易速傳真 (EFX) 2003 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Equifax Second Quarter Earnings Release Conference Call.

At this time, all participants are in a listen-only mode.

Later, there will be an opportunity for questions and comments.

Instructions will be given at that time.

If you should require any assistance during today's call, please press star zero and an AT&T operator will assist you.

As a reminder, this conference is being recorded.

I would now like to turn the conference over to our first speaker, Mr. Jeff Dodge.

Please go ahead.

Good morning.

Welcome to today's conference call.

I'm Jeff Dodge, investor relations.

With me are Thomas Chapman, our Chairman and CEO, Mark Miller, President and COO, Donald Heroman, CFO, Dennis Story, VP of Finance and Dave Gunter, Corporate Controller.

We'll be making certain forward-looking statements to help you understand Equifax and its business environment.

These statements including comments regarding our expectations for 2003 are forward-looking then of the security that are subject to inherent risks.

Please review our 2002 10-K and other SEC filings that describe our company in more detail.

Today's call is being recorded in addition to being Web cast live over the Internet.

The replay will be available on our Web site at www.equifax.com.

Now I'd like to introduce Thomas Chapman, our chairman and CEO.

Thanks, Jeff, and good morning, everyone.

Equifax had another outstanding quarter in Q2.

We delivered record revenues, while still improving operating performance in almost all of our business units and we made significant progress in our primary strategic initiatives, Consumer Direct, Small Business Credit Reporting, and analytics and modeling of our predictive sciences business.

Our second quarter performance continues the momentum and builds on the foundation established in the first quarter.

In fact, it's the best revenue growth quarter in the history of our company.

Revenues grew 18% to $317 million, a record quarter in our history.

EPS from continuing operations was 36 cents, up 6%.

As in Q1, our execution and performance was broad-based.

A tribute to the strength of the company and the 4,800 employees who delivered the results, serve our customers, and remain committed to maximizing shareholder value.

Across the board, the businesses hit their numbers with one exception.

Our e-Marketing business struggled within a very challenging environment during the quarter.

Donald and Mark will address this in a little bit more detail in a moment.

North America continues to be our growth engine.

Driven by the diversity in our core information businesses both in the US and Canada, and continuing strength in mortgage.

The Equifax business model is resilient and has proven that it delivers growth even in slow economic times.

The pipeline is strong, and we're excited about the prospects of our new growth initiatives, specifically the newest ones in Small Business Credit Reporting and our evolving analytics and modeling business.

Let's go south for just a minute, though.

In Latin America, the economies are stabilizing and local currency growth continues driven primarily by value-added decision solutions and analytics.

Despite all the challenging things in this region, our strong operating margins have continued to be maintained.

We continue to make good progress in Europe.

Margins improved to an all-time high for second quarter performance.

And we're on target to meet our expectations for the year.

Very interesting that consumer information reporting and ancillary services continues to be the key driver for our UK business, which, as you know, is the lion's share of our European franchise.

Now I'd like to just take a moment and update you on two of our strategic initiatives.

First, Small Business Credit Reporting continues to establish an excellent competitive position in this marketplace.

Our database now contains almost 40 million records on 17 million companies.

In June, we launched publicly, our commercial reporting products suite at the NACM, or the National Association of Credit Manager's convention in Orlando.

Quite frankly, response has been overwhelming, as this unit has continued to grow and now has generated revenues of $1 million dollars to date.

Next, we continue to see growing demand across all of our global markets and customers for our modeling and analytics solutions, which is delivering solutions that are increasingly focused on models, score validations, economic predictives and analytics targeted specifically at customer retention.

Again, we've seen a shift in the marketplace away from drive toward all acquisition to maintaining the good profitable customers they have, and that requires a plethora of information analyzed in order to have our customers serve their customers better.

Retention is the watchword in the industry today.

Clients are also using our products and services to monitor not only micro, but macro risk profiles of their current portfolios, and particularly guard against fraud, an increasing problem for our customers in the marketplace.

Donald will now give you more detailed financial update.

Following that, Mark will discuss our businesses and some of the dynamics and a bit more detail, and then I'll come back for some closing comments and, of course, then take your questions as always.

So now I'll turn it over to Donald.

Thanks, Thomas.

Our second quarter performance continues the strong pace we set in the first quarter.

In North America, which represents 84% of our revenues, and 89% of our operating profits, revenues grew 24%.

U.S. consumer and commercial information revenues of $135 million grew 23%, the best quarter ever for this business unit with record transaction growth of 34%.

Many of our major markets in addition to mortgage delivered record transaction growth.

Financial services delivered record volumes, accounting for 32% of our transaction growth, mortgage accounted for 33%, and telecommunications and utilities contributed 17%.

Our mortgage service revenue was up 81%, yet another record quarter.

Our Canadian operations delivered an all-time record in quarterly revenues.

They were up 15%.

Direct marketing services revenues, normalized for acquisitions were up 1%, reflecting the continuation of the challenges facing the marketing services industry.

Consumer direct revenues were up 101%, contributing an incremental $9 million of growth.

Equifax delivered consolidated margins of 27% in the quarter versus 33% last year.

While core margins remain very strong, which has enabled us to invest in key growth initiatives, in the quarter, there were four key factors impacting our core margins.

First, our lottery contract expired in May of 2002, eliminating $2 million of profit and approximately 1% impact.

Second, the performance of our e-Marketing products has suffered due to a severe shift in the industry.

Including some business write-offs during the quarter, operating profit was negatively impacted by $16 million or 5%.

As a result, we have taken aggressive cost-cutting measures including work force reductions, facility consolidations, trade receivable reserving, and write-off of data in an effort to refocus our business and return it to profitability.

Third, as I discussed in the first quarter call, we have continued to invest in future productivity improvements. $3 million was spent during the quarter, impacting margins by 1%.

We expect to realize savings from these initiatives in the second half of 2003 and significant savings in 2004 and beyond.

Finally, we have benefited from the profitable growth in Consumer Direct and Small Business Credit Reporting.

These initiatives produced lower margins than our traditional business, and impacted our overall margins by approximately 2%.

While meeting challenges in the quarter, we expect margins to return to the 30% level in the second half of the year.

Moving to our international operations, Latin America continued to make excellent progress driven primarily by local currency revenue growth in Brazil, which was up 16%.

When currency exchange rates are factored in, reported revenues were down 4%.

Europe's operating margins improved to 18% on flat revenue growth.

And in Spain, we entered into a letter of intent to sell our commercial operations, which is classified as a discontinued operation.

As a result, we have written down the commercial business's net assets in line with the letter of intent, resulting in a 5-cent a share loss.

Corporate financial for the quarter are as follows.

Free cash flow was an outstanding $63 million for the quarter.

Capital investment was at $10 million.

Our DSO was 56 days versus 61 days at the same time last year--significant improvement.

During the quarter, we repurchased just over 400,000 shares at approximately $10 million of cost, at an average price of $25.67.

We now have $192 million remaining under our authorization.

Again, an outstanding quarter for the company, we're very proud of the results.

And now I'll turn the meeting over to Mark.

Thank you very much, Donald, and good morning.

Now I'm pleased to give you some additional insight into the quarter starting in North America, Information Services.

In U.S. consumer and commercial information, we continued to drive share gain.

Overall, online transaction volume was up 34%, and nearly 70% of that growth came from non-mortgage activities.

Volume from our 75 largest customers was up significantly, driven by gains in our financial services and telco verticals.

Our momentum in the small and middle market continued as well, and for the quarter, we were up nearly 10% over last year, as a result of our aggressive cross selling and customer acquisition efforts.

A vitally important factor in our momentum is the products and services we're delivering at our customers' point of sale.

Decision Power and scoring continue to be our key competitive advantage for us.

While databasing technologies are important, marketing and risk management have become increasingly complex undertakings for our clients.

Our unique ability to extract information from a database and deliver actionable information at the point of sale distinguishes us in the marketplace.

I'd like to just give you a couple of examples.

We now have several large telcos using our point of sale decisioning solutions including Application Processing and scoring models for their new account opening and fraud detection process.

Another good example is a top 10 savings institution, which is now implementing Decision Power in over 2300 branch offices around the country, in addition to 14,000 brokers connected to their system.

Turning to mortgage services, we continue to experience outstanding growth driven by refinancing and market share gains.

Our best in class system availability enabled us to increase market share a full two percentage points in the quarter, to 14%.

As mortgage lenders, hustling to keep up with consumer demand, seek a more reliable source for their data needs.

Moving on to Canada, we'll shortly have 100% share of the online transaction volume with four of the top five banks.

This is driven primarily by core product functionality, meaning service levels, system reliability, and file quality.

We're also delivering superior value-added services to our customers in Canada such as scoring models and fraud detection tools.

So, despite a difficult environment in Canada with SARS concerns, we had an outstanding second quarter.

In credit marketing services, or CMS as we call it, we maintained our strong operating margins.

CMS continued to experience a shift from its new account acquisition products toward a more portfolio review environment and data enhancement services.

Also telco volume is up significantly compared to last year, as industry players ramp up their marketing efforts and vie for share in local, long distance, wireless, and broadband services.

In direct marketing, we offer a complete array of products and services for the postal and eMarketing needs of our customers.

The direct marketing landscape is changing.

As consumers exercise more control over how and in what form they'll receive marketing messages.

As a result, there's been a shift by our customers and prospects away from account acquisition to more account retention campaigns.

Our strategy is consistent with this market evolution.

We've combined now the best elements of our marketing databases and introduced a new product called Permissions, which adds precision and effectiveness to the goal market efforts of our customers.

Permissions integrates our extensive consumer demographic and preference databases.

This database, of over 40 million names includes over 20 different lifestyle and demographic attributes appended to each profile.

The result is a unique marketing database with updated email and postal addresses, and so far customer response and product performance has exceeded our expectations.

In our Consumer Direct business, we delivered another record quarter by doubling revenues to $17 million.

Strong demand for all of our products further demonstrates consumers' willingness to pay a fair price for information that helps them better manage their personal finances.

Based on customer feedback, two new products were introduced in the quarter, which expand the options and choices available to our consumers and help them protect against identity theft.

The success of our products has created a significant growth business for Equifax, focused squarely on consumer needs, to manage their financial health, and fight I.D. theft.

Moving now briefly to our international operations, Latin America continues to perform exceedingly well.

Brazil delivered record revenues in local currency with 16% growth.

Argentina revenues grew 33% over the first quarter with almost half of our revenue coming from Decision Power applications.

Throughout Latin America, our Decision Power and modeling solutions are increasingly becoming a vital part of our customers' operations, just as they are in North America.

So across all of Latin America, our operations are performing at or above our expectations.

In the U.K., we continue to win customers with our suite of value-add solutions.

Bank and financial institution there is are taking a leadership role in fighting I.D. theft and money laundering.

Recently, we signed a $2 million contract with a major U.K. bank for I.D. verification solutions to assist them in their anti-money laundering and anti-fraud efforts.

In U.K. consumer information, our largest 50 customers year-to-date volume was up 13%.

And finally, we're very excited about the launch of our Consumer Direct business in the U.K.

Using our new Internet based platform.

And with that, I'll turn it back over to Thomas.

Thanks, Mark and Donald.

Before we take your questions, let me just give you a view on the ongoing legislative activity in Washington concerning SCRA.

As you know, the Fair Credit Reporting Act since 1971 has been the governing piece of l legislation in America.

And in America, where the credit reporting and credit system is literally the idol of the world.

We have an election year coming up pretty soon, and, therefore, a lot of strange activities, as in your businesses and our businesses and every business, continue to pop up.

What we're doing is renewing the SCRA preemption, which gives us one set of rules, federally regulated, and which all of us in this industry operate.

If you'll note in the American banker online this morning, the house panel did okay, the SCRA preemption yesterday by a vote of 41-0, I might point out.

There is ongoing discussion about various amendments, what piece of legislation doesn't have that phenomenon in America with all sorts of hook-on and self-serving advantages.

I want to tell you that our industry is joined at the hip in this effort.

We are working together with the legislators, not only locally, but at the federal level.

We are continuing to make our points clear as did yesterday or day before Federal Reserve, Chairman, Greenspan in his testimony before the committee, and I quote, "it is very important to maintain a system that enables those credit scoring, credit reporting models and those technologies to advance," Mr. Greenspan said, "because if they do not, we will probably find that cost to consumers will rise."

Not a political - politically acceptable thing as election year moves forward.

And he went on to say we have a trade-off here, to make the system more transparent and remove mistakes, which, of course, are crucial.

But also to maintain the system in a proper way.

And a profitable way that enables those institutions to develop even more sophisticated models and tools.

We firmly believe that the credit-reporting infrastructure of the United States is, in fact, the model of efficiency.

That is our position.

There has never been a time in the history of America where Congress has legislated a company to deliver its products and services free, and we'll continue to work hard to prepare for the fight as it goes on, and it may well be that.

But we're increasingly, based on the results that I've just shared with you, bringing into our system those that support the need for there to be a viable credit system in this country, and that credit system is driven by accurate information.

There's a role that's played in legislative amendments are beginning to reflect it that says there are the credit reporting agencies, there's the consumer's right to know why they've been declined, in fact, they have not been declined by the credit reporting agency, they have been declined by the credit grantor, and, therefore, the credit grantor has a role to play in this as well.

And so we're all working together to try to find out or trying the best ways to continue to serve the markets, but I will tell you our principal role is to optimize shareholder value, and in so doing, we've been battling legislation for about the last 50 years and will continue to do that.

So I just wanted to hit on that.

If you have any other questions, this is not legislation that's passed, but I felt it incumbent upon us to give you our view and note that we are astutely on top of it across the board.

So with that, as always, we'll be delighted to take your comments and questions.

Ladies and gentlemen, to ask a question, please press "star" and then 1 on your touchtone phone.

You will hear a tone indicating that you've been placed in queue, and you may remove yourself from queue at any time by pressing the pound key.

If you're using a speakerphone, please pick up your handset before pressing the numbers.

Our first question comes from the line of Frederick Searby with JP Morgan.

Please go ahead.

Good morning, gentlemen.

This is Frederick Searby from JP Morgan.

Couple of questions for you.

The first one is, when you look at the corporate expenses and you highlighted that these are related to somewhat one-time legal and consulting fees, can you give us explicit guidance for the second half of the year where they should fall down to?

I assume you're still of the view that they should come off substantially.

And then secondly, you talked about momentum on the Small Business Credit Reporting and some of your other new initiatives.

Can you specifically -- which of your new initiatives are profitable, or do you expect to be profitable in the second half of the year contributing on that side?

Thanks Fred.

I'll let Donald handle the first one and then the second one, if he wishes, and then we'll amplify that accordingly.

Thanks Fred.

The corporate expenses of $30 million that we cited really fall into two categories.

One is some severance which amounted to about half of it.

The other is the ongoing project that we talked about in the first quarter to improve our technology on a go-forward basis.

The run rate for this quarter for the third quarter should drop down to $1 million dollars, or maybe slightly less.

But that will get offset significantly by some improvements that start this quarter and start building over the next two quarters and then over the next few years.

So a direct answer to your question is it should drop down to about $1 million dollar run rate.

Relative to the initiatives, the credit activity that we shifted to Consumer Direct has been profitable almost out of the get-go.

There are a very few start-up Internet companies that have grown to this mass, this number of customers in this period of time and be profitable right out of the -

I guess I'm talking more about the Small Business exchange and grid and some of the others.

I mean, I knew Consumer Direct.

I wasn't really thinking of that.

I think grid, based on the fact that there's been no compliance with the Patriot Act based on the fact that Secretary Snow has not enforced the Patriot Act, that none of the financial institutions are using, to a large degree, sophisticated products and services in the Patriot Act, we've not realized the kind of growth that we had expected.

We still see a very significant need there, but I don't think--We never planned for great revenue growth, but we do think that as it relates to fraud, I.D. protection and the like, that that effort in and around grid and verification will continue to be important as an adjunct to our other businesses.

What about the Small Business credit reporting?

We're scaling the Small Business very, very rapidly.

We're investing in it.

We are gaining great traction in the marketplace, and we expect that to be a positive contributor for us in 2004, but I would consider the Small Business enterprise to still be an investment in scaling mode.

Is that true of the healthcare initiatives?

And I'm just, I'm sort of generally trying to figure out, where we are in terms of those kicking in and when we'll start to see real contribution to bottom line or EBITDA?

Healthcare is not a strong initiative for our company, but I don't believe we've ever said it was.

We're serving the healthcare with some platform and decision tools, but it's not a major market for us, but it is incrementally accretive and profitable for us.

So I think we'll continue to try to serve the healthcare, insurance and brokerage markets with core products and services as we've done in the past.

Finally, if you could just give us the number on what was the -- I mean, if you back out the Navion acquisition, what was happening in direct marketing with Polk?

You've seen some improvement there and I guess you've had some price erosion at Navion.

What's the outlook there?

And what was the organic revenue growth on the direct marketing side?

Do you think that the do-not-call list, in any way, is going to really translate into real kind of rebound in your e-mail business?

Or is that right now under such pressure that we won't see the benefit?

Hey, Fred, it's Dennis Story.

The traditional DMS organic growth was 1% in the quarter.

We continue to see pretty solid trends relative to the industry in that business on a month-to-month basis with its sales volume.

I'll just comment on -- this is Mark.

I'll just comment on the marketplace trends.

We actually see the national do-not-call list as potentially being a positive for our mail and e-mail marketing activity.

Some of these people who have relied on telemarketing are now having to look to other channels, and as a multi-channel marketing solutions provider, we think that bodes well for us.

If I could, I just want to hitchhike real briefly back to your previous question.

I don't want to overlook the fact that we also took our Consumer Direct business, took it to Canada, and were profitable basically from the get-go, and we're launching that in the third quarter in the U.K., so (inaudible) over look that and quarter points Fred.

One other thing, Fred, that I don't think that I hit, but what we are seeing in the grid-related type of activities, let's just call it identification and security, and we are seeing significant traction in Europe, surprisingly to us and shockingly.

Despite the attacks on our homeland, in the U.K. particularly their government is driving and enforcing anti-laundering legislation, they're enforcing it, and we're creating a nice-sized business with a couple of major gains in the quarter in that space.

So that gives you sort of the around-the-world view of that environment.

Thanks, Fred.

Thanks, guys.

Next we'll go to the line of Craig Peckham with Jeffries & Company.

Please go ahead.

I wanted to drill down a bit into the North America margins for a second.

You've really sort of articulated some of the reasons why that's come down on a year-over-year and sequential basis, but I did want to see if you could help us a bit as we think about -- as the newer businesses really start to get some scale, what longer-term operating margins might be in the North America segment?

Craig, I didn't hear the front end of your question.

If you could repeat that for me, please?

Yeah, really what I'm getting at here is what the longer term expectation should be for where margins in the North American segment would stabilize.

Longer-term expectations, the core margins are strong.

Longer-term expectations is that those margins are going to run in the traditional high 38% to 40% range.

Ok.

Would that be a type of number we'd be thinking about for the full year 2003?

For the -- certainly for the balance of 2003.

Yes.

Ok.

Fair enough.

And I'm curious, with respect to Navion, how much of your goodwill balance is related to Navion?

Have you reviewed the fair value behind that goodwill?

This is Dave Gunter.

We've got about $100 million in goodwill related to that acquisition.

We've gone through the accounting pronouncements, and when you look at our total marketing business we find that the platform and the products and the way that we deliver those businesses for CMS, DMS and eMarketing are so interwoven, you really can't separate one from another.

So in the accounting, as you look at these documents, or as you look at the goodwill, there's not impairment there.

We've done the impairment testing, we've looked at the fair value of our marketing business going forward.

That fair value far exceeds the net book value of the business.

Ok.

Just a last question, have you seen in the CMS business at all any follow-through with respect to demand as a result of some of the more favorable pricing schedules coming from the post office for credit cart made mailers?

This is Mark.

We are not seeing a tremendous pickup in prescreening activity and marketing by the credit card companies.

The focus now is on credit quality and that seems to be shoring up across the board.

There was a good article in this morning's Banker about that very topic, or yesterday.

So typically what happens is after a period of stabilizing margins and credit quality, you see a period of growth.

So we're not seeing it yet.

What we are seeing is our CMS business benefiting from portfolio analytics to help those credit card companies do more with less.

We've also seen outstanding growth in the telco sector within the CMS business.

I think the other thing, this is Thomas.

The major player (inaudible) has created a low cost arrangement with the post office, so we have no doubt that others will follow.

As they drive down those postal costs, I think, as Mark already mentioned, earlier, that we expect the do not call situation to shift back to more traditional--eMarketing as well as mail.

And we're building technology that facilitates that, which is part of the investments that Donald has alluded to on two or three occasions.

New platforms, new technologies that will better facilitate that in multi-industry in the future, and we also just want to note that the telco, as Mark said, the telco industry in its marketing activity, is significantly strong right now in all four of its product deliverables.

And our market share there is outstanding.

Ok.

And finally, I assume that -- or am I correct in assuming that no reference to guidance in the press release means that there's no change there?

That's correct.

We are doing ahead of schedule in revenue and we're on track for our EPS guidance.

Ok.

Thank you.

We have a question from the line of Alan Zwickler from First Manhattan.

I'm a little fuzzy here.

You said you took some hits in the direct marketing business, and then you said there was no asset impairment.

I mean, could you help us through that?

Obviously revenues were down, but is it -- when you say you took a write-off, is it the business lost money or you took a write-off -- I'm just not clear as to what happened there?

No, there's really two things going on in the quarter.

The $16 million is really split between two areas.

One is an operating loss, and that's a little over $7 million, and two is a little over $8 million of write-downs.

And that came from assets and some receivables.

Ok.

It's not just write-downs.

It's also cost optimization of the business.

Now, if we look at your P&L, where do we see those items?

That will be in the North American consolidated margins.

Oh, I'm sorry.

You're talking about in terms of the line items on the external P&L?

Yes.

A portion of it -- most of it will mainly be in cost of services.

Ok.

So when we see close to -- cost of services up 30 some odd percent, most of it is going through that line?

Exactly.

Yes.

Ok.

And so for the quarter then, just so that we understand, the direct marketing business as you call it, direct marketing services, had sales of $26 million.

And you're saying it lost $7 million?

Did I understand that correctly?

Yes.

It had $27 million in sales and it lost $16 million.

It lost $16 million -- $7 million operating, $8 million write-down?

$7.5 million and $8.5 million.

Right.

Whatever it is, right.

Right.

And how does that compare with the prior year?

We didn't have eMarketing in the prior year.

Right, but, I mean, did the company make money in the prior year or -- let's say the prior quarter, could you tell us what it did in the prior quarter?

The prior quarter, the business generated about $2 million of profit contribution.

And last year in the same quarter, it generated approximately $5 million in profit contribution.

That would be $5 million on the business that you owned?

That's correct, Alan.

Right.

So it's $21 million last year and $5 million in profits this year it is $26 million, and the $16 million loss?

No, it's $5 million of profit last year in the business we owned, which did not include eMarketing.

Correct.

Of the $21 million of sales that you reported?

Correct.

Right.

This year, you had $27 million of sales and you lost $16 million.

Well, no, because see you're lumping - the $16 million is in eMarketing, Allen.

We lost $12 million in the business, so the rest of the business still made money.

I'm just looking at it as a category, direct marketing services.

Right.

And the $16 million was a portion of that called eMarketing.

Right.

So the total business lost $12 million.

Right.

EMarketing lost just over $16 million, so the rest of the business made money.

I understand.

As it did last year.

Ok.

And just one other issue on that.

What was -- so last year, you had $21 million, so this year $26 million.

Of the 26, what was the breakdown?

Could you tell us that, old company versus new company?

$27 and about 5 million of it was eMarketing.

So the balance of it is -- the revenues are flat roughly.

Ok.

The DMS, the traditional postal business, revenues were up 1%.

Right.

And the new business was down significantly?

That's correct.

Thank you.

I want to move on.

We had one hell of a quarter in every part of our business except this one.

We certainly want to answer the questions, and Alan, as always, we appreciate your attention to the detail, but I do want to spend two more seconds here on the fact that we've made you completely aware of the difficulties within that one segment of our business.

On the other businesses, they're all hitting or ahead of plan significantly.

And I'd like to just for two seconds have Mark talk about the repositioning of that new acquisition, not only the sizing of it, but how it will continue to sit in our strategy as the whole world has changed on standing, on the media attention to this, which has dramatically changed some of the ways that our customers think about that as a medium in the short run.

Because I think it's still important to note that North American revenues in our core business were up 24%.So Mark, if you will just set sort of, how we see that going.

I think it will help the ladies and gentlemen on the line with sort of strategy-wise how do we see this transitioning.

As I talk about a little earlier the market place is evolving is moving to more retention, CRM activities, and our new product launches are consistent with that evolution.

In the quarter, it seemed like frankly after the Iraqi conflict was over, at least the main fighting, media and political attention turned to this issue of spam and legitimate E marketers, like Equifax marketing services, were impacted by that.

It forced customers into a wait-and-see attitude, so we very quickly saw revenues under a lot of pressure.

Based on the evolving marketplace, where we want to go with this business strategically, and the media and customer reaction and frankly confusion, we've re-purposed our business during the quarter.

We've taken dramatic cost out, we have focused new products on that retention opportunity, and so on a go-forward bases, we don't see this business as being a net negative but a net positive.

We've done a lot of heavy lifting in the quarter, and we believe we've re-purposed the business, we've rationalized the expense base, and we're well positioned going forward.

Thank you.

I'd also just point out that if you look at our total marketing enterprises products and services, this is a $300 million business for our company.

Highly profitable and with great margins.

I appreciate the color, guys.

That's very important.

Thank you.

Thank you, sir.

You're welcome.

Next we'll go to the line of Bill Warmington representing SunTrust Robinson.

Good morning.

Bill Warmington, SunTrust Robinson.

Good morning Bill.

Good morning.

A couple of housekeeping items just confirming your--reaffirming guidance 2003 EPS, $1.46 to $1.52 range?

That's correct.

And for US credit reporting, unit volume, that was up 34%, very strong.

What was the pricing in the quarter?

$1.00.

So it's holding roughly flat.

So you didn't see deterioration in pricing, so that's very strong.

I wanted to follow (inaudible) I just wanted to add a couple clarification questions on Navion.

What was the revenue for Navion in the quarter, and what do you think the operating income or loss for Navion is going to be in the third and fourth quarters?

It sounds like you made a lot of changes to the business, and so that's a question that I would follow from that.

Hi Bill, Dennis Story.

The revenue in the quarter was $5.4 million.

We're continuing to focus on optimizing the business model and drive the business to break even for the second half.

So the goal is to get that down to break-even for the second half?

Yes, sir.

And the final question is, to follow up on Thomas's comments on the regulatory issues, it would seem that there are a couple of areas there that I'd ask you to comment on.

The one would be that -- specifically on the fact act, the right to the annual free credit report, the potential impact of that, and the other would be the limiting of unsolicited offers of credit.

It sounds like there's going to be or there's a potential to be -- you never know if this is going to happen -- but sort of a do-not-call list for credit card solicitations, the concerned being that those give an opening for identity theft potentially.

So those seem to be the areas that I'm getting questions on.

Though I have to look at a crystal ball there as everybody does because legislation is such a moving target, as I said earlier.

Companies are going to have to be able to sell their wares one way or the other.

They're either going to be able to do it face to face, they're going to do it postal, they're going to do it email.

There is no other way in America for businesses to do business, particularly, the financial institutions.

And they're very strong in Washington, they've got to continue to grow their portfolios, the consumer needs to be served.

We believe we have proven and we are making impacts on our testimony that consumers pay for quality products that enable and empower them.

There's not a clear view yet as to whether there will be a free report required.

If so, how will it be requested?

If so, how can it be fulfilled?

If so, what type of explanation, and all of those are things that we've got our numbers down to four or five decimal points because that's what we do.

What we're saying is we do not believe it constitutional to take assets and products and give them for free.

And our industry is fighting very hard on the fact that this is not America.

As prices move forward or as legislation comes out of committee, there's changes literally every day.

We'll continue to move with it, But, we're building, of course, multiple scenarios of, how you may do this or do that as an industry, as an industry.

And so, the free report has existed I think in six states or so for years.

It really had no measurable impact.

People that know their decline know their decline, and we know the behavior and dynamics of the consumers, and that's why I said the troika must be credit reporters, credit reporting agencies, and the consumer.

We've got to make sure that, for instance, let me just give you an example.

Consumers have to be honest and fair as is the same law if they apply falsely or fraudulently for a loan, they -- there also needs to be laws that look at the consumer and say, if you have stated illegally that this data is not, in fact, yours, there ought to be some punitive action.

All of that is being studied, Bill, and ladies and gentlemen on the hill and all of these committees, and we're all over it.

And I do repeat, I said it several times, we're very proud that our industry is working on this together, and we've worked on it for you to -- This free report came up in 1993, it came up in 1996, and it's just something we'll continue to look at depending on how it's dealt with.

The important thing for us, Bill, and ladies and gentlemen, is that what would be completely unworkable is to have every state in the union set up its own way that data is stored, the way it's contributed, and how institutions within that state lent.

Being a global economy, it's pretty hard to think that one or two states ought to dictate how we do business.

So I think it's a matter of great interest, but we're working very hard for there to be bottom line reasonable resolution.

And that we can all live with, financial institutions can live with, and consumers live with and I reckon it's maybe more than that -- that's our view, and that's really our position.

That's fair.

That's fair.

One final question for you would be on looking at the strong free cash flow in the quarter, whether you're again seriously looking at deploying that cash into acquisitions.

How that market is looking now?

I think we'll continue to look as we always have at acquisitions.

I think our first use of that free cash flow will be invested in our technologies, to invest in our product sweep, to enhance and broaden what we're offering to existing and expanding customers, and that's our first use, is to invest in our businesses.

As we've talked about our doing.

You know, we'll continue to do stock buyback as it makes sense as we've always done, so those were always be the real uses as I see going forward.

Thank you very much, and congratulations on the record revenue growth.

Thanks, Bill.

Nice talking to you.

We have a question from the line of Bradford Eichler with Stephens Incorporated.

Please go ahead.

Good morning, Thomas, Mark and Donald.

Good morning, Brad.

Three questions.

First, in the U.S. credit business, your volume was up, you know, 34%.

Is that impacted by the CBC acquisition?

And if so, how much?

Yes, it has an impact, Brad, but we integrate those acquisitions, so calling that out, I would say I'm going to give you a guess estimate, it's about 4%.

Small.

Ok.

So 30% would be all organic then?

Yes.

Ok.

In the mortgage area, what is the amount of mortgage business that's running through the U.S. consumer and commercial services line today?

The U.S.

Consumer and Commercial Services?

Just your direct, one-off credit reports to the mortgage industry, not the three-in-one stuff.

It's about -- let's see.

It's probably about -- hold on here.

Bear with me.

About $40 million.

$40 million in the last quarter?

Approximately, yes.

When you talk about the improvement of operating margins in the second half of the year getting back to the 30% level, what are the assumptions that you all are making as it relates to mortgage volume kind of relative to what we're seeing today to get to those numbers?

Well, mortgage margins are actually slightly less than North American in general on a regular basis, so the volume there really doesn't dramatically impact the margin number itself, Brad.

It's about comparable.

And as far as our assumptions on mortgage, we follow it very closely, and there seem to be no indications for the balance of the year that we're going to see a slowing in mortgage activity.

The MBA obviously just came out with a $3.4 trillion number, so we don't see any slowdown at this point, and obviously there's no sign of interest rates going up any time soon.

Brad, Dennis Story again.

The other thing is, as you know, we've always had a longstanding record of really focusing on productivity.

We continue to look at the business and optimize where we can in terms of the cost structure itself, so --

Ok.

Not to beat a dead horse but just a couple further questions on Navion.

Can you talk a little bit on the pricing trends that you're seeing in that business and how they may have played out during the quarter itself?

Yeah, Brad.

We are happy to do it.

In the core solicitation-based email, pricing pressure continued.

Our CPMs were down.

As I mentioned, really the last 100 days has been a difficult environment for the entire industry, and we've not been immune to that.

What we are seeing going forward, however, is with new products, the entire vision of this combination was to bring the best of these data ways databases together, and I talked briefly about permissions, but when we look at the combination of the best of those databases, we're getting -- I'll use an industry term, but a CPM of somewhere in the 50 to $55 range, and an open rate, an open rate in a 15% range.

We believe both of those are at the very top of the scale, so in terms of the traditional model, it's been under pressure, it continues to be under pressure, but the emerging model is really showing some outstanding signs of profit and revenue growth, albeit off a lower base.

What would you -- when you look at the revenue for that business, have you guys mentioned what your goal is for the revenues for the balance of the year?

No.

This is a business, this is an acquisition, as we've said repeatedly, in a difficult time that we have completely retooled, repositioned, consolidated everything from soup to nuts in the business, and in a marketplace that's still changing every day, so we're -- you know, we've not given any forecast for the specific revenue or anything including that business.

And you said that the $8.5 million included some data write-downs.

What data did you write down?

Some of the e-mail addresses that we had acquired.

And then finally, on the Small Business exchange, if I heard you correctly, you said it's produced about $1 million dollars year-to-date.

Kind of my expectations were that that business would generate about $10 million this year.

Were my expectations off to begin with, A, and B, is that still a reasonable expectation?

That's a little high.

I think, Brad, we were looking more in the kind of $5ish million dollar range, and we think we're still on track for that.

As we've always said, the first $5 million in that business will be the most difficult, and then we believe our growth can be quite dramatic.

We're still on track, our execution plans are right on track.

I think the reaction from the NACM says they want an alternative solution in the marketplace, they want a simpler, clearer approach, more cost-effective.

We're building scale.

There's strong pipeline.

You know that this is a start-up business.

It's the first time it's happened in the industry for decades.

We sat down to give alternatives that we've done, as well as the report, the score that will go with it, and soon you're going to see a significant advertising campaign, one of the first in our history that will vividly portray the product suite in two or three product ranges.

So timing is what we said.

I think having built it from scratch, we've got to build scale, and we've dedicated the resources to get that done.

Ok.

Thank you very much.

Thank you, Brad.

Thank you, sir.

Thomas, we're running close to an hour, so how many --

There are two participants in queue.

Okay.

Our next question is from the line of David Togut with Morgan Stanley.

Please go ahead.

Thank you.

Good morning Thomas.

Good morning David.

You've had remarkable growth from mortgage refinancing volumes, and I assume that obviously predicting those volumes is somewhat difficult, but to the extent you do see some slowdown in volumes, if rates were to move up, do you have contingencies built into your budget for that possibility?

Well, we've got plans (inaudible) that we eluded a few moments ago, to make sure that if the market normalizes, so will our expenses associated with that take place.

We've got a modular plan that says here's how we would, quote, go back to normal, I guess, David, whatever that means.

So we're clearly anticipating that.

Market share is growing.

As that's offset, we'll continue to look at mid market decision and analytics and our other items to offset that change when it occur, because I think we all know it's going to occur sometime, it's just a matter of when.

So we're ready to react to that.

Can you give us a sense of perhaps what the unit pricing might have been in the U.S. credit reporting business adjusted from more normalized mortgage volumes?

Because mortgage is fairly accretive to pricing, is it not?

David, we don't typically disclose pricing for competitive reasons on these calls.

And we're not going to now.

But there's not a big differential between the two.

Okay.

Thank you very much.

Nice talking to you.

Would you like to take this final question?

Sure.

Okay.

It's from the line of Mal Patel, representing HSBC.

Please go ahead.

Good morning gentleman.

I feel very privileged to been allowed to take the last question.

Thank you.

Good morning.

Firstly, I'm very sorry to keep going back to Navion, but can I just get a feel for what happened in the businesses excluding Navion?

Am I right in thinking that the underlying direct marketing business generated an operating margin of 18% in quarter 2?

Yes, that's correct.

I think you guys have some numbers, is that right?

That would be correct, yes.

And can you tell us how that margin has changed compared to last year?

It is down slightly.

Okay.

It is really what's driving that now, Mal, just so you understand is, we made some front-end investment in our technology platform there, so we have the bubble costs coming through on the depreciation and amortization.

Okay.

Sure.

Last question is a housekeeping question.

I noticed $40 million worth of acquisition going through the cash flow.

Have I missed something?

Can you tell me what that acquisition relates to?

The bulk of it is affiliate acquisitions, Mal.

A few more small affiliates were acquired earlier this year.

Okay.

Thank you very much.

Thank you.

Well, thank you, ladies and gentlemen, for your support and interest in our company.

I hope you have a great day, and we'll look forward to seeing you soon.

Goodbye.

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