mortgage market and how this could benefit Equifax, as well as the potential for improvement in the hiring market. He also explained that the subprime market has had an impact on USIS in the last three quarters, but that this could change with stabilization. Andrew Nicholas asked for clarification on any changes to economic assumptions for the second half of the year, and then followed up by asking about Equifax's plans to leverage artificial intelligence.

Mark Begor explains how AI can be used to manage large data and multi data sets to deliver better performing scores and models, which can be more valuable when charged at a higher price. He also explains that AI can be used to improve call centers and operating centers, and that the company's main focus is on delivering higher performing products, scores, models, and solutions.

Mark Begor and John Gamble of Equifax discuss the potential threat of their competitor, Truework, moving into their client base. Begor notes that Truework's revenue is small and that they do not have any scale differentiated data assets compared to Equifax's 161 million records. Gamble adds that their database is rapidly growing, reducing the need for manual verifications when using Equifax. Shlomo Rosenbaum then asks about the lowering of the EPS guidance, to which Gamble does not answer.

John Gamble explains that the main driver of the reduction in guidance is lower mortgage revenue and the difference between the reduction of over $40 million in mortgage revenue and the down $25 million is due to FX. The cost savings program only contributed a small amount of recovery, and the big movement is related to the reduction in mortgage revenue.

John Gamble explains that the most meaningful acceleration in the company's business will come from government revenue, as well as improved talent markets and product margins. He also states that consumer finance has hit a bottom and will see slight improvements, leading to growth rates that are substantially different than the first half of last year.

Mark Begor and John Gamble discussed EWS's outperformance in the mortgage market, which was 17% this quarter and is expected to continue in the second half. Toni Kaplan asked if the market is moving more towards allowing consumers to share their employment information directly from their payroll provider, to which Mark Begor answered that EWS has a solution that can do much of that, but there is still a lot of friction for customers and consumers.

This paragraph discusses the value of alternative solutions in the market for verifying consumer identities. It explains that in the 161 million records currently available, there is an additional 100 million people who are not included in the data set, such as self-employed individuals and pensioners. It also explains that solutions like Experian's are available, but there is still a lot of friction in the process since consumers have to provide credentials. Manual verification is an option, but it is slow and inefficient. The solution is to replace the manual process with a faster, automated one in order to drive speed.

Mark Begor discusses the value of technology transformation and the potential revenue opportunities. He explains that new product introduction is already happening with the 14% Vitality Index, and that this is expected to accelerate next year. Additionally, Begor states that being always on will have a quantifiable benefit, and that this will have a greater impact on USIS and international.

EWS is seeing real benefits from being in a cloud environment, such as always on stability and the ability to scale their data assets. This has enabled them to double their data records in the past five years. They also believe that being always on will help them gain market share, particularly in USIS and international markets, which should result in increased revenue in the coming years.

Mark Begor and John Gamble discussed the pricing dynamics of Equifax and Experian, noting that there was no additional price increase beyond the annual increase in both businesses. They also discussed the waterfall model for background screening, noting that there has been less hiring due to hiring freezes and layoffs in the second half of 2022.

Mark Begor discussed the potential resumption of student loan payments, which could have a negative impact on consumer balance sheets and credit scores, particularly for subprime consumers. He believes that, although it may cause some financial strain for those affected, it should be absorbable in the current economic environment as most of those impacted are employed. John was asked to follow up with a comment.

Mark Begor and John Gamble discussed how the international segment of their business will be affected by a $10 million cost restructuring program that will pick up steam in the third and fourth quarters. They also discussed how the non-mortgage business is responding to volume and pricing trends by taking manual verifications in-house.

Mark Begor explains that USI has seen increased shopping activity due to rising interest rates, which leads to more credit file pulls and multiple pulls from EWS. He also mentions that mortgage originators are reducing pricing and moving operations in-house, but not on the instant side or in the non-mortgage sector.

This paragraph discusses the activity of Early Warning System (EWS) in closed mortgages, which is used to determine the amount of effort a mortgage originator will put into a loan and what a consumer might qualify for. The speaker then invites any follow-up questions and concludes the event.

This summary was generated with AI and may contain some inaccuracies.