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

All right. Good morning, everyone, and thanks for joining our virtual fireside chat at the DB Technology Conference today. I'm Brian Bedell, and I cover the securities exchanges for Deutsche Bank. Today, we're very excited to have Ben Jackson with us from the Intercontinental Exchange, also known as ICE. Ben is the President of ICE, overseeing global technology, information security and operations, along with the global futures in OTC trading businesses. Among other things, he also leads the integration planning and execution of ICE's acquisitions and joint ventures, such as the recent acquisition of Ellie Mae, which we'll talk a lot about today. Ben has a solid technology background coming to ICE nearly 10 years ago from SunGard, which is a leading software and technology provider to financial companies. Just before we get into the conversation, I just want to quickly touch on our investment thesis on ICE too. We do have a buy rating on the stock. One of the most important themes within this thesis is the company's founding as a technology disruptor, starting 20 years ago as the first electronic marketplace to trade energy futures contracts. And that technology focus has endured throughout the company's history and has underpinned its general philosophy of converting analog markets to digital, which has been the basis of all of ICE's acquisitions really over the past 2 decades. From an investor perspective, this has made the stock increasingly attractive in our view, because a larger portion of the revenue and earnings base is coming from a very predictable recurring revenue streams. You're roughly half now with the recent Ellie Mae acquisition. And with at least a mid-single-digit annual revenue growth profile of these businesses, we think this can enable double-digit annual EPS growth even without any major tailwinds from trading volumes. This dynamic has been driving multiple expansion for the stock, and we think this will continue to grind higher from the current level of about a P/E multiple of 22x. So just for the format today, I'll start the conversation with some questions of my own and leave some time for questions from the participants. And just some quick instructions on that. You can ask a question via the web portal at any time, and I'll ask it most likely towards the end, and we'll keep the questions anonymous, of course. So with that, welcome, Ben. And thanks for being with us today.

Thanks, Brian. It's great to be here. It's our first time at this conference. We appreciate the invite, and look forward to chatting with you.

Great. Great. Yes. So maybe I'll just start off, Ben, with a big picture question. Maybe if you can tell us why you came to ICE nearly a decade ago? And then share your vision of how you expect the company to continue to transform analog markets?

Thanks, Brian. And I think the place to start there is just I've always had an intense passion for applying technology to create efficiency. And really where it started was my first job out of college. So my first job out of college -- I was born and raised in Cleveland, Ohio, and I moved to New York City to join Andersen Consulting. And the first thing I learned there was how to program and got into the weeds of programming and got a full appreciation for what technology can do in providing efficiency across the financial services landscape. And my career from there has spanned everything from consumer to commercial finance, to a big bulk of my career has been in and around the automation of trading and making trading more efficiency -- more efficient. Starting in the commodities markets, in the currencies markets then into fixed income, equity and equity derivatives stuff. Had a full appreciation for what technology can do in financial services. And when I think about ICE, I've always had a great respect for ICE throughout my career. It's actually a little known fact that, Jeff, our Founder -- I bought a business from him a little over a dozen years ago. And that's how I started to really, really get to know Intercontinental Exchange. And what's impressed me about that business historically, it still impresses me today is that our focus hasn't changed. In the 20-year history of this company, our focus has been primarily on 3 things and provide -- and applying these 3 things across multiple asset classes. So the first is, how can we help manufacture high-quality information, real intellectual property and connect people and organizations to that information. Information that will enable them to make decisions rapidly, enable them to manage risk, decide to take risk in a measured way, determine the value of a transaction, all these things that just make communication and decision-making more efficient. The second piece and second focus has been in interconnecting buyers and sellers and partners into a network, into a digital network, a digital highway, where information can flow seamlessly and transactions can be executed efficiently and seamlessly. And then third has been applying technology to electronically, efficiently and reliably settle transactions. So when I summarize, when I think about what ICE is all about, it's really about manufacturing information, connecting people to that information, interconnecting buyers and sellers into an electronic network. And then how do I apply technology to reliably settle transactions? It is this focus that I believe positions the company very well to grow the last 20 years. We'll position it to grow into the future, and it's why I joined ICE, almost 10 years ago.

That's definitely an interesting story and background. So maybe let's zoom in on the most recent transformational endeavor. The mortgage process. And I know CEO, Jeff Sprecher has talked about this a lot for quite some time as you have as well. Basically, how you see this market as being ripe for a technology solution? And maybe if you can just describe your strategic view overall, and starting with the MERS acquisition a few years ago and then into the Simplifile acquisition. Then, of course, the reasoning behind the Ellie Mae acquisition that just recently closed.

Yes. Brian, thanks for that. And I think, yes, where to start is, what I just mentioned, our focus has been in asset class by asset class, looking at how can we link people to information, create new information, establish a network and then apply technology to the efficient settlement of transactions and asset class. And in mortgage, you have a space that is one of the most analog asset classes, historically. But you have a real secular shift that's happening in that space and the unfortunate backdrop of COVID has even accelerated that further. So when we stepped into the mortgage space, into that asset class, we decided to start on the information side and on the settlement side. And when you think about an asset like MERS, what MERS gave us is the database an incredible information asset that captures information on more than 85% of U.S. mortgage transactions. So you have real deep insight into the details of mortgage transactions that are being done, new purchase trends that are happening, what's happening in the refinance market. And then secondly, with Simplifile, so that was our second step into this space. Simplifile gave us really 2 things. So the Simplifile, think of that as deep into the settlement side of real estate transactions. And what Simplifile had done over the last 20 years is they've done a lot of the hard work of paving, literally, the dirt roads of connecting over 27,000 settlement agents. Think of your attorney that's closing on your real estate transaction. To the vast majority of the counties across the United States. So they stitched that together into an electronic highway that no one else has done. And then the second thing Simplifile has in having that electronic conduit to all these settlement agents into these counties that you have a rich set of unique data. You know what are all the requirements to consummate a real estate transaction in almost every county in the United States. What needs to be provided? What can be done electronic? What has to be done still manual? What are the fees associated to it? What are the rules associated to it? Not only at the county level, but also with those settlement agents. So again, we started deep into the settlement side. We have great, unique informational assets with the 2 that we started with. And then when we came upon Ellie Mae, I think it's important to highlight that we actually established a partnership with Ellie Mae between Ellie Mae and Simplifile. Why did we find interest in doing that and why did Ellie Mae have interest in creating a partnership with Simplifile? Well the reason is that Ellie Mae is, by far, a market leader in the front-end network. They've established electronic network in that front-end of the process. So think of your mortgage broker, your underwriters and your lenders. And they have a huge lead in that market space with over 45% market share in that front-end space, and having stitched together, again, brokers, underwriters, lenders and partners. And they've done a great job under the covers there of automating a lot of that front-end process and gaining market share while doing so. Our businesses are very complementary, and they're in the back-end of the process. So we've been doing a great job with our unique network of settlement agents and counties of automating the back end settlement process. So what we saw as an opportunity, both us and Ellie Mae, is a way that, for the first time pull together a complete comprehensive solution from the front end of the process, all the way through to the back end by linking together an area that has historically been disconnected, which is your underwriter and lender in the process they go to, to get comfortable with the risk associated to you, getting a loan from them to your lawyer and to the settlement agent that's consummating the transaction. That handoff has historically been very manual. It's very error-laden. And what we did with Ellie Mae over the last couple of years is really get a foundation of new services being built to really electronify the handoff from that underwriter to the settlement agent. And what we've seen is that in this unfortunate backdrop of COVID, as I mentioned earlier, what we thought was going to be a 10-year journey has really become something that's moving electronic and moving electronic immediately. And that's what gave us conviction on doing this deal, and we're excited to be able to pull these assets together for the first time, providing a new innovative solution to help customers in this secular growth trend.

Yes. And it's funny actually, just coincidentally, the refi process that we're going through on our house with our local bank actually uses the Ellie Mae platform. And at least we're in the middle of the process. And so far, I actually have found it to be quite efficient and certainly better than -- do it in a sort of the legacy way of doing that. But maybe if you can touch on that opportunity, what do you see is the opportunity for more banks and mortgage originators to actually outsource this? Some are still doing it, I think, through -- in the manual fashion. I guess if you could sort of describe what you think is sort of the opportunity in sales process to get those originators to outsource this?

Yes. Absolutely. And there's significant opportunity on both. And I'll kind of -- I'll hit on both. So if you think of bank originators, what you tend to have there is you have a lot of homegrown solutions in the banks. But the reality is that these banks are increasingly hit with new regulations that they need to keep up with. You have new providers that are coming onto the scene. They've got to constantly stitch together and cobble together various solutions to try to automate as much of this process as possible. And our approach with the banks is that, yes, we have a front-to-back solution if you want something that's comprehensive. That can go all the way through from the point-of-sale to the loan origination process, to the closing and post close piece too. We're also very flexible and can engage with banks, just like we do today on just settlement post close. So we can help in automating the settlement process. We're seeing banks adopt the registration of eNotes as they're adopting more and more -- the actual note itself being electronic and our ability to register for them on their behalf. We've built out post-closing processes to and services to enable banks to instantaneously know when a transaction is consummated via Simplifile's rails at a particular jurisdiction to automatically get that information same-day back to the lenders. They know when the transaction is done, and which lenders now on risk versus, which one has come off-risk. So we have a very -- and another way we can engage is just in leveraging our network, our partner network that we have and enabling them to plug into the various partners that we have. So we can engage in a very flexible way. That's our plan. That's our strategy. And there's a ton of opportunity to do that, and banks are engaging us in it. On the nonbank origination side, here, you have a lot of manual processing still. Our -- the #2 competitor, which is a distant second, is literally cobbled together, very manual solutions, and with how much volume is going through both the purchase market and the refinance market right now, which is great to hear you're having a good experience on the Ellie Mae platform, by the way. But with the vast amount of volume that's coming through these originations, seeing new originators come on the scene. But you're also seeing that they have to adopt automation to be competitive. You can't just solve things by applying more bodies and more manual processing around it because the consumer is getting smarter about how much it's costing them to actually go through for refinance process. And we are in the uniquely positioned, being the only solution provider to literally provide a one-stop-shop for them to set up their entire origination process, start to finish, interconnect with all the partners that they need to connect with. We can do it instantaneously with our SaaS-based cloud-based platform, do it very inexpensively and enable them to be up in a competitive situation against other originators immediately. That's one of the areas that we continue to gain market share that we're excited about with this transaction.

Yes. That's certainly then definitely exciting. Maybe just also talk about the tangential revenue growth areas and the synergies out there with data? Obviously, you've got a gigantic data business. How do you -- I know it's more of a longer-term endeavor, but how do you look upon getting revenue synergies with, say, data and analytics around the mortgage process and bringing those into your offerings currently?

Sure. I'll touch on -- there's a whole bunch of different tangential areas of growth around this. So I'll touch on 2 that are -- that we're executing on real-time right now. So one is on the back of that partnership that I mentioned. So really creating for the first time an e-closing room, which -- a simple way to think about an e-closing room, which is, by itself, a $1 billion new market opportunity, is linking that underwriter and settlement agent into an electronic closing room. An electronic closing room, think of it as something that -- it's an electronic room that enables electronic collaboration to happen between the underwriter and the settlement agents, so electronic communications, but also the electronic sharing and organization of all the documents that are required to mature a real estate transaction. So that the underwriters gathering information about you and your family, they're getting your pay details, they're figuring out what products you qualify for, they're -- you're getting your appraisal, getting all that documentation organized in an electronic closing room, that then the settlement agent, as it's maturing, can have time access to and see as that's maturing. Is what I mean by that e-close and that electronic collaboration. We've got these stood up, and we're seeing this solution offering, really start to establish some green shoots, where we've gone from just 1% of the market in some of these service offerings that we stood up last year, to now 3%. So we're seeing it really start to compound and really start to grow. On the data and analytics side that you had mentioned, there's 2. So that, we've estimated at a $4 billion market opportunity. And again, this is something we're executing on. So one of the things that not a lot of people fully appreciate is that after Thoma Bravo bought Ellie Mae. Shortly after that, they bought a company called Capsilon. And what Capsilon does, is they have a artificial intelligence tool that can recognize documents. So physical documents, it will recognize them. It will digitize them, extract relevant data out of those, and then it provides an automatic checking for the accuracy of the information that's in those documents. It looks across the documents to see if there's inaccuracies in that. That's important because all this is -- it's historically been done by stare and compare and very manual based processing requiring eyeballs to stare and try to catch this information. The second thing that we're doing is that in the -- if you think about our fixed income business, Brian, that you know well, we're out taking millions and millions of securities every single day. And we're capturing and extracting structured data and unstructured data in bond prospectuses, for example. We're going through, we're analyzing it. We're creating new information assets such as our reference data offering, as well as we've built on top of that, a robust market-leading valuation service to enable people to value securities that are very difficult to value historically. So we're coupling the expertise that Capsilon has on the mortgage side with mortgage information and mortgage documentation with our expertise historically in the fixed income space of working with structured and unstructured data to create more information services. And that's the foundation that we see really enables us well to help reduce the manual processing, error checking process as well as innovate and create new data offerings around the mortgage space. It's crazy. I'll give you a perfect example on just what happens manually, historically, is that, we'll take simple -- an underwriter will take simple information like your pay stuff. So let's say you get paid every 2 weeks, and then they'll take your W-2, look at your annual income and then they try to manually figure out, do these 2 data points hang together? That oftentimes takes 30 to 40 minutes for someone to do it, costs $90 to $100 for just that one little step out of hundreds of steps that need to happen in an origination. And we have already with our Capsilon product can instantly do that error check, make sure that things either tie together or if it's not, create an alert, for the underwriter to see that. So it's done instantaneously and costs less than $10. So that's just one simple example of -- that all of us can relate to, in having gone through either a new purchase or a refi, on just one simple data element, and that literally, there's hundreds of these that just have a right opportunity to create a lot of efficiency and a lot of savings around it.

All right. Right. No, that's -- and maybe that's a good segue actually to the data and fixed income businesses. Can -- maybe you can talk about some of the parallels of how fixed income trading and the data ecosystem around that is still also even to analog today, and how you plan to leverage your -- maybe just touch on your capabilities, how you've grown them and those businesses organically and via acquisitions? And how you plan to leverage those acquisitions and initiatives into stronger revenue growth in the data segment?

Yes, happy to. And Brian, as you highlighted in your question, it's just amazing how analog, the fixed income execution space still is, maybe with roughly 25% of corporate bonds being executed electronically in 2020 is quite staggering. But it's also a great opportunity to create significant efficiency and our approach to this market. So if you look at our fixed income businesses as a vertical, everything from execution to data and analytics that we provide, its north of $1 billion a year business. And the cornerstone of where we started in that business is in connecting clients to information, and that's why -- and getting into the manufacturing of highly-valued information around the valuation of fixed income securities and bonds. It's very difficult to get a fair valuation on a bond because they just don't trade every day. 1% of municipals trade every day. As you know, around 5% of corporates trade every day. And yet, all of our customers require as close as an accurate view as possible as to what's the valuation of this instrument on an end-of-day basis. And we've matured that offering through our artificial intelligence to a real-time offering, to give people the best view of on an intraday basis, what is the best and closest view as to where valuation is at this point in time on the security that you want to trade. So that's where we started. That's the cornerstone of the business. We provided up and down the institutional space, and we're very well-known for the services we're doing there. The second, which Brian, you and I have talked about and we've talked about on earnings calls, is we're building new innovation to -- and plug it into workflows that are still extremely historically inefficient, nonstandardized and -- but yet, super high growth. And the perfect example there is the primary trading around ETFs and that creation redemption process, where historically, there's been no standardization there. Each -- if you're a bank and you want to interact with the various issuers, there's literally dozens of platforms out there that you'd have to get access to and use. It's a very convoluted workflow historically. And what we've done in partnering with -- and starting with BlackRock, and now we have other issuers that are part of our advisory group that we're also helping to help them to partner with to, advise on what are their requirements. We have 7 major APs, banks that are in our community and are on our network now executing transactions with BlackRock to start, and we have 6 market makers that are in that network now plugged in. So we're building new innovation to standardize a very inefficient workflow, make it much more efficient, plugging our communication protocols into there to enable communication to happen very effectively, efficiently, creating standards that can be used across the industry to just create a ton of efficiency in an area that's absolutely red hot growth, which is in the passive investing space. And then the third is we've taken our execution platforms. So think of our auction capabilities, our RFQ capabilities and our click-to-trade protocols. We've combined them all under one offering that I mentioned we launched on our last earnings call called ICE Select. And what's powerful underneath that is not just the combination of the execution venues, but it's also -- we've introduced our rich data and analytics capabilities onto that same application. So that as you're looking at, and you want to execute a transaction for a certain number of bonds in a certain security, on that same screen, you can see this is what I can execute at. This is what I can submit an RFQ out of the counterparties that I go ahead and select. I can see what is ICE's real-time view of price on that instrument. I can see, based on the security that I'm looking to execute, what's the liquidity that instrument that I can expect that instrument to have. And also, based on the size and the particular security that I'm looking to execute against, what is the best execution price that I should expect? Because that's going to differ based on the liquidity of the underlying instrument as well as the size that I want to transact. And we're uniquely positioned having decades of history of information to utilize here to be able to provide this type of rich analytics to our customer base.