易速傳真 (EFX) 2016 Q2 法說會逐字稿

Good day and welcome to the second-quarter 2016 earnings conference 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.

Thanks, and good morning everyone. 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 John Gamble, Chief Financial Officer.

Today's call is being recorded. An archive of the recording will be available later today at www.Equifax.com in the investor relations section under the About Equifax tab.

During this call, we will 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 businesses are set forth in our filings with the SEC, including the 2015 Form 10-K and all subsequent filings.

During this call, we will be referring to certain non-GAAP financial measures including adjusted EPS attributable to Equifax and adjusted EBITDA margin, which will be adjusted for certain items that affect the comparability of the underlying operational performance. For the second quarter of 2016, adjusted EPS attributable to Equifax excludes acquisition-related amortization expense, as well as the transaction and integration expenses associated with our acquisition of Veda.

Adjusted EBITDA margin is defined as net income attributable to Equifax, adding back income tax expense, interest expense net of interest income, depreciation, amortization, and the impact of certain one-time items, including the transaction and integration expenses associated with the acquisition of Veda. These non-GAAP measures are detailed in the reconciliation tables, which are included with our earnings release, and are also posted on our website. Also, please refer to our investor presentations, which are posted in the investor relations section of our website for further details. Now, I'd like to turn it over to Rick.

Thanks, Jeff, and good morning, everyone. Once again, thank you for joining us for our earnings call. As is normal practice, I will start by giving you some high-level overview on some financials, and go through some highlights on the individual business units, come back and give you some insight on the major corporate initiatives, and John will take it from there and go to details on the financials, and I'll come back with summary, then we'll do Q&A.

The second-quarter performance continues to reflect outstanding execution across our business units, our verticals, and our countries around the world. The team has developed good momentum which should carry us nicely into the remainder of the year, and into 2017.

Also, our Veda team has continued to deliver the performance that attracted us to the Company, and they fully embrace the integration strategy I'll give you more on that in a moment. I'm optimistic about the opportunities that the Australia and Southeast Asia business will generate for us, not just this year but into the future.

For the quarter, total revenue was $811 million, up 20% on a reported basis, and up 22% on local currency basis from the second quarter of 2015. Organic constant currency revenue growth accelerated from the first quarter, up very strong at 12%. Also in the quarter, FX created $17 million of year-over-year headwind.

The adjusted EBITDA margin was 36.6% compared to 35% in the second quarter of 2015, a very solid year-on-year increase. Adjusted EPS was $1.43, up 24% from $1.15 last year, and better than our expectations when we guided back in April.

Now going on to some of the individual businesses, starting with USIS. 3% revenue growth in the quarter, driven largely by mortgage originations, credit marketing activities, commercial information services, and our fraud solutions, with an adjusted EBITDA margin of over 50%.

Trended data for mortgage industry is expected to go live on September 24. We've been delivering trended data to our customers since April of this year, so they could develop familiarity with the content and understand the value to their underwriting processes. We've already signed agreements with three of the largest mortgage resellers, and we'll start billing for these services in August of this year.

Revenue from our credit marketing services product offerings grow upper single digits, driven by double-digit growth in both pre-screen and portfolio review offerings. We believe that the majority of these projects will focus on new account acquisitions and cross selling. The growth was also broad-based across all of our major verticals.

The team continues to make very good progress on our commercial information database and solutions. We've been operating under numerous extensions of our agreement with the Small Business Financial Exchange. We've been developing an alternative database, which we call the Commercial Financial Network.

We currently have over 1,200 institutions providing data for the database, including some of the largest financial institutions. And once again, our commercial business delivered double digit growth for the quarter. Our fraud solutions revenue was primarily driven by customer needs to authenticate consumer identity for online access. Growth was broad-based including financial services, telco, government, and our direct-to-consumer resellers.

Year to date, new product revenue for USIS is ahead of our expectation, driven mostly by non-mortgage related products, and as you know, once we get that NPI pipeline up and running, that bodes well for the next three years. We continue to expect USIS to deliver growth for the full year, at the lower end of the long term range of 5% to 7%. This is the range that we guided for USIS back in February.

EBITDA margins are expected to be above 50% for the year, which is slightly better than what we were expecting when we gave you guidance during our first quarter earnings call.

On to international. International delivered outstanding 13% local currency organic revenue growth. That's well above the upper end of their long-term range growth model we've talked about, which is 8% to 10%. This is driven by broad-based organic initiatives.

Total local currency revenue growth of 62% reflects this strong organic growth, and the full quarter of revenues from Veda. Organic revenue growth in international's four largest verticals, which are financial institutions, telcos, government, and auto, accelerated to 18% growth in the quarter, up from 13% growth in the first quarter versus first quarter of a year ago.

International's decisioning platforms, analytical services, and debt management services revenue grew a solid 25% in the quarter, up from 19% in the first quarter. So, again, accelerating growth sequentially. Our focus on delivering powerful insights continues to open new opportunities to help our customers operate their businesses more efficiently and effectively.

In the UK, our customer management solutions, including Know Your Customer have enhanced our competitive position, and enabled us to continue winning share within the financial institutions. Our UK government contract through TDX is performing well, and in line with our expectations. Initial collections results and anticipated lift are consistent with our original expectations, and relationships with the departments and the cabinet office remain very strong.

We have also made proposals to other government agencies within the UK, who are not included in the initial launch. While it's still early, we do not expect Brexit to have any material impact on TDX or the UK government initiative.

On to Canada. Canada has made great process on extending our credit data capabilities into their markets, and the customers' interest with both large banks and financial institutions has been very strong. Also in Canada, I think we alluded to this a bit last call, we have recently landed a multi-year multi-million dollar deal to provide TDX analytics solutions to one of our largest customers in Canada, and that relationship started building earlier this month.

We're excited about the opportunities in Australia to deliver solid long-term growth for the region. The integration really is going very, very well. To date, there's not been any surprises and the teams, in both Australia and New Zealand are embracing the integration initiatives at all levels of their respected organizations.

During the second quarter, we began implementation of our global platforms in Australia. Those include fraud management, analytics, which were Cambrian and cloud technology. These are very important strategic platforms which we have been investing in for many years. These are best-in-class platforms that will provide Veda and our teams down there with tremendous capabilities to develop new products for their markets and customers for years to come.

We've also identified a number of opportunities with Veda to both import and export new product ideas from that part of the other to other parts of the world and vice versa. Finally, the financial performance to date has met all of our expectations, and is on track to meet our full-year expectations.

International as a whole will have a very strong year of 2016. We expect organic constant currency revenue growth will be above the upper end of their long-term model range of 8% to 10%, and total growth for 2016 to be over 40% when we include Veda. EBITDA margins should exit the year comfortably above the second-quarter level, which is up nicely as you know, versus second quarter of a year ago.

Onto Workforce Solutions. They had another outstanding performance in the quarter with 21% revenue growth and a 480 basis point expansion in their EBITDA margin. We continue to add records to the work number database, and create valuable insights for our customers.

Our success in penetrating key verticals led to strong double-digit growth in auto, consumer finance, government, mortgage, pre-employment, and card. Revenue from our healthcare vertical, which is comprised of our income and phone verification for CMS and ACA analytics for employers grew almost 200% in the quarter, and continues to look very promising moving forward.

Within our suite of compliance center solutions, we've also developed a new series to help employers with the appeal management process under the Affordable Care Act. Employers can avoid penalties if they can prove to CMS that their employees were offered conforming affordable care coverage for those employees who applied, and were approved for subsidies covered through the ACA exchange.

During the quarter, we also announced the acquisition of Barnett Associates within EWS. It's a company that we've known for a long time. It's a company with over 33 years of experience, and is a nice tuck-in acquisition for EWS. We expect this acquisition to close during the current quarter.

Workforce Solutions, in summary, will have another outstanding year in 2016, with revenue growth substantially above their long-term range of 9% to 11% and adjusted EBITDA margins now in the high 40% range. Just an outstanding string of growth these guys have been on.

Onto what we used to call PSOL, we now all Global Consumer Solutions. They delivered 22% local currency revenue growth, driven largely by our indirect reseller customers, and also had solid adjusted EBITDA margins for the quarter. Indirect and resale revenue was up over 70%, primarily driven by our relationships with Credit Karma and LifeLock.

Our direct-to-consumer activities continue to deliver revenue and margin consistent with our expectations, and Global Consumer Solutions will easily exceed their long-term growth target, comfortably delivering strong double-digit growth for the year. The adjusted EBITDA margin for the year is expected to exceed 30%, and when John goes into his discussion, he'll talk about margin in GCS in the second quarter, to put some color and texture around that for you.

Back now to the corporate growth initiatives that you've grown familiar with. First is EGI, enterprise growth initiatives, which you know we've been at for seven years now. They're a fundamental growth driver to our multi-year growth levers. This year, we had eight initiatives in EGI, with very specific metrics and milestones, with the management team reviews, at least on a monthly basis.

Every six months we are -- after six months, we are projecting the full-year revenue from these eight very important growth initiatives to now come in over 33% above the target we had set at the beginning of the year. That team just continues to execute at a very high level.

Cambrian. You've heard us talk about that. It's truly having an amazing impact on how both we and our customers think about the effectiveness of our respective decisioning activities. For customers, we're developing tools that enable them to increase approval rates, while maintaining overall portfolio loss rates.

By incorporating more data than just the credit data, we can expand the universe of applicants on which they can render decisions with confidence. Both of which improve marketing effectiveness and contribute incrementally to their revenue growth with very modest to no increase in expenses for our customers.

Internally for Equifax, we used Cambrian to help us better understand the depth and quality of our data assets. With these insights, we can identify opportunities to broaden and enhance our data assets, as well as specific steps to further improve the quality of our data.

On to NPI. New Product Innovation is also making strong contributions once again to our revenue growth. Through June, revenue from these initiatives is running 10% ahead of our expectations for 2016.

You might recall that our expectations for third-year revenue from our 2016 new product launches was already 130% greater than the 2015 launches' third-year revenue expectations. So we had come into the year with very high expectations for the class of products in 2016, and it's already running at least 10% ahead of those expectations.

International workforce solutions and USIS are all exceeding expectations, with the majority of the USIS growth coming from non-mortgage solutions, when you think of new products. The pipeline is healthy, and we have a number of launches scheduled for the second half of the year, and expect that to support revenue growth in 2017 and beyond.

Our outlook for the mortgage market in the US has changed given the recent trends in the yield on 10-year notes, and the resulting strength in the refi activity. Previously, we had expected mortgage organizations for 2016 to be flat to slightly down.

Our current view is that the mortgage originations will be in the range of now flat to up mid single digits for the full year. That assumes that the 10-year treasuries stay in the general range that they are now. Obviously, if they get weaker, that gives us some tail wind. If they rise at a faster rate than anticipated, that might create some head wind at the back end of the year.

Over the years, our annual growth play book process has evolved to ensure we maintain an intense focus on the most critical opportunities that drive revenue growth. This year, we have completed, it's hard to believe, our 11th growth play-book, with a focus on individual enterprise-wide vertical market growth play books, develop much deeper insights into our opportunities across all of our business units. With these new play books, we can better leverage our resources, customer relationships, and opportunities to capture incremental revenue growth going forward.

In summary, before I turn it over to John here, our strategic initiatives are at or ahead of what we had expected as we entered the year. My optimism for both 2016 and 2017 continues to improve, as the year unfolds. One comment I want to make, and spend a minute on before I give it to John, is to put our USIS growth in perspective.

A number of you have written about that in your early reads last night, and I want to make sure you understand how I think about that. We view our enterprise-wide vertical market distribution efforts, you've heard us talk about that for a number of years now in the US, as vital to our differentiation and our success in the US marketplace. These vertical markets cut across our US business units, so it's not just credit.

So a good way to think about health of our US credit business is to combine, as we do our USIS business, with our verification services business, as you know resides in EWS, and our healthcare revenues, also residing in EWS. When you think about that enterprise of products we're bringing to the US market, our revenue for the quarter actually grew a very solid 10%, well above the overall growth in our economy.

That's largely driven by, as you know, new product innovation, market penetration, and insights. We can talk more about that during the Q&A. With that I'll turn it over to John for detailed of financials. John?

Thanks, Rick, and good morning, everyone. As before, I will generally be referring to the financial results from continuing operations represented on a GAAP basis. As a reminder, following the Veda acquisition, we started focusing on adjusted EBITDA margin to more consistently present the operating performance of the segments and the Company as a whole. The non-GAAP reconciliation attached to our earnings release provides a more detailed description of what is included in adjusted EBITDA margin.

Now let me turn to the business units' financial performance for the second quarter. US Information Solutions revenue was $308 million, up 3% when compared to the second quarter of 2015. Online Information Solutions revenue was $220 million, up 2% when compared to the year-ago period.

Total mortgage-related revenue in USIS was up 13% in the quarter. The Mortgage Bankers Application Index accelerated late in the quarter, coincident with the drop in the 10-year treasury, ending the quarter up 20%. Revenue mix shifted significantly in the quarter, with almost 60% of USIS mortgage revenue coming through resellers, where revenue grew 22%.

Financial marketing services revenue was $53 million, up 7% when compared to the year-ago quarter. Our commercial business continues to grow nicely, up 10% in Q2 and year to date. Identity and fraud solutions also continue to grow strongly, up 20% in Q2, and 25% year to date.

As you recall, in Q4, 2015, we realigned our business units, moving revenue with customers that have only direct-to-consumer relationships with Equifax from USIS to Global Consumer. During this realignment, customers with broader relationships with Equifax, including direct-to-consumer, principally other credit reporting agencies, were retained by USIS.

USIS revenue in Q2 2016 and first-half 2016 has been negatively impacted by declines in revenues from these retained direct to consumer customers by about 2 percentage points. The adjusted EBITDA margin for US Information Solutions for Q2 2016 was a very strong 50.4%, and up from the 50.1% we had in the second quarter of 2015.

Workforce Solutions revenue was $177 million for the quarter, up 21% when compared to the second quarter of 2015. Verification Services revenue of $110 million, up 17% continues to be driven by strong double digit growth across mortgage, government, auto, pre-employment and card segments.

Employers services revenue of $67 million was up 29% from last year. Again, the traditional employer service businesses of unemployment claims, WOTSE, I-9 validations, and on boarding performed well, with combined revenue growth consistent with our long-term expectations of mid single digits.

Workforce Analytics, which provides services to employers to ensure they are in compliance with the Affordable Care Act, grew several hundred percent in Q2 2016. Seasonally, the first half of the year was the highest revenue for Workforce Analytics. This is the period in which employers are required to provide Form 1095-C to employees, a service that Equifax provides.

Employer services revenue in 3Q 2016 is expected to grow double digits, but will not be as strong as the first half 2016, reflecting the seasonal nature of Workforce Analytics revenue. The Workforce Solutions adjusted EBITDA margin was 50.2%, up from 45.4% in Q2 2015. Seasonally, Workforce Solutions has higher adjusted EBITDA margins in the first half, reflecting seasonality in both WOTSE and Workforce Analytics. The adjusted EBITDA margin for Workforce Solutions in 3Q 2016 are expected to be up strongly year to year, but down sequentially due to this seasonality.

Revenue from USIS and Workforce Solutions, our total US B2B revenue was $485 million, representing organic growth exceeding 9%. International's revenue was $219 million, up over 50% on a reported basis, and over 60% on a local currency basis. Constant currency organic revenue growth, which excludes Veda revenue, was nicely above our long-term range of 8% to 10%.

By region, Europe's revenue was $67 million, up 12% in US dollars and 18% in local currency. Given the sharp decline in the British pound following the Brexit vote, we anticipate that 3Q 2016 in Europe revenue measured in US dollars will be negatively impacted by FX by approximately 10%.

Latin America's revenue was $47 million, down 8% in US dollars but up 14% in local currency. The depreciation of the Argentinian peso that occurred in Q4 of last year represented almost 75% of the FX impact in Latin America. Asia-Pacific revenue was $72 million, which is comprised mostly of revenue from Veda.

Canada revenue was $32 million, flat in US dollars, but up 5% in local currency. This was nice growth for Canada, and reflects the renewed focus on NPI in Canada we referenced last quarter. For the second quarter, International's adjusted EBITDA margin was 28.4%, up nicely from 25.9% in 2Q 2015. We saw nice growth in the adjusted EBITDA margin in Canada and Europe, as well as benefiting from a full quarter's EBITDA contribution from Veda and Asia Pacific.

Global Consumer Solutions revenue was $107 million, up 21% on a reported basis and 22% on a local currency basis. Growth was driven by our direct-to-consumer reseller customers. For the second quarter, the adjusted EBITDA margin was 26.4%, down from 30.6% in 2Q 2015. During the second quarter, we had program-related revenue and start-up expenses associated with the launching of a relationship with a new D2C customer.

Both this program revenue and the start up expenses will not continue into 3Q. As a result, revenue growth in 3Q is still expected to be double digit, but will be below the level generated in 2Q. Also as a result, adjusted EBITDA margin will improve significantly in the third quarter, and for the reminder of the year.

In the second quarter, general corporate expense was $46 million. Excluding Veda integration expense, Q2 2016 general corporate expense was $44 million. 2Q 2016 was down from 1Q 2016, as in the first quarter, executive equity comp is issued, with the bulk of it expensed in the period.

2Q 2016 corporate expense was lower than expected, as total employee bonuses accrued in the period were as expected, but more of bonuses were incurred in the business units than in corporate. Also some corporate investments expected to be incurred in 2Q 2016 were delayed. For the third and fourth quarters, we expect general corporate expense to be in the range of $50 million to $55 million, reflecting higher levels of corporate investments.

The adjusted EBITDA margin for Equifax was 36.6%, up from 35% in 2015. The strength in adjusted EBITDA margins in 2Q 2016 reflects the very strong adjusted EBITDA margins in workforce solutions, international and USIS, as well as lower corporate expenses. We expect the 3Q 2016 EBITDA margin to decrease sequentially, but increase year to year at a rate slightly lower than our expectations for full-year improvement. We expect our full-year 2016 EBITDA margin to be up about 75 basis points from the 34.7% we achieved in 2015.

Our GAAP effective tax rate for the second quarter was 34%, which was slightly above our expectations, due to unfavorable discrete items. Our expectation is that the full year 2016 effective tax rate will be just under 33%, consistent with our guidance at the beginning of the year. In the third quarter, the effective tax rate will be below the full-year rate.

Capital expenditures for the quarter were $43 million, and year to date are $83 million. Capital expenditures for the year are expected to be at approximately 6% of revenue, which is at the high end of our long-term range, reflecting investments made related to Veda integration.

Year-to-date operating cash flow will remain strong at $280 million, and consistent with our expectations. The slight decline from first-half 2015 is principally due to changes in working capital.

Total debt in the quarter was $2.95 billion. During the quarter, we issued $775 million of 5 and 10-year notes, that refinanced the 364-day credit facility used to finance the acquisition of Veda. As we indicated last quarter, we have suspended our share repurchase program and we will focus on debt reduction until we return credit metrics to a level consistent with our current credit ratings.

We are continuing with acquisitions, and in the quarter announced the acquisition of Barnett Associates, as Rick referenced earlier. With regards to the Veda acquisition, integration continues to go well, and we continue to expect 2016 revenue from Veda to be $230 million to $235 million, with adjusted EPS accretion from Veda at approximately $0.20 a share. Now let me turn it back to Rick.

Thanks, John. A quick summary before we go to Q&A. To guidance looking forward for the third quarter. We're increasing our outlook for both revenue and adjusted EPS.

We now expect revenue to be between $795 million and $805 million, reflecting constant currency revenue growth between 22% and 24%. That's partially offset by 3 points of FX headwind.

Adjusted EPS is expected to be between $1.33 and $1.36 for the quarter, which is up 17% to 19%. Excluding $0.03 per share of negative impact from FX, this reflects constant currency EPS growth for the third quarter of 19% to 22%.

With our strong second-quarter performance and our strong outlook for the third quarter, we're also increasing our full-year outlook for the full year. We expect revenue to now be between $3.13 billion and $3.16 billion, reflecting constant currency revenue growth of 20% to 22%, partially offset again by 3 points of FX headwind. This is an improvement from the previous guidance we provided you, which was $3.05 billion to $3.15 billion, and increases our confidence that we will end the year nicely above the high end of a multi-year model of 6% to 8% of organic revenue growth.

From a revenue perspective, 2016, I think you'll agree is shaping up nicely. Constant currency, organic revenue growth 11% in the first quarter, accelerated to 12% in the second quarter, and we're holding in the range of 11% to 13% in the second half, because of two years of double-digit constant currency organic revenue growth. This will also, as you might guess, give us good momentum as we go into 2017.

Adjusted EPS for the year is expected to be now between $5.35 and $5.40, which is up 19% to 20% excluding approximately $0.12 per share for the full year of negative impact from FX. This reflects constant currency EPS growth for the year of 22% to 23%. This too is up from the $5.15 to $5.25 we guided to during our first-quarter earnings call. And as John alluded to, we now expect our adjusted EBITDA margin to expend by 75 basis points, as we had guided to earlier for the full year of 2016.

So with that, operator we'll open it up to any questions.

(Operator Instructions)

David Togut, Evercore ISI.

Congratulations on the second-quarter outperformance and the lift in the 2016 outlook.

Thank you.

Rick, I was glad to hear the upgrade in your outlook for the mortgage market this year. I'm wondering, more broadly, are the lower interest rates we're seeing in the US and globally driving an increase in consumer credit demand more broadly as well, for example, auto, mortgage, and other key drivers?

Yes. We're seeing good strength in the US in auto, in car, and in mortgage. And obviously beyond that, which is not really influenced by interest rates, great strength in the debt management analytics platform. Talk about TDX, we had a nice win in Canada that I just announced. So broadly speaking, the interest rate in the US I think is healthy for the US consumer. We're not seeing dramatic changes quarter to quarter, David, but just good strength.

Got it. And then, sorry if I missed it, but did you call out the number of active work number records as of the end of Q2? And, as a related question, what are you seeing trend-wise in terms of hit ratio in Workforce Solutions?

Two great questions. I did not call it out. We are well on our path. We committed to get to a number of 300 million total records. We focus on total records. There's so much value in historical, not just the active. With that, and with other things that we're just doing, the hit rate across EWS on the work number continues to rise really solidly.

Understood. And then, just a quick final question. It was great to see the 480 basis points of margin expansion -- EBITDA margin expansion in Workforce Solutions. How much operating leverage is left in this business over the next two to three years, and what do you see as the ceiling on margins?

Yes, we've guided long-term model for EWS in the 50% range -- low 50%s, and I think we'll get that. It's remarkable, David, and you've done too, during analysis, when you look at the rate of increase in EBITDA margins over the past five years, that's the beauty of that model, the incremental margins are high. So, yes, we expect that to be in the low 50% range moving forward, which is extremely healthy.

Just finally, as Workforce Solutions becomes a bigger part of Equifax's total profit pool, how do you think about capital allocation across the businesses over time?

We continue to invest heavily. We are more fortunate, because of our model, we have the ability to invest significantly in growth businesses. We have grown -- we have invested heavily in EWS over the years -- core structural products, new products, new platforms -- and we'll continue to do so.

When I think about any long-term horizon, David, for EWS, the next horizon for them, which you know we're embarking upon now is taking it to global markets -- taking our exchange technology platforms, our know-how, our products. That requires capital investment, so we have the wherewithal, the ability to invest in those countries to create the vision we have for EWS, which is a truly global enterprise over the next 10 years.

Understood. Thank you very much.

Manav Patnaik, Barclays.

This is actually Greg calling on for Manav. I just wanted to ask about USIS and the bridge to the low end of 5% to 7% for the full year. I think it was about 3% in the first half, so just wondering what is driving the acceleration. I think you've got mortgage and the Fannie Mae contract, but any other things we should be thinking about?

Two things -- and, John, jump if you want to add, please. The point that John had made in his prepared comments, I think, is important, before we get to the acceleration, if I may. One is, if you think of the 3% as 3 point something -- it was 3 point something in the first quarter and 3 point something in the second quarter. As John alluded to -- and we made the restructuring of our PSOL business, now called GCS, end of last year/first of this year -- we left behind some traditional relationships that do the same thing. They sell those products but not to the Credit Karmas, the LifeLocks of the world. We left that behind with USIS.

We could have easily moved that whole thing over to the PSOL. The leave behind is a shrinking business as you know, and with that came about 2 points of headwind. So, you think about the health of the core USIS business, it actually grew with tough comps year on year because the mortgage last year actually grew, when you adjust that direct-to-consumer business, over 5%. That's one baseline.

Now when you think of the acceleration going into the second half of the year, it's really NPI. And part of the NPI you alluded to was trended data for Fannie Mae. But it's NPI generically in total, also then aided by the trended data for Fannie Mae.

And very good continued performance expected in marketing services, in commercial, in identity, and fraud. So those businesses that have been growing very well are expected to continue to accelerate -- drives the whole thing out.

Okay. Helpful. And then, the other one for me would be on the M&A, maybe a little detail on how Barnett Associates fits in with EWS, and then more broadly, how the pipeline looks, if we should expect any further deals in the back half of the year. Thanks.

Barnett's a company we've known for a long, long time, might be 20 years plus. Dan Adams, in his time when he ran the business, and even before him, Bill Canfield established really good relationships with owners of the company. I've gotten to know them over the last four or five years, we've really gotten to know them well. That's our philosophy and approach to new deals, is to get to know the cultures, the products, the opportunities. We've done that here. It's a small deal, but it's a nice deal. They are a mini EWS. They do everything that EWS largely does. It fits in nicely. There's good synergies for us there. As I think I said in my comments, we should close that in August.

As far as the pipeline, the pipeline continues to be healthy. We did not include any other acquisitions in the guidance that we provided you. We continue to be very thoughtful, obviously driven by our strategy as to where we acquire. But we have the capacity, and the pipeline, and the ability to do more acquisitions this year if they make sense.

Thank you.

Ato Garrett, Deutsche Bank.

Congrats on the strong quarter and the increased guidance. Just one more question on the auto end market. I know you called out some very strong results there. Given the fact that we're seeing declining auto sales -- or decelerating auto sales I should say, this year, can you go through and say how -- how dependent is that business on strong auto-sales volume, and how are you able to get such strong growth despite those trends?

Well one, obviously, a growing market helps all, and we're a benefactor as the market itself has grown. Having said that, in our forecast, it calls -- I don't know the exact numbers. It largely calls over the next X number of years, a moderation in growth in new and used car sales. Now we're talking in the US. So we don't expect the dramatic uptick from the market that we've seen post global recession to, to date. Having said that, we are relatively underpenetrated in auto.

Number two, we have got great new products that we've been launching that help us penetrate the auto market. Within the penetration, a long, (inaudible) left still is the use of our work number records to validate, verify employment and income. That will fuel automotive growth in other quarters or years to come.

Great. Also, looking at the Global Consumer Solutions, you mentioned that you're getting some strong growth in your indirect channel within that. Can you just give your comments or thoughts on some of the long-term agreements that your some of competitors assigned to that space for some of the transactions that have happened in that space, in terms of acquisitions?

Sure. When we think of partners out there, it's beyond the Credit Karma -- I'll come back to that. It's beyond Credit Karma and LifeLock -- they are two very, very nice and important and good partners of ours, but we have this business called TrustedID who have got a variety of partners you've heard us talk about, Ato, over the years. Those continue to grow nicely.

Specific to Credit Karma, as you know, we have a contract with Credit Karma. That contract expires towards the end of this year. As is common practice with any good customer that we deal with, it's in both of our best interests to negotiate those contracts well before expiration. You might guess, the team is doing that now.

But beyond just that, we're looking at ways that enhance the partnership to add value to Credit Karma. And that value would be through things like insights we provide, the unique data assets that only we have, and an interest in partnering with them where it makes sense, in countries around the world where we've got very strong sizable platforms to help them expand their revenue streams beyond just the US. All of those are being intertwined, as you might, into the discussion of the contract negotiation. And we remain very, very confident that we'll have a good resolution to the contract extension with Credit Karma.

Okay. And one last one. Just wondering if you have any updates on your contract win with the Social Security Administration in terms of your fraud and identity authentication revenue.

I don't. It's going well. It's going real well.

Great. Thank you.

Ramsey El-Assal, Jefferies.

Great quarter. I wanted to ask you about the International market expansion, very solid this quarter. Is this just a question of increasing operating leverage as you scale in global markets, is it a -- are there mix-related impacts, are there other levers you can work in order to get the margin growing internationally?

I'll start, and, John, please jump in. It is consistent with the expectation when we gave you multi-year guidance for margin for International. So, first and foremost, no surprises at all. There are a couple of things I think about -- and, John, you may have a couple more that I missed -- that are coming together to aid that margin increase.

Number one, you may recall, sometime in 2015, we announced some restructuring and regionalization across the International marketplace to get greater scale. That was the investment, we're now yielding some benefits. Number two, we talked about the government contract for debt management analytics in the UK, heavily burdened with investments in the past, no revenue. You're now getting revenue. Number three is, you know what? Our model is just -- incremental margin is nice. As you grow and continue to grow, the margin expands. Number four is, as you know, we bought Veda. Veda had margins, when we announced the acquisition, that were accretive to the International margins. You're now seeing that pull through.

So I think those four things are the vast majority. John, did I miss something?

Those are the biggest areas. We're also globalizing platforms, which allows you to reduce your costs more rapidly.

That's a great point. So, as we deploy these global platforms around the world, over the next X number of years, you should continue to see some margin enhancement from International.

Okay. Got it. That makes sense. Did the small tuck-in, Barnett -- will that add an impact? Could you parse out the impact on the year in terms of revenue EPS?

It's small, Ramsey. It's nice for us at the corporate level. It's very small, and -- very small this year. We close it in August, you'll have less than half a year of revenue. But we've got some great plans for synergies and growth, as we take that asset under our wings for 2017 and beyond.

All right. Terrific. Thanks a lot.

Toni Kaplan, Morgan Stanley.

This is Patrick in for Toni. I wanted to ask about global consumer growth, which was obviously very robust this quarter, but remains well above the 5% to 8% multi-year organic growth framework you've talked about in the past. Do you have any sense of that market for providing consumers with credit scores on personal finance websites, credit card statements, et cetera, is becoming increasingly saturated?

It will become saturated at some point in time. We don't see any signs -- let's talk the US first. We don't see any signs that there's a saturation of that marketplace yet in the US. Having said that, you also know that we directly and indirectly, through partners that I just alluded to in one of the last questions, is taking that capability to other markets around the world. Our global consumer -- the GCS business is truly global. If there's a need, an opportunity for us -- either with our partners or directly -- to build those products and capabilities in other parts of the world, we're going to do so.

Thanks. And then I wanted to ask about potential investments in alternative data. I know you're getting data from telecom and utility companies now, but I wanted to ask about that from an M&A and an OpEx perspective going forward.

We have, under Trey Loughran's leadership, we have got a -- who runs data analytics and marketing for us, have a data team. They're a very thoughtful data team. That data team is tied back to our strategy.

So as you might guess, Patrick, if you look at each country around the world, as you look at every vertical around the world, there's a strategy that says, where are we today in our data capabilities, where are the gaps in data capabilities, what's the process to fill those gaps? Is it the builder, is it partner, or is it the buy? That's a continual focus we have, at that granular level of detail around the world.

Great. And then lastly, I did want to ask about kind of growth in peer-to-peer lending in marketplaces over the next couple of years. This is a longer-term question. Do you anticipate any impact from that trend disintermediation on the USIS business over the long term?

I do not. I think, obviously, that whole marketplace is adjusting a bit. They've got some challenges ahead of them, as you know. They are customers of ours. They buy our credit data, as you know. They buy our employment data. They buy our income data. They buy some fraud data. So they're good customers of ours.

I don't know but if I had to make a guess, I think in the future if you think about the remote unsecured lending, which you call peer-to-peer lending, it wouldn't surprise me if those become really part of the banking capabilities, as opposed to individual entities.

Great. Thanks, Rick. Congratulations on the quarter, everyone.

Tim McHugh, William Blair & Company.

Can I ask if you can help size what part of USIS at this point is that direct-to-consumer piece still that's declining? And if you -- is that a business in longer-term decline? Should we -- just trying to think about how much of a medium-term drag we should think about that being on that piece of the business?

Yes, Tim, maybe back sometime in 2015, I can't recall, John, we talked about what the world might look in that PSOL direct-to-consumer business and we said that, that business would be low growth. Low single-digit growth, maybe in decline, but with other paths to grow with partners and so and so forth, our TrustedID business. So within USIS, to be very specific, John, I think defined that for you, if you take the USIS business, that DTC revenue created 2 points of headwind for USIS in the first half of the year. So you can reverse -- do that math yourself -- I don't have it off the top of my head. You can do that math and figure roughly how large that revenue decline rate (inaudible) basis.

It's not a large business for us, no, but it did decline materially in the quarter.

Okay. And then, for USIS, you didn't really change the revenue outlook, but you said you feel better about where margins will wind up for this year. What changed, as you look at that piece?

Well, just clarification on the revenue outlook, we didn't change it versus prior guidance, sequentially, just to reinforce the point, it's going to go from 3 point something to a total year of about 5% growth. So you'll have much higher growth in the second half of the year in USIS, and with that comes obviously margin -- incremental margin in USIS is significant. So growth accelerates the margin. It grows with it.

Okay. But your full-year guidance wasn't any different than before, but you said your full-year margin guidance is different? Is there --?

We said slightly higher.

Okay. All right. Thanks.

Gary Bisbee, RBC Capital Markets.

Hey, guys. Good morning. This is [Connor Anton] in for Gary. Congratulations on the quarter again. I guess, just thinking longer term I think, Rick, you mentioned that 2016 NPI is running 10% above plan through June. Any insight into what is driving that? Is it greater market potential that you are seeing or penetration or new adjacent market that some of these products can be heavily used by? What is driving that?

I think it's a couple of things, Connor. I think you may recall -- I can't remember when it was now but we launched a thing called Innovation 2.0, maybe late 2014. And that was a catalyst just where you think about innovation, where you think about NPI, it also focused on how we become better at executing and we launch products at time the revenue is better, was a big focus as well.

The other thing is, you recall we launched this capability called Cambrian which allows to build products in a fraction of the time it used to take us to build products. Modify products to meet customers' needs. So the combination of Innovation 2.0, a higher level of execution, which means the stuff we do build and launch, we actually get the revenue sooner and faster, and then the third element is Cambrian.

Mostly you've seen the maturation of those three now result in greater confidence in our revenue outlook for NPI. Then a point I'd make, which is not NPI, Connor, but was the growth coming out of our enterprise growth initiatives, which is substantially higher than one we saw also last year. So that team is executing at a very high level, as well.

Okay. Thanks. And on a similar front, the International organic growth among some of the key verticals you pointed out, accelerated pretty strongly there in the second quarter. Are there particular markets, or within those verticals, particular products that you are seeing particular strength?

The rewarding thing is -- the aspect is so broad based. So I think I mentioned the number of verticals. International was sequentially stronger the second quarter versus first quarter, and if you broke that down by country by vertical, you see similar things.

It's not that it's being driven by one vertical, one country, it's truly broad based, countries and verticals. That is largely due to the fact that the focus we launched a number of years ago become experts in different verticals that were important to our long-term growth, but the resources, the data assets, the technology platforms, the analytics focused on those verticals to drive growth, and we're seeing it as a continued benefit of that focus.

Great, thanks.

Jeff Meuler, Baird.

Can you talk about the employer services new product pipeline? Obviously WFA is red hot right now, but can you talk about the pipeline? And anything about that product development process, in terms of how it's maybe similar versus different to developing products in your other businesses, given that there's more of a BPO element to a lot of the products?

Let me see if I can tackle that. I'd say the processes are the same. NPI is NPI, it doesn't matter what you're doing. It's a rigorous toll-gated process that we've been at now for 10 years, that applies as much there. We are not developing a lot of products, to be very explicit, any that are BPO products. You don't get the kind of margin enhancements we're getting in EWS of 490 basis points, which was over 50% total EBITDA margin building new BPO products. It's building fast products.

We talked about in the last couple of calls this concept of compliance center, and a suite of products underneath the compliance center that Dan started building, and we're building out, and thinking of those as SaaS products largely. I-9 would be an example, ACA would be an example, and others. But SaaS margin, as you know, is a great revenue model, highly recurring revenue good amount of margin. So think about that no differently than you think about the rest of Equifax as you think about new products.

The largest --

But there's a good --

-- substantial investment there to make a SaaS product.

John just said a great thing. A big, big piece of the employer services part of EWS, as you probably know, Jeff, is our unemployment claims businesses and the team is investing heavily in moving that to a SaaS product as well, which if you think of the next 5, 10 years and the margin enhancement you get in converting or modifying a BPO business to more and more of a SaaS project, that's a huge margin benefit.

Okay. And then super scores. How big of a business is that for you today? Are we at the early stages of it?

It's in the scheme of things. If you think of the major growth levers that we have in the Company that John and I try to manage day in and day out, super scores is not one of them.

Okay. Finally, specific to Credit Karma, is it reasonable to assume that, since you were the second in order of time, data provider to that relationship, that maybe you came in at a lower price? So as price gets reset, at least for your competitor, that you would theoretically have less to lose in terms of a potential pricing adjustment?

I'm not going to talk about price, Jeff, with a particular client. I think you know us well enough now. Our philosophy, when we think about the relationships with clients, is to try to continue to add unique value and insights that make their business better, that make their revenue stronger, that make their profits stronger.

And if we could do things by leveraging the capabilities we have, that are unique to us, like the employment data, the income data, some fraud data, Cambrian, and I mentioned I think in my comments earlier, helping them get to countries that they want to get to that we're in, and we're very significant players, as a way to make their business better and stronger.

If you wrap all those things together, as we've done over the years, you tend to move away from price discussion toward a value discussion. We do the same thing with them. By the way, I should say, they are a very good customer of ours. Even more than a customer, they are a partner of ours. The attitude is along the lines I just described, and that's value creation for both sides.

Great. Thank you. Great quarter.

Andrew Steinerman, JPMorgan.

I know Equifax has many current strong growth drivers. I do want to ask more about the trended credit data, specifically the Fannie Mae initiative, and how much that might add to Equifax's revenues by fourth quarter of this year? Our team calculated about 1.2% for that, thinking about the price increases that only go to Fannie Mae loans. But maybe that's too low because I think I understand now that the trended data price increases are also going to Freddie loans as well.

Let me start with the latter piece and then I'll come to the first piece. What you're seeing occurring with the support of Fannie Mae making this a standard for all loans securitized through them, making trended a standard, you're simply saying merging is the only product being offered to the marketplace going forward for mortgage will be a product that has data that has been trended. So Freddie does not have the technical capabilities yet to consume the trended data. It's our understanding that they're highly interested in doing so. To be very clear, the product that we're going to offer to the mortgage market in the US is trended product only.

Yes.

That comes at a different price point than the past one. As far as where is that price point, Andrew, you are pretty smart. You have got ways to think about and get to a number. I'm not going to disclose that here.

Right. No, I understand the resellers price increase, but you do admit that when you add it all up, it's over 1 point of additional revenue for Equifax, right?

You're good, Andrew. We have not disclosed that, no. But, yes, it will go through all the resellers and our direct customers as well. We're just not going to disclose it.

By the way, you know this, you've been with us a long time. Wherever we can add value to a customer, in this case the mortgage market -- Fannie and others -- to make their underwriting decisions better, and we can add value from our product, in this case trended, and charge more for that, we've done that for years.

We're always about trying to create value to our customers, and I think you'll agree, trended data we know for a fact adds value to underwriting decisions and mortgages. We have investments and resources behind that. The result is the higher prices. That's no different than what we've been doing for 10 years. It just happens to be a different product, because there was a trended element to it. But we're not going to disclose what that percentage amount is.

Thank you for the try. I appreciate it. (laughter)

Shlomo Rosenbaum, Stifel.

Rick, could you remind us where we are in terms of getting ACA clients to contribute more of the employment records to the work number database? You mentioned in the past that's going to start defaulting there. Is that happening in their contracts, and are you actively working on migrating that?

Great question, Shlomo. I think we talked about this generically before it was ready, maybe a quarter or so ago. So think about -- what had to be done, number one, was a technology built that enabled a client, when they signed up for ACA, to seamlessly port the data from the ACA database into the work number database. That work was launched earlier this year, and I believe went live in June, July. Am I about right? June or July. So June or July. So it's now out and running today.

So then, if you set that aside, Shlomo, and think about there's two buckets of customers: there are customers who have already been clients of ACA, and there are new guys -- companies signed up for ACA. The new ones are easy. You sign them up, it ports over to the work number database. The teams are now going back to those clients who have previously been customers of ACA and working with them now to port their data from ACA into the work number. So, yes, we're adding records, and have been adding records for at least a month or so to the work number database out of ACA.

Okay. Is this -- are the customers amenable to that? In other words, the old customers -- the relatively old customers there amenable to going back and actively putting it on this platform?

Yes. Yes. The answer is, yes. There's almost virtually no work required from them, as well. So the existing customers who have been clients of ACA for the last year, yes, are amenable to becoming contributors to the work number database. That's a process we put them through to make sure they're clearly aware of that -- the population of the work number database.

Okay. Thanks. Then, John, in terms of second-half free cash flow, should we see some of those working capital items reverse, to have a pretty strong second half, or is there something going on that's going to make this somewhat of a lower free cash flow year in general?

The working capital items that affected the first half are really specific to the first half, so you should see better working capital performance in the second half. CapEx is up this year, so you're going to see that impact year on year. But in terms of operating cash flow, before free cash flow, the working capital items should reverse.

Okay. And then, I hate to be to beat this horse again, but can you just give us an on-the-ground description of the part of the business that was retained in USIS that is shrinking? Is this where other bureaus are selling your scores, or you're selling their scores? I'm just trying to understand exactly what it is that's shrinking over there.

John, I think, described it fairly well. You just hit it on the head. And that is that other players in the marketplace -- and we have got extensive relationships with, including DTC, so the other bureaus, as you call them, have been and are buying those products to sell to the DTC marketplace. Because of the free marketplace growing like its growing, their business -- the bureaus' business, is shrinking. When that shrinks, the USIS revenue shrinks. Does that make sense?

Yes it does. But your own direct to consumer, is that business at least stable?

PSOL? Or --?

Yes, where you have your own subscription-based business that I go up there on Equifax.com and sign myself up per month or something like that. Is that stable?

It's flat.

It's flat. Okay. All right. Very good. Thank you.

Oscar Turner, SunTrust.

Thanks for taking my question. So you talked about the importance of your enterprise-wide vertical focus distribution strategy. Which verticals do you view as having the most white space, maybe both in the US, and then also International? And then also, would it make sense to start reporting your business based on verticals?

Let me answer that last piece first and then I'll go to the first piece. I'm a firm believer you report the business the way you run the business. We don't run our business today by verticals, we run our business by portable use. We have verticals focuses across the globe however, which give us the main expertise and the ability to invest specifically in products and technologies.

I don't see a time, Oscar, in the near future -- whatever the heck that means, in the next three or four years -- where we would report and run it as a vertical focus. That does not mean we're not running at full speed around verticals. Having said that, one of the main verticals, and John, you jump in, as I think about the next five years globally, that add a lot of excitement and energy for long-term growth, obviously fraud prevention and identity management would be one. Government is another.

Around the world we're doing some really cool things in the US, as you know, around government. The debt management and analytic platform in the UK is government. So government is going to be a continued big growth area for us. Healthcare is, I think when we talked about growing almost 200% in the second quarter, would be another one. Those are a couple. Then there's the traditional ones you always think about us, we are underpenetrated in auto, but growing nicely. Financial services will always be important. Mortgage will always be important.

Commercial is an opportunity.

Commercial is an opportunity. We talked about, Oscar, in the early days, if your horizon is like ours, which is what my next 5 to 10 years look like, bringing our exchange capability and product capability from EWS to select countries around the world, and opening up a whole new realm of growth opportunities there would be another.

Thanks, that's helpful. And then, you mentioned government being a focus. Looking at the UK government deal, can you provide more color on the status of that deal? What's the volume in the database, and also how should we think about the timing of the revenue growth ramp?

The revenue is coming through nicely. It's on expectations. The relationships are fabulous. They have given us billions of pounds -- I can't remember. About GBP1 billion of debt that we've now analyzed and replacing.

That's at the expected level when we launched this thing. Almost under any dimension you can think of for managing a complicated project like the UK, debt management analytics platform, is at or ahead of our expectations. So it's really going well. And as we talked about before, the hope there is that gives us credibility, which it's starting to do right now into other arms of the UK government, to help build more revenue streams than we have today, and to take that product capability, once it's at a certain inflection point, and bring it to other countries as well, and help other governments around the world solve the same problem.

Okay. Thank you.

Brett Huff, Stephens Inc.

Just one housekeeping thing and then one general question. On the housekeeping side, I don't want to beat the Barnett thing to death, but your guidance raise was substantially above your 2Q beat, and I just want to make sure how much of that guidance raise was fundamental -- or organic, and how much of it was from Barnett? I know you said it was small, I just want make sure I understand that magnitude.

Good question. Thank you for the clarification. Zero is associated to the Barnett acquisition.

Okay. That's helpful. And then, in mortgage, I recall when mortgage is good, and you're selling a lot of 3-in-1s that's a low margin business. Did you see negative impact from that in the quarter on the percentage margin?

What we saw in the quarter actually is a shift in our mortgage business toward resellers, which is much higher margin. It's less revenue generation, but the margin is substantially higher.

Just one point of clarification. I would strike the word low margin, and call it lower. It's still not low margin, or we wouldn't be in the business.

That's all I needed. Thank you.

Okay. I'd like to thank everybody for their time and interest, and with that, operator, we'll terminate the call.

Ladies and gentlemen, this does conclude today's conference. Thank you, everyone, for your participation.