Dynamo Cougar, a Brazilian investment management firm, published its fourth quarter 2020 investor letter – a copy of which can be downloaded here. A return of 24.3% was recorded by the fund for the full-year 2020, above its IBX and Ibovespa benchmarks that delivered a -12.0% and -13.3% return respectively in the same period. You can view the fund’s top 5 holdings to have a peek at their top bets for 2021.
Dynamo Cougar, in their Q4 2020 investor letter, mentioned Equifax Inc. (NYSE: EFX) and shared their insights on the company. Equifax Inc. is an Atlanta, Georgia-based consumer reporting agency company that currently has a $22.2 billion market capitalization. Since the beginning of the year, EFX delivered a -5.83% return, while its 12-month gains are up by 46.18%. As of April 07, 2021, the stock closed at $181.59 per share.
Here is what Dynamo Cougar has to say about Equifax Inc. in their Q4 2020 investor letter:
“Unlike the proactive approach at Nike, the digital transformation at Equifax was triggered by a crisis. For context, Equifax is an American consumer credit reporting agency that competes with the likes of Experian, TransUnion, and, to some extent, FICO. Equifax collects consumer and business data and then sells this data to corporations, government agencies, and consumers. In 2017 Equifax suffered a security breach as part of which the private records of 143m Americans and 15m UK citizens were exposed. Given the confidential nature of these records, this was a detrimental blow to the company’s credibility. Those affected sued the company and many corporations shifted business from Equifax to their competitors. The new management team realized that in order to save the business they would have to rearchitect their IT and security stack. At the beginning of 2019 they announced that as part of this reorganization they would move their entire IT infrastructure to the Google Cloud Platform (GCP).
The transition to the cloud is being led by Bryson Koehler, the former CTO of IBM Watson and IBM Cloud Platform.10 Koehler joined IBM in 2015 when they acquired The Weather Channel. He was the CTO responsible for moving the business to the cloud and thereby transforming it into the leading global weather data provider. He joined Equifax in June 2018 and was responsible for determining the cloud-first strategy and choosing Google as the main provider. There are some interesting case studies on Koehler’s work at The Weather Channel, including two from Harvard Business School.
The ongoing technology transformation for Equifax is based on three principles. First, the company will become cloud-native, which means that all of their infrastructure will be moved to the cloud. Second, all applications will be built in a way that services and components can be easily assembled and connected using standard APIs (microservices architecture). This enables developers to reuse parts of their code and make sure that all applications can run on the same data infrastructure. The third principle is rationalization. In 2018 the company had six to eight versions of the same applications, running across different systems and customers. In the cloud there will only be one version, which is continuously updated. This means that development resources can now be focused on one version, rather than split across eight.
A transition of this sort is only possible with the right team in place. CTO Koehler replaced 50% of his leadership team within the first six months of arriving, by recruiting talent from the best technology companies. This exemplifies the difficulty associated with a true digital transformation and the likely employee resistance that organizations face.
The three principles are executed across five different tracks. First, the company will build what they call a common “data fabric.” The idea is to build one centralized data warehouse on the Google Cloud Platform that allows them to ingest, govern, enrich, and manage all of this data. This will replace a multitude of current purpose-built systems and siloed databases. It will allow customers access to data in real-time versus days or weeks based under the current system. They will also be able to take
advantage of Google’s industry leading querying, analytics, and machine learning tools. Most of the US data will be fully migrated by the end of 2020. Second, all of the customer applications will be rebuilt for or migrated to the cloud in a way that they can be delivered in a software as a service (SaaS) format. All new applications will be built to this standard. Equifax already initiated this process in 2016, when they launched their InterConnect SaaS product. Third, Equifax’s 4,000 global customers will be migrated from legacy systems and integrations to the SaaS products. Fourth, customer support software will be moved to the public cloud. As part of this transition, the company will also deploy SaaS solutions for customer support, such as Salesforce. Fifth, some of the operational business systems will be moved to SaaS applications. For instance, Equifax will move to Gmail for email and collaboration, move their Oracle financial systems from on-premise to AWS, and their sales management applications will be moved to the Salesforce cloud.The financial impact Equifax expects from this cloud transition is twofold. The simpler of the two is the additional revenue growth they anticipate. The management team 11 Equifax Q1 2019 Earnings Call believes that through their ability to launch more data products at a faster rate (100 products implemented in 2020 vs. 10 in 2019) they will be able to sell more to existing customers and attract additional ones. In addition, the increased speed at which the data and analytics will be available to customers should increase their data consumption. Finally, their access to Google’s machine learning and analytics capabilities should further accelerate their ability to sell more of the higher cost data insights rather than the raw data. In essence, they aim to offer a product that customers will purchase more of and at higher prices.
The second financial impact is the anticipated cost reduction from the transition. The two areas of cost savings will be technology costs and development expenses. Technology costs represent approximately 45% of the COGs and management expects to reduce these by 15%, which implies a 7% reduction in total COGs or $90m applied to the 2019 cost base. The company also projected a 25% reduction of product development expenses. Based on the 2019 numbers the combined cost saving would be $125m or 3-4% of revenues.12 Equifax also expects a 35% reduction in capital spending. Applying this 35% to the 2019 numbers results in a $115m saving. Consequently, the total pretax cash savings on 2019 numbers would be
$240m or 7% of revenues.Equifax is a good case study because they provide an unusual level of detail with regard to their cloud transition. We concede that the company is more data reliant than the standard enterprise and therefore the benefits from moving to the cloud are easier to understand. Notably, we spoke with the former CTO of a >$100bn market cap enterprise about the Equifax transition and he was adamant that the focus of a digital transformation should be a better customer proposition and the subsequent revenue growth that follows, rather than cost savings. We agree with this view, but since Equifax was already a data and technology-based operation prior to the transformation, they are also likely to benefit on the cost side. Furthermore, revenue synergies are harder to quantify and sell to the market than cost synergies, given the complexity of these transformations, which might explain why they have been more vocal about these to date.”
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Our calculations show that Equifax Inc. (NYSE: EFX) does not belong in our list of the 30 Most Popular Stocks Among Hedge Funds. As of the end of the fourth quarter of 2020, Equifax Inc. was in 36 hedge fund portfolios, compared to 42 funds in the third quarter. EFX delivered a 0.17% return in the past 3 months.
The top 10 stocks among hedge funds returned 231.2% between 2015 and 2020, and outperformed the S&P 500 Index ETFs by more than 126 percentage points. We know it sounds unbelievable. You have been dismissing our articles about top hedge fund stocks mostly because you were fed biased information by other media outlets about hedge funds’ poor performance. You could have doubled the size of your nest egg by investing in the top hedge fund stocks instead of dumb S&P 500 ETFs. Here you can watch our video about the top 5 hedge fund stocks right now. All of these stocks had positive returns in 2020.
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Disclosure: None. This article is originally published at Insider Monkey.
