Equifax Inc Q2 FY2023 Earnings Call

Greetings and welcome to the Equifax Second Quarter 2023 Earnings Conference Call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Trevor Burns, Senior Vice President, Head of Corporate Investor Relations. Thank you, sir. Please go ahead.

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 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 2Q 2023 earnings conference call. Also, we’ll be making certain forward-looking statements, including third quarter and full-year 2023 guidance 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 that may impact our business are set forth in filings with the SEC, including our 2022 Form 10-K and subsequent filings. We will also be referring to certain non-GAAP financial measures, including adjusted EPS attributable to 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 our financial results section of the financial info tab at our IR website. In the second quarter Equifax incurred a restructuring charge of $17.5 million or $0.10 per share. This charge is for costs principally incurred to reduce additional head counts in 2023 as we realign our business functions in advance of completing our cloud transformation. This restructuring charge is excluded from adjusted EBITDA, as well as adjusted EPS. Now, I'd like to turn it over to Mark.

Thanks, Trevor. Good morning. Turning to Slide 4, we executed well in the second quarter against a challenging mortgage and hiring markets, while delivering on our 2023 financial objectives. We continued to outperform our underlying markets with broad-based 6% non-mortgage growth against a tough 22% comp last year. We continued strong mortgage outperformance in a challenging market and very strong new product growth with a record 14% Vitality Index. We also executed well against the $200 million cloud and broad-based spending reduction program we announced in February and delivered 350 basis points of sequential margin expansion in the quarter. Globally, with the exception of the U.S. mortgage and hiring markets, we continue to see good customer demand across our consumer, commercial and government lines of business. However, the U.S. mortgage market weakened relative to our expectations as we moved through the latter portions of the second quarter when mortgage rates moved above 7%, which will impact our results in the second half. In the quarter, we delivered adjusted EPS of $1.71 per share and adjusted EBITDA margins of 32.7%, both above the guidance we provided in April. Execution against our cloud and broader spending reduction programs was also very strong and drove the 350 basis points of margin expansion in the quarter. Revenue at $1.318 billion was close to the midpoint of guidance with USIS and International delivering strong quarters, both above our expectations. EWS non-mortgage revenue up 4% was below our expectations, but off a very strong 52% comp last year, principally due to the weaker hiring market that impacted our Talent Solutions and onboarding businesses. EWS had outstanding operational execution in the quarter, delivering a new product Vitality Index of 25% and expanded Twin records by 12% to 161 million current records, a growth of 5 million records sequentially. EWS also had strong cost management as they fully operationalized their new cloud capabilities, delivering adjusted EBITDA margins of 51.5%, up over 100 basis points sequentially and stronger than our expectations. USIS had an outstanding quarter and delivered almost 6% revenue growth, much stronger than our expectations. Total non-mortgage revenue grew 8%, led by 9% growth in our B2B online and 10% growth in consumer solutions and adjusted EBITDA margins of 36% were also stronger than our expectations, expanding over 300 basis points sequentially. Total U.S. mortgage revenue from both USIS and EWS was down about 13% or 24 points better than the 37% market decline from pricing actions, new products, records and penetration. We continue to see stronger than expected consumer shopping behavior in these higher interest rate environments. So the weaker mortgage market we saw in June had a much smaller impact on USIS than on EWS, where their mortgage activity is more aligned with closed loans. International delivered 7% growth in constant currency, also stronger than our expectations with double digit growth in Latin America and high single digit growth in Canada and the U.K. CRA. International delivered 24.2% adjusted EBITDA margins, up 70 basis points sequentially and stronger than our expectations. New product innovation leveraging our differentiated data assets and new capabilities delivered by the Equifax Cloud is also executing at a very high level. Our new product Vitality Index of over 14% in the quarter was a record for Equifax and 400 basis points above our 10% long-term Vitality goal and up over 100 basis points sequentially. This is encouraging for the future and reinforces our long-term strategy of leveraging our differentiated data assets and our new cloud capabilities to deliver new solutions for our customers. We continue to make good progress on completing our cloud transformation. At the end of the quarter, over 70% of North American revenue was being delivered from the new Equifax Cloud. We're convinced that our Equifax Cloud, Single Data Fabric and AI capabilities will provide a competitive advantage to Equifax for years to come. As we look to the second half, we expect the weaker than expected U.S. mortgage market that we saw in the latter half of the quarter to continue through the remainder of the year. Our updated guidance is for U.S. mortgage originations to be down about 37% for the year and about 20% in the second half, a reduction of five points from our prior full-year framework. We expect Equifax mortgage origination outperformance to continue to be very strong in 2023. We're also expecting to see weaker U.S. hiring markets continue through the remainder of the year, impacting Workforce Solutions Talent and onboarding businesses. However, we expect to offset the hiring weakness principally from strength in the Workforce Solutions government business and continued solid performances at USIS and International. Equifax non-mortgage revenue growth was up 6% against a very strong 22% comp last year. We expect non-mortgage revenue growth to strengthen in the second half to up 11% and up over 300 basis points sequentially relative to the first half from continued commercial execution and strong new product rollouts. Our 2023 cloud and broader cost reduction program executed well in the quarter. As we continue to operate more of Equifax in the new cloud environment, we're seeing more opportunities for efficiencies and expect an additional $10 million of spending reductions in the second half. These new actions will deliver additional run-rate savings of $25 million next year. So we now expect to deliver spending reductions of $210 million this year and over $275 million in 2024. And as a reminder, the 2023 savings are weighted to the second half and will deliver $65 million of 2024 run-rate benefit. We expect the weaker mortgage originations to impact our mortgage revenue by about $40 million in the second half. Despite the weakening in U.S. hiring, we expect to deliver 2023 non-mortgage revenue growth of about 8% from strong growth in EWS government, USIS non-mortgage and International and stronger NPI growth. This above 8% non-mortgage growth is against a strong 20% non-mortgage growth last year, and well within our 8% to 12% long-term growth framework. The net impact of the weaker-than-expected mortgage market of about $40 million, partially offset by positive FX, is a reduction of our 2023 revenue guidance at the midpoint by $25 million to about $5.3 billion. The impact of the lower mortgage revenue results in a reduction of our full-year 2023 adjusted EPS guidance at the midpoint of $0.22 to $6.98 per share. We remain focused on delivering EBITDA margins of 36% and over $2 in adjusted EPS per share in the fourth quarter, which we believe sets us up well for 2024 and beyond. In June we received shareholder approval for the acquisition of Boa Vista Serviços, the second largest credit bureau in Brazil. We're energized to complete this strategic and financially attractive acquisition. We expect the transaction to close in early August and are actively planning for integration and the transfer of our cloud capabilities, global platforms and products to help accelerate BVS growth. The BVS acquisition will add approximately $160 million of year-one run-rate revenue in the fast-growing Brazilian market, and we expect the transaction to be slightly accretive to year-one adjusted EPS. The guidance we provided for 2023 does not include BVS. We intend to provide more details on our expectations for BVS in 2023 at our October earnings call after we close the deal. Before I cover results in more detail, I wanted to provide a brief overview of what we're seeing in the U.S. economy and the U.S. consumer. Since our April update, outside the challenging mortgage and hiring markets I already discussed, the U.S. consumer and our customers remain broadly resilient. We continue to navigate a higher interest rate environment that's negatively impacting the U.S. mortgage market. Mortgage interest rates have trended upward since April and were slightly above 7% at the beginning of July and were just under 7% at the end of last week, which is clearly impacting originations. We expect mortgage originations, as I mentioned earlier, to further weaken in the second half with originations down about 37% in 2023 or 500 basis points weaker than our April framework. Broadly, consumers are still strong and working with unemployment at historically low levels, and the market is resilient with roughly 10 million open jobs against 5 million people who are looking for jobs. Inflation is starting to abate at 3% in July, which should mean we are approaching a peak in Fed interest rates. Consumers are spending and borrowing with average credit card and personal loan balances back above pre-pandemic levels. With consumers working and still leveraging pre-pandemic savings, delinquencies are still at historic low levels, and close to 2019 pre-pandemic levels. Subprime delinquencies are the only areas of stress that we're seeing. We're also seeing credit card and personal loan utilization increases with some delinquency increases in subprime, but more broadly delinquencies are back at pre-pandemic levels, which as we all know were very low, and remain significantly below levels we saw in the last economic event in 2009 and 2010. Auto delinquency rates for subprime consumers are above pre-pandemic levels, as well as above levels we saw in 2009 and 2010. We believe there's been some credit tightening by our financial customers, principally in FinTech and subprime. Looking forward, consumers holding student loans will need to resume making payments beginning in October, and we believe resuming student loan payments will have a modest negative impact on average credit scores. Beyond the weaker mortgage market and slowing white-collar hiring market, which had a larger impact on EWS than we anticipated in the quarter, the combination of white-collar job reductions and broad hiring freezes has reduced both background screening and onboarding activity, and as I mentioned earlier, we expect this to continue in the second half. Turning to Slide 5, Workforce Solutions revenue was down 4% in the quarter. Mortgage revenue was down 20%, but up about 3 percentage points sequentially. The decline of 20% compares to mortgage originations down 37% as estimated by MBA based on data through May. Strong record growth, the positive impact of 2023 price actions, and strong NPI performance driven by the adoption of our Mortgage 36 Solution, a 36-month trended mortgage product, drove 17 points of mortgage outperformance by EWS in the quarter. During the quarter, about 50% of Twin mortgage inquiries were for products that include EWS trended or historical information, and of course these are all at higher price points. In the quarter, Workforce Solutions saw declines in low-margin, manual mortgage verification services revenue, as some customers moved some of these activities back in-house. This negatively impacted mortgage outperformance by about 300 basis points in the quarter. EWS had another very strong quarter of record additions with an incremental 5 million records added to the Twin database, ending the quarter with 161 million current records, which was up 12%, with 120 million unique records or SSNs, which was up almost 10%. Over the past five years, EWS has doubled the size of the Twin database, a strong testament to the record acquisition strategy EWS has executed across multiple segments of direct employers, third-party payroll providers, HR software management companies, pension administrators, and self-employed individuals. As a reminder, Twin’s 120 million unique records represent individuals or SSNs in the Twin database, and their 161 million current records represent current active jobs on the database, which means there are close to 40 million individuals in our dataset who have more than one job, including self-employed or 1099 employees and people on defined benefit pension plans. We now cover just over 50% of the 220 million working and income-producing individuals in the United States. Through our cloud transformation, we're expanding our capabilities to ingest all levels of records, including 1099-based self-employment records. As a reminder, about 50% of our records are contributed directly by individual employers, as they are customers of our expanding employer services business, and the remaining are contributed through partnerships, principally with payroll companies. During the quarter we signed agreements with four new payroll processors that will deliver records during the rest of the year. The Twin database now has 631 million total current and historical records, from over 2.8 million employers in the United States. Increasingly, more of our new products are incorporating current and historical records, with about 50% of second quarter verification services revenue coming from products that included historical records. Turning to Slide 6, Workforce Solutions delivered non-mortgage revenue growth of about 4%, with non-mortgage revenue now representing over 70% of Workforce Solutions revenue. As a reminder, EWS non-mortgage revenue was up a very strong 52% in second quarter last year, which was a very tough comp. Verification Services non-mortgage revenue, which now represents about two thirds of verifier revenue, delivered 4% growth both sequentially and versus last year in the quarter, which was below our expectations. This was also against a very challenging 90% non-mortgage growth comp by Workforce Solutions last year. The miss versus expectations was predominantly in Talent Solutions from weaker white-collar hiring. Government performed exceptionally well, consistent with the high growth that we had expected, and consumer finance declined somewhat in the quarter. In government we saw continued very strong growth with revenue up 21% off over a 100% growth last year in second quarter, and revenue also up almost 10% sequentially driven by strong growth in CMS at the state level, new products and Twin record growth. Government now represents about 45% of verifier non-mortgage revenue. We expect to see accelerating sequential growth in our government vertical in the second half, driven by growth from CMS Medicaid re-determinations, ACA open enrollment volume, further state penetration and pricing from state contract renewals. We began to see incremental volumes from CMS re-determinations in May and expect to see this accelerate in the second half. This strong sequential growth will also result in accelerated second half EWS growth rates. Talent Solutions were down 6% in the quarter, but up about 1% sequentially, as we are comping off a very strong 130% growth last year from record levels of hiring in the second quarter. As a reminder, we are currently more heavily penetrated to white-collar workers including technology, professional services, health care and financial services, which have seen greater reductions in hiring activity and broader hiring freezes than the roughly 7% decline that BLS is reporting through May. Approximately 70% of Talent Solutions revenue in the quarter was from industries that had negative hiring growth versus last year, with many of those industries having significant double-digit negative growth in the quarter. We are outgrowing the declining market from penetration of our digital solutions with background screeners, strong new product growth, continued expansion of Twin records and favorable pricing. We are also seeing continued customer penetration of our new differentiated educational products. We expect these new products to continue to drive above-underlying market talent revenue growth through 2023 and into 2024 and beyond. The consumer lending vertical in Workforce Solutions, which includes personal loan, card, auto and debt management, was about flat sequentially, but down 11% versus last year due to lower auto volumes and declines with FinTech lenders, principally in the subprime space. We expect modest consumer lending sequential growth in the second half driven by record growth, penetration and pricing. This will result in revenue growth in the second half as we lap 2022 headwinds in the auto and personal loan verticals. In total, we expect to see accelerated sequential growth in verifier non-mortgage in the second half, driven by strong government growth, as well as moderate sequential growth in talent and consumer lending. Employer Services revenue of $109 million was up 4% driven by growth in our I-9 and onboarding businesses despite the negative impact of U.S. hiring. In total, our UC and ERC businesses were up slightly. Despite the slowdown in U.S. hiring, we have not seen an increase in UC revenue yet. As a reminder, first quarter Employer Services revenues were seasonally higher than other quarters due to higher Affordable Care Act W-2 volumes. In the third and fourth quarters we expect to see overall growth in Employer Services sequentially from the second quarter levels driven by penetration in I-9 onboarding. Workforce Solutions adjusted EBITDA margins of 51.5% were up 110 basis points from first quarter and in line with our April guidance from strong operational execution. The EWS team continued to perform well despite the macro headwinds from mortgage and U.S. hiring, outperforming the underlying markets from strong record growth, new products, penetration and price. As shown on Slide 7, USIS revenue of $445 million was up 6% and much better than our expectations due to stronger mortgage and non-mortgage performance. USIS mortgage revenue was down less than 1% and outperformed the mortgage market where credit inquiries were down 33% by more than 30 points. The strong pricing environment that we discussed in April, both from the addition of Telecom & Utilities attributes to our new mortgage credit solution and the increased pricing for credit scores drove the very strong outperformance. At $113 million mortgage revenue was 25% of total USIS revenue in the quarter. Mortgage credit inquiries again outperformed MBA's current estimate of originations by about five points from increased shopping behavior. We expect this increased shopping behavior to continue as we move through the remainder of the year. Total non-mortgage revenue of $332 million was up 8% in the quarter, with organic growth of about 4% and better than our expectations. B2B non-mortgage revenue of $278 million which represented over 60% of total USIS revenue was up 7% with organic revenue growth of 3%. B2B non-mortgage online revenue growth was up 9% total and 3% organically. During the quarter online revenue had strong double-digit growth in commercial and identity and fraud with auto approaching 10% growth and telco and insurance growing low single digits. Banking was up slightly consistent with first quarter, with market volumes at larger financial institutions offsetting declines with smaller financial institutions and FinTechs that were more principally focused on subprime. Financial Marketing Services or B2B offline business had revenue of $56 million that was up 1%. Strong revenue growth in fraud and risk, as well as account reviews was partially offset by declines in marketing, principally pre-screen marketing with IXI wealth revenue growth about flat. Pre-screen marketing revenue was at similar levels as first quarter as we continue to see significant weakness from smaller FIs and FinTech in the subprime space, which was partially offset by growth from larger FIs. USIS is using the power of their Ignite platform along with their proprietary data to enable customers to drive deeper marketing insights, extend offers to better prospects and deliver better marketing performance management. USIS has seen incremental penetration and a growing pipeline from our advanced Ignite capabilities. Todd and the USIS team are on offense as they complete their cloud transformation and pivot to leveraging their new cloud capabilities to deliver new products. USIS adjusted EBITDA margins were 36% in the quarter, up 340 basis points sequentially and the strongest USIS margins since the beginning of the mortgage market decline a year ago. EBITDA margins were up sequentially from better-than-expected revenue performance and good execution against their cloud and broader cost reduction program. Turning to Slide 8, International revenue was $290 million, up 7% in constant currency and better than our expectations. Europe local currency revenue was down 2% through the expected about 16% decline in our U.K. debt management business. As we discussed previously, our U.K. debt management business was very strong in the first half last year, as the U.K. government made large catch-up debt placements following COVID debt collection moratoriums. As a result, we expected declines in the first half versus last year. However, we expect to see consistent sequential debt management growth as we move through the second half and we expect debt management to return to revenue growth later this year. Our U.K. and Spain CRA business revenue was up 7% in the quarter in a very good performance. This strong performance was driven principally by strong growth within identity and fraud decisioning, consumer and direct-to-consumer. Asia Pacific delivered solid local currency revenue growth at 4%, with growth in commercial identity and fraud and D2C, as well as continued very strong growth in our India business which was up 38% in the quarter. Latin America local currency revenue was up a very strong 23%, driven by double-digit growth in Argentina, Uruguay, Paraguay and Central America from new product introductions and pricing actions. This is the ninth consecutive quarter of strong double-digit growth for Latin America which we expect to continue in the second half. Canada local currency revenue was up 8% with broad-based growth in consumer and identity and fraud decisioning and commercial. In Canada we recently completed a full migration to our new cloud-based FraudIQ Exchange and now have all of our Canadian fraud exchange customers on this new cloud-based solution. International adjusted EBITDA margins of 24.2% were up 70 basis points sequentially and better than our expectations. The improvement was driven by good execution against their 2023 cost reduction plans. Turning now to Slide 9, the second quarter overall non-mortgage, constant dollar revenue growth of 6% was lower than our expectations, but against a very strong 22% growth last year. USIS and International both delivered stronger non-mortgage growth than we expected. This was offset by the slower growth in EWS non-mortgage that I mentioned earlier in Talent and onboarding, despite their very strong growth in their government business. As we look at the second half, we expect non-mortgage revenue growth to grow sequentially in the third and fourth quarter, led by very strong growth in the EWS government business, and growth in EWS talent and consumer lending from new products. We also expect continued strong performance in USIS and International, resulting in third quarter Equifax non-mortgage revenue growth above 9%, which is well within our 8% to 12% long-term growth framework. Turning to Slide 10, new product introductions leveraging our differentiated data and the Equifax Cloud are central to our EFX 2025 growth strategy. In the second quarter we launched over 30 new products and delivered a record 14% Vitality Index. Our second quarter Vitality Index was again led by strong performances in EWS and Latin America. In the second quarter over 80% of our new product revenue came from non-mortgage products leveraging the Equifax Cloud. Leveraging our Equifax Cloud capabilities to drive new product rollouts, we expect to deliver a Vitality Index of approximately 13% in 2023, which is 300 basis points above our 10% long-term Vitality goal. This equates to about $700 million of revenue in 2023 from new products introduced in the past three years. New products leveraging our differentiated data, Equifax Cloud capabilities and Single Data Fabric are central to our long-term growth framework in driving Equifax top line and margins. On the right side of the slide we highlighted several new products introduced in the quarter. These new solutions are a testament to the power of the Equifax Cloud and driving innovation that can increase the visibility of consumers to help expand access to credit and create new mainstream financial opportunities. We launched a new product this quarter, Talent Report Flex 2.0, a customizable pre-hire employment verification solution, that helps solve the challenge background screeners and HR professionals may experience when seeking to verify a candidate's specific employment records. With a unique and first-to-market employer preview option, a list of employer names is now available on the Work Number using a candidate's SSN. This allows the customization of the employment history report by selecting only the records wanted. With the power of the Equifax Cloud, we'll bring new solutions to market to meet the needs of our customers. Turning to Slide 11, we were very excited to receive shareholder approval for our new Boa Vista acquisition in late June. BVS is the second largest credit bureau in the fast-growing Brazilian market with over a $2 billion TAM. We expect the transaction to close in early August and Equifax will be able to provide Boa Vista with access to expansive Equifax international capabilities, our cloud-native data, products, decisioning and analytic technology for the rapid development of new products and services and expansion into new verticals like identity and fraud in Brazil. As a reminder, I mentioned earlier, we expect Boa Vista to deliver approximately $160 million in run-rate revenue to Equifax and to be accretive to adjusted EPS in the first year. As I mentioned earlier, Boa Vista results are not included in the guidance we're providing today. We'll provide more detail on Boa Vista’s impact in 2023 during our October earnings call after the transaction is closed. Given the size of the transaction, we plan to pause on M&A activity in the second half to focus on integration of BVS and our 2021 and 2022 acquisitions. Our intention is to use excess free cash flow over the coming quarters to pay down debt and reduce our leverage. Turning to Slide 12, we believe that artificial intelligence is fundamentally changing Equifax business capabilities and is becoming table stakes for data analytics companies to manage increasingly large, diverse and complex data sets, within a highly regulated data environment bringing unique complex challenges around AI explainability. On the left side of Slide 12, our large and diverse proprietary data set is a big differentiator for Equifax including our income and employment data, traditional alternative credit data, cell phone, utility and pay TV data, identity and fraud data and our commercial and wealth data. This proprietary data at scale, breadth and length in our new Single Data Fabric gives us significant advantages in using AI to build advanced models, scores and products including identity and fraud solutions, enabled by our best-in-class Equifax Cloud native technology. To date, Equifax has about 70 approved AI patents supporting our AI NeuroDecision Technology which we call NDT, and Explainable AI which is critical to ensuring that the correct data is used to make credit decisions that surface from AI models and scores. Equifax will continue to invest in AI as we remain on offense, leveraging Google's Vertex AI capabilities, combined with our own Equifax NDT capabilities to build more predictive and valuable models and scores with our expanding data set, and accelerate the speed at which we develop new models, scores and products to bring more current solutions to our customers. We believe Equifax is uniquely positioned to capture the value of AI going forward. Now I'd like to turn it over to John to provide more detail on our third quarter and full-year guidance. We're executing very well against our strategic priorities and delivering revenue growth and expanding margins in a challenging macro environment.

Thanks Mark. As Mark mentioned, second quarter mortgage market originations were estimated by MBA with data through May at down about 37%, which is in line with our expectations for the quarter. As shown on Slide 13, second quarter credit inquiries were down 33% and also in line with our April expectations. However, as Mark mentioned, we saw weaker-than-expected inquiry data in June, which impacted our overall mortgage revenue for the quarter. As we look to the second half of 2023, our planning does not assume a fundamental improvement in the mortgage or housing markets from the levels we saw in late June and early July. We're applying normal seasonal patterns to these current run rates of credit and Twin inquiries. In the first half of 2023, credit inquiries were down about 39% year-over-year, about 8 percentage points better than the about 47% decline in mortgage originations as estimated based on MBA data. In the second quarter, this spread narrowed to about 5 percentage points. In the third and fourth quarters, we expect this elevated impact from mortgage shopping and application activity that does not result in a closed loan to continue at about 5 percentage points. Applying normal seasonal patterns to the run rate we are seeing for mortgage credit inquiries at the end of June and early July, we expect mortgage credit inquiries to be down 31% for all of 2023, which is a slight reduction from our April guidance. However, we are expecting mortgage originations to be down about 37%, reflecting about 6 percentage points of shopping behavior that benefits credit inquiries. This is about 5 percentage points weaker than the 32% we discussed in our April guidance for mortgage originations. This full-year guidance for mortgage credit inquiries would result in second half mortgage credit inquiries being down about 14%, with the third and fourth quarter credit inquiries being down about 23% and 4% respectively. Applying the 5 percentage point benefit to credit inquiries relative to mortgage originations from shopping that is consistent with what we saw in the second quarter, we would estimate mortgage originations in the second half would be down just under 20%. We are expecting the number of originations to weaken slightly in the third quarter relative to the second quarter, and fourth quarter originations to weaken somewhat seasonally relative to the third. As we have discussed in the past, Workforce Solutions mortgage revenue is more closely tied to mortgage originations. This reduction in 2023 expected mortgage originations relative to our April guidance reduces Workforce Solutions revenue in the second half of 2023 by about $40 million. As our expectation for USIS credit inquiries in the second half of 2023 is slightly weaker than our April guidance, USIS mortgage revenue did not change meaningfully. Turning to Slide 14, as Mark referenced earlier, in the second quarter we exceeded our adjusted EBITDA margin and adjusted EPS guidance and delivered well against our 2023 spending reduction plan that will now deliver $210 million in spending reduction in 2023 versus 2022 levels, including workforce reduction, closure of data centers and additional cost control measures. For 3Q we expect adjusted EBITDA margins of about 33.5% at approximately the midpoint of our guidance range. The sequential margin expansion is driven by both revenue growth, as well as the savings related to our expanded $210 million spending reduction plan Mark previously discussed. As revenue grows sequentially through the second half of 2023 and cloud and broader cost reductions accelerate, we are focused on delivering fourth quarter adjusted EBITDA margins of about 36% and adjusted EPS exceeding $2 per share in the fourth quarter. Slide 15 provides our guidance for 3Q 2023. In 3Q 2023 we expect total Equifax revenue of between $1.32 billion and $1.34 billion, with revenue up about 6.9% at the midpoint. Non-mortgage constant currency revenue growth should strengthen to over 9% and will be partially offset by mortgage revenue that is down low single digits. FX is expected to have a minimal impact on revenue, and acquisitions are expected to benefit revenue by about 1%. As a reminder, this guidance does not include BVS. We’ll provide more information on BVS at our October earnings call. 3Q 2023 adjusted EBITDA margins are expected to increase sequentially by about 75 basis points at the midpoint of our guidance, reflecting both sequential revenue growth and the benefits of our cost actions. Overall, business unit EBITDA margins in total are expected to be up sequentially for 3Q 2023, driven by Workforce Solutions returning to revenue growth in the quarter, as well as margin improvement in International. Corporate expenses for 3Q 2023 are expected to be about flat with 2Q 2023. Business unit performance in the third quarter is expected to be as described below. Workforce Solutions revenue growth is expected to be up about 7.5%. We expect non-mortgage revenue will return to over 10% growth year-over-year from continued strong growth in government and a return to growth in Talent Solutions and consumer lending verticals. EBITDA margins are expected to be about flat sequentially. USIS revenue is expected to be up about 7.5% year-over-year. Non-mortgage year-over-year revenue growth should be up slightly from the 8% we saw this quarter, above their long-term 6% to 8% revenue growth framework. Mortgage revenue is expected to return to year-over-year growth in the quarter. Adjusted EBITDA margins are expected to be down about 100 basis points sequentially, principally due to the lower revenue. International revenue is expected to be up 4.5% in constant currency. EBITDA margins are expected to increase a very strong 250 basis points sequentially, reflecting sequential revenue growth and strong cost management, including the benefit of planned cost reductions. We're expecting adjusted EPS in 3Q 2023 to be $1.72 to $1.82 per share. Slide 16 provides the specifics of our 2023 full-year guidance. As Mark mentioned, we're lowering our full-year revenue guidance by $25 million at the midpoint to $5.3 billion from the weaker mortgage market. As Mark discussed, the reduction in revenue guidance reflects our assumption that U.S. mortgage originations will decline 37% in 2023, 5 percentage points more than our April guidance, reducing mortgage revenue by over $40 million in Workforce Solutions. As I referenced earlier, we're seeing continued high levels of shopping, which is benefiting USIS, and as such mortgage revenue in USIS is not expected to be meaningfully impacted by the lower level of originations. Total mortgage revenue is expected to decline about 13% in 2023. Partially offsetting the reduction of Workforce Solutions mortgage revenue is positive FX. We continue to expect non-mortgage constant currency revenue growth to be strong at above 8% in 2023, slightly stronger than our April guidance. Non-mortgage constant currency revenue is expected to grow over 11% in the second half of 2023 as continued solid performance from USIS and International and accelerating growth in the EWS government vertical more than offset the impact of weaker U.S. hiring. Adjusted EBITDA margins are expected to improve consistently throughout 2023, with the third quarter at 33.5% and the fourth quarter at about 36%. As Mark mentioned, we remain focused on delivering both 36% EBITDA margins and over $2 per share in fourth quarter 2023. As Mark also mentioned, we're reducing our adjusted EPS guidance for 2023 to the range of $6.85 to $7.10 per share with a midpoint of $6.98. This is a reduction of $0.22 or about $35 million in operating income. This is principally driven by the loss of over $40 million of high-margin Workforce Solutions mortgage revenue. We believe that our full-year guidance is centered at the midpoint of both our revenue and adjusted EPS guidance ranges. Total capital spending for 2023 is expected to be slightly over $550 million. Capital spending in the second quarter was about $150 million in line with our expectations. We expect capital spending in the third quarter to decline sequentially by almost $15 million as we continue to progress U.S. and Canadian migrations to the Single Data Fabric. CapEx as a percentage of revenue will continue to decline in 2024 and thereafter as we progress toward reaching 7% of revenue or below. As we discussed in April, we remain focused on delivering our midterm goal of $7 billion in revenue with 39% EBITDA margins. Market conditions are significantly different than when we first discussed in November 2021 our goal of achieving these 2025 goals. The U.S. mortgage market is expected in 2023 to be down about 40% from the normal 2015 to 2019 average levels we had discussed, to deliver $7 billion in revenue in 2025. Our non-mortgage revenue has grown faster than we discussed with you back in November 2021. However, even after considering the additional revenue from the BVS acquisition or a recovery in the mortgage market from the levels we are seeing in 2023, on the order of two-thirds of the lost volume still needs to be recovered to achieve our $7 billion goal in 2025. We are focused on driving above-market growth and delivering the cost and expense improvements committed with our expanded 2023 and 2024 spending reduction plans, and as part of our data and technology cloud transformation, which are needed to achieve 39% EBITDA margins as we exceed the $7 billion revenue level. We will continue to discuss with you our progress toward our $7 billion goal as the mortgage and overall markets evolve in 2023 and forward. And I would like to turn it back over to Mark.

Thanks John. Wrapping up on Slide 17, Equifax delivered a solid quarter with adjusted EBITDA margins and adjusted EPS above our guidance despite the challenging mortgage and hiring markets. USIS and International delivered strong quarters offsetting some weakness in the EWS Talent and Onboarding businesses, allowing us to deliver revenue at about the midpoint and EPS above guidance. The breadth and depth of our businesses and execution against our 2023 cloud and broader spending reduction program allowed us to deliver despite a challenging macro environment. Summarizing at the business unit level, Workforce Solutions continued to deliver against their long-term growth strategy. While their 4% revenue decline was pressured by mortgage and hiring macros, they were comping off a very strong 21% growth last year. We expect that growth to recover in the second half, and importantly EWS had another very strong quarter of Twin record additions, adding payroll providers, which brings a total added since the beginning of last year to 17, and increased current records to 161 million, up 5 million sequentially and 12% versus last year, with total records growing to 631 million. Workforce delivered a very strong NPI Vitality Index of 25%, leveraging their cloud capabilities which will benefit them in the second half and in 2024 and beyond. The continued growth of Twin, strong NPI and government growth positions EWS for 15% growth in the second half. EWS operating focus delivered 51.5% EBITDA margins, which is up over 100 basis points and stronger than we expected. Second, USIS continued their momentum with strong non-mortgage growth of 8% total and at the top end of their long-term framework and 4% organic, driven by online B2B non-mortgage growth of 9% total and 4% organic, as they focus on customer migrations to the Equifax Cloud. USIS delivered EBITDA margins of 36%, up over 300 basis points sequentially through revenue growth and strong cost management. International delivered strong 7% local currency growth with strong growth in Latin America, Canada, India and our European credit businesses, and they delivered EBITDA margins of 24%, up 70 basis points and stronger than our expectations. As mentioned earlier, our second quarter Vitality Index of 14% is an Equifax record and was 400 basis points above our 10% long-term growth framework, as we've delivered over 60 new products year-to-date, leveraging the new Equifax Cloud. The focus of our Equifax Cloud Data and Technology Transformation is on completing those North American migrations, which will allow us to further accelerate new product launches and complete legacy system decommissioning. Our cloud-native technology will differentiate Equifax and allow us to be on offense with leading systems stability and capabilities that position us to leverage AI tools to drive revenue growth and cost efficiencies. We're executing well against our 2023 cloud and broader spending reduction plan that will now deliver $210 million of savings this year, with run-rate savings of $275 million in 2024. This is up $10 million in 2023 and $25 million in 2024 from our April framework. We remain focused on delivering 36% adjusted EBITDA margins and over $2 per share in adjusted EPS in the fourth quarter, which sets us up well for 2024. We're energized about receiving shareholder approval for the BVS acquisition in June, and we're on track to close this strategic and financially attractive acquisition in early August. As mentioned earlier given the weaker-than-expected mortgage market, we're lowering our full-year revenue guidance by $25 million to $5.3 billion at the midpoint, with full-year 2023 adjusted EPS at the midpoint down $0.22 per share to $6.98 from the impact of the lower high-margin mortgage revenue. We're energized to be entering the next chapter of the new Equifax as we pivot from building the new Equifax Cloud to leveraging our new cloud capabilities to drive our top and bottom line. This is an exciting time for Equifax, and we're convinced that our new Equifax cloud-based technology, differentiated data assets, 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 for questions.

Thank you. Today's first question is coming from Andrew Steinerman of JP Morgan, please go ahead.

Hi John. Let me just ask my two questions together. The first one is, could you just tell us what second quarter mortgage revenue is as a percentage of total revenues? I didn’t catch that if you gave it. And the second one is looking at the EWS revenue growth guide for third quarter of 7.5% which is on Slide 15, and then taking it together with the comments for EWS revenue guide on Slide 16. It seems to imply a rather strong revenue ramp for EWS in the fourth quarter compared to the third quarter, and could you just comment on that?

So, your first question, it is 21%, the answer to your first question.

Thanks.

And as we take a look at EWS, Mark talked about it very thoroughly. What we're seeing is we're expecting to see nice sequential improvements, specifically in non-mortgage as we move through third quarter and into fourth quarter. A lot of it driven by very strong growth in government, which we feel very good about and the strength we're seeing in the government business, not only in the third and fourth quarter, but we've seen it in the first quarter and in the second quarter. We're also expecting to move back to see sequential growth in Talent driven by new products, and also in our consumer lending businesses, also driven by new product and to some extent penetration. So we think those factors allow us to see nice sequential growth as we go through the year. On mortgage, and as we're now comparing against easier comps as we get into the second half of 2023 versus 2022, we see better growth rates. You're also going to see better growth rates in mortgage, although we took mortgage down the level of decline in mortgage year-on-year and originations declined substantially going through the year, we can expect to continue to have very good mortgage outperformance in EWS, so that allows us to return to growth in EWS mortgages as we get toward the very end of this year. So with those two factors together, we think we're going to see nice acceleration in EWS revenue as we go through the rest of this year.

Thank you so much.

Thank you. The next question is coming from Manav Patnaik of Barclays, please go ahead.

Thank you. Good morning. Maybe my first question, just to follow-up on that. I guess you addressed the revenue visibility to seem to have as you ramp up into the end of the year. Can you just talk about the moving pieces on margins? How confident are you to hit that 36% and how that flows through to next year?

I'll start Manav and John can jump in. So we'll leave the revenue leverage aside, we have good visibility outside of the mortgage piece. As you know, we increased our cost program by another $10 million this year and $25 million next year. So we see additional efficiencies as we get further into the cloud completion. Combining that with the core program we announced in February, we have a lot of visibility, because we know when contractors are leaving and when we're taking other cost actions. That gives us a lot of confidence in the cost side across all the businesses and at the corporate level.

And again, as Mark said, good focus on cost, we have good visibility on cost and we do need to see the revenue growth we're talking about. But I think we feel very good about the sequential movements we're talking about in our non-mortgage business. We delivered well in non-mortgage other than the Talent impacts we talked about in the second quarter. And then obviously we've made an assumption on the mortgage market. We think we've made a reasonable assumption, but having the mortgage market deliver the levels we're talking about is also needed for us to deliver our 36% margins in the fourth quarter.

Got it. And then just on Workforce Solutions, I guess most of the changes are just your volume assumptions. I missed what your new gross hiring assumption is, but I was also hoping you could address confirming that you're not seeing any changes in competitive behavior, like all these changes are really just your volume assumptions.

John, I'll let you jump on the hiring assumption, but we did mention Manav that for example in mortgage, we're seeing some mortgage originators move manual verifications back in-house, so that had an impact on the quarter. We expect that to continue, so that is clearly a revenue impact. What we're seeing is mortgage originators doing less activity, so they've got people sitting in their offices and they are deciding to do some of those manual verifications in-house, so that clearly had an impact. I think there was no question that experience through, to a lesser degree, others in the marketplace are doing more than they were a year ago. We don't see that being a meaningful impact on our revenue, but they are definitely out there and they are doing more than they were a year ago. So that impacts particularly mortgage.

In terms of Talent Market we didn't give a percentage. In April we talked about the market being down around 10%. We said June was worse and that we're expecting that weaker level of the Talent Market to continue through the rest of the year. We didn't really give a number, but weaker than the 10% we talked about in April.

And again, we also commented Manav that we see ourselves over-indexed to white-collar employers in our customer base, and those are more impacted by hiring freezes as well as layoffs than the broader market.

Got it. Thank you.

Thank you. The next question is coming from Kevin McVeigh of Credit Suisse, please go ahead.

Great. Thanks so much. I'll ask one multi-part question. Thanks for framing the $40 million runoff. Was that purely higher rates or any dislocation from regional banks or maybe tightening standards and then I wondered if you could give us a sense of the sensitivity on the way up. So if rates started to go down, what would be the theoretical level where you might see people get more aggressive with a HELOC or refinance? It seems like 7% was a trigger for some weakness. What level of rate and is there any way to frame the sensitivity of what 6.5% might mean for the businesses as we think about 2024?

I think there are a lot of factors Kevin in the mortgage space. Higher rates clearly impact activity and there is uncertainty about where rates will stabilize which affects consumer behavior. There is also inventory constraints in housing stock so many homeowners are reluctant to move because they are holding low-rate mortgages. We believe there will be some rate stabilization and then consumer activity will increase. Predicting exactly when rates will come down is difficult — it could be a year or longer — but historically these things normalize over time. We have never seen purchase volume declines at this level relative to historic levels excluding the refi booms, so our view is that at some point we will return to more normal historical levels and Equifax will be well positioned for that recovery.

The important thing for us is we're continuing to drive very good performance above market. Very strong performance in the first quarter and again in the second quarter, adjusting for the manual business, which was lower margin and we elected not to chase price down. On the very high-margin digital verification business, we're seeing about 20 points of outperformance. So we feel good about our continued outperformance. To the extent we see a faster-growing mortgage market than we forecast, we will participate and see upside, but we clearly saw the reduction in transaction volume when rates moved above 7%. It's hard to predict what's going to happen when they move back below 7, but to the extent that we see growth we think we will participate well.

On the other side, the Fed will eventually reduce rates to boost economic activity and there will be another refi window at some point. When that happens, whether in 2025 or later, Equifax will be well positioned to benefit given the high incremental margins on mortgage revenue growth.

Thanks so much.

Thank you. The next question is coming from Kelsey Zhu of Autonomous Research. Please go ahead.

Good morning. Thanks for taking my question. My first one is on the government vertical for EWS. Part of the acceleration of growth in the second half is coming from the government vertical which part of that is coming from the Medicaid re-determination process. Can you talk about how much of that was done in Q2 and how much do you expect to be done in Q3 and Q4? And in general, it would be helpful to understand a little better the government revenue breakdown across different programs like Medicaid and Social Security.

There are multiple factors driving government growth which is good for us. Government is a very important, fast-growing segment of Workforce Solutions where we have a strong market position given the scale of our data set. We saw some Medicaid re-determination activity pick up in May and June and expect that to continue and accelerate in Q3 and Q4, with much of that being a 2023 event. We're also seeing more ACA volume, more state-level penetration and contraction pricing from renewals. The business has substantial runway: it is approaching $500 million against a TAM close to $3 billion across many agencies and states. We also have federal programs and ongoing opportunities at the federal level including Social Security-related work. So the drivers are re-determinations, ACA volumes, state penetration and contract renewals, and federal activity.

Got it. My second question is on the Talent vertical. Could you share a little more about the revenue breakdown across blue-collar versus white-collar activity? You introduced a new pre-hire employment verification solution targeting the hourly workforce. How much penetration have you gained with that product and what is the growth outlook for blue-collar revenue versus white-collar?

We participate across all types of employees. Our current customer base of background screeners tends to over-index to white-collar jobs, which is why we've seen more impact there recently. We have many blue-collar jobs coming through our employment verification work. The hourly solution has been in market only about 30 days, so it's very new but we've seen positive traction. We think it will drive penetration with existing customers and help them grow their business. We also have an education verification solution that has been live about a year and is seeing strong adoption, and our insights acquisition provides incarceration data that adds value in Talent. The Talent business is north of $400 million in run-rate revenue in a roughly $4 billion TAM, so there is significant penetration opportunity. New products are a major focus and should drive growth across Talent.

Super helpful. Thanks so much.

Thank you. The next question is coming from Kyle Peterson of Needham & Company. Please go ahead.

Great. Thanks. Good morning. I appreciate you taking the questions. I wanted to dig a little more into some of the talent weakness that you guys saw. I get that this is more white-collar based, but within verticals of the white-collar workforce, did hiring slow down broadly or was it concentrated in specific verticals? Any color would be helpful.

It's pretty broad-based. Many companies announced hiring freezes or layoffs across industries such as technology, professional services and financial services, all of which impact white-collar hiring more. That reduces inbound new hires. We've outgrown the declining market through pricing, new products and penetration, but the macro has had a clear impact and we expect it to continue in the second half.

Makes sense. And a follow-up on the cost side, with the additional cost savings identified, you offset some weaker volumes this quarter. If we continue to see challenging volumes, are there other efficiencies or levers you could pull? Or are you approaching max efficiency?

We expect a $65 million run-rate benefit next year because many actions from the 2023 program are weighted to the second half, and we expect further cloud efficiencies in 2024 and 2025 as we complete the remaining migrations. We're at about 70% of North American revenue on the cloud now and have about 30% left. Completing those migrations should deliver further efficiencies and margin benefits in 2024 and 2025, including carryover from 2023 actions.

As a reminder, the actions we've already taken and the site control on cost broadly are allowing us to drive margins higher in Q3 and Q4. We think we've taken significant actions already which are allowing a nice improvement in margins.

I would emphasize that these actions are aligned with completing the cloud transformation rather than reacting to revenue declines. The program announced in February is part of a multi-year effort tied to the cloud completion and has been planned for some time.

Makes sense, and that’s helpful. Thanks guys.

Thank you. The next question is coming from Andrew Jeffrey of Truist Securities, please go ahead.

Good morning. A high-level question: when I look at the U.S. economy and consider a soft landing or Goldilocks scenario, it strikes me that parts of Equifax benefit from rate of change in the economy whether improving or deteriorating. If we are in stasis, does that impact your business? Is change important regardless of direction? Obviously improving is better, but is change a meaningful impact to growth rates?

You have to break it apart. Mortgage has had a huge impact and will recover at some point. Importantly, 80% of Equifax is non-mortgage and those businesses have been performing strongly despite the macro. The company has much more diversity today than 10 years ago with fast-growing areas such as Talent and Government that didn't exist at that scale before. Our new product initiative, leveraging differentiated data and cloud, is driving higher-priced solutions and margin expansion. Inflation is abating and unemployment is low, which is generally positive. As we complete the cloud over the next year or so, the cost benefits and new product momentum should further expand margins and free cash flow, giving us more flexibility to return cash to shareholders in the future.

Thanks, as usual, a comprehensive thoughtful answer.

Thank you. The next question is coming from Jeff Meuler of Baird. Please go ahead.

I want to make sure I'm understanding the dynamic on mortgage originators moving the employment and income verification in-house. Are you saying that's just for the manual portion of the verification and you are not losing them as a client?

Correct. This is isolated to the manual effort we were performing for customers. Some customers asked us to lower pricing on manual work, which we considered low margin, and we elected not to chase the lower pricing. As a result, some customers moved that manual work in-house. That impacted our mortgage outperformance by about 300 basis points in the quarter. We have not seen an impact on the instant verification side which is where the majority of revenue and margins are.

Can you give any sense of how much revenue you generate from doing manual verification?

We didn't provide a specific total, but we noted it impacted our mortgage outperformance by about 300 basis points.

Got it. And I noticed you addressed competitor activity differently today. Regarding digital verifications and waterfall placements, have you seen any recent share changes for digital verifications or non-exclusive records?

Not that I would characterize as meaningful. We do hear smaller competitors talk about growth, but we don't see a material impact on our business. We continue to watch them carefully.

Got it. Thank you.

Thank you. The next question is coming from Craig Huber of Huber Research Partners. Please go ahead.

Great, thank you. You mentioned a 14% Vitality Index. Can you give a flavor of the areas of new products you're most excited about and where you think the biggest revenue opportunities are?

When we set a 10% Vitality goal we considered that ambitious versus the historical 5% to 7% range. Achieving 14% in a quarter is strong evidence of broad-based innovation across Equifax. I'm particularly excited about Workforce Solutions which achieved a 25% Vitality Index; they were the first business to be fully cloud-native and that has unleashed product velocity. Mortgage 36 is a unique 36-month historical mortgage product that leverages our Twin data and is driving higher-priced adoption. In USIS, we launched a differentiated mortgage credit file including additional attributes such as Telecom and Utilities that competitors can't match given our data scale. Talent solutions and Latin America product rollouts are also very encouraging. Overall, our differentiated data and Equifax Cloud are enabling higher-value, higher-priced products that expand margins.

My final question, looking into 2024 and 2025 as the macro normalizes, what areas are you most excited about for recovery and growth?

Mortgage recovery is an obvious tailwind when volumes normalize; that will be high incremental margin for EWS and USIS. Stabilization in the hiring market will help Talent. A recovery in subprime and FinTech activity would benefit parts of USIS. The combination of cloud completion, continued new product rollouts and cost efficiencies should drive margin expansion and free cash flow growth as the macro improves.

Thank you. The next question is coming from Andrew Nicholas of William Blair, please go ahead.

Hi, good morning. First, a clarification. You're expecting an acceleration into the end of the year. Is there any change to your economic assumptions for the second half, or are you still baking in the same outlook?

Correct, 100%. We have not changed our macro assumptions. The acceleration is driven by visibility around pipelines, particularly in government, and sequential improvement in Talent and consumer lending as new products take hold.

Got it. Second, on AI and costs. How expensive is it to leverage cloud and Vertex AI given chip cost and potential shortages? How do you think about costs when you invest in AI and large models?

Our principal AI focus is using AI to manage large multi-data sets to deliver better performing models and scores. AI allows faster development and operational efficiencies. Our OneScore rollout in April used AI modeling and delivered better performance, which supports higher pricing. We also expect to use AI to improve operations such as call centers. There are costs to AI, but the productivity and performance benefits are significant and should more than offset incremental costs over time.

Makes sense. Thanks.

Thank you. The next question is coming from Shlomo Rosenbaum of Stifel. Please go ahead.

Hi, thanks. I'm focusing on manual verifications moving in-house and competitors like Truework offering similar products. Strategically, are you concerned that stepping back from that low-margin manual work will give startups an entrée into the client base and potentially move into better positions in waterfalls or gain access to payroll data?

We are focused on maintaining strong customer relationships. The competitors you mentioned are fairly small and do not have our scale or differentiated data assets. We monitor them, but we don't see a meaningful impact to our business today.

Another point is as our database rapidly grows the need for manual verifications declines. With 120 million unique records versus approximately 160 million non-farm payroll, the need for manual verification when using Equifax is getting smaller.

Okay, great. Second question on the EPS guidance lowering. The midpoint was reduced by $0.22. Given $40 million of lower mortgage revenue, which you applied a high contribution margin to, it seems like this is mostly that, but you also had other positives like USIS and government. Can you comment why the EPS reduction was this size?

The primary driver of the EPS reduction is the lower mortgage revenue in Workforce Solutions which carries very high margin. Non-mortgage is slightly better, but that was not enough to offset the loss of high-margin mortgage revenue. The $25 million reduction in revenue guidance at the midpoint versus April is net of the mortgage decline and FX, with FX having limited operating income flow-through. The incremental $10 million of cost savings we announced is modest relative to the impact of losing over $40 million of high-margin revenue.

Thank you.

Thank you. The next question is coming from Heather Balsky of Bank of America. Please go ahead.

Hi, thanks. Following up on the acceleration in non-mortgage EWS revenue and the suggestion of healthy double-digit growth in Q4, where do you expect to see the most meaningful acceleration? The macro isn't changing, so how do you get from Q2 to double-digit growth in Q4?

Sequentially, the largest driver is government where we expect substantial improvement as we move through the year. Comparisons to last year also become easier. We're expecting Talent to improve sequentially driven by new products and consumer finance to show modest sequential improvement. Government is the biggest single driver of the sequential acceleration.

Outside of EWS, USIS and International were above our expectations this quarter and we expect them to perform well in the second half as well, which contributes to the overall acceleration.

Got it, thank you.

Thank you. The next question is coming from Toni Kaplan of Morgan Stanley. Please go ahead.

Thanks. One competitor launched a product allowing consumers to share employment information directly from their payroll provider. Do you see the market moving more that way and is there benefit for you to offer that model in addition to your traditional model?

We have solutions that achieve similar aims, but such consumer-mediated approaches have significant friction for both the consumer and the originator and they are difficult to scale. If an instant record is available, it will likely trump a friction-filled consumer credential solution because consumers are often reluctant or unable to provide payroll credentials. Those alternatives can have value in addressing records we don't have, but they will not replace instant records. We still see significant value in our instant, cloud-native data assets.

Thanks. One more on the technology transformation and revenue opportunities. Are you already getting benefits from the cloud in product velocity and should we expect acceleration next year? Also, how meaningful is the always-on benefit in terms of outages today and the incremental benefit from full cloud operations?

Yes, the cloud has already driven meaningful benefits, especially in EWS which completed cloud migration earlier and delivered a very high Vitality Index. As USIS and International complete their migrations, we expect them to move toward the 10% Vitality goal and increase product velocity. The always-on stability is also a competitive differentiator and should help us win primary or secondary positions with customers who maintain multiple vendors. Workforce's ability to scale data, doubling Twin records in five years, would not have happened without the cloud. The always-on and faster data speeds will benefit USIS and International proportionally as they complete cloud migrations and should show more impact in 2024 and 2025.

Super. Thank you.

Thank you. The next question is coming from Ashish Sabadra of RBC Capital Markets. Please go ahead.

Hi, just on the USIS mortgage business where outperformance relative to inquiries was much wider compared to the first quarter. You mentioned pricing and mix. Was there another step-up in pricing in Q2 or was this more mix or other tailwinds?

The pricing that impacted Q2 was the full effect of the score price increase related to a partner's price increase that rolled through the quarter. There was not an additional ad hoc pricing action in Q2 beyond the annual and partner-driven increases we discussed earlier. The full effect of that price increase impacted Q2 more than Q1.

If you're comparing Q1 to Q2, the full effect of the partner-related price increase did not impact Q1 to the same degree as Q2, which is why you see a bigger pricing effect in Q2.

Understood. On the background screener side, have you seen any change in their use of the waterfall model or other market dynamics?

We see the macro of reduced hiring continuing since mid-2022. Our focus is on converting manual verification and other legacy processes to instant digital verification. We continue to roll out new instant products to background screeners to reduce the need for manual verification and drive penetration.

That's helpful, thank you.

Thank you. The next question is coming from Seth Weber of Wells Fargo Securities. Please go ahead.

Good morning. Mark, you mentioned resumption of student loan payments might affect credit scores and consumer balance sheets. Can you talk about timing of that rolling through and any differential impact between prime and subprime?

There have been episodic developments and legal challenges, but if student loan payments resume, they would begin in the second half, potentially October as discussed. The impact will skew toward subprime consumers who are more sensitive to payment resumption. We expect it to be modest overall given the employment environment, but it may reduce some consumers' willingness or ability to apply for new credit and could modestly pressure some scores, particularly in the subprime segment.

Got it. A quick follow-up for John. Looking at margin guidance, International seems to show a big sequential increase. Is Q4 International north of 30% or is there something else driving that improvement?

We expect nice improvement in international margins driven by seasonal revenue strength in Q4 and strong cost management, including planned cost reductions. They are executing well on cost, and the margin uplift reflects both revenue and cost actions. The number you quoted may be high, but the trend is clear and positive.

Got it, thank you.

Thank you. The next question is coming from George Tong of Goldman Sachs. Please go ahead.

Hi, thanks. In EWS you talked about mortgage originators taking some manual verifications in-house as volumes decline. Can you talk about in-sourcing trends you're seeing in non-mortgage business due to volume or pricing trends?

We're not seeing meaningful in-sourcing in non-mortgage. The manual in-sourcing trend was localized to mortgage manual operations. In non-mortgage areas such as Talent or Employer Services we have not seen customers in-source at scale when they work with Equifax instant solutions.

Got it. You mentioned strength in USIS from shopping activity. Can you elaborate what you're seeing and how sustainable this shopping behavior is?

Consumers are shopping more in the higher rate environment, leading to more early-stage credit inquiries. These credit pulls are often the initial step for mortgage originators to engage with consumers and are benefitting USIS. EWS activity, which is more aligned to closed loans and later pipeline stages, is less impacted by this early shopping behavior. We expect increased shopping behavior to continue while rates remain elevated.

Got it, very helpful. Thank you.

Thank you. I'd like to turn the floor back over to Mr. Burns for closing comments.

Thanks everybody. If you have any follow-up questions, let Sam or me know and we'd like to get on the phone. Otherwise, have a great day.

Ladies and gentlemen, thank you for your participation. This concludes today's event. You may disconnect your lines or log off the webcast at this time and enjoy the rest of your day.