Equifax Inc. (EFX) Q2 2025 Earnings Call Transcript

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Overview

The earnings call reveals mixed signals: revenue growth and strong product development are positive, but there are concerns about litigation costs, economic uncertainty, and cautious guidance. The Q&A highlights ongoing litigation expenses, economic challenges impacting hiring, and uncertainty in international markets. Despite a strong first half, guidance remains unchanged due to macroeconomic volatility. The shareholder return plan is positive, but the lack of clear guidance on VantageScore and potential litigation costs are concerns. Overall, these factors balance out, leading to a neutral sentiment.

Key Financial Performance

Revenue $1.54 billion, up 8% in constant currency and 7% reported year-over-year. The increase was driven by strong performance in U.S. Mortgage, Workforce Solutions, and international markets, despite weaker mortgage and hiring markets.

Adjusted EPS $2 per share, $0.10 above the midpoint of April guidance. This was due to operating leverage from stronger revenue growth and solid cost management.

Adjusted EBITDA Margin 32.5%, reflecting solid cost management and operating leverage from revenue growth.

EWS Revenue Up 8%, led by Verifier, Government, and Consumer Lending, with Mortgage up 9%. Growth was driven by record growth, pricing, and strong performance in Government and Consumer Lending.

USIS Revenue Up 9%, with non-mortgage revenue growth of over 4% and Mortgage revenue up 20%. Growth was attributed to innovation, new products, and post-Cloud transformation benefits.

International Revenue Up 6% in constant currency, led by strength in Europe and Latin America. Growth was slightly below expectations due to economic weakness in Canada.

Workforce Solutions Adjusted EBITDA Margin 53.3%, up 50 basis points year-over-year, driven by higher-than-expected revenue growth and solid cost management.

TWN Record Additions Active records up 10% year-over-year to 198 million, with total records up 10% to 767 million. Growth was supported by new partnerships and cloud capabilities.

USIS Adjusted EBITDA Margin 35%, up 180 basis points year-over-year, reflecting cost savings from cloud migration and revenue growth.

International Adjusted EBITDA Margin 26.4%, up 80 basis points year-over-year, driven by revenue growth and cost improvements from cloud migrations.

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Operating Highlights

TWN indicator mortgage credit solution: Launched in the market, with plans to expand to auto and P-loan products later in 2025. Combines credit alternative data and TWN income indicators into a single solution.

New product launches: Over 100 new products launched in the first half of 2025, with a Vitality Index of 14%, exceeding the long-term goal of 10%.

EFX.AI-powered solutions: Leveraging Equifax's scale and unique data in the Single Data Fabric to develop innovative solutions.

International revenue growth: Broad-based 6% constant dollar revenue growth, led by Europe and Latin America. Canada showed weaker growth due to economic conditions.

Government business opportunities: New federal programs and legislation, such as OBBBA, provide potential growth opportunities in areas like Medicaid and SNAP.

TWN record growth: Active records increased by 18 million (10%) year-over-year, with total records reaching 767 million.

Cloud transformation: Completed cloud migration, enabling cost savings and innovation. USIS and International segments benefited from improved margins.

Cost management: Achieved solid cost management, contributing to adjusted EBITDA margin of 32.5%.

Share repurchase program: Repurchased $127 million in shares under a $3 billion program.

Focus on innovation: Pivoting towards leveraging cloud capabilities for new product development and growth.

Engagement in Washington: Increased efforts to support federal and state programs, aligning with new government requirements.

Long-term financial framework: Reconfirmed 7%-10% organic growth framework, with scenarios for significant upside if the mortgage market recovers.

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Risk or Challenges

Economic Uncertainty: The company highlighted heightened levels of economic uncertainty, including weaker hiring trends, inflation, tariffs, and interest rate volatility, which could impact revenue and operational performance.

Mortgage Market Weakness: The mortgage market remains weak, with hard credit inquiries down significantly from historical averages. This has led to lower mortgage volumes, which could impact revenue growth.

Litigation Costs: Higher litigation costs, including consumer litigation and single plaintiff cases, are expected to impact corporate expenses in the second half of 2025.

Government Revenue Volatility: Near-term volatility in government revenue is expected due to changes in federal program structures and funding, impacting state-level operations.

Hiring Market Weakness: Weakness in the hiring market, particularly in white-collar hiring, is negatively impacting Talent Solutions and employer onboarding businesses.

Foreign Exchange Impact: Foreign exchange fluctuations negatively impacted revenue year-over-year by $6 million, although some benefits were realized in the second quarter.

Regulatory and Federal Program Changes: Changes in federal programs and regulatory requirements are creating both opportunities and near-term challenges, particularly in the government business segment.

Supply Chain and Operational Costs: Higher operational costs, including those related to cloud migration and infrastructure, could impact margins despite cost management efforts.

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Guidance & Outlook

Third Quarter and Full Year 2025 Guidance: Equifax is holding its full-year constant currency framework from April, despite strong first-half performance. Reported full-year revenue guidance is increased by $35 million, and adjusted EPS is increased by $0.03 per share due to FX impact. Third-quarter revenue is expected to grow over 5% on a constant dollar basis year-to-year, with adjusted EPS expected to be $1.87 to $1.97 per share.

Workforce Solutions Revenue Growth: Revenue growth for Workforce Solutions in 2025 is expected to be about 5%, down from 7% in April guidance. Second-half growth is expected to be slightly below first-half levels due to weaker hiring trends and near-term government volatility. Employer revenue is expected to decline slightly year-to-year.

USIS Revenue Growth: USIS revenue growth in 2025 is expected to be about 7%, stronger than April guidance. Mortgage revenue is expected to grow about 13%, with non-mortgage revenue expected to grow over 4.5%. Second-half growth is expected to be slightly lower than the first half due to economic and interest rate uncertainties.

International Revenue Growth: International constant currency revenue growth is expected to remain about 7% for 2025, consistent with April guidance. Second-half revenue growth is expected to be just over 7%, with strengthening growth in Canada, Europe, and Asia Pacific.

Adjusted EBITDA Margins: Adjusted EBITDA margins for 2025 are expected to be about flat versus 2024. Workforce Solutions margins are expected to be about 51%, up 50 basis points from April guidance. USIS margins are expected to be about 35.5%, up 100 basis points year-to-year. International margins are expected to be about 28.5%, up 100 basis points from 2024.

Mortgage Market Projections: Mortgage hard credit inquiries are expected to decline over 13% in the second half of 2025. However, there is a growing pool of mortgages available to refinance when rates decline, with 13 million 30-year mortgages issued since 2022 having interest rates above 6%.

New Product Launches and Innovation: Equifax plans to launch auto and P-loan products powered by TWN in the second half of 2025. The company is increasing its 2025 Vitality outlook from 11% to 12%, driven by strong first-half NPI performance. New solutions combining credit, alternative data, and TWN income indicators are expected to drive growth.

Long-Term Financial Framework: Equifax reconfirmed its 7% to 10% long-term organic growth framework. A 2030 financial scenario projects revenue growth to $9.6 billion with EBITDA margins exceeding 35% and adjusted EPS of about $15 per share. A mortgage market recovery could increase revenue to $10.8 billion and adjusted EPS to $19 per share by 2030.

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Shareholder Return Plan

Quarterly Dividend Increase: Equifax increased its quarterly dividend by 28% to $0.50 per share.

Dividend Payment: In the second quarter, Equifax paid $62 million in dividends to shareholders.

Share Repurchase Program: Equifax repurchased $127 million in shares under its new $3 billion share repurchase program during the second quarter.

Capital Allocation Framework: The company announced a $3 billion share repurchase program as part of its capital allocation strategy.

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Key Q&A

Q:Can you give some more perspective on the TWN state agency headwinds? Is this more headwinds tied to the programs that are impacted by the federal government data expense subsidization changes? Or is it something else? And just any reason why now mid-calendar year there's incremental headwinds?

A:The headwinds are tied to changes made by the Biden administration in 2024 regarding data reimbursements. These changes have created dynamic challenges as states deal with contract timing and budget issues. Some states have resolved these issues, while others are taking longer. Additionally, waivers from the prior administration are expiring, leading to more stringent requirements, which could create momentum in commercial discussions. The OBBBA bill and new requirements like work requirements and redeterminations are also creating activity, but the immediate impact is due to states absorbing prior changes and working through complex budgets.

Q:What are the new mortgage prequal products that are already driving strength or share in the quarter?

A:The TWN indicator product, which has been in discussions for about six months, is gaining traction. It is embedded with aggregators and is commercially helping win share in the prequal stage. The TWN indicator is expected to take hold in the second half of 2026. Additionally, NC+ attributes, telco, cellphone, and utility attributes added to the mortgage credit file are helping from a share perspective. The TWN indicator will be offered as a differentiator for the Equifax credit file without a higher price to drive share gains.

Q:What is mortgage revenue as a percentage of total revenues in the second quarter just reported? And what are you seeing in terms of non-mortgage lender and consumer credit activity?

A:Mortgage revenue was 22% of total revenues in the second quarter. Non-mortgage activity remains relatively good, with auto performing strongly and FI (financial institutions) strengthening. FI is expected to be stronger in the third quarter, with sequential improvement seen in the second quarter. Other businesses, including commercial and payment spaces, are also expected to perform well.

Q:What exactly changed in the Government business assumptions for the second half of the year?

A:The changes are not tied to a single state but are due to dynamic challenges from prior administration changes around cost sharing between federal and state governments. States have different contractual periods, and their responses to budget impacts vary. Many states are in deficit positions, creating challenges in funding. While there are positives like expiring COVID waivers and new federal requirements, the timing of these benefits is uncertain and likely to impact 2026 rather than the second half of this year.

Q:What is happening in the Talent segment regarding criminal data and share shifts between background screeners?

A:One large customer lost a significant client to another background screener that does not use Equifax for court records. This caused a revenue impact but not a material operating profit impact, as court record verification is a lower-margin business. Equifax continues to grow its core incarceration records business, which is used as an indicator for background checks.

Q:What are you expecting in terms of price competition in the mortgage market with VantageScore?

A:It is too early to determine the pricing impact of VantageScore in the mortgage market. Equifax has access to VantageScore and will work with customers to offer it as an option. Conversations around this are still in early stages and will unfold in the second half of the year.

Q:Why was EBITDA margin guidance lowered despite raised revenue guidance?

A:The increase in revenue guidance was primarily due to FX, which is slightly dilutive to margins. Higher corporate expenses, including litigation costs and onetime employee exit costs, also contributed to the lower EBITDA margin guidance. However, business unit margins are performing well, with growth in USIS and International margins and strong EWS margins above 50%.

Q:What is driving the higher litigation costs, and will they continue into 2026?

A:Litigation costs are driven by general litigation related to outstanding lawsuits and an increased volume of small claims from individuals. These costs are expected to remain elevated through the second half of 2025. Costs related to larger cases may be mitigated over time, but small claims costs are likely to stay high for now.

Q:What trends are being observed in the Talent business, and how much of the lower guidance is related to the criminal data issue versus the market?

A:The Talent business is impacted by corporate caution around hiring due to economic uncertainty, which has been ongoing for over six months. There was a slight weakening in June, possibly due to renewed tariff discussions. The lower guidance is more related to the softer hiring environment than the criminal data issue, which had a smaller impact.

Q:What is the outlook for USIS non-mortgage, particularly in autos and offline business?

A:Auto has performed well in the first half and is expected to continue performing well. Offline or batch business has also shown good momentum, driven by prescreen and marketing businesses, as well as header data used in fraud and other services. New product introductions and NPI are contributing to growth in these areas.

Q:What is the longer-term goal for VantageScore, and how does Equifax plan to push for higher market share?

A:Equifax has been promoting VantageScore for over 20 years and will continue to do so across all verticals. However, displacing the widely used FICO score will take time due to its deep industry embedding. Equifax will work with customers to offer VantageScore as an option but acknowledges the challenges in driving adoption.

Q:What is driving the strong growth in EWS Consumer Lending, particularly in personal loans?

A:The growth is driven by the penetration of new products and customers, particularly in personal loans. These loans require additional underwriting, including income and employment verification, which benefits from Equifax's data capabilities. Record growth in the Work Number database is also contributing to this strength.

Q:How does the consumer backdrop in International markets compare to the U.S., and what is the outlook for International growth?

A:The consumer backdrop in International markets is broadly similar to the U.S., with stronger growth in Latin America due to unbanked consumers entering the banking sector. Canada has been impacted by tariff discussions, leading to slower growth. Other regions like Australia, the U.K., and Spain are performing normally. International growth is expected to be around 7% for the year, with improving margins due to cloud migration and cost management.

Q:Why was full-year guidance maintained despite strong first-half performance?

A:The decision to maintain guidance reflects uncertainty and volatility in the macro environment, including mortgage market fluctuations, hiring softness, and state budget challenges. Renewed tariff discussions and their potential impact on interest rates and the economy also contributed to the cautious approach. Equifax aims to provide balanced guidance considering these uncertainties.

Q:What is the outlook for FICO pricing and its impact on Equifax's growth rates?

A:Equifax does not have visibility into FICO's future pricing decisions, which are typically communicated later in the year. While FICO pricing has positively impacted Equifax's results in 2024 and 2025, the company does not rely on substantial mortgage pricing pass-through for its long-term growth framework. Equifax expects to achieve strong growth through other levers in its business.

Q:What is the impact of the OBBBA bill on EWS, and does it expand the $5 billion TAM?

A:The OBBBA bill introduces new requirements like work requirements, 6-month redeterminations, and more stringent income verifications, which are expected to drive growth for EWS. While these changes may reduce the number of people eligible for social services, the tailwinds from these requirements are expected to outweigh any headwinds. Equifax is reviewing whether the $5 billion TAM should be updated to reflect these changes.

Q:Review of Unclear Management Responses

A:Management appeared to avoid giving a direct answer to the question about the long-term pricing strategy for VantageScore in the mortgage market. They stated it was too early to determine the impact and provided no specific details on pricing plans or competitive positioning.

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Earnings Word Cloud

The most frequently occurring keywords in this quarter's earning call

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