Equifax Inc. (NYSE:EFX) Q4 2023 Earnings Call Transcript

The market continues to adopt higher-value solutions that include trended employment and income history that only Equifax can deliver. For example, in the fourth quarter, over 50% of mortgage revenue incorporated historic records. Turning to Slide 6, Workforce Solutions revenue was up a strong 10% in the quarter, which is a very positive sign as we look towards 2024. Non-mortgage revenue growth of 17% was very strong and up 600 basis points sequentially and at the highest levels that we saw in 2023. Importantly, Verification Services non-mortgage revenue, which represents about 75% of Verifier revenue delivered very strong 27% in the growth in the quarter and was up 16 points sequentially. In Government, we saw continued very strong growth with revenue up 47% in the quarter and over 30% for the year.

Government revenue was slightly stronger than our expectations given continued CMS redeterminations, the new SNAP contract, record growth, state penetration and pricing. We expect continued growth in government throughout 2024 with stronger growth in the first half as CMS redeterminations complete prior to the second quarter. Talent Solutions revenue was up 13% in the quarter and up 700 basis points sequentially. As we discussed, we are currently more heavily penetrated to white collar workers, including technology, professional services and financial services, which has seen a greater reduction in hiring activity and broad hiring freezes and layoffs than the total labor market over the past 12 to 18 months. These markets are off to a slow start again in January, and we would expect to see slower revenue growth in the first quarter in talent than we delivered in the fourth quarter.

We outperformed these underlying markets in the fourth quarter by over 25 points as we delivered new digital solutions, strong new product growth, pricing and continued expansion of Twin records. Employer Services revenue was down 7% and in line with our expectations, driven by declines in ERC revenue, which is now about $5 million per quarter as the U.S. government has suspended processing new ERC claims. ERC revenue is expected to stay at about these levels through 2024, and we’ll see headwinds in our employer vertical from this ERC decline through the third quarter of 2024. Excluding the impact of the declining ERC revenue, Employer Services revenue grew during the quarter driven by growth in our I9 and onboarding businesses despite the negative impact of U.S. hiring.

Workforce Solutions adjusted EBITDA margins of 51.2% were better than our expectations, principally due to better expected revenue performance. The strength of EWS and uniqueness and value of their twin income and employment data, and employer services businesses would clear again in 2023. EWS is expected to deliver strong growth in 2024 and continue above market growth in the future. On Slide 7, I’d like to expand on the significant opportunities still in front of us for EWS. This slide details a big $15 billion EWS TAM versus their $2.3 billion of revenue last year. EWS has plenty of room to grow. As you can see, with the exception of housing, which includes mortgage, where our penetration is on the order of 60%, our penetration is in the range of 10% to 20% in each target market where we compete.

In each of these markets, we principally compete against pay-per-pay stubs or other forms of manual verifications and we deliver instant verifications, productivity, speed and accuracy. In both mortgage, government and talent, where there’s a requirement for broad coverage and depth of detail and in talent and mortgage, where there’s a need for historical data, we have an opportunity to drive strong future growth from penetration in our existing verticals and leverage that penetration as we continue to expand twin record coverage towards the $220 million income-producing Americans in the United States. As shown on Slide 8, USIS revenue was up over 5% and above our expectations, principally due to stronger-than-expected mortgage revenue. USIS delivered non-mortgage revenue growth of about just over 3% in the quarter and slightly below our 4% growth expectation.

USIS mortgage revenue was up 16% and outperformed the mortgage credit inquiries that were down 17% by 33 points. The strong pricing environment drove the very strong outperformance. At $78 million in the quarter, mortgage revenue was 18% of total USIS revenue. B2B non-mortgage online revenue growth was down slightly less than 1% and below our expectations. We continue to see double-digit growth in commercial and single-digit growth in telco and auto with banking and lending about flat. The declines were principally due to weakness in D2C, our business where we sell data to other credit bureaus and insurance. Financial Marketing Services, our B2B offline business was up 7% and much better than our expectations. In marketing, we saw mid-single-digit growth in the quarter led by double-digit growth in our IXI consumer wealth data business, partially offset by declines in pre-screen marketing.

While pre-screen marketing revenue was down in the quarter, we did see an improvement over prior quarters with a return to growth in fintech pre-screen marketing. We continue to see declines in smaller FIs, partially offset by growth in larger FIs. Within risk and account services, we saw limited growth in our portfolio review business but not to the levels we would typically see if our customers were expecting a weakening economy. And within fraud, we saw double-digit revenue growth primarily from new business. USIS Consumer Solutions D2C business had another very strong quarter, up 15% from very good performances in both our consumer direct and indirect channels. And USIS adjusted EBITDA margins were 35.1% in the quarter and in line with our October guidance.

Todd and the U.S. team are on offense as they complete their cloud transformation in the first half of 2024 and pivot to leveraging their new cloud capabilities to deliver new products and drive share gains. In the quarter, the USIS team signed an extension to the NCTUE cellphone and utility payment data relationship, allowing USIS to exclusively manage the database and continue bringing new products to market that expand lending to consumers, including our differentiated USIS mortgage credit file solution that incorporates NC+ cell phone and utility data that only Equifax can provide. Turning to Slide 9, International revenue was up 22% in constant currency and up 6% in organic constant currency, excluding the impact of BBS and above the 20% growth we guided to in October due to better-than-expected revenue in Latin America, slightly offset by lower Asia Pacific revenue.

Europe, local currency revenue was up a strong 9% in the quarter from strong double-digit growth in our UK CRE business. And as expected, a return to growth from our UK debt management business. Latin America local currency revenue, excluding Brazil, was up 30% versus last year, driven by strong double-digit growth in Argentina, Uruguay, Paraguay and Central America from new product introductions and pricing actions. Brazil revenue in the quarter on a reported basis was $41 million. We continue to make good progress on the Brazil integration with strong progress in bringing new Equifax solutions such as count and mitigator to the Brazilian market as well as bringing EFX data and analytics expertise to our Brazilian customers. Our global Equifax teams are very engaged in integration activities, including moving BVS to the Equifax cloud and single data fabric.

Canada delivered low single-digit growth in the quarter as expected. Canada will complete their migration to the Equifax cloud by mid-2024. And similar to USIS, we expect to see accelerated NPI growth going forward. In Asia Pacific, revenue was below our expectations with revenue down 2% and to — due to lower market volumes in Consumer and Commercial, particularly late in November and December. We expect Asia Pacific to have declining revenue in the first half of 2024 due to the softer market conditions and the near-term impact of long-term contract extensions we signed with several large customers. We expect Asia Pacific to return to revenue growth in the second half of 2024. Despite the decline in revenue, Asia Pacific adjusted EBITDA margins were up over 200 basis points sequentially from strong cost management.

International adjusted EBITDA margins of 31.2%, were up almost 500 basis points sequentially, an outstanding performance. The improvement was driven by revenue growth and good execution against our 2023 cost reduction plan by Lisa and the international team. Turning to Slide 10. In the fourth quarter, overall non-mortgage constant dollar revenue grew a very strong 14% with organic growth of 9%, up over 250 basis points sequentially. A very good sign as we move into 2024. The acceleration in organic revenue growth was driven by very strong EWS Verifier non-mortgage revenue performance. As we look to 2024, we expect non-mortgage constant dollar revenue growth to be over 10.5% with organic growth of almost 8.5%, about 150 basis points above the levels delivered last year.

Non-mortgage organic revenue growth is expected to be led again by EWS, driven by strong growth in their government and talent businesses. Turning to Slide 11. We delivered strong 14% vitality, again in the quarter, led by very strong performance in EWS with a VI over 20% as well as over 15% in Latin America. Importantly, USIS accelerated in the fourth quarter to 7%, which was up over 200 basis points sequentially as we get closer to cloud completion and are able to begin to leverage our new cloud native infrastructure for innovation and new products. Our strong vitality index results are not only led by over 100 new products launched in each of the last four years, but the increasing average revenue per new product, which is up close to 50% since 2021.