易速傳真 (EFX) 2005 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Equifax first-quarter earnings release Investor Relations teleconference.

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

Later, we will conduct a question-and-answer session with instructions given at that time. (OPERATOR INSTRUCTIONS).

As a reminder, this teleconference is being recorded.

I would now like to turn your teleconference over to Mr. Jeff Dodge of Investor Relations.

Please go ahead, sir.

Good morning and welcome to today's conference call.

I'm Jeff Dodge, Investor Relations and with me today are Tom Chapman, our Chairman and CEO;

Don Heroman, Chief Financial Officer;

Dave Gunter, Corporate Finance and Nuala King, our Corporate Controller.

The financial information that we will be discussing this morning and during the call, and the reconciling information relating to certain non-GAAP information, is included in a press release that we issued this morning and filed in a Form 8-K.

The press release and the GAAP reconciliation information may also be found in the Investor Center on our website at www.equifax.com.

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

These statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially from our expectations.

Certain risk factors inherent in our business are set forth in the filings with the SEC, including our '04 Form 10-K, annual report and subsequent filings.

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'd like to turn it over to Tom Chapman.

Thanks, Jeff and good morning everybody.

Earlier today, we reported financial results for the first quarter.

All of our business units made solid and strong contributions to this performance; one of the best starts to a new year in our 106-year history at Equifax.

We also reinforced our strategy for growth with some very important accomplishments during the quarter.

Let's review what we achieved in the first quarter and then Don will give you his typical financial detail and then we will take your questions.

For the first quarter, revenue was a record $343 million, up 11%.

Earnings from continuing operations were $59 million, up 13%.

And EPS was $0.44, up 16%.

During the quarter, we further strengthened our franchise.

We finalized our acquisition of Appro Systems.

A company that for 18 years has developed industry-leading enabling technologies for consumer and commercial lending operations.

This edition provides significant competitive advantage and brings new executive leadership, and Steve Upman (ph) and the rest of his team, to drive future growth in this area.

Our Appro acquisition illustrates how Equifax continues to build and redirect the foundation for Enabling Technologies to serve all of our business unit customers and industries around the globe.

Our key growth initiatives in North America, Enabling Technologies, Personal Solutions and small business continue to gain traction and deliver strong topline growth, cash flow and margin.

And our international operations continue to strengthen their local franchise with analytical and Enabling Technology Solutions; while delivering record financial performance through core consumer and commercial credit reporting.

So let's review the key highlights for our businesses during the first quarter.

North America Information Services, led by Dan Adams (ph), delivered 11% topline growth and a 44% operating margin.

This represents over 50% of our revenues, of course, and this business grew its U.S. consumer and commercial revenue by 9%, mortgage reporting by 16%, and in Canada a 14% increase.

Enabling Technologies continues to generate excellent market response.

During the quarter, over 21% of all U.S. online transactions were processed through one of our Enabling Technology platforms.

Our InterConnect platform is gaining widespread acceptance.

We are actively working with 19 customers on projects which will generate new revenue in '05 and into the future.

We win over 40% of our project proposals, a strong indicator of the value to our customers.

And the applications are broad-based, including application services for a large Internet cataloger to significantly reduce their internal expense with a more streamlined process, integrating our small-business data for a major credit card issuer, to automate decisioning of small-business credit card applications, and point-of-sale decisioning for a private-label credit card issuer.

Also feeding North America's growth, Predictive Sciences has established a formidable competitive position in the marketplace.

During the quarter, nine significant consumer modeling engagements were undertaken.

These projects include customers from Telco, insurance and financial services, verticals and cover a broad range of applications; in other words, risk assessment, fraud prevention, profitability analysis, and marketing response.

And for small-business, we completed three custom modeling projects for our top five, Telco, a major bank, and a top 10 finance company.

Another North American growth engine, small-business, is gaining scale, scope and customer acceptance.

Initially, revenues were concentrated in various one off (ph) projects.

As customers evaluated the overall risk of their loan portfolios.

As customers implement our decisioning tools into their internal processes, the revenues convert to a transaction-based model, which is our 106-year old formula for success, click after click after click, by the tens of millions.

During the quarter, small-business reporting revenues were $3 million, up 58% from Q1 in '04.

Transaction- based revenue in small-business reporting, now represents over 50% of total revenues as customers increasingly access the database for their real-time decisioning needs.

Turning briefly to the FACT Act.

You'll remember our four part strategy has served us very very well.

First, FACT Act was to drive incremental operating efficiencies through and with our core business.

Secondly, develop new technical enhancements for ourselves, as well as for our customers.

Thirdly, improving consumer satisfaction and finally, becoming more proficient in cross-selling to consumers.

The Midwest region rollout began on March 1, as most of you know.

At this point in the implementation, we have approximately 45% of credit active consumers covered by the requirements of the FACT Act.

Throughout 2004, the industry, Equifax, and our customers work extremely well together to implement the necessary changes with the least amount of disruption for all of us.

Customers appreciated our proactive approach to educate them on the implications of the FACT Act for their business operations and our research applauds our willingness to work with them in order to mitigate the cost burden on our customers from this Act.

Furthermore, our execution on the requirements has simply been outstanding.

Consumers have an easy-to-use system for obtaining their credit files in a protected and safe environment.

And system availability and responsiveness has surpassed all requirements and all expectations.

So far, volume and operating expense has been well within the range of our planning estimates.

Now on to Marketing Services.

Our strategy and the leadership of Owen Flynn and his team is driving performance as we continue to see signs of an improving environment.

For credit marketing, the 8% revenue growth this quarter represents the highest growth rate in over four years.

Our newest product, TargetPoint acquisition, is creating a lot of demand from our customers.

Now this product allows customers to conduct highly targeted customer acquisition campaigns on a weekly basis.

We were first to market with this product and have developed a very fast process to deliver critical information to our customers.

Five of our top 10 credit marketing customers now use this product and the unique capabilities and value allow us to price this product at a premium which it deserves.

During the remainder of '05, we will introduce additional products in this suite that help customers make better decisions about their existing customers.

Direct marketing continued to benefit from implementation of Excel (ph), our proprietary supercomputing technology.

This has contributed to improved operating margins and the ability to rapidly introduce new products, some of which are scheduled for rollout this quarter.

Personal Solutions, led by Vince Corica, continued its strong growth and solid performance.

Revenues grew 19% to 30 million.

Visits to our website were up 31%, reflecting the impact of the FACT Act implementation, accelerating consumer interest in ID theft, and increased marketing and advertising activities on our part.

Repeat buyers were 38% of our Q1 customer activity.

Now, we are particularly proud and pleased with our website, which we continue to refine and improve daily.

For the first quarter, the conversion rate for new customers exceeded 12%.

What that means simply is that one out of every eight unique visitors to our website purchased a product.

Our recent survey of online retailers by Nielsen, on these conversion rate statistics, rates Equifax in the top five nationally.

New products, including Score Watch and Credit Rankings, represent substantial new growth opportunities.

Credit Rankings, as you may remember, launched late last year, is performing much stronger than our initial expectations.

And Score Watch, along with our other monitoring products, is exceeding expectations.

In the first quarter, revenue from all of our marketing and monitoring products was up 38% compared to Q1 last year.

Finally, our commitment to consumer education and fiscal literacy delivered another industry first this quarter as we launched www.mycrediteducation.com and distributed the CD to state and federal government officials and the media.

We also included the CD with our 2004 annual report.

You know, this proves the Equifax way works.

We took on onerous legislation in the FACT Act, while at the same time producing and delivering a CD, called Take Control of Your Credit.

This is a very important part of our credit literacy initiative to enlighten, enable, and empower consumers to be effective guardians of their identity and financial well-being.

In our viewpoint, the more the consumer knows about the credit, the better they are to improve; the better they improve it, the less the risk to our customers; the less the risk to our customers, the more growth is accomplished; the more growth is accomplished, the more revenue to Equifax; the more revenue to Equifax and our customers, the better it is for our economy.

It's that simple.

It's that powerful.

Everything you want or need to know about consumer credit is on this CD and the website.

This CD is a great teaching tool and it is my hope, that in the near future, this information finds its way to every school and university in this country and beyond.

And as you may know, it's available in both English and Spanish.

Our international operations continue to drive revenue growth and improving margins.

Michael Shannon, our group exec in Europe, and his team continue to execute their strategy, driving stronger operating margins and revenue growth.

Specifically in the U.K., consumer reporting volume was up 6% compared to Q1 of 2004; driven by growth in both the government and retail verticals.

Our top 20 accounts were up 11% for the quarter.

Predictive Sciences continues to be a growth driver for Europe.

Sales of account management scores were up 24% compared to Q1 of last year.

And we released a new version of our market leading generic risk score incorporating additional data to improve predictability.

U.K.'s Personal Solutions unit volume was up 34% over last year.

We set a new Q1 record with operating margins at 22% compared to 16% in Q1 of 2004.

And Rudy Ploder and his team has provided valuable leadership in Latin America; as they delivered outstanding growth and margin gains during the quarter.

All six of our Latin American country markets delivered an increase in operating margin in addition to double-digit revenue growth.

A 16% growth in online volume, the addition of new high-value products, and price increases are driving strong local currency revenue growth and an improving competitive position in the marketplace.

Marketing Services, Predictive Sciences, and Enabling Technologies are growing 47%.

And today, they represent approximately 30% of our Latin American revenues, up from 24% in 2004.

In summary, this quarter illustrates the continuing solid performance of our core North American information services business.

It also proves our commitment to growth by delivering innovative solutions, both organic and through acquisition in all of our served market verticals.

And it reinforces the value of our global franchise with outstanding performance in both of our international business units.

As I said at the outset, it's one of the very best starts ever to a new year at Equifax.

Now let me turn it over to Don.

Thanks, Tom and good morning.

The financial performance for this quarter represents an outstanding start to the year.

Where are appropriate in my comments, I will also present the non-GAAP equivalent information, excluding the financial impact of the FACT Act, all other financial informational will be given on a GAAP basis.

We have provided a detail reconciliation with the appropriate GAAP numbers in the Frequently Asked Questions attachment to the press release issued this morning.

For the quarter, Tom has already given you the GAAP numbers; so I will provide you the non-GAAP information.

Excluding the impact of FACT Act, consolidated revenue was $343 million, up 8%.

While earnings from continuing operations were $57 million, up 10%.

EPS was $0.43, up 13%.

And the corporate operating margin was 30%, up from 29% in 2004.

In North America, U.S. consumer and commercial information services, revenue was $144 million, up 9% compared to last year.

Adjusted for the regulatory recovery fee revenue was $136 million, up 3%.

Mortgage reporting revenue of $21.4 million was up 16% and adjusted for the regulatory recovery fee, revenue was $20.6 million, up 12%.

And this area continues to outperform the mortgage banking indexes.

Ten of this revenue was $27 million, up 14% in U.S. dollars, up 14%.

And in U.S. dollars, up 6% in local currency.

Marketing Services revenue of $59 million was up 4%.

Credit marketing revenue of $35 million grew 8%, our strongest quarterly rate of growth in 17 quarters.

Direct marketing revenues were $24 million, flat compared to Q1 of '04.

And Personal Solutions revenue of $30 million for the quarter was up 19% compared to the first quarter of last year.

Its operating margin was 10% for the quarter and adjusting for the radio advertising expense, the operating margin was 22%.

Overall, North America's operating margin was 38%, up from 37% in Q1 of 2004.

Europe delivered revenue of $37 million, up 8% in U.S. dollars or 4% in local currency.

As Tom mentioned, its operating margin was a record 22% in the quarter compared to the 16% in 2004.

Latin America's revenue of $26 million was up 24% in U.S. dollars and a very strong 17% in local currency.

The operating margin was 25%, up from the 17% in the first quarter of 2004.

And for the Corporation, free cash flow was $30 million for the quarter, up $23 million, up from the $23 million in 2004.

The primary uses of cash during the quarter were a $20 million contribution to our pension plan, consistent with our practice in previous years, and our $92 million acquisition of Appro which will net down to $74 million after liquidation of selected non-operating liquid assets and cash on hand.

During the quarter, we repurchased 812,000 shares of our stock for a total of $25 million and have $214 million remaining under the current authorization.

Days Sales Outstanding were 55.

Days up one day compared to last year.

Total debt outstanding is up 62 million -- 716 million compared with the 654 million in the first quarter of '04 as a result of our Appro acquisition.

Total debt is down $109 million when compared to the first quarter of 2004.

Again, overall, a very solid start to 2005 for the entire Company.

Thanks and now I'll turn it back over to Tom.

Thanks, Don.

This financial performance demonstrates the management team of this Company, as well as the 4400 other employees at Equifax, have incredible discipline and a dedication and ability to drive growth and value for our employees, our customers, and our shareholders.

I believe we have got the best management team by far in the industry.

It's got a great vision, the ability and the tenacious drive that makes Equifax the industry leader that it is today and will continue to be in the future.

This is a company, a franchise, a management style that is built to last.

Now I will be glad to take your questions.

+++ q-and-a.

(OPERATOR INSTRUCTIONS).

Brad Eichler with Stephens Inc.

Good morning, Tom and Don.

Congrats on those good-looking results.

A couple of questions.

First of all, I just want to make sure the $0.43 that you guys reported on operating or continuing operations, does that take out $0.01 from FACT Act or what's the difference between that and the $0.44 that was reported?

That's exactly right, Brad.

It takes out a penny from FACT Act.

The rest of it is core.

Just to keep on FACT Act for just a second.

Can you give us any type of idea as to what type of volume you are getting requests for free credit reports?

I'm sure you measure it on a daily basis but maybe on a weekly basis.

Of those, what type of response rate are you getting for an upsell of credit score?

Brad, what we have talked about so far is we've given the financial numbers that's within our range.

What we have historically seen is a real spike at the beginning and then a real trail off as time goes on.

What I'm trying to get to -- maybe you could answer it a different way.

When you think about what impact the sale of credit scores is having right now in you Personal Solutions business, is that a material amount or how would you look at that?

I would answer it this way.

There's no material impact on our Personal Solutions business nor is it negative.

Tom, you spent some time talking about the success you guys are having with the new decisioning and analytics products.

I'm just curious.

Obviously, that's a good stand-alone business on its own but when you implement some of those systems, what do you see from a data sale perspective?

Do you see -- I guess what I'm getting at is do you see a decent lift from your customers in terms of how much data you're selling them?

I think so.

We are going to the Appro Users Conference, for instance, next week in New Orleans and I will be keynoting that.

We will be presenting a broad base of Equifax products.

I'm sure that while they know about Equifax, I don't know that all of them use our data, and our solutions, and all of our products and services.

So I think as we continue to introduce platforms, I have no doubt that data builds on analytics and analytics builds on our platform.

So I think that it will certainly drive data sales in the future because once we have that embedded base with all the values of the platforms, it doesn't make a lot of sense in changing providers.

And then just two numbers questions.

What was volume trends for the core North American credit business?

This is Dave.

That volume trend was 4% and the good news is we were able to grow rapidly last year in telecom and financial services.

We continue to grow in those areas, single digits.

So we have consolidated our gains from last year and continue to grow. 4% is the number.

Thanks.

And then mortgage exposure as a percent of revenue in the quarter?

Yes, it was 15.9%, Brad.

So still well within our range.

Actually, at the lower end of our range.

Thanks again, guys.

Frederick Searby with J.P. Morgan.

Congratulations, Tom and Don.

Those are great results.

You defied the skeptics persistently.

A couple of questions here.

First, credit card marketing, you said had a four-year high and then you talked about the traction some union products are getting.

I just wanted to clarify, is the industry picking up?

Are you seeing credit card issuers more aggressive on the marketing front or are you gaining share because of new products?

Second question, not to focus on the negatives, but ChoicePoint and Sizent (ph), obviously we've had a flare-up and concerns about consumer data.

What are your thoughts there and how would it potentially impact you, if it all?

If you could just give us a big picture view.

And then finally, on InterConnect where you're getting again -- it sounds like some great traction.

Who are you really competing with there?

Who do you think you're taking share from?

Is it really more internal solutions that you're just offering a better ROI?

Thanks a lot.

If I got it right, there's three.

If you want me to limit it to one or two, no problem.

I want to make sure that I don't purposely avoid anything you have asked.

Generally speaking in the CMS base, we're seeing some improving trends in our large customers and there's a lot of focus on using a lot of our diagnostics and our technology for retention, and that's not surprising.

I think our top 25 CMS customers are up like 17% for the quarter.

We are pleased with that.

We think a lot of that has been driven by Excel, our new platform which allows the CMS customers to be able to sort, and get in the mail, much much quicker, exponentially than in the past. (indiscernible) we are gaining some share and we do have a competitive advantage with the technology.

I think your second point was about what's going on with some of the breaches (ph) and those things and what do we think about it.

I think that since time began, there have been various types of compromises of not only data-bases but paper.

It happens in every company regardless of what the industry is.

I think it's regrettable that this has sort of created a firestorm within the industry.

However, I never thought I'd say this, Fred.

One of the good things is we are so incredibly highly regulated.

And we have as a company, as everybody on this line knows, been dogmatic about never using information other than for a purpose for which it was achieved.

We have given up a lot of revenue, compared to our competitors over the years, because we simply will not push the limits.

I think what is going to end up happening is there's going to be some new regulation on companies that are resellers, which simply do not have laws and regulations and rules at the federal or state level like we do, as it relates to the appropriate use of data.

I think net net, even though that may be onerous, that is probably a good thing to protect the consumers, to establish the rules, and those companies you mentioned, they are good companies, it will give them an opportunity to comply with rules and regs just like we do.

And I think ultimately that will help the whole industry.

I think a derivative of this however has been horrible reporting by the media about ID theft.

The simple fact is if it's a credit card or otherwise, the losses are being incurred by the companies, not by consumers.

The media is doing a horrific job of explaining that to consumers.

I think what it is doing though, which may benefit us in the long-term, it is helping educate consumers to take better care of their data, to be more cautious about their own information and protecting it, and ultimately helping them be more enlightened about ID theft, what it can do, and how to protect themselves.

We are seeing a lot of interest from, let me just say from CEOs who almost looking paternalistically at their employee base and saying, "How can I help our employees feel more comfortable about this?"

So that's sort of two or three reactions, Fred, to what's going on in that space.

InterConnect, InterConnect was the third question.

I think that we will continue to build better solutions via InterConnect.

It's sort of cross-industry, which is important for us.

I think InterConnect can take us out of traditional industries.

It's new business for us relative to replacements.

Of course, we have got conversions in there.

I think most of this is new opportunities for us and I think they are also using it to replace old outdated internal decision tools and they'd rather utilize a plug and play type of solution, in the form of InterConnect, and investing their capital in their resources otherwise.

Who do we compete with?

We compete with Experian.

We compete with TU.

Small -- there's a lot of cottage industries out there that have got various applications.

So it's a pretty broad-based market and one that I think will continue to grow for a long period of time.

So I hope I got your three questions.

You did.

Thank you very much.

Congratulations, guys.

Good work.

Michael Meltz with Bear Stearns.

Dave, just a quick follow-up on Brad's question.

What was pricing down in the quarter?

And then I have a few others.

Pricing in the quarter, it is in the very low single digits, so very good performance as we continue to drive both topline and margin.

In terms of Personal Solutions, the growth was much stronger than I would have expected.

Can you talk specific as to what was driving that and say if you are expecting sequential growth the rest of the year?

And then regarding corporate expense, which is also higher than I expected, are you now accruing executive comp in that line?

What do you expect that line to be full-year '05?

Thank you.

You're correct on corporate expense.

This is Dave.

As to Personal Solutions, the important thing that's driving our growth is the sheer volume of traffic coming to the website and then the other item, which you'll note in the expenses that is driving revenue growth, is our advertising as we continue with the online programs.

So website traffic, online advertising are driving Personal Solutions growth.

Is that advertising going to continue?

It'll continue intermittently.

Just like any consumer marketing company, as market trends indicate opportunities, will -- I don't know that there will be a twelve-month every day advertising campaign.

But we're certainly going to support that business with awareness.

So we will be in and out of the market.

How should we think about margins in that business going forward?

We've told you what they are with and without.

They are in the low 20s without it, and there in the ten-ish range with it.

So depending on how we're in and out the market, it will be in that kind of range.

Normalized, it's a 20% business.

And that's the way you ought to look at it.

The question on corporate expense in terms of full year.

How should we be thinking about that?

You are right.

We have the impact of the executive expense in there.

That will be spread out over the course of the year.

17 million a quarter?

Overall, for corporate, yes, that's a plus or minus range.

I'd now like to turn the conference back to Mr. Chapman.

Please go ahead.

I'd like to thank you everybody for being with us.

We know it's a real real busy day for you.

We thank you for your continued support and interest in our Company and as usual, we will talk to you some of you I'm sure offline.

Have a great day.

Look forward to seeing you soon.

Bye-Bye.

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