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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good day and welcome to the Equifax second quarter 2018 earnings call. Today's conference is being recorded. At this time, I would like to turn the conference over to Trevor Burns. Please go ahead.
Thanks and good morning. Welcome to today's conference call. I'm Trevor Burns, Investor Relations. With me today are Mark Begor, Chief Executive Officer; John Gamble, Chief Financial Officer; and Jeff Dodge, Investor Relations. Today's call is being recorded. An archive of the recording will be available later today in the Investor Relations section in the About Equifax tab of our website at www.equifax.com.
During this call, we will be making certain forward-looking statements, including third quarter and full year guidance to help you understand Equifax and its business environment. These statements involve a number of risk factors, uncertainties and other factors that could cause actual results to differ materially from our expectations. Certain risk factors inherent in our business are set forth in filings with the SEC, including our 2017 Form 10-K and subsequent filings.
Also we will 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 the underlying operational performance. For the second quarter of 2018, adjusted EPS attributable to Equifax excludes, among other things, acquisition-related amortization expense, the income tax effects of stock awards recognized upon vesting or settlement and adjustments for uncertain tax positions.
Adjusted EPS attributable to Equifax also excludes legal and professional fees related to cybersecurity incidents, principally fees related to our outstanding litigation and government investigations as well as the incremental non-recurring project cost designed to enhance IT and data security.
This includes projects to implement systems and processes to enhance our IT and data security infrastructure, as well as projects to replace and substantially consolidate our global networks and systems, as well as the cost to manage these projects. These projects will transform our IT infrastructure and further enhance our IT and data security are available – are expected to occur throughout 2018 and 2019.
Adjusted EBITDA is defined as net income attributable to Equifax adding back interest expense, net of interest income, depreciation and amortization, income tax expense, and also as is the case for adjusted EPS, excluding certain one-time items, including cost related to the cybersecurity incident. These non-GAAP measures are detailed in reconciliation tables, which are included with our earnings release, and are also posted on our website. In the Form 10-Q to be filed later today, we will disclose the future losses from litigation and regulatory investigations are reasonably possible, but not yet estimable at this early stage in the proceedings.
Now, I'd like to turn it over to Mark.
Thanks, Trevor, good morning. Looking at second quarter performance, overall revenue and adjusted EPS results were consistent with our expectations and a solid performance as we continue win back customers' trust following the 2017 security breach. Revenue of $877 million was up 2% on a reported basis and local currency basis and was toward the midpoint of the expectations we discussed with you in April.
As a reminder, back in April, we expected an FX benefit in revenue growth of around 1% and as you know that did not occur in the second quarter with some of the currency fluctuations which negatively impacted our reported growth for the quarter. John will discuss this in further detail later in the call.
Adjusted EPS was $1.56 and at the high end of our expectations. By business unit, Workforce Solutions and International performed very well in the quarter on a local currency basis and GCS was consistent with our expectations. USIS revenue was modestly below our expectations. However, they continue to make very good progress with customers further increasing the number of relationships where we are now able to pursue new revenue opportunities and I'll talk more about that.
We also made very good progress on the critical areas of our transformation including IT and data security and customer support which we'll also cover this morning. I'll start by looking at the BUs and start with the USIS. USIS revenue was down 2% versus last year and was below the 1% decline we saw in the first quarter and slightly below our expectations. This was principally in Financial Marketing Services and to a lesser extent in Online Information Solutions.
As we have discussed consistently over the past nine months, the critical strategic deliverable for USIS in 2018 is working with customers to complete their security views and most importantly win back their trust so that we can return to working back collaboratively to pursue expanded or new solutions that drive the customers' business forward and create revenue opportunities for Equifax.
Starting in the first quarter but accelerating into the second quarter, we made great progress in winning back this trust. We closely track the status of our largest 80 customers and with the substantial majority I mean, that a substantial majority, we are now able to pursue expanded or new solution opportunities with those customers. Or said differently, we are rapidly approaching a mode of being back to normal commercial discussions with the vast majority of our USIS customers.
Over the second quarter I met personally with a significant number of our customers across all the business units with a particular focus in USIS. As recently as last Friday, I met with two key customers up in North Carolina and I was back in North Carolina yesterday with another key customer. And consistently these customers recognize the value of Equifax, its differentiated data assets, the strength of our analytical capabilities driven by Cambrian, Ignite Direct and Marketplace.
Customers are ready to work with us to solve their business needs and with very few exceptions our relationship has returned to a more normal commercial discussion or commercial relationship, focused on how we can help them grow. Every week is a positive step forward for USIS to return to a more normal mode of operations.
As we discussed in the past, sales cycles in our business can be extended and are initially less predictable particularly following an unprecedented incident like the 2017 data security breach. Sales cycles historically could be as short as a few months for CMS offline transactions to as much as 9 to 12 months for online products, including customer integration both on their side and ours.
In the second quarter in Financial Marketing Services, we saw this impact on the sales cycle as the bulk of the decline in Financial Marketing Services was due to a handful of transactions we expected to close in June that pushed out to the second quarter. We do not believe these transactions are lost and still expect to close the transactions and have closed several of them already in the first few weeks of July. Importantly, we are seeing the USIS sales pipeline strengthen substantially both in Online and Financial Marketing Services. Given this strength we expect USIS revenue growth in the third quarter and second half of 2018.
As in the second quarter, I will continue to devote a significant amount of my time with Paulino and his team working with USIS customers as we return USIS to a more normal mode of commercial activity. We are intensely focused on this. We are intensely focused on returning USIS back to a more normal growth mode and it will continue to be a priority for me.
Turning to Workforce Solutions, the team in workforce had a very solid quarter with revenue up 7%, and importantly, Verification Services had a very strong quarter with revenue up 15%. Verifier revenue growth was broad-based with double-digit growth across government, talent solutions, healthcare and auto. The Work Number record growth was also strong which as you know is critically important. We had the largest sequential growth in active and total records since the second quarter of 2017. So great progress there by the workforce team. And as you know, our growth in The Work Number makes our data increasingly valuable to our customers.
As we expected, Employer Services declined in the quarter, principally in unemployment claims and our ATA-related businesses, workforce and analytics from the stronger U.S. economy and lower employment. However, as we look to the second half, we believe Employer Services overall will see growth as unemployment claims stabilize and we see growth principally in our Employer Services businesses. With continued strong growth in Verification Services and return to growth for Employer Services we expect Workforce Solutions revenue to accelerate nicely in the second half. Workforce Solutions continues to be an important strategic asset and growth engine for Equifax.
International also had another very good quarter with 8% reported in local currency revenue growth. Our Latin American and Asia Pacific businesses, as well as our European credit businesses all grew over 10% in local currency. Canada had a very strong quarter growing 8% in local currency.
As we discussed last quarter, our European debt management business is experiencing declines specifically in our venture with the UK government. As we indicated last quarter, the venture continues to deliver greater than expected value to the UK government, however, the UK government budget constraints have resulted in lower revenue in the first half than the prior year. We expect to see improved performance in the UK debt management business overall in the third quarter and return to growth in the fourth quarter of the year.
During the quarter I spent a lot of time outside the U.S. in Australia, Canada, UK, and Spain with our management teams. I'm very excited about the future of our International businesses. In Australia, we've seen a continuous success of our business since our acquisition of Veda. Recently the largest banks in Australia announced that by the end of the third quarter of this year, they will supply the credit bureaus with at least half of the comprehensive credit reporting data they hold, paving the way for integration of positive data in the credit file and better consumer lending decisions. We expect continued performance from Australia, as well as our International team in the future.
Last, turning to Global Consumer Solutions, revenue declined as expected 5% in local currency in the second quarter. To provide some perspective, our total U.S., Canada and UK consumer direct businesses represent just under half of our GCS revenue. The U.S. is the bulk of this revenue and as expected and as a result of the suspension of consumer advertising following last year's data security breach, the U.S. consumer direct business revenue declines over 25% in the second quarter of 2018, and now represents just over 30% of total GCS revenue.
Our partner business is now the majority of our GCS revenue and represents direct to customer partners principally Credit Karma and LifeLock, as well as our growing U.S. benefits channel business. Our partner business revenue is predominantly in U.S. and is a very important franchise for Equifax in our GCS business. Our partner business was up nicely in the second quarter both in direct to consumer and in benefits. This growth partially offset the large declines in our direct to consumer business, as we again did not advertise in the second quarter.
In terms of the future of our U.S. consumer direct business, and we talked about this before with you. We believe maintaining a broader direct relationship with consumers will be important to our commitment to substantially strengthen our consumer support in the U.S., as well as to our direct-to-consumer partner NPI efforts. We intend to continue to invest in our U.S. consumer direct businesses, and in the U.S. – in the U.S. and in UK, Canada and Australia. We expect to begin marketing in U.S. again before year-end, likely in the fourth quarter, and it's likely our level of marketing investment will be consistent with that which we had in 2016 and the second half of 2017.
Turning to our commitment to becoming an industry leader in technology and data security and consumer support, this is fundamental to Equifax and we've talked a lot about the significant investments that we're making in this area. We made very good progress in the second quarter on all those initiatives. We will deliver on these commitments through our IT and process transformation, but also critically through ensuring we have a culture that puts security and customer support first. Our enhanced government structure, with a new risk office and a leader responsible for strengthening our enterprise risk management is designed to fully support this commitment. This structure, utilizing three clear lines of defense is effective for our customers and was for me in my prior role leading Synchrony Financial and it will help us ensure the culture we're committed to will endure.
During the second quarter, we also made very good progress in building out the senior leadership team. You saw the announcement a few weeks ago with the addition of our new CTO Bryson Koehler. Bryson brings very deep IT, Cloud, and transformation experience from leading IBM's Watson and Cloud efforts and prior to that, the CTO of The Weather Channel. His deep product and cloud expertise, including experience in consolidating premise-based systems and transitioning them to both public and consistently private cloud environments is directly applicable to the IT transformation we have underway. Bryson joins our CISO Jamil Farshchi, who joined us in the first quarter, and Prasanna Dhoré, head of our Data and Analytics team to really round out a very strong IT, security, and data and analytics team that will really drive our initiatives going forward.
Jamil has already substantially strengthened our security team, bringing in leaders with strong technical backgrounds, as well as security experience. And I know Bryson is quickly off doing the same thing to really build out and strengthen our technology team.
I want to thank personally Mark Rohrwasser for his strong leadership as interim CTO (sic) [CIO] (00:13:57) over the past nine months. Mark did an outstanding job and I'm really pleased that Mark will remain with Equifax as the CTO (sic) [CIO] (00:14:04) of our International business unit.
You also saw the announcement last Friday of Paulino Barros stepping back in to lead our USIS business unit. You know Paulino well from his prior leadership roles at Equifax. He's been responsible for every corner of Equifax over many, many years. He's well-known internally and well-liked by our customers and the team across Equifax. Paulino is an outstanding operating executive and his depth of experience and focus on results, laser focus on results, will be a boost to us in USIS and across Equifax and will ensure that we do not miss a beat as our U.S. business continues its path to recovery and return to a growth mode. I expect Paulino to dial up the intensity and focus with the USIS team on driving growth and I plan to partner with him closely in the second half. We have the right team in place for growth at Equifax.
Our technology transformation is critical to our technology and data security and customer support commitments. And when fully implemented, fundamental to delivering revenue acceleration, speed to market and margin enhancements across Equifax. We're making very strong progress in accelerating our technology transformation as our technology DNA and security teams are executing on a transition to a standard global data-centric infrastructure, enhancing and extending our leading Cambrian, Ignite and Global Gateway and decisioning platforms with a cloud-first strategy.
As we accelerate progress, we now expect total gross non-recurring spending related to the cybersecurity incident in 2017, principally non-recurring project cost related to our IT transformation and security plan, which we've talked about many times with you previously, as well as legal and other professional fee to be approximately $300 million, up about $25 million from levels that we discussed in April. And we view this positively as we continue to invest in our business.
As we discussed last quarter, our new product innovation and continued investments in the expansion of Cambrian and our Ignite analytics and linking platforms globally remains a top priority for our entire team. Both are off to a great start in 2018, despite being impacted as we focus project management and technology resources on IT and data security. As we talked on the last call in April, we're focused on making sure we keep resources focused on our NPI initiatives. We worked diligently to keep those resources protected and we have an active pipeline of over 100 new products at various stages in the funnel and we're tracking to launch over 50 products this year, consistent with our track record of launching new products in 2017, and 2016.
As with all years, success in delivering NPI revenue in 2018 and 2019 will be heavily based on sales of products launched in 2017 and 2016. As we move through 2018, we're seeing a growing number of successes. Ignite Direct and Marketplace placements, along with the pipeline of new products are growing very nicely with both delivering revenue and enabling faster NPI with customers that adopt the platform. Our new Identity and Fraud products based on machine learning are gaining traction in the Card space. Yesterday, we talked – when I was with my – our customer in North Carolina, we talked at length about our new Identity and Fraud products.
In Commercial, trended data and trended database scores are also gaining traction and InstaTouch, which we launched in 2017, is also expanding adoption and was part of my discussion with one of our key customers yesterday. A second major card provider has now signed to implement InstaTouch and we've signed several other agreements during the quarter and the pipeline is very active.
M&A also remains an active avenue for growth for Equifax. We are building our pipeline and have completed several bolt-on acquisitions supporting Workforce Solutions in Latin America in the first half of 2018. You saw 10 days ago that we announced the acquisition of DataX, a leading U.S.-based specialty finance credit reporting agency and alternative data provider to lenders nationwide. DataX will become a part of USIS and their data assets will complement our core credit, telco and utilities exchange and The Work Number databases to further broaden the base of consumers for which Equifax can assist lenders in making credit decisions. This includes lenders in the installment loan, rent to own, lease to own markets. Additional DataX offerings included credit reporting, ID verification, bank account verification, and customer risk services are a part of those offerings. We are very excited about this new data set for our U.S. customers.
Stepping back, I have been with Equifax for just over 100 days. And as I mentioned earlier, I've spent over half of my time on the road, meeting with customers, partners, and also regulators to as rapidly as possible gain their perspectives on Equifax, while focusing on regaining their trust and confidence in us. As I mentioned, I was with a big customer in North Carolina yesterday and two customers last Friday. I'm spending better part of half of my time with customers with a big focus on our U.S. USIS customers. Their insights are incredibly valuable and overall very consistent. We have great support from our customers. They value Equifax's differentiated data assets. They are very supportive of our strong progress on security and technology, but they are also clear that we must execute on that data and security plan.
Given the events of 2017, the bar is higher for us, and we must deliver on our commitments to be a leader in these areas and we will. Our customers and partners have also been clear that Equifax data is unique, and our analytical capabilities are very strong and differentiated. However, competition is very aggressive, and to win our focus on the customer needs to be sharper. This will be a personal focus of mine, and the entire Equifax team going forward. Resources, both people and investment, are and will move closer to customers.
New product generation jointly with customers in a collaborative way through our DNA and NPI teams and commercial teams will be accelerated. This includes making access to Cambrian, Ignite and our data scientist easier, faster and more co-collaborative with our customers. Finally, our technology transformation will be prioritized to deliver speed of new products to customers. We are committed to returning USIS to competitive levels of growth and accelerating the growth of Workforce Solutions International.
I also want to ensure consumers and customers have my absolute commitment and my personal priority to making Equifax a leader in IT and data security and customer support, to ensure that we protect the sensitive consumer and customer data which we've been entrusted and to empower individuals to understand and manage their personal data. We've made very strong progress in the past nine months, since the security breach, but we still have a lot of work to do. Our focus is clear.
Stepping back, I'm incredibly excited about the path forward for Equifax. Very excited! This is a great business and a great space. We have unique data assets and insights delivered – solutions to our customers. We are making strong progress winning back trust and confidence with our customers as we return to a more normal mode of operations and we feel real momentum in our USIS business.
As I mentioned earlier, I will continue to spend a majority of my time with Paulino and the USIS team to accelerate the return of USIS to the growth path that it's delivered historically. At the same time, our big investments in IT infrastructure will deliver industry leading capabilities. Our significant investments in security will bring us to an industry leading position in protecting consumer data. We have the right team in place to drive this transformation and we are laser focused and energized around delivering in the second half, and the future ahead for Equifax.
Thanks and with that, let me hand it over to John.
Thanks, Mark, and good morning, everyone. I will generally be referring to the financial results from continuing operations represented on a GAAP basis, but will refer to non-GAAP results as well. For 2018, additional items excluded from our non-GAAP results are the one-time costs related to the cybersecurity incident, and the one-time benefits for adjustments to uncertain tax positions. We will provide the details on this item so you can consider it in your analysis.
In total, in 2Q 2018, we incurred non-recurring costs related to the cybersecurity incident of $71 million. These have been partially offset by insurance recoveries of $35 million, resulting in net non-recurring charge of $36 million. The non-recurring charge is excluded from our adjusted EBITDA margin and adjusted EPS. The $71 million of gross cost includes $16 million were generally for legal fees and other professional services, principally related to outstanding litigation and government investigations related to the cybersecurity incident and $55 million were generally for one-time incremental project and other costs incurred to implement our data security and technology plans and to improve our technology infrastructure.
Total non-recurring and one-time incremental project and other gross costs incurred year-to-date were $150 million and since 3Q 2017, related to the cybersecurity incident, were $314 million. We have $125 million of cybersecurity insurance under our E&O policy against which we have received the payments to-date of $95 million, which partially offsets the cost referenced above. We continue to expect to make claims to fully utilize the policy.
For Equifax, in 2Q 2018, as Mark indicated revenue of $877 million was up over 2% from 2Q 2017, both on a reported and local currency basis, and at the midpoint of the constant currency expectation we discussed in April. At the time of our conference call in April, our expectation was for local currency growth of 2% to 3%, with reported growth of 3% to 4% reflecting foreign exchange rates at the time which would have generated an FX benefit to revenue of about 1%.
Cash EPS in the second quart of $1.56 was down $0.04 per share from last year, and at the high end of our expectations. Adjusted EBITDA margin was 35.0% in 2Q 2018, down 410 basis points from the record 39.1% margin we had in 2Q 2017, but up 150 basis points from 1Q 2018. About half of the reduction in adjusted EBITDA is directly related to the increased ongoing cost we discussed at the beginning of the year, specifically the ongoing cost due to the security and related technology, our transformation risk office and increased insurance costs. Much of the increases in security and technology related ongoing costs are being incurred directly in business units. The improvement in sequential EBITDA margins is driven by margin growth in USIS as well as International.
USIS revenue in 2Q 2018 was $325 million, down 2% when compared to the very strong second quarter of 2017 and slightly below the 1% year-to-year decline we saw in both 1Q 2018 and 4Q 2017, as well as our expectations. The decline in the overall mortgage market impacted USIS revenue negatively by about 1%. Sequentially, revenue was up 6%, consistent with average sequential growth over the last five years and slightly below the 7% sequential growth in 2Q 2017. The stronger sequential growth in 2Q 2017 was heavily driven by Financial Marketing Services.
Total mortgage-related revenue for USIS was up 8%. Total mortgage related revenue for Equifax, including Workforce Solutions mortgage revenue was up 8%. Our mortgage revenue growth was stronger than the overall market which saw inquiries decline by 5%. USIS Mortgage Solutions business in which we sell tri bureau mortgage reports was benefited by the launch of 3 Bureau trended data in 1Q 2018 and increased share in Mortgage Solutions, the portion of our business that delivers tri bureau reports.
In 3Q 2018, we expect mortgage market volumes to be down high-single digits versus 3Q 2017 and to weaken further in 4Q 2018. For all of 2018, we expect mortgage market volumes to be down high-single digit percent, an improvement from the down 10% we previously expected at the outset of the year.
Online Information Solutions revenue was $224 million, down slightly less than 4% when compared to the year ago period. Core Online was down less, declining slightly less than 3%, with the reminder of the decline principally in identity and fraud solutions driven by reductions in our government customers.
Commercial revenues within OIS were down slightly compared to the year ago period but up slightly when compared to 1Q 2018, reflecting the progress we are making in our transition to the commercial financial network. Sequentially, OIS was up 2%, when compared to 1Q 2018 and core Online was up 3%. This was in line with the average for OIS over the last five years of about 3% and 2Q 2017 sequential growth of 3%. Again, a portion of the slightly weaker sequential growth this year reflects the weakening of the mortgage market between 1Q and 2Q and the increase in share in the Mortgage Solutions business in 2Q.
Financial Marketing Services revenue was $55 million in 2Q 2018, down 9%, compared to a very strong 2Q 2017, which grew 15%. As Mark mentioned earlier, several transactions we had expected to close in 2Q slips to later in the year. We still expect these transactions to close. Sequentially, Financial Marketing Services was up 21% from 1Q 2018, a very good performance, below the 31% we saw in 2Q 2017 but above the average for the last five years, and the second highest sequential growth rate over that five-year period.
As we have discussed previously, the impact on the USIS selling process as customers completed their security reviews was principally on our ability to sell new product into certain customers, to sell batch transactions in Financial Marketing Services and some impact as well to Online. Also, as we have discussed, we have seen our competitors be more aggressive. Overall, this has resulted in lost sales and share.
As Mark discussed earlier, we believe we have made very good progress with customers and now for the substantial majority of customers are able to actively participate in new sales opportunities but we expect will benefit our sales efforts toward the end of 2018, but principally into 2019.
The adjusted EBITDA margin for USIS was 47.7%, down 380 basis points from last year, but up 360 basis points from 1Q 2018. Similar to 1Q 2018, year-to-year USIS margins in 2Q 2018 were principally impacted by the following factors, specifically increased third-party costs, principally in mortgage, negative revenue mix, including a higher mix of lower margin Mortgage Solutions and increased security-related and other technology costs. We continue to expect USIS 2018 revenue to be flat to up slightly from 2017 for the full year.
For the second half of 2018, reflecting the items that impacted the first half of 2018, we expect USIS EBITDA margins to approach the levels delivered in 2Q 2018. 3Q 2018 EBITDA margins will likely be lower than 4Q 2018, as mortgage revenue generally is lowest in the fourth quarter.
Workforce Solutions revenue was $208 million in the quarter, up 7% when compared to 2Q 2017. Verification Services had another very strong quarter with 15% revenue growth, driven by double-digit growth across government, talent solutions, healthcare and auto, and also was better than our expectations. We also grew both active and total records again in 2Q 2018.
Employer Services revenue was $58 million, was down 9%, or about $6 million from last year. As Mark indicated earlier, the decline was principally in unemployment claims and our ACA related business, Workforce Analytics. However, as we look to the second half, we believe Employer Services will see growth as unemployment claims stabilizes and we see growth principally in our employee services businesses, including I-9 and onboarding.
The Workforce Solutions adjusted EBITDA margin was 47.6% in 2Q 2018, down 360 basis points from 2Q 2017. The decline was more than explained by the expected increase in costs related to security and technology and increased investment in sales and marketing, partially offset by positive mix due to the growth in Verifier. Given the positive revenue mix driven by strong growth in Verification Services that we expect to continue throughout 2018, we expect to see continued sequential improvement in Workforce Solutions margins. For the full year, we continue to expect Workforce Solutions adjusted EBITDA margins to be flat to up slightly versus 2017.
International revenue was $250 million in 2Q 2018, up 8% on a reported and local currency basis. Asia Pacific revenue was $86 million, up 12% in U.S. dollars and in local currency driven by continued strong growth in our commercial business. Europe's revenues was $72 million in 2Q 2018, up 6% in U.S. dollars and down 1% in local currency. We saw low-double digit local currency growth in our combined UK and Spain credit operations. This was offset by a local currency revenue decline in our debt management business, specifically in our venture with the UK government. As Mark mentioned earlier, we expect to see improved performance in the debt management business overall in the third quarter, and a return to growth in the fourth quarter of this year.
Latin America's revenue was $54 million in 2Q 2018, up 2% in U.S. dollars and up 15% in local currency. Revenue growth was broad based, with strong double-digit local currency growth in Argentina, Chile, Ecuador and Mexico. Beginning in early May, the country of Argentina saw a substantial increase in inflation and currency devaluation of the Argentinian peso. In the quarter, Equifax Argentina continued to perform well, although we are expecting a more significant impact from foreign exchange in the second half of 2018.
Also beginning in the third quarter, under GAAP accounting, Argentina will be considered a highly inflationary economy and foreign exchange changes related monetary assets will be recognized in the income statement. We will exclude these impacts from our GAAP results beginning in the third quarter, and do not expect them to be material to our consolidated results.
Canada's revenue was $38 million, up 13% in U.S. dollars and up 8% in local currency. Canada's growth was broad based and continues to reflect on their strong execution. International's adjusted EBITDA margin was 30.5% in 2Q 2018, down 40 basis points from 2Q 2017 but up 110 basis points from 1Q 2018. The year-over-year decline reflects the expected increased spend in security and technology, as well as increased investment and sales generation. We expect EBITDA margins to continue to increase as we move through the second half of 2018.
Global Consumer Solutions revenue was $94 million in 2Q 2018, down 5% on a reported and local currency basis. As Mark covered, our U.S. consumer direct revenue, which now represents just over 30% of GCS revenue, declined more than 25% in the quarter as we have suspended advertising. Our partner-based business which now represents over half of the GCS revenue grew substantially and offset the majority of this decline. As Mark indicated, we intend to restart limited marketing in the U.S. consumer direct business in the fourth quarter.
GCS adjusted EBITDA margin was 31% in 2Q 2018, flat with 2Q 2017. The net decline in revenue and related gross margin was offset by lower marketing expense in our U.S. consumer direct business resulting in flat margins. In 3Q 2018, we expect a further sequential revenue decline, reflecting a further decline in U.S. consumer direct business and a resulting sequential reduction in EBITDA margins. Also, as we move into 4Q 2018 we would expect EBITDA margins to decline relative to 3Q 2018, reflecting both the lower U.S. consumer direct revenue and an increase in marketing expense, as we seek to add new consumers to our U.S. consumer direct business.
In the second quarter, general corporate expense was $73 million. Excluding the non-recurring costs associated with the cybersecurity incident, the adjusted general corporate expense for the quarter was $63 million, up $16 million from 2Q 2017. Over half of this reflects the increased ongoing costs we discussed at the beginning of the year, specifically the ongoing cost due to security and related technology, the free Lock & Alert product, our transformation and risk office and increased insurance costs. Our GAAP effective tax rate of 13.7% includes GAAP only tax benefits of $14 million related to adjustments from uncertain tax positions resulting from a settlement with tax authorities for prior tax years and $2 million from the income tax effective stock awards.
For 2Q 2018, the effective tax rate used in calculating adjusted EPS was 23.5%. This lower tax rate in 2Q 2018 reflects the following factors. First, we believe our ongoing effective tax rate is approximately 25%, down from the 26.5% we discussed in April. Catching up year-to-date to this lower tax rate in the second quarter, as well as several small discrete tax items resulted in a non-GAAP effective tax rate for the quarter of 23.5%. For 2018, we now expect our effective tax rate, including discrete items to be about 24.5% with 3Q 2018 somewhat lower than that level. In 2Q 2018, the 150 basis points benefit between the 23.5% effective tax rate achieved and our 25% ongoing rate, was a benefit of about $0.025 per share.
In 2Q 2018, operating cash flow was $235 million and free cash flow was $173 million, up 4% and down 2% compared to the prior year respectively. Through June, operating cash flow was $355 million, and free cash flow was $236 million, up 8% and 3% respectively. Net cash received from insurance recoveries in 2Q 2018 and year-to-date was $45 million.
Capital spending incurred in the quarter was $92 million and year-to-date was $149 million. Capital spending was up sequentially in the second quarter, principally based on the renewal and extension of a large software database licensing agreement. Year-to-date, capital spending is over 8% of revenue. For all of 2018, we continue to expect capital spending to be approximately 8% of revenue.
Total net debt at the end of 2Q 2018 was $2.31 billion. Our gross leverage was 2.58 times and net leverage was 2.26 times at the end of 2Q 2018. In 2Q 2018 we issued $1 billion of three and five year fixed and floating rate senior notes. The net proceeds of the sale of notes were used to repay borrowings under the revolver, term loan and commercial paper program. We now have no meaningful debt with a maturity prior to 3Q 2021. We did not repurchase shares in 2Q 2018 and do not expect to in 3Q 2018.
Before returning to guidance, I wanted to cover the impact of the substantial strengthening of the dollar that occurred in May and June. When we provided guidance, we assume FX will remain at the current levels through the entire period. In 2Q 2018, as we indicated earlier, actual FX results versus 2Q 2017 was only a very slight negative impact to revenue. However, relative to our expectations for FX, when we provided 2Q 2018 guidance, the movement in FX in May and June negatively impacted revenue by about 1% and EPS by $0.02 per share. The impact of changes on our guidance for all of 2018 is, of course, much larger. The impact on revenue of FX rates at their current levels relative to our prior expectations is a negative impact to revenue of almost 2% per quarter in 3Q 2018 and 4Q 2018 and on the order of $0.03 per share in each quarter. In total, for all of 2018, the impact on revenue of the stronger dollar is a negative impact of over 1%, and on the order of $0.08 per share.
Now turning to our guidance for 3Q 2018, at current exchange rates, we expect revenue to be between $853 and $863 million, reflecting reported growth of 2% to 3% versus 3Q 2017. Foreign exchange, based on current exchange rates, is expected to be negative, almost 2%. Local currency revenue growth is expected to be 4% to 5% verses 3Q 2017. Adjusted EPS is expected to be between $1.39 and $1.44 per share versus 3Q 2017. FX is expected to negatively impact adjusted EPS by approximately $0.03 per share.
Using the midpoint of our guidance range, 3Q 2018 is about $0.11 per share weaker than 3Q 2017. In addition, the lower tax rate in 3Q 2018 is a benefit of over $0.10 a share. Offsetting this over $0.20 per share is the following three factors: increased security cost for security, technology transformation and insurance-related to the cybersecurity incident, which we have discussed, of over $0.10 a share; expected negative FX and higher interest costs of over $0.05 a share; and in 3Q 2017 we had a benefit from lower bonus accruals which will not recur of about $0.05 a share.
Sequentially, again using the midpoint of our guidance range, 3Q 2018 is down about $0.14 per share versus 2Q 2018. The factors explaining this lower adjusted EPS are: about half in the business units principally as lower GCS operating profit is partially offset by nice growth in Workforce; USIS is down slightly due to revenue reduction; and the remainder principally from increased security, technology transformation and insurance costs related to the cybersecurity incident. Negative FX and increased interest expense and each year third quarter equity expense increases sequentially versus second quarter as we issue employee equity grants in the third quarter.
Our full year 2018 guidance for Equifax revenue and EPS are unchanged from our previous guidance. In total, we continue to expect Equifax revenue for the year to be between $3.425 and $3.525 billion. This reflects revenue growth of 2% to 5%. FX based on current rates is expected to be over 1% negative to revenue growth in 2018. This assumes total mortgage market volumes declined high-single digit percent in 2018, which is slightly better than our previous guidance. We continue to expect adjusted EPS to be between $5.80 and $6 per share unchanged from our April guidance. FX is expected to be approximately $0.08 per share negative to EPS in 2018. Given the substantial change in FX from our original expectations, we believe it is more likely we will be in the middle to lower end of our adjusted EPS guidance.
For perspective, looking historically at the last five years, excluding 2017, our adjusted EPS in 3Q and 4Q have been sequentially about flat. We expect in 2018 to incur approximately $225 million of net incremental costs for investments in technology and data security projects and legal and professional fees being incurred specifically to address litigation claims in governmental and regulatory investigations related to the cybersecurity incident. This represents gross cost of approximately $300 million offset by $75 million of insurance proceeds. This represents a $25 million increase in gross costs from our prior estimate.
Investments in technology and data security are expected to represent just over 75% of these costs. These costs are being excluded from our non-GAAP financial results and guidance. In 3Q 2018, we expect these gross costs to exceed the levels incurred in either 1Q 2018 or 2Q 2018. These estimates do not include any estimates of damages, fines or other amounts that may result from the resolution of litigation and regulatory investigations related to the cybersecurity incident. Our first half results provide a very strong start to 2018, relative to our full year guidance.
Before turning it over to the operator, as this is Jeff Dodge's last earnings call with Equifax, I want to thank him for the tremendous job he has done over the past 10-plus years. He is the standard by which IR professionals are measured in our industry, and he also was a critical player in Equifax strategic and operating decisions over that period. Thanks from me and the entire Equifax team, enjoy a well-earned retirement.
And with that operator, we will open it up for questions.
Thank you. We will now take our next question from George Mihalos of Cowen. Please go ahead.
Great. Good morning, gentlemen. And it's good to hear about the momentum in USIS and the reiteration of guidance there. John, maybe you can talk a little bit about the cadence in USIS growth 3Q and 4Q, is it going to be relatively steady? I know the comparison is a bit easier in 3Q. And also what the contribution exactly will be from DataX that will be included in the USIS segment?
Yeah, George. Thanks for the question. We're not going to be specific obviously in terms of the type of growth cadence by third and fourth quarter, but needless to say, as Mark indicated, we expect to have growth in those periods as well as growth for the year. The contribution from DataX is relatively small. The company is quite small and the contribution really isn't very large.
Okay, great. And just two quick ones if I may, Mark, the decision to kind of stay committed to the GCS direct business, if you could talk a little bit about that and coming back into the market in terms of advertising spend. And then just as it relates to Europe, have we sort of hit the bottom in terms of that minus one local currency growth that we saw in 2Q? Does that now start to turn positive in 3Q and then improve upon that in 4Q?
Sure. I'll start with GCS and maybe John can start on the Europe one. On GCS, we think this is a business that's important to us, dealing with consumers. We have a lot of interactions with consumers when they are dealing with us on the credit bureau side. And we had a nice business prior to the breach that we think we can continue with. We've been consistent in prior calls and meetings that we've had with our investors and others, George, that this isn't a business that we're going to have as the front of our strategy. It's not our primary focus, but it's one that we think is a business that's a good one for Equifax and that we'll start working our way back into doing some advertising and selling value-added products later in the year.
Yeah. In terms of Europe, right, I mean, basically the discussion is around debt management as you know, and we do expect to see some improvements in the debt management business in the third quarter and we expect to see that business return to growth in the fourth quarter. So that – those should both be very positive effects for Europe.
Thanks, guys.
We will now take our next question from Manav Patnaik of Barclays. Please go ahead.
Hi, this is actually Greg calling on for Manav. I just wanted to see if I could get any additional color on how you're thinking about the phasing of the IT and cybersecurity investments in terms of what's going in the buckets this year versus into next year. And also along those lines now that you have the CISO and the CTO in place, has that changed any areas of focus or emphasis on the investments?
Yes, good question, Greg. First, I think, John, gave you the guidance as I did, that we're taking up our forecast for this year by $25 million of the spend that we expect to do broadly. The bulk of that $25 million is between security and IT. Beyond this year, we're not ready to give any indications of what it looks like for 2019, but I think we've been clear that we expect to have a sizable investment again next year. And our goal is as we get into the fourth quarter, or later in the – probably in the fourth quarter versus third quarter, to give some real visibility to you and others around that as far as what our spend will be next year.
With regards to our new CTO from IBM, Bryson, he's only been on the ground for three weeks. We don't expect any significant changes in either our spend level or forecast. How we're going to spend it as a result of him joining, but we do expect him to make some refinements to it. He's got really deep experience around going from legacy to private as well as public cloud and that's part of our strategy. So we think he's going to help us enhance that. He's very product oriented, which will also be a positive for us and there may be some tweaking, if you want to call it, to our plan. I think his bigger impact will be in the plan that we have, he -as that gets shaped in the, call it the, next three, four, five months and we'll be ready to share that with you later in the year.
Okay. That makes sense. In terms of USIS, I think you talked about some of the larger customers and the conversations you are having there. Maybe if we think about it from a vertical perspective, are there any areas that are starting to turn on the spigot faster versus slower and how we should think about that going forward?
I guess it's hard to think about any verticals that would be any different. When we had the call back in April, we said, look, fourth quarter was really tough. First quarter was very tough with regards to customers wanting to understand our security plans and getting back to giving us some confidence and trust and when we talked in April, we felt some momentum there and some positiveness. That continued into May and June as we're into July. I think I tried to indicate, it's just a small handful, like, less than – it's less than the five fingers on my hand where we have, what I would characterize some ongoing tensions with customers that still want to see more of our security plans.
The vast majority of the rest are just back to normal mode of operations. And really, it's just our focus now is just getting our NPIs back in front of them, getting that collaboration with their risk teams, their marketing teams around how we can help them grow. And I tried to be quite consistent in that, the message I've gotten everywhere is that Equifax is valued. They value our differentiated data, meaning we've got data assets that we can bring that others can't, which is a real value for us.
From my perspective, we're kind of getting back to that more normal mode of operations. And I'm quite energized around Paulino coming back in. You know and others on the call know, he's an experienced leader, he's an aggressive leader, he's a commercial leader, and he and I and the team are going to be laser focused. We have been for the last couple of months and we will be for the rest of the year on really getting ourselves back to that normal growth mode in USIS. And we expect to see progress as we go week by week and month by month through rest of this year, into next year.
All right. Thanks and congrats to Jeff.
Thank you. We will now take our next question from Tim McHugh of William Blair. Please go ahead.
Thank you. First, I guess, just coming back to the discussions with customers. I know you said vast majority of them gotten better. Is it still the case, I guess, as you move further where you're not seeing a disruption to the kind of the Online business, it's more the back processing? Or is that still a fair description? And then secondly, you talked about competitors being aggressive, I guess. Have you seen that intensify or change at all? Or is it basically is an environment similar to what you would have described three to six months ago.
Yeah. They kind of tie together, Tim, it's a good question. Look, it's a competitive space, every space is. We operate versus 2Principle (51:37) and dozens of other competitors. And it was competitive before the security incident last fall and it's competitive since then. And so I think you point out that it is and will continue to be. Our competitors, I'm sure, it wasn't lost on them what happened to us last September and they would certainly probably try to take advantage of that in the past nine months.
That said we're going to be aggressive, too. We're going to be aggressive about maintaining our business. We're going to be aggressive about getting new business. And your question about Online versus batch, for the most part, I would characterize any changes in Online of being really related more to that normal competitive environment that we all live in versus something related to September. There's no question that the September incident impacted our batch and some of our NPI stuff. We've been clear about that. And you know our competitors have put up some really impressive numbers in the U.S. and a lot of that has been them taking share from us, we believe, in some of the batch and new product stuff. We're laser focused in getting back our share of that, as we go into July and the third quarter and the second half of the year and we expect to do so.
And as we talked about before, right, with NPI, a lot of NPI it drives Online. So, when you're asking does it impact Online revenue, certainly it does, absolutely. So, there's been impacts across the board, as we said. Online, batch, have both been impacted by the fact that we were impeded in our ability to sell, absolutely.
And Tim, just want to – one other point about – this, obviously, is an active world. And we're out there competing. But last night I got a verbal from our commercial team, from one of our U.S. customers that moved some business to us in a positive way that was with one of our competitors. So those things happen all the time. But, the good news is, is its happening, meaning we're out there winning in the marketplace. And I expect to see that to continue, particularly under Paulino's leadership and with the kind of focus and effort I'm going to put on it – continue to put on it as we go through the rest of the year.
Okay, great. And then just secondly, the increase to the spending on technology, I guess, is it just proving to be more expensive than you would have said before? Are you increasing the, I guess, the magnitude, I guess, of what you're trying to achieve or are you trying to get it done sooner? I guess how should we think about that spending?
Yeah. I would think about it as pace, right? So, when we gave you the initial guidance back in March, we were in the process of trying to ramp the resources necessary for us to deliver the changes that we committed to. And quite honestly at that time, that the – the exact pace at which we could ramp that level of resources wasn't completely clear. So, what we found is, I think, we've been able to ramp a little more effectively, so that our pace of completion is faster. And I think when we gave the guidance initially, back in March, we said to the extent we could go quicker, we would. And I think that's what you're seeing, since we can go quicker, we are.
Okay, great. Thank you.
Thanks, Tim.
We will now take our next question from Andrew Jeffrey of SunTrust. Please go ahead.
Hey, good morning, guys. Appreciate taking the question. Mark, with regard to the aggressiveness of the competition, which I guess should be expected and your commentary about growing and, you know, improving consumer customer, I should say receptivity, are you as confident now recognizing 100 days in as you might otherwise have been about having the right technology and the right solutions in USIS, is there – you know given the current offerings, the potential to meaningfully reaccelerate the growth in your view, is it just a matter of continuing to improve the selling motion and customer relations and ramping NPI? Or do you think there's new technology or new solutions that you might need to fill gaps at this point?
Yeah, it's a great question, Andrew. I think last time we spoke I was maybe 10 days into my role and now being three plus months I covered a lot more ground. And I was – I know a lot more now and I'm even more energized frankly about our market position. I believe, and I hear this from our customers, that's where I get the data point from is that our customers' view our data assets to be differentiated. So that's a very good thing.
Second is, they view our products, our technology, our NPI cadence, our DNA resources as being a real asset also. So I view that as a real advantage and I'm excited about that. I think we've also been clear that we've got some technology opportunities to allow us to speed up our ability to get products to market. Our competitors, my sense is over the last five years, made some investments there that we did not, we're doing that now. And that's part of the investments we're making this year and that will roll into next year that will allow us to be even more differentiated, I believe, as we go forward.
And the last one is that, there's great commercial relationships with Equifax. Those customers – the customer I was with yesterday has been with us for 40 years. And they are one of our key customers and we're primary there. And there's just a very strong relationship with or without the data security breach. They were supportive as we went through it. They paused, if you want it, in the first six months about new things, but now we are back to the races.
So, I'm really energized about the future and I don't need to remind you, if you go back literally a year ago and look at USIS, with our data assets, with how we went to market, with our commercial infrastructure, the business was performing very well. And 12 months later, with the data security breach, obviously, putting some pressure on the business and the team, I look at that and it gives me great confidence along with the dozens and dozens of commercial discussions I've had, that we're going to get back. We'll get back to that growth mode that you're used to and that we want to deliver for you and our other shareholders. And I add on top of that the team.
I'm really energized about Paulino agreeing to step back into a role that he did really well. Many of you saw him operate, you saw him lead and he's been there a week. I had dinner with he and his leadership team last night and they are charged up. And that is a long list of things that gives me confidence and it gives me more energy and confidence, frankly than I had when I was two weeks in. So, a long answer to your question, which is a very good one.
Okay. And if I may just follow-up with a quick one. Just for my own edification, when I think about Ignite, Cambrian, just as a framework, could you put a little meat on that bone for me, just in terms of an example of maybe a vertical or a specific function where that technology changes the sort of the, I guess, the value proposition or specific example of Ignite, Cambrian's value proposition, I guess. So we can think about it a little more clearly.
John might be able to give a better specific example. But I will just give you kind of in a generality. By getting Ignite into our customers and allowing their data and analytics, their risk team to have quicker and easier access to our data is incredibly valuable. And remember, Andrew, I was a customer. I ran Synchrony for nine years, so I know how data is used. I know how data and analytics teams work from a customer perspective. And this tool is so valuable to them to have really broad access to our data to experiment, to model and by having Ignite embedded with our customer, it just makes us more sticky with them. It makes their access to us more valuable. It allows them to test and model things in just a faster fashion, allows us to co-collaborate with them. So it's an incredibly valuable tool that as you know, we're actively deploying in the marketplace with our customers that we think is just going to be another step change in that integration and close commercial collaboration with our customers. Would you add, John, to that?
Only thing I'd add, we're very complete with Ignite Direct, obviously, also our customers their data scientists can contribute their own data...
Correct.
...can use third-party market data and can use our NeuroDecisioning (sic) [NeuroDecision] (01:00:24)Technology to generate products and understand where that relationships exist that we can deliver faster. And as Mark said, the technology investments we're making will allow us to get those products to market faster with those customers. And I know you know this Jeffrey, Ignite Marketplace is more of an app, right? So it allows our business users within our customers to take a look and run analytics against their broader business more simply, like you would with an app, as opposed to requiring a data scientist to do the work. So we think we have a great solution in Cambrian, Ignite Direct and Marketplace and we think we can be very well.
Thank you.
We will now take our next question from David Ridley-Lane of Bank of America Merrill Lynch. Please go ahead.
Sure. Good morning. So, you know, with the strategic decision to continue on the U.S. direct to consumer business, it sounds like you'll restart marketing in the fourth quarter. Heard that you expect that marketing spend to return to pre-breach levels, just to help level set expectations for your investors, would that be in the kind of single-digit million of spending per quarter?
Yes, we typically – as you know, David, we don't give the number out on that, but I would say we're still finalizing those plans. We've been consistent that – I've been consistent that we view this as a business that we want to be in. It's a business that we're never going to be as big as some of our competitors, use that as a boundary on it. And our entry is going to be what I would characterize as measured and whether we're actually at those levels or not, I think it's difficult to forecast at this stage, but we're going to walk our way into this in the fourth quarter and then we'll look at their performance and then make decisions about what we do in 2019 and everything we talked about is inside of kind of the guidance we've given you.
Yeah. And just in the fourth quarter, since we're just starting to do it as Mark said, you shouldn't expect to see anything really large, right.
Yeah.
It's something we've ramped into slowly. Again, all we're trying to do is give people a perspective that we're not looking at a large re-entry here. We weren't really large in that business in 2016 and 2017 either. This is a relatively small business that doesn't have large investment.
And I'll take another approach to the question about ongoing IT and security costs. Will you be fully ramped up in terms of staffing and head count and spending on those plans in the second half of 2018? And I understand you don't know if those costs will be up or down in 2019, but potentially, could you start to see some cost savings from simplifications but benefits from these, the work that you're doing in 2018 as you move into 2019?
Yeah, I think on the first half of your question about kind of getting fully staffed, it's – staffing is difficult to forecast but it's our goal to kind of be at a full staffing level. I know Bryson is looking at bringing in some new talent just like Jamil, our CISO did. And that will happen. It's happening as we speak. He's already worked a couple of hires. So my view to that first question is that we should be at kind of a run rate of the team as we finish out the year.
With regards to 2019, I think we've been clear that we're going to work those plans between now and the fourth quarter and share those with you once they are complete. And with regards to cost base, too early to predict that. But to be clear, our goal in making these significant IT investments are to allow us to accelerate our revenue growth, to increase our speed of products to market. And as you point out, just simplify our structure both from redundant systems and using cloud, either private or public as appropriate to improve our cost structure and, yes, we expect through these investments to have efficiencies that will deliver along with the revenue growth and as we define those, which our goal is to do that as we get into the latter parts of the year, Bryson has some time to get on the ground, we'll share them with you.
Thank you very much.
Thanks.
We will now take our next question from George Tong of Goldman Sachs. Please go ahead, sir.
Hi, good morning. This is Allison Chou on for George. Could you speak to trends you're seeing in Workforce Solutions and particularly Employer Services post breach and where you expect the margin improvement in the back half of the year to come from?
Yes. So just, again, I think we talked a bit about this in the script, right. I mean, what you're seeing in terms of the weakness in the first half of the year is principally around unemployment, insurance claims, our tax services business as well as in our ACA business. A lot of that's being driven obviously on the UC side by unemployment and in ACA I think it's kind of well chronicled what's going on there. So, I think what we're expecting to see as we go through the rest of this year is that we believe that those businesses are somewhat stabilizing and we're starting to see a little bit of growth in some of our employee services business. By employee services, it's the services we provide to our customers to help them board employees and manage their employees, and there I think we're expecting to see some improvement. In our I-9 business we're expecting to see some improvement, in our onboarding business and that should allow us to deliver a little bit of growth as we go through the back half. So we believe the declines should be behind us and we're starting to see – we expect to see some growth as we go through the rest of this year.
Margins in that business, in the total Workforce Solution business, we don't give margins by sub-segment. Again, you saw margins down a little bit in the first half. I think we said specifically related to the substantial security investments that we made, as well as the decision to add more marketing and sales, because that business is doing very, very well. So I think what you're seeing is Verifier growth continues and escalates as you go through the year. And as you've seen so far, and as we see employers somewhat flatten out, therefore the growth of that business grows. It's a very high variable margin business and we're expecting that you'll see gross margins increase from the levels we're at right now.
Great. And in terms of NPI and product generation and collaboration with customers, can you give more color on the areas of focus there, any competitive changes you've seen and maybe which businesses you expect to most benefit from NPI going forward, whether you expect that mid-50s level to ramp meaningfully in 2019 and 2020?
Yes, the NPI focus that, Allison, we've talked about on the call today and we tend to talk about with you is really around our core credit bureau or USIS and its both in the U.S. and of course our products travel globally. I don't see any different trends or competitive impacts there. This has been a really strong muscle for Equifax for a lot of years, and I think we've talked in prior calls that we've worked hard to make sure we protect the resources around our NPI processes as we're ramping up our IT and data security investments, and it feels like we've done a good job at that, meaning that the NPI engine is still working at Equifax.
And with regards to getting north of the kind of pace we've had, I don't think we see that and I'm actually quite pleased that we're still on pace with kind of a consistent and attractive NPI engine working at Equifax. It's a big priority for us. We have a lot of people focused on it. It's one of our – it has been one of our growth levers and it will be going forward. So it's clearly a priority.
All right, great.
If you look at – International has been very strong at NPI too. So historically, and they continue to work at it. International's performed very well on NPI.
Okay. Great, thanks, guys.
We will now take our next question from Brett Huff of Stephens.
Good morning and thanks for taking the question, guys.
Hey, Brett.
And Jeff, congratulations to you. It's been good working with you. Two questions from me. On the EBITDA declines that you mention, I think, John, I think you mentioned this, you said about half of the overall decline year-over-year for the company in margin was due to the ongoing security investments and things like that. I'm just trying to make sure I'm parsing out kind of what the one-timers are, if you will, that you're excluding versus what the ongoing base cost will be. Is that – if we just do that math and take half of that margin and multiply it times the revenue, does that give us a reasonably good ballpark on what the current ongoing investment will be? And I know 2019 may be more or less. I'm not asking that question. But is that the right way to think about magnitude from an ongoing addition to the base that we should expect to continue?
Well, maybe getting at it another way, right? When we did guidance initially back in March, for the full year, we indicated that you'd see about $0.40 a share from investments in security, technology, free product Lock & Alert and insurance, right? And we're kind of on pace for that type of number, not exactly. But there'll be – but it's – we're pretty much on pace for that type of number. So I think that's the way you should think about what those types of ongoing costs look like as we're looking at this year.
Okay, it's helpful. And the second question, you all talked a little bit about getting closer to your customers and you also mentioned the growth in some of your competitors has been better for a variety of reasons. Wondering, in terms of moving to reaccelerate, or working on reaccelerating particularly the USIS business, how do you think about getting closer to your customers versus the money you want to put into NPI or the processes around those two things? It sounds like there's a new focus on getting closer to the customer. How does that rank in terms of growth acceleration relative to NPI?
Well, they are both important. The NPI, Brett, from my perspective, has been a strong muscle of Equifax for a long time. So, that's in place and I think it's well organized. We've got very rigorous processes in place. We collaborate with customers. So that one's working and the thing we try to manage, what we're trying to manage this year is make sure we keep the resources dedicated to that, so it doesn't slow down when we're doing our security and IT transformation. So, that's happening.
The closer to the customer one is really one that's – an initiative that I'm really driving. And it's obviously quite logical. If you're closer to your customers, you're going to be able to engage more in commercial discussions, you're going to be able to show them new products. You're going to be able to show them new data analytics to help them grow. And it's really probably twofold. One, it's my DNA. That's how I lead as a business leader. I want our team to be close to customers. I think Equifax has always been that way. And it's quite natural, following the data security breach last September, the organization turned somewhat inward, which is natural. There was a lot of work done inside of the business and that focus externally, when I landed, call it three months ago wasn't where I would want it to be. And that's what I've just been ramping up. And I'm leading from my chair, by spending, call it half of my time in the field with customers. I'm in there with our key client teams and with our data and analytics teams. And it's really a mode of operations that I want to be a part of. And with regards to priority, I would say the NPI and being close to customers kind of go together. I'm just putting more emphasis on it.
Okay. That's – and then just one smaller question on the analytics, the Cambrian, Ignite group, kind of most of your customers have something that is similar, a kind of flexible data and analytics product. How do you all see the differentiation between what you offer and maybe what they offer? Is it in the analytics or is it in the base data? Or is there a simple way to think about that from us looking outside in?
Yeah, I think outside in I think it's what we've talked about really consistently. The differentiation that we believe we bring is the data assets, as Mark mentioned, right? So we think we have differentiated data assets beyond credit in terms of The Work Number, in terms of NCTUE, in terms of now obviously DataX, right? So we think that the data assets we bring to bear is what helps differentiate what we offer. We think we have an outstanding technology platform, and we think it's incredibly flexible. It's very modern. So we're extremely happy with it.
And also the other thing that's critical to remember is NeuroDecisioning (sic) [NeuroDecision] (01:13:22), right? It's a patent pending activity where we can do machine learning and through that machine learning we can actually determine reason codes. And so use the machine learning algorithm to determine algorithms that we can sell to customers and that they can use in production because we can determine reason codes. So, all of those things, with think, are what give us a product that's extremely strong. I'm sure our competitors have reasons they like theirs. Those are the reasons we like ours.
Great. That's really helpful. Appreciate the time, guys.
Thank you. We will now take our next question from Andrew Steinerman of JPMorgan. Please go ahead.
Hi, Mark. Are you able to give us any more color on your confidence on USIS returning to organic revenue growth in the third quarter and into the fourth quarter? I know you said more normal commercial activity, obviously. I see the easier comp. Is there any more specific you could give me around that dynamic of returning to growth and staying in the growth mode for USIS?
Yeah. I'll start will – I've been – said maybe four or five different ways in this call that the focus from our team is like crystal clear and laser. It's our biggest priority. It's one that the team is on, the addition of Paulino, we think is going to be quite attractive. I'm spending a lot of time there. So, the resources and focus are there.
And then it's – I'm really giving kind of my perspectives and the team perspectives. As I said, I had dinner with the team last night. We had a detailed discussion with them last week and where we're going through pipelines. And when we see pipelines building of commercial activity, that gives me confidence. When you – when I'm out with customers and we hear them, and then just have a dialog, yesterday, last Friday, the earlier last week when I'm meeting with customers, they are ready to get back into a growth mode.
You think about it for your customer and they're an Equifax partner, meaning we've been doing business with them, they've got growth needs. They want to access our unique data. They want to access DataX. They want to use The Work Number. They want to use Ignite, because they want to grow. They've got their own growth challenges and we're one of the levers of growth for them. So, I've got a lot of confidence in the team. It feels like there's some wind building behind our sails, which I think is a positive. And we're focused on getting back to that growth mode. It's still going to take time. It's not going to be something that's going to happen tomorrow or next week, but the – with the pipeline building, converting those to deals and revenue, that's the kind of mode that we're going to be in as we go into – as we're in the third quarter already and as we go through the rest of the year.
Okay. Thank you.
Thanks, Andrew.
Thank you. We will now take our next question from Jeff Meuler of Baird. Please go ahead.
Yeah, thanks. And a big thank you and congrats to Jeff from me as well. I guess first question on the Verifier growth, the mortgage market is down, the auto market is not overly growthy and you're calling it a really good rate and accelerating. I hear you on the records growth but anything else going on with Verifier, any sort of like new go-to-market product refinement, just any other leg to growth that's driving really good growth relative to the end market?
Look, overall, they are continuing to execute on the strategies they have for an extended period of time. As the records continue to extend, then obviously that drives growth themselves. But it also makes the specific application more attractive in each of the end markets you just referenced, right? So, we talked about the markets that we're growing and they've done a nice job of selling into markets where the expanded record base now makes us even more attractive. They've started – they focused on NPI. They're offering new products that allow us to get more information to individual verticals. If, for example, they don't need the entire Work Number record, but they can use a subset of the record to drive revenue at a lower price we've structured products to allow that to be the case, and to also provide them historical information that may not be as valuable as current – as the current information, but it's valuable in their decisioning process. So, they've just broadened what we can sell and have been more effective in selling. So they've done a nice job.
Okay, great.
Jeff, (01:17:54). We probably don't give workforce enough justice in dialoguing with you, at least since I've been here. This is a really good business. And from my perspective, we're still in the early innings of the kind of creativity we can bring about how The Work Number can be used, new verticals, new spaces, more penetration in auto, more use cases around government for verification. There are a lot of opportunities, and as John pointed out, and then how we deliver it. This is a very exciting business that we view as a growth engine for us, as we go through the rest of this year and into the future. And as I say, I view it as early innings, because there's just a lot of potential here.
Okay. And then, second, can you give us any kind of sensitivity to the potential outcomes from the ongoing conversations with the customers where you're still in the – working through the risk zone or getting them comfortable with your data security, et cetera? Like if one of those customers would go from primary to secondary or tertiary, is that a 1% consolidated revenue headwind? Is it more? Is it less? Just any sizing of that risk factor, thank you.
Yeah, it's hard to size. First off, it's very few. I think I'd characterized it as, like, less than five fingers on my hand. We got a couple that we're really working on. And what the dialog is, is they just want to see more progress on our security efforts. We're dialoguing with them on a biweekly, weekly basis. We're showing them our work plans. We make progress every day with them and I'm trying to be open and transparent with you, that sure, there are couple.
I don't anticipate what you described happening, meaning us changing our position but growing with them is not happening right now. The NPI discussions aren't happening with a couple of customers and that's something we want to move them to the more normal mode of discussions and we're going to work on that. The vast, vast, vast majority of our customers, that's behind us. They understand our data security plans. They believe in them. They see the kind of spending we're making, the kind of people we're bringing in. So, their confidence in us executing that is quite strong. And the dialogs are normal and we're into testing products, testing data sets, putting agreements in place to roll out new products, that's where the vast majority of our customer discussions are.
And you know this – our customer base is extremely diverse and we generally don't have really large customers but we have no customers that are near 3% of revenue, and any with that would be even moving up in that geography. The number is very small, right.
Yeah. Good point.
Okay, thank you.
Thank you. We will now take our next question from Bill Warmington of Wells Fargo. Please go ahead.
Good morning, everyone.
Bill. Hey, Bill.
So first, shout out to Jeff Dodge and congratulations on setting a new record for the longest drum roll pre-retirement.
Well done!
So it sounds like the revenue momentum is improving and in the USIS, and we can see that in the sequential trends, and when do you think we'll start to see margins return to historical levels?
Do you want to take that margin question, John? Bill's question is when will margins return to historical levels?
Yeah. So, we haven't really done a long-term model, Bill, right. So I mean if basically that's the question and so I think we'll be vindicated is – as we move forward here, we'll make a determination as to when we're ready to talk about the long-term model again, but we're just not there. So...
And, I think, Bill, we've also been clear in the last call and in other conversations, our goal is to do that. We're trying to do that before the end of the year. We want to have some more clarity around our legal discussions and some more clarity around the USIS trajectory and then some more clarity around our investment in technology spend and data security and IT.
And then my second and final question, the DataX acquisition, I know that's a smaller deal. The – but it is the first acquisition that you guys have done since the breach last September. So is that a one-off or are you guys back in the M&A market?
Yeah, we've actually done a couple as I mentioned in my comments, Bill. We did one in Latin America and one in Workforce and then DataX, I don't know if this is number three or four. Is that...
I think we've done four or five. Yeah.
Okay, so we've done four or five. And these have been bolt-ons and tuck-ins. And the other thing in my comments, Bill, I tried to be clear about is the M&A machine was never turned off. But If you want to characterize that way, we got it turned on meaning that our team is out there. We have monthly meetings on it. I meet with the team all the time, the team that works for me, that works on M&A, and we're in the marketplace. And we're going to be looking for more of these DataX type acquisitions where we can do something that's going to bolt-on to our business.
I've been clear in prior discussions that I'm a bolt-on guy. Looking for acquisitions where we can either have capabilities or product or importantly data assets is a real priority for us. And at the same time, I don't foresee another Veda in our near future, but we look for those. That was an example of a platform that gave us a really great position in Australia and is going to turn out, I believe, to be a very attractive acquisition for us. You know, those are things that we're looking at, too. So the M&A machine is on.
All right. Well, thank you very much.
Thanks, Bill.
Thank you. We will now take our next question from Shlomo Rosenbaum of Stifel. Please go ahead.
Hi, thank you for squeezing me in here. I know you haven't come out with a longer term model yet, but I just want to ask you, after your first 100 days, is there anything that you are seeing within Equifax or you're anticipating from the data breach that longer term changes the way that this company operated within the industry? I mean historically, Equifax had a leadership position in terms of being a leader in terms of growth through the cycle, ability to generate certain amount of growth. Is there anything that you're seeing after taking more of a deep dive that says that over time you can't get back to more of a leadership position over here or is there – either with in terms of the assets you have, in terms of the position with the clients that you've got, or anything else that you're looking at?
Yeah. It's a great question. I think if you step back and look at Equifax, look at our Workforce Solutions and International franchises they performed well prior to the breach. They're performing extremely well post the breach. Those are strong and intact. And I look at those as really attractive businesses for Equifax going forward. And I mentioned earlier that I would characterize Workforce as being early innings, meaning there is just a lot of opportunities for Workforce here in the United States. And we're looking at bringing Workforce to a couple of other markets like Canada, the UK and perhaps Australia.
So, you take those and – on USIS, there's no change in our differentiated assets. We've talked about that multiple times today. There's no change in our ability to bring new products to marketplace and obviously we took a real dent in customer confidence and trust as a result of security breach, but literally 12 months ago on this call, the second quarter last year, USIS was performing quite well and it's my expectation that we go back to that.
Now, I'm going to be careful because I don't want to get into the long-term model, but when you think about the investments we're making in our data security, that's kind of table stakes. We're going to be an industry leading there, but the investments in our information technology have to deliver positive differentiation to us. When we get products to market quicker, when we're a more reliable data partner to our customers, that has to be positive to us in the future. And it has been pointed out in a prior question, our investments in our data infrastructure are going to deliver efficiencies when we have five versions of something we are running today, and we go to one, and you move either a private or public cloud, that's going to be a positive moving forward.
So, we're going to spend more money on security. I think John has pointed that out. But when I think about the future for us, this is a business that performed extremely well for many, many years. I expect it to do the same in the future, to be a very strong competitor in our space, to be a great partner to our customers, and I'm very energized about the future for Equifax when you combine the underlying business and add to that the technology investment we're making, you get out into 2019, 2020, this is a very attractive business in our space.
Hey, great. Thank you very much to that. And I also want to give a shout out to Jeff Dodge. It's been a pleasure working with him over the last 10 years.
I'm keeping track, Jeff, but they're racking up the shout outs.
Thank you. That concludes today's question-and-answer session. At this time, I would like to turn the conference back to Trevor Burns for any additional or closing remarks.
No. Thanks, everybody, for their time today, and I'll be consistent and give Jeff another shout out. Anybody has any follow-up questions we'll be available after the call. Thank you very much.
Thanks, everybody.
Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may now disconnect.