Equifax: Your Score & More

Sector

Information Services

Background

Mo Spolan is an analyst at Weitz Investments. We cover Equifax's long history as a credit reporting bureau, the competitive dynamics and pricing structure of the industry, and why its employee verification tool is now its crown jewel.

Cover

Date

October 4, 2023

Episode Number

130

Background / Overview

History and Founding: Equifax was founded in 1899 as the Retail Credit Company by brothers Guy and Cator Woolford in Chattanooga, Tennessee. Initially a grocer-led initiative to assess customer creditworthiness, it evolved into a credit bureau by collecting borrowing and repayment data. The company rebranded to Equifax (a portmanteau of Equitable Factual Information) in the 1970s following regulatory scrutiny under the Fair Credit Reporting Act (FCRA). Through over 100 acquisitions in the 1980s, Equifax consolidated its position in a fragmented industry, emerging as one of three dominant U.S. credit bureaus.

Business Segments:

1. Equifax Workforce Solutions (EWS): Accounts for 45% of revenue and ~60% of EBITDA. The Work Number, a database of income and employment records for 120 million Americans, is the crown jewel, offering verification services with minimal competition.
2. United States Information Solutions (USIS): The core credit bureau business, providing credit reports and scores, primarily for lending decisions.
3. International: A portfolio of credit bureaus operating globally, competing with Experian and TransUnion in markets like India and Brazil.

Category and Scale: Equifax operates in the data services and analytics industry, leveraging its vast data repositories to serve lenders, employers, and government agencies. It employs thousands of full-time equivalents (FTEs) and has a global footprint, with a significant presence in the U.S. The acquisition of TALX Corporation in 2007 marked a pivotal expansion into verification services, transforming its growth trajectory.

Unique Dynamics: Equifax’s business model thrives on network effects and data exclusivity. The credit bureau operates a “give-to-get” model, where creditors contribute data to access aggregated credit files, creating a self-reinforcing data moat. The Work Number, however, is a near-monopoly in income and employment verification, with 95 million exclusive records and exclusive contracts with payroll processors, giving it unmatched scale and pricing power.

Ownership / Fundraising / Recent Valuation

Equifax is a publicly traded company (NYSE: EFX). Specific details on recent valuations, private equity ownership, or enterprise value (EV) multiples are not provided in the transcript, so they are excluded to avoid speculation. However, the 2017 data breach resulted in $800 million in legal fines and restitution costs, impacting its financial position temporarily. The company has since invested $1.5 billion in a cloud-based IT overhaul, signaling significant capital allocation to future-proof its infrastructure.

Key Products / Services / Value Proposition

Equifax’s offerings can be categorized into two primary units: credit bureau services and verification services (The Work Number). Below is a breakdown of their value propositions:

Value Proposition:

• Credit Bureau: Standardizes credit decisioning, reducing risk for lenders through comprehensive, longitudinal data. The tri-merge requirement in mortgages (pulling all three bureaus) ensures consistent demand, though the shift to bi-merge introduces potential pricing pressure.
• The Work Number: Provides instant, automated verification, replacing manual processes (e.g., calling employers). Its exclusivity and scale make it the default choice, with value-based pricing capturing significant customer surplus (faster loan conversions, lower verification costs).

Segments and Revenue Model

Equifax’s revenue is derived from three segments:

1. EWS (45% of revenue): Primarily The Work Number, generating per-transaction fees for verification services. Revenue is driven by record growth (adding new records) and penetration (increasing usage in end markets like mortgages, talent, and government).
2. USIS: Credit bureau services in the U.S., earning fees per credit file pulled. Revenue is tied to credit origination volumes (mortgages, auto, cards).
3. International: Credit bureau services in global markets, with higher growth in modernizing economies (e.g., India, Brazil) due to increasing penetration.

Revenue Model:

• Credit Bureau: Per-transaction model, where revenue = (end-market units) × (penetration rate) × (hit rate) × (price per file). For example, in mortgages, 100 originations with 100% penetration and 90-95% hit rate yield 90-95 units. Pricing varies by loan type, with mortgages commanding the highest fees.
• The Work Number: Per-verification fee (~$50), with revenue = (records) × (penetration rate) × (hit rate) × (price). Exclusive records (95 million) and high verifier penetration ensure steady monetization. Additional SKUs (historical records, incarceration data) drive average selling price (ASP) uplift.

Splits and Mix

Revenue Mix:

• EWS: 45% (The Work Number dominates, with HR paperwork as a low-margin adjunct).
• USIS: ~30% (estimated, as exact split not provided).
• International: ~25% (estimated).
• End-Market Mix (USIS): Mortgages (25%), auto, credit cards, personal loans, telcos, utilities (75% combined).
• End-Market Mix (EWS): Mortgages (60-65% penetration), talent (20-25%), government (20-25%).

EBITDA Mix:

• EWS: ~60%, driven by The Work Number’s high margins (>50%).
• USIS: ~25%, with margins in the mid-30s (down from high 40s due to IT investments).
• International: ~15%, with margins likely lower due to growth investments.

Mix Shifts:

• Historical: EWS has grown faster than USIS, increasing its revenue and EBITDA contribution. The Work Number’s margin expansion (from high teens to >50%) reflects the shift from low-margin HR paperwork to high-margin verification services.
• Forecasted: EWS is expected to continue outpacing USIS, driven by record growth and penetration gains in talent/government. USIS margins should recover to ~40% as IT investments conclude.

Geo Mix:

• U.S.: Dominant market, with mature credit bureau penetration.
• International: Higher growth in modernizing economies (India, Brazil), where credit file usage is increasing.

Channel Mix:

• Credit Bureau: Direct to lenders (mortgage originators, auto lenders, card issuers).
• The Work Number: Through verifiers (mortgage originators, background screeners like First Advantage, government agencies).

KPIs

• Credit Bureau:
• Penetration Rate: Near 100% in U.S. mortgages (tri-merge); lower in auto/cards.
• Hit Rate: 90-95% (record availability).
• Revenue Growth: Mid-single digits, tied to GDP and credit origination volumes.
• The Work Number:
• Record Growth: 6-7% annually (historical), high single to low double digits currently.
• Penetration Rate: 60-65% in mortgages, 20-25% in talent/government.
• Revenue Growth: Mid-teens, driven by record growth and penetration gains.
• Company-Wide:
• Revenue Growth: Low double digits, with EWS outpacing USIS.
• EBITDA Margin: High 30s, with potential to expand as EWS mixes up and IT costs normalize.

Acceleration/Deceleration:

• EWS: Accelerating due to record growth and penetration in underserved markets (talent, government).
• USIS: Decelerating due to mortgage headwinds and IT investment drag, but expected to stabilize as markets recover.
• International: Accelerating in modernizing economies with lower penetration.

Headline Financials

Long-Term Trends:

• Revenue: Steady growth, with EWS driving acceleration. USIS growth tied to cyclical credit volumes, peaking in 2020 (mortgage boom) and softening in 2023 (mortgage headwinds).
• EBITDA Margin: Declined from high 40s (pre-breach) to mid-30s (USIS) due to IT investments. Expected to recover to high 30s/low 40s as EWS mixes up and capex normalizes.
• FCF: Suppressed by high capex and $800 million breach-related costs (2017). Post-2024, FCF should improve with lower capex and margin expansion.

Value Chain Position

Primary Activities:

• Data Collection: Aggregating credit data (USIS/International) and income/employment records (EWS) from creditors and employers/processors.
• Data Processing: Standardizing and digitizing data into accessible databases.
• Data Distribution: Providing credit reports/scores and verification services to lenders, verifiers, and government agencies.

Value Chain Position:

• Credit Bureau: Midstream, acting as a data aggregator between creditors (upstream) and lenders (downstream). Equifax adds value by consolidating fragmented data into a standardized, actionable format.
• The Work Number: Midstream, bridging employers/processors (upstream) and verifiers (downstream). Its exclusivity and automation create a unique value-add, replacing manual verification processes.

Go-to-Market (GTM) Strategy:

• Credit Bureau: Direct sales to lenders, leveraging regulatory mandates (tri-merge) and industry standards (FICO). The give-to-get model ensures broad adoption.
• The Work Number: Dual-sided GTM:
• Supply Side: Free service to employers/processors to contribute data, offloading verification burdens.
• Demand Side: Value-based pricing to verifiers, emphasizing speed and cost savings. Exclusive contracts and network effects reinforce its position.

Competitive Advantage:

• Credit Bureau: Network effects from give-to-get model; regulatory barriers (FCRA compliance).
• The Work Number: Exclusive data (95 million records), network effects (largest verifier footprint), and sticky employer relationships via HR services.

Customers and Suppliers

Customers:

• Credit Bureau: Mortgage originators, auto lenders, credit card issuers, telcos, utilities. Key customer types include large banks and GSEs (Fannie, Freddie).
• The Work Number: Mortgage originators, background screeners (First Advantage, HireRight, Sterling), government agencies. Mortgage verifiers are the largest segment, followed by talent and government.

Suppliers:

• Credit Bureau: Creditors contributing borrowing/repayment data. Suppliers are also customers (give-to-get model), creating a closed loop.
• The Work Number: Direct corporate contributors (Fortune 500/1000, ~55 million records), payroll processors (e.g., ADP, ~65 million records). Exclusive contracts with most processors (except ADP) ensure data control.

Supplier Power:

• Credit Bureau: Low, as creditors are incentivized to contribute to access data.
• The Work Number: Moderate. ADP’s non-exclusive stance introduces some risk, but Equifax’s scale and revenue-sharing model (20% of verification fees) align processor incentives.

Pricing

Contract Structure:

• Credit Bureau: Per-transaction fees, with pricing tied to loan value (mortgage > auto > card). Contracts are short-term, tied to individual pulls.
• The Work Number: Per-verification fees (~$50), with multi-year (3-5 years) exclusive contracts with processors. Direct corporate contributors have no formal contracts but are practically exclusive.

Pricing Drivers:

• Credit Bureau: Limited pricing power due to commoditized data across bureaus. The tri-merge mandate historically supported pricing, but bi-merge risks price competition.
• The Work Number: Strong pricing power due to exclusivity and lack of substitutes. Value-based pricing captures customer surplus (faster conversions, lower costs). ASP uplift from premium SKUs (historical records, incarceration data).

Price Sensitivity:

• Credit Bureau: High, as data is near-identical across bureaus. Bi-merge could trigger price wars.
• The Work Number: Low, as verifiers lack viable alternatives. However, aggressive pricing risks customer resentment and regulatory scrutiny.

Bottoms-Up Drivers

Revenue Model & Drivers

Credit Bureau:

• Revenue Model: Per-transaction fees for credit file pulls.
• Drivers:
• Volume: Tied to credit origination (mortgages, auto, cards). Mortgages (~25% of revenue) are cyclical, peaking in 2020 and softening in 2023. Auto/cards are more stable.
• Price: Varies by loan type. Limited pricing power due to commoditization.
• Penetration: Near 100% in mortgages (tri-merge); lower in auto/cards.
• Hit Rate: 90-95%, reflecting record availability.
• Growth: Mid-single digits, aligned with GDP and credit volumes. International markets (India, Brazil) offer GDP-plus growth due to lower penetration.

The Work Number:

• Revenue Model: Per-verification fees, with revenue = (records) × (penetration) × (hit rate) × (price).
• Drivers:
• Volume (Records): 120 million records, growing 6-7% annually (high single to low double digits currently). Exclusive records (95 million) ensure monetization.
• Penetration: 60-65% in mortgages, 20-25% in talent/government. Growth opportunities in talent (blue-collar screens, new screeners) and government (agency adoption).
• Hit Rate: ~55% (120 million / 220 million Americans with income). Increasing as records grow.
• Price: ~$50 per verification, with ASP uplift from historical records and new SKUs (incarceration, education data). Aggressive pricing reflects monopoly position.
• Growth: Mid-teens, driven by record growth (mid-single digits) and penetration gains (10%+ units).

Absolute Revenue:

• Credit Bureau: ~$2-3 billion (estimated, based on $5 billion U.S. bureau market).
• The Work Number: Growing faster than USIS, contributing ~45% of revenue.
• Company-Wide: Low double digits, with EWS as the primary driver.

Mix Effects:

• Product Mix: EWS’s higher-margin verification services are outgrowing USIS’s commoditized credit reports, driving margin expansion.
• Customer Mix: Mortgage originators dominate, but talent/government offer growth potential.
• Geo Mix: U.S. is mature; international markets (India, Brazil) drive incremental growth.

Cost Structure & Drivers

Variable Costs:

• Credit Bureau: Minimal, as data collection is largely automated. Costs include data processing and compliance (FCRA).
• The Work Number: Revenue share with processors (~20% of verification fees, e.g., $10 per $50 verification). Low marginal costs for data distribution.

Fixed Costs:

• Credit Bureau: IT infrastructure, compliance, and personnel. Significant IT investments ($1.5 billion, 2018-2023) have increased fixed costs, reducing USIS margins from high 40s to mid-30s.
• The Work Number: Database maintenance, HR paperwork operations (low-margin), and sales/marketing. Fixed costs are low relative to revenue, driving high margins (>50%).

Cost Analysis:

• % of Revenue: IT capex (~$300 million/year, 2018-2023) and breach-related costs ($800 million) have been significant. Processor revenue share is the primary variable cost in EWS.
• % of Total Costs: Fixed costs (IT, personnel) dominate, providing operating leverage as revenue grows.
• Operating Leverage: High, especially in EWS, where incremental revenue faces low marginal costs. USIS margins are suppressed by IT investments but should recover post-2024.

EBITDA Margin:

• EWS: >50%, up from high teens (2007) due to verification services outgrowing HR paperwork.
• USIS: Mid-30s, down from high 40s pre-breach. Expected to reach ~40% post-IT investment.
• Company-Wide: High 30s, with potential to expand as EWS mixes up and capex declines.

FCF Drivers

Net Income: Impacted by $800 million breach costs (2017) and high IT capex. Margin expansion in EWS supports future growth. Capex: $1.5 billion (2018-2023) for cloud rewrite, classified as growth capex. Maintenance capex is lower, but total capex has suppressed FCF. Net Working Capital (NWC): Not detailed, but data businesses typically have low NWC requirements due to minimal inventory and receivables. Cash Conversion Cycle: Likely short, as revenue is transaction-based with upfront payments.

FCF Outlook: FCF is currently constrained by capex and breach costs but should improve post-2024 as capex normalizes and margins expand.

Capital Deployment

• M&A: Acquisition of TALX (2007) was transformative, creating EWS. Over 100 acquisitions in the 1980s built the credit bureau.
• Capex: $1.5 billion IT investment (2018-2023) to modernize infrastructure, expected to reduce capital intensity post-2024.
• Organic Growth: EWS drives organic growth through record and penetration gains. USIS relies on market-driven volume growth.
• Inorganic Growth: Limited recent M&A; focus on internal investments.

Market, Competitive Landscape, Strategy

Market Size and Growth

Credit Bureau:

• Size: ~$5 billion (U.S.), ~$10 billion (global, including international bureaus).
• Growth: Mid-single digits in the U.S. (GDP-aligned), high single digits internationally (modernizing economies).
• Drivers: Volume (credit originations), penetration (near 100% in U.S. mortgages), price (limited upside due to commoditization).

The Work Number:

• Size: Not specified, but significant given 120 million records and high penetration in mortgages.
• Growth: Mid-teens, driven by record growth (6-7% annually) and penetration gains (10%+ units).
• Drivers: Volume (records), penetration (talent/government), price (ASP uplift from premium SKUs).

Industry Growth Stack:

• Credit Bureau: Tied to GDP, credit volumes, and regulatory mandates.
• The Work Number: Idiosyncratic growth from record expansion and penetration, with macro tailwinds (job changes, lending activity).

Market Structure

Credit Bureau:

• Structure: Oligopoly (Equifax, Experian, TransUnion). High barriers to entry (network effects, regulation) prevent new entrants.
• MES (Minimum Efficient Scale): Large, requiring extensive data and infrastructure. Only three players can operate efficiently.
• Cycle: Mature in the U.S., with cyclicality tied to credit volumes. Modernizing economies are in growth phase.

The Work Number:

• Structure: Near-monopoly, with Equifax holding 95 million exclusive records. Experian (10 million) and Truework (5 million) are distant competitors.
• MES: Large, requiring a vast record database and verifier network. Equifax’s scale is unmatched.
• Cycle: Growth phase, with 55% hit rate (120 million / 220 million) and significant white space.

Competitive Positioning

Credit Bureau:

• Position: One of three equal players, with commoditized data and limited differentiation. Tri-merge mandates ensure demand, but bi-merge risks price competition.
• Market Share: Roughly equal among Equifax, Experian, TransUnion (~33% each in mortgages).
• Growth vs. Market: Aligned with market growth (mid-single digits).

The Work Number:

• Position: Dominant, with 95 million exclusive records and top waterfall position. Experian and Truework lag significantly.
• Market Share: ~70% of aggregated records (120 million / 135 million).
• Growth vs. Market: Outpacing market due to record growth and penetration gains.

Competitive Forces (Hamilton’s 7 Powers)

1. Economies of Scale:
• Credit Bureau: High fixed costs (IT, compliance) and low marginal costs create scale advantages. MES is large, limiting competitors to three.
• The Work Number: Scale in records (120 million) and verifier network ensures cost leadership and pricing power.
2. Network Effects:
• Credit Bureau: Give-to-get model creates a self-reinforcing data moat. Creditors contribute to access aggregated data, deterring new entrants.
• The Work Number: Dual-sided network effects. More records attract verifiers, and more verifiers attract contributors, reinforcing Equifax’s dominance.
3. Branding:
• Limited branding power in both segments, as services are functional and commoditized (credit bureau) or monopolistic (The Work Number).
4. Counter-Positioning:
• The Work Number: Automated, instant verification counters manual processes, making it difficult for competitors to replicate without scale.
5. Cornered Resource:
• The Work Number: 95 million exclusive records and exclusive processor contracts are a unique asset, unavailable to competitors.
6. Process Power:
• The Work Number: Proprietary data aggregation and verification processes, honed over decades, create operational superiority.
7. Switching Costs:
• Credit Bureau: Low, as data is commoditized across bureaus.
• The Work Number: Moderate. Verifiers face low technical switching costs but high practical costs due to Equifax’s exclusive data and verifier network.

Porter’s Five Forces:

• New Entrants: Low threat. High barriers (network effects, regulation, scale) prevent new bureaus or verification providers.
• Substitutes: Low threat. Manual verification is inefficient, and no scalable alternatives exist for The Work Number.
• Supplier Power: Low (credit bureau) to moderate (The Work Number, due to ADP’s non-exclusivity).
• Buyer Power: Moderate (credit bureau, due to price sensitivity) to low (The Work Number, due to lack of alternatives).
• Rivalry: High (credit bureau, due to commoditization) to low (The Work Number, due to monopoly position).

Strategic Logic

• Capex Cycle: $1.5 billion IT investment (2018-2023) is defensive (post-breach security) and offensive (cloud-native platform for product velocity). Post-2024, lower capex will boost FCF.
• Economies of Scale: Both segments benefit from scale, with EWS leveraging low marginal costs for high margins. MES is large, deterring new entrants.
• Vertical Integration: The Work Number integrates HR paperwork to retain employer relationships, enhancing data exclusivity.
• Horizontal Expansion: New SKUs (incarceration, education data) and penetration in talent/government expand EWS’s scope.
• Regulatory Risk: Exclusive contracts in The Work Number could attract antitrust scrutiny, though Equifax argues it operates in a free market with renewable contracts.

Valuation and Market Outlook

Valuation: Not provided in the transcript, so excluded to avoid speculation. However, Equifax’s investment in EWS and IT suggests a focus on long-term growth over short-term valuation metrics.

Market Outlook:

• Credit Bureau: Stable, GDP-aligned growth (mid-single digits) in the U.S., with higher growth in modernizing economies. Bi-merge risks pricing pressure, potentially capping margins at ~40%.
• The Work Number: Robust growth (mid-teens) driven by record expansion and penetration gains. Margin expansion (>50%) and lower capex post-2024 will boost FCF.
• Risks:
• Competitive Intensity: Experian’s entry into verification could erode The Work Number’s exclusivity, though its scale remains a moat.
• Regulatory Scrutiny: Exclusive contracts may attract antitrust focus, though Equifax’s market position is defensible.
• Pricing Aggressiveness: Risks customer resentment and adoption hesitancy in talent/government.
• IT Overruns: Delays or cost overruns in cloud rewrite could delay margin recovery.

Investment Thesis: Equifax is a compelling compounder, with The Work Number as a high-growth, high-margin engine offsetting the mature, cyclical credit bureau. Its network effects, exclusive data, and scale create durable competitive advantages, though regulatory and competitive risks warrant monitoring. Post-2024, margin expansion and FCF growth should enhance shareholder value.

Key Takeaways and Dynamics

1. Dual Business Model with Asymmetric Growth:
• The credit bureau is a mature, cyclical business with stable, GDP-aligned growth but limited pricing power due to commoditization. The Work Number, conversely, is a high-growth, high-margin asset with significant white space (55% hit rate, penetration upside in talent/government).
• Dynamic: EWS’s outperformance shifts Equifax’s revenue and EBITDA mix, driving margin expansion and reducing cyclicality.
2. Network Effects and Data Exclusivity:
• The credit bureau’s give-to-get model creates a self-reinforcing data moat, while The Work Number’s exclusive records (95 million) and verifier network ensure monopoly-like dominance.
• Dynamic: Exclusivity drives pricing power and top waterfall positioning, but risks regulatory scrutiny and competitor inroads (e.g., Experian).
3. Value-Based Pricing in The Work Number:
• The Work Number captures customer surplus (faster conversions, lower costs) through aggressive, value-based pricing, supported by its lack of substitutes.
• Dynamic: Pricing power supports ASP uplift (new SKUs) but risks customer resentment and adoption barriers in new markets.
4. Operating Leverage and Margin Expansion:
• EWS’s low marginal costs and high fixed-cost base create significant operating leverage, with margins rising from high teens (2007) to >50%. USIS margins, suppressed by IT investments, should recover to ~40% post-2024.
• Dynamic: As EWS mixes up and capex normalizes, company-wide margins and FCF will expand, enhancing capital allocation flexibility.
5. Regulatory and Competitive Risks:
• The shift to bi-merge in mortgages threatens pricing power in USIS, while exclusive contracts in The Work Number could attract antitrust focus.
• Dynamic: Equifax’s scale and network effects mitigate competitive threats, but pricing discipline and regulatory compliance are critical.
6. Accidental Innovation in The Work Number:
• The Work Number evolved organically from TALX’s HR outsourcing, flipping its model to offer free services to employers and charge verifiers. This accidental innovation underscores the power of customer-driven iteration.
• Dynamic: Listening to customer needs can unlock high-margin, defensible business models, even without a grand plan.

Conclusion

Equifax’s business model is a study in contrasts: a mature, commoditized credit bureau with stable cash flows and a high-growth, monopolistic verification business with significant upside. The Work Number’s exclusive data, network effects, and value-based pricing create a durable moat, while the credit bureau benefits from regulatory barriers and industry standards. Financially, Equifax is poised for low double-digit revenue growth, margin expansion (high 30s to low 40s), and FCF improvement post-2024, driven by EWS’s outperformance and reduced capex. However, risks from bi-merge, competitive intensity, and regulatory scrutiny require vigilance. By focusing on record growth, penetration, and operational efficiency, Equifax can sustain its competitive edge and deliver long-term value.