易速傳真 (EFX) 2013 Q2 法說會逐字稿

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  • Operator

  • Good day and welcome to the Q2 2013 Equifax earnings call.

  • Today's conference is being recorded.

  • At this time I would like to turn the conference over to Mr. Jeff Dodge.

  • Please go ahead, sir.

  • - SVP of IR

  • Thanks and good morning.

  • Welcome to today's conference call.

  • I'm Jeff Dodge with Investor Relations and with me today are Rick Smith, Chairman and Chief Executive Officer; and Lee Adrean, Chief Financial Officer.

  • Today's call is being recorded.

  • An archive of the recording will be available later today in the Investor Relations section in the About Equifax tab of our website at www.equifax.com.

  • During this call, we'll 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 2012 Form 10-K and subsequent filings.

  • We will also refer to a non-GAAP financial measure, adjusted diluted EPS, attributable to Equifax.

  • Adjusted diluted EPS attributable to Equifax excludes acquisition-related amortization expense.

  • This measure is detailed in our non-GAAP reconciliation table, included with our earnings release and also posted on our website.

  • Also, please refer to our various Investor Presentations which are posted in the Investor Relations section under the About Equifax tab on our website for further details.

  • Now let me turn it over to Rick.

  • - Chairman & CEO

  • Thanks, Jeff, and good morning everyone.

  • Thanks for joining us this morning.

  • As I typically do I'll start off with a few comments financially, for the quarter -- second quarter, then move into some highlights by BU.

  • We'll turn it over to Lee for some detailed financials and I'll come back and give you some color on the third-quarter, fourth quarter, second half of the year outlook.

  • Second quarter, if I look back, was the strongest and most balanced quarter we've experienced in my eight years here.

  • We delivered double-digit revenue growth in each of the four US-based businesses along with double-digit constant currency growth in International.

  • This performance was largely driven through our continued momentum across a broad range of strategic initiatives and high levels of execution, the theme we have talked about now for the last couple years.

  • We also are starting to see some modest signs of economic pick up.

  • Total revenue was $587 million up 14% from the second quarter of last year.

  • Operating margin was 26.9%, up from 25.1% a year ago.

  • Adjusted EPS was $0.92 a share, up 28% from $0.72 last year.

  • The first half of 2013 total revenue was $1.2 billion, up 13% and adjusted EPS was $1.79, up 27%.

  • Core organic non-mortgage growth rate accelerated from the 4.7% reported in the first quarter to 7.5% in the second quarter.

  • And that acceleration is expected to further as we go into the second half -- further expand as we go into the second half of 2013, enabling us to significantly mitigate the anticipated slowdown in mortgage originations over the balance of the year.

  • Now quickly, going into the BUs for some highlights, which are pretty fabulous in my opinion.

  • First, USCIS, we are aggressively pursuing market expansion and product penetration through their unique product offerings.

  • A Key Client Program, which we've talked about now for, I think, four years has enabled us to significantly strengthen share in these accounts and grow our business with the four largest banks driven largely by new product innovation and strategic growth initiatives.

  • That model of KCP, where we dedicate all resources across the Company to driving share gain and incremental new spend, has been so successful we've now expanded the program to now include two large credit card institutions and two large telecos.

  • Through our creative use of analytics-driven insights we continued to deliver strong NPI performance in USCIS.

  • During the quarter we finalized the development and delivery of our Analytical Sandbox to one of our largest customers, following their user acceptance testing.

  • That's something we talked about in the first quarter.

  • The pipeline for Analytical Sandbox projects now is robust as we further engage our large KCP accounts and develop new opportunities with many of our financial services customers.

  • I expect great things from the Analytical Sandbox over the coming year or so.

  • Next we will be launching trended data product in the USCIS business that will provide customers with a more granular understanding of consumer behavior through a richer, more robust portfolio of information.

  • Through our voice of customer research the math on this product is strong and crosses many of our end-user markets.

  • As a result, as you might guess, the pipeline for trended data is already very strong.

  • A year ago we launched an expanded focus on the automotive vertical in the US business.

  • These efforts, which leveraged multiple unique data assets of the Company, are now generating solid double-digit organic growth.

  • It's really the power of using our credit data combined with our VOE/VOI data.

  • This is a market we are very bullish on.

  • We see additional opportunities for continued growth.

  • Next, in USCIS the level of innovation, execution, organic growth in USCIS core non-mortgage activities accelerated in the first quarter and we expect that growth to continue to accelerate, much like the rest of the Company, as we move into the second half of the year.

  • As anticipated, the total mortgage market originations are expected to decline approximately 35% to 40% in the second half of the year when compared to the second half of 2012.

  • In that environment, we expect USCIS revenue growth to moderate a bit from the first half, which was 17% to 20% and moderate down similar to the low-to-mid teens in the second half of the year.

  • Next, moving on to International, as they have done now for many quarters they continue to strengthen its position in the marketplace through unique, innovative solutions and share gain and continue to deliver some solid growth.

  • Our Latin American countries continue to deliver double-digit revenue growth.

  • Revenue in our Technology and Analytical Services offering grew 13% for the quarter.

  • And two of the most troubled economies in which we operate, our leaders in Spain and UK continued to execute and innovate at very high levels allowing them to deliver double-digit growth rates, which is remarkable in those environments.

  • In the UK we've entered into an agreement with a top 10 consumer bank where we went from having 20% share to now becoming their primary provider for online credit information.

  • Our unique set of product offerings and focus on customers has enabled Canada to grow at almost four times the rate of GDP.

  • Great level of execution and innovation there as well.

  • Finally, by leveraging what Trey Loughran and the PSOL team have done in the US, outside of the US footprint, we're taking those capabilities and that platform now to our International properties and PSOL now is growing Internationally at 35% for the quarter.

  • For the year, we expect International's revenue growth to be in the upper half of their long-term target, which was 7% to 10% growth.

  • The transformation of Workforce Solutions business model to a broadening the end markets it serves and maintaining their premier automated Verification Services offerings, continues to drive strong broad-based growth and expanded operating margins, as you've seen.

  • Dan and his team have focused not only on the mortgage market, but growing the product offerings into new markets.

  • And for the quarter, they delivered double-digit growth in places like card, auto, government and pre-employment screening.

  • Just a great broad-based growth there.

  • During the quarter, two large clients added 265,000 records to our database.

  • And through our alliance partnerships, we have added over 100 new clients in the second quarter alone.

  • Total records on the Work Number database ended the quarter at 225.7 million, up 6% over a year ago.

  • The neat thing there is the team is continuing to develop new uses for the historical data, which help our clients and drive new sources of revenue growth for us.

  • Finally, I want to give you a quick update within Workforce Solutions on the recently announced contract win at CMS.

  • The Work effort is on schedule and as we talked about in our last call, we expect to be operational by October 1. At this point we've only factored in a modest level of revenue for the year, given all the uncertainty surrounding the implementation of the Affordable Care Act.

  • And as I told you last quarter, as we get into the third-quarter earnings call in the fourth quarter, we'll have a lot clearer insight as to what that means for us this year and next.

  • Workforce Solutions has improved organic growth in its core non-mortgage activities again by diversifying and into new and further penetrating the existing market segments.

  • And they're growing the Work Number database, which is a powerful lever for growth.

  • For the full year we expect Workforce Solutions to deliver revenue growth in the upper end of their long-term target, 7% to 9%.

  • PSOL continues to deliver strong, double-digit revenue growth with attractive operating margins through excellent operational execution.

  • Shortly after the close of the quarter, we made an important investment in PSOL, with the acquisition of Trusted ID.

  • This acquisition broadens PSOL's product offering and provides additional growth opportunities.

  • Trusted ID is a [Affinity] platform is best-in-class.

  • They service substantial clients such as AARP, Mint.com, H&R Block and many others.

  • Trusted ID is also an industry leader in assisting consumers with monitoring, managing their online reputation within social media sites, including Facebook, LinkedIn and Twitter.

  • They also enable consumers to control their off-line identity through opt-out options with third-party mailing lists.

  • Simply put, this was an opportunity that we saw as we looked at expanding our presence into the identity space and Trusted ID is fabulous there.

  • And secondly, for years we've been trying to expand our presence in Affinity and Trusted ID does that as well.

  • It's a nice fit strategically for Trey and his team.

  • We expect PSOL to end the year with double-digit revenue growth possibly exceeding the upper end of the long-term range which was 8% to 12%.

  • On to North American Commercial Solutions.

  • They delivered another quarter of double-digit revenue growth and on the path to finish 2013 with growth at or above the upper end of their 6% to 10% long-term target.

  • An intense focus on executing their strategic initiatives, building a strong pipeline of opportunities and a new product innovation, all of which are ahead of plan, has enabled a strong turnaround performance.

  • In summary, we have turned the corner with Commercial and they're back on the path to solid growth.

  • Our performance for the first half of 2013 has been strong and has been balanced.

  • The team continues to deliver at a very high level of execution across our initiatives, including new product innovation and providing superior customers service.

  • So in summary, I'd say the first half of the year was a great year for us.

  • With that, Lee?

  • - CFO

  • Thanks, Rick, and good morning, everyone.

  • This morning I'll be referring to the financial results of continuing operations generally presented on a GAAP basis.

  • You should also refer to the Q&A and non-GAAP reconciliations attached to our earnings release for additional financial information.

  • With our strong second-quarter performance, we are well positioned to tackle the expected mortgage headwind in the second half.

  • Let me first focus on the quarterly results.

  • Compared to the same quarter in 2012, for the first quarter of 2013 consolidated revenue of $587 million was up 14% on a reported basis and up 15% on a constant currency basis.

  • Operating margin was 26.9%, up 180 basis points from last year, driven primarily by operating margin expansion in Workforce Solutions, Personal Solutions and Commercial Solutions.

  • Diluted earnings per share attributable to Equifax was $0.73 a share, up 22% from the same quarter last year.

  • And excluding acquisition-related amortization and associated tax effects, adjusted earnings per share was $0.92, up $0.20 or 28% when compared to the second quarter of 2012.

  • Moving to the individual business units, US Consumer Information Solutions revenue was $260 million, up 19%.

  • Excluding the CSC acquisition, which we now operate as our central region, total organic growth in USCIS was 5%.

  • Online Consumer Information Solutions revenue was $185 million, up 17%.

  • Excluding the central region, revenue grew approximately 4%.

  • Transaction volume was down 2%, but average revenue per unit increased due to pricing initiatives and favorable customer acts.

  • Mortgage Solutions revenue of $33 million was up 38% compared to the second quarter a year ago, driven by the acquisition of our central region and organic growth of approximately 17%.

  • Consumer Financial Marketing Services revenue was $42 million, up 17%.

  • Organic growth was approximately 5%.

  • The operating margin for US Consumer Information Solutions was 40.2%, which is flat when compared to the second quarter of 2012.

  • Our International business unit's revenue was $130 million, up 9% on a reported basis, and up 12% on a constant dollar basis.

  • By region, Latin America's revenue was $49 million, up 5% in US dollars and up 11% in local currency.

  • Strong double-digit local currency growth and Technology and Analytical Services and Marketing Services were the primary drivers of this improving growth.

  • Europe's revenue was $47 million, up 14% in US dollars and up 16% in local currency.

  • Good growth in the telecommunications, government and insurance sectors, in addition to strong continuing double-digit growth in Personal Solutions, more than offset weakness in Marketing Services offerings.

  • Our Canada consumer information revenue was $34 million, up 7% in US dollars and up 9% in local currency.

  • Strength in Technology and Fraud Services, Marketing Services and Data Breach Services were the primary contributors to growth in the quarter.

  • International's operating margin was 28.7%, compared to 29.2% in 2012 due to increased investment in growth initiatives and infrastructure, but up 60 basis points from 28.1% in the first quarter.

  • Workforce Solutions revenue was $123 million for the quarter, up 12%.

  • Verification Services, with revenue of $77 million, was up 21% for the quarter driven by broad-based, double-digit growth across all major market segments, including mortgage, auto, government, card and pre-employment.

  • Employer Services revenue was $47 million, flat compared to last year.

  • Workforce Solutions operating margin was 31.1%, compared to 24.2% in the second quarter of 2012 driven largely by widening margins in our Verification Services business unit.

  • Approximately 50% of the improvement is from operating performance and 50% from lower acquisitioning amortization expense as a portion of the intangible assets from our 2007 acquisition of Workforce Solutions is now fully amortized.

  • North America Personal Solutions revenue was $52 million, up 12%.

  • Double-digit growth in our US-based subscription revenue and in Canada were the key drivers for the performance.

  • Operating margin was 27.6%, compared to 26.8% in Q2 of 2012, again benefiting from the lower credit file and monitoring expenses resulting from the CFC acquisition.

  • And finally, North America Commercial Solutions revenue was $23 million up 12% on a reported and local currency basis, driven largely by strong double-digit growth in our US Risk business segment.

  • Operating margin was 16.8%, up from 14% in the year ago quarter.

  • Now let me turn it back to Rick.

  • - Chairman & CEO

  • Thanks, Lee.

  • If I look back to February, we gave you a framework to think about for the total year.

  • In that framework we tried to define as best we could what we thought the mortgage market might do for the year.

  • As I sit here now in late July, the overall mortgage market is expected to perform as we got it, which is quite remarkable.

  • Little nuances, the first half of the year was marginally stronger than our expectation.

  • And the second half of the year, sitting here today we expect to be marginally weaker than we forecasted.

  • But in total for the full-year, the mortgage market is expected to perform kind of as we guided back in February.

  • In contrast, the organic growth in our core non-mortgage activities accelerated in the second quarter, as we mentioned before, from 4.5% to -- or 4.7% to 7.5%.

  • We expect that to accelerate further in the second half of the year, to the upper end of our long-term target for organic growth rate, which if you remember we talked like 6% to 8%.

  • So we expect third and fourth quarter to be at the upper end of that range, which is very healthy.

  • As a result, for the full-year, assuming current exchange rates and the anticipated decline in mortgage origination activity, our outlook remains strong.

  • We now expect revenue growth from continuing operations to be in the middle of a 10% to 12% guidance range which we gave earlier this year.

  • That translates into approximately $2.3 billion.

  • Growth in adjusted EPS and continuing operations is expected to be in the top half of the 21% to 24% guidance range we provided earlier, and that translates into $3.56 to $3.61 a share.

  • Operating margin is also expected to be comfortably in the range of 26% to 27%, which we gave guidance to earlier in the year as well.

  • So in summary, I'd describe the second quarter as very strong, first half very strong.

  • We're expecting a very strong 2013, kind of very balanced 2013.

  • So operator, with that we'd love to open it up for some questions, please.

  • Operator

  • (Operator Instructions)

  • Carter Malloy, Stephens.

  • - Analyst

  • Hi, guys.

  • Congratulations on the quarter there.

  • And thanks for taking my call, or my questions, rather.

  • So, first maybe on the core OCIS business, saw a little pick up there, especially in non-mortgage.

  • Can you give us a sense of is that just industry volumes or is that more pricing initiatives on your end?

  • Any detail there would help.

  • - Chairman & CEO

  • Well, it's a combination.

  • But what's really encouraging, I alluded to it a bit in my comments, Carter, is we launched an internal strategic initiative called 4G4 Growth.

  • The team came back with some ideas and automotive was a great area for growth.

  • About a year ago we deployed a lot of new resources there, a lot of new thinking there, brought in some outside consultants, and now that business is growing 14% in the quarter, which is just amazing.

  • There are other examples much like that as well.

  • It's as much new initiatives, expanding products and new verticals as it is pricing.

  • In fact, I'd say its more that than it is pricing at this juncture.

  • - Analyst

  • Okay.

  • And then also pretty encouraging lift in your European business.

  • You gave us some in the prepared remarks, but can you walk through again just what the key drivers are there?

  • You mentioned PSOL.

  • Is that a meaningful piece of that business?

  • - Chairman & CEO

  • The 35% PSOL growth was all of international, and that's inclusive of those two geography in Europe.

  • - Analyst

  • Is the PSOL a meaningful percentage of those businesses though?

  • - Chairman & CEO

  • In Spain, no.

  • In UK it's a good size.

  • - Analyst

  • Okay.

  • - Chairman & CEO

  • As I mentioned, I think it was last quarter, Carter, or the quarter before, it starts with leadership.

  • And we have got two energized, relatively new leaders in both UK and Spain.

  • They are looking at the business differently.

  • They are innovating at a very, very high level, bringing new products to market.

  • Their penetrating new verticals, like insurance and government.

  • For example, in the UK Growing Peace sold dramatically in the UK doing new verticals and spending that was never done before and their execution across all initiatives is extremely high.

  • And the neat thing is, it's not just one quarter now, it's been multiple quarters where they've executed.

  • And I think the future's bright there.

  • As you probably saw recently, some encouraging news coming out of the UK on their GDP.

  • So we get a little economic help in those two countries, that's even better for us.

  • - Analyst

  • Okay, great.

  • Congratulations again.

  • Thanks.

  • - Chairman & CEO

  • Thanks.

  • Operator

  • Jeff Mueller, Baird.

  • - Analyst

  • Thank you and congrats on the quarter.

  • Just wanted to revisit the guidance commentary since it sounds like the mortgage for the full year was in line with your expectations, but you're currently guiding towards the midpoint of the prior revenue range.

  • I guess was the non-mortgage core acceleration consistent with your expectations?

  • Because at least to me it seemed like a bigger step up going from 4.7% to 7.5% than I would've expected.

  • And then on top of that you're layering on Trusted ID.

  • Not sure how much revenue contribution there is there, but it just seems like directionally or order of magnitude a bigger acceleration than we would have expected.

  • So just wondering if you could comment on that please?

  • - Chairman & CEO

  • Yes.

  • I'd say it's important, Jeff, that we put it into context.

  • We gave a range of 10% to 12% back a year ago and different sell-side analysts developed different models and expectations for us as a company.

  • What we're saying now is the total mortgage market is going to behave largely as we expected.

  • The organic growth initiatives largely as we expected, just an acceleration.

  • There was some concern on the call in the first quarter where our core non-mortgage growth rate was 4.5%, 4.7% in the first quarter.

  • But we had planned on an acceleration beyond that in the second quarter and continuing the third and the fourth.

  • So largely all of our initiatives in the mortgage market performing as we expected.

  • As it relates to Trusted ID, the acquisition we just announced for PSOL, the revenue there is de minimus.

  • It's more of a strategic play to give Trey a foothold, a great platform into the annuity market and a great platform for managing IDs.

  • - Analyst

  • Okay.

  • And then I know you guys have been diversifying the business.

  • At this point the Verification Services Business, how much of that is mortgage?

  • - Chairman & CEO

  • It will vary over time.

  • Overall mortgage is about 18% verification at this peak it might be 40%-some.

  • - Analyst

  • Got it.

  • And then just finally any additional color you can give on the trended data product you referenced but didn't give a lot of color.

  • - Chairman & CEO

  • It's a pretty neat thing.

  • As underwriters continue to try to find better ways to make underwriting decisions and target the right people, today, as you might guess, they take a snapshot, a static look at someone's credit file.

  • And if we can give them historical data, 24 months or so, of historical data, and how consumers have behaved month-by-month, so you see a trended look, are they trending up, they trending down, are they volatile, are they steady.

  • That helps them make different product decisions and underwriting decisions.

  • So that's what we're talking about now.

  • It's time to build infrastructure to house the data.

  • - Analyst

  • Got it.

  • Thanks again.

  • - Chairman & CEO

  • Sure.

  • Operator

  • David Togut, Evercore Partners.

  • - Analyst

  • Thanks.

  • Good morning, Rick and Lee.

  • - Chairman & CEO

  • Hi, David.

  • - Analyst

  • Historically, pricing has been a very good driver of revenue growth for PSOL as you've migrated consumers up to family plans and such.

  • Can you quantify the impact that pricing is having on revenue growth this year and what you see going forward?

  • - Chairman & CEO

  • Are you talking specifically PSOL or in aggregate?

  • - Analyst

  • I guess let's start with PSOL and then maybe if you could give us a broader view Equifax overall.

  • - Chairman & CEO

  • I'm not going to quantify the number at either end but I'll give you a directional feel for it.

  • The stuff that Trey has done, new product introduction, expanded the value to his customers with things like [Fender Klan] or continue to have a positive impact.

  • I think that's a never-ending game, by the way.

  • I think as we continue to innovate and think about how you add more value to our customers, they are willing to pay more.

  • And that same trend holds true for Equifax.

  • At the Equifax level, the aggregate pricing benefit for Equifax, there's going to be ebbs and flows year-on-year.

  • But if you're looking at multi-year period of time, David, it's pretty consistent year in and year out.

  • One year you may have a little bit more, next year a little bit less.

  • But it is fairly consistent over multiple years.

  • - Analyst

  • Overall, what are you seeing this year in terms of pricing power?

  • - Chairman & CEO

  • Where?

  • It varies, David.

  • In some countries where the marketplaces may be different you may have a lot of pricing power.

  • Obviously in other countries you may not have as much.

  • Places like the UK where we're a number two player in the UK.

  • It's also clearly linked to the vertical, the country, the business and their level of innovation.

  • You've got a lot of pricing power if you continue to bring value to your customers.

  • New, unique value.

  • - Analyst

  • Where you have the most pricing power now, either by vertical or by geography?

  • - Chairman & CEO

  • Let me think about that.

  • I can't think of one that stands out as being dramatically different than another.

  • Again, from time to time, David, someone might come up with a really unique product in some part of the world and have a lot of pricing power there.

  • But then eventually competition might catch-up and someone else comes out with a great new product somewhere else in our business.

  • So it is truly balanced.

  • The stuff that Paul Springman and his team have built, and you've heard me talk about this before, they are top-notch, experienced, strategic pricing people and tactical pricing teams as well.

  • And they are penetrated in every single vertical country, BU, we have around the world.

  • - Analyst

  • I see.

  • I apologize if you mentioned this earlier.

  • I joined the call a few minutes late.

  • But did you quantify the contribution of revenue growth in the quarter and for year-to-date from NPI?

  • - Chairman & CEO

  • We did not.

  • But it largely had -- I don't have it off the top of my head either, I will tell you this though.

  • We had a review.

  • David, it is largely in line with the goals we've had.

  • In fact, I think we're slightly ahead of our budget through the first half of the year.

  • So NPI continues to be a meaningful contributor and we did not quantify it.

  • - Analyst

  • And what is the biggest driver of NPI related growth this year?

  • - Chairman & CEO

  • It's pretty cool.

  • It's like we had the last couple of years, David.

  • It's 60 to 70 products.

  • It's every BU, it's every geography.

  • A couple years ago we had a big hit in a thing called ESS, which you know of.

  • Maybe two years ago I think it was, we had another big hit and NC plus, the telecom utility positive data.

  • By and large what you're finding now in our eighth year of doing this, it's a lot of midsize small projects all around the world.

  • - Analyst

  • Got it.

  • And just finally, Rick, I realize that you don't control the Boa Vista JV, but you know Experian has certainly highlighted a slowdown in their growth rate at [Ceras] in Brazil.

  • Can you just give us a qualitative sense of what you're seeing in the Boa Vista JV in Brazil?

  • And is that seeing a meaningful slowdown in growth given some of the civil unrest over there?

  • - Chairman & CEO

  • Yes, I think the things that the world talks about when they look at Brazil would be reflective to Experian, reflective of our business down there as well.

  • I'm heading down, David, once in August and once again in October, to see the team down there.

  • From our side, as far as integration, developing new products, getting products to market, and getting market acceptance and so and so forth, all of that is working well.

  • But there's no doubt the Brazilian marketplace itself is slowing.

  • However, I'm still keenly interested in Brazil because it's not just a one-year bet or a two-year bet, it's a 5-, 10-, 15-year [bet].

  • - Analyst

  • Any update on when you might increase your ownership stake in that JV?

  • - Chairman & CEO

  • Not yet.

  • - Analyst

  • Okay.

  • I'll stay tuned.

  • Thanks so much.

  • Operator

  • Dan Perlin, RBC.

  • - Analyst

  • Thanks, guys.

  • Rick, can you just help us bridge the gap to this acceleration that you saw in this organic growth this quarter?

  • And then, you know an accelerant into the back half?

  • It was pretty stark.

  • And I just want to make sure I've got the kind of key tenants.

  • There's a lot of things you're throwing at us but I suspect there's maybe one or two that you really want to highlight for us.

  • If you just kind of outline that would be great.

  • - Chairman & CEO

  • Look at it this way, Dan.

  • I think it was -- first quarter was more of an aberration than anything else.

  • And as we -- as Lee and I built the plan for the year, and we've told you this, not just you but our investor base, that our long-term goal is to be in that 6% to 8% organic growth rate.

  • And we had a bit of an aberration for a number of reasons in the first quarter.

  • Now you're seeing us deliver the kind of growth we expected in the second quarter.

  • And you've heard me use the theme, Dan, in the past that we're executing at extremely high levels and the size I've seen.

  • And that's allowing us to creep up to the very high end of that 6% to 8%.

  • So it's no magic dust, it's no one product.

  • It is sustainable, repeatable, core organic growth.

  • Which is important to us.

  • And by the way, we intensified our effort.

  • If you're us and you're sitting there in the fourth quarter of last year looking at these low interest rates and knowing the mortgage rates, ten-year treasuries are going to pop-up, and mortgage rates are going to pop up in the second half of the year.

  • But we're going to go from a little bit of tailwind in mortgage to headwind?

  • We had to step up our game.

  • And I'm so proud of our team because all of our teams across the business have done just that, and that's going to enable us to have a strong second half of the year.

  • - Analyst

  • Okay.

  • And then when you look across your portfolio, in particular in the US, are you seeing a shift modest or otherwise really from the affluent category to the non-affluent starting to pick up?

  • - Chairman & CEO

  • Yes.

  • I'm looking at Paul.

  • Paul says yes, we are.

  • - Analyst

  • Can you quantify it either anecdotally or just -- has it just started recently?

  • We're starting to hear some indications of that with other companies.

  • I'm just trying to channel check with everybody on this.

  • - Chairman & CEO

  • What I think we are seeing is that the lenders, the banks, for cards, for mortgage to some degree, and for auto are going down a little bit in the credit scores.

  • I wouldn't call it quite subprime, but closer to subprime now than they were in the past.

  • That's been probably quarters now.

  • - Analyst

  • Okay.

  • And then I don't -- I'm sorry?

  • - Chairman & CEO

  • As they go down, we're fine but we're also doing which if you just know credit trends, is they're offering smaller lines of credit.

  • - Analyst

  • Okay.

  • And then in that typically when you go downstream you're seeing -- you would typically see the velocity of your credit apps go up because they got to put out more.

  • Is that still consistent?

  • - Chairman & CEO

  • Correct.

  • - Analyst

  • I didn't hear why transactions in online were actually down 2%.

  • I heard you talk about pricing being up, but I didn't hear why these were actually down?

  • - Chairman & CEO

  • Yes.

  • They were down 2%.

  • That's actually quite an improvement from the prior quarter.

  • We've commented in past quarters on a couple of clients where we have taken a smaller position.

  • We also saw in the second quarter Telco, which can fluctuate quarter to quarter, was down a little bit year-over-year.

  • - Analyst

  • Okay.

  • And then just one last question, I'll jump off.

  • The Employer Services was flat.

  • I know the division was good.

  • Is there any to call out there in particular?

  • Thank you.

  • - Chairman & CEO

  • No, I just think it's trends you see in unemployment claims.

  • There's a very encouraging thing there, Dan.

  • We have a new great leader in Scott Collins who's running that business for Dann Adams out there.

  • We should review those guys.

  • I have challenged them, even in this kind of unemployment environment, to step up their game in innovation and I think there's some very positive things you're going to see coming out of the employer business within EWS this year.

  • And it would turn the growth, which will help Dann.

  • - Analyst

  • Excellent.

  • Thank you.

  • Operator

  • Manav Patnaik, Barclays.

  • - Analyst

  • Hi.

  • This is actually Manav's associate Greg calling in for him.

  • Good morning.

  • On Commercial Solutions, which we saw had a pretty strong quarter, can you give an update on market trends and whatever company-specific attributes are helping to drive the growth?

  • - Chairman & CEO

  • Greg, it's more than that it's just -- I admitted this to our investor base back in the fourth quarter, maybe again in first quarter, we just had poor execution there.

  • And Alex and his team have refocused themselves on generating strong pipeline, both in the MDS business and the marketing business.

  • In Canada, we're proving our data quality in Canada tremendously.

  • We are revamping our entire go-to-market strategy in Canada and the US risk business has returned to growth.

  • So it's more of just doing what the rest of the business has been doing, which is improving the level of execution.

  • - Analyst

  • Great.

  • And then we saw some small tuck-in acquisitions like Trust ID.

  • But can you give a sense of what the larger deal M&A pipeline looks like?

  • CFC seemed kind of like a no-brainer, but is there anything else, any sizable deals that are on your radar?

  • - Chairman & CEO

  • We always are looking for the strategic deals that make sense to us financially and strategically.

  • The pipeline is good.

  • It's tied to our strategy.

  • We're in the process of just wrapping up our three-year strategy.

  • We maintain a goal of one, two points of growth coming from M&A over multiple years.

  • And I think you can continue to count on that.

  • And again you're going to have some years that are bigger than that, but in general terms think of us as being a one to two points of total growth coming out of M&A.

  • - Analyst

  • Okay.

  • That's it for me.

  • Thank you.

  • Operator

  • Shlomo Rosenbaum, Stifel.

  • - Analyst

  • Questions.

  • Could you just talk -- the most impressive part of the quarter to me is the fact that you guys are getting a growth in areas like mortgage reporting where you clearly have the wind starting to blow in-your-face.

  • Even the verification services as well where things are turning down.

  • Could you just give us a little bit more detail about what are you doing?

  • Is there other products that you guys are coming to market with?

  • Have you cut other deals where you're getting a bigger piece of the pie?

  • How are you executing so well over there?

  • - Chairman & CEO

  • That's a good question.

  • I think if you separate, maybe look at EWS one way and we'll look at USCIS a little differently.

  • In EWS, it is continue to gain greater penetration.

  • Believe it or not, there were a number of mortgage and underwriters historically who maybe didn't pull a VOE/VOI and now Dann and his team are out there knocking on the doors day in and day out.

  • So his ability to penetrate the mortgage market, I don't have those numbers memorized right now, (inaudible) but there's a lot of room to go still.

  • But he's penetrating now so he's getting more pulls for VOE/VOI than he's ever had in the past.

  • He continues to look at his pricing for VOE/VOI, which is another lift for them there.

  • He continues to look at new products, as well.

  • In USCIS it's really new product introduction.

  • You've heard us talk in the past, the launch of a product called UDM is an example, is one example of solving mortgage problems we hadn't solved in the past.

  • And Rudy's also gaining more share in the tri bureau.

  • But you always sort of say, Shlomo, if you go back two, three, four years, we use to always talk about the mortgage bankers index and what that growth rate was, if it was growing or declining.

  • And our expectations through new products and through penetration was to outperform.

  • So if it was up 5%, we expect to be up something more than that.

  • If it was down 5%, we want to be down less than that.

  • So the trend that you're seeing today is a trend where we're proud of, we've seen for a number of years now.

  • - Analyst

  • Do you think that you're at a point in time that the trend is going to have a meaningfully less impact on you given what you're doing in some of those markets?

  • In other words, the expectation is that for it to slow down a lot.

  • Do you have a lot of new products in the pipeline or a lot more market share to be gained that you think that you could continue to significantly outperform that mortgage banker's index?

  • - Chairman & CEO

  • That's a great question.

  • Strategically the challenge I've given our team is we'd like to eliminate the cyclicality in mortgage.

  • We're not there yet.

  • We've got a long way to go.

  • But the vision, the dream is to find ways to offset any cyclicality, any downturn we might have.

  • But again we're not they're yet.

  • I'd like to do it within the confines of just the mortgage market itself.

  • So today we're obviously having to rely upon core non-mortgage growth initiatives.

  • But the challenge I've given Craig Crabtree, who runs our mortgage practice, is to utilize all the great talent we have around here to think about ways to minimize the cyclicality we have in mortgage.

  • It's a long-term goal.

  • - Analyst

  • Okay, great.

  • And one question for Lee.

  • You're continuing to delever after the CSC acquisition, where -- remind us of where your targets are at?

  • I would think, given the business model, even the 1.9 times leverage you probably still have a decent amount of capacity if another significant deal came by to be able to take that on.

  • Could you just comment on that?

  • - CFO

  • Yes.

  • Our targets are to be between 1.75 and 2 times EBITDA in terms of leverage.

  • I think at that range we do have some capacity in case a large opportunity like a CSC comes along.

  • I will remind you we actually had levered down to 1.4 times in anticipation of a deal the size of CSC.

  • But for the deals in the multi-$100 million range coming from where we are today, we have the capacity to take those on.

  • - Analyst

  • Okay, great.

  • Thank you very much.

  • Operator

  • Paul Ginocchio, Deutsche Bank.

  • - Analyst

  • Rick, I know you made some comments on the CMS contract, but have you learned anything over the last quarter and is there any sort of update or different view on that?

  • Three or six months later.

  • Then second, of the 7.5 points of organic, or core growth, what percent, what point -- how many points of that was due to the Analytic Sandbox initiatives?

  • Thanks.

  • - Chairman & CEO

  • Paul, on CMS, no, the team is working hard getting the infrastructure and the systems set up ready to go.

  • We are expected to be fully operational come October 1st.

  • Beyond that -- and obviously the government, at the federal level and the state level are working very hard.

  • We're working very closely with them.

  • Everything is unfolding as we had planned and hoped at this juncture.

  • Again as I mentioned earlier, we get back together in October for our third-quarter call, we'll have really good insight at that juncture as to how the balance of the year will fold out and next year as well.

  • We continue to remain optimistic there.

  • The second point as far as Analytical Sandbox though, we just launched that, as I think I mentioned in my comments.

  • That's just going live now so it's a wait for the second quarter 7.5% organic core non-mortgage growth.

  • Very little comes from the Sandbox.

  • I expect it to be a more meaningful part going forward.

  • - Analyst

  • Thank you.

  • Operator

  • Andrew Jeffrey, SunTrust.

  • - Analyst

  • Thanks.

  • Good morning.

  • I apologize.

  • I had to jump on late so, Rick, I hope I'm not going to make you repeat yourself here.

  • - Chairman & CEO

  • It doesn't matter.

  • How are you?

  • - Analyst

  • All right.

  • How are you doing?

  • - Chairman & CEO

  • Great, thanks.

  • - Analyst

  • And for Rick and/or Lee I guess, segment profitability was pretty impressive, especially in Workforce Solutions.

  • Can you speak specifically to some of the drivers there?

  • Or just tell me to read the transcript if you've answered that question already.

  • (laughter)

  • - CFO

  • In Workforce Solutions, we improved by seven percentage points year-over-year.

  • Following a first quarter where we also had shown very strong improvement.

  • In the second quarter, because the first quarter had a temporary factor in it, just a shift from Q4 to Q1.

  • But the second quarter, and we'll see this on an ongoing basis, about half of that improvement came from some acquisition-related amortization that is rolling off from our original acquisition of Workforce Solutions that became fully amortized during the quarter.

  • The other half is just real operating leverage, and it's two things.

  • We've seen strong growth in the verifications business, which gives us good bottom line leverage, and the second thing is we've been aggressively applying LEAN techniques to improve the efficiency across both of the subsegments within the Workforce Solutions business.

  • And the two of those drove about half of that improvement.

  • So you're seeing real cash improvement in those margins.

  • - Analyst

  • Would you consider that an inflection point?

  • - CFO

  • No, I think this is probably more moving to another -- I'm not going to say plateau, we try to drive some improvement every year, but I don't see a continuing dramatic improvement.

  • I see us now having moved from the low-to-mid-$20 millions up to the very low-$30 millions.

  • - Chairman & CEO

  • Yes, the only color I'd add there, Andrew, I agree with that completely, is you had the big step up because of the amortization rolling off.

  • But we'll always expect every business unit leader to continue to drive efficiency and productivity to give us some incremental lift.

  • And because of the great model we have as we grow our online business like VOE/VOI, we'll get some more.

  • We're not going to get 300, 400 basis points of improvement every year, but you'll expect -- we should expect to continue to have some improvement margin across all businesses including [DMS].

  • - Analyst

  • Okay.

  • And Rick, you've done a great job with NPI and you're clearly demonstrating that Equifax is much more than a mortgage play.

  • When you think strategically about incremental technology or data sets, what comes to mind?

  • What should we think about you doing from a strategic perspective over the next three to five years to sustain the outperformance that you've enjoyed certainly post recession?

  • - Chairman & CEO

  • Thank you for the compliment, that's awful kind of you.

  • There are so many levers that we have to take this Company to a much higher level of profitability and topline growth.

  • I'm really excited about analytics.

  • We got a world-class guy we've brought in.

  • He ran all of analytics for Hewlett-Packard.

  • He's working for Paul Springman now.

  • There's a lot of money to be made by expanding how we think about analytics.

  • We're in the process of finalizing our strategic plan roll-out there.

  • Fraud and ID, there's a big play for us there.

  • You think about GMS, there's an element of identification to make sure there's no fraud in your salary level there.

  • And that's a huge potential for us.

  • There's so much more we can do there.

  • We're investing heavily in that for -- with Rajib Roy and his team.

  • There's some geographic places we don't play today that I'm extremely excited about.

  • Expanding our footprint there beyond just Brazil, for example.

  • Auto, we talked about auto.

  • Auto was a -- was just an afterthought two years ago.

  • Now we're getting significant traction and great growth because of our unique data assets.

  • Government, there's a world -- getting the CMS win is great for just the revenue that may come from CMS.

  • But it's opening the doors to different branches within the government at a rate we never anticipated.

  • And then lastly, we talked about it a few times, insurance offers a lot of hope and potential for us as well in places like the UK where we're already gaining traction, in the US as well.

  • - Analyst

  • Okay.

  • And one last one if I may.

  • I think I heard you mention perhaps that issuers are coming down the credit continuum a little bit.

  • Is that incremental to what you've seen over the last few quarters on -- specifically on the consumer credit card side of your business?

  • - Chairman & CEO

  • Yes.

  • So they were obviously coming out of the recession, reluctant to loan to these, the lower credit spectrum.

  • What we're now seeing is yes, this incremental outreach where they're offering smaller lines of credit, but offering lines of credit to subprime or lower than prime.

  • - Analyst

  • So we're talking like maybe the 675 to 700 kind of FICO range?

  • - Chairman & CEO

  • Correct.

  • - Analyst

  • Thanks a lot.

  • - Chairman & CEO

  • Sure.

  • Operator

  • Andrew Steinerman, JPMorgan.

  • - Analyst

  • Hi.

  • Rick, in your opening remarks, you talked about some signs of economic improvement kind of helping.

  • And I know you used the word modest.

  • My question is where do you see that in your business?

  • Is it what you just said, issuers moving down the spectrum?

  • Is there someplace else that you could actually point there, it's helping your business maybe from a consumer credit standpoint more broadly?

  • Or were you saying hey, in the context of our guidance we're reassured with how the economy feels?

  • - Chairman & CEO

  • Good point, Andrew.

  • Let me see if I can clarify.

  • One, yes we're seeing in the credit card issuances an example of the going down market, two you're seeing it auto.

  • I would see us continue to pick up as auto sales pick up as a benefit to us, and you know it's going to continue in 2014 as well.

  • Home sales are starting to pick up.

  • That will bode well over time.

  • It's important to talk about one thing, I want to come back to the heart of your question in a second.

  • If you think about the mortgage market, obviously modestly better in the first half, about as expected, maybe modestly worse in the second half.

  • We expect the first half of 2013 on the refinancing to be tough as well, much like the second half here.

  • But then a pick up in the second half.

  • And you're also starting to see existing home and new home sales pick up as well.

  • So as I look to the second half of next year, and you've anniversaried the refinancing kind of fallout and now you have new home sales and existing home sales continuing to climb, that bodes very well for us.

  • The other point on economic pick up is you're starting to see it now for the first time in years, a bit of a pick up in GDP growth, which is helping consumer confidence in the UK, and it's lending in the UK as well.

  • - Analyst

  • Okay.

  • That's cool.

  • Just could you square in credit card?

  • You mentioned it in your comments just now, it's come up slightly in other parts of this call.

  • Is credit card applications, as it relates to USCIS, up now?

  • Is it still modestly up off the bottom, how would you describe credit card, which is a bigger segment, I think, than mortgage.

  • - Chairman & CEO

  • The prescreen business was up, Jeff, was it 7% in the second quarter.

  • So it's starting to trend in the right direction.

  • - Analyst

  • Right.

  • I didn't mean the prescreen, I meant the actual credit card applications driving consumer credit reports.

  • - Chairman & CEO

  • It's up modestly.

  • - Analyst

  • Okay.

  • Thanks so much.

  • Sure.

  • Operator

  • That does conclude today's question-and-answer session.

  • At this time I would like to turn the conference back over to management for any closing remarks.

  • - SVP of IR

  • I want to thank everybody for your participation and with that, operator, we'll conclude the call.

  • Thank you.

  • Operator

  • Thank you.

  • And again that does conclude today's conference.

  • Thank you for your participation.