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

Welcome to Piper Sandler's Global Exchange & FinTech Conference. Our next speaker is the Chairman and CEO of ICE, Intercontinental Exchange, Jeff Sprecher. Jeff, we've known each other since you went public in, I think you said 2005. I thought it was the end of 2004, but anyway, for a number of years. But there has been discussions about the number of people -- with Scott Hill, your CFO, leaving and as well as Chuck Vice, Eileen Kelly become a senator. And this was a discussion at a peer's conference. Two people you didn't mention were ex President of the NYSE, Tom Farley; as well as the -- your first CFO, who I knew, who's Richard Spencer, who became the Secretary of the Navy. So you've been producing Secretaries of Navy, Senators, CNBC commentators, consistent commentators. But anyway, here's my question. And we know that they're not going to competitors. They're going -- they've achieved their goals. And they're doing things, I believe, for what they believe is the next life stage movement. But you and me, maybe the constants among all this, but you appear to be the -- still the entrepreneur, the idea-generation person. It comes up with things like the network and Ellie Mae and so forth. So anyway, the question is, is that really the role? And is that -- how do you see your role going forward as the idea growth generation point man?

Well, first of all, it's nice to be here with you again, right, for another year. I learned in business school and just through my own reading that great companies are simply collections of great people. And I really believe in my heart that a group of dedicated, great people can get anything done. And I believe that in sports, and I believe that in life. And it doesn't have to be a group of rock stars that get together. In fact, oftentimes, it's people that are overlooked, but who have tremendous passion and heart and dedication. And my job has really been to surround myself and surround the company with those kinds of people and make sure that I get out of their way to allow them to achieve their goals and work together as a team. So I kind of see my job for the last few years, particularly, has been mentoring the next generation of leaders, along with the people you mentioned. Chuck Vice, actually, Chuck and I talked about his retirement 5 years prior to his leaving. Scott Hill and I spoke about his retirement 3 years prior to his leaving. Richard Spencer, years prior to his leaving. So these actually had all been very calculated inside our company. And then together, we figured out who the successors were and how we could go about grooming those people and giving them more and more responsibility. So I kind of see my job now as pushing as much decision-making down into the organization as possible and allowing people the opportunity to take calculated risks and fail and keep the culture that caused the company to be so successful alive and instilling that in the next generation of leaders. I'll just say we're very proud of the team we have there. The group that runs the company today is better than the group that started the company, for sure. And with great respect to everybody you've mentioned, who still I'm very, very close to and talk to regularly, and they still come back and help mentor others in the company. So we have a culture that is important to us. And as you pointed out, when people leave here, they're not going to other companies. They're basically retiring or doing their own private equity or what have you because everybody so far has felt that there's no better culture than the one we've created. And that's a testament to the group we have.

And we talked about people moving to the next stage of their lives or careers, you also give people opportunities as well. And I think I've witnessed this over the past 15-plus years.

Yes, we tend to -- you'll see that we tend not to hire these really high-profile, highly paid, successful people because, largely, we can't afford it. And so we've sort of targeted people that have passion. I think when I interview somebody, I rarely look at their CV or their resume. I really just want to talk to them about their goals and hear how they describe what they do and get that sense on, is this person an honest, caring team player who's passionate about their own life? And we can pretty much train anybody. We're not splitting atoms in here. And so we can pretty much train anybody on what we do, and that's worked for us.

Well, I may come to you and talk to you about my retirement at some point, too.

You may be one of those high-priced guys.

No, I'm not. Believe me, I won't be. I won't be. Getting into more of the company content. You have emphasized networks, not just recently, but really from the beginning. And even when it was some networks that we looked that you might want to acquire it and didn't, but anyway, I'm getting to Ellie Mae and the network for mortgages. So here you are, you got this network, pretty much a physical process, manual process. You got $1 billion in revenue, it's a $10 billion TAM. You got -- you touch 85% mortgages. And it just seems like the Jeff Sprecher opportunity, just like the energy markets. But I'm just trying to see what are the differences? Like, this looks like a process that's -- you got a -- and you've talked about a front, middle and back-end process. And correct me if I'm wrong and what your viewpoints are, it seems like the front-end processes in other asset classes move forward pretty quickly to automation. But the middle and back-end take time. And a great example would be the equity settlement process. But anyway, the question is, how do you look at the middle and back-end processes of these networks automating? And do you think it will take more time? Or how did you evaluate it when you looked at Ellie Mae and the whole network you put together?

Yes. first of all, you're right in that we think about -- as networks. When we started ICE, Chuck Vice and I had never traded, didn't know anything about the markets. And maybe the reason we were successful is we didn't think of it in conventional terms and started thinking about -- and then we tried it -- for 2.5 years, we were very unsuccessful at launching this company. And I was funding it. And we realized that buyers are looking for sellers and sellers are looking for buyers, and we needed a group to arrive at exactly the same time. And we ended up giving equity to a consortium, 13 companies in exchange for their all logging in on the same day and starting the process. So we've always had this network sense, not exchange and clearing, which is how the market thinks of it. And you're right in mortgage that if you look at how we entered the mortgage business, we acquired some infrastructure that was the middle and back end, and then went out and recently acquired Ellie Mae, which is the dominant front end. But we started on the higher-value, more difficult, less automated part of the market. And now we can put them together, and I think we still talk about them as sort of front, middle and back. But the reality is it's more complicated than that. It's an end-to-end network. We're -- we think of it like a factory, where mortgages are being assembled, but there are all these parts that come in along the assembly line, many of which are provided by third parties. And in the case of our network, we have now more than 1,000 third-party vendors that are plugged into that network that are providing services to the mortgage industry. And our goal is to make that an open network and open factory where the best vendors can put their parts into it. And we can come up with standards, data standards and networking standards that will collapse the time and error rate that exists in a paper world today.

So -- and that's -- one of the benefits of the network is eliminating areas like you just mentioned. In some networks, especially like trading, when we've seen the energy trade volumes, my favorite saying is, "I never seen an asset class that went automated that didn't expand in volume." So -- and we'll stay with the mortgage network for right now. But like what's the opportunity for expansion? Like I don't see people doubling their mortgage origination. I do see a possibility of ICE taking more revenue out of the network or generating more revenue. You did hint at it in some other talks that there could be potential other networks and data effects of it. But I guess this idea of network expansion, either the mortgage itself or for ICE?

Yes. So the way we think about it is that network that we've already assembled touches about 85% of all U.S. mortgages right now. And we've talked to you and others about the fact, we think there's a $10 billion addressable market for that network. And as you mentioned, we're a little over $1 billion right now. So we already have the clients. We have 85% of the mortgages are already on the network. The goal for us is to have those mortgages use more parts of the network. And the vendors that are servicing those mortgages plug in various places along the network. So it's interesting because the mortgage business, I think there's a bias by people that look at mortgage, the mortgage business and cover the mortgage business in that it's about taking market share in the number of new loan originations, which is, I guess, historically, how you would look at a lender or even a loan origination system digital platform. But we don't really need to take market share. And we already have the bulk of the business already on the network. What we need to do is cross-sell and up-sell the people that are already here with the additional services that we're building on that platform. And so I do think that the reason we calculated, in our own mind, total addressable market was -- we sat down and said, what is the opportunity set here for a network? And then what are the parts of the manual, largely manual process that we can automate, offer savings to our customers, but also then revenue to ICE? And it's a very exciting period. And we're doing this in the middle of a pandemic, with a lot of people working from home and remotely and building out this network, but it's going amazingly well. So we're -- we closed on the Ellie Mae acquisition, I believe, it was August. So we've already largely integrated the networks and the people and the footprint and cross-selling the client base, and it seems to be working after just 1 or 2 quarters.

It's going to be fascinating to watch because I've been there. I watch the energy market and you push NYMEX to go -- to convert as well. So you've had your impact there. So we're going to beat the network effect to a T here. I do want to ask about regulation a bit. And I don't mean -- but you oversee much more than just the NYSE. But if we take this network sort of view, it's almost like we're seeing a collision of a retail network with an institutional network when we talk about the game stock trading. And then now all the, what do you call, the resulting regulation to try to separate the 2 and makes sense of sort of the collision that's happened. And I guess the question is about networks, you, like you have the front-end consumer network of a mortgage, how do you view a consumer network versus more institutionally? We've talked a little bit about it before, and maybe a little bit more specific, this collision we're seeing in equities between retail and institution.

Yes. It's a good question. The thing that a network does is it democratizes access. So the network doesn't know whether it's you and I sitting in our kitchen, on a computer with a mouse or whether it's an algorithmic customer or a large institutional customer. The network doesn't know. And of course, we build and what we're known for is highly scalable networks. So we tend to open the door. I think you're right in that in the world that particularly that you live in, with institutional investors, see a difference between consumer networks and the value of those and institutional networks and the value of those. And as an example, you're aware that I -- there was a rumor in the marketplace that we were part of a consortium that was looking to potentially make an offer to acquire eBay. And the market and our -- the ICE investor base hated that idea. And they -- people got on the phone and our shareholders called me and told me, "You're institutional, and that's retail, and we don't like it." And so I got a dose of it and walked, and next they said, "We're not going to pursue being part of that venture." And so I'm very aware that the market itself sees a difference. But I will tell you, we don't. In mortgage, for example, we have a consumer front end that we've just recently launched. We don't talk a lot about it for the reason you just said. But there are 2 mortgage, front-end retail, consumer-oriented mortgage front-ends that have come out of Silicon Valley that have multibillion-dollar valuations and they're darlings to the venture community. Our consumer front end, which we have built after the launch of those companies, has 10x as many customers. And so I say to investors that point out those darlings, "If you like them, then you should love us." But we don't tend to talk about it that way. I think you're right in the gamification of equities. And the ultimate, probably, response by regulators and network providers like ourselves is blurring the distinction, I think, now in the minds of the investing public.

I think that's an important point that networks don't differentiate between a participant, I guess. Maybe there's some automated way to do that a little later. But the -- by and large, the concept, it doesn't exist. Anyway, turning to energy and the energy exchange and the energy network that you've built, fabulous network, not only the crude, but of the natural gas and power, et cetera. But it is transforming with clean energy and ESG. I guess the question -- and you've built positions in both, strong positions in both carbon -- clean carbon, carbon emissions and so forth. There is no such thing as clean carbon, I guess. But the point being, how do you see -- have you timed it right where the sort of, I don't know what it's going to be, the extinguishment of the legacy, and I don't think it will be -- I know you'll talk about Abu Dhabi and Middle East where they're not moving as fast as up here. But have you thought about sort of the timing and the transition and what do you think of the timing of that shift in these 2 networks, if they're different?

Yes. First of all, by way of context, I started a company when I met a guy in graduate school, and the 2 of us started a company when I was young to do renewable energy projects. And I ultimately bought him out and ran that company for 17 years, and then started what is Intercontinental Exchange to be a renewable energy exchange in 1997. So I don't know that I got the timing right. It's been, I don't know what that is, 24 years. But it's not necessarily -- it shouldn't be a surprise that we are the global -- the dominant global exchange for carbon and renewables credits and electricity around the world. And so if you look at our business today, if you look at the revenues and the growth today, it's very interesting that on the one hand, I would say the fastest-growing part of our energy business is this renewable push, which is largely -- and carbon offset trading, which is largely coming from the western world. And in the middle, you see growth in electricity, which is parts of the world that are moving off of coal and oil-based energy production and moving to electricity, which is kind of this middle ground. But then you still have a growing crude oil and heavy oil infrastructure, which is largely the growth of Asia. And while they are doing things with electricity and renewables and what have you, their growth is overwhelming that capacity, and they're still very much in a heavy crude and refined products world. Shipping is largely refined products. And coming out of a pandemic, there's a lot of goods moving around as the economies are opening up. So we see both ends of this barbell growing, the West towards more renewables and electricity, the East towards more crude and refined products. And I think that will go for a while. But we have a natural transition, if you will. It's already built into the platform because we have over -- well over 1,000 products that span what we call energy, but get into some of these newer, more esoteric ways of dealing with the green economy, which we are largely underneath helping to hedge and finance.

I do -- we got a few minutes left. I do want to be able to touch on the fixed income network a bit. We've seen -- what I've learned from you and from your managers is that it's not -- it's about the workflow process on networks, not necessarily -- there's trading opportunities, but it's more about the workflow and the data you're providing. And then I think more people have copied that model and adding data. So I guess the question is the expansion of the fixed, what are the opportunities and expansion of that? We know it's a solid recurring 80% to 90% grower at 6%, give or take a percent or so. But what are the opportunities you think to excel?

Yes. So we have a bias that we're pretty transparent about, which is we think the least valuable thing that we can do is match a buyer and a seller. Over time -- I mean, that's how we started. So I'm not discounting it. It's how many, many companies that, Rich, you follow have started or are building. But in the long run, matching a buyer and a seller is not the end all be all. It is the back-end fulfillment, the capital management, the goods management, the delivery aspects where the value is. I would just say to you, most people think Amazon is a great place to go because they have so much selection for anything you want in the world at such a low price. But the real reason that, I believe, that people go to Amazon is same-day, 2-day delivery. I've built -- I'm a Prime member. I've got all my credit card information there. The back-end settlement is very, very easy. And so in our energy market, as you've pointed out, we drive about 15% of the value in the execution and 85% of the value in the back end. So that's the bias we bring to fixed income. We were late into the execution business, and there are other really powerful entities that are in that space. And we didn't value it that highly, and so we immediately pivoted and tried to work in the middle and back end, which we think are very sustainable, have network effects, they compound, they're sticky, and we've been doing very, very well there. But that was sort of a matter of necessity on where we would start in that market. Similarly, I mentioned that we started in the middle and back-end of the mortgage business. I just didn't understand trading well enough to realize until after we had started ICE that we needed to get into clearing and settlement. We started ICE in 2000, and we got into clearing and settlement in 2007.

At a pretty opportune time before the, I would say, before the global financial crisis.

Yes. And as you know, we talked a lot about it. People thought we were a little bit crazy. If you could buy clearing and settlement for a few pennies, why would -- and it would seem to be a utility to many people, why would -- it's a bit like warehousing for Amazon. Warehousing seems like it's a utility to most people. The reality is doing warehousing and fulfillment correctly and well is the value, I think, in that company.

And that's -- my favorite story is talking about how clearing became the most valuable asset afterwards. Now the trading gets low multiple, but clearing and the sort of the impenetrable boundaries it sets is the most valuable thing. I have like another -- we've got another couple of minutes. But the last thing I want to talk about is will you go forward. Now we know you're the focal point on development of people, we know that for sure, and the idea growth. You have these networks that are still in the formative -- I don't know what the right word, but still there's a lot of transformation potential. So is it just about execution on the networks that you're focused on right now? But I get a feeling you're think about -- you think about other networks. And what do you think about it? Trying to...

Well, I think you're right in that we are thinking about other networks. In fact, I've already had 2 meetings this morning on network ideas with the team here. We don't have our R&D department per se. What we do is by pushing decision-making down, we try to get a lot of customer feedback and take problem sets that customers are having and then think about whether or not there's a solution that we could develop. And so we have a number of ideas of things. And we like to do it we're there's an analog to digital conversion because it makes the adoption of the network easy. And in mortgage, we started looking at that in 2006. And it really, to me, was the pandemic that has caused the acceleration. And so some of these things take a while and need a catalyst. But we do have ideas. I think the truer form is that we're in the network business. The same people that are working on all these projects, they may be different asset classes, and we report them differently, and people think about them in these discrete buckets. But the reality is it's a database team that has high performance, scalable database skills that we use across those networks. And it has a massively common customer base across these networks that allow us to cross-sell the various businesses that we're doing.

I'm not going to push you for any more details.

Thank you.

Our whole -- all our conversations over the years has always been about the breadcrumbs, so to speak. We'll leave it up, so you can leave me to wondering. I'll try to -- but the one thing I would say is you are the R&D department, mind feeling it.

I'm part of it. I help curate it, probably the bad ideas, I guess. But no, it's a team effort. And it's an organized internalized part of our business, is we meet every 2 weeks and go over our strategy and our buy versus build scenarios and how we're doing in the plan. And so it's pretty disciplined.

Jeff, that's all the time we have, but it's always fun to explore and try to figure out what you're thinking and where you're going. So -- but I appreciate the participation. And we'll definitely be watching the network effects for ICE. Anyway, great talking with you. So that ends our session. Next up will be Jeff's peer, the CME, and Chairman and CEO, Terry Duffy. So thank you, Jeff, and we'll certainly be in touch.

Great. Thank you, Rich. Thank you all.