Equifax Inc Q4 FY2022 Earnings Call

Greetings, and welcome to the Equifax Fourth Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the call over to Trevor Burns, Head of Equifax Investor Relations. Thank you. You may begin.

Thanks, and good morning. Welcome to today's conference call. I'm Trevor Burns. With me today are Mark Begor, 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 in the IR Calendar section of the News & Events tab at our IR website, www.investor.equifax.com. During the call today, we’ll be making reference to certain materials that can also be found in the Presentation section of the News & Events tab at our IR website. These materials are labeled Q4 2022 earnings conference call. Also, we will be making certain forward-looking statements, including first quarter and full year 2023 guidance. We hope 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 may impact our business and are set forth in filings with the SEC, including our 2021 Form 10-K and subsequent filings. We'll also be making reference to certain non-GAAP financial measures, including adjusted EPS for Equifax and adjusted EBITDA, which will be adjusted for certain items that affect the comparability of our underlying operational performance. These non-GAAP measures are detailed in reconciliation tables, which are included with our earnings release and can be found in the financial results section of the Financial Info tab at our IR website. In the fourth quarter, Equifax incurred a restructuring charge of $24 million, or $0.15 a share. This charge was principally incurred to reduce headcount in 2023 as we realign our business functions ahead of completing our technology transformation. This restructuring charge is excluded from adjusted EBITDA and adjusted EPS. Now I'd like to turn it over to Mark on Slide 4.

Thanks, Trevor, and good morning. Equifax delivered another very strong quarter to close out 2022 with continuing execution against our EFX 2025 strategic priorities. Fourth quarter reported revenue of $1.2 billion was down about 4.5% and down 4% on an organic constant currency basis, both as expected against an unprecedented mortgage market decline, but above the high end of our October guidance from broad-based strength across Equifax and stronger new product introduction rollouts. Fourth quarter adjusted Equifax EBITDA totaled $371 million with an EBITDA margin of 31%. Adjusted EPS of $1.52 per share was at the upper end of our October guidance range of $1.45 to $1.55 per share, and John will provide more detail in a few minutes. Equifax US mortgage revenue was down 41% in the quarter, but outperformed the overall market by 27 percentage points with estimated US mortgage originations down 68%. Our global non-mortgage businesses, which represented about 84% of total revenue in the fourth quarter, were very strong with 12% constant currency and 10% organic constant currency revenue growth, stronger than we expected when we provided guidance in October and at the top end of our 8% to 12% long-term growth framework. This strong growth was driven again by outstanding performance at Workforce Solutions with 17% non-mortgage revenue growth overall and 23% non-mortgage revenue growth in Verifier. As I'll discuss more later, Government continued very strong in Workforce Solutions with growth at over 40%, and Talent and I-9 onboarding delivered over 20% growth but were impacted by slowing US hiring in November and December. Delivering 20% growth in that vertical against a slowing hiring market was a very strong performance. Second, USIS non-mortgage had an outstanding quarter, delivering very strong double-digit B2B non-mortgage growth of 10% total and 19% online, which was much better than our expectations. And last, International delivered another strong quarter with 9% constant dollar and 8% organic constant dollar growth, led by very strong performance in Latin America. We continue to make strong progress against the final chapter of our EFX cloud data and technology transformation in 2022. Currently, about 70% of North American revenue is delivered from the new Equifax Cloud. During 2022, we made the decision to increase capital spending by approximately $175 million to a total of $625 million to accelerate the completion of our North American cloud transformation. The progress made in 2022 will enable the substantial completion of North America transformation and customer migrations this year, including decommissioning of applications in our major North America data centers. Capital spending will decline significantly in 2023 due to the strong progress at completing the cloud last year. Our new EFX Cloud infrastructure is delivering always-on capabilities and faster new product innovation with integrated data sets, faster data delivery and industry-leading enterprise-level security. We're convinced that our EFX Cloud and Single Data Fabric will provide a competitive advantage to Equifax for years to come. New product innovation is also executing at a very high level. Our new product Vitality Index of 14% in the quarter is a record and a 500 basis point improvement from the 9% Vitality Index last year and 400 basis points above our 10% long-term new product vitality goal. Our focus on new solutions, leveraging the new Equifax Cloud is paying off. As a reminder, our Vitality Index is the percentage of Equifax revenue from new products launched in the past three years. As our fourth quarter performance highlights, we continue to execute very well, driving strong non-mortgage growth across Equifax and record levels of new product revenue. In addition to accelerating long-term revenue growth, two critical goals of our EFX 2025 strategic framework are significant and consistent EBITDA margin expansion and the lowering of the capital intensity of our business to drive our free cash flow. In 2023, we are executing a broad operational restructuring across Equifax, reflecting both the acceleration of our cloud transformation and a broader focus on operational process improvements. We will reduce our total workforce of over 23,500 employees and contractors by over 10% during 2023 as well as delivering cost reductions from the closure of major North American data centers as we complete the cloud and other broader spending controls. Total spending reductions from these actions in 2023 are expected to be about $200 million with about $120 million reduction in expenses and an $80 million reduction in CapEx. I'll cover our 2023 plan in more detail shortly, but first, we'll provide more detail on our strong performance in the fourth quarter. Turning to Slide 5. In the fourth quarter, we continued our strong non-mortgage performance with revenue growth up 12% in constant currency, led by EWS Verification Services non-mortgage revenue, which was up 23%, led by Talent, which was up 19% and Government up 43%; EWS I-9 and onboarding, which was up over 40%; USIS B2B online mortgage was up almost 20%; and Latin America was up over 30%, all very strong performances. Fourth quarter constant dollar non-mortgage growth of 12% was at the top end of our 8% to 12% long-term revenue framework despite some slowdown in the US hiring activity impacting our Workforce Solutions Talent vertical. Non-mortgage revenue growth continues to be very strong across Equifax. Turning to Slide 6. Workforce Solutions delivered another outstanding quarter. Mortgage revenue outperformed the overall mortgage market as measured by originations by about 30% in the fourth quarter and 38% for the full year. Verifier non-mortgage revenue was again very strong with organic growth of 23% in the quarter and 40% for the total year. During 2022, we signed 10 new agreements with US payroll processors, including four in the quarter that will be added to the TWN database during 2023. Recently, we also signed a substantial direct relationship that added over 2 million new TWN records. These new partnerships, along with continued growth in existing partner records and the new direct contributors through our Employer Services business, are delivering continuing strong growth in our TWN database with current records increasing by over 6 million sequentially, reaching 152 million records with 114 million unique and over 600 million total current and historical records from over 2.6 million employers. Industry-leading data security and operational processes as well as our ability to provide substantial value to our direct contributors and revenue share to our payroll partners are delivering exceptional record growth for Workforce Solutions. 114 million unique individuals in TWN deliver high hit rates and represent almost 70% of the 165 million US non-farm payroll. Adding gig and pension records, we have the ability to almost double our TWN records in the future, which is a big driver of EWS revenue and margins. As a reminder, about 50% of our records are contributed directly by individual employers, with the remaining contributed through partnerships principally with payroll companies. Workforce Solutions also continues to lead Equifax in new products, delivering a Vitality Index at over 2x of our long-term 10% vitality goal, which is a great proof point for the power of the Equifax Cloud to drive innovation in new products. Workforce Solutions Vitality Index has expanded from low single digits a short four years ago to over 20% vitality in 2022. Workforce Solutions, as you know, was the first Equifax business to be substantially complete with their cloud transformation over a year ago, allowing the team to fully focus on innovation and NPIs, leveraging their new cloud capabilities. The Work Number is also seeing accelerated expansion outside the United States in the UK, Canada and Australia. In January, Workforce Solutions signed an agreement with a leading UK payroll technology partner, obtaining access to over 40% of UK private sector employees. Workforce Solutions now has access to over 20 million active and historical records in Australia, Canada and the UK in addition to over 40 million active and historical alternative income records, including pension data and tax returns. Turning to Slide 7. Workforce Solutions delivered revenue of $508 million, down 4% in the fourth quarter. Revenue was slightly weaker than expected driven by slower growth in talent and onboarding businesses from declines we saw in US hiring in November and December. Verification Services revenue of $399 million was down 7%, driven by the unprecedented 68% decline in US mortgage originations. As mentioned earlier, EWS mortgage revenue outperformed the overall market by a very strong 30 percentage points, driven by strong TWN record additions, penetration, pricing and new product revenue growth with the strong adoption of our new mortgage 36 solution that was rolled out late last year. Verification Services non-mortgage revenue, which now represents almost 70% of Verifier revenue, delivered strong 23% growth in the quarter. We saw continued very strong 43% growth in the Government vertical, which is almost 45% of Verifier non-mortgage revenue, driven by strong growth in our Center for Medicare and Medicaid Services volumes. The EWS government vertical is benefiting from penetration, pricing, record growth and leveraging a strong new product portfolio, including our new insights data at the federal state and local level. We expect to continue this strong growth in our government vertical in 2023 in a big $2 billion TAM. Talent Solutions delivered strong 19% growth in the quarter despite the impact of the weakening overall hiring, which is estimated to be down about 8% in the quarter. We outgrew this market decline by over 25 percentage points and delivered 19% growth, a very strong performance, driven by continued penetration of our digital solutions and background screening, strong new product growth, continued expansion of TWN records and favorable pricing. In the first quarter, we will launch new products in the talent space targeted at the staffing and hourly segments designed to meet specific needs of background screeners in these high-volume segments, which will drive Talent growth. Employer Services revenue of $110 million was up 4.5% in the quarter due to strong growth in our I-9 onboarding and healthy FX businesses, which were up 17%. Our I-9 and onboarding businesses remained strong at 20% growth but were also negatively impacted by the declines in US hiring late in 2022. Our unemployment claims and employee retention credit businesses were down 11%, driven by lower jobless claims and lower ERC transactions as the COVID federal tax program expires. Despite the slowdown in hiring, we have not seen a meaningful increase in UC transactions yet. Workforce Solutions adjusted EBITDA margins of 46.8% were lower than our October guidance, principally due to lower revenue growth in talent and onboarding related to the slowdown in US hiring. We expect EWS margins to return to about 50% in the first quarter and will be above 50% for all of 2023. The strength of EWS and uniqueness in value of their TWN income and employment data in Employer Services businesses were clear again in 2022. Rudy Ploder and the EWS team delivered another outstanding quarter, outperforming the mortgage originations by 30 points and delivering strong 17% non-mortgage revenue growth. EWS is expected to deliver a strong 2023 and continue above market growth in the future. As shown on Slide 8, USIS revenue of $406 million was down 6.5% and slightly better than our expectations. USIS mortgage revenue was down about 46% and was in line with our expectations against an unprecedented 54% decline in credit inquiries compared to the 50-plus percent in our October guidance. Revenue outperformance relative to credit inquiries was strong at 8%, driven by favorable new mortgage business penetration, new mortgage products and new mortgage pricing. Credit inquiry performance continues to be less negative than estimated originations, reflecting higher relative levels of mortgage shopping behavior that we talked about before. At $67 million, mortgage revenue is now about 15% of total USIS revenue. B2B non-mortgage revenue of $288 million, which represents over 70% of total USIS revenue was up 10%, with organic revenue growth of about 6.5%. This was a significant sequential increase and much stronger than the levels we expected in October. Importantly, B2B non-mortgage online revenue growth was very strong at up 19% total and up over 13% organically, reflecting pricing and product rollouts as well as stronger volumes in banking as lenders continue to drive new originations. During the quarter, we saw strong double-digit revenue growth in commercial, identity and fraud and auto with banking at just under 10% growth. Financial Marketing Services, our B2B offline business had revenue of $72 million that was down 9% and slightly above our expectations. As we discussed during the year, we expect FMS to return to growth in 2023 with revenue up low single digits in the first quarter. USIS Consumer Solutions business had revenue of $50 million in the fourth quarter, up 8% from penetration and new product introductions. In 2023, we expect low single-digit growth from our US consumer direct business. USIS adjusted EBITDA margins were 35.3% in the quarter, up 120 basis points sequentially due to very strong double-digit B2B online non-mortgage revenue growth. EBITDA margins were down 400 basis points compared to prior year due to declines in high-margin mortgage revenue. International revenue, as shown on Slide 9, was $284 million, up a strong 9% in constant currency and 8% organically. We're seeing broad-based execution from our international businesses with particular strength in Latin America NPI rollouts. Europe local currency revenue was up 3%, principally driven by 9% growth in our debt management business. We continue to see strong debt placements from the UK government as we have over the past several quarters. Our UK and Spain CRA business revenue was about flat in the fourth quarter and below our expectations principally due to lower new business penetration. Asia Pacific, which is our Australia business, delivered local currency revenue of 6%, driven by growth in our commercial, consumer, identity and fraud and HR identification businesses. Latin America, local currency revenue was up a strong 31% driven by very strong double-digit growth in Argentina, Uruguay, Paraguay and Central America from new product introductions and pricing actions. This is the fifth consecutive quarter of strong double-digit growth for the Latin American team. Canada local currency revenue was up 7% and above our expectations. Growth in consumer, commercial, analytical solutions and identity and fraud revenue were partially offset by mortgage volume declines and lower direct-to-consumer revenue. International adjusted EBITDA margins at 25.8% were down 100 basis points sequentially and below our expectations due to a greater mix of lower-margin debt services revenue and higher costs principally from purchased data. Turning to Slide 10. 2022 was an outstanding year for new product innovation, and as you know, NPIs are central to our EFX 2025 growth strategy. We delivered over 100 new products for the third year in a row and a record full year Vitality Index of over 13% and a fourth quarter Vitality Index of 14%. The 13% Vitality Index in 2022 was up over 400 basis points above our strong 2021 results and over 300 basis points higher than our 10% long-term growth framework goal for new products and our vitality. New product revenue in 2022 was $650 million, up over 50% from about $420 million in 2021. And in 2022, over 90% of new product revenue was from non-mortgage products. Leveraging our new Equifax Cloud capabilities to drive new product rollouts, we expect to deliver a Vitality Index in 2023 at levels similar to the 13% we delivered in 2022 which is well above our 10% long-term NPI Vitality Index goal. And this equates to over $700 million of revenue in 2023 from new products introduced in the past three years. New products leveraging our differentiated data, our new EFX Cloud capabilities and Single-Data Fabric are central to our long-term growth framework and are driving Equifax top line growth and margins. Turning to Slide 11. 2022 was also a strong year for bolt-on acquisitions as we continue to focus on our strategic M&A priorities and growing our non-mortgage revenue. Since 2021, we've completed 13 acquisitions that are delivering $450 million of principally non-mortgage run rate revenue. Our 8% to 12% long-term growth framework includes 1 to 2 points of annual revenue growth from strategic bolt-on M&A aligned around our three strategic priorities: number one, expanding and strengthening Workforce Solutions, our fastest-growing and most profitable business; number two, building out our identity and fraud capabilities; and number three, adding unique data assets. We expect these strategic acquisitions to deliver growth synergies in 2023 and 2024 as we complete their technology and product integrations. Last week, we announced the acquisition of the Food Industry Credit Bureau, leading provider of credit information for the Canadian food industry, with over 90% commercial data coverage. This acquisition expands our commercial product offerings in Canada. We also continue to work closely with the Board of Directors of Boa Vista Servicos, the second largest credit bureau in Brazil on the proposed acquisition we announced in December. When completed, the BVS acquisition will add $160 million of run rate revenue in the fast-growing Brazilian market. The transaction is subject to Boa Vista shareholder approval and other customary closing conditions. To the extent we're able to finalize terms with the Boa Vista Board, we expect the transaction to close in mid-2023. Turning to 2023 guidance on Slide 12. We ended the year with significant momentum in the underlying growth of our businesses and in the execution of our EFX 2025 strategic priorities. However, we also entered 2023 with a continuing decline in the mortgage market and broader economic uncertainty impacting our underlying markets. Our assumption for US mortgage market originations is a further decline of 30% in 2023, which is more than 30% below the lowest level of originations in the past 10 years. For perspective, MBA is currently forecasting 2023 origination units down about 22% versus our 30% assumption. Fannie and Freddie do not forecast units but are forecasting origination dollar volumes down 30% and 25%, respectively. In our planning, we've assumed the bulk of the mortgage declines in the first half with first quarter originations down about 55%. Secondly, in 2022, we saw hiring freezes and headcount constraints impact our background screening volume in November and December, and we expect these conditions to continue in 2023 with hiring down over 10% impacting our Talent Solutions and I-9 employee onboarding businesses. Even with these market impacts, we expect both businesses to grow over 10%. Finally, in our planning, we're expecting to see weakening in our key markets in the US, UK, Canada and Australia in 2023. We're assuming slowing growth in the US as we move through the year, although at this point, we have not assumed the US will enter a recession. Similarly, we are expecting to see economic slowdowns in Australia and Canada with perhaps a more significant slowdown in the UK. The slow growth in these markets compares to the 2% to 2.5% underlying economic growth we assume in our long-term growth model. As we enter 2023, we have strong underlying growth across our businesses with execution of our EFX 2025 growth strategies. Despite the significant decline in the US mortgage market and slower economic growth across our major markets, we expect to deliver revenue growth at the midpoint of 4% in 2023. Total mortgage revenue should decline about 8%, over 20 points better than the 30% reduction in mortgage originations, and non-mortgage revenue should grow over 8%, which is within our long-term growth framework despite the slower economic growth in our major markets. We expect Workforce Solutions to deliver revenue growth of about 6% in 2023. This reflects a mortgage revenue decline of about 8% or over 20 points stronger than the expected 30% decline in mortgage originations. EWS non-mortgage verticals are expected to grow about 13% overcoming the expected 10% plus decline in US hiring and about 15% decline in our ERC businesses as that COVID program winds down. TWN record growth, strong new product rollouts and continued strong growth in both pricing and penetration will continue to drive Workforce Solutions outperformance. We expect USIS to deliver revenue growth of about 2% this year. Mortgage revenue is expected to decline about 7%, more than 20 points stronger than the expected 30% decline in mortgage originations. In 2023, USIS will begin to benefit from their new mortgage credit file that was rolled out late last year that includes telecommunications, pay TV and utilities attributes to help streamline the mortgage underwriting process and support loans with the secondary mortgage market. Equifax is the first and only in the industry to provide these insights, which will be available to Equifax customers in the first quarter and can help create greater home opportunities for consumers across the US. We're also seeing the impact of pricing increases from one of our largest mortgage vendors that we pass on to customers at levels to maintain consistent margins. Non-mortgage revenue is expected to grow about 5% despite the slowing growth. Non-mortgage revenue growth of about 5% will be driven by strong commercial, identity and fraud banking and auto growth. And Financial Marketing Services expect to return to growth in 2023 after a disappointing 2022. International had a very strong 2022 with revenue up 12% in constant dollars, but we saw some weakening end markets late in the year, particularly in debt services. We expect International growth of 5% in constant currency in 2023. This is below our long-term growth framework for International of 7% to 9%, principally due to the expected weakening economic conditions in our major markets of the UK, Canada and Australia and also a decline in debt services off a very strong 2022. As we discussed last year, debt services revenue in 2022 was somewhat of a catch-up year as the UK government collections were put on hold during the COVID pandemic. We continue to expect international to operate within their 7% to 9% growth framework over the mid and long-term. NPIs will again be very strong, consistent with last year's 13% Vitality Index, well above our 10% long-term vitality goal, and this will be led by Workforce Solutions in Latin America. As USIS and Canada complete their cloud transformation, we expect their NPI rollouts to accelerate as we exit 2023. As we complete our North American cloud transformation in 2023, we will pivot to leveraging our differentiated data assets and new cloud infrastructure to drive new product rollouts and top line growth. Workforce Solutions will accelerate its focus on leveraging their new cloud capabilities, and USIS and Canada will complete their consumer credit, alternative data and IFS transformation this year. These are big milestones in completing the cloud that we've been building towards for almost five years. We're on track to deliver the cost and capital spending reductions from the cloud transformation that are central to our long-term growth framework. As I referenced earlier and as shown on Slide 13, our accelerated cloud transformation cost reductions and broader cost restructuring will deliver $200 million of cost and CapEx savings in 2023 that will expand our margins and free cash flow in the future. During 2023, we plan to reduce our total workforce of about 23,500 employees and contractors by over 10%. As we complete our North American cloud transformation in 2023, we expect to close about 15 data centers, consolidate development centers and continue to reduce our software application footprint, and we'll closely manage discretionary spending, including professional services. We expect these actions to deliver $200 million in spending reductions in 2023, representing $120 million cost and expense reductions or about $0.75 per share and $80 million in capital spending reductions. The savings in the first quarter are limited and accelerate in the second quarter and through the second half of 2023. In 2024, the run rate benefit of these actions will reduce our spending by over $250 million. The lower cost and capital spending accelerates as we move through 2023 from cloud transformation cost benefits and other costs and restructuring actions planned throughout the year. As shown on Slide 14, adjusted EBITDA margins and adjusted EPS improved significantly as we moved through 2023. In the first quarter, revenue is expected to be down 6% due to the about 55% reduction in mortgage originations. EBITDA margins and adjusted EPS are at their lowest levels in 2023 in the first quarter, principally due to the higher incremental margins from the declining mortgage revenue and the timing of the recognition of the majority of our annual equity incentive plan expense in the quarter. Normalizing for this timing compared to the fourth quarter, first quarter EBITDA margins are slightly below fourth quarter margins of 31%. As revenue growth improve throughout 2023 and cloud and broader cost reductions accelerate, EBITDA margins and adjusted EPS improve sequentially with EBITDA margins expected to exceed 36% and adjusted EPS exceeding $2 per share in the fourth quarter. For the full year, EBITDA will be up 4% or $70 million, in line with revenue growth, with margins flat to the 33.6% we delivered last year. Adjusted EPS is expected to be about $7.20 per share, down about 5% from 2022, principally reflecting higher depreciation and amortization of about $50 million as North American cloud system implementations principally completes, also from higher interest and other expense of about $60 million and a higher tax rate. Capital spending will decline by $65 million to about $545 million in the year, or about 10% of revenue as we move closer to completing our cloud transformation. We expect CapEx to decline again in 2024. We have a clear line of sight to executing these proactive actions that will expand our margins and drive our free cash flow. In addition to cost benefits, completing our North American cloud transformation will enable significant commercial benefits to drive market share and revenue growth, including our always-on capabilities, better data quality, faster data delivery and faster new product innovation. And we're beginning to see meaningful commercial benefits from our new Equifax Cloud technology transformation. And now I'd like to turn it over to John to provide more detail on our 2023 assumptions and guidance and also provide our guidance for the first quarter. Our 2023 guidance builds on our strong 2022 non-mortgage growth from new products, record growth, pricing and acquisition synergies. John?

Thanks, Mark. Before we discuss 2023, I'll share a little more detail on 4Q 2022. As Mark referenced earlier, Equifax EBITDA margins came in slightly lower than expected in the fourth quarter at 31%, principally driven by lower-than-expected margins in Workforce Solutions, as Mark discussed, and also in International. Capital spending in the fourth quarter was $156 million, as we maintained investments to accelerate completion of North American cloud transformation. Capital spending will decline in 1Q 2023 to about $150 million and then sequentially further in each quarter of 2023, as we complete significant US and Canadian customer migrations. Total capital spending in 2023 is expected to be about $545 million. CapEx as a percent of revenue will continue to decline in 2024 and thereafter as we progress toward reaching 7% of revenue or below. Moving on to 2023 guidance. Mark provided an overview of our planning assumptions of a 30% reduction in mortgage originations in 2023. As shown on Slide 15, at these levels, and again, using credit inquiries as a proxy for the mortgage market, in 2023, the US mortgage market will be substantially below any level we have seen in the past 10 years. 1Q 2023 is expected to see the mortgage market down about 55% year-to-year. Sequentially, as we move through 2023, we're planning on a more normal pattern of mortgage activity with mortgage originations increasing sequentially on the order of 15% in 2Q 2023 from 1Q 2023, 3Q 2023 being about flat with the second quarter and normal sequential decline in the fourth quarter versus 3Q 2023. We expect with these sequential patterns, US mortgage originations would be up slightly in the second half of 2023 versus the first half of 2023, and the fourth quarter of 2023 would be up slightly year-to-year. And in at least the first half of 2023, we are expecting USIS to benefit from mortgage shopping behavior with better performance than originations. Slide 16 provides a revenue walk detailing the drivers of the 4% revenue growth to the midpoint of our 2023 revenue guidance of $5.325 billion. The 30% decline in the US mortgage market is negatively impacting 2023 total revenue growth by about 7 percentage points. The mortgage revenue outperformance relative to the mortgage market is expected to offset about 5 points of the negative 7 percentage point impact of the mortgage market on overall revenue growth. As a result, the expected 8% decline in Equifax mortgage revenue has a negative about 2 percentage point impact on overall revenue growth. Non-mortgage organic growth is expected to exceed 7% on a constant currency basis and is driving about 5% of the growth in overall Equifax revenue. As Mark referenced earlier, the growth is broad-based across all three BUs and is within our long-term framework of 7% to 10%, despite the economic uncertainty across our major markets in the US, Australia, Canada and the UK. The acquisitions completed in 2022 and year-to-date are expected to contribute about 1% of growth to 2023. For clarity, this does not include revenue from the potential acquisition of Boa Vista. Slide 17 provides an adjusted EPS walk detailing the drivers of the expected 5% decline to the midpoint of our 2023 adjusted EPS guidance of $7.20 per share. Revenue growth of 4% at our 2022 EBITDA margins of about 33.6% would deliver 5.5% growth in adjusted EPS. EBITDA margins in 2023 are expected to be about flat from the 33.6% we delivered in 2022. In 2023, the cost actions we are taking are expected to deliver about $120 million of expense reductions. These cost benefits are being principally offset by several factors. First, in 2022, variable compensation, including incentive and sales comp were at very low levels due to the substantial impact of the weak mortgage market on our performance. In 2023, our planning assumes we return to targeted levels of performance, and therefore, these compensation drivers. Royalties and cost for data and third-party scores are increasing as we continue to add new partners and broaden data sources. Also in 2023, we are also still incurring a level of redundant system costs as we continue to operate legacy North American systems prior to their decommissioning later in 2023. As we look beyond 2023, the impact of variable compensation moving to target and the cost of redundant systems in North America are behind us, and therefore, the benefits of our cost actions as well as accelerating high variable profit revenue growth are expected to drive significant improvement in EBITDA margins. Depreciation and amortization is expected to increase by just over $50 million in 2023, which will negatively impact adjusted EPS by about 4%. D&A is increasing in 2023 as we accelerate putting cloud native systems in production. The combined increase in interest expense, net other expense and tax expense in 2023 is expected to negatively impact adjusted EPS by just over six percentage points. The increase in interest expense reflects the impact of higher interest rates and also the increased debt from our 2022 acquisitions. Our estimated tax rate of about 26% is up about 150 basis points from 2022 due to a higher mix of non-US revenue and lower tax benefits as we reduce capital and development spending. Slide 18 provides the specifics of our 2023 full year guidance that Mark discussed in detail. The slide includes additional detail on expected BU EBITDA margins as well as guidance on specific P&L line items. EWS EBITDA margins in 2023 of 52% are expected to be up from the 51.3% delivered in 2022, given the strong non-mortgage revenue growth from new products, penetration and pricing and the benefits of the cost actions Mark discussed earlier. USIS EBITDA margins at over 35% are expected to be down from the 36.8% delivered in 2022. USIS is also benefiting from cost actions. However, revenue growth at 2%, again, due to the impact of the US mortgage market decline, is resulting in the year-to-year margin decline. International EBITDA margins at 27% are expected to expand versus the 25.7% delivered in 2022, driven principally by pricing and the 2023 cost actions. Corporate expense, excluding depreciation and amortization, is increasing in 2023 relative to 2022 due to the increases in incentive and equity compensation from the lower levels incurred in 2022 that I referenced earlier. Corporate functions such as finance, legal, HR and others are reducing costs in 2023, consistent with our cost actions. We believe that our guidance is centered at the midpoint of both our revenue and adjusted EPS guidance ranges. Slide 19 provides our guidance for 1Q 2023. As Mark discussed earlier, 1Q 2023 is expected to have the largest year-to-year decline in the US mortgage market that we'll see in 2023 at down about 55% as we compare to the relatively strong mortgage market in the first quarter of 2022. Despite the strong expected non-mortgage constant currency growth of about 9%, we will see a decline in 1Q 2023 revenue about 6% at the midpoint of our guidance. 1Q 2023 EBITDA margins are expected to be about 29%, down about 200 basis points sequentially. Overall, BU EBITDA margins in total are up sequentially from 4Q 2022 driven by Workforce Solutions delivering about 50% EBITDA margins in the quarter, which offsets declines at USIS and International. The decline in EBITDA margins in 1Q 2023 sequentially from 4Q 2022 is driven by higher corporate expense, specifically the higher incentive and equity compensation costs referenced earlier. The bulk of the expense related to our equity plans occurs in the first quarter and is reflected in corporate. Excluding the impact from the sequential increase in equity compensation expense, EBITDA margins are approaching flat sequentially at just under 31%. Corporate expenses will decrease meaningfully sequentially in 2Q 2023 as the equity compensation was principally reflected in the first quarter. Revenue increases sequentially in 1Q 2023 relative to 4Q 2022. We're not seeing the expected increase in EBITDA margin sequentially in the first quarter, driven by the same factors impacting all of 2023 that I referenced earlier and the fact that there is limited first quarter benefit related to our 2023 cost actions. In the second quarter of 2023, we will see both the benefit of reduced corporate expense and increased benefits from our 2023 cost action supporting growth and EBITDA margins. Business unit performance in the first quarter are expected to be as described below. Workforce Solutions revenue growth is expected to be down about 8.5% year-to-year due to the about 55% decline in the mortgage market. Non-mortgage revenue will continue to deliver double-digit growth. EBITDA margins are expected to be about 50%, up over 300 basis points sequentially, driven by sequential revenue growth from new product and pricing actions. Workforce Solutions will represent just under 50% of Equifax revenue in the quarter. USIS revenue is expected to be down about 5.5% year-to-year, again, driven by the about 55% decline in the US mortgage market. USIS credit inquiries are expected to somewhat outperform the overall mortgage market due to consumer shopping. The mortgage decline is partially offset by growth in non-mortgage expected to be up mid single digits. EBITDA margins are expected to be about 32%, down sequentially due to negative mix from growth in core mortgage and higher overall mortgage royalties as well as the normalization of incentive costs that I referenced earlier. USIS is also incurring incremental costs from customer migrations to data fabric that are occurring principally in the first half of 2023. International revenue is expected to be up about 5% in constant currency. The weakness relative to the strong 4Q 2022 growth of about 9% is principally a decline in the UK debt management business as we are now comparing to the very strong 2022 revenue driven by catch-up in our UK government business in 2022 as the UK government suspended collections during the pandemic. EBITDA margins are expected to be about 22%, down sequentially due to seasonally lower revenue in Canada and UK CRA and normalization of incentive costs as well as higher data costs. We're expecting adjusted EPS in the first quarter of 2023 to be about $1.30 to $1.40 per share. Looking forward, we remain focused on delivering our midterm goal of $7 billion of revenue with 39% EBITDA margins. Market conditions are significantly different than when we first discussed in November of 2021 our goal of achieving these results in 2025. The US mortgage market is expected in 2023 to be down over 35% from the normal 2015 to 2019 average levels we had discussed. Our core organic revenue has grown over 300 basis points faster than we discussed with you in November of 2021. However, recovery in the mortgage market around the order of two-thirds of the lost volume is still likely needed to achieve our $7 billion goal in 2025. We're focused on driving above-market growth including through accretive acquisitions and delivering the cost and expense improvements committed as part of our data and technology cloud transformation and needed to achieve 39% EBITDA margins. We'll continue to discuss with you our progress toward our $7 billion and 39% EBITDA margin goals as the mortgage and overall markets evolve in 2023 and forward. Now I'd like to turn it back over to Mark.

Thanks, John. Wrapping up on Slide 20. Equifax delivered another strong and broad-based quarter with above-market growth in 2022, more than offsetting the significant 55% decline in the US mortgage market originations. We delivered our eighth consecutive quarter of strong above-market double-digit core revenue growth and strong double-digit 12% non-mortgage growth, reflecting the power of the EFX business model and our execution against our EFX 2025 strategic priorities. At the business unit level, first, Workforce Solutions had another outstanding year, powering our results, delivering 14% revenue growth and strong organic non-mortgage growth of 24%. TWN current records reached 152 million, up 12%, and total records surpassed 600 million. Workforce also delivered a Vitality Index of over 20% from innovative new products and solutions, leveraging their cloud capabilities while further penetrating the high-growth Talent and Government verticals. USIS had a very strong finish to 2022 with fourth quarter non-mortgage growth of 10% total and 7% organic, driven by online non-mortgage growth of 19% total and 13% organic. The USIS team remains competitive and is winning in the marketplace. International delivered 12% local currency growth, their second consecutive year of double-digit growth. Our 2022 Vitality Index of 13% was a record as we delivered over 100 new products for the third consecutive year in a row. And since 2021, we completed 13 strategic bolt-on acquisitions to strengthen Equifax in identity and fraud that we expect to deliver over $450 million of principally run rate revenue going forward. Sixth, we made significant progress in 2022, executing against our EFX cloud, data and technology transformation with about 70% of North American revenue being delivered from the new Equifax Cloud. And we're laser-focused on completing our North American migration in 2023 to become the only cloud-native data analytics company. We're in the early days of leveraging our new cloud capabilities but remain confident that it will differentiate us commercially, expand our NPI capabilities and accelerate our top line. Our strong progress on the cloud allowed us to accelerate cost savings and launch a proactive restructuring across Equifax that will deliver $200 million of cost savings in 2023 that will expand our margins to 36% as we exit 2023 and position us for an uncertain economic environment. As we look to 2023, we're committed to completing our North American data and technology transformation, while delivering continued above-market revenue growth and a substantial and consistent EBITDA margin growth and a reduction in capital intensity that is a key benefit of our data and technology cloud transformation. As mentioned earlier, the cost actions were taken in 2023 reducing our spending by $200 million this year and over $250 million in 2024 will expand our margins and position us for a more uncertain economic environment. I'm energized about our strong above-market performance in 2022, but even more energized about the future of the new Equifax in 2023 and beyond. We're convinced that our new EFX cloud-based technology, differentiated data assets that are now in our single-data fabric and our market-leading businesses will deliver higher growth, expanded margins and free cash flow in the future. And with that, operator, let me open it up to questions.

Thank you. We will now be conducting a question-and-answer session. Our first questions come from the line of Manav Patnaik with Barclays. Please proceed with your questions.

Thank you. Good morning. Mark, you said you assumed a weakening economy pretty much globally but not a recession. But I guess my question is more the weakness that you've assumed, the magnitude of what you're seeing already today versus what you're assuming gets worse, if that makes sense?

Yes. So I think there's a couple of levels there, Manav. As you know, we've been living through a mortgage market recession here in the United States for the last nine months and that's going to continue. And it's really unprecedented. So I think you and our investors understand that pretty clearly. It's really a massive impact on our business. And what's positive is our non-mortgage businesses are performing exceptionally well. We talked about where we've seen the impact of hiring declines in late in the year. We expect that to continue being down about 10% in 2023, and that impacts our Talent business and also our onboarding and online businesses. So that's certainly in our outlook. And then we did factor in what we would characterize as an uncertain or slowing economic environment really more in the second half of 2023. It's hard to forecast where the economy is going to do, but it certainly feels like at these higher interest rates and higher inflation, and you've got the impact of mortgage and now in the hiring space that we're going to see slowdowns as we go through 2023.

Got it. Just to clarify on that: can you talk about what assumptions you're making on the card and auto side, since those areas are still relevant today, and how much you're assuming? And then, John, on free cash flow, can you walk us through this year's working capital moves and how we should think about free cash flow in 2023?

Yes. So on your first half of your question, John can take the second. You're correct, Manav. In a lot of verticals, we haven't seen that economic impact yet. We're expecting to see that as we go through 2023. So that's a part of our guide and a part of our outlook in verticals like cards, like P loans, like auto, we've seen some limited economic impacts there. But as you point out, cards, for example, are still operating quite well. But given where interest rates have been and where they're going and where the Fed is signaling they're going to take them and the challenge of taming inflation, we think it was prudent to include in our outlook for 2023 a softening of the economy as we go through the year.

As you look around outside the US, right, we saw a weakening in the UK. That's already occurred, started to happen in the fourth quarter, and we saw relatively weaker performance in some of the other markets around the world as well. So to free cash flow—so as we look through 2023, Manav, we're expecting to see expanding margins, as Mark talked about, and we're expecting to see, obviously, therefore, expanding EPS as well, and we're also expecting to bring down capital spending. So we expect to see very nice growth in free cash flow as we move through 2023 sequentially, as we go through the quarters. In terms of working capital, as we've discussed in prior calls, as we were going through a significant billing system migration, we did see some increase in our accounts receivable. The bulk of that is now completed. We've completed all of North America, and there's just a little bit more to go as we go through 2023 in some of our international operations. Our internal metrics are showing a nice improvement in terms of our operational performance in those systems in terms of what we're seeing in terms of collections activity. And so although we haven't really seen it yet in the numbers you would have seen in the fourth quarter, we're expecting to start to see some benefit as we move through 2023 in terms of AR, which would affect overall working capital. So net-net, I think free cash flow, we're expecting to see, obviously, expanding margins, improving profitability, lower CapEx and then improvements as we move through the year in working capital in general.

Got it. Thank you.

Thank you. Our next question is coming from the line of Andrew Steinerman with JPMorgan. Please proceed with your questions.

Hi. John, I just want to make sure I understand the $120 million of OpEx reduction on Slide 13. Is this $120 million for 2023 to be realized in year, or is that a run rate by the end of the year? And then I have a follow-up question.

So that's realized in year.

That's correct, yeah.

As John pointed out, those will be executed principally the actions of the contractors and attrition in some Equifax FTEs will be executed in the first quarter, so the benefits will accelerate as we go through second, third and fourth. And then as we said, we get a benefit — positive benefit in 2024 from the full year impact of that.

Okay. And then on the $120 million of expense savings, OpEx savings, is this really an acceleration of the original plan, or does this add to total target cost savings of the cloud transformation?

Yeah. It's a combo of the two. We tried to be clear about that, Andrew, in our comments because of the extra efforts and additional work we did in 2022, it's allowed us to accelerate the completion of the cloud savings that we've talked to you about for multiple years. So a big piece of the $120 million is the cloud savings, but there's a meaningful increment to that of just a broader restructuring of the company to improve our efficiencies and how we operate the company. Some of that from the investments of the cloud that are outside of technology just allow us to operate more effectively. So it's a combo with the two.

Thank you.

Thank you. Our next questions come from the line of Kyle Peterson with Needham & Company. Please proceed with your questions.

Great. Good morning guys. Thanks for taking the questions. I wanted to dig into the Talent Solutions piece. It definitely seems like there was some softness there compared to what you guys were expecting. And I know you kind of mentioned that hiring was a headwind and became more challenging. But I guess, was the softer result in that sub-segment of EWS, was that purely a kind of quantity and kind of hiring volume headwind, or did you see any clients like trading down to kind of less expensive products or doing anything else in kind of that area that might have caused some pressure?

No. Our analysis of it is it's all quantity. When we talk to our customers, meaning there's just less background screens happening. I think we were watching this as we went through the fourth quarter. I think all of us saw companies as we went through the tail end of the year, and they've accelerated in the first quarter here, announcing layoffs, announcing hiring freezes. That all is going to impact the hiring market. It's a bit bifurcated. I think we all know that the hiring at the hourly wage area is still very strong. So that really wasn't impacted. This is more white collar impact, where companies are just tightening their belts and being more cautious around hiring. So we haven't seen any impact from our new product rollouts, the penetration that we have. And just as a reminder, this is a $2 billion TAM for us, is Talent. And we have a lot of penetration opportunities, meaning we're continuing to work in to bring new solutions and convert our customers from their manual work to digital, and that's what really allows us to outgrow a declining market, which we expect to continue to do in 2023. And then as we also mentioned, that same hiring impact where companies are tightening their belts around adding new resources impacted our onboarding or our I-9 business in the latter part of the year, we expect it to impact in 2023. As we said in the comments earlier, we expect both of those businesses to grow double-digit even with those market declines because of the new product capabilities, the new penetration opportunities that we have and, of course, our normal pricing that we rolled out on January 1.

Got it. That's helpful. And then I guess just my follow-up was on pricing. I know kind of last quarter, you guys mentioned that pricing would be a tailwind in 2023 to margins. And I know like the 1Q guide kind of implies a couple of hundred basis points of pressure on EBITDA margins. I get some of that's seasonality. But is some of this that compared to what you guys saw in 4Q that just volumes in mortgage and some of the other areas are just facing pressure that's offsetting some of those price effects that went into place on 1/1, or did you temper any of those?

Yes, I'll let John jump in. No change in what we told you we were going to do in October on price and what we actually did. Obviously, what's happened is the mortgage market—first off, we have a very challenging comp in the first quarter and the second quarter versus last year. A year ago, the mortgage market was super strong. So you start with that, and that was as expected, although as we talked about, we've reduced our mortgage outlook for 2023 from what we thought in October. So that puts pressure on the quarter and on the year, from a margin standpoint. There's some small pressure from the lower growth in talent and onboarding in I-9 because of the tightening belts around hiring taking place, but the bulk of the first quarter impact is what John described of really from a cost standpoint in 2022, our incentive compensation was at very low levels because of the substantial impact of the weak mortgage market on our performance. As John said, we expect 2023 to be paying at target. So that's a higher expense to us. That flows through the year. And then we typically have in the first quarter when we make our retention equity grants to our team, an equity expense that takes place. And there, I don't know, what else would you add, John?

No. Just in terms of price and product, you can see the benefit of price and product in the fourth quarter, obviously, in USIS. Very strong performance in online. We saw volume in banking. But we had very strong performance in auto and in banking and lending and cards. So some of that was product and some of that was price. And you're certainly seeing it in the first quarter in EWS, right? As Mark mentioned, pricing increases going in January, and we're seeing the benefit of both product and price in EWS with their margins expanding in the first quarter. So no difference, and you're seeing it in the performance of the business.

I think John also said in his comments that if you look at first quarter versus fourth quarter and isolate around these expense items around incentive and equity, our margins are basically flat, which means we're absorbing a weaker mortgage market than the fourth quarter and still getting the benefits of operating leverage and price and everything else to kind of offset that excluding the cost items that we had that we talked about.

Thank you.

Thank you. Our next question is coming from the line of Kevin McVeigh with Credit Suisse. Please proceed with your questions.

Great. Thanks. Obviously, still a lot of volatility in the mortgage market. Is there any way to think about kind of purchase versus refinance? And as you get into 2024, I know 2023 is hard enough, but do you expect a little bit more recovery in refinance off of 2022, or just any way to think about kind of that base level of originations and how it trends over the course of the year?

I'll let John jump in. As you might imagine, refi is virtually gone. Refi really disappeared from the mortgage market about six months ago as rates started increasing. We don't anticipate refi coming back until there's a change in interest rates, meaning that there's some interest rate decline. What's really very unusual, and we've never seen before is the meaningful decline in purchase volume at this level. I think as John pointed out, our outlook for 2023 has mortgage inquiries 30% below the 10-year average. And that's really—the 10-year average includes purchase and refi. So you've got purchase down dramatically. So at some point, purchase volume should improve. There's no question. If it's 30% below a 10-year average. Now we're assuming that doesn't happen in the second half. Should it improve in 2024, I think it's part of it's tied to what's happening in the economy. Are we stabilized around inflation and interest rates, if the interest rate increase has flattened out and consumers that are thinking about a home can have some confidence around where the economy is going. That should help purchase volume. But at some point, whether it's in 2024 or 2025, the mortgage market should move up on the purchase side as the economy stabilizes to get back to that 10-year average. It's never had this kind of an impact. Of course, we've never seen interest rate increases at this pace ever before.

I think you covered it quite well, yes.

Great. And then just real quick, as you think about kind of— you mentioned the gig and pension workers a couple of times. Is that aggregation process similar to the traditional kind of record aggregation, or is it—how does that process occur? And is it at the same price point, or is it kind of less profitable?

Yes, no, they're very attractive records. We want them all. First, let me just make the point. We've got a long runway in traditional non-farm payroll. And I think you saw a 12% growth last year in TWN records, which was very, very strong. We signed, I think, 10 new partners that will come online in 2023. I think we said before that in our existing partners, think about payroll partners, there's meaningful records that we still haven't brought onboard with them. And there's a lot of incentives to do that. So that's kind of the base records. And over the last couple of years, we've scaled up resources that are going after pension records. I think it was in the third quarter last year, we signed our first pension partner to bring pension records into our data set. And we've got a pipeline of those. Process-wise, that's quite similar. If you think about pension records, they're probably in three different places, it's more than that, but three principal places. One is there are companies that are much like payroll processors that process defined benefit pensions for legacy companies that have those. So going to those companies and developing those partnerships is strategy number one. Number two is large legacy companies process their own pension payroll, lots of them. So we're already collecting their employee payroll, so going in and collecting their pension payroll as a part of that strategy. So we know how to do that in just a matter of executing it. And then the third is in federal, state and local governments. Many of them have their own pension processing operations, so going to collect those records. So that's where we're going on the pension side. And then on the gig side, there's a lot of different strategies, individual companies, as you might imagine, going to get that and other entities that will have those gig records. And as we've talked before, it's the 114 million uniques that we have. There's about 220 million working Americans between non-farm payroll, gig and pension. So over the long-term, we've got the ability to double the scale of our records going forward. So that's a big lever for growth from Workforce Solutions. I think as you know, the day we add a new record, we're able to monetize it instantly, because we're already getting inquiries for the record we don't have, right? With our 50-plus percent hit rates, as we add that 51st, 52nd set of data records, we're able to monetize instantly. So it's a very powerful part of the revenue engine and margin engine for Workforce Solutions, which is why we have such a dedicated team focusing on it. And if you think about the scale of our records, if you go back four years ago versus the 114 million uniques, we had something like 70 million and 300,000 companies. We ended last year with 2.6 million companies contributing their data to us. So the cloud has allowed us to really scale that, and there's a long runway for future growth.

Thank you.

Thank you. Our next question is coming from the line of Kelsey Zhu with Autonomous Research. Please proceed with your questions.

Hey, guys. On EWS margin, just kind of playing devil's advocate here. I want to understand a little bit better what's the biggest risk factors for margins to drop below your guide at 52%. Is this just mortgage market down more than 30%? Is it fields overachieving their targets again in maybe government the verticals? Just wanted to understand it a little better?

John, this was on EWS margins. And the question was, we've said that we expect them to be 50-plus percent in 2023. What are the risks of that?

Let me talk about what's driving the margins to be at those levels, and it is heavily driven by what Mark talked about in terms of the record growth and therefore the outperformance relative to mortgage and the very, very strong non-mortgage growth. And then the cost actions that they're taking in order to not only maintain but enhance their margins as they go through the year. So EWS has been executing extremely well. Obviously, if the mortgage market was to be substantially weaker, that's very high revenue and high margin revenue, that would be a risk. To the extent that there is risk to revenue in general, obviously, that can be risk to margins. But overall, we think we've taken a very reasonable view in terms of what 2023 looks like for EWS. Their execution has been very strong. The record growth has been very good. They've already executed their pricing actions. Their performance in new product has been outstanding, as Mark said, growing at twice the rate of our 10% goal for Vitality Index. So we feel like we've given a very balanced view of EWS as we look into 2023.

Maybe I just add to that, John. I think John mentioned, we rolled out our pricing actions late in the year effective January 1, so we know what those are. So that's kind of baked in. As I mentioned earlier, and John did too, we already know some meaningful record additions that we've signed agreements for that will come in in 2023. That's revenue and margin. We've got new products in Workforce that were rolled out in 2022 that get full year benefit in 2023. And we know our pipeline of new products we're expecting to roll out in the first quarter and second quarter from workforce going forward. So we think there's a lot to give us confidence in our outlook there. And I think as John pointed out, to me, the factor would be if the economy is worse than we factored into this or if the mortgage market is significantly worse than we factored into this outlook, that would put pressure on that. And then we would take actions to respond to it.

Got it. Super helpful. And then just on Boa Vista, I think that would be a really nice addition to your Latin America portfolio. And I was wondering if you could give us a little bit more color on how you're thinking about their data assets and their strategy. On the merger call, you mentioned Boa Vista is very strong regionally. Is there a strategy to expand them more nationally? Would appreciate any color you can share with us.

So first, we're working to try to finish the acquisition. We've been negotiating since December with the Board of Boa Vista. We're pleased with the progress, and we're — we want to conclude that. So that's kind of priority number one. But everything we talked about in December, we're still quite energized about. First and foremost, we would bring all of the Equifax capabilities to Boa Vista, whether it's our new cloud technology, our products from around the globe, our big platforms like Ignite and InterConnect, we'd really bring their capabilities up substantially versus what they have today as a standalone number two credit bureau in the market. So that is a real positive. And the underlying business is performing exceptionally well. They've got strong double-digit growth. It's a big market in Brazil that's expanding. There's a lot of alternative data available there that we would want to focus on. We just see a bunch of potential. As we pointed out, they have some unique data outside of the normal banking data that's unique to Boa Vista, which is another element that we like about it. So we're focused on completing our negotiations, so we can try to move forward in closing it.

Thanks.

Thank you. Our next questions come from the line of Andrew Jeffrey with Truist. Please proceed with your questions.

Hi. Good morning. Appreciate you taking the question and all the details as usual guys. Mark, one of the things that happened, obviously, that drove your mortgage growth before the collapse of the overall market was greater digital engagement. And I think you've talked to mortgage shopping a little bit today, too. Has—given that mortgage volumes are down so much, purchase and refi, do you think there's anything that's structurally changed in the market such that your customers either want to engage more digitally with you or less digitally? So I guess what I'm asking is when mortgage recovers, is that lever, which was such a nice driver for you when volumes were booming, is that still there? Is it—do you get more leverage, less leverage, about the same? Can we think about that structurally, if anything has changed this time around?

It's a great question, and we believe that it's more leverage or more opportunity to really drive our digital solutions. And if you think about a mortgage originator, that clearly is under significant financial pressure now because of the reduced volumes. They're looking to improve their productivity, and the only way to improve your productivity is through instant decisioning. And the goal that they always have and the leading players in the space are working to really shorten the time frame between application and closing. As you know, it's a very long time frame and that time frame has cost involved in it. It also has risk involved in it around the consumer changing. It has risk involved in it, and the consumer deciding, I'm not going to buy the home, meaning you've spent a bunch of cost on it. If they can shorten the time and take labor out of it by using instant data, that's a positive. So we expect our conversations around using our instant data, particularly around TWN, to accelerate in this environment, meaning we're going to become more embedded and more instant, which has been a trend, as you know, over the last couple three years, even in the stronger mortgage environment. Some of that over 2020 and 2021 was challenged by the pace of the volume they had. They didn't have time to really focus on changing their processes. Now they do. So it's clearly a focus of ours, and we think a positive going forward that instant is going to drive speed and drive productivity. And that doesn't only apply to mortgage, that applies to really all our verticals. Think about government, think about talent. If we're able—they're under cost pressure today. And those verticals, whether you're a background screener or a government agency, improving your productivity and improving the speed of the service you deliver is very, very valuable to them. And the way to do that is to use instant data from Equifax like our TWN income and employment data.

That's very helpful. Thanks. I appreciate it.

Our next question is coming from the line of Andrew Nicholas with William Blair. Please proceed with your questions.

Hi. Good morning. Thanks for taking my questions. I wanted to first touch on a comment you made about a win for EWS and Verification Services within the UK, I believe. I wanted to ask, I think you said 40% of the private sector employee base, if I heard correctly, if you could clarify that. And then just curious, is that an exclusive relationship? And how important could that relationship be to getting a foothold or the pole position in the UK market, especially given a competitor of yours ambitions to build a similar business there?

We've been clear that over the last couple of years, as we completed the cloud, we were looking for new international markets to take Workforce Solutions into. As we talked on the call earlier, we've been building out businesses in Australia and Canada, and then most recently, a year ago, really in the first quarter, we launched our UK business using our new cloud capabilities and started to go into the market and talk to both individual contributors and payroll processors around adding data records. So we've made some positive traction over the last 12 months in the UK. We're looking to continue to grow and expand our capabilities there. We had a handful of agreements signed in the UK, and we also signed an agreement with an entity that has tax data that is a proxy for income and employment. That has been a positive addition in the UK. That gives us a lot of coverage so we can start rolling out solutions there. In Australia, we've got an agreement with a pension administrator that brought pension-like data in, which is accretive also. So it's clearly part of our strategy to continue to build out and invest in our international footprint for Workforce.

Great. Thank you. And then for my follow-up, I just wanted to ask a question on margins. It looks like you're expecting 30% plus type margins exiting the year. Is there any reason not to believe that's a good starting point for 2024? And I know you're not going to give guidance for that year, but mostly asking about if there are kind of cost-saving actions that you expect to still be underway that late in the year or if that fourth quarter number is a decent run rate to think about kind of a stable base for out years? Thank you.

So as we talked about in the presentation, we're expecting in the fourth quarter to get to 36% EBITDA margins, driven by some recovery in revenue but also really significantly by the acceleration of the cost actions. And the cost actions have a continuing benefit in 2024. So we're expecting additional benefit from the cost actions as we go into 2024. And we're also expecting to get additional cost benefits as we continue to complete the cloud transformation beyond North America, and we'll start to start to see some of those benefits occur in 2024. So we think we still have tailwinds on the cost side that will benefit our margins as we get into 2024. And then obviously, as we get closer to 2024, we can start talking about revenue. But there certainly are cost tailwinds that continue out of 2023 and into 2024.

Thank you.

Thank you. Our next questions come from the line of Shlomo Rosenbaum with Stifel. Please proceed with your questions.

Hi. Thank you for taking my questions. Hey, Mark, I want to ask you a little bit about the main functional areas for headcount reduction. And what I'm trying to focus on is NPI has been a big driver and driving particularly non-mortgage growth. How do you make sure that you're going to not harm the growth in new product introductions by reducing your headcount by 10%? And then I have a follow-up.

Yes. We're obviously quite thoughtful about that, as you might imagine. We want to make sure we're quite strategic about where we're doing it. Remember, the bulk of the actions are really related to the cloud transformation and accelerating those. So a lot is happening in technology. And the bulk of the actions are also in contractors. We hired a bunch of contractors to do the cloud work, and we're taking actions now when we complete that and decommission the legacy infrastructure to take those out. The rest of the actions, I would characterize as normal focus and thoughtful focus around where do we have opportunities to be more efficient and more productive while protecting our focus on growth and on new products.

The only thing I'd add is as transformation completes the effort necessary to launch new products comes down substantially. It's one of the real benefits from cloud transformation that we've been talking about. As data is on fabric and everything is running through Ignite and InterConnect, then the level of investment necessary to launch those new products really starts to become something that we can do faster and cheaper. So as Mark said, we do a very good job of making sure we understand who is working on what. So as we reduce resource, we take it out of specifically transformation. But also as we go forward, we expect to get a lot of leverage in product launches in terms of being able to launch them faster and cheaper because they're on the transformed cloud infrastructure.

Okay. Thank you. And then as a follow-up, I want to ask a little bit more about the competitive environment on The Work Number. You have a competitor in the market that's talking about signing more contracts with mortgage processors, and the vast majority of those are being put at the top of the waterfall. I'm just trying to square what they're talking about and some of the growth that they're communicating to the analyst community with your market position and what you're seeing. I mean, are you seeing increased threats to your market position and the volumes that are coming through?

We're not. I'd clarify with them if you want to try to understand better the top of waterfall comment. We haven't seen them as a competitive threat in the marketplace. I think as you know, our record additions are quite substantial. We're adding more records than others have and we've clearly got an ability to attract new partnerships and individual relationships given the scale of the company. On the commercial side, our integrations are so deep and so substantial, we haven't seen an impact from a revenue standpoint. As you can see, the numbers are super strong in Workforce Solutions across all of our verticals, including mortgage. Their outperformance is exceptionally strong and hasn't slowed down.

Got it. Thank you.

Thank you. Our next question is coming from the line of Toni Kaplan with Morgan Stanley. Please proceed with your questions.

Thanks so much. First, I was hoping you could talk a little bit about the bearishness within the mortgage forecast. The 30% inquiries decline I think would imply that originations are even lower than that. I think just sometimes the third-party forecasts are a little bit optimistic. But I just felt like there was a pretty big delta there. If you could just go into maybe why your mortgage forecast is so bearish? Thanks.

It's very difficult to forecast. I think we've shown over the last year that it's a hard thing to do. We've been pretty good about forecasting inside of a quarter because the trends are pretty clear on what we're seeing on a daily and weekly basis. But as you get out a couple of quarters in this uncertain environment, it's much more challenging. For the last year we've had our outlooks more conservative than some other forecasters like MBA. That's not a new approach for us. And Toni, we have real visibility to originations that are actually happening on a near-term basis, which is what we try to factor into our forecast. You could call it bearish or conservative; in our case, we tried to put the most realistic outlook in place, and that's what we put out there.

Just a reminder, EWS, which is the bulk of the mortgage business, now looks a lot more like originations. USIS does have shopping behavior, which is better, but EWS is much closer to originations. We looked at run rates and assumed normal seasonality. Some third-party forecasters expect a substantial recovery in the mortgage market; that could occur, and if it does, we'll benefit. But right now, what we're assuming is we'll see a market that looks a little more normal in seasonality and we're waiting to see that recovery before saying it will happen.

Terrific. And I wanted to ask a little bit more broadly on consumer spending. When you think about your—what are you seeing in year-to-date trends and how are you expecting that to play out throughout the course of the year? Thanks.

Really not a lot of change from the consumer since October. They're still relatively strong. Unemployment is very low and there are many open jobs, which is a good thing for the consumer. They've spent down some of their COVID pandemic savings, but there's still positive savings relative to 2019. That's positive. At the low end, inflation is pressuring the subprime consumer and we've seen some uptick in delinquencies there. Broadly, we would characterize the consumer as being quite strong. Looking out for 2023, we've factored into our outlook a more uncertain economy which should impact the consumer in the second half, given rising interest rates and companies announcing layoffs or hiring freezes. On the B2B side, we've seen the hiring weakness that I mentioned, which impacts background screening and talent and I-9 onboarding. We still expect to grow over 10% in those two businesses because of pricing and product and penetration, but volume is expected to be down year-over-year, and that's an impact.

Perfect. Thanks so much.

Thank you. Our next questions come from the line of Seth Weber with Wells Fargo. Please proceed with your question.

Hey, guys. Good morning. Maybe for John, is there any way to quantify what the delta is from—on the compensation side where you're going from below plan last year to plan this year? Is there any way to just quantify what that represents as a year-over-year change?

I think in the quarter you noted—in 2022, we set out a plan for the year where we didn't anticipate a mortgage market change or interest rates going up or inflation where they were. We missed that plan. The way our compensation structures are aligned are tied to performance against plan, and we underperformed that. So our compensation was substantially down in 2022. In 2023, we're assuming we get back to target levels, which would be more like a normal level.

We haven't quantified the total incentive and sales incentive difference year-on-year here, but the $120 million in savings is substantial and offsetting the increase in incentive and equity compensation. We're also seeing increases in royalty costs as we add partners. The biggest things offsetting the $120 million are the change in overall sales compensation and incentive compensation as well as equity compensation.

Got it. You actually anticipated my follow-up question. Just you mentioned this higher royalty and data costs to you. Is that kind of just a catch-up or is this more of the new normal going forward that these costs are going to be structurally higher going forward for you guys?

The mortgage vendor increase was large and more of an industry event. On EWS, we've seen an increase in royalties over time as they grow partner records; that's part of the business model. The variable margin on those records remains high. Another cost is the duplicate costs from running major US and Canadian legacy systems until they're decommissioned; that's still being incurred and partially offsets the cost savings.

Got it. Okay. Thank you very much. I appreciate the color.

Thank you. Our next question is coming from the line of David Togut with Evercore. Please proceed with your questions.

Thank you. Good morning. Looking at Slide 13 with the $250 million total spending reduction for 2024, how much of that is a CapEx reduction versus OpEx? And then of those two numbers, particularly the OpEx reduction, how much will flow through to earnings versus being offset by additional expenses?

We didn't give specifics on the split, but it's probably reasonable to use the same split as in 2023. We'll need to wait until 2024 to provide specifics on 2024 guide, but we expect material expense savings that will benefit margins and continued transformation benefits. We expect margin enhancement through both revenue growth and cost savings as transformation completes.

Got it. And just as a quick follow-up, if you could quantify the EWS price increase at the beginning of this year?

We don't disclose specific pricing increases for competitive and commercial reasons. We have more pricing leverage in EWS than other businesses and generally implement price changes effective January 1. Those actions are negotiated with customers and already factored into our outlook.

Understood. Thank you.

Thank you. Our next question is coming from the line of Ashish Sabadra with RBC. Please proceed with your questions.

Hi. This is John Mazzoni filling in for Ashish. Thanks for taking the question. Maybe just building more on this new Equifax theme and in terms of the restructuring efforts, could these tech layoffs benefit the company in terms of hiring engineering talent? Your comments suggest that the white collar layoffs are concentrated in that type of high-tech area and maybe could help you in-source tech talent. Any color there would be appreciated. Thanks.

Yes, I'm not sure I fully followed the question at first. Tech is an important function for Equifax — we're a data analytics technology company. It's actually our largest number of employees and, by far, the largest number of contractors. Most of the cost savings we've planned and that we're executing in 2023 come from completing the cloud and reducing contractors. Regarding the market for tech talent, a year ago it was very hard to hire tech talent. Today, with many tech companies pulling back, it is easier to hire great tech people. So yes, it is a positive for Equifax that we can attract quality tech talent in this environment.

Great. Very helpful. And then following up, layoffs are broadening out across non-tech industries. Is any of that baked into the unemployment claims assumptions in 2023? And maybe due to lag effects of severance, could there be potential upside in the back half of the year as unemployment claims pick up?

In a rising unemployment environment like in 2020, we saw substantial upside in our unemployment claims business. Today, we haven't baked a meaningful unemployment increase into 2023 because we haven't seen it yet. If it comes, that would be positive for that business.

Great color. Thanks again.

Thank you. Our next questions come from the line of George Tong with Goldman Sachs. Please proceed with your questions.

Hi. Thanks. Good morning. You provided assumptions for industry mortgage volumes for 2023. Can you discuss your expectations for card and auto origination volumes for this year as well?

We haven't disclosed those specifics historically. We've been transparent around mortgage because of the volatility. In Q4 we saw strong results in card and banking, and auto was flattish. We expect overall modest softness in the broader economy later in 2023 and that's reflected in our guidance, but we haven't specifically modeled card or auto origination guidance publicly.

We saw nice growth in card volumes in the fourth quarter and strong revenue in banking. Auto was relatively flat but our online auto performance was strong due to product, pricing and penetration gains. Financial Marketing Services was weak in 2022 but we expect some improvement in 2023.

Got it. That's helpful. And related to the trends you're seeing on the card side, can you discuss growth trends you're seeing with credit card marketing and prequalification volumes?

We saw good activity in Financial Marketing Services historically and some challenging comps in 2022. We expect a return to some growth in 2023 due to improved products and market dynamics. Overall, card marketing is healthy and we saw good volumes in the fourth quarter.

Great. Thank you.

Thank you. Our next question is coming from the line of Surinder Thind with Jefferies. Please proceed with your questions.

Thank you. Hi, Mark, just following up on the questions from the last analyst. Just big picture-wise, I mean, does the relative strength you're seeing in auto, card, P loans at this point in the economic cycle both from marketing spend perspective as well as volumes surprise you? How should we think about cyclicality of the business? If the economy falls into a recession late 2023, is that when we would expect lenders to pull back more? Just trying to gauge if there's structurally anything different that we should be thinking about this time around?

This is a different economic event than we've seen before: rapid interest rate increases, high inflation, but low unemployment. Traditionally, lenders pull back when unemployment rises and consumers can't pay bills. Right now, the consumer is still healthy and working, though confidence is down. We've factored a more uncertain economy into the second half of 2023. The mortgage market decline has disproportionately impacted us; last year it impacted us by over $0.5 billion. Despite this unusual environment, Equifax has continued to grow driven by non-mortgage strength.

Two areas driving a lot of our growth are commercial and identity and fraud—segments that are less tied to consumer cyclicality and where we have differentiated capabilities. That gives us resilience if markets weaken.

Thank you. That was my question.

Thank you. Our next questions come from the line of Heather Balsky with Bank of America. Please proceed with your questions.

Hi. Thank you for taking my question. I'd love to ask about the Workforce non-mortgage verification side of things and how you're thinking about those businesses into the year, especially given the macro backdrop that you're layering into your guidance and both on the Talent and Government side, how you see those businesses shaking out?

We expect those businesses to perform very well. The underlying levers begin with records. Our 12% record growth last year benefits 2023 and we've signed 10 new processors to add records in 2023. Records are positive across verticals we sell into: government, talent, auto, cards and P loans. We have price increases in the marketplace and new products. There is a slowdown in hiring that impacts Talent and onboarding, but we expect those businesses to still grow over 10% in 2023 because of pricing, products and penetration. Government often benefits during economic stress, which could help that vertical.

As a reminder, we're expecting total non-mortgage for EWS next year about 13%, which is very good and reflects weakness in ERC but still strong overall growth for EWS.

Great. Thank you. And in terms of your overall non-mortgage business, you talked about the fact that you're assuming a weakening economy in the back half. Can you help us with cadence from 1Q to 2Q and then into the back half? What's baked into your outlook?

We provided guidance for the year and the first quarter and some visibility on margins. The cost savings accelerate in the second quarter, and margins are expected to improve throughout the year with EBITDA margins exiting around 36% in Q4. Beyond that, we don't want to get too specific on quarterly cadence other than the guidance we've provided and the expectation that cost savings and cloud benefits accelerate in the back half.

Thank you.

Thank you. Our next question is coming from the line of Faiza Alwy with Deutsche Bank. Please proceed with your questions.

Hi. Thanks. First I wanted to follow up on the USIS B2B online growth that looks like it accelerated in 4Q. How do you expect that business to trend in 2023? Was there something specific driving the acceleration, or just comps? And can you comment on the pricing benefit you expect in that business in 2023?

We planned about 5% non-mortgage growth for USIS in 2023, which is slightly lower than Q4 but still strong. The decline from Q4 reflects our assumption of weakening economic conditions as the year progresses. The non-mortgage growth of about 5% is driven by commercial, identity and fraud and banking and auto. Pricing benefits were present in Q4 and we expect continued price benefits across businesses in 2023, though outside of mortgage price increases are applied more throughout the year rather than a single date.

Okay. Thank you.

Thank you. Our next question is coming from the line of Andy Grobler with BNP Paribas. Please proceed with your questions.

Hi. Thank you. Firstly, on compensation: You've noted that it will come back in 2023 relative to 2022. Where would that stand versus 2021? In other words, 2022 was unusually low, and we're going back to a more normal level now?

Yes. 2021 was a strong year and compensation was higher because performance was strong. In 2022 our compensation was substantially lower because we missed plan. In 2023 we expect to return to targeted levels, which will be more like normal.

In terms of the costs and so forth, you had cost savings plans from the cloud transformation baked into expectations anyway. Now you've talked about the $120 million of savings next year. What is the increment versus your previous expectations within the $120 million?

The $120 million is a combination of accelerating some of the cloud cost savings that we had planned and additional company-wide restructuring to improve efficiencies. We increased CapEx in 2022 to accelerate the cloud; that allowed us to accelerate some savings into 2023. There's an incremental piece that is beyond the original cloud plan.

Thanks. One more: In terms of your EWS conversations with clients and data providers given the competitor, are those conversations changing at all?

They're not. We continue to add new partner relationships and have significant momentum in record additions. We signed 10 new exclusive partners in the fourth quarter and see substantial runway to continue adding records. We remain confident in our competitive position.

Okay. Thank you very much.

Thank you. There are no further questions at this time. I would now like to hand the call back over to Trevor Burns for any closing comments.

Thanks for everybody's time today. If you have any questions, you can reach out to me and Sam. We'll be around, and have a great day.

This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time, and enjoy the rest of your day.