Equifax Inc. (EFX) Earnings Call Transcript & Summary

Yes, we're excited about Kount. We knew Kount, we've watched them, stayed close to them for 3, 4, 5 years and really attractive company, a leader in the e-commerce identity and fraud space. What attracted us to Kount was the scale of their data assets, number one. They have really unique identity data assets. And maybe I should back up it. You have to start with is the market, the digital macro, you think about the big macros that are supporting our industry. One is more data. The other is digital, meaning more interactions with consumers online, whether it's in banking, insurance, credit cards, mortgage, e-commerce, where Kount was. So that macro, it's an $18 billion TAM growing at 20% per year, identity and fraud. So big deal, and it's only going to keep growing. Once you move to digital, you're not going to turn back. So that's -- it's a great TAM and it's the one that we want to play in and Kount gave us the opportunity to get some more scale there around the data assets. 32 billion interactions that they have, 400 million verified email addresses, IP addresses, cell phone numbers, just really rich data that's accretive to Equifax's identity data. Our identity data comes through credit cards, mortgages, payroll, those different elements of interacting with the consumers. So the combination makes Equifax data stronger in banking and insurance and telco and it makes e-commerce stronger for Kount by bringing the Equifax data. So that's number one. It was the market and the uniqueness of their data is number two. And then number three is the ability to be in e-commerce. We're not in that space. We weren't in it before. So it's a new vertical for Equifax, and we see the opportunity, as you pointed out, to bring some of the Kount solutions to financial services. And they'll be augmented and stronger with Equifax data because there'll be just more data elements there. And then conversely, some of the products and solutions we have into the e-commerce retail space, which is we didn't really spend a lot of time focused on, but Kount has those business relationships. So we're going to leverage those. For example, our wealth data is a data set that we think can be valuable to a retailer deciding how they target customers. Based on the information they have, which things should they market to a customer based on their wealth is an example of some of the data elements that we expect to be able to sell over in e-commerce from our traditional financial data solutions.

That's very interesting. And the time line for that, it sounds like the main focus at the moment is utilizing Kount resources for financial services. The retail part might come a bit later, but that's an additional path to growth.

I think we're multitasking. So we've got all those way. Our -- the Kount commercial team is looking to sell more things. So they're trying to bring the Equifax products in there. Our data technology teams are combining the data assets to bring new products to market. So all of those things are in-flight and part of what we're working on. And then we're just selling each other's products to the respective customers. It's -- we're very excited, and we'd like to do more M&A around identity. This acquisition checked the box of differentiated data assets and identity and fraud, which we'd like to be bigger in.

That's great. And would you say that there are other verticals out there that are a big priority? I know government has come up in EWS and there's others that you've been in for a while, like insurance. Just curious if there are others that are going to be big focal areas?

For M&A? Or just broadly?

Both M&A and for new product introduction.

Yes. So first off, Workforce Solutions, we'll probably touch on that separately, but there's a lot of verticals in there that have a lot of focus for us. Government is one where we sell solutions from Workforce Solutions. And from USIS data elements like identity kind of solutions into the government space. And that's one that we'd like to grow. Another vertical that's more Workforce Solutions, but there's also a USIS element to it is in the hiring process, talent solutions. There's 75 million people get new jobs or second jobs annually, and they have to verify their income -- I'm sorry, their employment, their prior employment is a part of that hiring process. The background screener or the HR manager does that. And actually, sometimes they actually pull the credit report as a part of that hiring process. So that's a vertical that's growing in. Telco is a big vertical for us that we're always looking to bring new products into. And insurance is a vertical that our competitors are stronger, and they've been in focused on more than we have. We're focusing on insurance as a vertical that we'd like to grow in. Cards are a place that we're bringing new products to market, personal loans, same thing in auto is -- are verticals that we're focused on.

Great. Well, since we're starting to talk about EWS, why don't we switch over and talk about it a little bit more. I think for those investors who haven't been as involved in the Equifax's history, it'd be very helpful to get an overview of what EWS is, what's driven the growth over the last couple of years and then really talk about what's going to continue supporting that growth going forward.

Yes, sure. It's a -- I call it a fairly new business, meaning it's only been around for a decade, but at scale, has only been really at scale for the last couple of years. It's a business we bought over 10 years ago. It collects payroll data to use an income and employment verifications. And income and employment verifications, as you know, are used in lots of verticals is a part of the process of underwriting. And mortgages you pull the credit file, you also verify, is Mark working? How much does he make? Auto loans do that, personal loans do that. In the hiring process, where has Mark worked. Those are all data elements that we have and we've been building up the data set over the last decade, accelerating in the last few years, but still have a lot of runway to build out the full nonfarm payroll. At the end of the first quarter, we had 90 million unique individuals, unique SSNs in our data set. And 115 million total records so 25 million people had 2 jobs. So that was our data set, and we've been collecting this data over the last decade. So we have 450 million total records. So over 340 million or 335 million inactive records. But there's a real value in that. We're able to use that as a history, which is very valuable. So we sell it in lots of different products used in mortgage, as I mentioned, some of the verticals at government and talent, the hiring process. And it's a business that uniquely has the ability to add records and monetize them because we have system to system integrations with our customers. So we're getting inquiries for all of their customers. But right now, at 90 million unique records versus 157 million nonfarm payroll, our hit rates are in the 50s. So as we add new records, they become revenue right out of the -- on day 2. And the business, as I mentioned earlier in my opening remarks, is our fastest growing business. It's growing substantially above the rest of Equifax. And with margins that are in the high 50s, which are highly accretive with that growth rate and those higher margins than our margins, which are in the mid-30s. So it's highly accretive to our growth rate. It's now our largest business, which is really quite substantial. And we expect it to stay there. It's one of the big levers for Equifax future growth is the power of Workforce Solutions and the uniqueness of the data set. And we believe there was a catalyst in the last 24 months when we got north of 50% of nonfarm payroll because we grow the data assets, and it becomes a data set that has real scale and becomes more usable. Now our customers would like us to have 100%. They have to use other mechanisms to verify income and employment when we don't have the records. We do some of that for them. We have a manual verification business in Iowa. But we want to keep building out the records, and that catalyst is some of the accelerated growth rate that we had in the last couple of years from the data set being larger, which is moving us into other verticals like credit cards where we weren't in that historically.

Makes sense. And you've mentioned a few interesting things about even expanding the pie of employment records. So it's not just the W-2 based records, but other sources of income. It'd be great if you could share a little bit where about that growth as well.

Yes, for sure. We talk about W-2 income, which is nonfarm payroll, there's a 40 million to 50 million self-employed individuals in the United States or 1099 kind of tax return individuals. That's a very valuable data set. We're adding those records. So that widens the data set for us. And our customers want us to have those because they're applying for financial products, just like the more normal or formal nonfarm payroll workforce is. And then there's another 20 million to 30 million pensioners, they receive a pension payment every month. That's their income and financial institutions use that to underwrite financial products. So that's another data set that we're chasing. So there's a lot of opportunity to grow it. Quite uniquely, most data businesses and databases have all the data, most of the data. And then they work to productize it and combine it with other data sets. We're doing that with the work number, but quite uniquely, we can grow the data set and then monetize it. And if you go back to the first quarter, we were up 10% year-over-year in number of records at the 90 million uniques. And we have dedicated teams that are working on growing those records going forward, which always makes the business more valuable and drives our top line because we can monetize them kind of day 2 because of the inquiries we're getting.

Yes. That makes sense.

On the customer side, we've made huge progress over the past 3 to 4 years in building out system to system integration. So if you went back historically, people would get work number information by logging into our website after they've been credentialed and downloading that information. We're to the point now where, for example, in mortgage, 70% of the transactions we process are system to system integrations. And because this data set is new, those are unique integrations and they're unique to us. And that's something that an extended period of time and has really accelerated, as Mark said, as the data set got larger, right? And when you think about the new markets we've been accessing like card, like auto, like government, those are all built through system to system integrations because the volume is so high. And again, those are unique integrations, not just because of the newness of the data set because we provide, in many cases, up to 50 attributes about a role as part of the data set. And it's very different than the integration that you would have on a credit integration. So it is something that's unique that we've built out over time.

That makes sense. And that kind of gets to my next question, which is really about the competitive landscape in this space. There have been announcements pretty recently about the other credit bureaus coming up with Workforce Solutions like products. Obviously, much smaller than the data sets that Equifax has. So would you say that it's really about the scale and the integrations that's driving the differentiation. Is there anything incremental that you would say?

Yes. It's -- we've watched the announcements and heard the same things you've heard. We haven't heard much in the marketplace. We've heard more from investors. But we think it's going to be a long road. It's going to be quite challenging because you need scale. You have to have scale, the data assets. And if you've got 2 million, 3 million, 5 million records versus Equifax's 115 million actives every pay period or 450 million in total, that's very challenging. And as John pointed out, we've developed the system to system integration we have, that connection is unique to Workforce Solutions. It's a different connection for the credit file, and it's taken years, 10 years to build up all those relationships and connections, that's a long road. Adding records is a very challenging project. We've been at it for 10 years. 60% of our records come from individual companies, where we go to those individual companies to collect the records. We provide a lot of services to those companies in our benefit solutions business, whether it's unemployment claims, I-9 management, W-2 management, work opportunity, tax credit, employee resource credit. All those services get us records. And then we are able to use those to monetize. And that's a very long road to do those one at a time. And we have real scale in our benefit solutions business. Like unemployment claims, we process 1 in 3, unemployment claims in the United States, and it's up from 1 in 5, 12, 18 months ago. So that's a barrier to entry, if you will, for 60% of the records. And most companies, the vast majority of companies, I don't know what the right percentage is. Maybe it's like 70% of companies do their own payroll. It's a very big number. And then the partner records we have are with payroll processors and employee benefit software companies. And we've got 30-plus relationships, and we're working to have more in those relationships are predominantly exclusive. It's our intention for them to be exclusive and not all exclusive, which is where our competitors may have found a way to get access to some form of a record. But the ones are exclusive, they're not going to be delivered to Equifax. And I think you know we announced back in February that we're adding another large payroll processor later this year on an exclusive basis. And the question is why exclusive? They're very risk-averse in doing a relationship like this. They're only going to do it with 1 company generally. They want to do it with a company that's going to really protect their relationship with their customers, meaning we're going to do it really well from a security and a privacy standpoint. And then when it comes to a revenue share, we pay a revenue share to them. We can monetize their records day 2 because we have those inquiries coming in. If you're in a start-up mode, you can't monetize them. You don't have the system to system integrations. You don't have the volume of inquiries coming to your database. It's very difficult to monetize. So we think that's going to be hard to build out a business of that fashion. At the same time, it's not lost on us that there's some focus by them on our business, and we intend to stay on offense and strengthen our business and invest in it organically. We've invested hundreds of millions of dollars in the technology stack, which I don't think they're talking about doing. I haven't heard them talking about incremental technology spends, which this is not for the faint at heart, if you want to play at scale. We already talked about how hard it is to get the records. And those system to system integrations, those take a lot of time. We've been building those over many, many, many years. And they are very valuable because we have those workflows coming to us, and we're embedded in the workflows, and we get those inquiries that we can monetize as we add records going forward. And the payroll processes, we don't have, we're talking to all of them. We're having active dialogues with those that are not with us. And as you might imagine, it's not lost on them that their competitors have joined Equifax. It's not lost on them that their competitors have joined Equifax exclusively and are getting an incremental margin that puts them at a competitive disadvantage, both from a margin standpoint and from a capability standpoint because they're not able to offer this free service to their customers because they don't charge for it. We don't charge for that income and employment verification.

As Mark mentioned, we have 450 million records. So it means we have history, right? So for many people, we'll have 3, 4, 5 jobs worth of history, right? And many of these solutions require employment history. And the only really way to pull that forward is with time, right? So we've launched a lot of new products recently, and most of them are at much higher price points, and most of them provide some level of deep of history, 1 year, 2 year, 3 years, up to 7 years of employment history. That it would be very difficult for anybody to replicate.

That makes sense. Great. Well, I'm going to switch over to a couple of other questions that came in a few minutes ago. So these are all ones that I'm very interested in as well. I'm going to give you maybe 2 of them and then reserve 1 for the final question. So the first one is, can we talk a little bit about the D2C business, particularly some of the areas where you're in a stronger competitive position? And the second question is, can you talk about the proposals in the U.S. for public credit registry and potential impacts to the business? That's been in the news, I think, again, today. So it would be interesting to hear your thoughts at present on that topic.

Yes. And our D2C business, we have a business in the United States and in Canada, U.K. and to a lesser degree, Australia, where we sell pay protection products to individual consumers to either get their credit score or protect their credit file or those kind of solutions. One of our competitors experience has a very large business in the United States that's 4, 5x the size of ours. But it's a space that we're in, and we like it. And we're continuing to invest in it with new products. We're investing in the cloud, and we've got new solutions coming out in that space. On the second question around the public credit bureau, I think it's -- I'm not sure why it's in the news because there's really no news. We think the likelihood of that is really 0. There's no discussion in Washington around it. I understand there may have been a sell-side analyst that talked about it or something, but I don't know who he or she talked to, but we see no traction in Washington on that or no interest in it. Certainly, from -- really from anyone, there's been 0 conversation about it. The last time there was any real discussion was really a year ago when Senator Sanders and President Biden's teams came together, and it was part of Sanders campaign, really more we view for political reasons than reality. And there's no interest on the Republicans to do something like this. There's 3 credit bureaus. There's a lot of scale and competition and there's really, from our perspective, even in the moderate Democrats and even the more left leaning democrats, they're focused on other things around the credit bureau is more around accuracy or around the access to credit through alternative data, and those are things that the credit bureaus are focused on. So we see no plans or no traction for something like that.

Got it. That makes sense. And then the last question, this is a fairly big one, but I think it gets to the macro questions that are on everybody's mind all the time. So can you give us a general picture of the health of the consumer from 2019 through the pandemic and now? How that's looking too often?

Certainly, now, they're pretty strong. And they're a lot stronger than everyone thought a year ago as we were over a year now that we're coming into the pandemic, but we've never been through anything like this where you're kind of locked down in your home. And then the massive amount of stimulus that took place. Now there were a lot of people that lost jobs, a lot of people that got furloughed but the stimulus was just so massive that it really counteracted a lot of that. And you have consumers now that have credit scores have gone up on average, I think, 10 to 15 points so the consumer is stronger. They've been making more minimum payments, so keeping themselves current and not missing payments, which helps their credit score, whether it's from stimulus or just from the fact they couldn't spend money. When you were locked at home, you didn't have a lot of opportunity to spend money on things. So the consumer is clearly stronger than they were during the pandemic and I would argue coming into the pandemic. And of course, employment is really coming back quite quickly. And in many areas, there's job shortages, which is good for the consumer because there's going to be more and higher paying jobs coming back with a recovery.

Did we lose, Mark?

I think we've gotten a bit frozen, but John, any comments you want to add to that?

No. I think he effectively covered it. We're obviously seeing credit quality -- credit quality, as Mark said, it's quite strong, and the consumer right now appears to be in a pretty strong position, yes.

That makes sense. Okay. Great. Well, I think we are just about out of time, and I'm not sure, John, if on behalf of Mark, do you have any kind of closing comments that you want to make? I think we're still a little bit frozen here.

No, we just wanted to thank you. Thank you very much for including us. We enjoyed being part of it. And as Mark said we look forward to seeing you in person next year.

That sounds great. Thank you both very much for joining us, too, really helpful overview. And thank you all to all the investors for joining as well. Take care.