Equifax Inc. (NYSE:EFX) Q4 2023 Earnings Call Transcript

Equifax Inc. (NYSE:EFX) Q4 2023 Earnings Call Transcript February 8, 2024

Equifax Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings. Welcome to the Equifax Fourth Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. The question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded. I would now turn the conference over to Trevor Burns, Senior Vice President of Corporate Investor Relations. Thank you. You may begin.

Trevor Burns: Thanks, and good morning. Welcome to today’s conference call. I’m Trevor Burns. With me today are Mark Begor, Chief Executive Officer; and John Gamble, Chief Financial Officer. Today’s call is being recorded. An archive of the recording will be available later today in the IR Calendar section of the News & Events tab on our IR website. During the call, we’ll be making reference to certain materials that can also be found in the Presentation section of the News and Events tab at our IR website. These materials are labeled 4Q 2023 earnings conference call. Also, we’ll making certain forward-looking statements, including first quarter and full-year 2024 guidance to help you understand Equifax and its business environment.

These statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially from our expectations. Certain risk factors that may impact our business are set forth in filings with the SEC, including our 2022 Form 10-K and subsequent filings. We’ll also be referring to certain non-GAAP financial measures, including adjusted EPS and adjusted EBITDA, which will be adjusted on certain items that affect the comparability of our underlying operational performance. In the fourth quarter, Equifax incurred a restructuring charge of $19 million or $0.11 a share. This charge was for costs incurred as we realigned business functions ahead of completing our technology transformation. This restructuring charge is excluded from adjusted EBITDA and adjusted EPS.

These non-GAAP measures are detailed in reconciliation tables, which are included with our earnings release and can be found in the Financial Results section of the Financial Info tab at our IR website. Now I’d like to turn it over to Mark.

Mark Begor: Thanks, Trevor, and good morning. Before I cover results for the quarter, I wanted to spend a few minutes on our 2023 performance. Equifax performed extremely well last year against our EFX 2025 strategic priorities. Our strong performance was against one of the most challenging mortgage markets in the last 20-plus years with our USIS mortgage inquiries down 34% and Equifax mortgage revenue down 17%, which equates to almost $500 million of lost mortgage revenue last year. Despite the significant decline in 2023 mortgage revenue, Equifax delivered. We delivered 2% organic constant currency revenue growth with 7% organic constant currency non-mortgage revenue growth, which was at the low end of our long-term 7% to 10% growth rate.

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Q&A Session

Importantly, we had sequential improvement during the year with 8% total growth and 9% non-mortgage growth in the fourth quarter. We also delivered over 100 new products with a vitality of 14%, which was a record for Equifax and well above our 10% long-term goal. EWF delivered strong 10% organic non-mortgage revenue growth, which allowed them to deliver flat total growth despite mortgage revenue that was down 23%. They delivered sequential non-mortgage revenue growth and exited fourth quarter with strong 17% non-mortgage growth. Verifier non-mortgage revenue grew 14%, led by government that grew over 30% and talent that grew 5% despite the white collar hiring market that was down just under 10%. EWS grew current twin records to $168 million, up $16 million or 11% and grew total records to $657 million or $53 million records.

We added 17 new twin partnerships last year, our highest number ever and have a strong pipeline for 2024. And in the third quarter, EWS signed a contract extension to provide income verification to the U.S. Centers for Medicare and Medicaid Services as part of a contract valued at up to $1.2 billion over the next five years, which is the largest contract in Equifax’s history. EWS also delivered over 20% new product vitality. USIS delivered 4% revenue growth with 7% non-mortgage growth within their 6% to 8% long-term growth framework, while mortgage declined 5%. The USIS Commercial and Consumer Solutions business had very strong years with double-digit revenue growth led by strong market penetration and new products. International delivered 12% constant dollar revenue growth and 6% organic constant dollar growth, led by continued very strong 17% organic growth in Latin America with a vitality index over 15% and close to 10% revenue growth in our UK CRA.

And in July, we completed the BVS acquisition in the fast-growing Brazilian market. We delivered these strong results while making significant progress towards completing our cloud migration, ending the year with about 70% of Equifax revenue in the new Equifax Cloud. We decommissioned seven data centers and migrated about 37,000 customers to the Equifax Cloud. We are convinced that our new EFX cloud single data fabric and AI capabilities are delivering new differentiated products faster with better performance and will provide a competitive advantage to Equifax for years to come. The strong progress we made in 2023 will enable the substantial completion of our North American transformation and customer migrations in the first half of 2024, including decommissioning of the mainframes and major North American data centers.

Also in 2024, we expect to make substantial progress towards completing transformation activities in Europe and Latin America. By the end of 2024, we expect to have about 90% of our revenue in the new Equifax cloud with the vast majority of new models and scores being built using Equifax AI. In 2023, we executed very well against our EFX Cloud and broader operational restructuring plan across Equifax, reflecting cost reductions from the closure of major North American data centers and other broader spending controls in excess of our original $210 million goal. We expect an incremental $90 million of run rate spending reductions in 2024, which is up about $25 million from our prior forecast due to the additional actions we took in the fourth quarter that will benefit 2024.

Of this $90 million 2024 spending reduction, about $60 million reduces operating expenses and $30 million reduces capital spending. These actions are improving operating margins and lowering the capital intensity of our business. As we move into 2024, I’m energized by our commercial momentum, NPI capabilities and the benefits of the new Equifax Cloud. Turning to Slide 4, our strong fourth quarter gives us momentum as we move into the new year. Fourth quarter revenue of $1.327 billion and adjusted EPS of $1.81 per share were both at the high end of our guidance. And EBITDA margins at 33.7% were up about 60 bps sequentially. Our non-mortgage businesses, which represent about 85% of total revenue in the quarter, were very strong with 14% constant currency and 9% organic constant currency non-mortgage revenue growth, also at the high end of our 7% to 10% long-term organic growth framework driven by strong performances at EWS and international.

Total U.S. mortgage market was slightly stronger than we expected in the quarter with USIS inquiries down 17%. As mortgage rates declined during the quarter from a 23-year high of 7.9% in late October to about 6.8% late in the year, we saw some increased activity to expect we’ll grow if rates continue to decline in 2024. Mortgage volumes began to strengthen slightly relative to normal seasonal levels in December, and we’ve continued the slight improvements during January, which is a good sign if the market has bottomed. Mortgage market outperformance of 33% for USIS and 18% for EWS last year in the quarter were strong and about as expected. We’ll share further perspectives on the mortgage market when we discuss our 2024 guidance. At the BU level, EWS non-mortgage revenue was up a strong 17% and above our expectations, principally due to strength in our government and talent businesses, which drove adjusted EWS EBITDA margins sequentially to above 51%.

USIS had a good quarter with revenue up 5%, slightly above our expectations, principally due to stronger mortgage revenue, which drove adjusted EBITDA margins up about 100 basis points sequentially to 35%. International delivered 22% constant dollar revenue growth and 6% organic constant currency revenue growth, excluding the impact of the BVS acquisition. Very strong growth in Latin America and Europe were principally offset by lower-than-expected growth in Asia Pacific. International delivered very strong 31.2% adjusted EBITDA margins, up about 500 basis points sequentially and much stronger than our expectations. Before I cover our business unit results in more detail, I wanted to provide an overview of what we’re seeing in the U.S. economy and with the consumer.

Broadly, outside of what appears to be a bottoming of the mortgage market, there’s not a lot of change from our prior view. The U.S. consumer and our customers remain broadly resilient. Employment remains at historic levels with low unemployment and almost 9 million open jobs, which is a positive for consumers and our customers. However, there continue to be some constraints in white collar hiring. Credit card delinquency rates for prime consumers, which represent about 80% of the market are stable and at historically low levels at less than 1%, but above pre-pandemic levels. However, subprime borrower delinquencies, which have been increasing over the past year are now above pre-pandemic levels and are approaching 2009 levels. Auto delinquency rates for prime consumers, which represent about 80% of the market are also stable and well below 1%, but are above pre-pandemic levels.

Delinquencies for subprime consumers are above pre-pandemic levels, as well as above the levels we saw in 2009. And any credit tiding that we’ve seen has been largely in fintech and subprime, which started well over a year ago. When consumers are working, they largely have the capacity to keep current on their financial obligations, which is good for our customers and for Equifax. Turning to Slide 5, strong twin record growth and the positive impact from new products, penetration and price drove a strong 18 points of EWS mortgage outperformance in the quarter. As expected, mortgage outperformance was down sequentially from the third quarter as we lapped the 2022 launch of our Mortgage 36 trended data product. EWS had another very strong quarter of twin record additions, adding five million current records in the quarter and $16 million during 2023.

EWS grew twin records 11% in the quarter to $168 million on 124 million unique individuals, which was up 9%. Total records, both current and historic are now over $655 million and were up 9%. In terms of coverage, we have current employment records on about 75% of U.S. non-farm payroll and about 60% coverage on the $220 million income-producing Americans. At 124 million active records, we have plenty of room to grow the twin database. During the quarter, we signed agreements with six new payroll processors that will deliver records in 2024. In 2023, we added partnerships with 17 payroll processors and over the past three years, have added partnerships with 33 payroll processors. During the quarter, EWS also surpassed a significant milestone with over three million companies contributing to the work number every pay period, a huge milestone as we continue to focus on expanding our twin coverage.