Equifax Inc. (NYSE:EFX) Q3 2023 Earnings Call Transcript

Equifax Inc. (NYSE:EFX) Q3 2023 Earnings Call Transcript October 19, 2023

Operator: Hello and welcome to the Equifax Q3 2023 Earnings Conference Call. [Operator Instructions]. A question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to turn the call over to Trevor Burns, Senior Vice President, Head of Corporate Investor Relations. Trevor, please go ahead.

Trevor Burns: Thanks and good morning. Welcome to today’s conference call. I’m Trevor Burns. With me today are Mark Begor, Chief Executive Officer; and John Gamble, Chief Financial Officer. Today’s call is being recorded. An archive of the recording will be available later today in the IR Calendar section of the News & Events tab at our IR website investor.equifax.com. During the call today we’ll be making reference to certain materials that can also be found in the Presentation section of the News & Events tab at our IR website. These materials are labeled 3Q 2023 earnings conference call. Also, we’ll be making certain forward-looking statements, including fourth quarter and full-year 2023 guidance to help you understand Equifax and its business environment.

These statements involve a number of risks, uncertainties, and other factors that could cause actual results to differ materially from our expectations. Certain Risk Factors that may impact our business are set forth in filings with the SEC, including our 2022 Form 10-K and subsequent filings. We will also be referring certain non-GAAP financial measures, including adjusted EPS attributable to Equifax and adjusted EBITDA, which will be adjusted for certain items that affect the comparability of our underlying operational performance. Recently Equifax reached an agreement with the UK Financial Conduct Authority in relation to the 2017 cyber security incident. In connection with the agreement Equifax taken the charge in the third quarter of $14 million which is excluded from third quarter adjusted EBITDA and adjusted EPS.

These non-GAAP financial measures are detailed in reconciliation tables, which are included in our earnings release and can be found in our financial results section of the financial info tab at our IR website. Now, I’d like to turn it over to Mark.

Mark Begor: Thanks, Trevor and good morning. Turning to Slide 4, we continue to face a very challenging U.S. mortgage market that weakened substantially in August and September beyond our July framework with mortgage rates moving above 7% and now approaching almost 8% over a 20 year high. Revenue in the third quarter was 1.32 billion, was up 6% on a reported basis, 6.5% on a constant currency basis, and 3.5% on an organic, constant currency basis. An adjusted EPS of $1.76 per share was up 2% versus last year. In the quarter BVS, the Brazilian credit bureau that we acquired in August had revenue of 23 million and contributed $0.02 per share to adjusted EPS, which was not in our July framework for the third quarter. Overall, Equifax revenue of 1.32 billion was $34 million below the midpoint of the guidance we provide in July, which excluded Brazil, driven primarily by the weaker U.S. mortgage market and FX.

Together, these items impacted revenue by about $28 million and adjusted EPS by about $0.10 per share. Adjusting for the mortgage markets and FX impact, revenue in the third quarter would have been just below the midpoint of our July framework, and both adjusted EPS and EBITDA margins would have exceeded the framework we provided in July. Overall mortgage market volumes, measured based on our credit and TWN inquiry volumes, we are on the order of 650 basis points weaker than we expected in our July guidance. Mortgage rates increased substantially during the quarter, with a 100 basis point increase in the ten-year Treasury rate, driving mortgage rates to almost 7.5% in September. The mortgage volume decline negatively impacted mortgage revenue by about 22 million, and the strengthening dollar negatively impacted revenue versus our July expectations by about $6 million.

The U.S. mortgage revenue from EWS and USIS was down about 8%, reflecting the significantly weaker mortgage market conditions. Mortgage outperformance relative to the mortgage industry volumes I referenced remains strong in both USIS at over 30% and EWS at 22%. Non-mortgage constant dollar revenue was up a strong 11% in the quarter and was up 8% excluding revenue from BVS, against a strong 20% growth last year. Non-mortgage constant dollar organic growth was up 7% versus last year with our non-mortgage growth rate strengthening 300 basis points sequentially from the second quarter. Non-mortgage growth was led by EWS that was up over 11% and up 800 basis points sequentially. And USIS that was up almost 8.5% and up 50 bps sequentially. International organic non-mortgage revenue growth at 3% was slightly weaker than our expectations, principally due to lower revenue in our UK debt management business.

We had another very strong quarter in new product growth with a record 15% vitality index, which is well above our 10% long-term growth framework for NPIs. As I referenced earlier, despite the much lower than expected mortgage revenue in the third quarter, we delivered adjusted EPS of $1.76 per share and adjusted EBITDA margins of 33.1%. Excluding BVS we delivered adjusted EPS of $1.74 and adjusted EBITDA margins of 33.3%, up 60 bps sequentially, both in line with the guidance we provided in July, while absorbing the significant impact of the $22 million of lower mortgage revenue. The impact of lower mortgage revenue and FX negatively impacted adjusted EPS by about $0.10 per share. We delivered very good execution against our $210 million cloud and broader spending reduction programs, which allowed us to grow margins sequentially in the quarter despite the lower mortgage revenue.

We continue to expect to deliver spending reductions of $210 million in 2023, with 120 million benefiting operating expenses and over 65 million of incremental run rate savings in 2024. We also continue to make good progress on completing our cloud transformation with large North American customers migrating to the cloud during the quarter. We expect both USIS and Canada to complete their credit exchange cloud migrations in the first half of 2024. At the end of the quarter, about 75% of North American revenue was being delivered from the new Equifax Cloud. We are convinced that our Equifax Cloud single data fabric and AI capabilities will provide a competitive advantage to Equifax in the future. As we look to the fourth quarter, we expect revenue of 1.317 billion, adjusted EPS of $1.77, and adjusted EBITDA margins of 34% at the midpoint of our guidance ranges.

This includes about 38 million of revenue from BVS, which adds about 3% to our revenue growth. We expect fourth quarter revenue will be up 10% with organic constant dollar growth of 7%, adjusted EPS to be up over 16%, and adjusted EBITDA margins will expand about 300 basis points versus last year. Non-mortgage constant dollar growth is expected to be strong at about 13%, with organic growth of about 9% led by EWS which should deliver over 15% non-mortgage growth. However, excluding BVS, this framework is about $70 million below the implied fourth quarter revenue guidance of $1.35 billion at the midpoint we provided in July. The sharp decline in the mortgage market and FX drive the majority or about $60 million of this decline. Our guidance assumes that substantially weakening trends in the U.S. mortgage market that we’re currently seeing continue through the remainder of the year, and that we also see normal seasonal mortgage declines in November and December.

On this basis, we’re assuming U.S. mortgage credit inquiries will be down about 22% in the fourth quarter, driving a reduction in overall mortgage volumes of about 18 percentage points versus the guidance implied for the fourth quarter in our July framework. This negatively impacts mortgage revenue in the fourth quarter by about $47 million. At these levels, U.S. mortgage activity will be down an unprecedented more than 50% from 2015 to 29 averages, which we consider to be normal mortgage market levels. We expect FX to negatively impact revenue in the fourth quarter versus our July guidance by $13 million. The net impact of the $70 million reduction in revenue is driving the reduction in EPS and EBITDA margin from our original fourth quarter goals of $2 a share and 36%, respectively.

The second half of 2023 has clearly been very challenging as the accelerated decline in the U.S. mortgage market in August and September, as well as FX negatively impacted revenue by almost $90 million. Like many, we are struggling to forecast the bottom of the mortgage market in this unprecedented environment of fed rate increases, driving mortgage rates up over 2X to 20 year highs in such a short 20-month time frame. Outside the unprecedented mortgage market decline, we are executing extremely well. As I’ll cover in the remainder of my remarks, we are delivering accelerated non mortgage growth, executing on our cloud customer migrations and overall cost plans, outperforming our expectations for new products. and adding new EWS record partnerships and records at an accelerated pace adding over 25 million records since the beginning of last year.

In both our mortgage and non-mortgage businesses, we are continuing to outgrow our underlying markets. Before I cover our business unit results in more detail, I wanted to provide a brief overview of what we’re seeing in the U.S. economy and consumer. Outside of the challenging U.S. mortgage market, the U.S. consumer and our customers remain broadly resilient. Employment remains at record historic levels with low unemployment and about 10 million open jobs against about 5 million people who are looking for jobs. Excess consumer savings built up during the pandemic still exist, however, have declined to the lowest levels since the second quarter of 2020, particularly amongst lower and middle income households. Credit card utilization is increasing, credit card delinquency rates for prime consumers which represent about 20% of the market are stable but are above pre-pandemic levels in less than 1%.

However, subprime borrower delinquencies which have been increasing over the past year are now above pre-pandemic levels and approaching the levels we saw in 2009 and 2010. Auto delinquency rates for prime consumers, which represent about 20% of the market, are also stable but above pre-pandemic levels and still well below 1%. Delinquencies for subprime consumers are above pre-pandemic levels as well above levels that we saw in 2009 and 2010. And any customer credit tightening has largely been in fintech and subprime, which started over a year ago. Overall, still a solid market for Equifax outside of mortgage and hiring. When consumers are working, they largely have the capacity to keep current on their financial obligations. Turning to Slide 5, overall workforce solutions revenue was up 3% in the quarter, a return to growth, which is a very positive sign as we look towards 2024.

Strong TWN record growth, the positive impact of 2023 price actions, and strong NPI performance driven by the adoption of mortgage trended data drove a strong 22 points of mortgage outperformance again in the quarter. EWS had another very strong quarter of record additions with an incremental 2 million current records added to the TWN database. EWS closed the third quarter with 163 million current records on 121 million unique individuals or SSNs, which was up 12% and 9% respectively versus last year. Total records, both current and historic are now over 640 million and we now have current records on over 70% of U.S. non-farm payroll and over 50% of the 220 million people in the U.S. with employment and income records relevant to the TWN database.

The EWS team has acquired over 11 million records so far in 2023 that are driving top line growth and will significantly benefit Verifier Revenue Growth when the U.S. mortgage and white-collar hiring markets recover. During the quarter, we signed agreements with four new payroll processors that will deliver records in the fourth quarter in 2024 and over the past three years, we’ve added partnerships with 27 payroll processors. As a reminder, about 50% of our records are contributed directly by individual employers from our employer services customer relationships. The remaining 50% are contributed through partnerships with payroll processors, HR software companies, pension administrators, and other relationships. Increasingly, more of our new products are incorporating both current and historical records with about 50% of our third quarter verification services revenue, as well as about 50% of our mortgage verification services revenue coming from products that include historical records.

Turning to Slide 6, Workforce Solutions delivered strong non-mortgage revenue growth of 11%, a return to double-digit revenue growth with a growth rate up about 800 basis points sequentially. And as a reminder, EWS non-mortgage revenue was up a very strong 40% in the third quarter last year, which of course, was a very tough comp. Verification services non-mortgage revenue, which represents just under 70% of Verifier Revenue, delivered 11% growth versus last year in the quarter. This was also against a very challenging 72% non-mortgage growth comp last year. In government, we saw a continued very strong growth with revenue up 23% compared to over 90% revenue growth last year in the third quarter. Government revenue was slightly lower than our expectations due to timing of Medicaid redetermination volumes.

We continue to expect that EWS will capture significant volume from these redeterminations as they complete prior to the end of the second quarter of next year. During the quarter, we signed a contract extension to provide income verification to the U.S. centers for Medicare and Medicaid services as a part of a contract valued at up to $1.2 billion over the next five years. This contract is the largest in Equifax’s history and extends our services via healthcare.gov for ACA related determinations while allowing workforce solutions to continue to work to penetrate the state level Medicaid verification services market. Also during the quarter, USDA’s Food and Nutrition Service awarded a national contract to Equifax Workforce Solutions to provide verification services in support of the Supplemental Nutrition Assistance Program, commonly known as SNAP.

The award is for $38 million in the base year, which we began on September 30th with a potential total contract value of $190 million. These large new EWS government contracts reflect the uniqueness of the TWN data supporting the delivery of social services at the U.S. federal, state, and local level. These new contracts give us confidence in strong future EWS growth in the large 4 billion TAM for our government vertical. We expect to see accelerating sequential growth in our government vertical in the fourth quarter, driven by growth from CMS Medicaid Redeterminations, ACA open enrollment volume, further state government penetration, and pricing from state contract renewals, as well as revenue from the new SNAP agreement with the USDA. Talent Solutions was up 6% in the quarter versus a very strong over 110% growth last year in the third quarter from record levels of U.S. hiring.

As a reminder, we are currently more heavily penetrated to white-collar workers, including technology, professional services, healthcare, and financial services, which has seen a greater reduction in hiring activity and broader hiring freezes and about 10% decline that the BLS reported in the third quarter through August. We outperformed the hiring market by about 20 percentage points in the quarter as we delivered new digital solutions and background screening, strong new product growth, continued expansion of TWN records and pricing. Employer services revenue of 118 million was up 13%, driven by growth in our I9 and onboarding businesses despite the negative impact of U.S. hiring, as well as growth in our ACA business. In the fourth quarter, we expect overall employer services revenue to decline slightly as growth in I9 and onboarding is offset by declines in ERC revenue as the U.S. government has suspended processing new ERC claims.

Earlier this year, we announced the launch of PeopleHQ, a workforce solutions cloud native solution that brings together multiple best in class employer compliance services and a single unified customer experience. PeopleHQ will help companies of all sizes access EWS employer services, including income verification, I9, and ACA from our new self-service portal. Since the launch of PeopleHQ in the first quarter, EWS has onboarded about 45,000 companies, which also delivers new records for TWN. Workforce Solutions’ adjusted EBITDA margin of 50.9% was up 140 basis points versus last year, but down 60 basis points from the second quarter from the mortgage market decline. The EWS team continue to perform very well despite the macro headwinds from mortgage and U.S. hiring, outperforming their underlying markets from strong TWN record growth, penetration, new products, and price.

As shown on Slide 7, USIS revenue of 426 million was up over 7% and down slightly from our expectations due to the impact of the much weaker mortgage market. USIS delivered strong non-mortgage revenue growth of about 8% in the quarter. USIS mortgage revenue was up 4% and outperformed the mortgage credit inquiries that were down 29% by 33 points. The strong pricing environment that we discussed in July drove very strong outperformance. At 101 million, mortgage revenue was 24% of total USIS revenue in the quarter. B2B non-mortgage online revenue growth was up a very strong 10% total and up 5% organically. During the quarter, online revenue had strong double-digit growth in commercial and banking and lending from strong identity and fraud revenue and mid-single-digit growth in auto and insurance, offset by declines in telco and direct-to-consumer.

USIS also saw a strong double-digit growth in count from very good new business and NPI performance. Financial marketing services, our B2B offline business had revenue of 51 million that was down just under 1%. In marketing, declines in pre-screen marketing revenue in the quarter that were consistent with declines in the first half, more than offset nice revenue growth from our IXI consumer wealth data business. In pre-screen, we continue to see weakness with the smaller FIs and Fintechs in the subprime space, offset by growth with larger FIs. Within risk and account reviews, we did see limited growth in our portfolio review business, but we have not seen a meaningful increase in risk-based portfolio reviews that are typical during challenging economic periods.

USIS consumer solutions D2C business had another very strong quarter with revenue of $56 million of 12% from very good performances in both our consumer direct and our indirect channels. USIS adjusted EBITDA margins were 34.2% in the quarter and slightly below the 35% we had guided from the impact of weaker mortgage market as well as higher technology spend as we migrate customers to the new cloud data fabric. Todd and USIS team are on offense as they work to complete their cloud transformation and pivot to leveraging their new cloud capability to deliver new products and drive share gains. In the third quarter, USIS onboarded a new large FI customer to our new cloud platform, which you expect to deliver share gains moving forward. Turning to Slide 8, international revenue was 316 million, up 12% in constant currency and up 3% in organic constant currency, and below the 4.5% growth we had guided to in July due to the greater decline in our European debt collection revenue than we expected.

Europe local currency revenue was down 2% in the quarter. Our UK and Spain CRA business revenue was up a very strong 8% in the quarter, a very good performance offset by the weaker than expected 17% decline in our UK debt management business. We expect Europe to deliver almost 10% growth in the fourth quarter from continued strength in the CRA business and a return to growth in our debt management business as we lacked difficult comps from last year. Latin America, local currency revenue, including Brazil, was up a very strong 21% comping off a very strong 34% growth in the third quarter of last year driven by double digit growth in Argentina and Paraguay and from new product introductions and pricing actions. We expect LATAM to deliver strong double digit revenue growth again in the fourth quarter.

Canada and Asia Pacific both delivered low single digit growth in the quarter as we expected. International adjusted EBITDA margins of 26.3% were up 210 basis points sequentially. Excluding Brazil adjusted EBITDA margins of 26.8% were up 260 basis points and in line with our expectations. The improvement was driven by revenue growth and good execution against their 2023 cost reduction plans by Lisa and our international team. Turning to Slide 9, in the third quarter overall non-mortgage constant dollar revenue growth grew a strong 11% with organic growth of 7%, both inside our long-term framework. Positively, this was up 300 basis points sequentially. The acceleration in organic revenue growth was driven by strong 11% EWS non-mortgage growth and improvement of about 800 basis points sequentially.

As we look to the fourth quarter, we expect non-mortgage revenue growth to be about 13% with organic growth of about 9% above the levels we delivered in the third quarter. The acceleration organic growth is expected to be led again by EWS with growth of over 15% driven by their government and talent businesses. Turning to Slide 10, new product introductions leveraging our differentiated data and new AFX cloud are central to our EFX 2025 growth strategy. In the quarter, we delivered a record 15% vitality again led by very strong performances in EWS and Latin America. EWS non-mortgage VI in the quarter was over 25%, a very strong performance. And in the third quarter, about 85% of new product revenue came from non-mortgage products leveraging the EFX Cloud.

Leveraging our new EFX cloud capabilities to drive new product rollouts, we expect to deliver vitality index of approximately 14% in 2023, which is about 400 basis points above our 10% long-term vitality index goal. Importantly second half USIS VI is expected to be up about a 100 bps higher than first half as we are closer to cloud completion and able to leverage our new cloud native infrastructure in USIS for innovation and new products. This is broadly positive momentum for 2024. On the right side of this slide we’ve highlighted several new products introduced in the quarter. These new solutions are a testament to the power of the Equifax Cloud and AI in driving innovation that increase — that can increase the visibility of consumers to help expand access to credit and create new mainstream financial products while driving Equifax’s top line.

Turning to Slide 11, we’re very excited to have closed the Boa Vista AC acquisition in early August and welcome the Boa Vista team to Equifax. We’re focused on driving growth in Brazil and expanding BVS’s capabilities by deploying our cloud-based decisioning and analytical products, as well as expanding in new verticals like identity and fraud. In the third quarter for the period after our acquisition closed on August 7th, EFX Brazil delivered revenue of $23 million and was accretive to adjusted EPS by $0.02 per share. Going forward, Brazil will be included in our Latin American region for reporting, and as a reminder, we expect Brazil to deliver approximately 160 million in run rate revenue to Equifax to be accretive to adjusted EPS in its first year.

And now I’d like to turn over to John to provide more detail on our fourth quarter and full year guidance. John.

John W. Gamble, Jr.: Thanks, Mark. Turning to Slide 12, as Mark mentioned, third quarter mortgage market credit inquiries were down about 29% weaker than the down 23% in our July guidance and EWS mortgage outperformance was about 22% from records and price product and mix, and consistent with the second quarter. For the fourth quarter, we are assuming the weakening trend in mortgage market volume estimated based on the change in our credit inquiries we have seen in October continues as well as further normal seasonal declines in November and December. On this basis, we expect mortgage credit inquiries to be down about 22% in the fourth quarter, which is an 18 percentage point reduction from our July framework for the fourth quarter.

For perspective, to the extent the mortgage market continues at the levels we’ve assumed for 4Q 2023, which is more than 50% below pre-pandemic averages, 2024 mortgage market credit inquiry volumes would be down approaching 15% versus 2023. Slide 13 provides the details of our guidance for 4Q 2023. In 4Q 2023, we expect total Equifax revenue to be between $1.307 billion and $1.327 billion with revenue up 10% at the midpoint. Non-mortgage constant currency revenue growth should strengthen to 13%. Mortgage revenue in the fourth quarter is expected to be below 15% of Equifax revenue. Business unit performance in the fourth quarter is expected to be as described below. Workforce Solutions revenue growth is expected to be up about 8%, which is lower than the implied fourth quarter framework we outlined in July.

The bulk of the $47 million mortgage market impact on revenue that Mark referenced impacts EWS. As we discussed in July USIS benefits from greater mortgage revenue in the early application phases, which should continue into the fourth quarter. EWS non-mortgage revenue will return to strong over 15% growth year-to-year in the fourth quarter. However, this strong growth is below our framework from July. Government growth should be above the 23% we saw in the third quarter, but is below our framework from July as state benefit redeterminations are occurring at a slower pace than we anticipated. Talent growth should be above the 6% we saw this quarter as well, but will also be below our July framework as overall hiring has decelerated from the levels we were seeing in July with BLS now down 10% with white collar verticals down significantly more.

And employer services revenue will be below our 4Q framework from July for both I9 and onboarding that should continue to deliver year-to-year growth but at levels below our July framework from weaker overall hiring and ERC with the IRS announcement that they would pause on new ERC claims. Adjusted EBITDA margins for EWS are expected to be about 50.5%. USIS revenue is expected to be up about 4% year-to-year despite the increased mortgage headwind. Non-mortgage year-to-year revenue growth of 4% should be down from the about 8.5% growth we saw this quarter as we lap 4Q 2022 pricing actions. This is somewhat stronger than we expected in our July framework driven by continued good growth in commercial, consumer solutions, auto, and across our account IB [ph] products.

Adjusted EBITDA margins are expected to be about 35%, up sequentially, principally due to revenue growth and cost actions. International revenue is expected to be up about 20% in constant currency due to the addition of BVS and as we lap headwinds in our UK debt management business. Revenue is expected to be up about 6.5% in organic constant currency, this is somewhat stronger than our July framework. EBITDA margins are expected to be about 30%, reflecting revenue growth and strong cost management, including the benefit of planned cost reduction actions. We expect Brazil to deliver revenue of about $38 million in the fourth quarter. Equifax 4Q 2023 adjusted EBITDA margins are expected to be about 34% at the midpoint of our guidance, an increase sequentially of almost 100 basis points.

And adjusted EPS in 4Q 2023 is expected to be $1.72 to $1.82 per share, up 17% versus 4Q 2022 at the midpoint. Both adjusted EPS and adjusted EBITDA margin are below the $2 per share and 36% targets that we set as goals as we entered 2023, principally due to the assumed further decline in mortgage market volumes and associated reduction of high-margin mortgage revenue that Mark discussed. Slide 14 provides the specifics of our 2023 full year guidance. 2023 revenue and adjusted EPS are being reduced consistent with our 3Q 2023 results and our 4Q 2023 guidance. We expect 2023 non-mortgage constant currency revenue growth to be strong at about 9% and organic revenue growth of about 7%. Total capital spending for 2023, including the addition of Brazil, which was not previously included in our guidance, is expected to be about $580 million.

Capital spending in the third quarter was about $145 million. We did see the expected decline in spending sequentially, however, the reduction was slightly less than the expected, principally due to higher spending related to customer migrations. We expect capital spending in the fourth quarter to decline sequentially by about $15 million as we continue to progress U.S. and Canadian migrations to Data Fabric. We remain focused on reducing CAPEX as a percentage of revenue to about 7% by the end of 2025. We remain focused on executing our long-term model, delivering 8% to 12% revenue growth with 50-plus basis points of margin expansion annually on average over a cycle. Although the unprecedented decline in the U.S. mortgage market in 2022 and 2023, pushes out our prior midterm goal of $7 billion in revenue and 39% EBITDA margins to beyond 2025, it does not change our focus on expanding our margins toward our 39% goal as we drive revenue higher.

We will continue to focus on delivering strong non-mortgage growth at or above our long-term revenue growth framework, outperforming our underlying markets, including the mortgage market, and executing our cloud transformation, including delivering ongoing cost improvements. As mentioned earlier, to the extent the mortgage market continues at the levels we have assumed for 4Q 2023, 2024 mortgage market inquiry volumes would be down approaching 15% versus 2023. Now I’d like to turn it back over to Mark.

Mark Begor: Thanks, John. Wrapping up, Equifax delivered on its earnings guidance in the third quarter with adjusted EBITDA margins and adjusted EPS within our guidance range despite the challenging U.S. mortgage market. While the mortgage market was down significantly again, our non-mortgage businesses delivered strong constant dollar organic growth of 7% and overall growth of 11%, including BVS. Importantly, EWS returned a strong 11% non-mortgage growth and USIS delivered a strong over 8% non-mortgage quarter. We expect our strong third quarter constant dollar non-mortgage revenue of 11% to accelerate in the fourth quarter to about 13%, including EWS, above 15% and international, including BVS at about 20%. The breadth and depth of our non-mortgage businesses, which account for about 81% of Equifax revenue in the third quarter and execution against our 2023 cloud and broader spending reduction program, allowed us to deliver against our earnings guidance despite the decline in the mortgage market.

While it’s early to provide 2024 guidance, I wanted to give you a perspective on how we plan to operate in 2024 in what could be another challenging year from a macro perspective as we exit 2023 with U.S. mortgage volumes at historically low levels with record mortgage rates. We remain committed to executing against our EFX 2025 strategy with a focus on things we can control. As we move towards 2024, we’re focused on: first, continuing above-market non-mortgage growth inside our 8% to 12% long-term framework and outperforming the underlying mortgage market. Second, substantially completing our cloud transformation in 2024 with revenue from our new cloud platforms approaching 90% by the end of the year, which will be a big milestone to allow our team to pivot to fully focus on innovation and growth.

Third, as we complete our cloud investments, we expect CAPEX to move towards our long-term goal of 7% of revenue in 2025 and our CAPEX spend to pivot from maintenance and cloud investments to innovation and new products. Aligned with our cloud technology completion, we will continue to execute against the cloud and broader spending reduction program we announced in February, which we expect to deliver $65 million of 2023 carryover next year with additional cost savings next year as we complete the cloud. Our 14% vitality performance in the second half of this year gives us strong momentum as we move towards 2024. We will continue our focus on new product innovation using our single data fabric, cloud capabilities, and AI to bring new models and scores to the market, including a focus on bringing EWS and USIS assets much closer together with a long-term annual vitality goal of 10%.

We’ll focus on adding new ERB records to further strengthen the TWN data set, including the acquisition of traditional W-2 pension and 1099 records. And last, we’ll continue to look for financially attractive bolt-on M&A aligned with our strategic priorities around differentiated data, strengthening EWS, and identity and fraud. Despite the challenges of an unprecedented decline in the U.S. mortgage market, Equifax demonstrated in 2022 and 2023 that we can grow revenue as we outperform our underlying markets over the last two years from above-market non-mortgage growth, outperforming the mortgage market, vertical penetration, new product innovation, adding new records to TWN, and pricing. We are committed to delivering on our long-term framework of 8% to 12% revenue growth and 50 basis points of annual margin expansion as well as our medium-term goal of 39% EBITDA margins.

And when the mortgage market recovers, we are poised to generate accelerated above-market growth and margin expansion from investments we have made in our cloud technology, new products, TWN record additions, and expanding our unique data assets. During the next chapter of the new Equifax as we pivot from building the new Equifax cloud to leveraging our new cloud capabilities to drive our top and bottom line. We are convinced that our new Equifax cloud-based technology, differentiated data assets in our new single data fabric, and market-leading businesses will deliver higher growth, expanded margins and free cash flow in the future. And with that, operator, let me open it up for questions.

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Q&A Session

Operator: Thank you. [Operator Instructions]. Our first question is coming from Manav Patnaik from Barclays. Your line is now live.

Manav Patnaik: Thank you and good morning. Mark, I just had a question, I think the negative 15%, I guess potential decline in mortgage increase next year based on I guess, your current run rate, seasonality, etcetera. If that is the case, you’ve obviously been outperforming the market consistently this year, but are there other initiatives you can put in place to potentially outperform further, or just curious on what the strategy in a longer — weaker for longer, I guess, mortgage market would be?

Mark Begor: Yes, Manav, we believe that we have multiple levers in both mortgage and non-mortgage. I’ll focus on mortgage because that’s your question, to continue to outperform the underlying market. And you’ve seen us do that over an extended period of time. And we’ll talk about USIS and EWS, if you want, because that’s a mortgage. In USIS, they obviously have the ability to deliver price, and we expect price to be a part of the levers for 2024. There’s new product rollouts inside of USIS. For example, if you recall earlier this year, we rolled out our new mortgage credit report that includes those NC+ attributes. That’s going to be a positive for us to outperform the underlying market. And then if you go to EWS, you’ve got the same two levers there plus more, obviously.

Price is an opportunity as we have more records, and we can deliver more value to the mortgage customers. We’ve got a big focus in more leverage in EWS around new products. You’ve seen us roll out new solutions like a year ago, mortgage 36 with 36 months’ worth of history. So new products will be a continued lever for us in the mortgage space. And of course, records growing records double digit in the quarter, the new payroll processors that we’re adding in the fourth quarter and next year that we signed up during the quarter, and of course, our pipeline of new records those drive higher hit rates in the EWS mortgage business, which we expect that to continue going forward. And then the last for EWS quite uniquely, is ability to drive penetration, meaning more usage of the income and employment data inside the mortgage process.

And as we’ve talked before, we don’t have — every customer doesn’t use our solutions. Some still use manual verifications and we’re driving them to using our verified solution. So yes, we’ve got confidence about our ability. I wouldn’t characterize that we have new levers, but we’ve got a lot of focus around them. And I think — when you think about EWS and USIS, and we mentioned it earlier in our prepared comments, as USIS completes the cloud, and of course, EWS is already there, we think the ability to have each business bring new products to market will continue, but the ability to bring solutions that combine the two businesses, data assets for mortgage and non-mortgage with USIS getting into the cloud is another year for us in the future.

Manav Patnaik: Okay. Got it. And then just on the margin front, the 34% for the fourth quarter, is that a right run rate to think about as you exit the year, I know you have a lot of, obviously, mortgage headwinds and then cost savings coming in to offset that. And if you could just remind us versus the 39% target that you had, how much of that is going to be a mortgage shortfall in terms of getting to that 39%?

Mark Begor: I think first on the 39, we tried to be clear, our goal hasn’t changed. As you know, for a couple of years, we carried a goal of 2025 for 39% against $7 billion of revenue. Clearly, that $7 billion is going to be pushed out with the mortgage market decline and we wanted to be transparent today that we view that as being post-2025. But our focus on 39% hasn’t changed. We have a path to 39%. In the future, it’s going to be beyond 2025 and then post 39%, we still see between operating leverage in the businesses, the strong margins in EWS, the ability to grow 50 basis points per year post that 39%.

John W. Gamble, Jr.: And as you’re specifically looking at 2024, right, we’ve already talked about the fact that we have significant cost reduction plans we put in place in 2023. They’ll drive an additional $65 million of savings as we get into next year. We also look at some savings as we continue to migrate to the cloud, which weren’t included in that $65 million. So we expect to have cost levers that will help drive our margins higher. Obviously, we’re not giving revenue guidance but again, for us, for 2024 but for us, as you know, our variable margin on new revenue is very high, right. So as we drive more revenue, that also is a way that we drive margins as we go forward. So just as a reminder, those people think about next year, first quarter margins for us tend to be lower, right, because a significant amount of equity and variable compensation expense hits in the first quarter as opposed to being spread throughout the year because of the structure of our plan.

So just as a reminder, first quarter margins tend to move down.

Operator: Thank you. Next question is from Andrew Steinerman from J.P. Morgan. Your line is now live.

Andrew Steinerman: Hi, two quickies. Well, actually, we’ll see if it is quick. The first one is, for third quarter, what was mortgage as a percentage of total revenues? And then the second question has to do with, could you just review with us the cadence of Equifax government revenues from the Medicaid redetermination fourth quarter to second quarter. I’m also assuming that it might be higher in total now because you talked about additional state penetration?

Mark Begor: I think the first question, John, it was 19%.

John W. Gamble, Jr.: 19%, yes.

Mark Begor: In the third quarter, that will be lower in the fourth quarter for obvious reasons on the percent of revenue, Andrew from mortgage. On the government one, maybe just a couple of comments on government, and I’ll get to redeterminations and John can jump in. We’ve got a lot of positive levers in government. I hope you saw Andrew had noted that those two large contracts, which we alluded to in July, meaning that we talked about some visibility that we had of new contracts, $1.2 billion and $190 million USDA contracts give us some visibility and momentum in our government vertical, not only in the fourth quarter but also for 2024. Those contracts as well as others also give us the ability to continue our expansion at the state level.

As you know, our government vertical inside of EWS is call it roughly $500 million run rate business, but in a $4 billion TAM. So there’s a lot of opportunity to add new states and new agencies at the state levels and you might imagine we have a deal pipeline of customers or agencies that we’re working on adding at the state level, which is a part of our visibility for fourth quarter and into 2024 for the government vertical. And in particular, the CMS contract is — and the USDA contract actually are both helpful in the addition of more state-level relationships. On redeterminations, it’s clearly been a very challenging forecasting about when will states actually activate those redeterminations. We saw a strong volume of that in the third quarter.

We expect that to continue in the fourth. And then as you point out, in first and second next year, there’ll be continued redeterminations because of the time line is to really complete those, I believe, at the end of the second quarter. So we work closely on those, but it has been a bit more challenging to forecast those. Anything you add, John?