易速傳真 (EFX) 2003 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Equifax third quarter earnings release conference call.

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

Later we will conduct a question and answer session.

Instructions will be given at that time.

If you should require assistance during the call, press * then 0.

As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Mr. Jeff Dodge with investor relations.

Please go ahead.

Good morning.

Welcome to today’s conference call.

I am Jeff Dodge, investor relations, and with me today are Tom Chapman, our Chairman and CEO;

Mark Miller, President;

Don Heroman, CFO; and Dave Gunter, Corporate Controller.

The financial information that will be discussed during this call, including the reconciling information relating to certain non-GAAP measures that we discuss is included in a press release that we issued this morning.

The press release may be found in the investor center on our website at www.equifax.com.

We will 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 under the Securities Act and subject to inherent risks which are discussed in detail in our 2002 10-K, 2003 10-Qs and other SEC filings.

Also, GAAP reconciliation information is available in the attachments to our press release and also on the website.

Today’s call is being recorded in addition to being webcast live over the Internet.

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

Now I would like to turn it over to Tom.

Thanks, Jeff, and good morning, everyone.

Equifax delivered a record third quarter with solid revenue and EPS increases, plus exceptionally strong cash flow.

Our clear consumer credit reporting business units in North America, Europe and Latin America continue to drive revenue growth and improved profit performance.

Free cash flow was at record levels, and we continue to make good progress in our strategic initiatives, and a little bit more about those in just a moment.

Revenues grew 7 percent over the prior year to $310m.

EPS from continuing operations was a record 39 cents, up 8 percent and free cash flow was $78m, up $39m from last year.

I would last to address the five areas of strategic significance for our company, and then as usual let Don drill down on more financial details.

First of all I would like to talk about our consumer credit reporting business, which many of you not only refer to but know as our credit bureau business.

North America once again was our primary growth driver with its diverse and profitable revenue base.

Let’s talk about the U.S.

Total consumer online unit transaction volume was up 26 percent.

Unit volume from our largest 75 customers, excluding mortgage, was up 30 percent.

Again, our financial services and telco market verticals were the primary sources of growth and share gains during the quarter.

Let’s not forget Canada.

Canada had another outstanding quarter with a record $23m in revenue and volume growth of 14 percent.

I think it’s interesting to note that we successfully fought aggressive price competition over the last couple of years from the new entrants into that marketplace, and we’ve done so with better quality, the quality of our people, technological excellence, customer service and value-added products and services, and that in fact is what differentiates us to our customers.

And as a result, in Canada, we have now 100 percent share from five of the top six banks.

I’ll talk a little bit more about gains there in a few moments.

Going down south to Latin America, the economies where we do business are stabilizing somewhat as growth in local currency reached 11 percent.

That’s 17 percent in U.S. dollars.

Our proprietary decisioning solution platforms and models continue to build preemptive relationships with our customers.

Online volumes, for instance, in Brazil were up almost 20 percent over last year, and operating margins were 28 percent in Latin America.

Let’s go across the pond to Europe for a moment.

Operating margins grew to 15 percent, up from 3 percent last year.

During the quarter we began negotiations to extend a very important partnership with a top U.K. bank.

This three-year, multi-million dollar contract includes 100 percent of their consumer risk business in addition to our commercial and marketing services products as well.

So on an increasing basis, not only at home but abroad, our clients are purchasing a doubling of value-added products instead of single one-ofs, and that is exactly what our strategy is in the information business.

So on a global basis, our resilient consumer credit reporting business continues to generate exceptional cash flow, the sales pipeline is strong, and the new business initiatives therein continue to build scale and competitive advantage.

Next I would like to talk about predictive sciences.

That is our core competency, in developing models in analytics that drives much of our value and initiatives.

This particular business has a new focus and strong management driving incremental revenue growth.

This group is lead by Paul Springman.

Almost all of you know Paul, he’s been part of our company for 14 years.

He’s a veteran and literally has managed every single part of our business, I think, except for technology.

And he brings a great deal of knowledge, insight and customer knowledge and contact to this business.

Predictive sciences continues to sell valuable solutions for our core business customers and enhancing the competitive positioning of our emerging businesses.

For instance, our small business or commercial services enterprise, which we’ll talk about in just a moment.

Now, we’ve done a great deal of research on this space as we move rapidly into the solutions, analytics and modeling part of the business, and one point is clear.

With all the customers we talk to in every market in every industry, give us better tools and give us alternatives to what we have today.

And that’s exactly what we’re delivering.

Let me describe some examples of the impact we’re making with customers in this predictive sciences arena.

During Q3, predictive sciences sold custom modeling engagements for 12 customers.

The projects provide solutions to a wide range of business problems, including risk and response and decisioning solutions for the U.S., Canadian and Latin American customers.

For a top five global financial services company, our Decision Power platform is rapidly becoming their primary decision engine using multiple Equifax products.

And in fact, we now have 100 percent of that online application business.

We’ve integrated our Internet delivery capabilities to help them address their U.S.

Patriot Act plans, and we’re delivering our industry-leading bankruptcy predictor score and presently installing a fraud predictor model.

In Q3, a major Canadian retailer moved 100 percent of their online business to Equifax, but they did so principally because of our proven expertise in the development of custom profitability models.

Let’s turn next to commercial services.

Our newest venture focused on small business information, and the U.S. continues to achieve momentum and wide-spread acceptance in the marketplace.

Critical to this business is a robust database which now utilizes information on almost 20 million small businesses.

I think last quarter I mentioned 17, so we continue to add companies to this database.

Not only companies, but during the quarter we added public record data, including bankruptcies, judgments and liens dating back to 1995, making our scoring and decisioning solutions even better than ever.

We deliver highly predictive, custom commercial risk scores, and based on numerous requests from customers Equifax is developing industry-specific and generic scores for risk decisioning and lending to small business.

In that regard, we recently brought on board a highly respected scientist, a true pioneer and a developer of commercial credit scoring solutions for over 20 years in this space, and he will lead the small business solutions unit.

Our unique commercial services decisioning technology can access information from numerous data providers.

In other words, our solutions are data agnostic, and what that means is we will build models, we will do analytics, we will cause predictors of all sorts on any data our customers desire, not just Equifax data.

So let’s talk about our consumer direct business.

A market which we pioneered several years ago is now expanding internationally and delivered another record quarter out of consumer direct with $19m in revenues.

Implicit to that is we also continue to create renewal rates in excess of 45 percent for credit watch.

That’s our top of the line product that assists consumers and now small businesses in fighting ID theft.

You probably saw the DFTC a week or two ago stated that 10 million Americans suffered some form of ID theft last year.

Now some in our markets say that credit information is not enough to help predict ID theft.

We disagree.

We’ve proven that the daily updates to our database, this is a perpetual update on over 200 million consumers in the U.S., perpetual updates.

We’ve proven that those updates to our database gives us and the consumer the most current information on an individuals identity and the most highly predictable information to enable consumers to effectively fight ID theft.

This is the only warning that comes from the spontaneous and perpetual information load to our database that differentiates Equifax.

With our intense focus on improving margins and market penetration we’ve increased revenue per order in our consumer direct business to over 40 percent compared to Q3.

In other words, that incremental revenue for the same expense.

That’s how we multiple revenue.

And following our success in launching our product line in Canada, we launched our consumer direct business recently in the U.K. and the immediate results were very fulfilling, resulting in 6,000 sales during the first 12 days of introduction.

Yesterday, Household International announced a partnership with Equifax that we feel is so important.

They did so to promote consumers’ financial education and understanding.

Household has long been an important and critical partner of Equifax, for years and years, and we are excited about this important consumer education effort.

Our participation in the “Build Your Tomorrow” campaign underscores Equifax’s ongoing commitment to enlighten, enable and empower millions of consumers to better manage their financial health.

And finally, let’s turn to marketing services.

This part of our business, as you know, leverages data and analytics to support customer’s account retention and account development strategies.

It continues to make progress in what we all know is a challenging environment.

One significant success that I want to point out, our multimedia products.

Our revenue in Q3 was up 8 percent from last year in this direct marketing business in a time when the industry is under pressure and few have experience this positive momentum.

While our credit marketing business has been impacted by the erosion of marketing activity by certainly the large credit card issuers, which has resulted in a 9 percent decline in revenues, we have positioned this business for future marketing needs.

Let me just say that as you step back and look at how retailers, banks, card companies, telecos, insurance companies, industry after industry look for tomorrow, they must use multimedia marketing to not only engage but to perpetuate relationships with those customers.

They will eventually use e-marketing.

Again, they will have to reach customers and prospects via the mail.

The “do not call” list phenomenon will not stop customers from contacting, with permission, their existing customers to cross-sell and up-sell them products and services.

It is my strong belief, and the rest of our company, that we must be there with state of the art technologies, procedures and best practices.

As consumer confidence rises, which it is doing slowly, so shall the marketing services business.

We are providing answers for the future and investing accordingly.

Our new CMS platform, which will be launched in Q104, is cutting edge technology which is redefining the competitive dynamics in this marketplace.

For instance, let me tell you what this platform, among other things, will deliver.

It’s a unique, patent-pending technology developed by Equifax.

It will drive customer benefit including increased system responsiveness, access to better tools for predicting consumer behavior and integration of more data, all from a single technology interface with Equifax.

We are also expanding our product offerings into other industries, including telecommunications, our mid-market customers across all industries and even the mortgage industry.

Now Don, I’ll send it over to you for more details on the financials, then I’ll come back, ladies and gentlemen, for a couple closing comments and as usual take your questions.

Don.

Thanks, Tom, and good morning everyone.

Our third quarter performance further builds on the strong pace we set during the first half of the year.

In North America, which represents 83 percent of our revenues and 89 percent of our operating profit, revenue grew 8 percent over the prior year.

U.S. information revenues of $132m grew 10 percent.

Industry penetration and share gain continues to drive double-digit volume growth.

Financial services delivered record volumes, accounting for most of our transaction growth.

Volume from our mortgage, telecommunication and utilities customers was also considerably up from last year.

Our margin service revenue was up 14 percent over third quarter 2002.

It was down 14 percent from last quarter, driven by a 40 percent decline in the mortgage banker application and debt.

Tom referred to our Canadian operations, I would like to reiterate, they delivered another all-time record in quarterly revenues which were up 21 percent, and operating margins were at record levels, rivaling those of the U.S.

Marketing service revenues were down 11 percent, reflecting the challenges of this industry.

Our suite of postal products grew 8 percent, continuing the positive trend that has been established in the two preceding quarters.

We continue to make good progress in right-sizing our e-marketing business and are on-track to delivering a breakeven cash flow operations by the end of the fourth quarter going into 2004.

Equifax delivered consolidated margins of 29 percent in the quarter, up from the 27 percent we experienced in the first two quarters of this year, so reflecting a positive trend that we had suggested would occur in the later half of the year.

Latin America increased their margins to 28 percent from 25 percent in Q2.

North America’s information services maintained its margins while progress was made in our consumer direct and marketing services operations.

Corporate financials for the quarter are as follows.

Free cash flow exceptionally strong at $78m for the quarter, up $39m or 100 percent from third quarter of 2002.

Capital investment was $14m, it was primarily to our internal systems development, including CMS.02 which Tom just referenced.

DSO was down from 62 days to 56 days, versus last year at this time.

During the quarter we increased our stock repurchase to 1.5m shares, or $35m.

We now have $157m remaining under our authorization.

Year-to-date we have invested $65m in repurchasing our stock, 54 percent of that came during the third quarter.

Now I will hand it back over to Tom.

Thanks, Don.

One point I’d like to make before we move onto questions is, Equifax is totally committed to excellence in all that we do, and as an information technology company it is especially important that we’re at the forefront of excellence in technology, innovation and implementation.

Because of this, we are so proud that we were honored by the recent recognition from Information Week’s 500 list as the number 2 ranked company among financial service firms in 2003.

This ranking was based on best in technology, and business practices of those companies that demonstrate patterns of technological, procedural and organizational innovation.

This recognition is not only a great tribute and an honor to our dedicated employees, but also strongly reinforces to our customers that they made the right decision in choosing Equifax.

In closing, the third quarter of 2003 continues to demonstrate that we are making a difference for our customers and consistently delivering on our commitment to shareholders and customers.

Again, we are delighted that you are with us today and we’ll be glad to take a few questions at this time.

Thank you. (Operator instructions) Our first question will come from the line of David Togut with Morgan Stanley.

Hi, this is Charlie Murphy calling in for David.

Could you just go into a little bit greater detail into your outlook for NAIS margins going forward?

Also maybe get a little more detail on the cost actions taken in marketing services and consumer direct during the quarter?

Yes, Charlie, thanks.

That is two questions there.

On the margins, as we talked about, we have seen improvement.

We think we will continue to see improvement as we right-size our e-marketing business, a two percentage point increase this quarter and we would expect that to continue, some improvement into the fourth quarter.

Now the second question I think was on the right-sizing?

That’s correct.

What we’ve done is we’ve significantly cut the operating loss from the second quarter that we experienced.

It’s still operating at a loss, but as I mentioned in my script we expect that to be a breakeven on a cash basis by the end of the year, positioning us well as we go into next year.

That business has been completely integrated into our direct marketing services, and so now we refer to it on a combined basis as Equifax Marketing Services.

Great.

Thanks.

You bet.

We have a question from Fred Searby with JP Morgan.

Good morning, gentlemen.

A couple questions.

First, can you just update us on, I assume you are maintaining guidance for the year, but if you could just explicitly point that out.

And then, can you strip out mortgage for us?

Give us what “X” mortgage, what your core business, the credit bureau business is growing?

And then, if you could just touch upon free cash flow in the fourth quarter, I mean you had very robust free cash flow here and we know it’s back in line, seasonally, but kind of what your expectation is.

And maybe just talk a little bit about the upside reportability of numbers in the teleco, insurers, as it picks up here.

I’ll handle the first and third, and I’ll let Dave handle the middle.

The guidance does continue, we still are expecting in the range of 146 to 149 for the year.

The latter part of the free cash flow, yes we are particularly happy with it.

It puts us in a very strong operating position.

Our balance sheet has significantly strengthened this quarter, our debt is down, our shares, we’ve repurchased has been increased, so we are very pleased with the cash flow.

We expect another good quarter next year, that’s a bit of a seasonal shift and that pattern will continue.

Dave, do you want to take the middle part?

I do.

Wasn’t the guidance 146 to 152?

Yes.

Okay, so you are maintaining that guidance?

Or have your brought it down to the low end of the range, 146 to 149?

It’s still in that same range.

Same being 146 to 152.

Right.

Fred, this is Dave.

You asked a question, without mortgage how our core business is doing in North America.

That core consumer reporting business has grown 10 percent in revenues, and Canada again has grown 21 percent, so again, the core that you’re looking for in the credit reporting business still has very healthy growth.

10 percent in the third quarter?

That’s the core business for credit, yes.

Okay.

This is Tom.

I might just mention that while its early on in the game, on the core reporting question, we are beginning to see some uptake in marketing – that’s going to be a real ball game for the telcos, trying to figure out how to do this and differentiate it, but we are seeing a lot of interest and we think more of that volume will probably come in in fourth quarter and then move into 04 as they figure out exactly how they want to deal with it.

Okay.

Thank you.

Thank you.

We have a question from the line of Brad Eichler with Stephens Inc.

Good morning, Tom and Don.

You talked about the volume trends in the U.S. credit market, could you talk a little bit about the pricing trends you saw?

Yes, we sure can, Brad.

The pricing has declined, but there were really three major factors that are affecting that.

The first one is the shift out of mortgages as we talked about, mortgage declined 14 percent for the quarter.

The second is, part of the driving factor of our volume growth is we picked up 100 percent volume of a major new customer, and that is at some of our lowest pricing.

And so the addition of that weighs it down, so it’s really not so much the core as it is the incremental add there, Brad.

The core volume, let me speak to that.

It’s continued its usual pattern.

It has been declining, but not out of the ordinary.

Brad, this is Tom.

If you sort of bust out the pie, it doesn’t have a great deal to do with mix.

You know, the big guys, the major customers across every industry I know in America, not just ours, are forcing prices down.

So that pressure of the big guys continues.

However, we’ve made huge strides over the last number of years in the niche market, and those pricings, because of the way we are bumping those pricing dynamics, are moving north, which is a good trend.

Our decision power in applied products, which are the embedded decision-making tools for customer acquisition and retention at the point of sale are growing very rapidly, and that volume is up 20 percent for this year.

So that embeds our tools and decisions in major customers and smaller customers alike.

What was the percent that you guys were up on pricing?

10 percent.

About 10 percent?

Yes.

Okay.

Just to make sure I understand, on the mortgage piece that’s inside of the U.S. commercial and consumer services business, about how much of that number was mortgage related?

How much of the $132m?

That number, roughly over time is what, about 15 percent in our bracket.

Right.

It will develop to 15 percent of the total.

Okay, you guys talked about the small business exchange.

What type of revenues did you have out of that this quarter, and are you still customer with I think a $5m to $10m run rate for the year?

Yes, I think Brad, what we said last call was closer to the $4m to $5m range.

We still think that is going to be the number for this year.

So a million or so out of the quarter?

Wouldn’t be a bad estimate.

Okay, and then final question is, congrats on the predictive science sales.

It sounds like you did 12 in the quarter.

Can you quantify, how big of a sale are these?

Are these million dollar plus type contracts you are signing?

Just frame them up a little bit.

Well, as you know, that is sort of – they are multiyear.

I would say that some of the development projects range from the $50,000 if you are building a model, as such, or to a different kind of analytics in the $500,000 range.

But generally that is the range that we are seeing.

What comes with that of course is once we get embedded in the transaction buy, that continues to view it as we double, not on analytic models, but with our Decision Power and applied platforms.

That’s the total solution.

That’s where we are going with this business.

It’s not just – where anybody can build on us.

Anybody.

We’ve got a team that we’ve build on board that has clearly differentiated themselves with their commercial and consumer expertise.

You add that too our decision platforms, that’s a new kind of business and a new choice for customers.

Thank you very much, Tom and Don.

Have a good one.

You bet.

We have a question from Craig Peckham with Jefferies & Co.

Good morning.

I have two questions.

First, I wanted to return to the subject of margins.

A couple of cross turns happening here.

New products starting to ramp up, mortgage starting to turn down, certainly some changes in the cost structure, the IBM arrangement.

As you look out over the next say four quarters or so, is it reasonable to expect the North American margins to get back to the nearly 40 percent levels we’ve seen in the past?

Craig, I think the answer to that is yes.

As we continue to right-size our marketing services, which we are rapidly doing, I think the margins for next year should return to more traditional levels.

You also mentioned the new business, obviously as we add that, especially as it ramps up, there are very low margins in that business initially, but over time those should increase significantly.

This is Tom.

I had another point to that, that I don’t know how quickly we get back to 40, but I think we are certainly moving in that direction.

I think the other point that we always look at in this company, as you know, is cost reductions and productivity gains.

We’ve got a terrific opportunity which we intend to take advantage of against that strong cash flow in investing in new ways to handle the operations of the core business.

We’ve got great sourcing opportunities to look at, we’ve got new combinations and new organizations that we are considering to provide more focus to the specific customers.

I think we’ve got really, additional ways around the world to take our operations, our customer interfaces, our consumer interfaces and make those consolidated with new technology, whether it’s ours or somebody else’s.

I think that will also will add to where we are going and if you take the new platform, CMS model 3, we call it, Consumer Direct, has got some neat ideas and some new products coming down the line.

Small business is developing two or three products.

Quite frankly, we set out saying we thought we’d be a player in small business credit reporting.

We found that our database and our customers want far more, and that is something that we didn’t expect.

I’m telling you, Decision Power is just a significant lift along with some other decisioning platforms that we’ll be introducing in 04 to feed the growth side.

So you know, if you sort of step back, if you ask me to go four plus that scares me to death in this crazy world, but there are probably five key areas of growth.

We still believe this is more weighted to differentiate and create share in the core.

We think predictive sciences will really begin to kick in and make a difference.

I remain committed to the commercial small business endeavors, and Consumer Direct is moving forward.

I think if you sort of look at those as the core credit reporting, predictive sciences, the commercial business, the consumer business, those have really become as I look down the road at operating units that provide more focus and more dedication to the market.

So I think there are some interesting things we have underway and we’ll do to accomplish that margin increase.

A second question.

It’s an open question at this point, with the timing and the form of FCRA legislation, but one thing that does seem to be clear is that free annual credit reports will be part of any new legislation here.

Tom, I’m curious to hear how you think that impacts the business both from a revenue as well as an expense side.

Okay, let me.

We really would like to give an update, and I’m glad you brought that up on where it stands.

I think all of you know that our industry and our two competitors have joined arms and have been on the Hill and have fronted our industry against what we still believe to be unconstitutional, unnecessary and unfounded legislation concerning the free report.

I think more importantly – and we’ve done a hell of a good job.

And on both sides of the aisle, with the FTC, with various departments of the Cabinet.

I met personally last week with Secretary of Commerce Evans, talking about the possible impacts, the lack of need for this kind of legislation.

This thing’s not over, by a long, long shot.

The House, you do know that the House bill passed in September and the Senate bill we think may come to some vote next week.

The interesting thing that makes it so hard to predict, which we really can’t do, is different versions in the two different bills.

The hope is, I think, coming from certainly Senator Shelby is that if they can get their acts together and come out with one bill that doesn’t cause for ongoing debate indefinitely.

I think the good news is that we have been successful so far -- I have to say that because this is legislation -- in getting some mitigating factors that will not only help us in many ways but may provide some revenue producing opportunities which I think are not going to be insignificant.

But here are the mitigating factors that exist now.

Just going forward, it extends the report requirement to have us fulfill the credit report now is five to 15 days.

Now the time for investigation goes from 15 to 45 days, which allows us more time to ensure we are sending the report to the right business and find different ways to interact with them, and that is an important thing.

Interesting to note that the lenders still do not have requirements on their responding to consumers which is something that we’ve discussed with Congress and the FTC as an industry, we think is a vital thing that needs to occur, needs to happen.

I believe there will be further discussion on that at the FTC and in the Senate Banking Committee as we go forward.

As it stands now, we probably will have 12 months after the effective date of the bill before it becomes effective, so we’ve got a lot of work that we can do.

We are playing -- we’ve got numerous ways to deal with this.

I think it’s also important to note that within the bill today it directs the FTC to provide rules for surge protection.

Now, that normally has been our biggest concern as an industry and as a company.

What happens if all of a sudden you get a hit like the FTC themselves, interesting that they are regulating this but they understand what surges can be.

So we all want the bills passed as it exists today, which is usually the case in our industry.

The FTC will have purview over the rules, the rates, the compliance on many of the shapes, forms and fashions of delivery.

And they haven’t said a word on that.

I will tell you we’ve met on three or four occasions with the FTC in very good dialog on this.

They do understand the need for mitigating circumstances like I have addressed and they also do not want to cause legitimately declined credit active consumers from having access to those files to get employed or for welfare or they suspect ID theft or fraud, those things are vital and they understand the systems can be clogged for bona fide credit active consumers, and so they are working with us.

We don’t know exactly what the details will be, but to try to find a way to ensure that the consumers that are in the credit game are still going to get their questions answered in the right priority.

And then, I guess the final thing that exists today is that this legislation does permit requests for free reports only by mail or Internet, and certainly those that come by mail will have, we believe, the appropriate ID requirements.

A copy of the drivers license, a copy of a bill.

I mean, we are just not going to put these reports in the mail without verifying who the consumer is.

And nobody in Washington wants that to happen, and so there has to be some further planning on this.

There are also a lot of contingency plans that we are addressing, have been addressing, that will allow us not only to handle the volume but also apply true marketing opportunities.

We expect this to be an interesting thing to determine really what the impact is on the consumers.

We think our Consumer Direct business does really well, has great opportunities.

We may think this may play into some marketing hands on our part.

So there is no way at this juncture that I could give either positive or negative impacts.

It is certainly a substantial change in the way we run the credit reporting businesses.

So you know, we think we’ve got a year, we probably will, we’ve got a lot of methods to deal with this from changing the adverse action notices and working with Congress down the road so the consumer is better informed.

We hope that can happen.

And we have created, I will tell this, and forgive me for the length of the answer, but I think you’d want me to tell you everything I knew here.

There is great concern in Congress about the possible ID theft ramifications to this.

They want the consumers to be better informed and they also are not interested in causing the biggest boom in ID theft in our country’s history.

We are working with them as an industry and as a company to try to balance the risk and reward associated with it.

We’ve done one hell of a job in making sure they understood the risk and how they needed to be mitigated.

I think the other thing that is very interesting is this.

As our volumes go up, depending on how they do, so will our customers as we go back for reverification, et cetera.

And so there are some ways that I think we will look at in trying to recover or at least to share partnering some of these transactions as we look down the road.

So there are a lot of things the consumers are interested in other than just their credit report, and I think our success has proven that.

Customers are very interested in monitoring services, that monitoring happens to come in the credit file, which as I said earlier, is the only predictable part of that.

It’s instantaneous.

There’s a lot of unknowns but there are some knowns that are clearing up as we go forward.

There’s just no way to predict at this juncture what the impact, plus or minus, may be.

But we are all over it, as you know, and appreciate the question so we can give you the latest update.

At least the latest when I walked in here this morning.

Okay.

I’ll let you go onto the next question.

Thanks.

We have a question from the line of Michael Vinciquerra with Raymond James.

Please go ahead.

Hopefully my question will have a shorter answer, much less complicated.

Good morning, guys.

First of all, just I was a little confused.

You were talking about the consumer direct business and you said something about 40 percent incremental margins.

I just missed the point on what you were trying to point out with that 40 percent number.

And then second of all, I wanted to know if you had implemented some additional tax strategies during the quarter, it looked like your tax rate went down another percentage point or so from Q3.

You bet.

Thanks, Mike.

I think the 40 percent you are referring to there is the renewal rate, it’s actually approaching 45 percent.

That’s very good, that’s a very positive trend for us.

That’s people who are currently doing business with us that re-up again.

And then on the tax, we did have some tax strategies as we went into this year, and they have proven, it’s official, we did a true up for the third quarter and it looks like our run rate for the year is going to be a little bit lower, so we have a little bit of extra benefit for the third quarter.

What should we expect on that for Q4?

Well I think it will go back up slightly, but it should hold at about the 37 percent level.

Thank you.

Mike, this is Tom.

I hope that was shorter.

Very efficient.

Thank you.

We have a question from the line of Scott Tester with Standard & Poor’s.

Hi, thanks very much.

Can you comment a little bit regarding the strength of your balance sheet and how you plan on potentially making use of that going forward with respect to either acquisitions or continued buy-backs?

I got on the call late, so I’m not sure if you provided details regarding your repurchase program.

We did talk about it a little bit, I am happy to talk about it some more.

The balance sheet, we are particularly proud of the strength of it.

We think the key word there is flexibility.

It gives us flexibility to do whatever is the best in the best interest of the company, whether that is buy shares back or do acquisitions, either one.

So we are in good shape there from a balance sheet flexibility standpoint.

In terms of the cash flow, it continues to be strong and that’s helped the balance sheet a lot.

We reduced debt for the quarter by $47m because of the cash flow as well.

And then the other flexibility that it gives us is continued internal investment.

That’s where we spent our $14m capital spend this quarter.

Did you provide the details regarding the buy back activity for the quarter?

Yes, sir.

We bought back 1.5m shares for a total of just over $35m, bringing the total for the year to $65m.

Thanks very much.

You bet.

We have a question from the line of Bill Warmington with SunTrust Robinson-Humphrey.

Good morning, everyone.

I wanted to ask to see if we could get some guidance on Q4 revenue, for NAIS in particular.

The guidance we’ve given is for the year, and as already said we stand behind that guidance that we’ve given for the year, in the 4 percent to 7 percent in revenue and 6 percent to 9 percent in EPS.

We stand by that.

Is it too early to talk about some preliminary ranges for 2004 on the top and bottom line?

It sure is, but as you know, as soon as we can, we’ve got that put together we’ll certainly address it.

And then the last question would be to see if we could get an update on some of your Homeland Security initiatives.

I think one of the things that we’ve all seen is, we have a lot of help from California and other places that pretty much killed the Patriot Act, in particular the part that called on financial institutions to do significant due diligence as it related to accounts, et cetera.

But you know, daily enquiring rates are at an all-time high in September, just on using the credit report or part of our ID products to do a simplified version of that, that is sort of contained in our credit reporting business.

If there is not going to be any compliance, enforcement it will be up to the financial institutions, and I bet you through the control of the currency as to determine what will be the best practices, but it will clearly be a simplified thing.

You know the passport ID that we’ve got over in the U.K. is moving very nicely, but I think we will just take a look at ways to distribute through Decision Power and other platforms ID type of products that are far more simpler than we had originally thought with the whole concept of GRID.

There is really not much of a market for that, sort of whole Monty evaluation.

Thank you very much.

Thank you, Bill, it was good talking to you.

We have a question from P: Kevin Gruneich with Bear Stearns.

Thank you, I’ve got a few questions.

I was wondering, first of all, if you could tell us about the expanded IBM outsourcing contract, if it has had any impact on your Q3 runs and if so, well what was the extent?

Kevin, as you know, as we talked about before we said $4m to $5m for the year, so we are phasing into that, so you can assume it was some impact but fairly small for the quarter.

Okay.

And in terms of the mortgage product, what percent of that fee is in one report?

What percent of the revenues in mortgages?

The percent of revenues in mortgages is running about 15 percent.

That’s all three and one?

No, that mortgage –

--services is three and one.

That’s the total.

The question was, three and one?

We’ll get that number for you Kevin.

You had another question?

Just a follow up from that, could you talk about the variable false nature of the mortgage business and be specific on numbers?

Well, I can talk about it.

That is, if you look at the quarter you saw 14 percent decline in mortgage related volume, and you saw our margins go up.

So incrementally margin, as we’ve said before, the margins in mortgage business are about the same as they are in the rest of the North American business.

So when it changes we don’t see the margin change a lot.

And in that mortgage question, out of the total number of mortgage, about one-third of that 33 percent is the three and one product.

And finally, could you isolate for us the operating loss and any write-off or severance emanating from the [Navian] systems in Q3?

We tried to address that in the call, Kevin, since it is part of the marketing services from a Reg (G) standpoint, we don’t disclose that but what I can tell you is that we’ve cut the loss substantially, and for the first of the year next year we plan on going in on a cash breakeven basis.

We think we’re on track to doing that.

Now is that a change in guidance from your operating breakeven guidance of the last conference call, and what was the revenue for [Navian] in Q3?

Again, we don’t break it out, but what I can say is it is basically where we were before, we just wanted to make sure we understood everything, cash breakeven.

We’ve reduced staffing there by 60 percent.

Okay, so when you say it fought red once before, you are talking about essentially sequential revenue flatness with Q2?

No, what I’m saying is by year-end, right now it’s running at an operating loss, by the end of the year and going into next year it would be, on a cash basis, an operating breakeven.

Okay.

And was there any non-operating loss in your Q3 number from Avian?

Yes there was.

That’s what I’ve said, we’ve cut it substantially but it’s still there.

What was the extent of the non-operating loss or write off severance, et cetera?

Kevin, as I’ve said, that is part – we’ve incorporated it and it’s all in that marketing number.

I’m sorry, did you answer the question on revenues?

No, because it’s part of the total revenue of marketing services.

It’s fully integrated.

Thanks for your help.

You bet.

Let’s take a couple more questions, and then we’ll be available this afternoon or actually later this morning and this afternoon.

If anybody has additional questions we can certainly handle those then.

Go ahead.

We have a question from Alan Wickler with First Manhattan.

Please go ahead.

Good morning.

I will try to keep it short.

Europe has had two consecutive quarters of $5m in operating profits, give or take.

Should we surmise that this is a trend, or is something, is there sort of – I hate using the word, but I can’t think of a better one, any one-time sort of goodies that have been in there that make it especially good?

Hi Alan, it’s Tom.

How are you, Tom?

I’m doing okay, sir.

I think we’ve done a couple of things there which worked in our favor.

One, we’ve given the goal to improve margins, and we sure as heck have done that, and one of the ways we’ve done that is to continue to right-size that business and take expenses out.

We will continue to do that.

The other thing is our consumer reporting business in the U.K. is doing very well.

It is doing, I hate to say this, it’s doing better than I can remember in a lot of years, and it’s throwing off some good profit and margin as well.

We are looking at transporting some of the things that are working in our marketing services business over there, and to the U.K.

You know, as I’ve mentioned, we’ve negotiated, we are working on a three year multi-million dollar deal with one of the largest banks there, and Consumer Direct is just now, it’s just launched over there.

I think there’s some positive trends, but still continuing strong management of the margin.

Okay, but to the extent that – so the 15 percent give or take margin, is that sustainable?

Yes.

Absolutely, we think so.

Okay, because there was a time when getting to 10 would have been great.

I remember.

Alan, this is Jeff.

Just to point out, the margins in Q3 were 15 percent versus 3 percent last year.

No, I understand that, but what I am just looking at is, two quarters in a row you generated $5m.

I’m not being critical, I’m being happy, I just want to understand whether there is some – you know, sometimes you have a product or a project that will make it happen.

No, that’s not it.

It’s core.

Okay, and just the clarification, for the umpteenth time on the mortgage business, the three and one reports are in the mortgage line, is that correct?

The mortgage services line?

Yes.

Okay, and that’s why that line was down sequentially.

Is that the reason?

The market was down 40 percent, and that business was down 14 percent.

When you say the market, what do you mean by the market?

The mortgage application, the mortgage bankers application end, sort of a generic market measure that everybody looks at, it was down 40 percent year over year.

Year over year it was down 40 percent.

Okay, great.

Thank you very much.

And the final question will come from the line of Steve Bogadman with Highland Capital Management.

Good morning, and thank you.

Good morning, Steve.

Good morning, guys.

Two quick questions.

One, on your small business database, although you are gaining some traction and seeing that start to grow, can you give us a little feedback from the industry?

I mean, I know a lot of small business owners and they are cheap guys.

Are these guys willing to pay for these services?

Or, are you finding resistance in pricing?

Or is this just getting it going and getting people to understand it, that’s my first question.

The second is just an observation on the Patriot Act, I don’t know about other folks on this call or for banks or bank-related companies, but we are having to go through all kinds of hoops this quarter on knowing your customer and doing verifications with the Patriot Act.

Yes.

First of all, the customer, the financial institutions and the lenders, you know we are not selling a credit file profile to small businesses, but I do believe they will want that profile just like consumers have wanted that profile and an understanding of how they stand from a credit standpoint down the road.

That is what I am talking about, right there.

The second question, the Patriot Act, I’m just saying that we had originally started a plan that was a big grid operation with a lot of abstract data coming from multiple sources.

You know, one mega-database was at one time seemingly the solution.

All I am saying is that we have begun to simplify the product offering and therefore reduce the investment in grid per sae.

Because we are not saying it’s not happening, we are just trying to provide tools that enable you to know your customers quickly and more simply.

Thank you very much, I appreciate that.

Yes sir.

Well I want to thank everybody for your attention and interest.

We are proud of the quarter, there are a lot of dynamics going on in the world, in the marketplace.

I think we continue to knock ourselves out for our shareholders and we appreciate your interest and concern in our company and I hope you have a great day.

Good bye.

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