Equifax Posts a Decent Quarter - Analyst Blog

Equifax Inc.(EFX) posted decent third quarter 2010 adjusted earnings per share (EPS) of 60 cents, beating the Zacks Consensus Estimate by 2 cents. The adjusted EPS excludes acquisition-related amortization expense. The earnings surprise was due to growth across all the revenue segments and high demand for new products.

Revenue

Revenue in the quarter was $473.8 million, up 11.5% from $425.0 million in the year-ago quarter and above the Zacks Consensus Estimate of $458.0 million. The year-over-year upside may be attributed to revenue growth across all the segments. Moreover, a revival in the economy and clients' adoption of new product innovations also led to higher revenues.

Segment-wise, total U.S. Consumer Information Solutions (USCIS) revenue was $194.0 million, compared to $173.8 million in the year-earlier quarter. Within USCIS, strong growth was noticed in Mortgage Solutions Services and Consumer Financial Marketing Services, followed by a marginal growth in Online Consumer Information Solutions. Total International (including Europe, Canada and Latin America) revenue stood at $122.5 million, up 6.6% year over year. Of this, Europe decreased 4.1% year over year, Latin America increased 13.0% and the Canada Consumer segment climbed 8.8% in U.S. dollar terms.

Revenue from the TALX segment leaped 19.3% year-over-year to $99.1 million. The segment's revenue grew as a result of the 49.2% year-over-year increase in Work Number revenue, offset by a 4.8% year-over-year decline in Tax & Talent Management Services revenue. North American Personal Solutions contributed $39.9 million, up 7.5% year over year. North American Commercial Solutions contributed $18.3 million, up 13.7% from the year-ago quarter.

Operating Results

Gross margin in the third quarter was 60.3%, up from 58.2% in the year-ago quarter. Operating margin was 23.3% versus 23.5% in the year-ago quarter. The margin decline was due to lower margins reported in North American Commercial Solutions and International segments, partially offset by marginal growth in the other three segments. The decline may be credited to the substantial increase in total operating expenses, which surged 11.9% to $363.6 million (76.7% of revenue).

On a GAAP basis, net income from continuing operations was $61.3 million or 49 cents per share versus $55.7 million or 44 cents in the comparable quarter last year. Excluding the impact of acquisition-related amortization expense (net of tax), adjusted net income was $75.7 million or 60 cents, compared to $68.3 million or 53 cents in the year-ago quarter.

Balance Sheet, Cash Flow & Share Repurchase

Equifax exited the quarter with $115.6 million in cash and cash equivalents, up from $70.1 million in the previous quarter. Total long-term debt was roughly $1.0 billion, up from $979.4 million in the prior quarter. Cash provided by operating activities was $68.5 million, compared to $123.2 million in the prior-year quarter.

During the quarter, Equifax repurchased 1.7 million of common shares for $51.7 million. At the end of the third quarter, the company had authorization for future share repurchases worth $155.5 million.

Guidance

For the fourth quarter of 2010, Equifax expects revenue to be up 8.0% to 10.0% from the year-ago quarter, based on contributions from domestic and international businesses and ongoing foreign exchange rates. Excluding the impact of acquisition-related amortization expense, Equifax expects adjusted earnings per share to range between 58 cents and 61 cents.

Our Take

We believe Equifax is well positioned to benefit from its leadership in important markets, heightened consumer concern regarding identity theft and strength in international markets. With the sale of its direct marketing division, the company is now increasing focus on its main business. The company is also in an expansion mode through new product launches and international growth.

However, given the strong correlation to consumer and financial markets, as well as the company's U.S. exposure, improvement in results will at best be gradual, in pace with the country's economic recovery.

Currently, Equifax has a Zacks #3 Rank implying a short-term Hold rating.