The operator welcomes participants to the Equifax Fourth Quarter 2023 Earnings Conference Call and introduces the speakers. The call will be recorded and materials can be found on the company's IR website. Forward-looking statements and non-GAAP financial measures will be discussed, including a restructuring charge in the fourth quarter that will be excluded from adjusted EBITDA and adjusted EPS.

Equifax had a successful year in 2023, despite challenges in the mortgage market. They delivered 2% organic constant currency revenue growth and had a record vitality of 14%. EWF and Verifier also had strong performances, with EWF delivering 10% organic non-mortgage revenue growth and Verifier seeing growth in government and talent sectors. EWS also had a successful year, with record current and total twin records and adding 17 new twin partnerships.

In the third quarter, Equifax signed a contract extension with the U.S. Centers for Medicare and Medicaid Services worth up to $1.2 billion. They also saw strong growth in their USIS and International businesses, with a focus on new products and market penetration. Equifax also made significant progress in their cloud migration, with 70% of their revenue now in the new Equifax Cloud. They expect to have 90% of their revenue in the cloud by the end of 2024, with a focus on utilizing AI for new models and scores.

In 2023, Equifax successfully implemented their EFX Cloud and operational restructuring plan, resulting in cost reductions and improved margins. They expect further spending reductions in 2024, which will benefit their operating expenses and capital spending. The fourth quarter of 2023 showed strong revenue and adjusted EPS, with non-mortgage businesses performing well. The U.S. mortgage market was slightly stronger than expected, and there is potential for growth if mortgage rates continue to decline. Overall, Equifax has positive momentum moving into the new year.

In the last quarter, the mortgage market outperformed expectations, with USIS and EWS seeing strong growth. EWS saw a 17% increase in non-mortgage revenue, driven by government and talent businesses. USIS had a 5% increase in revenue, mainly due to stronger mortgage revenue. International had a 22% revenue growth and 31.2% adjusted EBITDA margins, driven by strong performance in Latin America and Europe. Overall, the U.S. economy and consumer remain resilient, with low unemployment and stable credit card delinquency rates for prime consumers. However, subprime borrower delinquencies have increased and are approaching 2009 levels.

The article discusses the stability of auto delinquency rates for prime consumers and the increase in delinquencies for subprime consumers. It also mentions the growth of Equifax's Employment and Income Verification Services (EWS) and the addition of new payroll processor partnerships. EWS has surpassed three million companies contributing to the work number every pay period, showing strong growth and potential for further expansion.

In the fourth quarter, Equifax's Workforce Solutions revenue increased by 10%, with non-mortgage revenue growing by 17%. Verification Services non-mortgage revenue saw a strong 27% growth, while Government revenue grew by 47%. Talent Solutions revenue also increased by 13%, but the first quarter is expected to see slower growth due to reduced hiring activity in white collar markets. Equifax outperformed these markets by 25 points in the fourth quarter due to new digital solutions, strong product growth, pricing, and expansion of Twin records.

The Employer Services division saw a 7% decrease in revenue due to the suspension of new ERC claims by the U.S. government. However, excluding this decline, revenue grew due to strong performance in I9 and onboarding businesses. The division's adjusted EBITDA margins were better than expected and there is still significant room for growth in their target markets, as their penetration is currently only 10-20%. They primarily compete against manual verification methods and offer faster and more accurate services.

The company has opportunities for growth in their mortgage, government, and talent sectors by expanding their coverage and leveraging their existing penetration in the market. In the USIS division, revenue was up due to strong mortgage revenue, but non-mortgage revenue growth was slightly below expectations. Mortgage revenue outperformed mortgage credit inquiries due to a strong pricing environment. B2B non-mortgage online revenue was down, mainly due to weakness in the D2C business. However, Financial Marketing Services saw a 7% increase in revenue, driven by growth in the marketing sector. While pre-screen marketing revenue was down, there was improvement in fintech pre-screen marketing and growth in larger FIs.

In the risk and account services division, there was limited growth in portfolio review but strong double-digit growth in fraud, primarily from new business. The USIS Consumer Solutions D2C business had a very strong quarter, with a 15% increase in revenue. The USIS team is focused on completing their cloud transformation and leveraging their new capabilities to drive new product offerings and gain market share. In the international division, revenue was up 22% in constant currency and 6% in organic constant currency, with strong growth in Europe and Latin America offset by lower revenue in Asia Pacific. Brazil revenue was $41 million in the quarter.

Equifax has made good progress in integrating its operations in Brazil and bringing new solutions to the market. In Canada, they expect to see accelerated growth after completing their migration to the Equifax cloud. However, in Asia Pacific, revenue was lower than expected due to market conditions and long-term contract extensions. Despite this, international adjusted EBITDA margins improved significantly. Overall, non-mortgage constant dollar revenue grew 14% in the fourth quarter, with organic growth of 9%. For 2024, they expect non-mortgage revenue growth to be over 10.5%, with organic growth of almost 8.5%, higher than the previous year.

Non-mortgage organic revenue growth is expected to be driven by strong performance in EWS, with a vitality index of over 20% and over 15% in Latin America. Equifax's strong vitality index results are due to their focus on new product innovation, with 90% of new product revenue coming from non-mortgage products leveraging the Equifax cloud. This has led to an increasing average revenue per new product and a projected vitality index of over 10% in 2024. Equifax AI, powered by their differentiated data assets and new Equifax cloud capabilities, is positioning them as a leader in the industry with their EFX AI powered model scores and products.

Equifax has a significant advantage in using AI to build predictive multi-data models, scores, and products due to their proprietary data at scale and cloud capabilities. They have made significant progress in building advanced models using AI and ML tools, with a goal of reaching over 80% this year. Equifax has received over 90 approved AI patents and has launched new products, including Equifax OneScore, which has improved the performance of their solution. They are optimistic about the capabilities of Equifax AI to strengthen their business and accelerate the value of their proprietary data. In 2024, they expect to continue their momentum and see improvements in their non-mortgage businesses, driven by their strong execution against their strategic priorities. The U.S. mortgage market also appears to be improving, which is positive for Equifax's future.

The company's 2024 planning assumption is that the current level of U.S. mortgage activity will continue for the rest of the year with a 15% decline in mortgage inquiries. This is lower than the average forecast from MBA and Fannie Mae, which predict an increase in origination units and volumes. The company will continue to share mortgage credit inquiry volume changes each quarter and does not include interest rate changes in their forecast. They also expect modest economic deacceleration in 2024, but still anticipate revenue growth of $5.72 billion and 8.6% growth at the midpoint of their guidance. Constant currency revenue growth is expected to be 10.5%, with organic growth at 8.5% in line with their long-term framework.

In 2024, total mortgage revenue is expected to grow by 9.5%, with non-mortgage revenue growing by 10.5%. Workforce Solutions is projected to have 8% revenue growth, with mortgage revenue increasing by 2% and non-mortgage revenue growing by 10.5%. USIS is expected to have revenue growth of 8%, with mortgage revenue increasing by 20% and non-mortgage revenue growing by 4%. The growth in non-mortgage revenue will be driven by commercial, identity and fraud, FI, and auto sectors.

The company expects its Consumer Services sector to grow by 5%, with weaker revenue growth in D2C and telco. International had a strong 2023, but saw some weakening in end markets towards the end of the year. The company anticipates over 15% growth in international revenue and a 10% growth in organic constant currency in 2024. Inflation in Argentina is expected to benefit overall international revenue growth. The company expects its new product vitality index to be over 10% in 2024, led by EWS in Latin America. EBITDA is expected to increase by over 12% and adjusted EPS by 9.5% in 2024. Capital spending will decrease by over $100 million, reflecting progress in completing the company's cloud transformation. The company's 2024 guidance assumes a 16% reduction in mortgage credit inquiries and a 26% decrease in USIS mortgage credit inquiries in the first quarter.

In 2024, the company expects overall mortgage activity to remain at current levels, with a projected revenue growth of 8.6% to $5.72 billion. The decline in the mortgage market is offset by outperformance in mortgage revenue and non-mortgage organic revenue growth. The BVS acquisition is also expected to contribute to revenue growth. Adjusted EPS is expected to increase by 9.5%, driven by revenue growth and an expansion in EBITDA margins. The company's long-term financial framework is expected to be maintained with organic revenue growth of 8.5%.

In 2024, the company plans to generate 50 basis points of margin expansion from high variable margins on revenue growth. They also expect to see $90 million in spending reductions from cost reduction actions taken in 2023 and a further $65 million in spending reductions from actions taken in 2024. However, these savings will be partially offset by higher variable compensation expenses, resulting in a net margin expansion of about 180 basis points. The completion of their cloud migration and growth in high variable profit revenue are expected to drive further improvement in EBITDA margins in the future. In 2024, the company projects a 12.5% increase in adjusted EBITDA and a $60 million increase in depreciation and amortization, which will negatively impact adjusted EPS by 5%.

The P&L line items below operating income, such as interest and tax expense, are expected to negatively impact adjusted EPS by about 4 percentage points. EWS and International EBITDA margins are expected to increase, while USIS EBITDA margins will remain flat. Corporate expenses are increasing due to higher incentive and equity compensation. Capital spending is expected to decrease in 2024 compared to 2023.

The company expects to achieve over 50% growth in free cash flow in 2024, with EBITDA increasing to $1.9 billion and capital spending declining to $475 million. This will result in a decline in EBITDA leverage and provide flexibility for returning cash to shareholders and making acquisitions. The guidance for 1Q '24 includes expected revenue of $1.385 billion, with growth in non-mortgage revenue and a decline in mortgage revenue due to a decrease in twin inquiries. Workforce Solutions revenue is expected to grow 2%, with non-mortgage revenue up 9% and Verifier non-mortgage revenue up 15%.

In the first quarter of 2024, employer revenue is expected to be down 4%, but total Workforce Solutions non-mortgage revenue will be up 11%. EBITDA margins are expected to be flat year-to-year and decline slightly due to seasonal mix. USIS revenue is expected to be up 9%, with mortgage revenue up 25%. USIS non-mortgage revenue is expected to be up 3%, led by commercial and identity and fraud growth. EBITDA margins are expected to be flat year-to-year but decline by 300 basis points sequentially due to customer migrations and seasonal decline in revenue. International revenue is expected to be up 18%, with 4% organic growth in constant currency.

The paragraph discusses the expected EBITDA margins and adjusted EPS for Equifax in the first quarter of 2024. It also highlights the impact of the decline in the mortgage market on Equifax's revenue and mentions the potential for growth as the market recovers.

In the third quarter, Equifax reported strong financial results, with a 14% growth in non-mortgage revenue and a $700 million EBITDA. They expect this trend to continue into 2024, with a 9% revenue growth and 110 basis points of adjusted EBITDA margin expansion, despite a decline in the mortgage market. The company's focus for 2024 is to complete their cloud transformation, resulting in further margin expansion and reduced capital intensity. They believe their new Equifax cloud, data assets, and technology will drive future growth, margins, and free cash flow. The CEO is confident about the company's future.

The analyst from Barclays asks about the inquiries for USIS and Twin, and John Gamble explains that next year, Twin will perform better than USIS due to comping off of a high shopping activity year. He also mentions that they use current run rates to make predictions. The analyst then asks about talent volume assumptions, and Gamble explains that they expect to outperform the market by over 10 points.

In the paragraph, the speaker discusses the company's ability to continue growing talent despite a potential decrease in the hiring market. They also mention the percentage of mortgage revenues in the fourth quarter and for the fiscal year, as well as the expected percentage for the first quarter. The speaker also mentions the variable gross margin on mortgage revenues and the expected non-mortgage growth for 2024.

Mark Begor, CEO of Equifax, discusses the company's 8.5% growth rate and how it falls within their target range of 8% to 12%. He also mentions the pressures on their non-mortgage business due to the talent market and the impact of the ERC program being curtailed by the IRS. There are no expected upsides to the 8.5% growth rate. John Gamble, CFO, talks about the ongoing benefit of the Medicaid determination program, which is expected to contribute to growth in the first and second quarters of 2024. He also mentions that redetermination is a consistent driver of growth in their government business. Mark Begor adds that there are other levers for growth in the government vertical within Workforce Solutions.

The company had a strong year in 2022, with business reaching over $500 million and potential for further growth. The government sector, which makes up a significant portion of the business, has a TAM of $3 billion and there are opportunities to expand into states that are not currently using their solution. The company has secured contracts with CMS and USDA that will contribute to future growth. The non-mortgage growth in the guide was influenced by volume assumptions in areas such as auto and consumer loans, which are expected to continue performing well in 2024.

The speaker discusses the impact of fintech in the second half of 2022 and into 2023, noting that it has stabilized and is not declining. Large financial institutions are consistently originating, but there is some choppiness with smaller FIs due to liquidity issues. The company's near-term priorities for capital deployment include reducing CapEx and increasing margins to grow free cash flow. They also have a pipeline of potential M&A opportunities.

The company expects to engage in mergers and acquisitions in the second half of the year, with a focus on disciplined integration of previous acquisitions. In the future, the company plans to continue adding bolt-on M&A opportunities to their strategy, with a goal of reaching 39% margins and 50 bps growth per year. As the company completes its cloud, they anticipate having excess free cash flow in 2025 and 2026, which they plan to use for restarting dividends and buying back stock. The company has recently raised their government TAM numbers from $4 billion to $5 billion, with a focus on government social services delivery and targeting programs and states for growth.

The company offers programs for social services that require income and employment verification, as well as an incarceration check. They use instant data to deliver these services quickly and accurately, and have contracts at the federal, state, and local levels. They have a large penetration opportunity at the state level and are focused on deploying resources to the largest states, but also have a focus on all 50 states.

Equifax expects strong growth in their government services business over the next few years, with a potential increase in their total addressable market due to the integration of their Insights acquisition. They are also considering pricing for VantageScore 4.0 in the mortgage vertical, which may be added to federally supported mortgages in the future.

The speaker discusses two requirements related to mortgage originators, the 3B requirement and the Vantage plus FICO requirement. They mention that they expect originators to continue pulling three credit files due to the differences between them. They also mention that the Vantage plus FICO requirement is still in a comment period and has not been factored into their 2024 framework. The speaker notes that if this requirement becomes mandatory, it would be positive for their business. They also clarify the issuance metric for workforce on the mortgage side and discuss the incremental margins on mortgage, which may be slightly higher than the gross margins mentioned earlier.

The company's mortgage margins will be lower than expected due to a price increase from a vendor, but they will still maintain attractive margins. The company expects an increase in mortgage volumes in the future and will continue to share this information with investors. The company also differentiates between USIS and EWS inquiries and notes that there is not much data available on market volume forecasts. They will continue to forecast mortgage volumes based on current trends.

The company expects a positive impact on their top and bottom line as mortgage volumes return to normal in 2024-2026. They monitor daily inquiries to forecast future trends. On the origination side, data is only available on a lag basis and they are transparent about inquiries. There may be duplicative costs and migration costs in the first half of 2024, but they should go away as milestones are hit. There is a risk of some of these costs trickling into the third and fourth quarters if not all clients migrate.

Equifax's net benefit in the margin bridge is about 30 basis points for the year. The company will incur incremental costs in the first half of the year, mostly related to North American migrations to Data Fabric. However, these costs will decrease in the second half of the year due to the elimination of redundant costs and migration costs. Despite the decrease in rates, Equifax's forecast for inquiries remains the same, although there have been slight improvements in the last 60 days. This suggests that the mortgage market may have reached a bottom, which is positive for Equifax.

Equifax's revenue has grown in a flat mortgage market due to outperformance in both businesses and increased penetration in EWS. The company is transparent about its forecast and is not able to predict changes in interest rates. In January, mortgage trends were slightly better than expected, but the company's guidance for the full year still reflects a 15% decrease. The company will continue to monitor the situation, especially in light of potential interest rate changes by the Fed.

In Paragraph 37, Equifax discusses the potential for increased revenue in their mortgage business as interest rates begin to decrease. They expect the market to improve and for their mortgage business to outperform the market by 24%. This outperformance is attributed to price, records, and product launches in their USIS and EWS divisions. They anticipate continued growth in their mortgage business as they consistently launch new products.

The speaker discusses an increase in profits from a vendor and the impact on EBITDA margins. They also mention growth in the mortgage market due to new products and prequal products. In regards to delinquencies, they do not believe it will spread to other credit tiers as employment remains strong.

The speaker explains that as long as people are employed, they are able to meet their financial obligations and financial institutions use data to ensure they lend to those who can pay back. Unemployment is a key factor in delinquency rates, particularly in the subprime market where inflation has put pressure on consumers. However, the majority of lending is done in the prime and near prime markets, with subprime lending primarily done by fintechs. The speaker believes that as long as unemployment remains low, the financial services industry will continue to thrive. They also discuss the various factors that contribute to margin expansion, including growth and cost savings.

The speaker discusses the positive outlook for the company's margins in the second half of the year, citing a better mortgage environment and the elimination of redundant system costs. They do not provide specific guidance for the third and fourth quarter, but expect to see strong margin improvements compared to last year. They also mention the potential for accelerated margin expansion if there is a mortgage recovery. The speaker concludes by thanking the participants and inviting them to reach out with any follow-up questions.

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