Equifax's Workforce Solutions Segment Is Its Largest Profit Driver

Equity Analyst

Rajiv Bhatia

Revenue segments as reported by the company.

Workforce Solutions

U.S. Information Solutions

International

Global Consumer Solutions

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Along with TransUnion and Experian, Equifax is one of the big three credit bureaus. Given the fixed costs inherent in a data-intensive business, Equifax has been able to enjoy strong operating leverage from incremental revenue. As the U.S. credit bureau market is relatively mature, the company has been adding new capabilities and expanding its geographic footprint, both organically and through acquisitions. As an example of its bolt-on acquisition strategy, Equifax announced in January 2021 that it will acquire e-commerce fraud prevention platform Kount for $640 million. Kount builds on Equifax’s existing antifraud products and we think acquiring unique data and software assets makes sense.

Equifax’s star in recent years has been its workforce solutions segment, which is now its largest segment. Workforce solutions includes income verification (primarily for mortgages), and we don’t believe Equifax has meaningful direct competition for this service. We expect Equifax’s competitive position to persist as the large amount of existing records and the difficulty of convincing employers to share employee information would be too tough for new entrants to overcome. In the years ahead, we expect Equifax to focus on expanding use cases of income verification beyond mortgage to auto, card, government services, and employment screening. Workforce solutions also includes employers’ services, which consist of employee onboarding solutions, I-9 management, tax form services, and unemployment claims processing. Growth by acquisition in Workforce Solutions has also been a focus, most notably with its $1.8 billion deal to buy Appriss Insights. 

Equifax’s reputation took a beating after a well-publicized data breach in September 2017. This wasn’t the first time Equifax suffered a data breach; however, the depth and the breadth of the breach created ire among the public and showed that the company wasn’t prepared to handle customers data securely. Following the breach, Equifax has invested heavily in cybersecurity and incurred significant legal and product liability costs. In our view, Equifax has largely put the episode behind it.

Business Strategy & Outlook

Overall, we believe Equifax merits a wide moat rating based on intangible assets.

Equifax’s data is critical to its customers’ (often banks) underwriting decisions, and the price of its services is negligible relative to the loan amounts at risk. We estimate that North American credit bureaus’ revenue represents about 1-2 basis points of total household debt. Because the accuracy and completeness of data is critical to credit decision-making, lenders often pull from more than one credit bureau, and we do not believe pricing is the primary factor for choosing a credit bureau. We believe the barriers to entering the credit bureau business are high, as replicating a database of millions of customers would be incredibly difficult. Because the credit bureaus’ data is based on the voluntary reporting of thousands of financial institutions, it’s unlikely that a startup, particularly with heightened data security concerns, could convince banks to share consumer information. 

Mortgage-related revenue makes up 25% of U.S. information services revenue. Government agencies (Fannie Mae and Freddie Mac) require a credit report from all three bureaus (known as a tri-merge report in the industry). Given that the bulk of mortgages are agency-compliant, using Equifax (along with TransUnion and Experian) is essentially required for a mortgage lender. However, in October 2022, the Federal Housing Administration announced that it will work toward moving from a “tri-merge” to a “bi-merge” which would only require two credit bureau pulls. The timeline for this change is unclear. While this has the potential to expand mortgage credit to more of the population, we view the requirement of going from three credit bureaus to two as a modest negative.

The 22% of firmwide revenue that Equifax generates outside the U.S. tends to be lower-margin, with segment adjusted EBITDA margins of 28% versus the firmwide 34%. Given the relatively fixed-cost nature of Equifax’s operations and less amount of scale, we do believe Equifax’s EBITDA margins will improve but still trail the core U.S. business, given the smaller market size in each individual country. 

Equifax’s workforce solutions segment (45% of revenue and 57% of adjusted EBITDA) has been a key driver of earnings growth. The growth driver has been verification services (about 80% of segment revenue) whereby Equifax offers end users (lenders, employers, government, and so on) the ability to verify a person’s income. Given the need to persuade businesses to share sensitive employee income data, we believe this business benefits from a first-mover advantage that allowed it to amass a sizable number of records. We note that margins have meaningfully expanded in recent years as its database has grown. In 2022, Equifax had over 600 million historical employment records, up from 255 million in 2014 and 203 million in 2009.

Wide

Economic Moat

Equifax

Equifax, Inc. engages in the provision of information solutions and human resources business process outsourcing services. It operates through the following business segments: U.S. Information Solutions, Workforce Solutions and International. The U.S. Information Solutions segment includes consumer and commercial information services, mortgage loan origination information, financial marketing services, and identity management. The Workforce Solutions segment covers employment, income, and social security number verification services as well as complementary payroll-based transaction and employment tax management services. The International segment offers information, technology, and services to support debt collections and recovery management in Canada, Europe, Latin America and Asia Pacific. The company was founded by Cator Woolford and Guy Woolford in 1899 and is headquartered in Atlanta, GA.

Earnings data Q1 2024

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