Equifax Inc (EFX) — Q4 2019 Earnings Call Transcript

Thanks and good morning, welcome to today's conference call. I’m John Gamble, Chief Financial Officer. With me today is Mark Begor, Chief Executive Officer. Today's call is being recorded. An archive of the recording will be available later today in the Investor Relations section in the About Equifax tab of our website at www.equifax.com. During this call, we will be making certain forward-looking statements including full year 2020 guidance to help you understand Equifax and its business environment. These statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially from our expectations. Certain risk factors inherent in our business are set forth in filings with the SEC including our 2018 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, which will be adjusted for certain items that affect the comparability of our underlying operational performance. For the fourth quarter of 2019, adjusted EPS attributable to Equifax excludes accruals for legal matters related to the 2017 cybersecurity incident, costs associated with acquisition-related amortization expense, the income tax effect of stock awards recognized upon vesting or settlement and foreign currency losses from remeasuring the Argentinean peso-denominated net monetary assets. Adjusted EPS attributable to Equifax also includes legal and professional fees related to the 2017 cybersecurity incident, principally fees related to our outstanding litigation and government investigations, as well as the incremental non-recurring project cost designed to enhance our technology and data security. This includes projects to implement systems and processes to enhance our technology and data security infrastructure, as well as projects to replace and substantially consolidate our global networks and systems. These projects that will transform our technology infrastructure and further enhance our data security were incurred throughout 2018 and 2019 and are expected to occur in 2020 and 2021. Adjusted EBITDA is defined as net income attributable to Equifax adding back interest expense, net of interest income, income tax expense, depreciation and amortization and also as is the case for adjusted EPS, excluding accruals for legal matters related to the 2017 cybersecurity incident, costs related to the 2017 cybersecurity incident and foreign currency losses from remeasuring the Argentinean peso-denominated net monetary assets. These non-GAAP measures are detailed in reconciliation tables which are included with our earnings release and are also posted on our website. I would also like to welcome back Jeff Dodge who’ll be rejoining us for the next several months until Trevor Burns returns from his medical leave. Mark and I would like to thank Jeff for stepping back in; it is greatly appreciated and Jeff has joined us today. Now I’d like to turn it over to Mark.

Thanks, John and good morning everyone. If you’ve been following the news this week it was another busy week here at Equifax. Before I get into the fourth quarter financial results, let me just spend a few minutes on Monday, the Department of Justice and FBI announcement on their indictment of four Chinese military officials for their role in the 2017 cyber-attack on Equifax. We’re pleased that the FBI and DOJ were successful in identifying the criminals who attacked Equifax and U.S. consumers. Monday’s announcement is another positive step forward for Equifax as we close the chapter on the 2017 event. Continuing on the 2017 cyber event, you may recall we took a $700 million charge in the first half of 2019 related to the comprehensive settlement of the most significant legal and regulatory matters facing Equifax. In the fourth quarter, we recorded an additional charge of $100 million related to the resolution of all remaining U.S. legal proceedings and investigations arising from the 2017 cybersecurity incident. This charge includes settlements in the securities class action and the shareholder derivative litigation. The financial institutions class action and lawsuits by the States of Indiana and Massachusetts, who did not join last year’s multi-state Attorney General Settlement. The charge also includes an estimate to resolve the remaining open U.S. proceedings and investigations. This charge is net of insurance proceeds related to these matters. The matters for which no estimate is included in this charge are the resolution of the review being undertaken by the Financial Conduct Authority in the U.K. and the Canadian Consumer Class Action Litigation. Consistent with prior legal settlement charges related to the 2017 cybersecurity incident, the $100 million net charge is excluded from our fourth quarter 2019 adjusted EBITDA and adjusted EPS. In January the court granted final approval for the multi-district consumer class action settlement we entered into in 2019. The timing of when the remaining approximately $360 million of the consumer restitution fund will be paid depends on the resolution of the appeals filed related to this case. The timing of that resolution of the appeals is still uncertain. Details on the status of all outstanding legal and regulatory issues will be provided in our 10-K to be filed later this month. Monday’s indictment by the Department of Justice and our resolution of the U.S. matters related to the 2017 cyber event allows our team to fully turn the page and focus on our EFX 2020 Security and Technology transformation and growth as Equifax is a leading data analytics and technology company. Let me move now to our fourth quarter results. We’re very pleased with our financial performance in the fourth quarter and strong progress in 2019. The results were broad-based, showed sequential improvement, were above guidance, and were another very positive step forward for Equifax. These results are our strongest since the 2017 event and reflect Equifax's return to a more normal growth mode. Revenue at $906 million was up 10% in constant currency and up 8% on an organic constant currency basis and above the top end of our October guidance. We had strong revenue growth driven by our two U.S. B2B businesses, USIS and EWS. They collectively grew a strong 13% overall with workforce solutions up an impressive 22%, and USIS up a very solid 8%. The 22% growth at EWS was the strongest since 2016, and USIS’s second half performance was their strongest since 2015. U.S. mortgage market inquiries remain strong, with inquiries up just under 21% and consistent with our guidance. International delivered 4% constant currency revenue growth with growth in all regions in the quarter, but with continued pressure from the slowdown in Australia, Brexit uncertainty in the U.K., and most recently the unrest in Chile. Global consumer continued their path back to growth with revenue up almost 3.5% and, as I expected, showed improving revenue growth driven by the recovery of our U.S. consumer business. Adjusted EPS of $1.53 per share was at the top end of our guidance provided in October. The adjusted EBITDA margin of 35.2% grew nicely, up 200 basis points compared to 2018. While we’re seeing increased depreciation and duplicate cloud costs as our transformed systems move into production, these costs were in line with our guidance provided in October. Let me move now to the individual business units. First, USIS; their revenue was up 8% versus the fourth quarter of 2018 on a reported basis and 5% on an organic basis. Total mortgage revenue was up just over 20% consistent with the growth of the mortgage market inquiries. Mortgage solutions revenue was up 19% in the quarter, much stronger than prior quarters in 2019 as we left the negative impact of the mixed shift from a large mortgage reseller, which occurred in the fourth quarter of 2018. Our non-mortgage revenue growth grew 3% in the quarter and non-mortgage organic growth was positive again, but up only slightly compared to last year. This was lower than the third quarter and lower than our expectation and reflects the continued choppiness of the USIS recovery that we’ve discussed over the past two years. We saw continuation in some very positive trends in USIS and feel good about accelerating USIS non-mortgage organic growth in 2020. Online revenue in USIS was up 7.5% on a reported basis and up 4.5% on an organic basis. We saw double-digit growth in mortgage, ID and fraud, insurance and data analytics, as well as in auto and banking. These are all very important verticals for USIS. This growth was principally offset by declines in our telco segment and our direct to consumer segment. Direct to consumer is the segment in which USIS sells credit files in scores to other credit reporting agencies. This was down due to a one-time sale that occurred in the fourth quarter of 2018 that did not repeat. We expect this segment to return to growth in the first quarter of 2020 and while telco saw a decline in the quarter, we’ve been very successful with recent customer wins and win backs and see a clear line of sight to growth in telco as we move into 2020. Financial marketing services revenue was up 3.5% in the quarter compared to last year. For the full year 2019, FMS delivered 2.5% revenue growth as compared to 2018. While quarterly FMS revenue was still choppy, they delivered growth in three of the four quarters in 2019, which we view as positive. The revenue growth reflects the continuing growing pipeline that we discussed over the past couple of quarters in that business. Sid Singh and the USIS team continue to show accelerating commercial activity through 2019 with good momentum coming out of the fourth quarter and into 2020. Their new deal pipeline is up 15% at year end 2019 versus year end 2018 and new deals won in 2019 increased over 2018 by almost 25%, and in the fourth quarter, the dollar value of new deals won was the highest it’s been in the past four years. We continue to believe that our differentiated data assets coupled with our technology investments will return USIS to its traditional growth mode. The fourth quarter and 2019 results show that they’re well down that path. USIS adjusted EBITDA margins of 45.1% were down 240 basis points from the fourth quarter of 2018, primarily due to increased royalty costs as well as higher development expenses and investments in data analytics, commercial resources, and new product resources. Shifting now to Workforce Solutions, they had a very strong quarter with revenue up 22% compared to last year, which was much better than our expectations. Verification services revenue was up an extremely strong 33% driven by broad-based strong double-digit growth across mortgage, healthcare, debt management, auto, government, and talent solution verticals. The strong and broad-based verification services revenue growth reflects continued growth in work number active records as well as the rollout of new products, expansion into new verticals, and the addition of new customers. EWS and verification services revenue growth, excluding the benefit of the mortgage market, were up a strong 12% and 19% respectively. Rudy Ploder and the EWS team did an outstanding job in 2019 growing their business and expanding the Twin database. Twin has almost 105 million active records at the end of 2019 and over 82 million active unique individuals, up 15% from a year ago. These compared to the roughly 170 million including self-employed individuals in the U.S. non-form payroll which gives us plenty of room to grow our database in the future. As you know these Twin records really drive our revenue generation for our customers and benefits to U.S. consumers. Our system-to-system integrations with our customers allow us to monetize additions to the Twin database as soon as they’re added by delivering the higher hit rates to our customers as they access our database and their system-to-system applications. Employer services declined in the quarter by 6% and in line with our expectations, primarily due to the expected declines in workforce analytics, our ACA business, as well as our unemployment claims business. The strong verifier revenue growth resulted in strong adjusted EBITDA margins of 47%. Margins were lower in the quarter compared to the prior year, principally due to incremental third-party implementation and royalty costs associated with the Twin records expansion and some higher selling costs. Workforce Solutions is clearly Equifax’s best business and they continue to deliver strong results with significant future growth potential. Shifting now to international, their revenue was up 4% in local currency and almost flat on a reported basis. This was weaker than our expectations. The majority of the weakness compared to our expectations was in Latin America, particularly in Chile and to a lesser degree in the U.K. debt management business. Importantly, we saw a better than expected performance in Asia Pacific, including Australia. I’m encouraged about the trajectory of the international business given the revenue growth posted in the second half of 2019 despite the continuing economic headwinds in Australia, Chile, and the U.K. Asia Pacific, which is primarily our Australian and New Zealand businesses, was up almost 1% in local currency in the fourth quarter versus the fourth quarter of 2018 and 1.5% for the second half of 2019. Importantly in Australia, we saw our consumer and commercial online revenue which combined represents just under half of Australian revenue grow about 5% in the quarter. We also saw nice growth in our identity and fraud business as well as our HR solutions business. We continue to see weakness in our marketing services business, which we expect to continue, but at a lesser extent through the first half of 2020. I was in Australia two weeks ago with our new leader Lisa Nelson; she and her team are focused on returning the business to growth in 2020. We expect local currency Australia revenue growth to return to normal in the first quarter and strengthen in the second half of 2020. The Australian business continues to make very good progress with positive data, and by the end of the fourth quarter we had 80% of positive data from contributors, including 90% of the credit card and mortgage data for Australia. We expect this additional data to be a new lever for growth for the business in the future. Shifting now to our European businesses which were up 1% in local currency in the fourth quarter and weaker than our expectations, primarily in our debt management business. Importantly, our European credit business was up 5% in local currency and improvement from the up 1% in the third quarter of 2019 and their strongest performance in 2019. Consumer online and batch, which represents almost 60% of our European CRA revenue, was up 3% in the fourth quarter. Our Analytics and Scores business and Ignite InterConnect revenue grew double digits in the quarter, and this growth was driven by strength in FinTech and financial services. Commercial and ID fraud revenue was weak in the quarter. Our European debt management business declined 7% in local currency, principally in Spain, and our debt management business with the U.K. government did return to growth in the fourth quarter which was positive. However, we expect the overall debt management business to remain weak through the first quarter of 2020 as the Brexit situation normalizes. Shifting to our Latin American business, they grew a strong 10% in local currency in the fourth quarter of 2019 despite the impact of Chile due to the recent unrest. We saw double-digit constant currency growth in Argentina, Ecuador, Uruguay, El Salvador, and Mexico. We’re seeing growth accelerate as our Latin American businesses benefit from the expansion of Ignite and InterConnect SaaS customer rollouts and strong NPI rollouts in 2018 and 2019. Canada was up strong 9% in local currency in the fourth quarter and 8% for the full year reflecting a continued focus on customer renovation and new products. Canada continues to be a very strong growth market for Equifax. International adjusted EBITDA margins at 36.4% were up 400 basis points compared to the prior year. The strong recovery in margin reflects both the return to growth in the quarter and the benefit of the cost actions we implemented in the fourth quarter of 2018 and during 2019, as well as improved income from minority investments. Shifting now to Global Consumer Solutions revenue, that business was up 3.5% on a reported and constant currency basis in the fourth quarter, a substantial improvement from the 50 basis point increase in the third quarter of 2019. Global consumer direct revenue, which represents just under half of our total GCS revenue, was down only 1% in the quarter. Double-digit growth across the U.K. and Canada’s combined consumer direct businesses was offset by an 8% decline in U.S. consumer. Although a slightly greater decline in the U.S. than we’ve expected, it still represents a substantial improvement from the double-digit decline in U.S. consumer direct we saw in the third quarter and earlier in 2019. Our GCS partner business increased 6% in the quarter as a result of solid growth with our U.S. partners, our benefits channel, and our Canadian business. Our GCS partner team continues to close new logos, and their pipeline has grown nicely from this time last year. GCS adjusted EBITDA margins of 26.9% increased by 580 basis points compared to the prior year and increased 200 basis points sequentially in the third quarter of 2019. As expected in the fourth quarter, we saw effective revenue growth and the benefit of cost actions taken earlier in 2019. The GCS team has done an excellent job turning this business around and returning it to growth. Dann Adams, our leader of GCS, retired from Equifax in late 2019 after a 21-year career at Equifax. I want to personally thank Dann for all his contributions to Equifax including his presidency of USIS, EWS, and GCS during his career. Dann leaves a tremendous legacy and will be missed. Taking over for Dann is Bev Anderson, who joined us after more than 30 years of experience in financial services. Bev joins us from Wells Fargo where she was most recently responsible for leading the growth and transformation of their consumer credit card business and operations. I’m really excited to have Bev join my leadership team and to lead the GCS business. Turning now to our technology transformation. In the fourth quarter, we reached some significant milestones in our $1.25 billion EFX 2020 Security and Technology transformation. As you recall, we launched a three-year program in 2018 to migrate our data and applications to the Google Cloud. We made significant progress on the implementation of our U.S. data exchanges and the new cloud-based data fabric during 2019, and we have some real momentum as we move into 2020. As of today, initial migrations of the work number and CTUE, auto, Target Connect, and our IXI Wealth Exchange in cloud-native environments are complete. We expect to begin delivering in production to customers from these migrated exchanges as early as March, with complete migration of all data ingestion processes and legacy system decommissioning completed over the next six to twelve months. By the end of the second quarter in 2020, we expect to have completed the initial migration of our U.S. commercial exchanges, property exchange, and our data exchange and by the third quarter of 2020, the initial migration of all U.S. exchanges including our property exchange, U.S. consumer, or ACRO exchange, are both scheduled to be completed. These data migrations to the cloud are meaningful milestones in our technology transformation program. Our Ignite Analytics and Machine Learning platform that includes Attribute and model management capability is integrated with InterConnect, and will be fully available for our customer migrations at EWS by the end of the first quarter and at GCP by the end of the second quarter 2020. This will include the ability for customers to easily ingest and manage their own data as well as Equifax data in their own Ignite instance. We continue to make strong progress globally and rolling out our Ignite Analytics platform with over 150 customers now using Ignite Direct and Marketplace. NDT, our proprietary explainable machine learning technology, has now been deployed in Ignite development with over 30 customer models. We a few weeks ago, we received our second U.S. patent for NDT. We’re also making progress internationally with our cloud transformation. The initial migration of the Canadian Consumer Risk Exchange and known fraud exchange to GCP and EWS will occur by the end of the second quarter of 2020, with similar progress in the U.K. and Australia and New Zealand. Consumer exchange is expected by year-end. We’re also seeing accelerating progress in the migration of our customers onto our cloud-based InterConnect and Ignite API framework. This is the common set of services on which we’re working to migrate all USIS, EWS, and International customers. By the end of the first quarter of 2020, we expect to have migrated approximately 1,000 U.S. customers with similar amounts in International. This pace will accelerate significantly through 2020 with the vast majority of U.S. customer migrations completed by early 2021. As we’ve discussed, customer migrations are certainly the most challenging part of our technology transformation to forecast. But we’re very pleased with customer enthusiasm for the benefits of our new cloud-native environment and the accelerating pace of customer migrations. I hope this gives you a sense of the significant progress we’re making in our technology transformation that will deliver industry-leading cloud-native technology to our customers. We are laser-focused on execution and have continued good momentum as we move into 2020. Shifting now to new products; this remained a key component of our EFX 2020 strategy and a long-term muscle for Equifax. We have an active pipeline of innovation and new products and we’ve launched over 90 new products in 2019, up 50% from 2018 and up from the guidance we provided in October. As you well know, innovation and new products fuel our growth and are integral to our strategy. Importantly, USIS product launches were up two times in 2019 and are back to the levels we were seeing in 2016. EWS also had a very strong new product year, doubling their new product launches. Innovation and product rollouts will get increasing focus from our team in 2020 and 2021 as we leverage the unique benefits of our cloud-native data fabric and cloud-based applications to deliver capabilities and new capabilities to our customers. It is a key lever for Equifax growth in the future. In 2019, USIS launched new or enhanced products in marketing including enhanced email append services, pre-screen, and pre-approval of one. In identity and fraud, we introduced the new Luminate fraud product suite and Synthetic ID 2.0, and several vertical-specific products in commercial which allow our customers to take advantage of our broad commercial lease payment dataset with the acquisition of PayNet in real estate for lead scoring, a new inside score for personal loans, and for the insurance industry, the new Inflection Score which we developed jointly with Verisk. EWS also expanded their product offerings through the addition of new data assets including education, property, and other data to augment their unique income and appointment data which is part of their path towards being a data hub that centers around their income and employment data asset. EWS’s new product included expanded mortgage product offerings as well as new talent reports to support the identification of loan stacking for the personal loan industry. International also had a strong year with new products increasing launches over 30%, with good distribution across all of our geographies. The strength in international new product introductions is driven by over 100 customer Ignite installations at our international customers. As you can see, we really prioritized our focus and resources on driving innovation and new product introductions in 2019, and we plan to invest even further in innovation and new products in 2020 and beyond. New product initiatives continue to be an increasingly important lever for Equifax growth, particularly as we leverage the new product opportunities in front of us from the cloud transformation. We also recently announced new partnerships with rent reporting platforms including Esusu, MoCaFi, and Zingo to help develop a more complete picture of our consumers' financial profile from rental data. These rent reporting platforms enable customers to often include rental payment data as a part of their credit report to allow for a more complete picture of their financial history. All three companies, as part of their credit education initiatives, will also present their users with a free weekly or monthly Vantage score so consumers can track score changes over time. We believe these partnerships are a win for consumers and a new data source for Equifax. Earlier this month, we completed the acquisition of the remaining interest in our India business to take 100% control of that business. We view India as a strategic long-term market with tremendous potential with our unique data assets and capabilities. Wrapping up and looking back at 2019, we made tremendous progress in executing against our EFX 2020 strategy. We’re convinced we’ll return Equifax to market leadership and growth as a leading data analytics and technology company. We have strong operational momentum coming out of 2019, with revenue growth in the second half of 2019 at almost double the pace of our first half performance. This second half acceleration, particularly in our U.S. businesses, as well as a return to year-over-year growth in EBITDA margins and adjusted EPS positions us well for 2020 and beyond. Monday’s announcement of the DOJ indictment, along with our resolution of the principal remaining legal issues related to the cyber event, is another very positive step forward for Equifax that allows us to close the chapter on the 2017 event and turn our focus fully towards the future growth of Equifax. Our $1.25 billion EFX 2020 cloud-native transformation has accelerating momentum, and we’re now implementing in production major exchanges as well as our Ignite Analytical environment in our cloud-native infrastructure. We are also actively migrating customers onto our cloud-based InterConnect Ignite API-based platform, and we’re equally energized about all the learning and improvements that our cloud-native environment will drive in terms of innovation, speed to market, new products and solutions, always-on stability, and the cost and cash savings we’ve discussed previously. We remain convinced that our cloud investment will be transformational for Equifax and will drive our top and bottom line in the future. We continued our focus in 2019 on advancing our already differentiated data assets by adding significant new data capabilities in the U.S. through our PayNet acquisition and in our partnerships with FICO, Yodlee, and Urjanet. This focus on expanding our data assets will continue in 2020 and beyond. We continue to make big investments in our data security to deliver on our goal of being an industry leader in data security. Lastly, we have the right team in place for the future of Equifax. Over the last two years, we have brought in strong talent to my leadership team and the broader business. We’re all aligned on returning Equifax to growth and market leadership. We’re energized by all that we accomplished in 2019 and the momentum in the business as we move into the first quarter in 2020. We know we have a lot of work still in front of us, but our focus is clear around executing our $1.25 billion cloud technology transformation while driving new innovation and products that will accelerate our growth in the future. With that, let me turn it over to John.

Thanks Mark. I’ll generally be referring to the financial results from continuing operations represented on a GAAP basis, but we’ll refer to non-GAAP results as well. In the fourth quarter, total non-recurring or one-time costs related to the cybersecurity incident and our transformation, excluding the $100 million in legal accruals that Mark discussed, were $82 million and below our expectations, principally due to lower legal fees. The cost includes $76 million of technology and security and $6 million for legal and investigative fees. For all of 2019, U.S. mortgage market inquiries were up over 6.5% versus 2018, which is in line with what we had expected in October for 2019 inquiries. Fourth quarter 2019 inquiries were up almost 21%, consistent with what we had expected in October. In the fourth quarter, mortgage-related revenue represented just over 19% of Equifax revenue. As a reminder, the estimate we provide is for 2020 mortgage market credit inquiries. We base our estimate on multiple third-party forecasts of mortgage originations in dollars including MBA, Fannie, and Freddie. Our current forecast originations to be about flat in 2020 as we believe, only slightly more positive on the order 50 basis points than the current MBA originations forecast of down 7%. Inquiries can mean a lot from originations, principally due to mortgage tight mix and timing of inquiry versus closed lines. In the fourth quarter, general corporate expense was $211 million excluding non-recurring costs, adjusted general corporate expense for the quarter was $72 million down $4 million from fourth quarter 2018. Adjusted EBITDA margin was 35.2% in fourth quarter 2019, up 200 basis points from fourth quarter 2018 and up 130 basis points from third quarter 2019. As we discussed in October and covered in Mark’s comments, the increase in overall adjusted EBITDA margins year-to-year is driven by positive mix as high margin USIS and EWS had the highest revenue growth rate in fourth quarter 2019. Growth in margins and international and GCS, as well as leverage on corporate cost as revenue grows. Margin declines in USIS and EWS from strategic investments partially offset these increases. In fourth quarter 2019, the effective tax rate used in calculating adjusted EPS was 22.7%, slightly below the approximately 23% we had provided for guidance for our fourth quarter 2019 in October. We expect our 2020 effective tax rate to be about 24%. Full year operating cash flow of positive $314 million was down $358 million from 2018. The decline was principally driven by the following non-recurring items: Equifax made payments of $341 million in third quarter 2019 for the consumer settlement announced in the second quarter; no such payments were made in 2018; and payments related to the $57 million of restructuring charges taken in fourth quarter 2018 and first quarter 2019 totaled $36 million. Capital spending or the incurred costs of capital projects in fourth quarter 2019 and year-to-date was $90 million and $376 million, down $28 million and up $8 million respectively from 2018. Excluding payments related to settlements of litigation or regulatory actions, full year 2019 free cash flow was above $250 million and was better than our expectations. Now let’s take a look at 2020. 2020 is an important turning point for Equifax's 2020 Security and Technology transformation as we accelerate the move of our data exchanges to data fabric at GCP. Our customer transitions to our Ignite InterConnect API framework, and our identity and fraud customers transition to using our new systems at AWS. As we put our cloud-native systems into production we will begin to depreciate these new systems and incur the cloud and other operating costs of running these new cloud-native systems. It will generally take six to twelve months from the start of production to fully transition a legacy exchange or positioning system to a new cloud-native system. During that time period we will incur both the cloud and other operating costs of the new system as well as the operating costs of the legacy systems. As 2020 is a transition year and the decommissioning of the legacy systems is not expected to substantially occur until late fourth quarter 2020 and 2021, we will incur these additional system transition costs for much of 2020. For 2020 we expect these additional system transition costs to be in the range of $0.40 to $0.50 per share, with increased depreciation representing about two-thirds of this additional cost and cloud costs net of any legacy system decommissioning savings representing approximately one-third of this cost. As we move into 2021, we expect the savings from the decommissioning of legacy systems to exceed the incremental cloud cost resulting in a net benefit to the P&L as opposed to the duplicate cost we will be incurring in 2020. As we have said in the past, when this transition is complete we expect to generate significant cost savings of 15% plus savings in technology cost portion of cost to goods sold, and the technology portion of cost to goods sold represent just under 15% of our total COGS, and the 25% reduction in our development spend both in expense and capital. We expect our new single data fabric and cloud-based applications to accelerate innovation and new products that will be accretive to our growth rate. Now for 2020 guidance; we expect total revenue to be between $3.65 billion and $3.75 billion, reflecting constant currency revenue growth of 4% to 7%. The U.S. mortgage market will be about flat in 2020. FX will negatively impact revenue by almost 1% and adjusted EPS by about $0.03. USIS revenue is expected to be up mid-single digits in 2020. EWS revenue will continue to deliver double-digit revenue growth with very strong growth in verification services, while employer services is expected to be flat to down. International revenue will grow mid-single digits with growth strengthening in the second half of 2020 due to expected economic improvement in Australia and Europe. GCS revenue will also grow mid-single digits in 2020 with continued growth in our partner business at ID Watchdog and in our U.K. and Canada Consumer Direct businesses. We expect U.S. Consumer Direct to return to growth late in 2020. For 2020, we expect adjusted EPS to be $5.60 to $5.80 per share, reflecting constant currency growth of approximately flat to 3.5% versus 2019. As I discussed earlier, impacting adjusted EPS in 2020 is $0.40 to $0.50 per share of increased depreciation and additional system transition costs. This represents approximately eight percentage points of growth in adjusted EPS. As such, excluding this tech transition impact, adjusted EPS growth is 8% to 11% which helps give a clear picture of the post-Equifax 2020 earnings power of Equifax. Due to the substantial increase in depreciation, we will in 2020 add to our discussion with you more focus on adjusted EBITDA margins which we believe will better reflect the true earning power of Equifax. In 2020, adjusted EBITDA margins are expected to expand by approximately 50 to 100 basis points. This includes drag of about 50 basis points from the additional system transition costs. Excluding this transition cost, adjusted EBITDA margins would expand between 100 to 150 basis points in 2020. As we discussed, the duplicate legacy and cloud costs will be in place during 2020 and 2021 as we migrate customers to the new cloud environments and decommission legacy mainframe and server environments. In 2020, we expect to incur approximately $255 million in non-recurring expenses comprised of $250 million in non-recurring security and technology transformation expenses and less than $5 million in legal and regulatory expenses. This does not include the cost of any potential judgments or other regulatory outcomes should they occur. In 2021, as we have stated previously, we will no longer exclude these non-recurring expenses from our adjusted EPS. Capital spending in 2020 is expected to be approximately $335 million. There are several important assumptions impacting 2020 in total as well as the individual quarters. U.S. mortgage market inquiries for all of 2020 are expected to be flat, however first quarter 2020 inquiries are expected to remain strong, up over 21% year-to-year. Second quarter 2020 inquiries are expected to be about flat, and we expect inquiries to decline about 10% in each of the third and fourth quarters. 2020 corporate costs are expected to increase approximately $45 million versus 2019. Depreciation expense included in the corporate cost line is expected to increase over $15 million. 2020 corporate cost excluding depreciation are expected to increase year-over-year by about $30 million. The increases are principally in security and technology as well as equity compensation. The higher security and technology cost are partially a result of the system transitions in 2020 as we invest to ensure we maintain high levels of security in both the new cloud-native and legacy systems. As we decommission legacy systems at a more rapid pace beginning in late 2020, we would expect these security and technology costs to moderate. Over half of the 2020 total increase of $45 million in corporate costs is expected in first quarter 2020. Interest expense is expected to increase about $13 million or $0.08 per share in 2020, reflecting the incremental borrowings to fund the legal settlement payments in third quarter 2019 and first quarter 2020. About two-thirds of this increase will occur in the first half of 2020. Note that our guidance does not reflect any incremental borrowings associated with approximately $355 million remaining in consumer legal settlements as the timing of that payment is still not known. Our 2020 tax rate is expected to be slightly higher than the 2019 tax rate at 24%. We continue to expect our normal seasonal pattern for recorded revenue and adjusted EPS with first quarter being the lowest and the third and fourth quarters being the highest in dollar terms. However, in terms of year-over-year growth rates, we expect first quarter to have the highest growth rates for revenue and adjusted EPS. For first quarter 2020, we expect revenue in the range of $915 million to $930 million, reflecting constant currency revenue growth of 9% to 11%. We are expecting adjusted EPS to be $1.29 to $1.34 per share. FX is expected to negatively impact revenue by over 1% in first quarter 2020 and negatively impact adjusted EPS by $0.01 per share. Higher interest expense negatively impacted adjusted EPS by $0.03 per share versus first quarter 2019. The tax rate in first quarter 2020 is expected to be about 25%. And with that operator, please open it up for questions.

I just wanted to understand how you’re using the word mortgage inquiries. To be flat in 2020, is your team’s expectation, is that supposed to be a proxy for Equifax’s revenue in 2020 for that part of the business, which is about 19%? And if so, 4% to 7% constant currency revenue growth would be kind of high single-digit non-mortgage revenue growth rate?

The credit inquiries is exactly as it sounds, right. It’s with each mortgage transaction we get an inquiry and we’re simply trying to let you know what we forecast those inquiries to be for the year and as I said, we estimate that based on the information we have in terms of the number of inquiries that we get per closed mortgage loan and then we use the forecast provided by MBA and Freddie and Fannie to do an overall originations forecast and then translate into credit inquiry. So it does reflect the inquiries reflect, it isn’t necessarily a proxy for revenue because obviously there’s pricing changes in the year. We also get new records in workforce solutions, so we get growth from that and we also launch new products in mortgage which drives our growth higher.

We also get some penetration with the mortgage customers when they’re using our credit reports or the Twin records, two times, three times, four times in their mortgage process, so that’s another part of our revenue model.

Absolutely, as you know historically, we tend to outperform the inquiry index. So it is to give you a view as to what we think the market is going to do in terms of the number of times the market will request information from the credit bureaus.

John, the second part was to do 4% to 7% constant currency revenue growth, you’re assuming that 19% of your revenue is headwind, so you would have to do the kind of high single-digit constant currency revenue growth in the non-mortgage segment, right?

So certainly, our guidance indicates that non-mortgage is going to be higher. Right? It’s going to do kind of – now again but you have to keep in mind we’ll outperform that EWS for example as they continue to grow records. We certainly will outperform in the mortgage segment, the revenue they generate versus that inquiry index. So you can’t just use the credit inquiries or the proxy directly for revenue because certainly we do perform differently than that in certain circumstances.

Great, thank you.

John, if I heard you right it seems like degraded back, the depreciation, the EPS would be $6 to $6.20. That’s a lot better than where the Street is on revenue that’s pretty much in line. Is that the mix in EWS or where else is that leverage coming through in the model?

Can you ask the question one more time? I didn’t fully follow? I’m sorry.

Yes, so. It looks like there’s – the depreciation, if I heard you right it was kind of $0.40 to $0.50 headwind that deflected depreciation which would imply $6 to $6.20 versus or your guidance would be $6 to $6.20 versus the Street at $5.80. That’s a lot better than kind of where the Street is, the adjusted EPS versus kind of where the revenue guidance is relative to the Street. Is that just the mix that’s driving that? And I guess I’m assuming there’s some margin outperformance there. Is that margin outperformance in workforce solutions or am I just not thinking about that right?

So what we indicated it was $0.40 to $0.50 per share for both the increase in depreciation and the duplicate costs we’re occurring because we’re running both cloud systems and our legacy systems until those legacy systems are decommissioned. So that is 40% to 50% and yes, we did say that’s about eight points of growth in the year. So relative to where the Street was, I can’t specifically address that. But I can indicate that we did in the third quarter pretty specific guidance as to how much we thought our depreciation would go up, right? So I think there was a pretty good understanding generally prior to the fourth quarter beginning following our third quarter earnings call that we were going to see significantly increased depreciation in 2020, and we’re also going to see significant increases in cloud costs in 2020. So I think that information was broadly out there before.

It’s helpful. And then just with the indictments, does that open the potential that maybe you can recover some of those costs driven by writing the incumbent insurance, or does that not change the outcome in terms of what you’ve already incurred?

I think we fully took advantage of our insurance coverage there as far as any recovery. So our expectation is that the charges that we took last year and the charges we took in the fourth quarter will be Equifax’s costs. The numbers we’ve shared with you are net of insurance.

Super, thank you.

Mark, over the course of the year, you’ve talked a lot about how the pipeline has been improving in product and all the progress you’ve made. But at the same time, I think in the few quarters where you said the ex-mortgage USIS has been short of your expectations. So I was just curious if you could maybe help us bridge that gap and maybe what is your expectation for USIS mortgage for 2020?

Yes, I think that John talked about we expect that USIS overall to be in mid-single digits. With regards to expectations, we’ve got a high bar here, that’s how I operate. I think that’s Manav, you know that we want that business to return to its historical growth rate. It’s making great progress. I think you know a year ago when we were on this call with fourth quarter 2018 that business was in the flat to negative mode and was just getting out of the penalty box with their customers, and we’re now four quarters or so into that recovery. We’re making great progress as far as their pipeline is building, their win rates and we see some really positive momentum as we move into 2020. We expect that business to continue to improve as we go through the year and expect it to return to its historical growth rate; it’s just a matter of time. It’s still one that the non-mortgage growth. There are a lot of variables there as far as pipelines being rebuilt and the timing of closing deals that we’ve talked about virtually every quarter since the cybersecurity incident that we’re just seeing deeper pipelines, better win rates which gives us confidence as we go into 2020.

I just want to make sure — to Andrew’s initial question. Just to make sure, I was clear, right? So Equifax has historically performed better than the mortgage index in terms of our revenue. So again, as you’re doing your analysis on the implications of our mortgage market guidance in terms of its implication to our non-mortgage revenue growth, you need to please recognize and take a look at the history of the fact that we’ve generally significantly outperformed the mortgage index in terms of our own mortgage revenue growth.

Got it. John, just two clarifications on the guidance. So one, can you just — is there any M&A baked into it whether that’s India or any of the other acquisitions from this prior year, and then I lost you a little bit on the $0.40 to $0.50 of the incurring which year and how that the savings that you said was one-third of the costs?

The only thing we include in our guidance is acquisitions that have actually closed. So there’ll be no new acquisitions included. In terms of the — I think you’re asking about the $0.40 to $0.50 per share in system transition cost. That $0.40 to $0.50 per share is made up of two things. We said about two thirds of it is incremental depreciation, right? So we’ve been investing heavily over the past several years, building new production systems, cloud-native production systems in the cloud. And as they go into production obviously, we start to depreciate them. So off that, $0.40 to $0.50 we said about two-thirds of it will be a substantial increase in depreciation in 2020 versus 2019. And then about, one-third of the incremental cost is related to duplicate costs in operations because we’re running cloud systems as well as our legacy systems in parallel for an extended period of time while we migrate customers. So we’re incurring effectively double cost, the cost of the existing legacy premise system as well as the cost of the cloud system during the transition period, and we said that transition cost in the period of running both sets of systems would be about one-third of that $0.40 to $0.50 per share. And the final comment I made is, on that specific cost the duplicate cost of running two sets of systems. We had said, as we move into 2021, as we move through the year, we expect that to actually become a positive, where the savings related to shutting down legacy systems will exceed cloud costs and that will start to become a positive for the company.

And Manav, just to add to that. I think as you know, a lot of our investors have asked for some transparency around that because number one, on the second point John raised in the duplicate cloud cost as you know those aren’t going to be here forever and those are going to start, as we decommission the system they’ll turn into being a positive, there’ll be some of that in 2020 that’s in our guidance now and the numbers John talked about and that will accelerate in 2021 and we’ll get to a fully migrated basis sometime in the future and we’ll give you guidance on that. So that was that element. And then on the accretive amortization, same thing, that’s a temporary element if you will, it will be there for a number of years of that increased amortization which is a non-cash item and that’s going to work its way down as we amortize our investments in the cloud cost. As you know, our intention is to reduce our CapEx spending in 2021 as we complete the cloud migration. So our intention is to be clear about our guidance which John gave you, but also give the additional visibility of what’s inside that guidance so you can be aware and think about what Equifax looks like on the other side.

And just what will be M&A contribution, John? I know you mentioned it would have been one deal because all in that in 2020?

It’s relatively small, right? If you think about we closed PayNet, I think in the second quarter of 2019, and that was the largest acquisition for the years. In the fourth quarter we gave some indication the total amount of acquisition revenue was just over 1% of revenue, so not a significant number, and it should decline as you move through 2020.

This is Allison on for George, thanks for taking my question. I wanted to follow-up on the comments made about Workforce Solutions margins in the quarter. I think I heard that the year-over-year decline was driven by third-party implementation royalty cost. I’m just curious is there anything else to call out there, maybe mix and how we should think about segment margins going forward in 2020?

Yes, I also mentioned Allison that there was some additional sales cost in the fourth quarter in that business which put some pressure on margins. I think John also said that we expect that business to expand margins in 2020 and we don’t see any change in that, but high growth in their inherent margins. That’s a business that we expect expanding margins going forward.

And just to make sure you were clear; the royalty costs are actually separate from the third-party implementation cost. Right? So those are two different cost items that affected us in the quarter as well as obviously increased sales expense.

Okay, great. Thank you. That’s super helpful. And then just one quick follow-up, Mark I heard you mentioned the solid progress being made of positive data in Australia. I’m curious if we should expect any impact from this in 2020?

Yes, we hope it will be accretive as we go through the year. We’ve seen in all the markets where positive data comes in, it obviously first takes a lot of time to get that data from the contributors into Equifax and the other credit bureaus. Then turning that into usable information that we can take to the marketplace depends on that. The good news is we have the data now which we’ve been working to get there, so we expect it will be a positive element for that team in 2020.

My first question is just, if you could just talk about how long your sales cycle today is on new products currently and maybe how much they’re contributing to growth today versus sort of pre-breach, just to give us a sense?

So sales cycle really depends on the product, so if it’s a batch product. Something that we’ve sold historically that effectively reselling it’s something that can sometimes be initiated and transacted within a period. For implementing a new online service for the customer the implementation period can be over a year and it really depends on the service. In terms of NPI contribution and new product contribution in 2019 versus prior years. I think what we try to be clear on is the level of acceleration we’re seeing in new products launches which we think is very beneficial as we go forward into 2020 and 2021. Obviously the level of new product revenue we generated in 2019 and 2018 was certainly down from what we saw historically because of the fact that we didn’t have the same level of product generation over the 2017, 2018 period so that was – so we’re seeing a period of lower new product revenue generation, but we see very good signs that will start to recover as we move into 2020 and then certainly 2021.

You heard my comments, just to add on that. New products and innovations is a real priority. And it’s one that obviously we had some pressures on following the cybersecurity incident with all our focus on security remediation, everything else, and I’m pleased that our efforts in 2019 to make this a priority central to Equifax’s strategy. And you saw the performance of us rolling out, the highest new products in number of years in 2019, and that emphasis is going to continue. We really believe there are cloud transformation and having our single data fabric and having our products in the cloud is going to allow us to even accelerate that going forward. This is an area that we’re going to continue to invest resources, time and money on because of the positive impact it will have in the future around our top line by investing in more new products.

Very helpful, just a follow-up question. I’ll turn it over. Could you give us a sense of how much of your portfolio is sort of directly linked to the credit cycle versus how much of the portfolio is just data similar to influence services company? Any sense of rough percentage or qualitative comments there?

I think the best thing I can suggest is if you take a look at the earnings that we published, we published obviously last quarter and there’ll be one published today. In it, we show revenue by market segment for Equifax and for each of the business units and it’s probably the best place to take a look to so you can judge based on where we sell and how you think that is impacted by the credit cycle. I think that’s the best source for you.

I think the other thing that you should be aware of is, our business and our industry during a credit cycle. Obviously, expenditures by our customers on new originations may come down, but the shift and focus to the back book through managing credit lines. So there’s an element to counter-cyclicality to it and then the other element is quite different at Equifax today versus the last economic cycle is the mix of our businesses. We’re obviously larger internationally than we were in the last economic cycle and then second, Workforce Solutions is very different scale in our business and size and Workforce Solutions has that additional lever in a credit cycle of the ability to continue to add new data records that are monetizable so that’s another element of how we think about ourselves. If there’s a credit cycle, we’re very different in a positive way than we were in the last credit cycle.

Great, thank you.

I was hoping to dig in a little bit more to the USIS growth organic ex-mortgage slowing from I guess it was three to slightly positive. Part of it, I clearly understand financial marketing and an outsized growth quarter last quarter and maybe a more normalized trend number. This quarter to that part of it and you called out a couple of the end market that were a little weaker. Can you give us any other color just to understand this and maybe how we think about the cadence of that into Q1 that will be helpful? Thank you.

I think in Mark’s script where we talked specifically our Direct, our D2C business, which is the transactions we do with our competitors. Part of the reason that was down, obviously was because we had a sale that occurred in the fourth quarter of 2018 that was one-time, that didn’t recur and that directly impacted the organic growth in the period. And then also we talked about telco and yes it was down, but we think we see very nice path to growth as we get into the second quarter and beyond in 2020. So I think overall, we’re expecting to see nice improvement in our level of organic, non-mortgage growth as we move into 2020 and beyond. So we do like the trend, right? We said it would be choppy, so that doesn’t mean the trend is always straight up, but we do like the trend. We see continuing improvement that the sales metrics are very good, and the level of growth of pipeline is outstanding and we are very happy with that performance. So I think that overall we’re expecting to see nice improvement in 2020 relative to 2019 in total and certainly relative to where we ended the year.

Thanks and then the follow-up. Just on the pipeline you prefer to improvement in growth, but in absolute terms is like the — is the pipeline back to where it was in mid-2017? Are you still below that? And as part of that historically with NPI you guys talked about a three-year build to sort of mature revenues, 2017 and 2018 you had a lot less product development and NPI. New products, as you were trying to fix some of the challenges. Is the fact that you had those product launches in 2019, should we think it’s a three-year process to really get a lot of that stuff particularly in USIS? Getting the business back churning the way one might expect if you want on a normalized basis?

You’ve hit a lot of the challenges that we’ve had following the cyber event. First was — we had a pipeline in place the day before the cyber event happened and that pipeline went virtually to zero for the balance of 2017 and through the bulk of 2018. As you know we were on security freeze for much of 2018 and as we finished 2018 and moved into 2019 we were able to start getting into a more commercial mode when customers grew quite comfortable about our security protocols and our investments and that pipeline has been building rapidly through 2019 and John I don’t know, I believe it’s actually back or above where it was pre-2017 and we’ve seen real growth in that. We’ve also got a different leader in the business who’s got a real commercial cadence to him; there’s real intensity around pulling that forward. I wouldn’t think about a new product taking a full three years to get to revenue. I think we’ve talked about before there’s a maturity element in that but each of these products have a different cycle dependent upon the customer. You’ve got a customer that the operations team or the marketing team or the risk team really likes the product and then they want to test it and then we go through a contracting process with their sourcing team many times in their course, then you go in the implementation mode which sometimes includes their IT team and that could lead to some unpredictability in a pipeline that maybe to your point is less mature meaning you don’t have two-year old deals in there. Three-year old deals, one-year old, six months; you know you have to have that layering. Our pipeline today is more of call it a 12-month kind of build versus historically, we had two and three-year kind of deals in there that sometimes take that amount of time. So I think that layering creates some of the choppiness but the fact that the pipelines building we’re seeing better win rates out of the pipeline in the second half of the year, in the first half; which tells us that we’ve got a better pipeline in that commercial activity gives us the enthusiasm about the continued progress of USIS going forward as we get into the first quarter in 2020.

I just wanted to be clear. So we provided overall guidance and we provided mortgage inquiry guidance. We didn’t give mortgage revenue guidance or non-mortgage revenue guidance, and again just to repeat where we started, right? So we did say flat for the total mortgage inquiry market, but people should keep in mind that historically our revenue has performed better than the overall mortgage inquiry market in some cases substantial, so that’s a judgment you’re going to have to make for yourself.

Understood, thank you.

I was looking at your 2020 revenue guidance, which I know comes below your prior long-term target of 6% to 8%. I know you haven’t reinstated financial targets yet, but based on customer conversation, to what degree do you believe long-term growth potential remains intact?

Again, that is similar question earlier George on long-term guidance. We clearly gave our guidance for 2020; we’re not ready to put a long-term financial framework back in place although we’re working towards that in 2020. We talked about the things we want to see and we’re getting really close to that. So I think I’ll just leave it at that.

Okay, and then, for your revenue guidance. What level of price increases are baked into that?

We didn’t give specific information on price increases, right? Generally speaking there are some level of price increase in the market. However, for credit reports in general, if you think about those, they tend to go down in price over time. So we haven’t given specific price increase guidance as part of this process.

Okay, great. Thanks.

And operator, we have time for one more.

The company used to just give straight out organic growth excluding mortgage, and I was just wondering, there’s a lot of positivity in terms of the sales momentum. It’s not a number though that you’re providing now, and I was wondering if you could give us a little bit more, just clarity, as the rubber meets the road for organic growth of the business excluding the mortgage? I’m just trying to see if I can do the calculation, the way I used to do it.

We actually are giving that — we gave that number at each quarter last year in terms of organic, non-mortgage growth. We indicated this quarter it was up slightly, last quarter I think was just under 3% and I think we gave it each of the first two quarters as well. So we’re trying to give that indication and we’re also trying to separately give a view of just what the market did, so you can have some perspective. So I think the depth of information is actually quite good in terms of how USIS is performing to let you kind of disaggregate the performance by piece.

So this — I’m talking about for the whole company, so the numbers you’re referring to are for the whole company?

That’s for USIS.

Okay and just if I took the whole company together just in mortgage and if I look at it, the mortgage — the non-mortgage revenue organically up or down. I know it’s choppy. I’m just trying to see if I can do the calculation.

So that isn’t specifically we disclose, right. But I kind of walk you through what we do disclose and I think the information is available for you to do whatever analytics you like.