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Edited Transcript of EFX earnings conference call or presentation 13-Feb-20 1:30pm GMT

Q4 2019 Equifax Inc Earnings Call

ATLANTA Feb 17, 2020 (Thomson StreetEvents) -- Edited Transcript of Equifax Inc earnings conference call or presentation Thursday, February 13, 2020 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* John W. Gamble

Equifax Inc. - Corporate VP & CFO

* Mark W. Begor

Equifax Inc. - CEO & Director

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Conference Call Participants

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* Allison Michelle Jordan

Cowen and Company, LLC, Research Division - Associate

* Andrew Charles Steinerman

JP Morgan Chase & Co, Research Division - MD

* Andrew Owen Nicholas

William Blair & Company L.L.C., Research Division - Analyst

* Gary Elftman Bisbee

BofA Merrill Lynch, Research Division - MD & Research Analyst

* Hamzah Mazari

Jefferies LLC, Research Division - Equity Analyst

* Jeffrey P. Meuler

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Kevin Damien McVeigh

Crédit Suisse AG, Research Division - MD

* Manav Shiv Patnaik

Barclays Bank PLC, Research Division - Director & Lead Research Analyst

* Shlomo H. Rosenbaum

Stifel, Nicolaus & Company, Incorporated, Research Division - MD

* Toni Michele Kaplan

Morgan Stanley, Research Division - Senior Analyst

* William Arthur Warmington

Wells Fargo Securities, LLC, Research Division - MD & Senior Equity Analyst

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Presentation

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Operator [1]

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Good day, and welcome to the Equifax Fourth Quarter 2019 Earnings Conference Call. Today's conference is being recorded.

At this time, I'd like to turn the call over to John Gamble. Please go ahead.

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John W. Gamble, Equifax Inc. - Corporate VP & CFO [2]

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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 us -- 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 effects of stock awards recognized upon vesting or settlement and foreign currency losses for remeasuring the Argentinian 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 nonrecurring project costs 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 as well as the cost to manage these projects. 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 Argentinian peso-denominated net monetary assets. These non-GAAP measures are detailed in reconciliation tables, which are included in our earnings release and are also posted on our website.

I would also like to welcome back Jeff Dodge, who will 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.

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Mark W. Begor, Equifax Inc. - CEO & Director [3]

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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's Department of Justice and FBI announcement on their indictment of 4 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 recall that 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 resolution of all remaining U.S. legal proceedings and investigations arising from the 2017 cybersecurity incident. This charge includes settlements reached 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 EFX2020 security and technology transformation and growth at Equifax as 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' 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 2 U.S. B2B businesses, USIS and EWS, that collectively were up a strong 13% overall with Workforce Solutions up a strong 22% and U.S. up -- USIS, up a very solid 8%. The 22% growth at EWS was its strongest since 2016 and USIS' second half performance was their strongest since 2015. U.S. market -- 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 expected, 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 we provided in October. The adjusted EBITDA margin of 35.2% grew nicely, up 200 basis points compared to 2018. While we are 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 lapped the negative impact of the mix 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 2 years. We saw continuations of 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 DataX as well as in auto and banking and lending. 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 and scores to other credit-reporting agencies. This was down due to a onetime 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 telco saw a decline -- and while telco saw a decline in the quarter, we've had very good success with recent customer wins and win backs and expect a -- 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 full year 2019, FMS delivered 2.5% revenue growth as compared to 2018. While quarterly FMS revenue is still choppy, they delivered growth in 3 of the 4 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 continued 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 4 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 are well down that path.

USIS adjusted EBITDA margins of 45.1% were down 240 basis points from fourth quarter 2018 primarily due to increased royalty costs as well as higher development expense 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, health care, 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 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 TWN database. TWN 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 compare to the roughly 170 million, including self-employed individuals in the U.S. nonfarm payroll, which gives us plenty of room to grow our database in the future. As you know, these TWN records really drive our revenue hit rates for our customers and benefits the U.S. consumers. Our system-to-system integrations with our customers allow us to monetize additions to the TWN database as soon as they are added by delivering the higher hit rates to our customers as they access our database in their system-to-system applications.

Employer Services declined in the quarter 6% and in line with our expectations primarily due to the expected declines at 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 TWN records expansion and some higher selling costs. Workforce Solutions is clearly Equifax' 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, and this was weaker than our expectations. The majority of the weakness versus our expectations was in Latin America, particularly in Chile, and to a lesser degree, in the U.K. debt management business. Importantly, we saw 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 fourth quarter '18 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 and 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 2 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 growth 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, an 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 not return to growth in the fourth quarter -- I'm sorry, 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 a double-digit constant currency growth in Argentina, Ecuador, Uruguay, El Salvador and Mexico, and we are 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 a strong 9% in local currency in the fourth quarter and 8% for the full year, reflecting a continued focus on customer innovation 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 expected, this 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 breach 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 580 basis points compared to the prior year and increased 200 basis points sequentially from the third quarter of 2019. As expected, in the fourth quarter, we saw the effect of 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 as President 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 be the head of the GCS business.

Turning now to our technology transformation. In the fourth quarter, we reached some significant milestones in our $1.25 billion EFX2020 security and technology transformation. As you recall, we launched a 3-year program in 2018 to migrate our data and applications to the Google Cloud. We've made significant progress on the implementation of our U.S. data exchanges in 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, NCTUE, auto, target connect and our IXI wealth exchanges 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 6 to 12 months. By the end of second quarter in 2020, we expect to have completed initial migration of our U.S. commercial exchanges, property exchange and our DataX exchange. And by third quarter of 2020, 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 and is integrated with InterConnect, 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 of 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 in rolling out our Ignite analytics platform with over 150 customers now using Ignite Direct and Marketplace. NDT, our patented explainable machine learning technology, has now been deployed in the Ignite development with over 30 customer models. And a few weeks ago, we were awarded 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., in Australia and New Zealand on consumer exchanges 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 are 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 a similar amount 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 are very pleased with customers' 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 are making on 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 remains a key component of our EFX2020 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 gave you 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 2x in 2019 and are back to the level that we were seeing in 2016. EWS also had a very strong new product year, doubling their new product launches. Innovation and new product rollouts will get increasing focus from our team in 2020 and '21 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. This is a key lever for Equifax' growth in the future.

In 2019, USIS launched new or enhanced products in marketing, including enhanced email append, DataX prescreen and pre-approval of One; in Identity and Fraud, including our Luminate -- new Luminate fraud product suite and Synthetic ID 2.0, and in several vertical-specific products in commercial, which allow our customers to take advantage of our broadened commercial lease payment data set with the acquisition of PayNet; in real estate, for lead scoring, a new Insight Score for personal loans; and for the insurance industry, a new score, the 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 employment data, which is part of their path towards being a data hub that centers around their unique income and employment data asset. EWS' new products included expanded mortgage product offerings as well as new talent reports to be rolled out to support 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 NPIs 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 NPI rollouts in 2019, and we plan to invest even further in innovation and new products in 2020 and beyond. NPIs 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 a consumer's financial profile from rental data. These rent-reporting platforms enable consumers to opt-in to include rental payment data as a part of their credit report to allow a more complete picture of their financial history. All 3 companies, as a part of their credit education initiatives, will also present their users with a free weekly or monthly VantageScore so consumers can track score changes over time. We believe these partnerships are a win for consumers and a new data source for Equifax.

And 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 EFX2020 strategy that 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 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 EFX2020 cloud-native technology transformation has accelerating momentum, and we are now implementing, in production, major exchanges as well as our Ignite analytical environment and 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 that we have about the power of the new cloud-native environment to drive innovation, speed-to-market, new products and solutions, always-on stability, and the cost and cash savings we talked about previously. We remain convinced that our cloud investment will be transformational for Equifax and 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.

And last, we have the right team in place for the future of Equifax. Over the last 2 years, we brought in strong talent to my leadership team and the broader business. We are all aligned on returning Equifax to growth and market leadership.

We're energized by all we accomplished in 2019 and the momentum in the business as we move into 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.

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John W. Gamble, Equifax Inc. - Corporate VP & CFO [4]

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Thanks, Mark. I will generally be referring to the financial results from continuing operations represented on a GAAP basis, but will refer to non-GAAP results as well.

In the fourth quarter, total nonrecurring or onetime 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. 4Q '19 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 of about flat in 2020 is, we believe, only slightly more positive on the order of 50 basis points than the current MBA originations forecast of down 7%. Inquiries can be very meaningfully -- can vary meaningfully from originations principally due to mortgage type mix and timing of inquiries versus closed loans.

In the fourth quarter, general corporate expense was $211 million. Excluding nonrecurring costs, adjusted general corporate expense for the quarter was $72 million, down $4 million from 4Q '18.

Adjusted EBITDA margin was 35.2% in 4Q '19, up 200 basis points from 4Q '18 and up 130 basis points from 3Q '19. As we discussed in October, and as 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 4Q '19, growth in margins in International and GCS as well as leverage on corporate costs as revenue grows. Margin declines in USIS and EWS from strategic investments partially offset these increases.

For 4Q '19, the effective tax rate used in calculating adjusted EPS was 22.7%, slightly below the approximately 23% we had provided for guidance for 4Q '19 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 more than driven by the following nonrecurring items: Equifax made payments of $341 million in 3Q '19 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 4Q '18 and 1Q '19 were $36 million. Capital spending, or the incurred cost of capital projects in 4Q '19 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' 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 6 to 12 months from the start of production to fully transition a legacy exchange or decisioning 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 legacy systems is not expected to substantially occur until late 4Q 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 2/3 of this additional cost and cloud costs, net of any legacy system decommissioning savings, representing approximately 1/3 of this cost. As we move into 2021, we expect the savings from the decommissioning of legacy systems to exceed the incremental cloud costs, resulting in a net benefit to the P&L as opposed to the duplicate costs 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 costs portion of our cost of goods sold, and the technology costs portion of our cost of goods sold represents just under 15% of our total COGS; and a 25% reduction in our development spend, both in expense and capital. And 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%. This assumes 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. Employer Services is expected to be flat to down. International revenue will grow mid-single digits, with growth strengthening in the second half of '20 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 8 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 clearer picture of the post-Equifax 2020 earnings power of Equifax.

Due to the substantial increase in depreciation, we will, in 2020, add our -- add to our discussion with you more focus on adjusted EBITDA margins, which we believe will better reflect the true earnings power of Equifax. In 2020, adjusted EBITDA margins are expected to expand by approximately 50 to 100 basis points. This includes a 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 nonrecurring expenses, comprised of $250 million in nonrecurring 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 2020, as we have stated previously, we will no longer exclude -- sorry, in 2021, as we have stated previously, we will no longer exclude these nonrecurring 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, 1Q '20 inquiries are expected to remain strong, up over 21% year-to-year. 2Q '20 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 within the corporate cost line is expected to increase over $15 million. 2020 corporate costs, 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 costs 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 will occur in 1Q '20. 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 3Q '19 and 1Q '20. About 2/3 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 reported revenue and adjusted EPS, with 1Q being the lowest and 3Q and 4Q being the highest in dollar terms. However, in terms of year-over-year growth rates, we would expect 1Q to have the highest growth rates for revenue and adjusted EPS. For 1Q '20, 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 1Q '20 and negatively impact adjusted EPS by $0.01 per share. Higher interest expense negatively impacts adjusted EPS by $0.03 per share versus 1Q '19. The tax rate in 1Q '20 is expected to be about 25%.

And with that, operator, please open it up for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question will come from Andrew Steinerman with JPMorgan.

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Andrew Charles Steinerman, JP Morgan Chase & Co, Research Division - MD [2]

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

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John W. Gamble, Equifax Inc. - Corporate VP & CFO [3]

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Yes. So 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 we translate it into credit inquiries. So it does reflect the inquiries we receive. It isn't necessarily a proxy for our revenue because, obviously, there's pricing changes in a 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.

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Mark W. Begor, Equifax Inc. - CEO & Director [4]

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And we also get some penetration with some mortgage customers where they're using our either credit reports or the TWN records 2 times, 3 times, 4 times in their mortgage process. So that's another part of our revenue model.

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John W. Gamble, Equifax Inc. - Corporate VP & CFO [5]

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Yes, absolutely. So -- and as you know, historically, we've tended 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.

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Andrew Charles Steinerman, JP Morgan Chase & Co, Research Division - MD [6]

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Right. And then, John, the second part was to do 4% to 7% constant currency revenue growth, you're assuming that 19% of your revenues is a headwind. So you would have to do kind of high-single-digit constant currency revenue growth in the non-mortgage segment, right?

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John W. Gamble, Equifax Inc. - Corporate VP & CFO [7]

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So certainly, our guidance indicates that non-mortgage is going to be higher, right? Is going to do better. Now again, but you have to keep in mind, we'll outperform that -- EWS, for example, as they continue to grow records, will certainly outperform in the mortgage segment the revenue they generate versus that inquiry index. So you can't just use the credit inquiries as a proxy directly to revenue because certainly, we do perform differently than that in certain circumstances.

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Operator [8]

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Next question will come from Kevin McVeigh with Crédit Suisse.

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Kevin Damien McVeigh, Crédit Suisse AG, Research Division - MD [9]

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

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John W. Gamble, Equifax Inc. - Corporate VP & CFO [10]

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Just ask the question one more time. I didn't fully follow. I'm sorry.

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Kevin Damien McVeigh, Crédit Suisse AG, Research Division - MD [11]

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Yes. So it looks like there's -- the depreciation, if I heard you right, it was kind of a $0.40 to $0.50 headwind, the duplicative 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 it? 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?

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John W. Gamble, Equifax Inc. - Corporate VP & CFO [12]

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So what we indicated was it was $0.40 to $0.50 per share for both the increase in depreciation, and the duplicate costs were 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 8 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, give 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 are also going to see significant increases in cloud costs in 2020. So I think that information was broadly out there before.

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Kevin Damien McVeigh, Crédit Suisse AG, Research Division - MD [13]

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That's helpful. And then, just with the indictments, does that open the potential that maybe you can recover some of those costs you have incurred already, the outcome insurance? Or does that change the outcome in terms of what you've already incurred?

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Mark W. Begor, Equifax Inc. - CEO & Director [14]

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I think we've fully taken 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 charge we took in the fourth quarter will be Equifax-funded. These are all net -- the numbers we shared with you are net of insurance.

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Operator [15]

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Next question will come from Manav Patnaik with Barclays.

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Manav Shiv Patnaik, Barclays Bank PLC, Research Division - Director & Lead Research Analyst [16]

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

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Mark W. Begor, Equifax Inc. - CEO & Director [17]

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Yes, I think that John talked about, we expect that USIS overall to be in the 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 rates. It's making great progress. I think you know, a year ago, when we were on this call with fourth quarter of 2018, that business was in the flat-to-negative mode and was just getting out of the penalty box with our customers. And we're now 4 quarters or so into that recovery. We're making great progress as far as their pipeline's building and 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's 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 that since the cybersecurity incident. But we're just seeing deeper pipelines and better win rates, which gives us confidence as we go into 2020.

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John W. Gamble, Equifax Inc. - Corporate VP & CFO [18]

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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 history of the fact that we've generally significantly outperformed the mortgage index in terms of our own mortgage revenue growth.

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Manav Shiv Patnaik, Barclays Bank PLC, Research Division - Director & Lead Research Analyst [19]

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Got it. John, just 2 clarifications on the guidance. So one, could you just -- is there any M&A baked into it, whether that's India or any of the other tuck-ins you did from this prior year? And then I lost you a little bit on the $0.40 to $0.50 that you're incurring this year and how that -- the savings that you said was 1/3 of the cloud cost or something. I was hoping if you could just help me with that in '21?

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John W. Gamble, Equifax Inc. - Corporate VP & CFO [20]

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Yes. So in terms -- 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 transition costs, in system transition costs?

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Manav Shiv Patnaik, Barclays Bank PLC, Research Division - Director & Lead Research Analyst [21]

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Yes.

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John W. Gamble, Equifax Inc. - Corporate VP & CFO [22]

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That $0.40 to $0.50 per share is made up of 2 things. We said about 2/3 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 of that $0.40 to $0.50, we've said about 2/3 of it will be substantial increase in depreciation in 2020 versus 2019. And that's -- and then about 1/3 of the incremental costs 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, the period of running 2 sets of systems, would be about 1/3 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 2 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.

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Mark W. Begor, Equifax Inc. - CEO & Director [23]

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And Manav, just to add to that. It's Mark. 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 on the duplicative cloud costs, as you know, those aren't going to be here forever. And those are going to start, as we decommission systems, that will turn into being a positive. There will be some of that 2020. That's in our guidance now and the numbers John talked about, and that only 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 increased amortization, same thing. That's a temporary element, if you will, which will be there for a number of years of that increased amortization, which is a noncash item, and that's going to work its way down as we amortize off our investments in the cloud costs. And 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.

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Manav Shiv Patnaik, Barclays Bank PLC, Research Division - Director & Lead Research Analyst [24]

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And just what was the M&A contribution, John? I know you assume only deals closed. So what is that in 2020?

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John W. Gamble, Equifax Inc. - Corporate VP & CFO [25]

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

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Operator [26]

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Next question will come from George Mihalos with Cowen.

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Allison Michelle Jordan, Cowen and Company, LLC, Research Division - Associate [27]

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This is Allison on for George. 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 costs. I'm just curious if there's anything else to call out there, maybe mix? And how we should think about segment margins going forward in 2020?

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Mark W. Begor, Equifax Inc. - CEO & Director [28]

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Yes, I also mentioned, Allison, that there was some additional sales costs in the fourth quarter in that business, which puts 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 they're high growth in their inherent margins. That's a business that we expect expanding margins going forward.

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John W. Gamble, Equifax Inc. - Corporate VP & CFO [29]

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And just to make sure you were clear. The royalty costs are actually separate from the third-party implementation costs, right? So those are 2 different cost items that affected us in the quarter. As well as, obviously, increased sales expense.

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Allison Michelle Jordan, Cowen and Company, LLC, Research Division - Associate [30]

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

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Mark W. Begor, Equifax Inc. - CEO & Director [31]

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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 and then turning that into usable information that we can take to the marketplace has a lag to it. 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.

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Operator [32]

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Next question will come from Hamzah Mazari with Jefferies.

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Hamzah Mazari, Jefferies LLC, Research Division - Equity Analyst [33]

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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?

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Mark W. Begor, Equifax Inc. - CEO & Director [34]

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Go. Take it, John.

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John W. Gamble, Equifax Inc. - Corporate VP & CFO [35]

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Perfect. So sales cycle, it really depends on the product, right? So if it's a batch product, something that we've sold historically, that's effectively reselling. It's something that can sometimes be initiated and transacted within a period. For implementing a new online service with a customer, the implementation period can be over a year, right? And it really depends on the service. In terms of NPI contribution, new product contribution in 2019 versus prior years, I think what we tried to be clear on is the level of acceleration we're seeing in new product 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 2017-28 (sic) [2018] period. So that was a -- so we're seeing a period of lower new product revenue generation, but we see very good signs that, that will start to recover as we move into 2020 and then certainly, 2021.

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Mark W. Begor, Equifax Inc. - CEO & Director [36]

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If you heard my comments, just to add on that. New product innovation is a real priority of ours, and it's one that obviously, we had some pressures on following the cybersecurity incident with all our focus on security and remediation and everything else. And I'm pleased that our efforts in 2019 to make this a priority central to Equifax' strategy. And you saw the performance of us rolling out the highest new products in a number of years in 2019, and that emphasis is going to continue. We really believe that our cloud transformation and having our single data fabric and our having our products in the cloud is going to allow us to even accelerate that going forward. And 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.

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Hamzah Mazari, Jefferies LLC, Research Division - Equity Analyst [37]

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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 sort of an info services company? Any sense of rough percentage? Or qualitatively, anything -- any comments there?

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John W. Gamble, Equifax Inc. - Corporate VP & CFO [38]

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I think the best thing I can suggest is if you take a look at the earnings deck 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 the -- for each of the business units. And that'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.

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Mark W. Begor, Equifax Inc. - CEO & Director [39]

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I think the other thing that you should be aware of is that our business and our industry, during a credit cycle, obviously, expenditures by our customers on new originations may come down, but then there's a shift in the focus to the back book, to managing credit lines. So there's an element of counter cyclicality to it. And then the other element that's 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 a very different scale in our business in 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 -- that's how we think about ourselves if there is a credit cycle, we're very different, in a positive way, than we were in the last credit cycle.

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Operator [40]

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Our next question will come from Barry -- Gary Bisbee with Bank of America.

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Gary Elftman Bisbee, BofA Merrill Lynch, Research Division - MD & Research Analyst [41]

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I was hoping to dig in a little bit more to the USIS growth organic ex-mortgage slowing from, I guess, it was 3% to slightly positive. Part of it, clearly, I understand financial marketing and an outsized growth quarter last quarter and maybe a more normalized trend number this quarter. And so that's part of it. And you called out a couple of the end markets that were a little weaker. But can you give us any other color just to understand this, and maybe how we think about the cadence of that into Q1? That would be helpful.

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Mark W. Begor, Equifax Inc. - CEO & Director [42]

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Go, John.

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John W. Gamble, Equifax Inc. - Corporate VP & CFO [43]

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Sure. So the -- yes, I think in Mark's script, right, he talked specifically about direct -- our D2C business, which is the transactions we do with our competitors. And part of the reason that was down obviously was because we had a transaction that occurred in -- a sale that occurred in the fourth quarter of '18, 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 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 do see continuing improvement, that the sales metrics are very good, the level of growth in pipeline is outstanding and we're very happy with our performance. So I think overall, we're expecting to see nice improvement in 2020 relative to 2019 in total and certainly relative to where we ended the year.

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Gary Elftman Bisbee, BofA Merrill Lynch, Research Division - MD & Research Analyst [44]

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And then a follow-up, just on the pipeline, you've referred to improvement and growth, but in absolute terms, is like the -- is the pipeline back to where it was in mid-2017? Or are you still below that? And as part of that, historically, with NPI, you guys talked about a 3-year build to sort of mature revenues. '17 and '18, you had a lot less product development in NPI or new products as you were trying to fix some of the challenges. Is the fact that you had those product launches in '19, should we think it's a 3-year process to really get a lot of that stuff, particularly in USIS, getting the business back churning the way one might expect it to on a normalized basis?

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Mark W. Begor, Equifax Inc. - CEO & Director [45]

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You 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 0 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 '18 and moved into '19, 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 if it's -- 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, and so there's real intensity around pulling that forward. I wouldn't think about a new product taking a full 3 years to get to revenue. I think we've talked about before that there's a maturity element in that. But each of these new products have a different cycle depending 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 they go -- we go through a contracting process with their sourcing team many times. And then, of course, then you go into implementation mode, which sometimes includes their IT team. And that creates some unpredictability in a pipeline that, maybe to your point, is less mature, meaning you don't have 2-year-old deals in there, 3-year-old deals, 1-year-old, 6-months, you don't have that layering. Our pipeline today is more of a, call it, a 12-month kind of build versus a historical would have 2, 3 and -- 2- and 3-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 pipeline is building, we're seeing better win rates out of the pipeline in the second half of the year than the first half, which tells us that we've got a better pipeline. And that commercial activity gives us the enthusiasm about the continued progress of USIS going forward as we get into first quarter in 2020.

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John W. Gamble, Equifax Inc. - Corporate VP & CFO [46]

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And Mark specifically referenced new deals won in his script. And yes, that is -- that's up higher than we saw prior to 2017.

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Mark W. Begor, Equifax Inc. - CEO & Director [47]

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Right.

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John W. Gamble, Equifax Inc. - Corporate VP & CFO [48]

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So we think the momentum is good.

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Operator [49]

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Next question will come from Toni Kaplan with Morgan Stanley.

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Toni Michele Kaplan, Morgan Stanley, Research Division - Senior Analyst [50]

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In an interview the other day, Mark, you mentioned that you're about 2/3 of the way through the tech transformation. And you mentioned some color earlier in terms of what you've done and what you have left to do. I guess, my question is can you just give some color on how much risk is left in terms of execution? Like have a lot of the difficult items been done already, or is there still a lot to come? And just any color on that would be helpful.

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Mark W. Begor, Equifax Inc. - CEO & Director [51]

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Sure. And I talked a bunch of my comments earlier, Toni, about that. And I think, first off, as you know, these kind of tech transformations are not for the faint of heart, meaning that you use the term risk, but there's a lot to do and a lot to work on. We're 2 years into it, call it that, whatever, that kind of time frame. And the milestones we're achieving around this -- when I think about a tech transformation like this, and I've done them before, obviously, not at this scale, but I've done them before. First off, you have to make sure does the technology work? Meaning, can we get our databases from our legacy applications into the cloud. And I think we're making this big move of going from siloed databases to a single data fabric. And that's in place. We did that in 2019. We've started moving our exchanges. As you know, we have -- I don't know what the number is, but probably a couple hundred exchanges around the globe, close to 50 here in the U.S., where we have some big ones. And we're moving big ones into that new Google Cloud fabric, and it's working. We have customers accessing it. So that's kind of risk #1 is, will the technology work. And I think we're over that hurdle. The second one is you've got to migrate your customers. And we've been very clear with you that the feedback from customers is extremely positive. If you think about it, if you're a customer, do you want to do business with a company that has the very latest technology, that's going to deliver always-on capabilities, that's going to deliver a latency and speed that is not possible in the industry today, and with security that's second to none given the focus on data security. And so customers all want to do it. The wildcard or that one complexity that I talked about in my comments earlier is getting into their schedule. And every one of our customers has an IT team, they've got their own priorities for 2019, '20 and '21, and we just have to make sure we fit into that. So that's, that scheduling or forecasting element that I talked about earlier. But as you also heard in the comments, we're really rolling, meaning we're moving thousands of customers. And so there's real progress there, but it just takes time. And of course, we need to move all our customers off each of our different mainframe or server environments at different data centers we have in order to decommission those and get the savings that we're looking for from the technology transformation. So to me, it's really around execution. And you've heard our transparency around the technology element, and we feel very good about that. And we're making real progress around the customer migrations, but there's still work to be done there.

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Toni Michele Kaplan, Morgan Stanley, Research Division - Senior Analyst [52]

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Great. And then with the legal settlement almost behind you, pending the final payment, I guess, any new thoughts around capital allocation, notably, like when we could start seeing share repurchases?

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Mark W. Begor, Equifax Inc. - CEO & Director [53]

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Yes, I think you're leading me towards our financial framework, which, as you know, we pulled in 2017. We've been clear with you that we want to put that back in place. We're getting closer to that time frame. We've been very consistent. We talked about 3 areas that we wanted to make sure we had clarity on before we put that framework back in place, which will include our capital allocation model. One was real clarity on the legal settlements. And with today's announcement of the finalization of the U.S. issues, we're at that stage with that first item.

Number two is the tech transformation. We already talked about that. Really having some clarity about timetable, our execution, our confidence in that. And I'd say every day and week, we get closer to completing that one.

And number three is USIS. And we're way further along than we were a year ago, and even in the fourth quarter with our confidence in USIS. And so just a long-winded answer that it's our expectation that the way we're pacing that we're looking to put that framework back in place for sure in 2020.

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Operator [54]

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Thank next question will come from Bill Warmington with Wells Fargo.

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William Arthur Warmington, Wells Fargo Securities, LLC, Research Division - MD & Senior Equity Analyst [55]

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So first off, a tip of the hat to Jeff Dodge. It's one of those, just when I thought I was out, they pull me back in situations, I think.

So my question is, you gave some strong new stats on the new deals won in the fourth quarter. I was just hoping to get some color there. You mentioned some on telco, some wins and win backs. But for the new wins, how many are going to new customers? How many are share gains? How many are just additional sales into the same customers?

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Mark W. Begor, Equifax Inc. - CEO & Director [56]

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Yes, Bill, it's probably hard to split. I would just tell you that it's all of the above. First off, new wins, as you know, a competitive takeaway is hard, and it's one that we all work on, but we've had a handful of those. So that's in that bucket. New products are really a fuel for us, whether it's InstaTouch or Ignite rollouts or some of the new products and scores that we talked about that we've got in the marketplace. Those are bread and butter, really helping our customers grow their originations, solving on fraud. So that's a positive. And then share gains, we've had a handful of those, too. And I think you're talking mostly about USIS in your comments or that's where your question is directed. But of course, broadly, that's the fuel for our growth in Equifax is to look for expanding either new customers, new verticals, penetration and share gains with existing customers. New products are really a big fuel for growth. And I hope you get a sense of the focus we have around the new products. It's a real priority of mine. It's one that I think our tech transformation is going to leverage. It's going to give us real fuel in '20 and '21 and beyond as we go forward to really be more aggressive around funding new products, investing in new products and then bringing them into the marketplace.

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William Arthur Warmington, Wells Fargo Securities, LLC, Research Division - MD & Senior Equity Analyst [57]

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And for a follow-up question. Just wanted to see if we could get an update on the FICO partnership, how that's been going? And maybe some comments on the Inflection score that you're putting together with Verisk?

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Mark W. Begor, Equifax Inc. - CEO & Director [58]

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Yes, first on the FICO partnership, as you know, we announced that last March. We're in the marketplace with our integrated decisioning system inside of FICO with our data piped in there. And we're in with a handful of customer POCs. We've had a handful of customer wins around the globe. So we're pleased with that performance with FICO. And I think you know, we're rolling out some other products, including an AML/KYC here in the United States that's going to be in market in the first quarter. And we've got some other opportunities there. So there's a great collaboration between Equifax and FICO around how we can leverage our respective capabilities in the marketplace, and we'll look forward to that growth going forward.

The score with Verisk is new. It's just in the marketplace. We've had good response from customers so far. I think it's another example of what we -- what I like to do and we like to do is really collaborating with strong partners like FICO or Verisk to really leverage our respective assets and market capabilities to bring new solutions to the marketplace, and that's just another example. So that one's just newly launched in the marketplace.

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Operator [59]

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Next question will come from Jeff Meuler with Baird.

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Jeffrey P. Meuler, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [60]

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Yes, it sounds like, given the CapEx guidance for 2020, that depreciation is going to continue to build in '21. So can you give us some sense of once you're through EFX2020, and I know there's some spillover into '21, what does CapEx go to as a percentage of revenue on an ongoing basis? Because I think the 25% development savings are both OpEx and CapEx. So that would be part one of the question, so we can get to EBITDA less CapEx.

And then part two, on the 15%-plus of tax savings within COGS, do you get the substantial majority of that on a gross basis in 2022? And I understood there could be some reinvestment. Just trying to figure out the timing of when you'll get the step-up on that?

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Mark W. Begor, Equifax Inc. - CEO & Director [61]

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Jeff, you're leading us quite tactfully into a financial framework, so let me give you my best response to that. I think they're very good questions. And first, on the CapEx, we're not ready to give '21 guidance, but -- or a financial framework for our capital allocation in the future. But we've been clear with you that we expect: number one, the incremental spend that we've had in '18, '19 and '20, to fund the EFX2020 cloud transformation. We've been very clear that, that's going to come down in '21 and will continue at a more normal rate going forward, meaning versus this incremental rate that we've had in '18, '19 and '20. And we've really shown you what the incremental dollars are. So I think you can think about what it looks like on the other side. And then as you pointed out, we've also been clear that we expect to see development savings, meaning with a new tech stack, with a single standardized set of products, we expect to see savings in the future. So that will be a part of that CapEx benefit in the future post-2020. And where we get the full run rate will be something we'll come to you when we put the financial framework in place.

On the operating cost savings, we've also been clear that we expect to see inside of our cost structure for technology real savings from going from legacy to cloud. That is -- we have some of that feathering in our guidance. It's in our numbers for 2019 -- I'm sorry, for 2020. That will continue to accelerate through the year as we decommission legacy environments, and that will continue into 2021. And we're not ready to give a run rate on that, but we tried to give you both by sharing what we view as the duplicate costs as well as that guidance around our expectation of 15% to 20% operating cost savings from technology going forward so you can think about what Equifax looks like in the future. And as you know, those 2 benefits, along with -- we expect some accretion to our top line from ability to roll out more new products from the new technology investment are the 3 benefits that we're driving to as a part of this big tech investment.

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Jeffrey P. Meuler, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [62]

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Okay. And then just how meaningful is this EWS data hub concept like the new data sources beyond employment and income data? Just any additional color on that or how meaningful this is.

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Mark W. Begor, Equifax Inc. - CEO & Director [63]

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Yes. It's another element, Jeff. I think we've been very clear that we think more data results in better decisions for our customers. And EWS has a very unique position in a lot of verticals with their income and employment data that they provide. As you know, it's really the only place to go to get that data set, and a lot of our customers have to go to other data sets to get other data. And either us building that out, us partnering on it or making acquisitions to add those data sets we think is another lever for growth for EWS. It's part of that theme that I've used with the team internally and with you and others in the investment community that while Workforce Solutions is clearly our best business, it's performing way above the rest of Equifax. We think about it being in the second inning with the opportunities in front of it, both in its core business, but also in what it can do around things like leveraging its market position and its unique data assets with other capabilities in order to bring more value to our customers.

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Operator [64]

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Our next question will come from Andrew Nicholas with William Blair.

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Andrew Owen Nicholas, William Blair & Company L.L.C., Research Division - Analyst [65]

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You touched briefly on your decision to increase your ownership stake to 100% in ECIS in India, which is obviously a fast-growing market. Can you talk a little bit more about your business in India today, how you think about the opportunity set there? And then any color on ECIS' competitive positioning? That would be helpful.

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Mark W. Begor, Equifax Inc. - CEO & Director [66]

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Yes. It's a business that, as you know, we've been in for a long time. We like the market a lot. We had the opportunity and strategically owning 100% of the business makes it easier to operate, easier to control, and then we kind of own our whole destiny. So we're very pleased to move forward on that. I think it's a market we want to be in. It's a market that we want to grow. You may know that we're doing a build of Workforce Solutions in India, as an example. We started that a couple of years ago, and that's got some traction on it. We just think it's a market that we want to play in. And one that's a big market.

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Andrew Owen Nicholas, William Blair & Company L.L.C., Research Division - Analyst [67]

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Great. And then just back on organic revenue growth guidance, just to ask it another way. Can you just walk us through what you consider to be the primary factors that would drive you to the top and bottom ends of that guide outside of any changes to mortgage inquiry volumes?

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Mark W. Begor, Equifax Inc. - CEO & Director [68]

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Yes, I'll give you a few thoughts. I don't want to go too far in this. But obviously, USIS is still not back to where it was before the cyber event. And we're convinced -- I've been very clear. It's not a matter of if, it's only when. But their recovery, which we see great momentum in, if that accelerates, that's a real positive for us near term and long term, so that's a very positive one.

International, I think as you know, we gave guidance on where we expect the year to be, but we're still battling some economic headwinds. Brexit, while it's resolved, there's still some uncertainty on implementation and what it's going to do to the economy over there, so I think that's a little bit of a headwind. Latin America seems to have settled down, but that tends to be temporary. There's always issues and challenges down there. And of course, Australia, we've seen some positive momentum, but the recent wildfires there, some are saying could have an economic impact there. So I think that's another factor in there.

And then the real positive is, obviously, Workforce Solutions has some great momentum, is performing extremely well, and that's kind of a bedrock inside of Equifax that we've got a lot of confidence in, that they continue to perform. And they performed last year above our expectations quite significantly. And we expect them to continue to perform very, very well in 20 -- 2020.

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John W. Gamble, Equifax Inc. - Corporate VP & CFO [69]

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Just want to be clear, right? So we provided overall guidance, and we provided mortgage market inquiry guidance, right? We didn't give mortgage guide -- 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, we have performed -- our revenue has performed better than the overall mortgage inquiry market, in some cases, substantially. So that's a judgment you're going to have to make for yourself.

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Operator [70]

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Next question will come from George Tong with Goldman Sachs.

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Unidentified Analyst, [71]

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Yes, [Brian] on for George. So I was just 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 organic growth potential of the business isn't halted?

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Mark W. Begor, Equifax Inc. - CEO & Director [72]

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Yes. Again, got a similar question earlier, [Brian], on long-term guidance, we clearly gave you 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.

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Unidentified Analyst, [73]

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

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John W. Gamble, Equifax Inc. - Corporate VP & CFO [74]

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Yes. So we didn't give specific information on price increases, right? So generally speaking, there's 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.

And operator, we have time for one more.

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Operator [75]

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And our final question will come from Shlomo Rosenbaum with Stifel.

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Shlomo H. Rosenbaum, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [76]

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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. That'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 -- just as the rubber meets the road, the organic growth of the business, excluding the mortgage, just so that we can track. Was it a little bit up? Was it a little bit down? Where are we doing in terms of actual sales and things coming into revenue?

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John W. Gamble, Equifax Inc. - Corporate VP & CFO [77]

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So we actually are giving that -- we gave that number, I think, each quarter last year, right, in terms of organic non-mortgage growth. We indicated this quarter, it was up slightly. Last quarter, I think it was just under 3%. And I think we gave it each of the first 2 quarters as well. So we are 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.

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Shlomo H. Rosenbaum, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [78]

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So this -- I'm talking about for the whole company. So that net numbers -- the numbers you're referring to for the whole company?

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John W. Gamble, Equifax Inc. - Corporate VP & CFO [79]

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That's for USIS.

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Shlomo H. Rosenbaum, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [80]

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Okay. And just -- if I took the whole company together just in mortgage, and should I look at it as like 8.5% growth, minus 4% that would be implied by -- inquiries?

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John W. Gamble, Equifax Inc. - Corporate VP & CFO [81]

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So Shlomo, we do give mortgage as what percentage of the total company mortgage revenue is, right? So I think from that, you can get a good view as what -- of what mortgage revenue is for the entire company and how it's changing. And that's information we also provide.

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Shlomo H. Rosenbaum, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [82]

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So is it going up or down? I mean, just -- it's just a question. If I look at it, is the mortgage, the non-mortgage revenue organically up or down? And just -- I know it's choppy. I'm just trying to see if I can do the calculation the way I used to do it.

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John W. Gamble, Equifax Inc. - Corporate VP & CFO [83]

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So that isn't something specifically we disclose, right? So -- but I kind of walked you through what we do disclose, and that I think the information is available for you to do whatever analytics you'd like, okay?

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Shlomo H. Rosenbaum, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [84]

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Okay. And then what drove the strong EBITDA margins in international?

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John W. Gamble, Equifax Inc. - Corporate VP & CFO [85]

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Yes. So I think Mark walked through that in his discussion, right? So we got back to growth. They did some very significant cost reduction actions. As you take a look at fourth quarter of '18 and 2019 through that entire period. So their cost structure got nicely better. And as they return to growth, they got a lot of leverage from that in the fourth quarter. And they also had some benefit from income from some minority investments. So those 3 things drove their higher EBITDA margin.

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Shlomo H. Rosenbaum, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [86]

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So is that -- were the cost takeouts a way that we can look at them kind of establishing a base here? Or as that ramps, that we should be ramping from this kind of level?

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John W. Gamble, Equifax Inc. - Corporate VP & CFO [87]

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Yes. So the significant majority of the cost actions, I think, that they plan to take have been executed. So yes, this is kind of the base of cost that we're starting from. The base that we ended with in 4Q '19.

Okay. We'd like to thank everybody for participating, and we'll talk to you again soon.

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Operator [88]

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And that does conclude our call for today. Thank you for your participation. You may now disconnect.