The Equifax Inc. Q1 2024 Earnings Conference Call is being held and will include a question-and-answer session. Trevor Burns, Senior Vice President, Head of Corporate Investor Relations, is leading the call with Mark Begor, Chief Executive Officer, and John Gamble, Chief Financial Officer. The call is being recorded and will be available for later access. During the call, they will be referring to certain materials and making forward-looking statements, as well as discussing non-GAAP financial measures. Mark Begor notes that they are off to a strong start in 2024.

In the first quarter, reported revenue for the company was up 7%, with adjusted EBITDA margins and EPS exceeding expectations. U.S. mortgage revenue was up 6%, driven by strong performance in USIS and offset by a decline in EWS mortgage revenue. Non-mortgage businesses had 9% constant currency revenue growth, slightly below expectations. Non-mortgage organic constant currency record growth was 5%. EWS Verifier non-mortgage revenue was up 15%, while employer revenue was down 10% due to a decline in ERC revenue and delays in state government processing of WOTC claims.

In the first quarter, the company saw a decline in WOTC revenue, but expects it to pick up in the remainder of 2024. On the other hand, I-9 and onboarding revenue showed mid single digit growth. USIS had a strong quarter with revenue up 10%, driven by a 38% increase in mortgage revenue and strong performance in other areas. However, non-mortgage revenue was weaker than expected due to declines in third-party bureau sales and Telco and Auto. International revenue grew by 20% and delivered strong margins, with the exception of lower growth in Asia Pacific. Overall, the company's adjusted EBITDA margins were higher than expected due to strong operating leverage and performance.

In the fourth paragraph, the speaker discusses the addition of a new strategic priority to focus on driving AI innovation. They mention that 85% of new models and scores were built using AI and ML in the first quarter, exceeding their goal of 80%. The speaker also talks about the company's focus on Equifax.ai and maintaining their 2024 guidance for revenue and adjusted EPS. They then provide an overview of the U.S. economy and consumer, noting that employment remains at historic levels and turnover and hiring are lower than last year.

Equifax's credit card and auto delinquency rates for prime consumers are stable and at historically low levels, but subprime delinquency rates remain above pre-pandemic levels. Workforce solutions revenue was slightly below expectations, with mortgage revenue down as expected. Twin inquiries were down, but revenue outperformed inquiries due to price increases and stronger fulfillment rates. However, this was partially offset by a shift in product and customer events. The company expects improved mortgage outperformance in the second quarter and the second half of the year, but a decrease in outperformance compared to last year.

In the first quarter, Non-mortgage verification services revenue had a strong 50% growth, exceeding expectations and representing over 70% of verifier revenue. Government revenue grew by 35% and is expected to continue growing throughout 2024. Talent Solutions revenue was down 4%, Consumer lending revenue was up 6%, and Employer Services revenue was down 10%. Workforce Solutions adjusted EBITDA margins remained strong at 51.1%. The company is investing in new products and expanding high-growth verticals.

EWS first quarter margins are lower due to a higher mix of employer solutions revenue, particularly from ACA and W-2. The government vertical has been a fast-growing segment for EWS, with a 50% CAGR over the past three years. EWS expects to continue penetrating this market through additional sales resources, new product rollouts, and system integrations. The company has secured contracts with various government agencies, such as SSA, CMS, and SNAP, to improve the consumer experience and operating efficiency. EWS had a strong quarter in terms of new record additions and signing new payroll processors.

During the quarter, EWS signed agreements with two new payroll processors, adding six million current records to the TWN dataset. This brings the total number of payroll providers added to 35 since the beginning of 2021. EWS' ability to deliver high levels of client service and record monetization has contributed to their success in various verticals. The company's advancements in AI and cloud-native capabilities have decreased the time to board new records from payroll processes. In the first quarter, EWS added four million current records, growing the TWN database by 10%. The database now has 172 million current records on 126 million unique individuals, with a total of 670 million records. Despite typical churn in holiday season hiring, these are strong results. EWS has coverage on 75% of BLS non-farm payroll and over 55% of the estimated 225 million income producing Americans. With 126 million unique active records, there is still room for growth towards the TAM of 225 million income producing Americans.

In the first quarter, USIS revenue exceeded expectations with a 10% increase, mainly driven by a 38% increase in mortgage revenue. Non-mortgage revenue was up 1%, but weaker than expected due to declines in third-party sales to credit bureaus. B2B non-mortgage online revenue was down less than 1%, while commercial revenue and financial marketing services were up slightly. Marketing revenue was down 4%, primarily due to a decline in IXI revenue. Pre-screen marketing was down less than 1%, but is expected to grow for the full year. Smaller FIs saw declines, but larger FIs experienced growth.

The company saw limited growth in their portfolio review business, but fraud revenue was up 8%. The USIS Consumer Solutions D2C business had a strong quarter with a 10% increase in revenue. International revenue was up 20% in constant currency, exceeding the 18% growth they had predicted. Europe and Latin America saw strong growth, with Brazil revenue at $41 million. The company is working on integrating new platforms to enhance their capabilities in the Brazilian market. Canada saw a 4% increase in the quarter and is on track to complete their migration to the Equifax Cloud. NPI is expected to accelerate as the cloud migration is completed.

The company's Asia-Pacific revenue was lower than expected due to market conditions and contract extensions, but is expected to return to growth in the second half of the year. The company launched over 25 new products in the quarter and expects to continue to innovate and drive new product rollouts throughout the year. The USIS and EWS segments delivered strong performances with VI of 7% and over 10%, respectively. The company's EFX.AI initiative, enabled by their EFX Cloud, is a key strategic priority for the company.

Equifax is accelerating the development of new models, scores, and products using AI and machine learning, with 85% of new models and scores built using AI and ML in the first quarter. This aligns with their goal of 80% by 2024 and shows a clear focus on NPI and AI. Completing the cloud is a major priority for Equifax, as it will allow for faster execution of AI and analytics, improve system response time and resilience, and free up the team to focus on growth and innovation. Over 70% of total revenue is already in the new Equifax Cloud, and the goal is to reach 90% by the end of the year. USIS is expected to complete their customer migrations to the new Equifax Cloud in the third quarter, with positive feedback from customers so far.

Equifax is making progress in their strategic priorities for 2026, including completing consumer credit exchange migrations to the data fabric in Canada and Europe, and cloud migrations and decommissionings in the UK. They are also driving AI innovation through their cloud-based data fabric and application architecture, as well as their global Ignite and Interconnect platforms. They are deploying Equifax proprietary explainable AI and Google Vertex AI across these platforms, which will provide faster and more predictive model development for Equifax and their clients. With access to 100% of the U.S. population through their data sets, Equifax is expanding their global population of consumers for their customer cases by over 20%.

The company is focused on driving faster data ingestion and analytics through increased processing power and expanding their cloud capabilities. They have also begun a restructuring plan to improve operating margins and lower capital intensity. The company is now shifting towards leveraging their new cloud capabilities to drive revenue and the CFO will provide more details on their first quarter financial results and second quarter guidance. Mortgage market credit inquiries were down in the first quarter, but the company expects to see a rebound in the second quarter.

The company has seen some weakening in trends for credit and TWN inquiries in late March and early April due to an increase in mortgage rates. However, mortgage credit inquiry rates are still better than the guidance provided in February. The company expects mortgage revenue outperformance to moderate in the second quarter and the second half of 2024. In the second quarter of 2024, total Equifax revenue is expected to be between $1.41 billion and $1.43 billion with nonmortgage constant currency revenue growth of about 11%. Mortgage revenue is expected to be about 3% and will account for just over 20% of Equifax revenue. Workforce Solutions revenue growth is expected to be up about 3%, with mortgage revenue down about 12.5%.

EWS nonmortgage revenue is expected to grow by over 9% in the second quarter, driven by growth in nonmortgage Verifier and a return to growth in Talent Solutions. Employer Services revenue is expected to decline by 4% due to declines in ERC revenue, but excluding ERC, it should see slight growth. Adjusted EBITDA margins for EWS are expected to be around 51%. USIS revenue is expected to increase by over 8%, with mortgage revenue growing by 25%. International revenue is expected to grow by over 20%, with Brazil delivering over $40 million in revenue. Equifax's adjusted EBITDA margins are expected to increase by 300 basis points, and adjusted EPS is expected to be $1.65 to $1.75 per share. Capital expenditures are expected to be consistent with the first quarter and around $475 million for the year.

The company's capital allocation priorities for 2024 include reducing leverage and using free cash flow for dividend increases, share repurchases, and acquisitions. The company is on track to achieve its goal of a leverage ratio of 2.5 times by the end of 2024, which will allow for increased flexibility. The migration of credit exchange changes to the cloud will result in cost benefits in the second half of 2024, leading to higher EBITDA margins and adjusted EPS. The company's 2024 full year guidance remains unchanged, with a constant currency revenue growth of 10.5% and organic growth of 8.5%. Total mortgage revenue is expected to grow over 10%, driven by stronger USIS mortgage revenue. Non-mortgage constant dollar revenue is projected to grow over 10%, slightly below previous expectations. Foreign exchange is expected to have a negative impact on revenue growth. Some BU level guidance has also been adjusted.

In 2024, Workforce Solutions is expected to deliver revenue growth of 7%, with mortgage revenue down slightly but still better than underlying transactions. Non-mortgage verticals are expected to grow by 10%, but this is a slight decline from previous guidance due to weaker employer revenue. Excluding the expected decline in pandemic support programs, non-mortgage revenue growth is projected to be 12%. USIS is expected to have revenue growth of over 9%, with mortgage revenue growing by 25% and non-mortgage revenue growing by 3%. International revenue is expected to have constant currency growth of over 15%, with organic growth of 10%. The guidance is centered at the mid-point of both the revenue and adjusted EPS ranges.

The mortgage market is currently below its average inquiry levels, but as it recovers, it presents a potential revenue opportunity of over $1 billion for Equifax. This would result in significant EBITDA and earnings per share growth. The company's strong performance in the last quarter was within their long-term revenue growth framework, and their focus for 2024 is to complete their cloud transformation and drive innovation through investments in AI and ML. This will lead to market expansion and reduced capital intensity, with the goal of having 90% of revenue in the Equifax Cloud by the end of 2024.

Equifax is entering a new chapter as it shifts its focus from building its cloud to leveraging its capabilities to drive growth and increase margins. The company is confident that its differentiated data sets and use of EFX.AI and machine learning will lead to higher growth, expanded margins, and increased free cash flow. The company remains committed to its long-term model of 8-12% revenue growth and 50 basis points of annual margin expansion. The CEO is optimistic about the future of Equifax and believes they have good visibility, despite some uncertainty in the market.

The speaker discusses the recent increase in mortgage rates and the uncertainty surrounding the mortgage market. The company had a strong first quarter, but they decided to be cautious in their outlook for the rest of the year due to the current economic climate. They expect the mortgage outperformance in their EWS division to continue, but at a slightly lower rate compared to previous years. The addition of new records and clients will help boost their performance in the coming months.

John Gamble explains that the higher hit rates will benefit all of the EWS businesses in the second half of the year, including mortgage. However, the first quarter was lower than expected due to customer and channel mix. The company expects this mix to continue for the rest of the year. The 500 basis point better assumption for USIS mortgage credit inquiries translates into better mortgage revenue for USIS in total, not just OIS. The trajectory for mortgage in total is expected to be in line with the levels of outperformance for EWS in general.

The speaker explains that although mortgage solutions and OIS are reported as separate line items, they are managed as one business. The company expects mortgage performance to be strong for the year, with a 40-point outperformance. If rates stay high, mortgage market may be flat in 2025, but there is a potential tailwind in the long-term. Non-mortgage businesses are not significantly impacted by rates and the company remains confident in its 8-12% long-term framework, including M&A.

The benefit of rates coming down to a lower level will provide a tailwind for the mortgage market as it recovers from its low levels. The company's guidance for 2024 assumes that rates will stay where they are currently. There has been consolidation in the background screening space, but the company's strategy and outlook for Talent, within Appriss and TWN products, remains the same. The company sees a big opportunity for growth in the talent space and has strong relationships with top players. They also have a pipeline of new product additions in this space.

The speaker discusses the potential for growth in the talent vertical due to the large number of background screeners still using manual methods. They also mention the potential for tailwinds from a stabilizing job market and increased economic activity. The addition of 4 million records in the quarter is expected to result in higher hit rates and there are plans to increase prices in 2025. The government sector is also expected to see opportunities for growth. The outperformance of EWS compared to volume is attributed to a mix of factors, including customer shifts and the state of the mortgage market.

The company has noticed changes in the volume of business from specific customers, especially when the numbers are smaller. These changes can be influenced by the marketing efforts of mortgage originators, which are primarily done digitally. However, the company's overall performance is not significantly impacted by these fluctuations. The main driver of the business is the consistent growth in records, which makes the product more valuable. The company expects to see continued improvement in mortgage revenue due to the rapid addition of records. As for margins, the company has increased its inquiry numbers on the mortgage side, but it is not a significant factor in overall performance.

The company is maintaining its EBITDA outlook for the full year, although there may be some fluctuations due to changes in interest rates and inflation. They will re-evaluate the outlook after the second quarter when they have more visibility. The company is also expecting margins to go up throughout the year due to cost reductions and an improving mix of revenue.

The addition of records in EWS is expected to be margin accretive for the company. The volume of talent in January and February was lower than expected, but is now improving. The company is confident that the trend will continue in the second quarter. The cloud migration is expected to result in revenue growth and margin expansion, but the specific impact is not quantified.

In the full year guidance, the company has not factored in the benefits of the cloud migration into their 2025 forecast. However, the completion of cloud transformations this year will benefit margin expansion in 2024 and provide further benefits in 2025. The cloud will also bring top line benefits through improved customer partnerships, increased new product innovation, and accelerated growth in businesses like USIS. The completion of the cloud transformation will allow the company to focus solely on growing the business, as opposed to also managing the transformation process.

The company is focused on utilizing their differentiated data in the cloud and increasing their focus on AI and ML, which they believe will benefit them in the second half of 2025 and beyond. The next question is about the outperformance in the mortgage sector of USIS, with the pricing pass through being a significant factor, along with the new Prequal product. The company plans to continue bringing new solutions to market. The second question is about the Workforce Solutions 2024 guidance going down to 7% from 8%, despite expected improvements in the mortgage market. The reasons for this decrease are attributed to potential delays rather than permanent impacts.

The speaker is discussing the decline in revenue for the full year, which is primarily due to lower performance in employer services and mortgage revenue. They are also seeing stronger performance in non-mortgage verification services, particularly in government and financial services. The decline in revenue is also affected by weaker outperformance in mortgage inquiries due to customer mix.

In response to a question from Faiza Alwy of Deutsche Bank, Mark Begor explains that third party sales to credit bureaus were weak and down double digits in the first quarter. This was due to a decrease in credit report sales to companies that provide credit monitoring services. The company expects this trend to continue in the second quarter. However, they are seeing strong performance in government revenue and are confident in their talent recovery for the rest of the year.

The company expects revenue to decline due to redeterminations being completed by the end of March. However, they have seen strong performance across government, CMS, and other areas, and are expanding staff to continue growth. They expect to get back to growth as the year progresses and feel good about their non-mortgage financing structure. The growth in records and adding new payroll processors will further strengthen the company in all three areas. The FHFA released a timeline for credit score requirements at the end of February.

The speaker was asked about the potential impact of a recent proposal on the business of Equifax. They stated that the proposal has been pushed out to late this year or early next year and that they do not expect any changes to occur until 2025. The speaker also provided additional context on the average inquiry level from 2015 to 2019, stating that during this time period, the average originations were $7.5 million a year, with a mix of under 60% purchase and over 40% refinance.

The speaker says that there was an increase in rate shopping during the COVID period, particularly in the mortgage market due to the rise in digital consumers. This trend is expected to continue in the future, even as rates decrease.

The speaker discusses the potential impact of changing interest rates on consumer behavior, noting that even if rates increase, they will still be higher than pre-pandemic levels. They also mention a slight decrease in marketing spend, but do not see it as a concern for future volumes. In response to a question about a new process for validating income, employment, and assets in the mortgage industry, the speaker does not expect it to affect their business.

The company has not seen a change in the instant nature of their data and expects this to continue. They have seen wide utilization of their data in the mortgage vertical and expect this to continue as they add more records. Renewals for exclusive contracts with payroll providers are happening now, but they are on auto-renewal and the company adds new partnerships every quarter. The integration process for new partnerships is complex and makes their relationships with partners sticky.

The company's business growth also benefits its partners' monetization. The company has strong partnerships with payroll processors and is expanding its services with them. The company is confident in the long-term nature of these partnerships. There were some product headwinds in TWN mortgage due to lapping the Mortgage 36 adoption. The company is focusing on new solutions to add value. Half of the company's records come from individual relationships, while the other half comes from partnerships. The company is growing its individual relationships every month.

The speaker discusses the partnerships the company has, including with payroll processors and HR software companies. They also mention their relationships with pension administrators and their pursuit of defined benefit pensioners. They do not provide specific numbers for their credit card and auto exposure in their USIS segment, but state that they expect good performance in U.S. consumer, commercial, and ID and fraud.

The company had a strong performance in the government vertical in the first quarter and it is now their largest vertical. They do not provide guidance at the segment level. The growth in this vertical was not solely driven by redeterminations. The company recently signed a large contract with CMS that had a price increase and this is expected to have an impact on the fourth quarter.

The company has signed a new contract with USDA for SNAP TANF benefits worth $190 million over five years, which will positively impact their financials in the fourth and first quarters. They have also focused on increasing state penetration for growth, as government social services are delivered at the state level. The company has put more resources at state capitals to drive usage of their solutions. Price increases are built into their multi-year government contracts, and they have visibility on when these increases will impact their financials. Despite the redetermination pause being over, the company expects to continue with strong growth in the second quarter. Redeterminations are a continuous requirement for government programs.

The speaker discusses the impact of the evolving mortgage market on Equifax's business and pricing power. They mention the increasing use of online mortgage shopping and the value of instant and accurate data in shortening the time between inquiry and closing. They also mention the importance of instant data in mitigating risks for mortgage originators. Overall, the changes in the industry play to Equifax's strengths in providing instant data.

The company is seeing positive trends in their mortgage and employment verification services due to the increasing use of their automated solution. This has led to improved productivity, accuracy, and speed. The guidance for the second half of the year suggests a strong improvement in workforce, with record additions being an important driver. The company recently added four partnerships and a large payroll processor, which will add 6 million records to their database. This will lead to immediate monetization as their customers are already inquiring about them.

The second half of the year is expected to be positive for the company, with the WOTC piece causing a timing impact. The company has a strong pipeline for new contributors and is actively adding more. There is a long runway for growth as there are still 100 million individuals to add to their data set. The company has exciting new products in the non-mortgage segments that should drive growth. Consumer demand and lender appetite remain strong due to the persisting trend of strong employment.

John Gamble and Mark Begor discuss the changes and trajectory they have seen in the market, particularly in relation to mortgage originations. They state that the market expectations have moved closer to their own, but that auto and sales to other bureaus have been weaker than expected. They also mention that FI looks fairly good. When asked about the discrepancy between their reported 22% decrease in mortgage originations and data from other sources, they clarify that they are reporting on inquiries, not actual originations.

The speaker clarifies that they use actual inquiry data on the credit bureau, unlike third party groups that use estimations. They also mention that they don't see mortgage originations until six months later, and that surveys done in February or March may not reflect current market conditions.

The speaker discusses the strong alignment between historical originations and inquiry activity, using mortgage inquiries as a proxy for the market. They also compare TWN inquiries to credit inquiries and look at trends in EWS compared to USIS. The speaker then addresses customer price sensitivity and competition in the Workforce Solutions business, noting that nobody likes price increases but customers understand the value of their data.

Equifax considers various factors, not just price, when determining how to approach the market. They focus on providing value and ROI to customers in order to increase their penetration into different industries. They do not feel threatened by smaller competitors in the income and employment sector, as their main competition is manual verifications. The company is focused on converting manual verifications to their digital solution in order to tap into the white space in the market. When asked about the proportion of mortgages with rates below 5%, Equifax did not have the information readily available but stated that the recovery of the mortgage market will be driven by purchase activity, which has decreased significantly compared to normal refinancing.

The paragraph discusses the different types of mortgage refinancing, including rate refis and cash-out refis. It also mentions the impact of rising interest rates on these types of refinancing, as well as the current state of the housing market and its effect on mortgage activity. The speaker expects rates to stabilize and eventually decrease, leading to an increase in mortgage revenue in the future.

Trevor thanks everyone for their time and invites any follow-up questions. He and Sam will be available to discuss further. The operator then concludes the teleconference and webcast.

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