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

All right, everybody. Going to keep on chugging along here today. I hope everybody is doing well. I'm having a good conference so far. Again, my name is Jeremy Campbell, I cover the Exchanges, Brokers and Asset Managers sector here at Barclays. And today, it's my absolute pleasure to welcome both ICE's CFO, Scott Hill; as well as the Ellie Mae COO, Joe Tyrrell, to the Virtual Global Financial Services Conference. Scott and Joe, thrilled to have you guys here.

Thanks for having us, Jeremy.

Thanks.

Now that I have both of you here, just spend some time and probably most of the session today talking about the recent transaction with Ellie Mae, and now ICE is a much larger footprint in the mortgage services landscape. So Scott, I think we've had many investors call up, maybe not fully aware of ICE's presence in the mortgage business before the Ellie deal. So I guess let's just set the table for a go-forward conversation with a bit of look back and a background on the MERS and Simplifile, and what they do and how they became part of ICE historically?

Sure. So one of -- as we think about things from an ICE business model standpoint, what we think we've been really good at over time is owning and operating mission-critical networks, particularly those that support an asset class or an industry that's moving from a more analog world into a digital one. It's where Jeff started the company with trading 20 years ago in the energy markets. It's what we're doing in the fixed income space that will significantly enable the IDC acquisition 5 years ago. And as early as 2015, '16, we saw a similar opportunity emerging in the mortgage space. One of the things that we've learned over time is the importance really of kind of the back end settlement process. Jeff, on the investor call around Ellie, talked about the fact that we've understood the importance of settlement or clearing and kind of the data components. And so where we established our footprint back in 2016 was MERS. And so for people who are more familiar with our -- the trading part of our business, a good way to think about MERS is it's the DTCC of the mortgage space. It's where the golden record is for 80-something percent of U.S. mortgages. But when we did the deal in 2016, the technology there was a mess. And at our heart, our company is a technology company. And so what we agreed was to work with Fannie and Freddie and the big financial institutions that were the owners of the technology mess to rebuild. And so we took a majority stake in 2016, but we didn't consolidate. We had it below the line because we didn't control the entity at the time. The entities' operations itself were still being driven by the other owners, while we spent time completely rebuilding the technology. And then so not only were we able to successfully do that, but we learned a lot in the process about the type of data that's resident in MERS. And so it was a technology rebuild and over the 3 years, 2016 to '19, we learned a lot about the data that was resident on those mortgages, and the importance of the ability to see how those loans are performing subsequent to being closed. But we also understood that as we look to a world where people were doing more electronically in the mortgage space and hopefully a shift towards eNotes, that we weren't at a point at the end of the process where we could dictate that flow upstream. And so it was really difficult to say, hey, eNotes is better for the industry, as we're sitting there at the end having the mortgage filed with us versus upstream. In 2019, in addition to closing the MERS deal, we also bought Simplifile. And again, that's a business that, to some extent, is more at the closing of the settlement process. Because, effectively, what the Simplifile business had done is build plumbing into counties that represent roughly 85% of the U.S. population. And so now you can electronically file mortgage documents and documents related to the mortgage in those counties. And again, it's a means of generating more efficient flow, more of a digital process. But again, Simplifile was more at the settlement end of things, at the closing end of things. And that's where we really got our first view into the importance of the Ellie network because Simplifile and Ellie were partners. And as we thought about the Simplifile and MERS really moving the industry more towards an automated, more digital process, something that would facilitate more electronic mortgages being done, it became clear that sitting at the end of the process, we weren't going to be able to drive that, and we really needed to move to the front end. And so that's when we decided we would make the move on the Ellie deal. And we showed a chart in the Investor Day -- or in the investor call that really showed how we now go from end-to-end, all the way from the application, through to the filing and then to registering those mortgages in MERS. But it was really focused on the important closing parts of the process and then looking upstream to see where the market traded, and Ellie was clearly the network that is the most critical with the highest share in that origination process. And we just felt the combination would be extremely powerful.

Yes. Great. And then just from back in my day covering the mortgage industry, and Joe, maybe this is for you, is -- I knew Ellie mostly as an origination technology provider that find out most of the small to midsized nonbank originators, while large bank or nonbank firms either ramp proprietary platforms or use some Black Knight origination technology. Is that still the labeling today?

Kind of. I mean our #1 competitor is actually those proprietary systems that a lot of those large depositories used. But when you look at our position in the market, actually, we have customers across the entire spectrum of both size and lending channel. So our platform supports the largest retail, wholesale and correspondent leaders in the industry, including 2 of the top 3 largest correspondent lenders. We also have some of the biggest banks using not only our core lending platform in Encompass, but some of the nation's largest depositories also use our Velocify and our AIQ solutions. We do have more of the largest independent mortgage bankers in any other platform, and we also support a significant number of regional and community banks, credit unions, even mortgage brokers. I think the beauty for us, Jeremy, is we do this all on one platform. And because our platform supports these large lenders across all these channels, it also gives us a lot of different ways that we can grow the number of loans on our platform. So to give you an example, our lenders, especially because they skew larger and they skew more towards those independent mortgage bankers where lending is all they do, we've seen that they have been taking more and more share from some of the larger depositories over the last several years. So regardless of what the volume is in the industry, we get the benefit of that shift. And then historically, lenders have been using different systems for different channels. So they'll have 1 platform for retail, 1 platform for correspondent. Because our system now can support multiple channels, we're seeing lenders take more of an omnichannel approach, where they want to have all of their users on a single platform and then as volume shifts from channel to channel, they can actually shift their folks and take advantage of any changes in the market. What it's also allowed us to do is have lenders that may have thought about entering a channel. Perhaps they're on retail, but they want to go into wholesale. Now that they're on our platform, it gives them the ability to do that without them to make any additional technology investments because they can just spin up a new channel and configure it on the platform. And certainly, we're always adding new lenders, and this brings incremental loan volume to the platform. And I can tell you, even during this pandemic, where certainly normal sales cycles have gotten a little extended, we've still had some very significant wins with very large lenders, including going live with the largest correspondent lender in the country just a few months ago. So all of that and our position in the space, the spectrum of lenders that we support, also gives us a huge opportunity to monetize those loans multiple ways by cross-selling other products into that base. So I think our position in the market, as Scott mentioned, from a market leadership perspective, is really reflective of the size and scope of customers leveraging the platform.

And then maybe just one last -- lay the groundwork type of question here. So we talked about -- Scott with Simplifile and MERS. We talked about the origination and the clientele of Ellie Mae. But Ellie has done quite a number of things very well also. So maybe just a quick backdrop here on the Ellie Mae network and some of the things that you've done to enhance digitization and automation and documentation, things like that.

Sure. Well, since you mentioned the network, let's start there. The Ellie Mae network is the industry's largest marketplace. So what we're doing is we're connecting virtually every provider in the mortgage supply chain. And then what we do through the Ellie Mae network is we facilitate the exchange of data between the lenders and all the service providers. We do this securely and safely, and we do it through millions of transactions each month. But our solutions, as you just mentioned, span the entire mortgage manufacturing process. And so that's from point of thought when a lender first engage that consumer, all the way through to the delivery of that asset into the secondary market. And so the way that we kind of provide solutions all throughout is, if you start-up at the top of the funnel, we have our Velocify solutions. So this is marketing automation for helping a lender create leads with automated lead management and distribution that helps lenders not only increase both capture, but also pull-through rates of those leads. And then our Consumer Connect point-of-sale solution has over 1,500 lending institutions that are leveraging it. And this, again, national banks to the largest independent mortgage bankers on our platform leveraging this consumer-facing technology. And what it does is it gives them the ability to create this touchless application process for the consumer, touchless borrower engagement and then it's where that borrower engages with that lender over the course of the next several weeks and providing documents and other materials needed to manufacture that loan. You also mentioned kind of the document recognition. So that's our AIQ solution. What this is, is it's a machine learning document recognition and automated data extraction platform. And again, support some of the largest national banks in the country as well as the industry's largest wholesale lenders. And really, what this is helping everybody do is it's achieving that automation quality data through algorithms in our proprietary platform that have been trained by millions and millions of mortgage documents. So we can recognize the document, we can extract the data and now we're using that data for automating the workflow. And one of the ways we do that is with our analyzer suites. So what we're now doing is we're taking the process, which has historically been pretty form-centric, very document-oriented, and it's kind of a serialized process where you do step A and then step B. So we're breaking that apart into essentially task-based workflow. And now our analyzers are going in and actually through artificial intelligence they're actually performing the tasks that normally are done by, in this case, underwriters. So income calculation and validation, automated appraisal underwriting, credit and asset underwriting, and it's kind of just the tip of the spear with a lot more analyzers to come. And then I mentioned how we also go all the way through to investor delivery of the asset. So our Investor Connect service delivers complete data and document payloads to most of the largest investors in the industry. And what we're doing there is we're really removing the friction in the loan purchasing and delivery process. So huge benefit to the investors purchasing those loans because we're often populating their systems with data directly, but huge benefits to the lenders because they're able to sell those loans much faster and create liquidity for their next lending. And I'm assuming we'll probably talk about data a little bit today. We have just started to scratch the surface in data. We're doing this through our Ellie Mae Insights product. It just launched. But it's the industry's first real-time peer comparison solution that allows a lender to compare themselves to an anonymized peer group on a whole realm of different lending metrics, so not just rates and terms, but pull-through, demographics and a lot of other attributes. And then lastly, to drive even further automation. Right now, we're in the process of planning to codify our AllRegs solution. And what this does is it contains underwriting guidelines for virtually every lender in the industry. So this, combined with our AIQ, our machine learning and AI solution and our Encompass automation engine, it's going to give us the ability to automate the complete processing and underwriting of the entire loan. But the special sauce here is we plan to do that literally as the application is being completed by either the consumer or the originator. So yes, it's a lot more than just the Encompass platform for sure.

Great. And then I think like we laid the groundwork really nicely here. And I think -- so let's talk about the go-forward of the combined entity. And I think, Scott, one of the things that you had referenced earlier was that fantastic slide. It really stuck out to me in the post deal call where you visually paired up the legacy ICE mortgage business with what Ellie Mae had to offer to showcase this end-to-end solution. So maybe let's stick there for a couple of questions. I mean just the high level one, as you look at the more origination process from application to title tech to originations, the post close and everything that's involved in that, I guess where are the pain points in the industry today? And how is ICE best positioned to kind of facilitate a fruition?

So I'm going to let Joe answer that. And you introduced him correctly as the COO of Ellie, but he's going to be running our entire ICE Mortgage Technology segment. And so I'll let him talk about the pain points and how we're going to address those.

Sure. So it's a great question, Jeremy. And what's interesting, it's not as much -- when you talk about pain points, it's not as much the steps in the process, but it's how those steps actually get completed. So the best way to think about this is for a lender to extend a mortgage, it's kind of like a manufacturing process. So think about auto manufacturing, right? The auto manufacturers, they don't actually build the tires and the radios for the cars that they're manufacturing. They procure them from service providers. And then they assemble them into the car. It's the exact same thing with mortgages. So what lenders are required to do in order to make sure that they're meeting all the regulatory requirements and all the requirements of the secondary markets so that they don't have to worry about the risk of loan buyback is they're assembling these loans. So they're getting flood reports, title reports, credit, appraisal, fraud, all these verification services from all these third parties. But unlike other assembly lines, today, lenders are employing people to literally push buttons, order services, receive the documents, then they're looking at the documents and keying information in. So it's a really laborious process that's heavily reliant on people. And this is the reason why for a lender, it costs them $8,000 to $9,000 just to originate a loan. So for us, this is a perfect opportunity for full automation. And so when you look at the next phase of our growth, that's what it's all about. When you look about the TAMs that we can penetrate, the biggest one is around automation and starting to now -- the fact that we can take this data out of these documents and actually perfect the quality of the data so we can use it for automating the steps in the process, that's where we're going to really accelerate a lot of the initiatives and automation that we've been focusing on. And so it's interesting when you look at the parts. What MERS has done is they've digitized the file cabinet. And what Simplifile has done is they've digitized kind of the counties. And then really what Ellie Mae has done is we've digitized the supply chain. And so now that we have all this digital plumbing in place, the opportunity for us is to then change how all of these parties interact in sharing and exchanging that data and leveraging automation to remove all those pain points.

And one of the things, Jeremy, that I'm excited about on that chart is, if you think of about it -- so Joe has talked about how we can harness the data to automate the process and to make the process better to do the error checking, to do compliance, to do it more efficiently. But there's a lot of information in that chain, too, a lot of unstructured, useful information that's real time. As opposed to a core logic or looking at servicing, which is telling you what happened 3 or 4 months ago, Joe was -- on the call last week mentioned that data is at least 3 or 4 months old when you see it or older, we know what's happening right now. And so we were talking before we started about places where ICE and Ellie coming together are synergistic, I think beyond the data piece that Joe's talked about, which they already had in full motion, I'm excited about the opportunity for Lynn's business and her teams to come in and take a look at that unstructured -- just like we're doing in the ESG world today, just like to a large extent we're doing in the fixed income ETF world, and finding -- reading bond documents and all of that. And so I think there's an opportunity. Again, this isn't driving 8% to 10% next year. But in a world where I gave a decade's worth of guidance, another big opportunity and $4 billion of addressable market is in that data site and creating more real time, immediate information for the industry to know what are the products that are selling, what are the markets that are hot. And so I'm excited about that opportunity on the data side as we move forward as well.

Yes. And I'll just add to that, Jeremy, that for us we've had so much interest in people coming to us for our data. So not only are lenders that are looking for how can we access the data that you have to help us make better decisions, but people well outside of the mortgage industry. I mean if you think about something as simple as prepays for mortgage-backed securities, right? And people will talk about, well, the servicers have access to that data. The reality is as a servicer knows about a prepay when they receive a request for a payoff. So that's happened 30 to 45 days after the application started to either do a purchase of that subject property or a refinance. So at Ellie Mae, we know about the potential of their prepay a month, 1.5 months before anybody else. But we don't have the ability to understand how to unlock that data and really help people consume it so that they can run their businesses. And that's what we were really excited about. Because for us, we don't look at ICE as just a technology company. They're a technology and data expertise company. So for them to be able to come in and help us understand how to harness the power of this data and unlock it for the communities that have been looking to leverage it is huge upside for us.

Yes, last I checked mortgage was just a little bit of a size of the fixed income market. I'm sure Lynn's team is champing at the back here. I guess we may perhaps like a live read on prepay data and other sources of strength and weakness in the market. I guess let's just move on. On the user base, I had a question here is, is there upside to the number of users that are using the combined complex? Like are you guys going to be able to flex your muscle now that you have all 3 elements under 1 umbrella here and penetrate either new users that have access on platform? Or people that are actually like heading a deeper engagement with the platform now that you're a combined entity versus 3 stand-alone businesses historically?

You take that one, Joe?