Mark Begor: I’d start with — and I think we tried to be clear about that. We don’t see any real change as we go into 2024 from those verticals like cards, auto, p loans, how they performed in the second half of last year. We talked a little bit about fintech was impacted in the second half of ’22 and into ’23, but that seems to be kind of a, I would call it, a stable level now, meaning it’s not declining, which is good news versus the declines that happened last year. Large FIs are fairly consistent as far as they’re still originating because consumers are strong. There’s some choppiness with some of the smaller FIs that might be impacted by some liquidity stuff. But again, not a real change from what we saw in the second half of last year.
Kyle Peterson: That make sense and is helpful. And I guess just a follow-up on capital deployment and priorities there. Just want to see how — if you kind of prioritize where some of the near-term priorities are on the capital front, you mentioned leverage and eventually being to potentially buy back stock or increase the dividend. How are you guys thinking about some of those initiatives and priorities versus potential bolt-on M&A and kind of what’s the near-term priority between the two?
Mark Begor: Yes. So I’ll go near term, which is 2024, I think we laid out that CapEx is coming down again this year in 2024. We expect it to step down again next year as we complete the cloud, big cloud completion in our USIS business and some of our international properties in the first half of this year and getting to 90% cloud complete will be a big milestone. So you’re going to see our CapEx come down over the short term, meaning in ’24 and over the medium term in ’25 again as we complete the cloud. Over that timeframe, we expect our margins to continue to expand, which will grow our free cash flow. Our free cash flow this year is up almost 2x.
John Gamble: It’s well over 50% this year, yes.
Mark Begor: So our free cash flow in 2024 is up substantially. We expect that to continue to grow as we get into ’25 and ’26. And so as you get over the — again, back in ’24, we have a pipeline of M&A that we’re watching. I suspect that given we’re already in February here that, that M&A would be in the second half if we do some. We’re going to be very disciplined around M&A as we always have been. And we’re focused on integrating the large number of acquisitions. We’ve done 14 in a little over three years that we’re integrating like Boa Vista, as we talked about on the call. But when you get look forward to ’25 and ’26, we’ll continue to add bolt-on M&A inside of that 8 to 12 framework that includes 1 to 2 points of revenue growth from bolt-on M&A.
So that’s clearly a part of our strategy. And we’ve been crystal clear that as our margins expand and we still have the goal of 39%, and we still have the goal of growing 50 bps a year post 39. As we move towards that 39% and our CapEx comes down, we would expect to have significant excess free cash flow when you get into ’25 and ’26, where we could look at restarting the dividend and also look at buying back meaningful amounts of our stock, and that’s no change in that. We’ve been very clear in that over the last really three years that that’s the goal we’ve been working towards as we complete the cloud.
Operator: Our next questions come from the line of Kelsey Zhu with Autonomous Research.
Kelsey Zhu: I think you have raised government TAM numbers, again, from $4 billion to $5 billion. I was wondering if you can give us a little bit more color on where the incremental upside comes from? And just in general, what are some of the major programs that you’re targeting or states that you’re trying to get in growth into that will bridge to this $5 billion TAM number?
Mark Begor: Yes. And it’s really around the government social services delivery, which is huge. There’s 90 million Americans roughly that get some form of government social services, whether it’s food support, rent support, cash support, childcare support, student lending support, all those different programs, unemployment support. All of those programs have to be verified by income and you have to verify employment and there’s also an incarceration check on many of them, which is from our APRs data set. We’ve been growing rapidly there because of the real desire to deliver those social services quickly to those that deserve them and need them. And our instant data really delivers that. And we’re competing, as you know, against manual processes and paper paste dogs, which means the recipient who’s after the social services generally has to bring in proof of income.
We can deliver it instantly. And of course, where our data is accurate, it’s one to two weeks old depending upon the time frame because we’re getting payroll every two weeks and we have such broad coverage. So our programs are really at kind of three levels at the federal, state and local level. We have federal programs where some of that verification is done at the federal level like with Social Security Administration. That’s a large contract for us. We talked earlier in this call about the CMS contract that we extended. It’s done at the federal, but then executed at the state level and the new USDA contract. And then we operate at the very state level and the state levels are more complex. There’s a large, large penetration opportunity at the states.
That’s really where a big portion of our growth will come and a big portion of that TAM that you referenced is all the states — all 50 states are not with Equifax, and it’s really at the agency level, each state has separate agencies that deliver these services, and that’s who our customers are. I think as you know, we’ve added resources over the last number of years at the state capital levels to work on deploying these resources. So we have a large pipeline. As you might imagine, we’re focused on the large states: California, Texas, New York, Florida and some of the big, big states that are out there, but we have a focus on all of them. And as you go forward over the next ’24, into ’25, ’26, that will be a big part of the growth is our penetration into the states to deliver these services.
And it’s a very strong value prop. In many cases, the data costs are subsidized by the federal government just as the social services are. So it’s matter of getting the technology aligned with ours and helping change the process flow at each of those different agencies in all 50 states in order to deliver those. So we’re very bullish about that business. As we said, it’s close to $0.5 billion at the end of last year, and we expect strong double-digit growth again in 2024.
John Gamble: I think one of the reasons the TAM is growing as we continue to integrate the insights business into Workforce Solutions fully. We’re able to now see there’s incremental products that can serve portions of that government market that we couldn’t serve before. So I think the part of the increase in the TAM in addition to what Mark described is the broadening of our product set because of the Insights acquisition. So we feel very good how that’s going to continue to allow us to broaden that TAM even further over time as we generate new products to service government needs.
Kelsey Zhu: Got it. Super helpful. My second question is. I’m not sure if it’s too early to talk about how you think about pricing for VantageScore 4.0 in the mortgage vertical. I think based on the FHA’s original time line guidance; we should start transitioning towards that two score system later this year. And I think pricing decision for VantageScore is being made at the bureau level. So just curious to hear how you’re thinking about setting prices for VantageScore for mortgage?
Mark Begor: Yes. I think as you know, there’s two pieces to that potential change by the regulator that is still in a comment period. One is to add Vantage to every federally supported mortgage. That’s going to be a good guide for Equifax when it happens going forward. And then second is the 3B requirement going to 2B. We’ve talked before that we expect on the second half of that mortgage originators to continue to pull the three credit files because there are meaningful differences between the three credit bureaus, three credit files. For example, there’s 8.5 million consumers that are only in one of the three credit files in the United States. So the value of three is quite important. On the Vantage plus FICO, same thing. It’s still in a comment period.
