Mark Begor: Yes, they’re a little bit better than how we thought they would be when we gave guidance in October. That started in December, I said we called it slight improvements. But that’s factored into the guidance we’ve shared with you this morning. So we’ve included that in the down 15%, and we’ll continue to watch that closely. And watch it going forward. And obviously, we all know if, in fact, the Fed is going to take rates down. That’s good news for our mortgage business in the future, which is why we tried to frame that $1 billion of potential revenue in the future as mortgage volumes return to more normal levels, and we expect them to return to normal levels. At these high rates, people are sitting on homes that they want to upgrade and move to that 4-bedroom home versus a three and they’re waiting for rates to come down.
Now what’s that inflection point? We’ll see. But the positive from our eyes is that it feels like the market has bottomed and with the Fed’s managing inflation and indicating rate cuts in the future, that’s going to be a good guide for Equifax and a tailwind going forward. The question is when?
Unidentified Analyst: Got it. That’s really helpful. Also, could you maybe please add some — a little bit more color on how the 24% outperformance compared to the mortgage market figure was arrived at? I mean I know some of this has already been touched upon, but if you can maybe expand on that a little bit.
John Gamble: Our overall mortgage outperformance lended USIS and EWS, right? So again — so it’s kind of two drivers, right? So we’ve talked about. We expect in the first quarter, for example, EWS outperformed by on the order of 11 points, and we think that’s really driven by price and records, right? And then — and product, as we said, we’re lapping the launch of mortgage 36, which occurred in the fourth quarter of 2022, right, and was kind of fully implemented in the first quarter of 2023. So we don’t see the big product benefits that we saw in ’23 recurring here in 2024. Over time, we will continue to launch new products. We do it very consistently across the business. and we should see that in mortgage as well, and that will continue to add to the outperformance in EWS.
In USIS, obviously, the outperformance is extremely strong in the first quarter, right, on the order of 50 points relative to what we’re seeing the market at. And again, it’s really two big drivers. We’ve talked about it already. We’ve seen a substantial increase from a vendor that we passed through as part of our pricing and we mark it up to try to maintain our EBITDA margins. That is a little dilutive on our overall margins, but it is something that we generate significant incremental profit from. So we do mark it up to maintain EBITDA margins. We’re also seeing some incremental growth because in the second half of last year, we saw some — we saw acceleration in products that are sold very early in the mortgage cycle. And since they accelerated in the second half of last year relative to the first half of last year, we’re seeing incremental growth relative to the mortgage market transaction levels in the first quarter of 2023 relative to what we would have seen last year.
Mark Begor: On some new products that Equifax rolled out.
John Gamble: And it’s also the prequal products that have gone on across the industry. So that’s why we’re indicating as, as we move through 2024, we would expect the level of outperformance in USIS mortgage to decline as we lap the periods in which those prequal products were launched.
Operator: Our next questions come from the line of Toni Kaplan with Morgan Stanley.
Toni Kaplan: I wanted to ask about the comment you made on the delinquencies. It seems like subprime has been getting worse approaching ’09 levels, as you called out earlier. Do you see that spreading to near prime or prime? And I guess, so far, it hasn’t — you haven’t seen changes in consumer behavior and things like that. But I guess, how do you think that this plays out?
John Gamble: Yes. I’ve been in the financial services space for a long time. Obviously, here at Equifax for almost six years, but for 10 years, we’re in what is now Synchrony. So I know the financial services space well. And personally, I don’t. Yes, that’s not my view that it’s going to spread and primarily because unemployment is so low and employment is so high. As long as people are working, they have the capacity to maintain their financial obligations. And of course, financial institutions like meaning our customers are using data to make sure they’re offering credit to those that can pay it back. So we’re in an environment where unemployment really drives positives in most of the delinquency bands. Subprime has been pressured primarily because of inflation in what we see.
While they’re working that demographic inflation, whether it’s heat, gas, groceries, all those have pressured that group. And then as a reminder, it’s a small part, a small part, an important part, but a small part of the financial services ecosystem, meaning most of the lending that takes place in cards and auto is done in prime and near prime. Subprime is generally done today with fintechs. That’s where most of the — and they’ve tightened up starting in the summer of ’22, almost 18 months ago. They started tightening up because they saw subprime consumers pressured by inflation, and they were getting pressured around their balance sheets because most of them are bank funded or securitization funded. So they had some pressures. So no, I don’t see it as long as unemployment stays.
The thing that we watch a lot and I watch a lot personally is where’s unemployment. And as it stays low and it feels like it’s going to stay low. I think we still have something like nine million jobs open with five billion people looking, and we’re still generating net new jobs. So that’s a good environment generally for the financial services industry.
Toni Kaplan: Yes, makes a lot of sense. I wanted to ask a question on margins in a slightly different way. You talked about the moving pieces, very helpful bridge that you gave. And so the way I’m thinking about it is you have sort of the normal margin expansion from growth, you have the more cost savings than you previously expected. Better mortgage environment in the second half and then you have the redundant — some of the redundant system costs going away in the second half. So basically, a lot of positives in second half of the year for margins. I guess where — what kind of ballpark should we be thinking about exiting ’24? And obviously, I’m trying to think about my ’25 number.
John Gamble: I think it’s a little too early for us to begin in third and fourth quarter guidance. But look, we’ve said consistently, we expect to see nice margin improvements as we move through this year. And that’s both sequentially and then relative to what we delivered last year. So we continue — we expect that to continue to happen. I think you summarized what we talked about very well, right? And we do expect to see very good margin progression as we go through this year. And then obviously, to the extent that there was a mortgage recovery, which we haven’t forecast, we should see accelerated margin expansion as that occurs, right, based on variable to gross profit margins that you apply against our mortgage.
Operator: We have reached the end of our question-and-answer session. I would now like to turn the floor back over to Trevor Burns for any closing remarks.
Trevor Burns: I just want to thank you everybody for joining the call today. And do you have any follow-up questions, please reach out to myself or Sam. Otherwise, have a great day.
Operator: Thank you. This does conclude today’s teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.
