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Morningstar | Equifax Still Working Through Breach Hangover in 2Q

Equifax posted a somewhat weak second quarter, as the declines it has seen following the data breach accelerated slightly in some areas. Overall, though, we continue to believe the aftermath of the breach has largely played well, and the company’s resilience supports our wide moat rating. We will maintain our $139 fair value estimate.

The core domestic credit bureau segment was down 2% year over year, which marked a slight deterioration from the last couple of quarters despite an 18% increase in mortgage-related business. However, we are not overly concerned. Management said it still expects to start to return to business as usual in the back half of this year, and we think the company’s ability to transition back to more normalized growth will be a more important indicator of its long-term position post-breach.

International results remained fairly strong, with revenue up 8% year over year. Stripping out currency effects, Asia and Latin America were the strongest performers, which supports our view that the industry’s most value-creative long-term opportunity lies in replicating the business model in emerging markets.

The workforce solutions segment was up 7% year over year, with a 15% increase in employment verification partially offset by a 9% decline in employer services. We are encouraged by the ongoing growth in employment verification, as we believe the moat surrounding this business is as strong as that of the company’s legacy credit bureau operations. We think the wind-down of Affordable Care Act-related business will remain a headwind for employer services. Historically, we believe employer services has acted as something of a feeder for employment verification, so this is something to watch, but this dynamic could be lessening in importance as the coverage in the employment verification database has improved.

The consumer segment was down 5% year over year. We expect the company will continue to struggle as it was never particularly strong in this channel and is now operating with a damaged brand. However, some key partnerships such as Credit Karma and LifeLock in the indirect channel should provide ballast over time.

Adjusted EBITDA margins declined to 35.0% from 39.1% last year, with the falloff in the core domestic credit bureau business as the primary culprit. We maintain our view that the impact of the breach on margins is manageable.

For more on our views of the credit bureau industry, please see our July 11 report, "The Credit Bureaus Have Wide Moats That Can't Be Breached."