Equifax Inc (EFX) — Q2 2017 Earnings Call Transcript

Thanks and good morning. Welcome to today's conference call. I'm Jeff Dodge with Investor Relations; and with me today are Rick Smith, Chairman and Chief Executive Officer; and John Gamble, Chief Financial Officer; and Doug Brandberg with Investor Relations. Today's call is being recorded. An archive of the recording will be available later today in the Investor Relations section on our website. During this call, we will be making certain forward-looking statements to help you understand Equifax and its business environment. These statements involve a number of risks, uncertainties, and other factors that could cause actual results to differ materially from our expectations. Certain risk factors inherent in our business are set forth in filings with the SEC, including our 2016 Form 10-K and subsequent filings. Also, we will be referring to certain non-GAAP financial measures, including adjusted EPS attributable to Equifax and adjusted EBITDA margin, which will be adjusted for certain items that affect the comparability and the underlying operational performance. For the second quarter of 2017, adjusted EPS attributable to Equifax excludes acquisition-related amortization expense and the income tax effects of stock awards recognized upon vesting or settlement. Adjusted EBITDA margin is defined as net income attributable to Equifax, adding back income tax expense, interest expense, net of interest income and depreciation and amortization. These non-GAAP measures are detailed in reconciliation tables, which are included with our earnings release and are also posted on our website. Please also refer to our various investor presentations, which are posted in the Investor Relations section of our website for further details. Now I'd like to turn it over to Rick.

Thanks, Jeff, and good morning, everyone. I appreciate you joining us for our call. The second quarter demonstrated another strong performance from the team. Revenue from USIS, Workforce Solutions, and International was robust, with all three units meeting or exceeding our expectations. Global Consumer revenue fell short of expectations, which I will address later. Overall, our revenue performance was strong and aligned with our expectations, even with a more significant foreign exchange headwind than anticipated. The adjusted EBITDA margin and adjusted EPS both exceeded our expectations, thanks to strong revenue growth and high margins from USIS and EWS Verifier, as well as performance in Canada and Argentina. Our results coming out of the second quarter set us up well for the latter half of 2017. Total revenue for the quarter reached $857 million, representing a 6% increase on a reported basis and a 7% increase on a local-currency basis compared to the same quarter in 2016. The foreign exchange impact amounted to approximately $10 million year-over-year, which was more than we foresaw. Adjusted for the effects of currency fluctuations, revenue for the quarter remained within our expectations. The adjusted EBITDA margin stood out at 39.1%, an increase of 250 basis points from a year ago, with solid growth across all business units. The adjusted EPS was also strong at $1.60, reflecting a year-over-year increase of 12%. I will now discuss some business unit activities before passing it over to John. Starting with USIS, there was a strong revenue growth of 8% in the quarter, up from 5% in the first quarter, despite a challenging mortgage market. This growth was broad-based, particularly in the Marketing Services segment, which grew by 15%. This reflects the success of our new products and expanded capabilities through Cambrian analytics and our new delivery platforms. The adjusted EBITDA margin was impressive, rising over 100 basis points from 2016 to 51.5%. We introduced Ignite, our suite of data and analytics solutions powered by Cambrian, which has received a positive response from customers. Ignite’s versatility allows us to offer a range of solutions, from standard to highly tailored offerings, leveraging Equifax’s comprehensive data assets, including trended data. This integration allows our customers to create their own trended attributes and use those alongside our unique data in their custom models. Ignite also serves to develop new models and validate existing ones, resonating well with our customers. We plan to deploy Ignite globally alongside Cambrian, with expansions into numerous countries by the end of next year, including Australia, New Zealand, Europe, Argentina, Chile, Peru, the U.S., and Canada. While still in the early stages, Ignite is progressing well, and we see significant opportunities for the future. Continuing with USIS, we previously mentioned the launch of InstaTouch, a mobile solution that simplifies user identity verification and facilitates easier and secure access to Equifax’s data assets for completing applications and purchases, which enhances conversion rates and reduces abandonment. We are currently operational with a major financial institution and foresee significant growth potential in 2017 and 2018. Although led by USIS, InstaTouch has wide-ranging applications across Workforce Solutions, Global Consumer, and International. InstaTouch benefits from our global decision platform, InterConnect, enabling its global deployment and leveraging our IT infrastructure efficiently. Now, turning to Workforce Solutions, the segment posted a strong revenue growth of 10% for the quarter. The team is effectively penetrating key markets and expanding their business model internationally. Adjusted EBITDA margins increased by 100 basis points to over 51%. Verifier achieved a notable growth of 19%, even amidst a softer mortgage market. The team’s strategy is delivering results, leading to a record number of additions to The Work Number database, with strong performance across various sectors including government and auto. We launched our income and employment verification solutions in Canada, gaining traction with clients in various verticals. Given the scrutiny in mortgage lending practices in Canada, our solutions are well-timed to improve underwriting quality and reduce fraud. Our efforts in Canada highlight our strategic expansion outside the U.S. and present significant global opportunities. In terms of Global Consumer Solutions, revenue performance in the first half of 2017 indicated a significant annual customer delivery shift between the first and second quarters. Therefore, it's essential to assess overall half-year performance against prior expectations, with a 2% local currency growth for the first half, which is below our anticipated long-term growth range of 5% to 8%. We've recognized the shifts in the U.S. consumer market and adapted our strategy accordingly by embracing new channels and expanding into new geographies. Our goal for GCS is to achieve 5% to 8% growth in a softer U.S. paid consumer market through partnerships with both new and traditional players, geographic expansion where our unique data can drive growth, and launching new products based on our distinctive data assets. Although progress has been slower than expected so far, we remain confident in these initiatives’ ultimate success. We anticipate GCS revenue in Q3 2017 to be flat compared to Q3 2016, yet expect a return to growth in Q4, positioning us well for 2018. Internationally, we achieved another impressive quarter with a 10% local currency revenue growth, driven by new products exceeding our targets. We expanded our margins by 250 basis points through growth in higher-margin countries and effective cost management. Europe experienced a strong quarter with 12% local currency revenue growth, especially in the debt management sector, where we are strengthening relationships with the UK government. Collections performance improved, leading to positive outcomes and a robust pipeline for new business. Our core financial data services in the UK and Spain also showed good growth, supported by our expanding Decision Solutions offerings. Asia-Pacific's growth was at 4%, aligning with our expectations, while our Veda acquisition performed well with over 5% growth and a healthy EBITDA margin. Previous year's large one-time projects in Australia impact year-over-year comparisons, but we foresee strong growth in the latter half of 2017. We have appointed Paulino Barros as President of Equifax Asia-Pacific, confident in his ability to implement key management disciplines and reignite our M&A focus in the region. Latin America demonstrated an impressive quarter with 14% local currency growth, led by excellent performances in our largest markets. We continue to enhance our technology capabilities and are on track to deploy InterConnect and Cambrian across the region soon. New Product Innovation in Latin America exceeded expectations, significantly contributing to revenue growth. Canada reported a strong quarter with 8% local currency growth for Q2 and over 9% growth for the first half of the year, driven by impactful new product innovations. Canada secured multiple gains, including a contract with a major financial institution for unique Lean monitoring solutions. Now, I will turn it over to John, who will discuss the financial details.

Thanks, Rick, and good morning, everyone. As before, I will generally be referring to the financial results from continuing operations represented on a GAAP basis. We had solid 2Q and first half results, which puts us on a good path to deliver 2017. Revenue adjusted for FX was within our expectations, and adjusted EBITDA margins and adjusted EPS were very strong and well ahead of our expectations. USIS revenue in 2Q '17 was $332 million, up 8% when compared to the second quarter of 2016. This is very strong considering the impact of the decline in overall mortgage market inquiries. Online Information Solutions revenue was $233 million, up 6% when compared to the year-ago period. Online Information Solutions reflects double-digit growth in Identity and Fraud Solutions and telecommunications revenues. The 6% growth in Online Information Solutions represents very nice acceleration from 1Q growth despite the impact of a weaker mortgage market in 2Q. Mortgage market inquiries weakened in 2Q versus 1Q, declining in the high single-digit percentages in the second quarter, which was consistent with our expectations. Total mortgage-market related revenue for Equifax was up 13%. We continue to expect a significant decline in mortgage market inquiries in 2017, but we now expect the decline to be somewhat less for the full year than the 15% we discussed in our 1Q earnings release. For 3Q '17, we expect the mortgage market to be down 10% to 15% year-over-year, with a significant decline also expected for 4Q. Financial Marketing Services revenue was $61 million in 2Q '17, up 15%. While revenue performance can be lumpy quarter-to-quarter due to project-related revenues in this segment, we were very pleased with our 2Q growth of 15%, which was up nicely on a sequential basis from 1Q. Performance was broad-based within the segment, and we are encouraged by the trends we are seeing. We saw strong double-digit growth in both our traditional credit marketing services to financial institutions, as well as double-digit growth in our other marketing-related revenue streams, including our unique asset and wealth database. Through the first half of the year, Financial Marketing Services revenue was up 9% compared to 4% in the first half of 2016. The adjusted EBITDA margin for USIS was very strong at 51.5%, up over 100 basis points from 50.4% in 2Q '16. As you remember, selling trended data reports to the mortgage industry started in August of 2016. USIS revenue and adjusted EBITDA growth in 3Q and 4Q '17 will be negatively impacted as we lap the launch of trended data in mortgages. Also, the expected 10% to 15% decline in overall mortgage market inquiries creates an approximately 400-basis-point headwind to USIS revenue growth in 3Q '17. Excluding these impacts, we would again expect USIS revenue to exceed our long-term range of 5% to 7%. Reflecting these impacts, we expect USIS revenue growth to be low single-digit percentage in 3Q '17. For the year, USIS revenue is expected to be stronger than we previously expected, but still slightly below their long-term model of 5% to 7%, with this again driven by the headwinds created by the expected decline in overall mortgage market activity. Workforce Solutions revenue was $195 million in the quarter, up 10% when compared to 2Q 2016. Verification Services delivered a very strong quarter with revenue of $130 million, up 19%. Growth was broad-based with strong growth in government, card, pre-employment screening, auto, and mortgage. Our enterprise vertical strategy is working very well as our enterprise sales teams across USIS and Verification Services work together to penetrate markets and deliver innovative solutions to our customers. Combined revenue for USIS and Verification Services revenue was $462 million in the quarter, up 11%. Employer Services revenue of $64 million declined 5% versus last year. Employer Services, excluding our Workforce Analytics business, grew over 7% in the quarter, driven by nice growth in several of our tax and compliance and onboarding solutions. Workforce Analytics, our business that helps employers stay in compliance with the Affordable Care Act, was down about 40% in 2Q '17. We mentioned in our last call that employers completed tax reporting for 1095s and 1094s much earlier in 2017 than they did in 2016, benefiting Workforce Analytics revenue in 1Q but creating a difficult comp in 2Q. Our revenue for Workforce Analytics has progressed in line with our expectations so far in 2017, down a little over 1% for the first half. We continue to expect our total ACA revenue to be about flat for 2017 versus 2016. Looking forward, we expect employers to grow high single-digit percent in the second half of 2017. The Workforce Solutions adjusted EBITDA margin was a very strong 51.2% in 2Q '17, up 100 basis points from 50.2% in 2Q '16. This reflects continued strengthening of mix as high-margin Verifier continues to grow aggressively as well as good cost control. Workforce Solutions grew at 10% was very strong, but down from 1Q '17 due to the significant timing-related decline in 2Q '17 Workforce Analytics revenue. As a result, we expect Workforce Solutions' overall growth to increase in the second half. For the full year, we expect continued strengthening of Workforce Solutions revenue at levels above our long-term model. Global Consumer Solutions revenue at $99 million in 2Q '17 was down 8% on a reported basis and down 7% on a local currency basis. As we discussed in April, 1Q '17 revenue growth was benefited by more than 5 percentage points, as the timing of an expected annual purchase of data by our reseller partner occurred in 1Q '17 versus 2Q '16 in the prior year. Adjusted for this occurrence, GCS 1Q '17 revenue was up about 7% on a local-currency basis and 2Q '17 revenue was down just over 1% on a local-currency basis. For the first half of 2017, local currency revenue is up about 2%. Adjusted EBITDA margin was 31% in 2Q '17 and was 31.4% for the first half. As Rick discussed, revenue performance was weaker than expected in 2Q and is performing below our full year expectation as growth on our geographic channel and NPI growth initiatives has been slower than we had planned. As a result, we expect GCS revenue to be about flat in 3Q '17 and for the full year to be below their long-term range of 5% to 8%. However, as Rick indicated, we do expect to exit 2017 with stronger growth rates and improve the growth again in 2018. International revenue was $231 million, up in 2Q '17, up 6% on a reported basis and up 10% on a local-currency basis. By region, Europe's revenue was $69 million in 2Q '17, up 2% in U.S. dollars and up 12% in local currency. Asia-Pacific revenue was $77 million, up 6% in U.S. dollars and 4% in local currency. This performance was in line with our expectations for the quarter. Our acquired Veda assets grew at over 5% in the quarter, slightly below our long-term expectation, reflecting that in 2Q '16, Veda delivered a large one-time project, which drove significant revenue in the year-ago period. As Rick indicated, for the second half of '17, we're expecting growth for Veda and high-single-digit growth overall for the nine months ending 2017. Latin America's revenue was $53 million in 2Q '17, up 13% in U.S. dollars and up 14% in local currency. Canada's revenue was $34 million, up 4% in U.S. dollars and up 8% in local currency. International's adjusted EBITDA margin was 30.9% in 2Q '17, up from 28.4% a year ago. Margin expansion was outstanding and reflects the focused growth in high-margin products as well as continued execution on a long-term project to consolidate support services. For all of 2017, we continue to expect revenue growth for International to be above their long-term 8% to 10% range. In the quarter, general corporate expense was $48.1 million. For Equifax, adjusted EBITDA margin was 39.1% in 2Q '17, up 250 basis points from 2Q '16. This was outstanding performance and reflected positive revenue mix across the BUs and within the BUs themselves and very good cost control in the BUs and centrally. Looking forward, we expect continued significant year-to-year improvement in adjusted EBITDA margin but not to the degree we saw in 2Q. Revenue mix is unlikely to be as positive as the overall mortgage market weakens and lower margin GCS revenue recovers. The timing of equity compensation grants increases variable compensation expense in 3Q. Investment spending related to EGIs and other significant programs increases in 3Q. This is mostly a timing effect. Additionally, acquisition and integration costs will increase. Our GAAP effective tax rate was 30.9% in the quarter and includes a $4.8 million benefit from the income tax effect of stock awards. Excluding this item, our 2Q '17 effective tax rate would have been approximately 32.9%. Our non-GAAP tax rate for the full year is expected to be approximately 32.5% and somewhat below this level in 3Q '17. As a reminder, our non-GAAP effective tax rate in 3Q '16 was only 29.1% due to the benefit of discrete items. As I mentioned earlier, we expect to continue to see significant year-to-year expansion of adjusted EBITDA margin in 3Q '17, which will drive growth in operating income and adjusted EBITDA at a higher rate than revenue. However, items below operating income, principally the tax benefit in 3Q '16 as well as higher shares outstanding as we have not repurchased shares since the Veda acquisition negatively impact 3Q '17 adjusted EPS growth by about 4 percentage points. In 2Q '17, operating cash flow was $225 million and free cash flow was $176 million, both consistent with our expectations. Through June, operating cash flow was $329 million and free cash flow was $229 million, up 10% and 6%, respectively. Capital spending incurred in the quarter was $47 million. Total debt at the end of the quarter was $2.8 billion and our leverage was 2.32 times EBITDA. We raised cash in the commercial paper market in the last week of June to allow us to repay $272.5 million of bonds maturing in early July. Excluding the additional $272.5 million in commercial paper used to pre-fund the bond maturity, leverage would have been 2.1 times EBITDA. As we have delevered from the Veda acquisition consistent with our plans, we will restart share repurchases in 3Q. As Rick indicated, Equifax performance in the first half of 2017 has been outstanding with local currency revenue up 11% and adjusted EPS up 14%. As Rick will describe shortly, for the full year, our expectations for both revenue and adjusted EPS are improving versus when we gave guidance in February. At that time, we expected the mortgage market to be down about 15%, principally in the back half of 2017 driven by increasing interest rates. We indicated that we would offset the overall 3% revenue headwind caused by the weakened mortgage market by accelerating new product innovation, accelerating growth in nonmortgage segments of USIS and Workforce Solutions, driven by product innovation as well as improved market conditions as increasing interest rates cause an acceleration in growth of credit card and other nonmortgage markets and continued very good performance from GCS and International. As we look at our current expectations for the full year, we expect to continue the strong performance we have shown to date, executing on what we committed. For the full year, we expect NPI to continue to be strong. Overall mortgage market revenue decline will be somewhat less than the 15% we expected, and therefore mortgage revenue in USIS and Workforce will be stronger than expected. USIS and EWS nonmortgage revenue will continue to be strong. We expect market conditions to continue to be favorable, but not at the accelerated rate expected earlier in the year as interest rates have not increased as expected. International growth will continue ahead of schedule. GCS revenue growth being weaker than expected is now expected to be below our long-term 5% to 8% range for the year. Taken together, performance looks to be better than our expectations when we started the year.

Thanks, John. Let me just give you a little color first on the third quarter and then the full year, then the operator will open up for some questions for all participants. For the third quarter at current exchange rates, we expect revenue to be between $853 million and $861 million, reflecting a growth rate of 6% to 7% with limited FX impact for the quarter. Mortgage market headwinds impact third quarter revenue growth by approximately 300 basis points. Adjusted EPS is expected to be between $1.50 and $1.54, which is up 4% to 7% for the third quarter, also with minimal FX impact. Mortgage market headwinds impact adjusted EPS growth by over 500 basis points in the quarter. Also, John mentioned earlier, third quarter 2016 had a tax benefit that did not reoccur in third quarter 2017, and that will impact adjusted EPS growth by about 300 basis points. As you know, our long-term growth model is 7% to 10% revenue growth and 11% to 14% adjusted EPS growth, adjusting for the expected mortgage headwinds. Our outlook for both revenue and adjusted EPS for the third quarter is nicely within our long-term model. The full year of 2017 guidance has improved as we've narrowed the range and increased the midpoint, shifting both revenue and adjusted EPS toward the upper end of our previous guidance. At current exchange rates, we expect revenue to end the year between $3.395 billion and $3.425 billion, reflecting constant currency revenue growth for the year of about 9%. We're increasing the bottom end of our range by $20 million in the guidance we had given earlier, which was $3.375 billion. We expect adjusted EBITDA margin for the year to be above 37%, which is up nicely from our previous guidance. We now expect adjusted EPS to be between $6.02 and $6.10, which is up about 10% and up from our earlier guidance of $5.96 to $6.10, and this reflects the high level of execution by the team and the strength of our diversified business model. Just to refresh your memories, this is on top of the 23% adjusted EPS growth we delivered last year. Within the framework of our long-term model and adjusted for mortgage market impact this year, our full year guidance for both revenue and adjusted EPS is also at the high end of our long-term model. So with that, operator, if you could open up for questions, please.

This is Patrick in for Toni. John, you referenced in your prepared remarks that total mortgage-related revenue was up something like 13% this quarter, while inquiry volumes were down in the high-single digits. I believe you reported a similar level of outperformance last quarter. So I'm just wondering as we think about the third quarter, whether or not that mortgage guidance might be overly conservative?

The performance you observed is not overly conservative. The outperformance relative to the market, which can be defined in various ways, is not just a one-quarter or two-quarter or one-year or two-year anomaly; it reflects a long-term trend. Therefore, we still expect to outperform the market. We have provided guidance based on the mortgage market, which aligns with many economists' views, and we anticipate outperforming that as well.

The big gap you saw in Q2 and Q1 between our performance and market performance, a chunk of it is trended data, right. So we had nice growth from trended data, which started, as we said, in the third quarter of last year. A part of that very wide gap is because of trended data revenue. But as Rick said, we'll still outperform the mortgage market as we go forward.

Great. And then a quick follow-up, if I could. I believe in the past, you've talked about Canada as more of a mid-single-digit grower. Given the stronger performance in the first half of this year, I'm wondering if at least over the next couple of quarters, whether or not we should expect that to be more like high single-digit grower.

You get a lot of noise quarter-to-quarter and geography-to-geography. And I don't pay much attention to that. We get great momentum in NPI, great momentum in Cambrian, and across many verticals. So you may see quarter-to-quarter something outperforming and some quarters underperforming, but long-term, we still felt very good about being in that mid-single-digit growth as we spoke of high margins.

This is Greg calling on for Manav. I appreciate all the color on the mortgage segment. I was just wondering if you could give a little color on how you're thinking about some of the other consumer classes like auto and cars, just given the interest rate backdrop.

I think from a macro perspective, with interest rates not rising as maybe the economy had expected earlier in the year, you're not seeing the growth at the macro level maybe in the car business as you would have expected earlier in the year. But we have a wide array of customers, and we've got some that are doing extremely well. You saw the performance in our marketing services; prescreening was really strong in marketing. Auto, even though you're seeing a plateauing of new car sales in the U.S., projecting it will be over $17 million for the year. As we participate in the used car market as well as the new car market. Used car continues to grow. And we talked about our EWS business being lightly penetrated with a lot of room to grow. We signed a great contract with a partner in that arena in the last 6 months, and that's continuing to fuel growth. So even though new car sales are plateauing, we continue to expect places like EWS and auto to be a good growth driver for us.

On the fraud and ID side, you sounded pretty excited about the InstaTouch and some of the other things you're doing there. A bunch of your peers have also talked about fraud and ID as being an important growth driver. So I'm just hoping if you could give some color on what you think can be the differentiator for you guys versus the peers?

Well, one, it's important to know, Greg, that we think about fraud and ID not just in the U.S. where we have the traditional competitors. It's in countries where we don't necessarily have traditional competitors. You go to Latin America; we plan on bringing fraud and ID we have into those countries. You think about Australia; we're really excited about bringing products like InstaTouch to Australia. So it is a global excitement that you're hearing from us, not just in the U.S. And InstaTouch is very unique. And what makes InstaTouch unique is not just the technology itself and the first-mover advantage. That's one small piece of fraud, by the way. It is also that coupled with our unique data assets that makes InstaTouch really powerful. And by the way, Greg, we also alluded to InstaTouch being a really exciting capability we're bringing to Workforce Solutions. And as you know, Workforce Solutions has the unique capability that we have in our business.

I wanted to ask, Rick, about the financial marketing again, which has historically indicated that strong performance could signal future growth. Do you still believe that this relationship holds, meaning that having the prescreen and other factors in place will contribute to some near-term revenue acceleration?

Good question, George. So the strength, first of all, was in three unique areas. It was the portfolio management, it was prescreen and it's our IXI business; all three exhibited really strong growth. The correlation and connection between prescreen growth and an uptick in online; we talked about this the last few years. There seems to be a slight decoupling. It used to almost be a one-quarter lag between prescreen growth and an uptick in online. We're not seeing that necessarily that correlation. We're keeping an eye on it going forward. And if it does correlate, obviously, that's nice upside for our online business and USIS. We've not seen that direct correlation for the past few years.

Okay. I appreciate that. And then just I might have missed it, but just your confidence on the consumer coming back in the fourth quarter. Is it just a matter of there was a push-out again of some new products, and is that the driver or anything going on in the customer base that might worry you a little bit?

The confidence level, George, is extremely high, and we've got great visibility into contract-level details. And again, if you look at the first half compared to the third quarter, we saw modest growth in the first half, slight decline to flattish in the third quarter. We got that visibility; it gives us a high level of confidence that fourth quarter will exit nicely in the range, and that will bode well for 2018.

Two quick ones. One, you'll mention that you're going to try and get back to doing some buybacks later in the year or in 3Q. On a broader question of capital allocation, how are we still prioritizing things? I know you want to invest a lot organically. But as you look around, is there anything that you're particularly more focused on now inorganically?

Yes. First of all, strategically, Brett, the priority remains the same. It's investing in organic growth, protecting the dividend we talked about, and investing in share repurchase and inorganic growth. As you might guess, we have been focused over the last 18 months on the integration of Veda and deleveraging. So as you think about capital allocation in the back half of this year and going into 2018, John mentioned share repurchase. We're back in that arena and expect us to get back into the arena of acquisitions as well. We do a good job of that, and it's tied to our strategy. We've got a good pipeline and we have the financial capacity to do so.

My second question is about how you prioritize growth opportunities. Given the numerous options available, do you see a greater potential in expanding your existing products into other regions, especially in your well-established markets like the U.S.? Or do you believe there is more room for growth through new product innovations? Perhaps there is a balance between the two approaches?

Yes, let me start at a high level and drill down. Number one, if I had to prioritize a single highest growth prospect we have over the next three to five years, it's obviously The Work Number. We alluded to that; we have had a record number of additions of employers and records to the database. We talked back in October of last year that we had a short-term goal of getting 300 million records on that database. We have blown through that number and are over 320 million, and we're on our way to 350 million. You couple that with the penetration of different verticals; you penetrate and get smarter in that arena and take that then global. So Work Number is by far the number one area that I see for growth over the next five years in the U.S. and globally. Number two, obviously, NPI is always a very strong part of our growth, and that hits across many verticals and many countries. Categorically, we've talked about fraud being a very, very important market for us. We talked about InstaTouch just a second ago, and that hits all markets. Your comment on moving products around the country, we're getting better at that. That's a big part of what we are. It's cost-efficient and effective to do. We'll continue to move things like our OSHA platform globally, Cambrian globally. Ignite will be another area in both direct and marketplace. It excites us as we port Cambrian worldwide. And yes, debt services is interesting; we tend to talk a lot, and there may be some questions today about Indesser. Debt Services in Indesser that the UK government has been a great growth driver for us. The interesting thing is over 50% of our revenue for debt services now comes from opportunities outside of Indesser and roughly 30% to 40% of it is outside of the UK altogether. We're deploying debt services now in virtually every country we operate around the world, and that's a great driver of growth this year, next year, and beyond.

Can you clarify which part of the consumer segment fell short in the second quarter compared to your expectations? Additionally, as you look ahead to 2018, could you provide more details on which areas of the business you anticipate will perform better qualitatively, considering you mentioned having visibility on specific contracts?

Yes, the miss was in our direct business. We are working to reposition the business as we discussed earlier. We have a four-pronged strategy that Dan Adams and his team are implementing. New product introductions are a key element of this, as well as globalization, collaborating with our indirect partners, and acquiring new indirect partners. This is not a quick fix; it’s a continuous effort to reposition the business that has been underway for six to nine months. John, would you like to add anything?

Actually, the biggest area was really the consumer direct business and also some of the white-label areas just didn't quite show the growth that we expected. As Rick said, we didn't see the expanded growth through channels and geographies that we had expected we would see in the quarter, and that's just lower than we thought.

And Tim, to reiterate, we have great transparency. We can look at contract levels, customer levels, product levels, channel levels and we wouldn't see replacing. We've got confidence in returning to that long-term growth model in the fourth quarter unless we saw it, and we do see it.

So we refinanced it with commercial paper. So the debt level didn't change but the mix of debt did.

It is, but it's extremely small. It is not closed yet, to be clear. The hope is that it gets closed sometime here in the third quarter, but it will be de minimis in the third and fourth quarter. More importantly, it's strategically an opportunity for Dan to get in that world of the benefits world and sell and monetize products. So long term, we're very bullish on that; I mean in 2018, but in 2017, yes, it's in our guidance but it's de minimis.

This is Gunnar Hansen in for Gary. I just want to touch base. I guess going back to Veda, you guys cited the one-time project making for a tough comp last year. I guess any sense as to how big that was? And I guess, just the underlying growth in Australia and Veda in particular? And any particular product or verticals that are seeing strong growth or maybe a little more insight there?

Yes, regarding the guidance we provided in the second quarter, we were fully aware of the one-time contract from last year, so it wasn't unexpected for us. We are very optimistic about Australia and Asia overall. We anticipate strong growth to round out the year, with a solid third quarter and a strong fourth quarter. We are well-prepared for next year, and the economic outlook for Australia looks promising. The expected growth for next year is between 2.3% to 7%. Paulino is there to speed up the adoption of our platforms, products, and processes, so I remain very positive about the entire region.

We also said that we're going to see for the last 9 months of 2017 growth in the high-single digits, so that includes the second quarter. And that high-single digit is at the high end of the range we indicated we'd see for Veda when we acquired them. So again, we feel very good.

Gunnar, the latter is the more important. As we talked about, it's a nice revenue contributor. But more importantly, it gives us the kind of cache and credibility in the digital market space, and we're seeing the benefit of that.

Couple of questions for you. I guess, first of all, Rick, it's good to hear that Verifier is enjoying new vertical growth. Can you talk a little bit about how penetrated you think you are at some of those new verticals and how long the runway might be for sustainable growth in that subsegment of EWS?

Yes. Andrew, it's amazing. I say this all the time. One, the visibility into the long-term growth is phenomenal. Meaning we see the levers that we can pull to continue to grow. If I look out 5 years, I see significant growth over the next 5 years for that business just in the U.S. alone, and it could even be longer. And then you say growth; planting the seeds we're planting in Canada, Australia, U.K. gives you confidence in growth for years to come even after that. So vertical penetration and expansion, I think there's a whole new world of things we can do in that entire employer space and HR space that is yet to be tapped. So I'm extremely bullish. It's been a hell of a run for us since we bought that company 10 years ago. On the revenue side and the profit side, converting the model from a BPO model to a data and analytics and insight model is remarkable. It shows through, as you know, in the top line as well as the margin expansion. It would not be farfetched to say that in a period of time, that may be our largest, most profitable business we have in the world.

Okay. I mean, that's exciting. And obviously, there are lots of moving pieces still around ACA. But given what you know today or where you think we are in the potential legislative process, barring, say, a full repeal of ACA, it sounds like EWS is a business that could grow above your current long-term trends for some time. Is it reasonable to expect that as we get clarity, you might be upping those targets?

Right now, we're assuming that there is a continued headwind around ACA. And if that changes, if there's no repeal and no replacement, obviously, that bodes well for the analytics business within EWS.

But as an example, for the second half an employer, we're expecting to see the whole employer business to grow nicely in the second half of the year, right. So kind of high single-digit range. So we've not only seen good growth in Verifier, we're seeing good growth in employer as well, and that's with a flat FWA business.

John, why aren't we seeing an uptick in the minority interest as Indesser is doing better? Or shouldn't we start to see that increase more?

Minority interest generally increases with the performance of our International properties because we have partners in many of these locations worldwide. While it doesn't always align perfectly due to variations in performance across different countries in each quarter, you can expect that as International growth accelerates, minority interest will also rise. We factor this into our EBITDA calculations.

And Shlomo, that's not new. We've had those partnerships for a long time. In many cases, as long as my tenure here; in some cases like Russia, where it's occurring since we've been there, but that's not a new phenomenon for us.

I'm just wondering, is that what we should expect though over the next year or so that we should see this line item expand as Indesser does better?

Well, the line item will expand in general as International does better, right, because the partnerships are broader than just Indesser, right. The impact of minority interest is really driven by improvements in Argentina, in Chile, in Spain, and in other parts of the world where we have partners.

On the global consumer side, the Direct-to-Consumer aspect is slower than expected, particularly regarding market entry and new product introductions. I understand your confidence for Q4. When you mention delays, are you referring to slow market entry or a slower market adoption rate once we're established? Also, for the Direct-to-Consumer segment in Q4, are you expecting stabilization in the year-over-year trend or is there a possibility of continued decline despite your projected growth?

Yes, Jeff, it's largely stabilization on DTC. And really, the slowness was not as geographic expansion in new geographies, but it might be taking products into new geographies and products into existing geographies. To be honest, that was execution mostly around NPI within GCS. But to your question, we do expect DTC to slow, stabilize in the fourth quarter. The confidence level is very high that we'll be back in that range.

That's not a surprise. We saw good growth in Verifier; we're seeing good growth in employer as well, and that's with a flat FWA business.

With that, operator, we will terminate the call. I appreciate everybody's time and interest in Equifax, and have a good day.