Equifax Q2 2022 Earnings Call Transcript

Quartr
Provided by Quartr
July 20, 2022

There are 16 speakers on the call.

Operator

Hello, and welcome to the Equifax Q2 2022 Earnings Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Trevor Burns, Senior Vice President, Head of Corporate Investor Relations.

Operator

Please go ahead, sir.

Speaker 1

Thanks, and good morning. Welcome to today's conference call. I'm Trevor Burns. With me today are Mark Begore, Chief Executive Officer and John Gamble, Chief Financial Officer. Today's call is being recorded.

Speaker 1

An archive of the recording will be available later today in the IR Calendar section of the News and Events tab at our IR website, www.investor. Aquifax.com. During the call, we will be making references to certain materials They can also be found in the Presentations section of the News and Events tab at our IR website. These materials are labeled Q2 2022 Earnings Conference Call. Also, we'll be making reference to certain forward looking statements, including 3rd quarter Full year 2022 guidance to help you understand Equifax and its business environment.

Speaker 1

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 We will also be referring to 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. These non GAAP measures are detailed in reconciliation tables, which are included with our earnings release and can be found in the Financial Results section of the Financial Info tab at our IR Web Now I'd like to turn it over to Mark beginning on Slide 4.

Speaker 2

Thanks, Trevor, and good morning. Equifax delivered another solid quarter with record second quarter revenue of 1 point $2,000,000,000 which was up 7% and at the middle of our April guidance, including the negative impact of 190 basis points or $23,000,000 of FX. Constant currency revenue growth was almost 9% at 8.5%. Adjusted EPS of $2.09 was above the top end of our April guidance range with Market overall about at the level of our April guidance, with U. S.

Speaker 2

Mortgage credit inquiries down 33% versus last year. As expected, the mortgage market decline increased as we move through the quarter. In the first half of July, mortgage credit inquiries were down about 40% versus last year. Core revenue growth in the quarter of 19% and core organic revenue growth of 16% in the quarter were very strong, Consistent with our expectations, which allowed us to deliver the 8.5% constant currency growth against a 33% U. S.

Speaker 2

Mortgage market decline. Importantly, non mortgage constant currency growth of 22% was very strong in the quarter and well above our 8% to 12% long And of course, this represents about 75% of Equifax revenue. Workforce Solutions core revenue Growth of 41% was outstanding and above our expectations. International delivered 11.5% constant currency growth, which was also above our expectations. And USIS B2B non mortgage growth at 6% was up from Q1, but lower than we expected.

Speaker 2

B2B non mortgage online was strong at 9%. However, our B2B offline business was much weaker than expected declining 5% in the quarter, and I'll cover this more fully shortly. 2nd quarter adjusted EBITDA totaled $461,000,000 up 7% and adjusted EBITDA margins of 35% were about in line with our expectations for the quarter. We continue to make strong progress during the quarter on our EFX Cloud Data and Technology Transformation. Year to date, we've migrated approximately 14,500 customers to cloud in the U.

Speaker 2

S. And since the start of the transformation, we now have migrated about 70% of our U. S. Customers. So far in 2022, we've also migrated 13,000 international customers and decommissioned 4 U.

Speaker 2

S. Data centers. Leveraging our new EFX cloud infrastructure, we continue to invest in new product sources and accelerate new product innovations. So far in 2022, we released 50 over 50 new products, continuing momentum from 2021 where we launched a record 151 new products. In the quarter, our vitality index defined as revenue from new products introduced in the last 3 years was extremely strong and exceeded 13%.

Speaker 2

This is over a 400 basis point improvement from our 9% vitality last year And the highest level in over 10 years at Equifax. For 2022, we expect vitality of over 11%, which is 100 basis points above our 10% long term vitality goal and 100 basis points above the framework when we started the year. This strong NPI performance will benefit our growth in the second half And in 2023 and beyond. We continue to invest our strong free cash flow and strategic bolt on acquisitions with the acquisition of Law Logics We announced earlier this morning, which will further strengthen our EWS Employer Solutions I-nine and Immigration Regulatory Service capabilities. This is our 6th acquisition in Workforce Solutions since January 2021 and aligned with our M and A strategy to strengthen Workforce, our largest and fastest growing Business.

Speaker 2

Both on acquisitions that broaden and strengthen Equifax are a strong lever for future growth and are central to our long term growth framework Add 100 to 200 basis points to our revenue growth annually from strategic bolt on M and A. We are very pleased with our strong second quarter results, particularly our strong 22 Non mortgage constant currency growth. This is clearly an unprecedented economic environment with record inflation, strong Fed actions and the impact from higher interest On the mortgage market. Despite our strong first half performance, we felt it was prudent to adjust our 2022 guidance to reflect expectations For further weakening of the U. S.

Speaker 2

Mortgage market in the second half beyond the framework we provided in April, as well as the significant negative impact of FX from the stronger dollar. Importantly, our expectations for 2022 core revenue growth remains a very strong 17% And our expectation for constant currency non mortgage revenue growth remains a very strong 19%, both unchanged from our April guidance. While our 2nd quarter mortgage results were aligned with our April guidance, we felt there was enough uncertainty between future Fed actions, The impact on interest rates and mortgage activity to further adjust our second half mortgage outlook. Our updated expectations for mortgage are that credit inquiries will by over 46% in the second half, which is down about 600 basis points from our April framework, With mortgage originations declining 200 basis points to 300 basis points beyond these levels. This compares to the Mortgage Bankers Association Forecast for the second half of twenty twenty two mortgage origination units of down 43.5% that was released last night.

Speaker 2

As you know, USIS mortgage revenue is tied more closely to credit inquiries, while Workforce Solutions revenue is tied more closely to mortgage originations. And for the second half of twenty twenty two, FX is a headwind of over $40,000,000 up from an impact of about $7,000,000 on our April guidance from the stronger dollar. The change in the second half mortgage inquiries and FX impact results in our revised 2022 guidance For revenue at the midpoint of $5,100,000,000 down $100,000,000 from our April framework, but still up almost 4% versus last year or 5% on a constant currency basis. This reduction in revenue is about 2 thirds related to mortgage with the balance from FX. Our updated adjusted EPS guidance is to a midpoint of $7.68 down $0.47 from our April guidance And up about 1% from 2021.

Speaker 2

As I said earlier, there's no change in our core organic revenue growth framework, which remains up remains a very strong 15% for 2022 and 13% in the second half of twenty twenty two and our non mortgage growth framework, which remains up a strong 16% for the year And 12% in the second half as we comp off some strong double digit results in the second half of twenty twenty one and In the second half of twenty twenty one. In the second half of twenty twenty two, non mortgage is about 80% of Equifax revenue consistent with 2019 And up from 68% last year. Turning to Slide 5. In the Q2, Equifax core revenue growth, The green section of the bars grew a very strong 19%, which was in line with our expectations and substantially above our long term financial framework of 8% to 12%. Core organic revenue growth of 16% in the quarter was also substantially above the long term framework of 7% to 10% For organic growth, non mortgage organic growth in EWS, International and USIS drove about 12 points of core organic revenue growth in the quarter.

Speaker 2

Core mortgage outperformance of 13% predominantly in Workforce Solutions drove the remaining 4% of 2nd quarter core organic revenue growth. With our strong 19% core growth in the quarter and accelerating NPI rollouts, we continue to expect 2022 Core revenue growth of 17%. This is driven by broad based strong performance across workforce solutions as well as strength in USIS non mortgage B2B online and international, which is supported by our accelerated new product introductions. As detailed on Slide 6, U. S.

Speaker 2

Core mortgage revenue growth in the quarter was up a strong 13%, driven by Workforce Solutions core mortgage revenue growth of 20% And 2% in USIS. 2nd quarter mortgage revenue was down only 19% despite the 33 decline in the overall U. S. Mortgage market is measured by our credit inquiries and an MBA June estimated decline in mortgage originations of about 37%. Workforce Solutions core mortgage growth of 20% continues to be driven by very strong performance on twin record additions, new products and pricing, System to system integrations and continued penetration.

Speaker 2

Their 20 points of market outperformance is very strong, particularly in a period of declining market Transaction volumes. We expect to see continued very strong core mortgage growth from EWS approaching this level in the second half. As a reminder, we estimate the U. S. Mortgage market as the change in USIS credit inquiries.

Speaker 2

In a rising interest rate environment, we believe consumers tend to rate shop more frequently, thus creating a favorable variance between mortgage credit inquiries and originations. This trend benefits USIS credit file pulls. In the Q2, we saw mortgage credit inquiries perform on the order of 4 points better than the estimated change in the mortgage origination units estimated by MVA. However, TWIN income and employment is typically pulled later in the mortgage application process and at closing. As a result, EWS does not benefit as much from the upfront rate shopping trend that occurs in a rising interest rate environment as twin increase are more closely correlated 77% of total Equifax revenues, which is up a very strong 900 basis points from the 68% of total Equifax revenues That we saw in 2021.

Speaker 2

Given the above market growth and fast growing workforce solutions verticals such as talent, government and card, Further penetration identity and fraud accelerated by our 2021 acquisition account and accelerated NPIs with the vitality index expected to be 11% in 2022 And of course, growth in our international markets. We also expect non mortgage revenue will benefit from being the only cloud native credit bureau Through always on system stability, faster transaction processing and leveraging the data fabric to expand our NPIs. Turning now to Slide 8. Workforce Solutions delivered outstanding 41% core revenue growth in the 2nd quarter, the 5th quarter over 40% revenue growth in the last 6 quarters And their 10th quarter of double digit revenue growth driven by outstanding non mortgage growth of over 50%. As a reminder, non mortgage revenue It's over 65% of Workforce Solutions and a big EWS growth driver for the future.

Speaker 2

Rudy Porter and the Workforce Solutions team Continue outstanding execution across their key growth drivers detailed on the right hand side of this slide. As I referenced earlier, we signed a definitive agreement to acquire Law Logics last night, The next in a string of bolt on acquisitions that strengthen Workforce Solutions Employer Services vertical and adds Twin Records. Over the past 2 years, we've completed 6 bolt on acquisitions supporting Workforce Solutions growth, including Appra since rights last fall And Law Logics this morning. Turning to Slide 9. Workforce Solutions' very strong performance is driven by the team's consistent execution across their key growth levers that They will drive their long term growth of 13% to 15%, including 1st, growing the work number database.

Speaker 2

Since late last year, we signed 4 new exclusive agreements with large payroll processors that we started to board in the second quarter and expect to have all of them contributing records by the end of Q3. We ended the quarter with 144,000,000 total current records, which is up a very strong 22% from last year and up 6% sequentially. These 144,000,000 total records represent 110,000,000 unique individuals, representing 2 thirds of the over 160,000,000 W2 employees included in U. S. Non farm payroll.

Speaker 2

In addition to traditional W2 wage earners, we estimate there are approximately 30,000,000 to 40,000,000 gig workers and 20,000,000 to 30,000,000 pensioners in the U. S. We will also bring valuable insights to lenders, background screeners and government agencies. We're in the very early innings of collecting records on these 50,000,000 to 70,000,000 non W2 2 wage earners, but expect to make significant progress as we move through 20222023. We have the ability to double our TWN database With the total potential market for income and employment information on about 220,000,000 individuals versus the 110,000,000 we have today.

Speaker 2

As a reminder, over 50% of our records are contributed directly by individual employers. The remaining are contributed through partnerships principally with payroll companies. The vast majority of our partnerships with payroll companies are exclusive, including all the relationships we've signed in the past 4 plus years. 2nd, Workforce is increasing penetration in their key non mortgage verticals of mortgage, talent, government and consumer finance. With all 4 verticals having significant opportunity for continued expansion by new products leveraging our expanding twin active and historical data assets.

Speaker 2

Our talent and government businesses have seen average organic growth of over 50% since last year and over 20% CAGRs since 2017. Our strength in talent in government is driven by the depth and coverage of our Twin database with over 570,000,000 total records, both current and historic, That provide both current and previous employment information on individuals, allowing us to increasingly provide an instant digital resume or employment verification on both Current and historical job histories. The expanding depth of our twin database and expansion of the Workforce Solutions talent data hub As well as the increasing ease of integrations as Workforce leverages the API capabilities through our new Google Cloud is also providing The ability to continue to increase penetration in key verticals. 5th, Workforce is expanding their system to system integrations. Currently, more than 75% of our mortgage transactions are system to system integrations as web access, which is up over 2x versus web access, Which is up over 2x from 2019.

Speaker 2

As you know, we get about a 20% lift in mortgage pulls when we convert our customers from web System to System Integrations. In Talent Solutions, System to System now represents more than 85% transactions, while in government, we have More opportunity with about 65% of transactions on a system to system basis. As a reminder, close to 100% of credit files are delivered system to system for originations. From our perspective, it's only a matter of time for Twin to approach these levels of system integrations with customers, which of course will drive our revenue. As Workforce continues to deliver greater value to customers through deepening the database and extending real time system to system integrations and accelerating its launch of higher value Vertical specific new products, average revenue per transaction will continue to grow significantly both through higher value and price new products and annual price increases.

Speaker 2

As I said earlier, Rudy and the AWS team have a long runway for growth, leveraging multiple levers in 2022 and beyond. We have a lot of confidence in Workforce's ability to deliver on their 13% to 15% long term framework. As a reminder, over the past 3 years, they've delivered 34 percent CAGR, which of course is well above their 13% to 15% long term growth framework. Turning to Slide 10, Workforce Solutions had another exceptional quarter delivering 6 $109,000,000 of revenue, their 2nd revenue quarter above $600,000,000 Revenue growth was up a very strong 21 with organic revenue growth of 11%, despite the significant decline in the U. S.

Speaker 2

Mortgage market. Non mortgage revenue is now over 65 Workforce Solutions with organic growth of 30%. Verifications services revenue of $505,000,000 up 28% Was over $500,000,000 for the Q2 in a row, again, despite the decline in the mortgage market. Non mortgage verticals now represent almost 80% of Verifier revenue and delivered 90% and 53% 90% total and 53% organic growth. Appris Insights, which we acquired late last year, delivered strong 15% growth in the quarter.

Speaker 2

Growth was strong in their key verticals of Risk and Justice Intelligence. Risk Intelligence helps background screeners analyze people risks via background checks and continuous monitoring and Justice Intelligence helps channel partners Law enforcement agencies and their investigations. Increased customer penetration, white space expansion and strong hiring volumes are driving growth, And their NPI pipeline also remains strong. We are very positive about the future growth and potential of our Insights business. Talent Government Solutions, which now represents 40% of Workforce Solutions and almost 80% of Verifier non mortgage respectively, Both had outstanding quarters.

Speaker 2

Talent Solutions delivered 134% total and 73% organic growth in the quarter on record growth And strong new product revenue. We also saw strong growth in the government vertical with revenue up 100% total and 50% organic With significant new wins at the state level and continued growth of our large SSA contract. The continued expansion of Workforce Solutions Data Hub The fast growing 50000000 talent and 2,000,000,000 government TAMs is driving strong double digit organic revenue growth in both verticals, Leveraging workforce solutions over $570,000,000 current and historical records for new products. The integration of the unique AFRIS Insights, National Student Clearing House and other talent related data assets strengthens our ability to deliver to these new solutions leveraging the EWS Data Hub and drive outsized growth in the future. The non mortgage consumer lending business principally in banking and auto also showed strong growth, up 18% in the quarter And Debt Management grew over 70% in the quarter.

Speaker 2

Employer Services revenue of $105,000,000 was down 3% due We expect total UC and ERC revenue to be down over 25% during 2022, Driven by lower jobless claims and lower ERC transactions, as well as the COVID federal tax credit program as The COVID federal tax program runs out. Employer services revenue, excluding UC and ERC was up a strong 42% in the quarter, driven by strong base double digit growth in our I-nine and on boarding, healthy FX and our tax credits businesses. Workforce Solutions adjusted EBITDA margin remained strong at 53.4%. In the quarter, we increased spending relative to our April Expectations on both technology and marketing, principally for new products. The strength of Workforce Solutions and uniqueness and value of their twin income and employment data Employer Services Businesses was clear again in the Q2.

Speaker 2

Rudy and the EWS team delivered another outstanding quarter with 21% revenue growth and 41% core growth, Well above their 13% to 15% long term framework, and we're well positioned to deliver a very strong 2022 And continue above market growth in the future. Turning now to Slide 11, USIS revenue of $421,000,000 was down 7.5% compared to last year and slightly below our expectations. The decline was driven by the reduction in USIS mortgage revenue, which at $113,000,000 is about 25% Of total USIS revenue and was down 29% in the quarter, about 4 percentage points better than the overall mortgage market credit inquiries that declined 33%. Importantly, USIS delivered their 6th consecutive quarter of growth in B2B non mortgage revenue of $259,000,000 Which represents over 60% of total USIS revenue and was up 6% with organic revenue growth of 4%. This was at the low end of the 6% to 7% growth we discussed in April due to lower than expected FMS for Financial Marketing Services revenue.

Speaker 2

Importantly, B2B non mortgage online revenue growth was strong at 9% with 7% organic growth. During the quarter, we saw double digit growth in insurance, financial services, commercial, as well as count, our identity and fraud business. We also saw growth in direct to consumer with auto about flat in the quarter on favorable pricing offset by lower volumes given the continued auto supply chain issues. Kount, which provides unique identity and fraud solution, continues to perform very well. Our core new product growth continues to be strong and the team continues on the development of joint solutions leveraging both Count and Equifax data, including combining Count's market leading Omniscore AI and digital identity data with Equifax's physical identity into a single score to enhance fraud protection.

Speaker 2

Financial Marketing Services, our B2B offline business had revenue of $55,000,000 down 5% year over year, and although better than the Q1 was lower than our expectations. FMS is principally comprised of 3 lines of business, including 1st, fraud and data services, in which we provide header data principally Providers of identity and fraud services, which is the line of business is driving the weakness in our B2B offline. Fraud and Data Services historically represents over 20% of our offline revenue, but has declined substantially in the first half. We saw this decline in the Q1 as customers either decreased frequency of refresh data or shifted to use of their own internal data. This decline continued in the Q2.

Speaker 2

Revenue was about 10% of B2B offline in the first half. We expect revenue at this level to continue through 2022 The team focuses on bringing new solutions to market later this year. Marketing services, which represents over half of BB Offline revenue in the first half performed very well, growing it but got consistent with our non mortgage B2B online organic growth. This is the business in which we provide data in decisioning principally to financial institutions for prescreens as well as providing our IXI data for marketing activities. And 3rd, risk management or portfolio represents about a third of B2B offline revenue.

Speaker 2

This is the line of business in which we provide data and analytics services to financial institutions To evaluate the health of their existing portfolios or in some cases, portfolios they're acquiring. This business is often somewhat countercyclical as customers Perform more risk analytics during weak economic periods. This business was down slightly in the first half and slightly weaker than expected. We expect this business to be down slightly for the remainder of the year. Overall, for our financial marketing services and B2B offline For the remainder of 2022, we expect to see declines in line with the Q2 as the weakness in the fraud and data services is partially offset by continued good growth in marketing services.

Speaker 2

As we look to 2023, the completion of the Equifax new cloud data fabric will enable enhanced Product offerings in B2B offline combining U. S. Credit file, DataX, Teletrac, count, ID and fraud and NCTUE data. We believe this will drive growth across all three of our B2B offline lines of business as we get to 2023. For B2B non mortgage in total, we expect to see continued strong online growth consistent with the first half.

Speaker 2

However, declines in financial marketing services are Expected to result in second half total B2B non mortgage growth at or slightly below the bottom end of our long term framework of 6% to 8% revenue growth. USIS Consumer Solutions business, the U. S. D2C business from GCS that we combined with USIS in the Q4 last year Had revenue of $49,000,000 up 3% in the quarter and about flat versus last year. We expect second half growth rates to improve as the team leverages the cloud to roll out NPIs.

Speaker 2

The USIS sales team had a strong quarter with a number Key wins resulting in a healthy win rate and their new deal pipeline remains very strong with the overall pipe slightly higher than the Q1. And USIS adjusted EBITDA margins were 38.2% in the quarter, 110 basis points lower than the Q1, but better than our expectations. The decline relative to the Q1 is principally driven by lower revenue from the decline in mortgage. Turning now to international, as shown on Slide 12, The revenue was $286,000,000 up a strong 11.5% on a local currency basis. We're seeing broad based execution from our international businesses.

Speaker 2

Europe local currency revenue was up 16%, principally driven by strength in our UK debt management business. We've seen significant increase debt placements from the UK government over the past several quarters that we expect to continue. Our European CRE businesses Was about flat in the quarter and below our expectations driven by declines in consumer, direct and commercial, partially offset by strong growth in identity and fraud. Asia Pacific local currency revenue was 6%, driven by strong growth in our Australia Consumer Business, HR Services and Identity and Fraud. Latin American local currency revenue was up 28%, driven by strong double digit growth in Chile, Argentina, Uruguay, Mexico and Central America.

Speaker 2

The team's strong new product introductions over the past 3 years and pricing actions continue to drive strong growth across the region. This is the 6th consecutive quarter of growth for Latin America. Canada local currency revenue was up 2% below our expectations. We saw growth in commercial and analytics solutions, which was partially offset by consumer services, mortgage related products and online businesses due to interest rate increases. International adjusted EBITDA margins at 24.7 percent were down 200 basis points from last year, due primarily to the elimination of equity income from our Russia joint venture.

Speaker 2

As shown on Slide 13, we had another very strong new product quarter with our vitality index over 13%, which is up 400 basis points Above our full year 2021 vitality goal. And 300 basis points above our 10% long term framework goal And our highest vitality performance ever. Building on the record 151 new products last year, we've delivered over 50 new products leveraging the new EFX Cloud So far in 2022, with broad based execution across all of our business units. We detailed some of the more significant new products on this slide. Leveraging our new eFX Cloud capabilities to drive new product rollouts, we expect to deliver a vitality index of over 11% this year, Which equates to over $550,000,000 of new product revenue in 2022.

Speaker 2

We believe our strong NPI revenue generation is an important early indicator of Benefits of the new Equifax Cloud, new products leveraging our differentiated data and new EFX Cloud capabilities are central to our long term growth framework and driving future Equifax top line growth. As detailed on Slide 14, reinvesting our strong cash flow and accretive and strategic bolt on M and A is central to our 3 growth strategy and long term framework. We expect to add 1% to 2% of revenue growth annually from strategic bolt on M and A, including Lirologix that we announced this morning. We completed 11 acquisitions since January 2021, aligned with our strategy to add bolt on M and A Around 3 strategic priorities: number 1, expanding and strengthening workforce solutions, our fastest growing and most profitable business Number 2, adding unique data assets and number 3, building out and expanding our ID and fraud business. Slide 15 provides detail on our latest acquisition of Law Logics, which further strengthens our workforce solutions, employer solutions capabilities And provides I-nine Management and Immigration Case Management solutions focused on removing friction during the employee onboarding experience.

Speaker 2

LawLogic's suite of products supplements employer services capabilities by building upon investments made to help clients enable automation, Deepen employee insights and increase efficiency. Our I9 Anywhere product has seen very strong 45% growth over the past few years. The Logix acquisition is aligned with our M and A priority of expanding and strengthening our strongest and fastest growing business, Workforce Solutions. And with that, I'll turn it over to John to provide some more details on the mortgage market and our Q3 and full year 2022 guidance. Thanks, Mark.

Speaker 2

As Mark mentioned and

Speaker 3

is shown on Slide 16, our guidance now reflects an expectation that the U. S. Mortgage market credit inquiries will decline over 46 In the second half of twenty twenty two, a continued decline from the down 40% level we're seeing in early July. Our assumptions reflect mortgage originations 200 basis points to 300 basis points Weaker than those levels with the work number inquiries more closely linked to mortgage originations. The reduction in U.

Speaker 3

S. Mortgage credit increase of over 46% in the second Is off the second half twenty twenty one reduction over 20%. This level of U. S. Mortgage credit inquiries in the second half is over 30% lower than the second half average levels We saw over the 2015 to 2019 period.

Speaker 3

1Q mortgage revenue was 29.5 percent of total Equifax revenues And 2Q mortgage revenue was 24.7 percent of total Equifax revenues. In 3Q, we expect mortgage To make up just over 21% of total Equifax revenues and about 23.5% in the full year of 2022. As we have shared in prior quarters, Slide 17 provides a view of both the number of home mortgages that would have a rate Benefit from refinancing on the left and a view of the levels of home purchases on the right. The left side of the slide provides a perspective on the number of home mortgages For which the refinancing would provide a rate benefit, the end of money population of mortgages. The end of money population as of mid July is about 1,900,000 homes And below the $3,300,000 we saw in April.

Speaker 3

At the current level, mortgage refi activity is heavily driven by cash out refis that are often executed with no rate benefit or rate increase. For perspective, for the most recent available Black Knight data for May 2022, About 95% of refinancings were cash out. As shown on the right side of slide 17, the pace of existing home purchases continues at high levels, But we're down about 7% in May 14% in June from the levels we saw in 2021. We believe our assumptions for US mortgage market Credit inquiries over the last 6 months of 2022 reflect the trends just discussed. The 46.5% year to year decline in mortgage credit inquiries reflects a continued sequential The mortgage market with 3rd quarter inquiries down over 25% from the 2nd quarter and 4th quarter down a further over 15% from these much reduced 3rd quarter levels.

Speaker 3

The rapidly changing and unprecedented macro environment makes forecasting the impacts on the U. S. Mortgage market incredibly challenging. We will continue to be transparent with you about changes in the mortgage market and the impacts on our business. Slide 18 provides a walk detailing the drivers of the 5.2% constant currency and 3.6% total revenue growth To the midpoint of our 2022 revenue guidance of $5,100,000,000 The revenue decline from the midpoint of our April guidance of $5,200,000,000 is Driven by about 2 thirds by the decline in the mortgage revenue reflecting the expectation of a weaker U.

Speaker 3

S. Mortgage market With the remainder due to a greater negative impact from FX. The over 37% decline in the U. S. Mortgage market is negatively impacting 2022 growth By about 12%, about 150 basis points more negative than the levels we discussed in April.

Speaker 3

When combined with the expected declines in the Workforce Solutions unemployment claims in the RC business that we discussed with you in April, total headwinds into 2022 revenue growth are about 13 percentage points. As Mark discussed earlier, core revenue growth is Expected to be 17% and core organic revenue growth to be about almost 15%, consistent with our April guidance, both well above our long term growth framework and reflecting outstanding growth and execution on new products. Non mortgage organic revenue growth is driving 11% of the core organic revenue growth. The largest contributor continues to be workforce solutions with strong organic growth And Talent Solutions, Government and Employee Boarding Solutions, including I-nine. International and USIS non mortgage are also expected to drive core growth.

Speaker 3

Slide 19 provides an adjusted EPS walk detailing the drivers of the expected 0.4% growth to the midpoint Our 2022 adjusted EPS guidance of $7.68 per share, the growth in revenue and expansion in EBITDA margins by about 25 basis points drives growth EPS of about 8%. Higher depreciation and interest expense and the negative impact of weaker FX are principally offsetting This growth in adjusted EPS, the reduction of $0.47 or about $75,000,000 in pre tax income from the midpoint Of the guidance we provided in April is at a high level driven by the following: higher interest expense of about $13,000,000 And weakening FX impacting income by over $8,000,000 negatively impacted pretax income by over 21,000,000 The remaining about $54,000,000 in lower pretax income is driven by the reduction in mortgage revenue with high variable margins. Some other factors impacting overall 2022 EBITDA margins in our July guidance relative to April guidance include an increased spending on product technology and related Marketing to continue to drive NPI. International's stronger than expected revenue growth includes strong growth in Debt Management, Which has somewhat lower margins and therefore puts margin pressure on international and lower overall variable compensation benefits margins.

Speaker 3

As I just referenced, we are continuing our investments in new product development and related marketing and sales and our data and technology cloud transformation As these are the levers driving our over 10% new product vitality index and improved cost structure in 2023 and beyond, We will continue to tightly manage spend outside these critical growth areas. Slide 20 provides the specifics on our 2022 full year guidance, which I also just discussed. At a BU level, our updated view of U. S. Mortgage impacted both EWS and USIS.

Speaker 3

EWS is expected to deliver revenue growth of around 15% as Strong non mortgage growth expected to be over 40% is partially offset by the impact of the weaker mortgage market. EWS EBITDA margins are expected To approach 53%, slightly lower than 2021. USIS revenue is expected to be down 8.5%, reflecting the greater than 37% assumed decline in the U. S. Mortgage market.

Speaker 3

B2B non mortgage revenue is expected to be slightly below or at the low end of our long term framework for USIS of 6% to 8%, reflecting the line and B2B offline discussed earlier. USIS EBITDA margins are expected to be about 37%, reflecting the impact of the weaker mortgage market. International continues to deliver a strong year and is expected to deliver constant currency revenue growth of about 10%. International EBITDA margins are expected to be about 27%. International EBITDA margins are negatively impacted Product mix as our debt management business, which is growing strongly in 2022, has somewhat lower margins than our credit business.

Speaker 3

For the full year of 2022, we expect capital expenditures to be in excess of $500,000,000 Slide 21 provides our guidance for 3Q 2022. We expect revenue in the range of $1,210,000,000 to $1,230,000,000 reflecting revenue of about flat year to year at the midpoint of our guidance We're up just under 2% on a constant currency basis. Similar to full year 2022, in the Q3, we are overcoming significant revenue growth headwinds of about 17 from both the decline in the U. S. Mortgage market, which is impacting revenue growth by 15% and the normalization of the unemployment claims in ERC businesses.

Speaker 3

Core organic revenue growth on a constant currency basis of 15% and about 4% revenue benefit from acquisitions are allowing us to overcome these headwinds and deliver constant currency growth in the quarter. 3Q 2022 EBITDA margins are expected to be Flat to slightly down year to year. The flat EBITDA margins reflect the flat year to year revenue as well as execution of the planned cost reductions related to transformation, The benefit of which is being principally offset by year to year cost increases and the dilutive effect on near term margins of the 2021 and 2022 acquisitions. This impact on margins will be eliminated with time as acquisition synergies drive these margins higher. We're expecting adjusted EPS in 3Q 2022 of 1 point $62.70 per share compared to 3Q 'twenty one adjusted EPS was $1.85 per share.

Speaker 3

The decline in adjusted EPS in 3Q 2022 year to year is driven by an over 15% per share negative impact on adjusted EPS of items below operating income, Specifically interest expense, lost other income principally from our Russia JV and a lower tax rate in 3Q 'twenty one related to specific discrete items. Adjusting for these items and the negative impact of FX as well as the increased depreciation we are incurring related to tech transformation, Adjusted EPS at the midpoint of our guidance would be about flat to 3Q 2021 and consistent with flat revenue. We believe both our Q3 and full year 2022 guidance are centered at the midpoint of the revenue and adjusted EPS ranges we provided. Now, I'd like to turn it back over to Mark.

Speaker 2

Thanks, John. Turning to Slide 2022, the new Equifax is a much different business today than we were in the last recession. We're more resilient and better positioned for stronger revenue and earnings growth. During the 2008 to 2009 global financial crisis, Equifax performed very well And exhibited the resiliency you would expect from a data analytics business. In 2,009, we saw only a 6% decline in total revenue.

Speaker 2

Importantly, Workforce Solutions revenue grew throughout the period and showed substantial growth of 17% in 2,009 From Twin record additions and their other growth levers, which drove higher verification rates and strong unemployment revenue growth from the growing unemployment levels In 2,009. We believe that Equifax business mix is much better positioned for a potential economic event in the future than we were in 2,009. Strong Workforce Solutions growth has increased their relative size in Equifax from 16% of revenue in 2,009 to almost 50% today with margins above 50%, about 20 percentage points higher than the Equifax average. EWS is benefiting from strong growth levers that are not directly tied to economic activity, including record growth, penetration into new fast growing verticals like talent Government, system to system integrations, deploying new and higher value products, as well as the measured price actions, Taking advantage of the scale of the Twin database. 2nd, completion of the Equifax cloud will deliver cost savings in 2020 And beyond, you expect will drive about half of our targeted 500 basis point margin expansion from 2022 to 2025.

Speaker 2

The cloud migration cost savings are independent of any economic event and driven by our execution. And

Speaker 3

third, we're leveraging

Speaker 2

The cloud to accelerate new product development with a goal of 11% vitality index in 2022, which is over $500,000,000 of annual incremental revenue, New product revenue for Equifax. As a reminder, new products rolled out in 2021 2022 will drive top run growth in 2023 and beyond as they mature in the marketplace. To estimate the impact of recession that we have on Equifax, we've assigned our lines of businesses into 3 categories. 1st, recession growth or recession resistant. These businesses have drivers that are not directly aligned with economic activity in recession, and we expect them to grow during a recession.

Speaker 2

The best examples of this are Workforce Solutions, U. S. Mortgage, Identity and Fraud and our government lines of businesses We expect will continue to grow during an economic event from the uniqueness of the data, including TWN or from low interest rate environments impact our mortgage business. 2nd is our countercyclical businesses that typically perform better during a recession and the best examples is our unemployment claims management business, We expect significant growth in Workforce Solutions from growing unemployment in the U. S.

Speaker 2

Or some of our account management solutions. And 3rd, recession impacted. These are businesses that are directly impacted by economic activity and contract in a recession. They include auto, cards, P loans, For both consumer activity declines or lender activity is contracted for risk containment reasons, we expect these business lines to be flat to negative revenue growth and recession. Today, we believe almost 60% of our global business is recession resilient or countercyclical.

Speaker 2

This is a big change in a strong position compared to Equifax in the 2008 global financial crisis, where only about 40% of our businesses were either recession resistant or countercyclical. The meaningful revenue growth in Workforce Solutions, U. S. Mortgage and Identity and Fraud since 2,009 as well as the cloud transformation cost savings Position Equifax very well if there is an economic event or recession in 2023 or beyond. As highlighted in Slide 23, We remain laser focused on executing our EFX 2023 growth strategy to leverage the new EFX Cloud for innovation and new products.

Speaker 2

EFX 2023 is the foundation of our new 8% to 12% long term growth framework. We continue to make significant progress executing the EFX, Cloud data and technology transformation, we're now approaching 60% of total revenue being delivered from the new AFX Cloud. And we've completed over 139,000 B2B migrations and over 10,000,000 consumer migrations. Our international transformation is also progressing and we continue to expect to principally complete the transition by geographic region as we move through 2023 and into 2024. We're in the early days of leveraging our new cloud capabilities and are confident that it will differentiate us commercially, expanding our NPI capabilities, accelerating our top line growth, Expand our margins from the growth and cost savings in 2022 and beyond.

Speaker 2

We remain confident in our plan to become the only cloud native data analytics company. Wrapping up on Slide 24, Equifax delivered another strong and broad based quarter with 7% overall growth and 19% core growth And a 13% vitality index, more than offsetting a 33% decline in the mortgage market. Against the declining mortgage market, Equifax is resilient, On offense and investing for future growth. Our updated 2022 revenue and adjusted EPS guidance reflects the impact of the expected accelerated decline in the U. S.

Speaker 2

Mortgage market to a decline of over 46% in the second half of twenty twenty two, resulting in a mortgage market decline of over 30% for the year 37% for the year. Against this unprecedented mortgage market decline, Equifax will deliver constant currency revenue over 5% and deliver growth in adjusted EPS. More importantly, our core revenue growth of 17% And non mortgage growth of 16% are both well above our 8% to 12% long term framework and reflect the strength of the underlying Equifax business model today and in the future. EWS continues to deliver above market growth and is our largest, fastest growing and highest margin business. Workforce Solutions above market 34% revenue CAGR over the last 3 years is powering Equifax growth as they approach 50% of our revenue.

Speaker 2

New products leveraging the new Equifax Cloud are also driving growth. Our 11% vitality from NPIs in 2022 will drive growth in 2023 and beyond. And we're in the early days of leveraging the new Equifax Cloud to drive innovation in new products. Our 11 bolt on acquisitions since January 2021 Have expanded our capabilities and are delivering strong top line growth and will deliver synergies in 2023 and beyond. And then last, we're in the final chapters Completing our 4 year $1,500,000,000 transformation to the cloud that will deliver top line growth and cost benefits in 2023 and beyond.

Speaker 2

Even in these uncertain economic environment, Equifax continues to be on offense and reinvesting in the new Equifax cloud, new products, Data analytics and bolt on M and A to drive future growth. We continue to be confident in our long term framework of 8% to 12% revenue growth. Our goal is $7,000,000,000 of revenue in 2020 or by 2025. Our ability to expand our margins 500 basis points between 2022 2025 And 50 basis points per year of margin expansion longer term. We remain energized about our performance in 2022 in a challenging mortgage market macro And even more energized about the future of the new Equifax, a faster growing, higher margin, cloud native data analytics company.

Speaker 2

And with that, operator, let me open it up for questions.

Operator

Thank you. We'll now be conducting a question and answer session. Our first question today is coming from Manav Patnaik from Barclays. Your line is now live.

Speaker 4

Thank you. Good morning. I just wanted to touch on the strength of the non mortgage Workforce Solutions businesses and kind of the sustainability Of that business and maybe if you could just comment specifically on the Talent Solutions side, just given all the Announcements just trying to see on hiring freezes or layoffs, etcetera, do you anticipate any slowdown there?

Speaker 2

Yes. So it's a great question, Manav. As you know, we're investing heavily in the non one of our priorities is to invest heavily in workforce broadly because it's our fastest Growing business and as you point out, the non mortgage businesses and workforce are really outperforming the underlying market and Delivering substantial growth and I'll touch on Talend first, as you pointed out, a big TAM of $5,000,000,000 and Our play there is to help digitize the background screeners using our data. As we continue to expand our historical data, we can deliver real solutions there. And We haven't seen any impact from the hiring market.

Speaker 2

As you know, unemployment is still very low. There's still More jobs open than there are people looking for them. And even in if that starts to slow down in the future, there's just so much Penetration opportunity for us to really work to help digitize the background screening environment, both with our core work history. As you know, we have 570,000,000 total records. So we have a digital resume on the average American worker It totals 5 jobs for each individual.

Speaker 2

So there's just a lot of data and growth opportunity there. And then we're also, as you know, adding data assets To go beyond just our work history and talent, whether it's education, medical credentialing data that we acquired with Afris Insights, of Of course, the incarceration data that's used in virtually every background screen and we have a stated strategy to look for more either partnerships Or M and A to really strengthen the TalentHub. So I don't expect them to grow at the rate they have been over the last couple of years, which is Very, very strong, but certainly there'll be a big growth driver going forward with double digit growth in the future. Government, as you know, is another big non mortgage vertical for workforce solutions that's around social services. The $2,000,000,000,000 or $2,000,000,000,000 Government TAM is a big one.

Speaker 2

We have a lot of penetration opportunities there. Social services are only expanding and it's really the same thing. We're able to Deliver an instant decision to that government agency either the federal, state or local level and we've just seen a lot of traction. They have the same labor issues, Meaning they're looking for productivity in their centers where people come in to apply for social services and We can deliver productivity with the instant decisioning and of course, it also delivers that social service to that individual very quickly. And same thing, The ability now to not only have that income and employment information that's used in really every social services is needs or income based, But also adding to it the incarceration data that we have that's used in virtually all social service processes.

Speaker 2

Beyond talent and government, just touching quickly on kind of non mortgage financial services, those are Newer verticals for workforce with the data, whether it's in the card space where we're starting to get penetration to have The income and employment data supplement the credit data in a card origination. Of course, auto, we've We've seen nice growth in subprime and moving into nearprime and of course it's used in P loans. And then just jumping outside of Verifications in your Employer Services, as you know, we've been making acquisitions. We've done 5 acquisitions in the Employer Services space In the last 2 years to really build out the capabilities in those regulatory compliance services, whether it's unemployment claims, Work Opportunity Tax Credit, ACA or healthcare, and of course, in the Work Opportunity Tax credit and I-nine benefits like Law Logics that we announced this morning, that's a space that has a big $5,000,000,000 $6,000,000,000 TAM. In a more challenging economic environment, we expect more outsourcing by HR managers of those activities that we can perform more efficiently.

Speaker 2

So we see Growth opportunities for that business, which is why we're investing in technology and the bolt on M and A like Law Logics. And of course, as you know, as we expand our capabilities and reach there with individual companies, we get more records. And of course, underlying The growth of workforce and of course non mortgage is record growth, which was up a strong 22% in the quarter and we still have a long runway to Essentially double the size of our database when you include gig and pension income recipients. So there's a lot of So lots of levers for non mortgage in Workforce Solutions.

Speaker 4

Got it. Thank you. That's helpful. And then maybe just to follow-up like In terms of the M and A pipeline, a lot of these tuck ins, I guess, it makes sense. But just given maybe just some comments around What valuations in the private market look like and your appetite and capacity for maybe larger deals than these?

Speaker 5

Yes. I think as

Speaker 2

you know, we try to be very disciplined about our approach to M and A. We're very I use the term bolt on. You can describe how big bolt on is. Obviously, This was a larger acquisition, count was a larger acquisition last year, but we see a lot of opportunity to deliver very high return Both on M and A that are highly accretive to our cost of capital. So it's a you start with our kind of capital allocation, We see big opportunities to invest in the core of Equifax and we're doing that.

Speaker 2

And that's really through our cloud transformation, which we're in the final innings of completing. That was a big project and a Big focus of Equifax that will start tailing off our investment in that over the coming year or so as we complete the cloud. New products, we get very high return on. And then when you get into inorganic, we see an opportunity to continue to do bolt on M and A that Adds very positively and we are very disciplined financially and looking for businesses that are growing faster than Equifax On the top line that are accretive to our margins and obviously deliver high returns. So those are the kind of M and A that we're doing and We've got a pipeline going forward of deals that we continue to look at that will really add value in the 3 areas that I talked about during my Prepared comments of strengthening workforce, adding differentiated data and strengthening identity and fraud.

Speaker 2

And as you know, as We go into 'twenty three, 'twenty four, 'twenty five with our margin expansion accelerating in that 500 basis points to 39% in 20 Our free cash flow accelerates dramatically in the coming 12, 24, 36 months and We'll continue to run the play of bolt on M and A. Where it's appropriate, we'll look for acquisitions that might be at the larger end of bolt on like an Apris, but We'll be at a point in the near future where we're going to want to return cash to shareholders. And we've been very clear When that time comes, that will be a part of our capital allocation strategy as our free cash flow accelerates as we get into 'twenty three, 'twenty four, 'twenty five.

Operator

Thank you. Our next question is coming from Andrew Steinerman from JPMorgan. Your line is now live.

Speaker 4

Hi, John. It's Andrew. I wanted to Check if that 24.7% mortgage revenue figure you gave on the call was for total revenues in 2nd quarter. And then also my second question is, again, on a total company basis, what was Equifax's 2nd quarter organic Constant currency non mortgage revenue growth year over year?

Speaker 3

So 24.7% was on total Equifax revenue. And then, I don't believe we gave an organic revenue growth for the entire company non mortgage.

Speaker 4

So Right. But you gave all the segments. Can't you total it out for us?

Speaker 2

We can certainly follow-up with you, Andrew. Trevor or Sam can come back to you on

Speaker 4

Okay. Thank you very much.

Operator

Thank you. Next question is coming from Kevin McVeigh from Credit Suisse. Your line is now live.

Speaker 2

Hey, Kevin.

Speaker 6

Hey, Mark. Hey, John. Hey.

Speaker 4

I know it's hard to kind

Speaker 6

of project, but any sense of Kind of the near term outlook for mortgage 2022 to 2023. And the reason I ask is, obviously, it seems like unprecedented declines, but we're in a much stronger macro environment than we were back in the GFC. Is there any way to frame do you think you see continued refi kind of cash outs More near term on the purchase side, just as you think about mortgage within kind of the context

Speaker 7

of more of a recovery, just given kind of where we are

Speaker 6

from Kind of feels like we're bottoming here.

Speaker 2

Yes, I think bottoming is probably in the second half based on our forecast, Kevin, as you know. But It's very hard to really predict what's going to happen with the environment with the economy, given the inflation Rates that we haven't seen in really our lifetimes and what the Fed is going to do to respond to it. I would make a couple of comments on mortgage, which Look, the mortgage market doesn't disappear, right? There's a core mortgage market that in any economic environment stays there, meaning people move and buy houses. People upgraded, buy houses on the purchase market.

Speaker 2

And as you know, there's more people still looking for houses in the United States today than there are houses. So there's still quite a bit of demand on the purchase side. So we expect there to be as there isn't any economic environment, Continued purchase market and John gave some views about how we think about that in the second half. As you point out in the refi side, The interest rate refis are going to be lower or less of those in the second half given where interest rates are, Because there aren't many opportunities for homeowners to do an interest rate refi, but there's a ton of untapped equity In Homes in the United States, over the past 24 plus months, home price appreciation is up almost 30% And there's about $27,000,000,000,000 of untapped home equity. And we've seen in economic environments in the past That homeowners will tap into that equity.

Speaker 2

If you think about a 5.5% fixed rate mortgage in order to refi into that To access your home equity, which consumers are doing or homeowners are doing, we expect that to Continue and if you think about 5.5% interest rate on a fixed rate mortgage, that's a heck of a lot less than an auto loan, a student loan or a credit card. And that's what you'll see consumers do. So there'll be a level of cash out refi going forward. And I know you get that. I think the Challenging part is what's going to happen, how far is the Fed going to have to go to slowdown in inflation with it at 9.1%.

Speaker 2

So that's the harder part for us Forecast, we did talk about in our prepared comments that we remain confident in obviously the long term future of Equifax. Our goal is $7,000,000,000 by 2025 hasn't changed. Our goal to expand our margins to 39% by 2025 hasn't changed. And we're still investing in the future of Equifax as we speak. We're making investments that will benefit 'twenty three, 'twenty four, 'twenty five Based on our strong performance, particularly in non mortgage, which is exceptionally strong.

Speaker 6

And actually, that's where I want to follow-up, because it seems like you're comfortable with those 2025 targets. It's probably more just a little bit lighter. Where's been kind of the offset? Is it within EWS or other parts of the business That continue to give you the confidence to push towards those 2025 targets?

Speaker 2

Yes, it's certainly I think as you know, We raised our non mortgage or core guidance twice this year, once in February and once in April. That gives us confidence. It should give you confidence. And if you look at our non mortgage performance and our core growth performance, which includes How we're performing beyond the mortgage market, those are strong numbers. And those give us confidence In our ability and then if you add to it, during that 'twenty three to 'twenty four timeframe, in the next 12 months, we're going to be completing substantially the U.

Speaker 2

S. Cloud migration. So we'll be cloud native and we can take full advantage of that. We'll finish international as we get through 2023 and into 2024. That's another lift for Workforce Solutions.

Speaker 2

The other thing that should give you confidence and gives us confidence is the M and A that we've done over the last 18 months. We've done 11 acquisitions now with Law Logics. Those are in our run rate revenue or will be. And of course, the synergies from those acquisitions that we had in our acquisition cases really kick in, in 'twenty three, 'twenty four, 'twenty five As they really get integrated into our businesses. And then the last point I'd make that gives us confidence is NPIs.

Speaker 2

The vitality index that we're delivering, as Our long term frame on vitality is 10. We were 13 in the quarter. We're expecting to be north of 11 for the year. Those are big numbers. When you talk about having $550,000,000 of revenue in 2022 from new products and remember New products we introduced in 2022 really benefit 'twenty three, 'twenty four, 'twenty five.

Speaker 2

They mature as we get into those years. So There's a lot of levers that give us confidence around the future of Equifax.

Operator

Thank Your next question is coming from Toni Kaplan from Morgan Stanley. Your line is now live.

Speaker 8

Thanks so much. 1st, I wanted to ask about the mortgage performance. So last quarter, you talked about The mortgage market by about 30 points in the year and for the quarter last quarter it was about 27 Points above the market. This quarter looks a little bit more like you outperformed by 20 points according to Slide 10. So are you still expecting the 30 or has something changed to bring that down a little bit?

Speaker 8

And what are sort of the drivers that Lead to that outperformance delta, like why would it jump around, I guess?

Speaker 3

Sure. And so I think last quarter what we indicated, we were up 27% and we thought for the full year we could deliver something south of 30%. But I think the 20 points is very strong, right. And what drives the outperformance in general is the new products, the price actions, the record additions And all of those activities that Workforce Solutions is executing extremely well, actually executing faster than planned. The record additions, as Mark already covered, were well faster than planned as we're up to 44,000,000 records, they're all volume dependent, right.

Speaker 3

So when we get into circumstances where we see the current year volumes decline substantially, it

Speaker 5

makes it more difficult to outperform the prior year market because of the

Speaker 3

lower volumes. So that's all I The prior year market because of the lower volumes. So that's all it really is. In terms of the drivers that will allow them to outperform the market over the long term, They're actually outperforming the expectations we had when we started the year. So we feel very good about how they're performing.

Speaker 3

We think given the much lower Level of mortgage inquiries we're talking about, of mortgage originations we're talking about in the second half, if they're able to outperform at about 20 or I think we just said Somewhat under 20, but that will be very, very strong and consistent with the execution against product price records, System integrations that we've been talking about.

Speaker 8

Great. In the guidance, it seems like the main delta on the revenue guide is really mortgage. You're expecting essentially the non mortgage expectations outside of FX, largely on Just if we look forward, if there is A recession or a tougher environment that comes up, just maybe talk about some of the expense levers that you can pull and How you think about when to pull the trigger on that versus continued investment in the business, because obviously you have a lot of really strong growth opportunities that You want to capitalize on. So maybe just how are you thinking about downturn playbook and when you would pull the trigger?

Speaker 2

Yes, it's a great question, Tony. This is Mark. First off, we don't see that in the second half. You may have a different point of view, but we don't See that in the second half, but to be clear, we think about it a lot, obviously, and we do have levers. First off, we think we're going to outperform The way we did in the past, if there is an economic event.

Speaker 2

We had a page in there that we talked about it in the investor deck and we talked with you about it before. The difference in the business and Levers like continuing to add records at Workforce Solutions and so many other levers in Workforce, in particular, Identity and Fraud Business. So we think about that. Well, we clearly have the ability to throttle cost if we got into an economic event. In 2022, While we're seeing the pressure from the mortgage market macro and it's also FX revenue, we've made the decision to continue to invest, which is I think you want us to do and our investors do because our core business or non mortgage business, which is A big part of Equifax is performing exceptionally well and we want to keep driving that.

Speaker 2

So investing in things like new products, Investing in completing the cloud transformation, which of course that will take a lot of our cost out As we get into 'twenty two I'm sorry, 'twenty three, 'twenty four, 'twenty five, we get significant margin expansion or cost reductions As we complete the cloud and decommission a lot of our data centers, that's kind of a natural recession hedge for us as we execute The cloud transformation, but we've got other cost levers that we could or would pull and we'll be ready to do that if there is an economic event. But At the same time, we have a lot of confidence in how we would perform in an economic event because of the changing dramatically changing nature of Equifax. Would No,

Speaker 3

I just think outside of the investments Mark already talked about in NPI and transformations, kind of the product technology and then product marketing Investments we're making, we certainly are looking at all the other expenses and we're just going to manage those very tightly, right. So even though we don't expect a recession to come at this point in time, certainly not in the second half of Here, obviously uncertain about 2023. What we are going to do is make sure we manage very tightly all of the expenses that don't drive that revenue growth.

Operator

Thank you. Our next question is coming from Ashish Sabadra from RBC Capital Markets. Your line is now live.

Speaker 5

Thanks for taking my question. So, Mark, thanks for providing that details around the Financial Marketing Services business. I I just wanted to drill down further on the fraud and identity piece and see, you talked about new product innovations there, which Could reaccelerate growth maybe next year. So I was just wondering if you could provide some more color on that front or maybe also talk about the pipeline for new deals, Particularly on the offline side and how should we think about those momentum going into the back half but also in 'twenty three and beyond? Thanks.

Speaker 2

Yes. So we've talked about that we're obviously doing some work to get some new products positioned in the second half of this year to bring the FMS Portfolio review business back into a different position. That's clearly a place that we're investing in. I think part of your question was also around Broader identity and fraud, which is a different business for us. That's really under the account business, which we're very pleased with.

Speaker 2

That's a business that It performed exceptionally well in the quarter and the half. We see big potential in just a massive TAM around the broader identity and fraud. And of course, as you know, we bought 18 months ago, and we're still integrating that inside of Equifax and rolling out new solutions. And That's an area that we're investing in new products for both the e commerce space, but also for our traditional financial Customers and also looking for inorganic or M and A to continue to expand. That's one of our three priorities around M and A Yes, to grow in identity and fraud.

Speaker 2

And in B2B offline specifically kind of

Speaker 3

the fraud header business, I think some of the real opportunities we have as we get into 20 3 is heavily around Data Fabric, right. As we're able to more aggressively integrate different data assets, again, it will differentiate our Information, our header information that we sell into those markets and we think we have the opportunity to reaccelerate that growth again. But that will happen as data fabric completes for USIS.

Speaker 5

That's very helpful color. And then going back to Slide 9 and drilling down further on the questions that were asked on the talent and government side, The penetration there is pretty low on talent, just 10% and on government, it's 20%. You talked about some new state wins there. But just can you talk about, Again, the pipeline both on the talent and government side and how do you drive better penetration in both of those markets? Thanks.

Speaker 2

Yes. These are I still call them newer verticals for us in workforce solutions, both talent and government. They're big TAMs. Talend's a $5,000,000,000 data TAM for us. Government's about a $2,000,000,000 We've got big teams in Workforce Solutions focused on that.

Speaker 2

We've made, as you know, some M and A additions to strengthen our capabilities there. We want to do more. That's an area where we want to expand in either M and A or M and A being like APRIS Insights, where we got the incarceration and medical credentialing data. It's really helping us In both government and talent, the partnership we have with Nestle's doing clearinghouse where we're bringing education data And we'd like you to do more partnerships or more M and A there. The other really lever for us in talent and government is new products, It's really bringing new solutions together, combining data elements we have in workforce.

Speaker 2

And of course, at the heart of Our growth in both of those verticals is our twin dataset. Both are 144,000,000 active records or 110,000,000 Active individuals in our data set, which is a huge coverage now. And as you know, when we add records, our hit rates go up. Because remember in our system to system integrations, whether it's talent or government or other verticals, they're hitting our database for every applicant Or individual that they're trying to process, whether it's a mortgage or a background screen or a social service like rent Or unemployment claims. As we grow our records, that grows the business.

Speaker 2

And then leveraging our historical data, We just got so much historical data of the 570,000,000 total records, which equates to about 5.5 Jobs for the average American, that's a very valuable instant decisioning data set for the talent space. So the combination of new products, Continuing to grow out our Twin Record database and continuing to do M and A and having our dedicated teams of growing Customers, there's still a lot of customers that don't use our data in government, social services and in talent. So that's another opportunity. So we're pretty energized about the growth potentials in those two verticals.

Operator

Thank you. Our next question is coming from Kyle Peterson From Needham and Company, your line is now live.

Speaker 9

Great. Good morning, guys. Thanks for taking the questions. Wanted to touch on inflation. Obviously, it's the highest we've seen in quite some time.

Speaker 9

Where are you guys kind of seeing it on On the cost side of your business and how much have you guys been able to successfully pass along to clients?

Speaker 2

Yes. So I share your concern. When I think about the 9.1% inflation or 9.4% in the UK or pick your market, What I spend more of my time thinking about is what the impact is going to be on the consumer, on our customers. With regards to our cost structure, it hasn't had much of an impact. We haven't seen a big impact in labor.

Speaker 2

We're still able to track the people we want inside of with some slight pressure On wage rates, but we're still managing that. A big part of our cost structure is technology and we're really heading more towards cost savings there As we convert from our legacy infrastructure to the cloud and we've got long term contracts in our cloud infrastructure. And with regards to passing it on, price versus inflation, we're at a net positive. We Put pricing increases in place earlier this year that give us a net positive margin impact versus inflation is That's even with inflation where it is today.

Speaker 9

Understood. That's helpful. And then just a quick follow-up, particularly on the Unemployment verification claims part of the EWS business.

Speaker 2

Now how

Speaker 9

should we think about the puts and takes? I know you guys said you weren't Currently expecting a recession, but if we do had a new recession, how

Operator

much of

Speaker 9

a potential tailwind could that be in a more garden variety Session not with unemployment kind of where it was in 2020, but just a little more run of the mill would be helpful.

Speaker 2

Yes, it's obviously a positive for us. That business is a lot bigger today than it was in 2008, 2009. Obviously, we've got a lot more scale. Yes, we're expanding the business with a lot of the investments in people and technology and capabilities as well as the M and A that we've done. So it will clearly be a tailwind.

Speaker 2

Obviously, it's a headwind right now coming off 2020 2021 when there was a lot of furloughs And layoffs during the COVID environment, I know John, would you size it in any way?

Speaker 3

Yes, just to give you a perspective, this year it's $135,000,000 business, Right. So and I think during the COVID recession, it increased obviously dramatically. But and it basically scales directly with unemployment insurance activity. So it's about $135,000,000 So whatever you however, as you look at what the level of unemployment that could come in a recession, it will scale pretty directly with that.

Speaker 2

And that's just one of as you know, that's one of many kind of countercyclical businesses. Another if you're focused on countercyclical, the other one is inside of our Credit business, while prescreens will go down, account management and portfolio management activity goes up in an economic event. Now we're not seeing that today because it's There isn't really an economic event yet, but that's a countercyclical element for our core credit businesses. And of course, we got all kinds of levers in workforce solutions. We're going to keep adding records whether the economy is up, down or sideways.

Operator

Thank you. Our next question is coming from Andrew Jeffrey from

Speaker 2

Mark, I wanted to ask you a question about The Twin database and sort of line of sight to getting to 2x current records, do you think you can get there with your current payroll agreements? Do you need to add more? And I know you mentioned they're exclusive today. Can you talk about your comfort with those remaining exclusive sort of in the long run? And just any color in terms of trajectory there would be helpful.

Speaker 2

Yes. So bunch of layers of questions in there. First, I think as you point out, it's a really attractive lever for growth and unique to this business, right? No other data business that I know of As the ability to add records the way workforce has been able to do, and of course, it translates into revenue day 1, quarter 1, week 1, The minute we add them, because remember, we're as we're integrated or even through web access, customers are coming to our data set looking for all of their applicants. And as we grow our hit rates, it really drives the revenue.

Speaker 2

And revenue the records were up 22% in The quarter, we've had very strong double digit growth for the last 3 years of growing the data set and now have 144,000,000 actives and 100 and 10,000,000 uniques, which is really powerful in the scale of the data set. Not only is it driving revenue, but it also drives usage, Meaning, it's a data set that's more valuable. And you remember, you think about it, our customers want 100% coverage, because The consumers that they can't identify in our data set, they got to go somewhere else to do a manual verification or do something else that slows down their process. So as we Add records to our data set, we become more valuable to them. So, as you know, 50% of our records come from partnerships, 50% come from direct relationships that we have through our Employer Services business, and we want to grow both.

Speaker 2

On Employer Services, as you know, we've been Making acquisitions, we've done 5 acquisitions in the last 2 years to strengthen our capabilities in employer services, whether it's an I-nine, unemployment Claims, work opportunity tax credit, and that's a kind of a $6,000,000,000 TAM and we've got a $400,000,000 plus business. And the power of that is not only we're growing our the outsourcing there, but when we get the contracts for I-nine or unemployment claims or work opportunity tax We also get records. So growing records there is a big lever. The other 50% come from partnerships of payroll processors. And what I'm referring to is really mostly W-two or non farm payroll income, Which is employees, which is the 160,000,000 individuals in the United States versus the 110 we have today.

Speaker 2

The newer markets for us are gig, which is $30,000,000 to $40,000,000 and pensioners, which is another $20,000,000 to $30,000,000 So if you think about the $110,000,000 Yes, there's about 220,000,000 Americans that have some form of income. That's what we want to grow the database to and that's going to take time. If you think about going from $110,000,000 to $220,000,000 that may take a decade, but there's such runway for growth and we now have dedicated teams On the pension side, and we expect to be on boarding records, obviously, from those aren't typically with payroll processors. There are other Entities that are processing those, whether it's a benefits administrator or individual companies. And then the gig record, those are all records we want to add As we go forward, I think your last question was around our partnerships.

Speaker 2

The last part of your question was around your question was around Our partnerships and exclusivity, as I said, the vast majority of our partnerships are exclusive. All the relationships we've signed in the last 4 plus years have been exclusive and all the relationships we intend to sign going forward as well as extend, it's our intention for them to be exclusive. We think that's good for us and good for our partners going forward. Super comprehensive answer. Thanks.

Speaker 2

Appreciate it.

Operator

Thank you. Next question is coming from Andrew Nicholas from William Blair. Your line is now live.

Speaker 9

Thanks and good morning. I think different answers have touched on this already, but I want to ask a little bit more directly about kind of the health of the U. S. Consumer and what you're hearing from customers On the core credit side,

Operator

are

Speaker 5

you seeing any signs of

Speaker 9

weakness across the USIS business as it relates to core credit? Guidance doesn't seem to imply any slowdown there. So if you could just kind of talk about what gives you confidence in that part of the outlook And the overall state of the economy? Thanks.

Speaker 2

Yes. And to be clear, we're not. The U. S. Consumer from our perspective is strong.

Speaker 2

I think you've heard it from the banks Over the last week or so, as they talk about their performance, there's no sign. And It really goes it starts with employment. People are working. And there's 2 open jobs for every person looking for a job, which we've never seen And really our environment, you've seen strong wage growth, which is a positive, but it starts with people that are working. That's a big deal.

Speaker 2

There's still a lot of stimulus around, meaning consumers are still spending some of the stimulus they saved over the COVID environment, But there's still access to a lot of stimulus or social services support in the United States, which is benefiting consumers. So that's a positive. Obviously, inflation is having an impact on confidence, having an impact on some spending and having an impact in some of the lower Subprime or lower income consumers is having a bigger impact there. But kind of broadly, we don't see the consumer Weakening in the second half. We haven't seen our customers thinking about it that way.

Speaker 2

And there obviously, everyone's watching, but you haven't really seen a change in delinquencies, Like card delinquencies are lower than they were in 2019. There's a little uptick in subprime auto delinquencies, But the consumer is strong and it starts with their working and then add to it, those that are homeowners have a bunch of equity in their home, Plus 20%, 25%, 30% versus a couple of years ago that's untapped. So those are all equations that are quite positive around the consumer, which It's going to make in my view, taming inflation quite challenging because consumers are still out there spending. You've seen the banks Kind of credit card spends are up strong double digits. Consumers are traveling.

Speaker 2

They're still spending, maybe not on big ticket transactions, but they're They're still pretty strong and we haven't seen any signs of a changing.

Speaker 3

Other thing which has happened since 2019 is that the percentage of consumers that are actually defined as subprime is just down materially, right? So Down to the on the order of 20% of consumers and was much higher back in 2019 and that's just the strengthening in credit scores you've seen. So that's very material for people's access Credit scores

Speaker 2

were up 15 to 20 points since 2019 still. So a lot of factors supporting the consumer.

Speaker 9

Great. Thank you. That's very helpful. And then switching gears a bit for my follow-up. Mark, I think you alluded to growing the work number Internationally, as part of the 3 year 2025 outlook, I understand in the past you've talked about your right to win there, and your relationships With global organizations as being a differentiator, but just kind of curious, can you speak to kind of go to market strategy there?

Speaker 9

Is it any different in these international markets than what you've developed here through payroll providers and outsourced kind of HR Capabilities or are there differences in those markets that we should kind of keep in mind that make that go to market strategy a bit different abroad?

Speaker 2

No, it's very similar. And we could spend hours talking about all the things we're working on. And obviously, expanding workforce internationally is one of the initiatives that Rudy and his team has. As you know, we're in Rudy and his team has, as you know, we're in 4 markets now. We added UK in the Q1.

Speaker 2

We paused during our cloud Information to go in other markets. We're in Australia, Canada, UK and India. We paused Couple of years ago when we were doing the cloud transformation, but now that we have a tech stack that we've invested a couple of $100,000,000 in, It makes it easy to enter new markets from a technical standpoint. So that's an approach that we have and why we kind of made our first move into the UK Following our cloud transformation at Workforce Solutions, the market dynamics are very similar. Mortgage is a Place where you want to use it and you think about the markets we're in, they have mortgage markets, consumer mortgage markets.

Speaker 2

So that would be a priority for us when we think about future markets. And then the talent side is another one. Using the data for the hiring process is similar. And as you point out, we have some levers with our current Multinationals in the U. S.

Speaker 2

Where we're collecting their records from them directly or through partnerships, But the direct relationships, they want us to do income and employment verification for them in other markets. So that's a positive. And then as you also point out, The payroll processors we do business with today in the U. S, many of them are global. So they want to do this have the same relationship outside the United States.

Speaker 2

And then In individual markets, there's payroll processors or HR software companies that are unique to so many markets and we're developing partnerships with them. So It's clearly part of our strategy. We've got a lot of needle movers in workforce solutions between now 2025. This will be one of the smaller ones, but it's one that we're investing in. I think you'll see more traction out of it perhaps in 2024, 2025, 2020 6th and you will see in 2023, 2024.

Speaker 2

But as you would expect us to do, we're investing in it. And we think we've got a franchise that obviously is It has a strong market position here in the States, and it's one that we want to take global and take advantage of it because there really aren't Other players like Workforce outside the United States.

Operator

Thank you. Our next question is coming from Shlomo Rosenbaum from Stifel. Your line is now live.

Speaker 7

Hi, good morning. Thank you for taking my questions. Hey, can you dig in a little bit more on what's going on with FMS and the offline? And You said it's like the part where you're doing a fraud and header data. I'm just not clear as to what all of a sudden changed in that business.

Speaker 7

Is there something competitively that Changed in where maybe one of the other bureaus are doing better over there or is there anything else happening? And Typically, in a certain point in the cycle, you guys would see a pickup in some of the FMS business as well in terms of portfolio reviews. And I want to know, are they starting to pick up because banks are worried about that, but you're not getting them or they're just not happening?

Speaker 2

Yes. The portfolio reviews are a constant part of the business. But as you point out, in times of economic challenges that Typically, we see some real pickup there. That hasn't happened yet. The financial institutions really don't view The second half of being economically challenged, it's more in the newspaper than it is in the consumer or their results.

Speaker 2

I don't know if you want to touch on the header business again?

Speaker 3

Yes. I think Mark covered, Shlomo, really what's going on with the fraud or header business within FMS, right? We are just We are seeing lower volumes and we're seeing lower levels of activity and for transactions that are occurring, we're looking we're seeing smaller volume Transactions. So, what we're doing is what we talk about, which is working to try to enrich our data sets so that we can again make it More valuable to drive greater differentiation in that market, but we're just seeing it we're seeing that market slow currently. And given that it has, we just made the assumption it's going slow for the rest of the year.

Speaker 3

And as we launch new products, we'll talk to you about them as we do with anything with NPI, and we can give you perspective on how we think That product area may grow.

Speaker 7

Great. Thanks. Just for the follow-up, the other part of the business that you would start to see slowing down would be the background screening area. And Are you seeing anything that's indicating that given the layoffs and stuff that you're hearing from some of the bigger technology companies The polls are really starting to slow or significantly changing?

Speaker 2

No, we're not. And remember, When you think about our business, it's obviously different than the background screening industry because we're so new Kind of dealing with the industry. We have so much penetration opportunity. It's our view that even if the market slows, Our ability to digitize and help background screeners digitize their businesses will mitigate, if you will, or offset Some of that is add to it new products that we'll be rolling out for the background screeners that include other data elements. So when an economic event happens and there is Slow down there.

Speaker 2

We think we'll be able to offset that with some of the new products as well as penetration because we're fairly new. Remember, the TAM for that talent and background screeners is about $4,000,000,000 and our business is a couple of $100,000,000 We've got the opportunity to continue to grow into the data elements of that, even in an economic event.

Operator

Thank you. Our next question is coming from Craig Huber from Huber Research Partners. Your line is now live.

Speaker 10

Great. Thank you. Can you talk a little bit further about how you think your verification service business will do if we go into elongated recession here? And then you guys adding more and more records here. It's a significant part of your business.

Speaker 10

How do you think it will do an elongated recession?

Speaker 2

Yes, I think we've been pretty clear. We think it will do pretty well. As we pointed out in the comments and in prior calls, you go back to 'eight, 'nine, Which was a pretty brutal economic event, the toughest I think we've seen in our lifetimes, it grew through that whole period. I think in 2,008, it grew 17% or something like that. And now it's got more levers.

Speaker 2

Remember back then, It was mostly a mortgage business. And now it's highly diversified into other verticals, government, talent, It's employer services business and then non mortgage verticals inside of financial services. And the ability to add records It's one of many levers that the business has that we think is what makes Equifax So different today versus our last economic event, if you want to call 'eight, 'nine that. Our ability to grow is Significantly enhanced by workforce being such a big part of Equifax and having so many different levers that are either unaffected by a recession Or allow them to actually benefit from a recession like the unemployment claims business.

Speaker 10

And then also The 50% or so of records you get from the outside the partnerships, can you talk about the pitch there that you use to get Those records help these etcetera. And also, if you could just also touch on the historical records that you've built up in your database, I believe in total is like 25%, 30% of your revenues that you get is historical records, not the current person's employment.

Speaker 2

Yes. So first on the direct records that we have. Remember, at the core of Workforce Solutions is what we call our Employer Services or Employer Solutions business. That's where we deliver regulatory and compliance services to companies through their HR managers. And that's where they outsource these activities to Equifax.

Speaker 2

And That's about a $6,000,000,000 TAM. We have about a $400,000,000 business there and where we deliver those services like unemployment claims Management for a company, we do the processing for them, I-nine verification in the onboarding side, work opportunity tax credit, employee retention tax Credit, we do W-two management for employees, meaning if someone needs a W-two, we'll deliver it for them. So all those Services that are outsourced by an HR manager is what we do as a business. And as you know, as I pointed out earlier, we've invested heavily In our cloud transformation to make those services and capabilities more efficient, more effective, and just a better service For the HR manager. So the play there is to continue through our commercial coverage is to drive more outsourcing of those activities to Equifax.

Speaker 2

And for example, like in unemployment claims, we process either 1 in 4 or 1 in 5 unemployment In the United States that are done by 3rd parties, meaning not individual companies, most companies still do it today. So we have real scale in these businesses. And then as a part of that commercial relationship, we're delivering these regulatory services to the HR manager at a company. We also do income and employment verification for free. And they will deliver their payroll records to us that, of course, we monetize.

Speaker 2

In return, we'll do income and employment verification securely. We'll do it with a high degree of privacy. And it allows the HR manager to outsource that activity to us because if we're not doing it for them, They have a call center inside of their HR shop where they're doing it and they're fielding calls from mortgage originators, auto lenders, Background screeners, government agencies to verify income and employment on their employees. So we do that offer free. So a very powerful Value profit we have for the HR manager, which is why we've developed a bunch of relationships and that's why we're also expanding through M and A and like Law Logics, the company that we announced this morning that we're acquiring strengthens us In the I-nine verification space, it delivers records.

Speaker 2

So those are the 5 or 6 acquisitions we've done in the last 24 months to strengthen our Employer Services business. It's Really at the core of who Workforce Solutions is. So we want to continue to invest in technology, in capabilities and bolt on M and A to Strengthen that because not only do we have a very attractive business growing in that $6,000,000,000 TAM, it also delivers records we can monetize very effectively. The The second half of your question was around our historical records. You're right on.

Speaker 2

It's a very big part of our business model. A lot of our verifications are around where does Mark work today, how much does he make today, but a lot of the verifications are want to have need and want to have historical data In order to complete the process and as you point out, we keep every record, every week, every pay period And we're now up to 570,000,000,000 records, which as I mentioned earlier, equates to about 5.5 jobs From a job history status on the average American, in my case, it would be my Equifax records, my Warburg Pincus records and my GE records. So we have those historical records and they are incredibly valuable. And it's a big part of the competitive position or moat we have around the business Those historical records are a big part of that, because the only way you can develop those is over time. And of course, we've been at this for a decade of building out the data set and maintaining all those records.

Speaker 3

And importantly, in non mortgage verification services businesses, about 50% Of the revenues generated from transactions that involve historical records, either historical records only For historical records and current records, so it's 50% penetration of historical records in the transaction. So very, very high and huge differentiation.

Operator

Thank you. Our next question is coming from Simon Klinch from Atlantic Equities. Your line is now live.

Speaker 2

Hey, Simon.

Speaker 11

Hi. How is everyone? Thanks for taking my call and my question here. I just wanted to cycle back to The comments you made about the outgrowth of the mortgage in EWS, and I was just wondering in terms of how to think about the core growth generally that you outlined For Equifax overall, historically, my understanding was that we should think of that as effectively a static Opportunity versus the market that each of those various segments play in. But it sounds like with the comments around EWS That actually, they should be considered to be some level of beta, I guess, to the macro or to the 6 categories market.

Speaker 11

Is that how we should think about things going forward?

Speaker 2

Well, as John pointed out, and we can hit it again, is that in the mortgage Application process, there's a difference in this market than there is in a normal market. John pointed out that there's more consumers or homeowners that are when they're doing a home purchase that are doing shopping for rates. And generally, when a consumer does rate shopping, a credit file will be pulled by the mortgage originator, make sure that Consumer can qualify for the mortgage that they're rate shopping on and then they'll deliver some kind of a response around what rate they can deliver. And the consumer will hit a bunch of mortgage companies in this higher rate environment in order to check rates. And that results in credit polls, which is good for USIS and part of their outperformance, if you will, the number of polls that they have.

Speaker 2

Conversely, in workforce, when you're rate shopping, they don't pull income and employment till further into the application process. It might be When an application is actually filed versus rate shopping, and of course, it's always pulled during the closing of the application. I think John was pointing out a change From a more normal mortgage environment because the rate shopping benefits the credit file and somewhat doesn't benefit The income and employment data. Now of course, workforce solutions has all the levers to outperform The mortgage market starts with as we add more records, we have higher hit rates. So they get more Revenue as they add records and records are up 22%.

Speaker 2

So that's a benefit for them in any mortgage environment. It's still benefiting them today. New products are benefiting them, pure prices. We did a price increase in January, so that's benefiting their business. Penetration is still a benefit.

Speaker 2

Remember, they're only seeing what now 65% of mortgages? A little over We have a little over 60% of mortgages. So as they get out there and remember the credit files used in virtually every mortgage Because it's been around for 50, 60, 70 years. So the ability to drive commercially into those mortgage originators that are not using Our income and employment data from Workforce Solutions. And then as we point out system integrations, which have grown dramatically, but There's still a lot of web access and we know that with web access, we don't get every application for mortgage originator.

Speaker 2

They're doing manual Verification, so you've got multiple levers for workforce to continue to outperform the mortgage market, be it at a bit lower Level than in a normal environment.

Speaker 11

Okay. Yes, I understand that. And then just when I'm thinking about the sensitivity to the up and the down here, Is it would it be fair for me to take the how you've reduced your guidance For revenues and the subsequent flow through to EBITDA, if there was mortgage upside, should I expect that same high level of incremental margin to drop through?

Speaker 2

Yes. Any change in revenue is high incremental margin up or down. And I think as we pointed out earlier, we've opted to continue to invest in the second half for the future of Equifax. So meaning as our Mortgage revenue came down. We're not taking costs out.

Speaker 2

We're focusing on redeploying some costs or still continuing to invest Going forward, John, would you add to that?

Speaker 3

No. We see very high variable margins on the upside and the downside. They aren't necessarily always exactly the same for the reasons that Mark indicated, but The variable margins on our revenue is are certainly quite high.

Operator

Thank you. Our next question is coming from Seth Weber from Wells Fargo Securities, your line is now live.

Speaker 12

Hey, good morning and thanks for taking my question. I actually had A similar question on the margin side. I heard the comments about some increased spending as For this Q2 and through the back half of the year, I was just wondering if you could give us any additional color on what this increased spending is, if that's Opportunistic or is this kind of the new normal sort of framework that we should be thinking about from a margin perspective? Thanks.

Speaker 2

A couple of layers in there. So we still are confident in our plan to increase our margins. So no change Our outlook for 2025 of 39%, no change in the cost benefits that we're going to deliver this year, next year, 2023 from the Cloud transformation, no change in the broader margin expansion. In the near term, we are continuing to invest in New products, obviously, we're still investing in completing the cloud transformation. We have some additional investments on onboarding Some of the new partnerships we have for Records and Workforce Solutions.

Speaker 2

So we're continuing to do opportunistic or maybe target is a better Term investments that we think will benefit 'twenty three, 'twenty four, 'twenty five in 2022. And so there's no question we're doing that. Would you add to that, John?

Speaker 3

Yes. Just current margins, and we talked about it on the call, right, are being significantly impacted by the large reduction in mortgage, Right. And our very high variable margin. So if the question was, is this the new level of your margins, no, as Mark just said, we expect our margins to reaccelerate As the market recovers. But in terms of the exact pace of that reacceleration, we'll give you guidance on that as we get into each individual year.

Operator

Okay.

Speaker 12

And then just as a follow-up, the Internet the guidance for international margin for the year sort of implies a pretty big step up in the second half versus Just the first half, is there something there? Is it just seasonality? Is there something from lower Tech transformation spending or something like that that's happening in the second half versus the first in international? Thanks.

Speaker 3

So historically, you've seen international margins are generally higher in the second half than the first. So we've seen some of that. But we work we did try to be clear in the call that in terms of the level of Acceleration in the margins in international, there is some pressure on that because of the fact we're seeing great growth in our debt management business, but that does have lower margins. So we do expect to see the improvement we talked about, but there is a little bit of pressure on those margins because of debt management.

Operator

Thank you. Our next question is coming from Heather Balsky from Bank of America. Your line is now live.

Speaker 13

Hi. Thank you for squeezing me in. Just a follow-up on Tony's Question earlier regarding outperformance on the mortgage side for AWS. I'm curious With the softer mortgage market, and it sounds like it's a little bit of a lighter outperformance outlook. Where that lightness is coming from, just sort of what is the toggle in a sort of weaker Mortgage market that kind of flows through to that outperformance?

Speaker 13

Thanks.

Speaker 3

Yes. So, In terms of the drivers of outperformance, it's actually workforce is actually performing better than our expectations. They've added records faster than we thought. And so that's actually a greater benefit to outperformance than we would have expected when we started the year, and they've executed very well on both new products And then the pricing programs they put in place at the beginning of the year, which tend to go in, in January. So we know about all those, right?

Speaker 3

The issue is that the reason why the outperformance looks lower than what we saw Last quarter's twofold. One is because all of those factors I just described are all variable with volume. So since volume is declining, Like that level of outperformance and absolute dollar shrinks. So that's why you see a smaller outperformance relative to the market, because it's It's just the math and the measurement. The other thing is what Mark talked about, right.

Speaker 3

We measure the mortgage market. We define it, right, as USIS credit inquiries. Well, since USIS credit inquiries are benefited by shopping and Workforce Solutions isn't benefited by shopping to the same degree, Then what we end up having is USIS gets somewhat of a benefit, and so therefore the market itself is measured as stronger And that provides a little bit of a greater headwind to outperformance to EWS. We don't think that in any way indicates they're not performing as well. They're performing Extremely well.

Speaker 3

And as I said, the actual drivers they can control. They're actually outperforming our expectations in terms of record additions, Products and then obviously good execution on price. And as Mark mentioned, they're also doing very, very well on system to system integration. So we feel very good about the execution that's occurring during the

Speaker 13

Thank you. And as a follow-up, just given sort of stock price performance in the market and your expectation next year for much stronger free cash flow and Returning cash to investors, what are your thoughts regarding using your balance sheet today to potentially return cash versus waiting for next year?

Speaker 2

Yes, it's a great question. We certainly think about it, Heather, but we think the timing is not right for us to do that. As you know, we announced this morning another bolt on acquisition, which we think will benefit Equifax quite strongly going forward. And we're still digesting some of the M and A we did in 2020 So it's certainly on our mind when the time is right to return cash to shareholders both through restarting our dividend and doing a buyback. We don't think Time is right today, but it's coming.

Speaker 2

As we look to 'twenty three, 'twenty four, 'twenty five with our margins Expanding and our free cash flow expanding, we clearly believe we have ample resources to invest in that bolt on M and A, But also have excess cash in the future to return to shareholders and we'll do that at the right time.

Speaker 13

Great. Thank you for your answers. Thanks.

Operator

Thank you. Our next question is coming from George Tong from Goldman Sachs. Your line is now live.

Speaker 14

Hey, George. Hi, thanks. Good morning. In the mortgage space, new purchase originations have been declining relatively sharply in recent months. What assumptions around new purchase volumes are you inventing in your 46% plus mortgage volume decline forecast for the second half of this year?

Speaker 14

And how would you frame the downside risk to your forecast?

Speaker 3

Yes. So, in terms of the way we structure the forecast, We obviously look very closely at the current trends we're seeing. We obviously look very closely at the last 14 days, right, what we're seeing in early July, and we saw we're down 40%. So what and we also look very closely At the trends we're seeing and the movement in inquiries between April, May June, We think that the forecast that we put together or the estimate we used in our financial guidance is very consistent With what we're seeing in terms of movements in the mortgage market itself, we think it's very consistent with the information we shared on new home purchases And the fact that there's certainly weakening as we go through the year relative to what we've seen earlier in the year, we think it's consistent with that. We think it's also consistent with The very low levels of refinance that are currently occurring and really that refinance is at this point almost completely driven by cash out refi.

Speaker 3

Also, I think you saw last night that all 3 of the major parties that forecast mortgage originations refreshed their forecast Yesterday evening, Freddie, Fannie and MBA came out and said they expect originations to be down in the neighborhood of 43.5 And I think all three indicated that origination units, sorry. And I think all three indicated that origination dollars will be down on the order of 46% in the second half. So we feel like with us indicating, you're going to see over 46% reduction In the inquiries, which would imply a 200 to 300 basis points, so think 48% to 50% decline in origination units, We think we've given a very reasonable forecast. We think it's consistent with other third party forecasters. And so we feel like We've done a fairly good job at encompassing the information we have today.

Speaker 3

But obviously, to be fair, very hard to forecast the mortgage market. And What we'll do is we'll just keep letting you know what we're seeing and then any changes that we're seeing that might drive in our output. But Right now, we feel like we've done a nice job of including all the information available, and we feel relatively good about the fact that the other third parties have come out and look to be At or slightly stronger than us.

Speaker 14

Got it. That's helpful. Gross margins in the quarter fell 210 bps Year over year, how much additional gross margin pressure do you expect with input cost inflation trends and changes in revenue mix?

Speaker 3

Yes. I think the big driver obviously for us and what's occurring right now is the impact of mortgage market overall, right, On our

Speaker 2

there really isn't any inflation impact, George, from our perspective in that margin. It's really the loss of that mortgage revenue. It's

Operator

Thank you. Next question is coming from Jeff Meuler from Baird. Your line is now live.

Speaker 2

Yes. Thank you. So I understand the And the argument that Equifax on a consolidated basis, including the recession resistant and countercyclical businesses is relatively resilient. I guess I was surprised that you said that even in your recession impacted businesses, you think they could potentially be flat At the high end of the range in a recession, so could you flush out the argument behind that for us? I'm guessing the short answer is NPI and The other structural growth drivers and verifier, but help us understand how you could potentially be flat in those businesses in a recession?

Speaker 2

Yes. I'm not sure when I said that or John said that, Jeff. We didn't intend to say that. So when we think about our view of Equifax today versus the last recession, we think we're much better positioned. It starts with workforce being So much larger than it was before and kind of broadly in workforce.

Speaker 2

As we point out in 'eight, 'nine, it grew 17% when Equifax was down 6%. It was a very small business in the scheme of Equifax, and it's got more levers today. So we think workforce is positioned to grow in a recession So we're very clear on that. And with that being approaching 50% of Equifax, that's a big factor. We talked about identity and fraud being Kind of a business that we expect to grow through a recession just because of the digital macro is benefiting there.

Speaker 2

There's a couple of businesses that Are quite uniquely positive in a recession like our unemployment claims business, which is part of workforce. So those are 60% of Equifax and then the 40% is kind of the rest of which is our credit business is primarily in international In USIS, those are generally impacted negatively by a recession. Inside of that negative impact, I think I tried to say that The negative of prescreens and volume coming down and originations coming down is dampened somewhat, not offset, but dampened somewhat By account management increasing, by credit line actions and line management actions increasing, so there's More volume there, but we would expect those to have some pressure. Now, you also got to think about the timing of the recession, as you point out, Which is different in Equifax today than 2008, 2009. If you think a recession is going to be in 2023, for example, We've got unique levers we didn't have in 2008,009.

Speaker 2

We're in the throes of completing our cloud transformation. And the cost Savings that come from that are not impacted by the recession. We're going to execute the cloud transformation and the benefits, That 250 basis points is going to flow through. As you also point out, new products is a different game at Equifax today than it was in 2008, 2009. The kind of focus, the resources and the vitality we're delivering, that's going to benefit us in a recession having more solutions In market and being cloud native.

Speaker 2

So those are benefits. And then the 4th point I hit earlier in our comments was around M and A. The acquisitions we've made in the last 24 months, which as you know, is well above historical trends, meaning we've done a bunch of M and A, 11 acquisitions, over $3,000,000,000 of TEV, those are in our run rate revenue, but the synergies Are kicking in, in the latter parts of 2022, 2023, 2024. So that's going to be a positive for us as we think about the recession. So Those are all the factors we put together.

Speaker 2

We haven't done a revenue, EBITDA, EPS forecast on a recession, but we've Trying to share with you some of the factors we think about that are positive and negative, and there's a whole bunch more positives at Equifax Certainly today than there was in the last economic event.

Speaker 3

Thank you. And those recession impacted businesses would decline, right? So yes.

Speaker 2

Got it. Thank you. Thanks, Jeff.

Operator

Thank you. Next question is coming from Faiza Ali from Deutsche Bank. Your line is now live.

Speaker 15

Yes. Hi, good morning. Thank you. My first question, I just wanted to clarify on the margin impact of Mortgages and product development costs, are you able to size the incremental product development costs? Because it seems like your Overall, EPS guidance is a lot lower than I would have thought, just given the Implied revenue decline from mortgages.

Speaker 15

So I'm curious on how big of an impact their incremental impact there is from product development costs. And Are these new products something that you had planned to invest in, in 2023? And is that something that you're maybe pulling forward This year.

Speaker 3

So by far the largest impact in the reduction in our adjusted EPS, we tried to walk through the drivers, right. But In terms of the margin piece, right, outside of interest and outside of the impact of FX, right, By far, the largest driver is obviously the reduction in mortgage and mortgage has very high variable profit, right. So that's what's really driving the reduction In our margin dollars and therefore driving the reduction in our adjusted EPS. And yes, there is some incremental cost that we're investing going forward And as we invest going forward in new products, but that's not the driver. The driver is really the movement in mortgage, Frank, what we were trying to do is to give you a perspective on there's a substantial driver and there's some other things that are impacting Margins as well.

Speaker 3

We talked about investments in the development costs. We talked about some mix issues in international as we grow the debt management business. We also talked about the fact that we get a little bit of a benefit because our variable compensation goes down. We're just trying to give you a perspective on the On different side levers that are playing within the larger impact of the decline in the mortgage market.

Speaker 15

Got it. Okay. Thank you for that. And then just as a follow-up, I'm curious if Experian talked about how There now Fannie Mae has certified them for day 1 certainty. And I'm curious how you think about that.

Speaker 15

Like, is that relevant or important? Are there any considerations for your business at all?

Speaker 2

Sure. It's Mark here. We're aware that Experian is doing Work and investing around the income and employment space, we don't see them commercially yet, meaning that we haven't seen any impacts From their work that they've done, they've got a our understanding is a very small data set compared to our 144,000,000 records or 110,000,000 And so we just haven't seen an impact. That said, it hasn't slowed us down in our investments in technology and products, And of course, in our M and A focus, we're one of our priorities, one of our top priorities around M and A is to strengthen workforce solutions to ensure that we Continue to build the mode and the competitive position around the business and including the acquisition we announced this morning of Wallogix is making that business stronger. We're clearly focused on continuing to build out workforce, which is our largest and fastest growing business.

Speaker 3

In addition to Equifax, there have been multiple companies that have had day 1 certainty for several years. Yes, perfect. So this is not anything new.

Operator

Thank you. We've reached the end of our question and answer session. I'd like to turn the floor back over to Trevor for any further or closing remarks.

Speaker 1

No. I just want to say thanks, everybody, for joining the call. If you have any follow-up questions, please feel free

Operator

We thank you for your participation today.

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Earnings Conference Call
Equifax Q2 2022
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