Equifax Inc (EFX)

• Equifax is nearing completion of its cloud transformation, with 80% now migrated and aiming for 90% by year-end, which will reduce CapEx, increase margins, and free up significant cash flow. This positions the company to return cash to shareholders through dividend growth and share buybacks starting in 2025. -
• Strong growth in Latin America, particularly with the integration of Boa Vista, is expected to provide market share gains. Equifax is excited about Boa Vista's performance and anticipates more traction as they deploy Equifax technology like Ignite and InterConnect into 2025. -
• New product innovation is driving growth, with a Vitality Index above 11%, surpassing their long-term outlook of 10%. The company is particularly excited about new identity solutions, alternative data products, and unique solutions between EWS and USIS, which differentiate their offerings from competitors. -

• Equifax's Employer Services revenue declined by 19% in the quarter, which was weaker than expected, primarily due to lower Employee Retention Credit (ERC) revenues and a slowdown in white-collar hiring affecting their onboarding business. -
• Integration of Boa Vista in Brazil has not yet resulted in significant market share gains, and strong competition from established players like Serasa Experian poses challenges to growth in the region. -
• The Identity and Fraud segment experienced a revenue decline, weaker than expectations, mainly due to weakness in chargeback management volumes, indicating potential challenges in this important growth area. -

1. Mortgage Market Outlook
   Q: What will drive mortgage revenue recovery?
   A: Mark Begor explained that the $1.1 billion mortgage revenue opportunity assumes a return to historical averages from 2015 to 2019, with purchase activity being a significant contributor. He highlighted that as interest rates decrease, both purchase and refinance activities are expected to pick up, moving towards that $1.1 billion market opportunity. The recent rate increases are unprecedented, but even small rate declines have stimulated the market, indicating pent-up demand. - - -

2. Guidance Reduction and Philosophy
   Q: Why has guidance been lowered?
   A: Mark Begor stated that the guidance reduction is primarily due to volatility in the marketplace impacting certain verticals, notably the EWS employer business. Factors include the halt of employee retention credits by the IRS, delays in state responses to federal changes in work opportunity tax credits, and slowdowns in background screening volumes, particularly in white-collar hiring. Despite these challenges, they are pleased with their third-quarter performance and strong fourth-quarter guidance. - -

3. Capital Returns: Dividends and Buybacks
   Q: How will you approach capital returns in 2025?
   A: Mark Begor indicated that with the completion of the cloud transformation and a reduction in CapEx, substantial free cash flow will be available to return to shareholders. They plan to continue with bolt-on M&A while also increasing dividends and initiating share buybacks. The dividend growth is envisioned to align with earnings growth, and excess free cash flow will be used for share repurchases. -

4. Technology Transformation Benefits
   Q: What benefits will the tech transformation bring?
   A: The completion of the cloud transformation allows USIS to focus on growth, innovation, and new products without the distraction of migration efforts. Mark Begor anticipates share gains, cost savings, and margin expansion. He noted that USIS's vitality increased by 100 basis points in both the second and third quarters, moving towards a 10% vitality rate, which is expected to benefit 2025 revenues. - -

5. Workday Partnership and Record Additions
   Q: What is the impact of the Workday partnership?
   A: Mark Begor expressed excitement about the strategic partnership with Workday, noting it will contribute to sizable record additions in 2025. While some records will come online in the fourth quarter, the substantial growth is expected next year. Overall, they continue to see strong record growth, with records up 12% in the quarter, and expect this to drive revenue growth as they monetize new records across their verticals. - -

6. Employee Retention Credits Impact
   Q: How did the halt of employee retention credits affect you?
   A: The stopping of employee retention credits by the IRS has impacted the EWS employer business, contributing to the slight lowering of guidance. There is currently no activity expected from these credits, which affects revenue in that segment. Previously, employee retention credits were about $10 million per quarter and are now approximately $1 million per quarter. - -

7. Consumer Credit Environment
   Q: What is the outlook on consumer credit health?
   A: Mark Begor observed that while there is some softening in end-market consumer demand, such as in auto loans, overall consumer credit health remains good. Delinquency rates have increased but are still within manageable levels for lenders. Employment remains strong, and unless unemployment rates rise significantly, they do not expect major impacts on their volumes. - -

8. Government Vertical Growth
   Q: Where do you see growth in the government sector?
   A: The primary opportunity lies in penetrating state agencies to provide social service verifications, a market with over $4 billion in potential revenue. Equifax is investing in new products and technology and adding resources to increase penetration at the state level. They expect the government vertical to continue growing at strong double-digit rates, outpacing the 13% to 15% growth framework of Workforce Solutions. -

Quarterly guidance for Q4 2024:

• Revenue: $1.438B to $1.458B - (raised from $1.425B to $1.445B - )
• Adjusted EPS: $2.08 to $2.18 - (raised from $1.75 to $1.85 - )
• Adjusted EBITDA margin: About 35.5% - (raised from under 33% - )
• Mortgage revenue: Up almost 30% - (no prior guidance)
• Non-Mortgage revenue: Up over 7% - (no prior guidance)
• Workforce Solutions revenue: Up about 10% - (no prior guidance)
• USIS revenue: Up over 10% - (no prior guidance)
• International revenue: Up over 9% - (no prior guidance)

Annual guidance for FY 2024:

• Constant currency revenue growth: 10% - (lowered from 10.5% - )
• Adjusted EBITDA margin: 32.4% - (lowered from 32.6% - )
• Mortgage revenue: About 12.5% - (raised from over 10% - )
• Capital expenditures: About $485 million - (no change from prior guidance - )
• Organic growth: 8% - (no prior guidance)
• Non-Mortgage revenue: Almost 10% - (no prior guidance)
• Vitality Index: 11% - (no prior guidance)
• Leverage Ratio: Progress towards 2.5 turns by year-end 2024 - (no prior guidance)
• Free Cash Flow: Expected to accelerate - (no prior guidance)