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

Great. Good morning, everybody. Next up, it's my pleasure to introduce Jeff Sprecher, Founder, Chairman and CEO of ICE. Over the years, ICE has established itself as a leading global network of exchange, clearing and data services. Of course, most recently, ICE also expanded into the mortgage space with an acquisition of Ellie Mae, creating the largest front-to-back electronic network in the U.S. mortgage ecosystem. With lots of momentum in the business, we look forward to getting an update from Jeff on ICE's growth strategy into '21. So welcome back. Always great to have you here.

Thank you, Alex. It's good to be here. I mean, it's a little weird, right, this year, but we'll make it work.

Yes. Well, I had to fix my banner few seconds ago. So we kind of make it work as we go.

Our Zoom conference broke down, so I'm sitting at my desk, but yes normally -- I normally don't let people [indiscernible].

I got it. All right. Well, more importantly, let's talk about ICE, let's talk about what's been going on. And look, not surprisingly, I probably want to start with the mortgage business. And several years ago, ICE embarked on a mission to sort of digitize the U.S. mortgage industry. As an owner of Ellie Mae, MERS, Simplifile, what is your vision for that industry over the next 5 years? And more importantly, what role does ICE play in that future?

So it's a good question. I think when you step back and think about like what's going on in the minds of the management here is we really want to be in network businesses and particularly where there's an analog to digital conversion going on. So the whole mortgage strategy has been about assembling a network. It's actually something that we thought about over a decade ago. And we did a lot of buy versus build analysis. And ultimately, we've put together 3 really interesting companies that give us pretty much an end-to-end network. And so the goal is to make that the network of choice for the mortgage industry at the same time that it's going from analog to digital, so that it not only drives the adoption rate, but drives more content across the network. So, if you think of a network like a television network, you need both viewers and content. And the more viewers you have, the more people are talking about you, and it attracts other viewers. And the more content you have, the more you can distribute to those viewers. So there's kind of a hand-in-hand content distribution, build and that's really what we're building in the mortgage space.

Right. So obviously, a handful of follow-ups here. And one, I guess, starting with the revenue synergy from this deal. And look, Ellie Mae was clearly very attractive growth asset on a stand-alone basis. And we all kind of gotten to know that a little bit over the last couple of months as we got to know the business more. What does ICE bring to table to sort of further accelerate that growth? And when it comes to some of the key synergy areas, such as, for instance, extending the data from Ellie Mae to ICE's customer network or facilitating and streamlining the closing process more, what sort of those revenue synergies you see as more immediate that you can sort of execute on almost in the next year or 2 versus some of them going to be a little bit longer term?

Yes. That's a big question, loaded question, but let me break it down a little bit. We had -- so Ellie Mae is really a significant mortgage origination platform. So it's connecting potential borrowers and lenders, and others that are in that lending ecosystem. And then we acquired MERS, terrible name, but it's an acronym for the Mortgage Electronic Registry Service, which is -- where all -- almost all U.S. mortgages are registered and give them a MERS ID number called the MIN, M I N, MERS identification number. And so it's kind of a middleware. And then Simplifile is a company that we acquired where it takes the completed mortgage and sends it to the local registration jurisdiction, the County Registrar's office, if you will. So by assembling those 3, we built a pretty much an end-to-end network that will -- in the primary market, in the market of a lender, finding a customer and closing the mortgage and putting it all the way through to its registration and then ultimately spinning it out into the secondary market or to Fannie and Freddie in the case if it goes to one of the GSEs. So a big piece of what we're doing is is putting that network together. We've already seen revenue synergies there because there -- and I've been involved in a number of sales processes, where there was a large institution that was on the fence on whether they should acquire this network or upgrade or what have you and putting that end-to-end people in that space, see the vision and the simplicity that will come. The other pieces are now that, as you mentioned, the closing process, we're building out -- we've been very transparent and vocal about the fact that we're building out a digital closing room. So think of it as a place where everybody that would normally go into an attorney's office or an escrow office to sign the paperwork and with the notary republic would all meet, and they would actually consummate the transaction. So you've got to have all the documentation there. You've got to be able to verify identities, and then you have to, once closed, ship the documents to the various locales and safely deliver them. So that's an interesting revenue synergy, if you will. It's a business that, once you have the whole network together, we're able to build that, let's call it middleware piece. It's something actually we and Ellie have been working on privately prior to the acquisition, and it was through that partnership and relationship that we got to know, Ellie and said, you know what, if we actually did this as one company and own that end-to-end network as one, we will have interesting opportunities on how to make that available to the market.

Got it. So as far as the addressable market goes, as part of this deal, you guys talked about a $10 billion addressable market, again, largely predicated on Ellie Mae's continue to gain share, some of these data and analytics uptake and the closing processes. If you were to kind of zoom out a little bit and you were to think about, are there things outside of the $10 billion TAM, what would they be? How would you go about trying to achieve them?

Yes. So just for the audience perspective. What I just talked about that we've built sitting here today is around a $1 billion revenue business, little larger than $1 billion revenue business. And we talked about a $10 billion TAM in our minds. And that's a TAM that says -- and we have about 45% market share of mortgage originations. So we touch about 45% of all U.S. mortgages that are originated. So obviously, we can grow that market share and double the $1 billion to $2 billion. But beyond that, what we're really seeing are other mortgage opportunities that now that we have the network, we can tap into. And it was surprising to me when we got into this to learn that the average mortgage costs about $8,000 for it to be entered into and underwritten. So a pretty big cost to do a transaction that is for those participants relatively routine. And a lot of that cost, the bulk of the $8,000 cost is human touching -- it's personnel costs of people that are having to touch mortgages and a lot of what we like to call stare and compare, just passing one set of documents to another person, who has to take the information off those documents and put it into a different system, et cetera. So what we really see as the bulk of the TAM, if you will, is automating that process and then participating in the revenue and some of the savings as we automate. And one of the companies that we have that's now in this is an artificial intelligence company and not to throw that out as a jazzy term or something, this is really a place where AI can work. It can -- there are so many sources of information now about you and I as consumers [indiscernible] credit agencies, the lender itself may have a pre-existing relationship. You've got other kinds of relationships potentially in the housing market. You've got an employer, potentially a spouse, other income, all of that data is pulled together in a mortgage record and AI can really -- can accelerate, if you will, looking for certain bits and bobs of information and then making sure they're in the right format and can be easily pulled into a mortgage file and completely automated. And so we -- that is an accelerating area of people that are trying to get more volume through or reduce headcount and is being incredibly well received. The last thing I would just mention is you brought up data. As a major participant now where we hope to touch all aspects of the mortgage business, we are acquiring a tremendous amount of information. And that information exists in the mortgage space in various spots, but it's never really been able to pull together and dished out in real-time or near real time. And obviously, as we automate and reduce the time to close a mortgage, and you've increased the velocity that the data is of interest. And since we're in that business in distributing data, we're already working on data products that the industry is interested in.

Great. So as you talk about -- just around out the mortgage discussion, as you talk about your vision for the mortgage business, are there additional capabilities that ICE will need to acquire as you further build out this vertical? We've seen you do that in data to some extent. You bought IDC and you kind of started adding little things here and there. Is this a similar playbook? Or do you feel there's so much to deal with the TAM is so large that a lot of these things are going to be organic?

What is interesting about the network that I described is we have over 1,000 companies that access that network in order to dish their services to our customer base. So think of it as an Amazon-type platform with various sellers. And the business model has been for that network is right now, it's licensing or access fee by the third-party and then usually some revenue share or tiering of licensing or access per seat, some kind of negotiated access fee for the third party. But as a result of that, we participate in the growth of those third parties. We want them to be successful because we become successful. But we also have visibility into what are the products and services that are most in demand and where can -- where do the customers -- where are their gaps. And and I just mentioned that we acquired Ellie because we got on their network, if you will, and saw the power of putting those networks together. And so pretty much all Ellie itself in building out its origination platform acquired businesses that it became partners with on the platform. And so I think it's fertile ground for us to say, are there partners there that if we were together, we could accelerate each other's business faster and be better for the end user. So that's one really robust area that we've been looking at. Beyond that, we kind of know the playbook. It's what we do. These are network businesses, and that's what an exchange is, and that's what our fixed income network is. And so we know the right questions to ask and the kind of the connectivity issues that come along with running a network and where we can pull levers and look for either buy or build that would expand the network. And as you know, from talking to me for years, we -- in the exchange world, you either want to expand your distribution or expand your content, both help grow the network. So what I just talked about with those 1,000 partners -- 1,0000-plus partners are expanding content and expanding network capability.

Great. That's a really helpful framework to think about in that vertical. It's great. Why don't we shift gears a little bit. I want to spend a little bit of time, and I know in these discussions, we usually really start with some of the newer things you guys are doing. It's -- whether it's data or something else. But I actually want to talk about energy. It feels like it's a part of ICE's business. It's clear, it's still very significant. But if it's kind of flying under the radar a bit despite posting record results this year and importantly with accelerating growth, can you help us unpack some of the key drivers there, especially in light of pretty range bound oil markets in the last 6 months or so? What's changed? And sort of what's your outlook there?

Yes. So the very first acquisition that we did when we were a tiny little company as we bought the International Petroleum Exchange of London, which had 4 contracts listed on it. And today, that is the heart of our energy business that, that company became the heart of our energy business, and we have almost 1,000 energy products. So what you've seen over the growth of our company is just a massive expansion in the number and the type of energy products that trade. And in fairness, when we acquired the IPE, it was an open outcry floor-based exchange, so every contract needed real estate, if you were going to launch a new one, you actually had a real estate issue, which is where we're going to locate a group of traders flashing hand signal. And the beauty of being automated now and all digital, is it's very easy for us to roll out new content. So you've seen that analog to digital conversion results in a lot of new products and differentiation. And where the business -- what I think people don't appreciate because oil tends to be the flagship product for energy, it always has been, and it's representative of energy. The growth has been -- well, just to give you a sense, our revenues are up maybe 15%, I think, plus or minus, through the third quarter this year. And if you look over the last 5 years, our average revenue growth has been 7%. So pretty consistent, steady growth. And what is driving it? It's -- we do renewable credits. We do emission carbon credits. We have all forms of natural gas, liquefied natural gas. And so as the traditional carbon-based energy business continues to grow because of GDP growth, particularly driven by China and other parts of the world that are still in emerging economies that are consuming traditional fuels, you also see the more organized economies moving -- shifting to a lower carbon footprint. And so that transition, which all involves the same group of companies in terms of participants has really driven quite a lot of growth. And it's the energy conversion that's going on in the world, and we're right at the center of helping to finance it through trading these derivative contracts.

Got it. That's helpful. Definitely an important business to watch. Shifting a little bit to data. So on the last call, you talked about accelerating growth in data services into '21, particularly within pricing and analytics business. I guess, can you talk about key client segments and products that are driving this acceleration? And then I want to take a little bit of a step back and maybe that will become all pronounced once you guys go through your segmenting of the business that's coming up, but pricing and analytics is about $1.1 billion, $1.2 billion a year kind of revenue business. What do you see as the addressable market there? I mean we talked about that for mortgages, but I think it's important for people to understand what that could look like. And given recent M&A in the space, obviously, data is -- always continuously kind of growing in its importance. So how do you envision the competitive landscape evolving for your data services, given some of the deals in the space and the addressable market there?

Yes. So you alluded to the fact that we're going to resegment the business. And we had a segment called data in that was exchange data, so the output, the tape, if you will, that comes out of an exchange. Also the business that you mentioned and then now increasingly mortgage data going in. So we've decided that to give you better visibility into the business and to also allow you to do better comparables on how we're doing relative to our peers, we're resegmenting, and we're going to take the exchange data and put it back into our exchange and clearing segment, which is how most of the other exchange peers that you look at report their business. And we're going to similarly take the mortgage data and keep it in a mortgage vertical and then take all of the other business that we have, which is largely a fixed income data and network business. And in the heart of that, data and network business, is this really growing an interesting business that we run, where we are providing reference data and also on bonds and fixed income products. And we're also providing sort of real-time estimates of what -- valuation estimates of what we think these securities are worth, which are used both for compliance purposes, for risk management purposes and also for people that are trying to put deals together to figure out what a trade might be worth. And that's our growing business that takes a lot of analytics skill, years of database structure and increasingly putting that data into indices and other tradable forms of baskets of fixed income products. And I think the addressable market is huge, honestly. We've seen -- we're all witnessing a conversion in the way fixed income is traded. There's an analog to digital conversion of outright bonds going on. But more interesting in the part that we're participating in is a securitization, if you will, of the securities in the form of ETFs or other baskets that make it easy for investors to control fixed income assets as opposed to trying to buy an individual bond and then deal with the latter, if you will, on duration. People are essentially taking that out, that dilemma out and doing that for you in an easy-to-own instrument. And so -- but all of that underneath it needs this data and analytics and indices, and we have wired ourselves into that ecosystem, and it's growing, it's accelerating. And I think it's been underappreciated. We view that not all recurring license revenue that many of our peers have is equal. And what we really want is recurring revenue that is incredibly sticky, that gets wired into the plumbing -- networks that get wired into the plumbing, so they become incredibly sticky and then we're able to compound our growth on top of that year after year. And in this case, where we've been seeing it accelerate, which if you would ask me in the beginning of the COVID crisis, what we thought, we would have told you, my god, how are we ever going to sell to clients that are working from home. But Lynn Martin and her team has done a phenomenal job of figuring out how to access clients and expose their interest and close business that's actually been accelerating.

Right. All makes sense. Let's talk a little bit about another important theme in financial services, but really broadly for the economy as a whole, which is ESG. ESG has become, obviously, a big focus across different market participants. And I know ICE has been -- has had various initiatives kind of targeting that same theme. So can you help us better frame what ESG-related offerings ICE provides today? Any way to sort of size the revenue contribution from these services and the opportunities that you see there for yourself?

Yes. So because we have this great network and infrastructure, we've taken a team. It's a little over 100 people. And what we now do is we go through every public document right now, it's in the United States, about 2,000 companies, we go through every public document that a company may make. So think of Qs and Ks and ESG reports or any proxy statements, anything that a company might be publishing, and we go through those documents, and we pull out 400 attributes that are ESG related. And we put those in a database and then make those available digitally and easily and keep them updated in real time. And so we're not grading people, we're not suggesting what ESG standard should be. We're providing the underlying data that investors and index creators can use to assemble their indices. And similarly, because of the unique relationship we have with thousands of listed companies on the New York Stock Exchange, we're able to give that database back to the listed companies and say, by the way, here's what we see when we look at what you say. And it gives them an opportunity to say, "Oh, my gosh, I actually have -- I've done these initiatives and these other initiatives, and you haven't reported them." And we say, look, next time that you do a public filing, talk about what you're doing, and our people will pick it up. And so that's been a very healthy relationship. It's, like I said, 400 attributes, which the market itself helped us to determine what they want. And it's obviously a growing -- starting off a 0 base, but growing quickly because of the interest in this kind of information. And it's a big opportunity for us because I think, obviously, 400 attributes will probably expand over time, as people ask for other kinds of information, and also, the ESG trend is becoming a global trend, and we'll be able to export this infrastructure around the world.

Great. All right. Shifting gears a little bit. Let's talk about some of the other inorganic things. And we talked about M&A with respect to some of the mortgage things earlier. But again, when you take a step back, how are you thinking about complementing growth in other parts of your business inorganically from here, especially given some of the near-term balance sheet constraints? Obviously, you guys have levered up to do the Ellie deal, a little bit above your target path to delever. But obviously that -- presumably, that's a bit of a constraint today. And then separately, are there things outside of your current verticals that might be interesting? You've got a lot going on, both on the data side and obviously on mortgage side. But are there things that you're kind of potentially planting, like you did with MERS despite of its name, to kind of plant in other parts of the ecosystem to monetize the network better?

Yes, we sort of have 2 minds. One is, are there places we want to go in these existing businesses that we could get there faster by doing a bolt-on. And we've done about 30 or so acquisitions during my tenure here. So we've done a lot of bolt-ons. And then similarly, we say, are there whole market segments that -- where there are needs for networks that could drive analog to digital conversion that the market just hasn't assembled yet. And are there things where if we bought our way into some nucleus there that we could use our domain expertise and expand it. And those tend to be bigger deals and usually, honestly, a little outside the box for what most people assume that we might do. The hardest deals to do are the ones that analysts like you think are somewhat obvious because most companies that are takeover targets get fully valued. And when we do a deal, we have to assume we're going to own that business into perpetuity. And when you recommend a trade, you can -- somebody can own it for 6 months. So I need to buy it at a moment in time when it's either early -- in its early stages, so that we can grow our return on invested capital by growing the business or buy it after it's sort of fallen out of favor and people don't realize the opportunity, and it's the ones in the middle that are hard to do, if you will. And we've done both ends, buying New York Stock Exchange, a 200-year old -- 227-year old company. So definitely, a legacy business, one of the oldest companies in the United States, but it kind of fallen out of favor, as you know. And kind of lost its way. And so we do -- we will look at sort of both extremes and -- because ultimately, we think we can provide value to our shareholders, right, if we do the either end of that spectrum.

Yes. And if something interesting does come along in either one of those buckets, the way you described it, and if it happens to be sizable, is the balance sheet in constraint right now. It's a big priority, to like, look, we've got to delever back down first before we look at anything substantial, or if an interest opportunity comes along, there's obviously other ways you could finance it?

Yes, it's the latter. We're leading the world in the listing of SPACs on the New York Stock Exchange. There's an unbelievable amount of capital. I use that just as an example, but there's an unbelievable amount of capital that is pent up, that is interested in transactions that are -- that could provide growth, which is what that really represents. So I'm convinced that right now, a good management team with a good track record and interesting opportunity can raise capital easily. I've never seen capital that's available and have a number of good friends that have raised capital through SPACs, for example. But I think it's a broad recognition that the world sees a change going on, particularly behaviorally with COVID, for example, a lot of the leaders are COVID related have been accelerated due to COVID. People seem to have patience for growth, buying into a SPAC is really saying, I know you're going to buy a company that's going to take some time for me to get real value back. A lot of the big leaders in tech -- people have had long-term patience duration for earnings. And so I think it's just a great M&A environment right now. But we would only do something where we really thought it would give value to shareholders, not just to do a transaction. And honestly, some of the bigger transactions that have gone on right now haven't been that interesting to us just because they didn't fit what our game plan is.

Got it. So let's talk about the stock. We have a couple of minutes left. And the question that I want to propose here is ICE's multiple is in the low 20s. Its screens is fairly attractive. On a couple of metrics, right? But I would argue, given the resiliency and the growth profile of the revenue base and comparing it to the comp group, and we've seen some of the recent deals. IHS Markit by multiple was 30; so look, clearly, there's a discount there. And when you think about resegmenting the business, hopefully, that will shed some light on that sort of dislocation, but if that doesn't really work, what are some other ways you could unlock value for shareholders? Are there businesses that might be slower growing, you'll be looking to dissect, anything else that you're thinking about?

Well, let me just first point out. I think we have the best commodity and derivatives platform in the world, the energy and ] commodity platform that you talked about. It's growing. It's been predictably growing. It's stable. It grew during the financial crisis. It grew during a number of Middle East conflicts. It's grown during the COVID crisis. I mean it's an unbelievably strong business. I think we have the best mortgage franchise against peers that have much higher multiples than the implied multiple in that business for us. And this is, by far and away, the best mortgage asset in the United States. And I think we're probably #2 in fixed income, 2 or 3 depending upon what you want to figure as the perimeter of a business in terms of having fixed income network. So these are very powerful businesses, which is why we decided to resegment them, so that you can make your own analysis about how these businesses perform relative to their peers. But beyond that, I'm a large shareholder and my entire management team is compensated largely in shares. We have a ownership mentality here. We are -- we -- when we feel the company is being misunderstood, we don't take that for granted. Part of it is resegmenting, part of it is the messaging that we need to do better job to show where we think there are shortfalls. And if we have to do economic restructuring in order to get value, we will. I mean, we buy businesses, we also sell businesses, terminate businesses. We're constantly editing what we're doing. Because, as you know, Alex, and you're probably sick of it, but at the end of every one of our earnings calls, and you've been on dozens and dozens of them, I end on a chart that shows the EPS growth of the company. And we do that intentionally because as a management team, we view our job is to grow EPS in all environments. And that's the portfolio that we constantly are evolving. And I know over time, the share price catches up to that.

Right. Well, we're pretty much out of time. It's a good note to leave it on. Jeff, thank you very much for joining this morning. Always great to have you, again, hopefully in person next year. But I hope you guys have a great holiday, and we'll talk to you soon.

Thank you for the [indiscernible]. It's good to see you.