Intercontinental Exchange, Inc. (ICE) Earnings Call Transcript & Summary

Welcome back to the Piper Sandler Global Exchange and Financial Technology Conference. We are well into our second day and our focus on exchanges. It's my pleasure to introduce the Chairman and CEO of the Intercontinental Exchange, or ICE, as we all know it, Jeff Sprecher. So welcome, Jeff.

Thank you, Rich. It's nice to be here.

Jeff's been -- he founded the company, I think, 20 years ago or so.

Yes. And I know I'm getting old. You are too, by the way.

Yes, both...

We're aging together.

Both of us. Yes. In fact, I think it's been about 15 years since it's been public and...

Correct.

We're right through there. So we were just talking about what a crazy year this been for the whole world primarily beyond exchange space. But if you look at the things, you had great volumes in the first quarter, got overlooked. It was sort of an issue with eBay. And certainly, the pandemic what you call, surging volumes, but also the conversion to the stay-at-home workplace, a lot of decisions to be made in regards to the NYSE. So I guess, you've been through financial crisis back in the 2008 and '09. But I guess, what did you learn about ICE during all this? What did you learn about your leadership style? I think just reflect back on this crazy world that we've been in, in this year.

Sure. Well, one thing I know about myself is that I'm not a particularly strong operational manager. And so I've...

You might be depending...

And I think I tell you that every year, knowing that I've surrounded myself with really strong operational people. And believe it or not, my team had created a pandemic response plan about 6 years ago. So we had a good plan to start with. And the other thing that was kind of interesting, serendipitous for us is that when we bought the New York Stock Exchange, it was right after Hurricane Sandy. And the New York Stock Exchange was really incapable of running during Hurricane Sandy, and it did close down along with a lot of financial services industry and so we decided to really put a business continuity plan into New York Stock Exchange. And very obvious thing that you're aware of, Rich, was that we redid all the technology, but we also looked at what happened in Hurricane Sandy when everybody just went home and took their mobile phones, and then they had power outages. So what we did is we've moved our entire company away from desktop computers and put everybody on laptops and then put their -- whatever they do for a living, put that entire portfolio of work product into that laptop. So they have a hardened network, hardened video PBX system and -- which would allow people to grab their laptops and go home or go wherever and work from wherever they can get access to the Internet. And so we went completely work from home. And the reason I give you all that data is that it all worked flawlessly, and the entire company has been working virtually for weeks, and it's only just now that we're reopening offices and allowing people to trickle back. But during that period, as you mentioned, we had the best quarter in our company's history. We were on top of our billing and receivables. We -- all of our platforms operated. We increased our sales cycle. It was just amazing. So I'm very, very proud of a lot of people that are -- that surround me that really did the planning and heavy lifting to make the company so powerful.

Yes, it was some uncanny foresight, I guess to...

Yes. As an entrepreneur, you don't -- it's easy to say you make your own luck, but every once in a while, you get lucky. And having bought some businesses that were not well equipped caused us to overcompensate and the timing. We rolled out the new NYSE technology last year and so had this happened a few years earlier, we would not have been as well equipped. So there is an element of luck to it.

And not only from a technology standpoint, the business model sort of the shift, we watched the stock performance during the pandemic period. And you're right now at the top of the exchanges. The ones with more recurring revenues because there is some concern about where volumes would go post crisis here. But I guess, segue into the market data topic here. So on your call, you talked about a flight to quality in market data and whether it related to some of the business continuity programs -- initiatives that you're rolling out. But I guess how -- I think if there is a concern -- again, it's not the same as with trading transaction, but how will market -- how resilient is it in this pandemic period.

Yes. Let me make a couple of comments about things you embedded in there. First of all, we're really known as being good technology providers. And to give you a sense, the highest throughput that the New York Stock Exchange had ever seen in its history was about 35 billion messages a day. And on March 16, we had over 100 billion. So triple, the highest volume we had ever seen. And we handled that seamlessly and with no latency. I know particularly outlying latency. But the knock-on impacts of that was there's a lot more equity data that has to be distributed. That equity data goes into the calculation of ETFs and other derivative products. It also informs the fixed income markets and other nonequity markets as to algorithms that do pricing and create data. So our whole system, our whole platform had the scale, and it did so really well and outperformed many of our competitive peers. So that has helped improved our sales cycle. I think customers recognize that. Secondly, we're sort of distribution agnostic. We're not a desktop-oriented data company. We have desktops, but one of the things that we saw our customers doing was trying to take data in different ways to get their employees set up to work from home or other locations. We were very, very flexible. So that helped our sales cycle. And our employees adapted really well. I mean, we had, as you sort of alluded to, we were having the best January in the history of the company and the best February. We knew that. And one of the things that we were seeing was that we were ahead of budget in Asia on our data sales, which was surprising because in January and February, Asia was really locking down. So we had some confidence in our platform that the customers could adapt and our front-facing employees could adapt to keep the sales cycle going. And that's partly why in our first quarter, we reiterated our full year guidance, revenue guidance and feel pretty good about where we'll end on our data sales.

So you touched on a couple of things in this market data. We've heard how important it is. One of your growth initiatives being a fixed income market that actually, as you know, a proponent of automation, electronics. But we heard that it did in certain aspects of the market move more electronic. And data was critical to do the automated trading and the algorithmic trading, the ETFs as well. But I guess my question, Jeff, is how do you feel -- how well is IDC positioned? If -- are we -- you have the ETF hub as well, how close it'll be to some inflection point? I know you feel you're well positioned, but just some more insight to where we're at and how you can leverage that?

Yes. There are a couple of things. First of all, we price 3 million securities a day and do that with a deep historical database and algorithm capabilities that have been developed over decades. And so for our customers, we have -- there are new entrants that are creating data and have data streams and what have you. But our customers need to price every instrument in the world. And so if a customer because of this dislocation decides, all of a sudden, there's an opportunity to buy a bond in Liechtenstein, it needs that price. So one of the things we've seen is a reminder to the major customers that they need a data provider that can price every single security in the world and -- because they don't know which security they're going to be interested in tomorrow. Second thing that we've seen is that we've built the ETF hub. And obviously, there was a lot of money moving around ETFs, both in and out on 2 different cycles, particularly fixed income ETFs that had a withdraw and now probably have higher AUM. And so that platform that we have, which really helps the ETF providers do their balancing within their ETFs has really a lot of demand right now. So BlackRock was our flagship launch partner. The other big issuers are all working around us talking to us trying to figure out how to work it into their workflow. And most interesting that you'll see in our next earnings call and commentary is the number of new market participants that have been moving to connect to that platform. We're really building a network. We understand and know the value of networks. If you look at the businesses that we build and acquire they are network-oriented businesses, which is where we do well. And so we've been tremendously focused on using this dislocation to continue to advance that network, and it's a valuable proposition to the customer base.

So you're astute with study of electronics and the automation of trading and -- well, I think this connects to that somehow. And IDC overall, do you think that you unlocked the value -- you significantly improved margins from the, what you call, 1%, 2% they were. But do you think you overall have unlocked the value of IDC? Other people sort of copied the trick, but where are we in it?

Yes, I don't, in the sense that we unlocked the value to make it a very good return on investment, which is key when you're buying assets. And so our ROIC is phenomenal on that because of the way we unlock value. But we really bought it to be part of the analog to digital conversion that's going on in fixed income and find a spot where we can benefit from that tailwind. And I think we're still early in that tailwind and the way we're positioning that business is to be the reference data for the market, to be the index provider for the market, to be the analytic provider for the market and around the BondHub and the ETF hub, to provide some execution capability, but knowing that these other services that we provide are really, really sticky. The index business, for example, very, very sticky. The reference data business is very sticky. So we're -- execution can come and go, particularly in securities can become highly competitive. We run the largest security execution platform in the world, the New York Stock Exchange, and yes, I think the 15th, 16th and 17th U.S. equity exchanges have already announced and are in the process of launching. So that business can become highly competitive, which is why we wanted to stake out some of the infrastructure underneath those businesses. And IDC has given us a co-hold there, but there's still a lot of headroom in our thinking and the ETF hub will help drive it.

So I guess, it seems like this is a perfect time to get you well on that way to unlock the value. So moving on let's just talk a little bit about the transaction environment. The open interest across is pretty good, flat to up in products. But I guess there's 2 wins that we're sort of seeing, one in interest rates where reserve or whatever how people caught the low interest rate environment. But on the other hand, you have energy volatility.

Right.

Right. I guess, how you sort of view what's your outlook on each, interest rates as well as energy?

Yes. So we have a short-term European interest rate platform. So that business has been not particularly robust given that the ECB and the Bank of England long ago cut rates, the ECB going negative. So people don't really need to hedge negative rates. The propensity to hedge goes way down when central banks cut rates. So that franchise will stay flattish until there's a perception that central banks are going to change their policy, and who knows when that will be. There'll be some uptick around Brexit, and there are constantly skirmishes, if you will, that provide volatility in those markets. But broadly speaking, the interest rate business is determined by central banks and central bank policy in Europe will continue to be pretty low and not need a lot of hedging. The flip side, and that's a very small part of our business. But the real core of our business is that energy business. And energy, as you know, that business has just been phenomenal. And we've seen a lot of movement into the 900 products that we trade around energy. It's a much bigger platform for us because of the diversity of the energy market globally. And we've seen a resurgence in natural gas trading in the United States as we've seen. This little tiny contract that we launched years ago in Europe called TTF become increasingly a global marker and maybe ultimately the global marker for natural gas around the world. And we've seen a launch of Asian natural gas trading, emissions trading and some of the new alternatives to traditional energy doing well. The U.K. just announced in the last few days, they're going to create an emissions trading program. And so there's just a lot of innovation going on around that energy platform and a lot of interest in it, and so it continues to do really, really well. And as you alluded to, our open interest there is high. Open interest in a normal environment for energy would -- will require people to come back to manage those open positions. So it's a foreshadower of future volume growth, which looks really good for us.

And I know you're very genuinely -- the WTI situation, the contract now has -- it seems like the supply demand and storage issues, they've done some pretty unique things to balance that out. So any thoughts on that?

Yes. Well, WTI is a specific grade of oil delivered at a specific location on a specific day in a pipe. And so if there's problems with the pipes or there's problems with the storage, it's reflected in the price. So the price discovery of having a big negative price on a given moment on a given place is maybe not that phenomenal in and of itself. But to the extent that people had benchmarked other kinds of businesses against that 1 day, that 1 number, it really has caused some issues. And so we've seen a movement. It was -- the trend was already there, but we've seen a movement more towards broad-based benchmarking is the Brent crude market. Brent crude is settled on an index. It's an index that we calculate. It's based on the physical markets, but we have some discretion to throw out to trades that we think are not representative. And it's also calculated over a broader period. And it's oil that is in tankers at sea. So it has a much broader delivery portfolio in that it basically -- it would only go negative if every port in the world were somehow locked up and couldn't take delivery of oil or if somehow, there were just some acts of God that really disrupted the supply chain globally. And so it's a little more stable and maybe for people that are really just looking for longer-term benchmarks to reflect the GDP of the world or the GDP of a specific economy, those oil products are probably a better fit for them. And we're seeing that movement.

Understood. It's been a unique time. They were going -- the contract was stabilized. I think we still could see energy volatility doesn't have to trade negative to see plenty of...

Yes. I mean, the thing -- we obviously had massive demand disruption with the coronavirus, but it was in an era where we were having massive supply disruption with the OPEC+ group trying to figure out where cuts should be made if there was going to be a demand destruction. So you have both a supply issue and a demand issue in energy. And that will -- and a futures contract represents the marginal barrel on it. And so the marginal price of a barrel will ultimately approach the cost of production and once all inventories are exhausted. So it's an interesting market in that you have people that are trying to figure out the inventories, trying to figure out the supply situation, trying to figure out the demand situation and just a lay person puts it here and say, this is probably going to take a while to work itself out and as a result of that, there's going to be volatility. And that means that people will be thinking about hedging unlike a negative interest rate market.

So we get about 3 or 4 minutes left, Jeff. But I really want to wrap up by giving you your freedom to run in with your thoughts on where exchanges can go. It's been a unique year. We don't know -- at least I don't know how sustainable some of the market conditions that we're going through. But I know this spurs -- I know and you, spurs innovative thoughts on how ICE can position itself or what did you learn from it that looks the thoughts -- just growth opportunities in your mind. So I guess wrap up by, say, what can we expect from ICE, what did you learn? I know how you learned from the operational side, but from a future strategy side from what's all going on in the first half of the year.

Yes. One of the things we see, and you've probably seen it in your business, too, is that during times of stress, people tend to turn to the people they trust, the people they know, the systems they know. This last few years have been full of fintech start-ups and interesting new challengers coming into the financial services space. But when you get in these stress periods, people want to go back to what they know and trust. And that certainly happened with us. And it's given us an opportunity to showcase some of the new things that we're doing, the ETF hub that you mentioned, the digital mortgage solutions we have, the digital payments that are in the early stage we have at this affiliate called Bakkt. And talk about some of the new products we're launching, the Middle East crude contract, a better benchmark crude oil going directly to Asia from the Middle East. And so I'm bullish, the exchanges are in the business of helping people to manage risk. And I think there's going to be a lot of risk in the world, coronavirus risk, geopolitical risk, central bank risk. And so I think the incumbent exchanges and intermediaries and platforms that surround us will do well as we help customers. And we saw that during the last financial crisis, our company grew through the last financial crisis. We saw it around the Enron collapse. Our company grew around the Enron collapse. And I think knock on wood, but we'll continue to grow as we continue to find solutions to help people manage risk.

So you're not leaving us the breadcrumbs that you've used -- because in the last financial crisis, you did say it. You said clearly it was going to be a big issue. Maybe you're keeping those thoughts a little bit closer to your...

Yes. I do. We had the scramble, my colleague scrambled to help people figure out how to do a digital notary and whether -- and get government to accept the digital notary in mortgage, for example, so that you didn't have to have physical people together in order to refinance a mortgage. And so there have been some structural changes that have been going on as a result of this work-from-home period that lend themselves to more digitization of more businesses. And I just think that those people that have well accepted hardened networks that can deliver these digital services will do well. And I say that -- I say that about eBay. I say that about Amazon. I say that about anybody, Facebook, anybody that has built a robust digital network will continue to do well as people need to communicate during more difficult times. And certainly, that's what we felt.

And you've proved that the automation -- that you have a platform. You've done it in the trading space, but I know you think about the potential in places like mortgages, et cetera.

Yes.

And I'll leave it at that. I'll stop.

Thank you.

But I want to thank, Jeff. It's always great to get your insights. I tried to get my fire up, but I couldn't -- it wasn't possible. But hopefully, we'll be able to do this in person a year from now, Jeff. So thank you for your patience.

Thank you, Rich. It's always good to be with you.

Thank you. With that, that wraps it up. I hope everybody will tune in 5 short minutes. We'll have the CME at 11 o'clock. So that wraps up this session. Again, thank you, Jeff, and ICE.

Great. Thanks, Rich.