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

Great. Well, good afternoon, everyone. I'm Alex Blostein, capital markets analyst here at Goldman Sachs. It is my pleasure to introduce Jeff Sprecher, Founder, Chairman and CEO of Intercontinental Exchange. Over the years, ICE has established itself as a leading global network of exchanging -- exchanges, clearinghouses and data services. Most recently, ICE also expanded into the mortgage space with an acquisition of Ellie Mae, creating the largest front-to-back electronic platform in U.S. mortgage ecosystem. With lots of momentum in the business, we look forward to getting an update from Jeff on his vision for the business. So Jeff, thanks so much for joining us.

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

Awesome. Well, this is not the most typical audience for us, being a tech conference but mostly a financial service conference. Since the last time you participated in this event, actually, quite a bit has changed and evolved in the business, probably most notably the acquisition of Ellie Mae and kind of how that sort of propels ICE into the mortgage space.

So maybe just to level-set everyone, can you help us understand how these assets, exchange, trading, clearing, data and now mortgages, how do they come together on ICE's network? And ultimately why is the sum greater than the individual pieces here?

Yes, it's a good question. I am the founder of the company, and I came from outside the financial services industry. And we started building exchanges, and I realized pretty quickly, in a digital world, those are just networks. And they have this unique effect that every new participant on the network makes the network more valuable to all the other participants. And every new piece of data or information that is pushed across the network can be sold and -- to everybody. So build it once, sell it many times. And so we have as a company just looked for opportunities where we can build, buy or start networks. And so we really have, from a segment standpoint, 3 that we think about. One is exchanges, both the commodities and equities. One is fixed income, in other words, bonds and information data related to bonds. And then the third, mortgage or essentially interest rates. And the reason that they work well together is at the core of them are some, let's call them anchor tenants like Goldman Sachs, the major financial institutions around the world, tend to be in all of those businesses and have connectivity to us to these networks. And so I like the compounding effect in terms of managing a business, and that's really what we look for.

So we'll unpack some of that in a little bit. But I -- first, I wanted to kind of hit maybe on the financial profile from these changes, right? So ICE recently revamped disclosure, really I think trying to -- aiming to underscore the durability of the revenue base, right? Like roughly 50-ish percent of the top line is coming from these recurring businesses, so not volume, non-transaction-based sources. How should investors think about sort of the growth algorithm for that recurring piece of the model for the next 2 to 3 years? And what are some of the key themes that are underpinning these growth assumptions?

Yes, it's a good question because I think investors, in my view -- and you can challenge me on this because you're better placed -- but investors, in my view, don't -- in our space, haven't really differentiated between variable revenues and recurring subscription revenues. And -- but as a manager, I would much rather have recurring subscription revenues. They -- we pay a dividend. We have -- the mindset of our Board is that as we grow earnings, we should be growing the dividend. And so from a purely cash flow standpoint, from an M&A standpoint, having a predictable compounding, growing revenue base is valuable to me. And -- however, when you have spikes in volatility, these businesses, all at the core of them, are there to effectively help people manage risk. And so when you have spikes in volatility, around day-to-day economic affairs of the world, volumes tend to go up on these businesses. And so we do participate a lot in the upside, if you will, of significant impacts to the globe, such as COVID, which gave us a record quarter in the first quarter of last year.

Yes. Let's kind of break this up a little bit and let's talk about some of these individual pieces. One that I'm sure you guys are probably getting most questions on is the mortgage business. It's going to -- the newest and probably the fastest-growing part of the model on the back of the recent acquisition. But if I kind of take it a couple of years back, you guys sort of started this mission to digitize the U.S. mortgage space a little while ago. You bought MERS. You bought Simplifile and obviously, of course, Ellie Mae now. So what is your vision for this industry sort of 5 years from now? And what role do you kind of see ICE playing in that, whatever that world sort of looks like in the mortgage space?

Yes. So through acquisition and then what we've built around it, we would like to have a complete end-to-end network in the mortgage space that -- and we -- currently, we start with prospecting for mortgages and consumer interest in looking at rates and what have you online, so early stage prospecting all the way through to when a mortgage is actually consummated and filed with the local recording office. And we've built a network that basically handles that entire life cycle. What we've been doing now is there's still -- if you look at the way mortgage works today, there's still a lot of paper. So people are -- they may be scanning pieces of paper and creating PDF files and they're going across the network. But they also then come off the network and become paper again and then on the network as PDF and off the network. And so our goal is to completely digitize that mortgage so that it never has to leave the network. And so that all participants in the mortgage are using the same data set and the same data standards so that artificial intelligence and other tools can be overlaid. And by the way, which is the big growth driver for us right now, to take errors out of the process of writing and underwriting a mortgage and streamlining and speeding up the process of actually entering into a mortgage. I think my company, because we own LIBOR and calculate LIBOR, which is at the heart of many mortgages, we have credit default swaps. And we're writing -- are helping people to manage risk around the GSEs and other major banks and mortgage participants. So we touch all kinds of institutional credit around the mortgage market. And I think if we can get the underlying market completely digitized, I think it will create a velocity in other products that you'll see in risk management on the institutional level a few years from now.

That actually dovetails into my next question, which is really thinking about the addressable market you guys see for ICE in the mortgage space. And in the last -- when you announced the deal -- and most recently, of course, you talked about it being roughly a $10 billion addressable market. I think the current revenue run rate in the mortgage for you guys is about $1.2 billion, right? So it's a considerable runway. And the way you talked about gaining share of that sort of pie is through, obviously, share gains for origination, platform. There's data analytics uptake and then the closing process. And that sort of rounds out how you get to that $10 billion mark to address the market, right? What are the things outside of that you think could be interesting sort of again down the road for ICE to address outside of kind of like that core mortgage system?

Well, let me just say, the fastest part of the growth that we see right now and at very, very early stages is putting some automation and artificial intelligence around the data that is flowing across that network. In other words -- and our network has about 1,000 third parties that are -- that use our network to go to market or to do various things in the mortgage space. So we see a tremendous amount of information. And the real goal and what will really increase the addressable market is by automating the ability to, for example, look at a consumer's credit report, look at what they've filled on, on their loan application, look at the W-2 and payroll information of their employer automatically and to pull that all together and to make sure that everything is verified because a lot of what goes on in underwriting a mortgage today is a lot of people that are manually doing that work and a lot of what we call stare and compare. So we think if we can automate the existing data set that we have -- and we've already started. And it's, like I say, the fastest-growing part of our business off a very low base. But we think that really increases the addressable market. Beyond that, we have essentially this data set that is the most significant transaction that a consumer probably does in their life. We see the cash flows that come across it. We know exactly when the deal closes. We know exactly who the participants are and -- because that's all digitized now. In real time, we can know that there's a major difference in this person's life who just bought a home. So what else will -- having just bought a home, what are the other things around that person's behavior that might be interesting? I've talked to other people in the industry who say a home purchase often triggers other kinds of behaviors in a family. And we're looking at -- okay, we have information and data about that. What -- who would that be valuable to? What could we actually do with it? What rights do we have to it? And how do we think about growing the information business?

Yes. That's a great point. The other element from what you guys are trying to build that stands out is how much money this could actually save to the originators, right, I mean people that are actually underwriting mortgage. You guys provided a ton of interesting statistics around that. The thing that strikes me is that despite the fact that it's a significant amount of savings for them, you guys are way cheaper, but there's a lot of room to go, right, like that gap is still quite significant. So how do you think about sort of the pricing power in terms of what you guys are trying to build? How big of a growth algorithm is that going to be for ICE for the next couple of years?

Yes. So what we're -- what is lacking in the market right now is essentially a digital note. You -- most lenders still have a paper note with a wet signature on it. And if there's a foreclosure, most courts respect a original paper note document with the wet signature on it in terms of dealing with foreclosure issues. The industry is working with, and it's under 10% of the market right now, a digital note that you would consummate by mouse clicks, much like the signatures that many of the people that are watching this would do on other kinds of legal documents using a mouse. And that, that would never necessarily have a wet signature. It would never be put on paper. And it would be ultimately stored in a digital vault and accessible as the original, respected as the original, if there was a foreclosure. So we're building that, and we'll be launching a lot of tools around that workflow this year. And once we have that, it will really then allow a collapsing, in our mind, of the time to enter into a mortgage, particularly if you can couple it with some of this artificial intelligence and data work that we're doing. And it will collapse the closing from -- if you've ever done a -- bought a new home or done a refinancing, it's probably at least a 30-day period. And there's no reason for that if we can bring all the data together and the parties together and it's all online. So the savings that we're talking about is tremendous, both in the stare and compare personnel, but also just the cash flows that would go along. And our fixed income network, we are the largest pricing agent for mortgage-backed securities. And we calculate for institutions the value of mortgage-backeds. And so we do feel like part of what we'll be able to wire together ultimately is real underlying information about the mortgage and the people in the mortgage. And when it's going to fund and what rate it's at and how the rate's going to lock, and the actual institutional capital markets that are backing that funds flow. And so there's just tremendous savings in there. And we're -- we've got a team together, and we've been doing a lot of work on. How do you go about pricing these things? How much of it is -- to your opening question, how much of it is recurring revenue subscription based? How much of it would be transaction based that would be on the closing statement of the actual borrower? We don't have the answer for that now, but it's definitely an area where we're doing a lot of work.

Yes, yes, makes sense. So since you mentioned data, I wanted to move on to the next kind of vertical of what ICE looks like today, which is your fixed income data business. Again, you guys kind of built it through a number of acquisitions, IDC being the largest one several years back now. It feels like that business has seen accelerating momentum towards the end of last year and into 2021. But again, for the benefit of this sort of audience, maybe spend a minute on sort of talking through the key elements of what your fixed income data business looks like today? What does the competitive set looks like there? Who do you guys compete with? And how do you envision that business growing over the next couple of years?

Yes. I mean for those that don't touch fixed income, there's an unbelievable number, millions and millions, of debt bond instruments in the world, all of which have their own customized bond documents. There's no 2 that are alike. And so our business starts with the reference data, which is we have a database where almost every security in the world, we have the terms and conditions that we get out of the paper bond documents and digitized and so that they're available. Having that information then allows us to help people create indices because we know all the instruments and the underlying terms. And so we also have some execution platforms, which are mostly consumer based. And as you know, we've been moving them and building them out so they can become more institutional. And we've seen this tremendous trend now of people that are preferring to own fixed income securities in the form of ETFs as opposed to individual instruments. And so we're involved in helping people to construct the indices under those, helping to calculate the values of those ETFs on a real-time basis and also listing them on one of the New York Stock Exchange venues that we have. So it's an ecosystem that we've built. And I think it's the sum of all those parts that's been accelerating the growth. And this is a case where we have largely been capturing revenue through subscription as opposed to transaction. And it's a large compounding, growing subscription base because we keep finding new ways to add value to that whole portfolio of fixed income services.

It's interesting. You mentioned indexation. That's probably one of the bigger trends in financial services, tremendous amount of growth. If you look at what happened on the equity side, many would argue that the fixed income side of the ETF trend is still kind of in early innings. Can you dive into that a little bit more? How does ICE as a whole benefit from that trend towards indexation? Any numbers around that in terms of how much in kind of total revenues you guys have from the index business and where you see that going?

Yes. So your audience will be familiar with the major equity indices around the world, and those are fantastic franchises for the people that own them and we own some. But fixed income is a little different in that if somebody does a 20- or 30-year bond, they can redeem it and pay it off early. Sometimes, the bonds [ have ] fees. There's a lot more activity in a bond that's created and then it's ended. And so an index has to be constantly rebalanced. And it doesn't necessarily lend itself to quarterly rebalancing or predictable rebalancing dates. Because bonds suddenly are retired or people go bankrupt and -- or other defeasement issues. So the trick there is in coming up with obviously the original index and then ongoing substitutes that can fit into the index as it's being rebalanced on the fly, so that it has a continuous look and feel to it, even though underneath, it's definitely a duck with little legs that are moving underwater. But we just happen to have an unbelievable capability there to help people figure out what instruments to put in an index and then how to keep it balanced. Similarly, once an ETF forms against an index, it can't always buy all the names that are in the index. And so we help the ETF industry figure out ongoing substitutions that can be held sometimes for short periods of time while they look for the actual instruments that they need so that, again there's continuous performance underneath that index.