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

All right. Well, we're going to get started with our next session. Thanks, everybody, for joining us. It is my pleasure to welcome back Jeff Sprecher, CEO of Intercontinental Exchange. Over the years, ICE has evolved from an energy trading platform into really a network of trading, data and most recently, mortgage solutions, where about half of its revenues coming from recurring sources of income and really supporting the firm's history of double-digit EPS growth. We look forward to getting your perspective as always, on the market, on the trading conditions and everything that ICE has built over the years. So always great to see you. Thank you for being here.

Yes. Thank you, Alex. Always nice to be here.

Yes. We were trying to remember last year, there was a window for a couple of days when we actually managed to squeeze this conference in. So hopefully, no surprises this year.

So look, why don't we start with an energy -- with ICE's energy business. I got a bunch of questions on that. So -- but the first one is like maybe talking through some of the near-term dynamics. 2022 clearly has been a very challenging year for energy markets with declines in European and TTF, nat gas. Some of that was made up by U.S. nat gas, but quite not all. So when you unpack some of the cyclical versus secular changes occurring in the energy space today, how do you see them? What does it look like in '23? And how do you respond to that?

Yes. So well, first of all, we're very fortunate that we have a global energy footprint with about 1,000 different tradable products that are on our platform that pretty much covers every geography, every type of energy products that are related to energy like freight and emissions and what have you. So we have a really good footprint to try to help our customers navigate what's going on. There's no question that certain European-oriented products have -- the markets have struggled to figure out pricing and the long-term dynamics of those products, particularly some of the middle distillate products that are inside Europe that have Russian origin that haven't -- up until now haven't specifically been tariffed, but which the market is voluntarily avoiding. And so what we're seeing now is while those tariffs were announced a long time ago, they really are meant to kick in, in the next calendar year. So we're starting to see now people understanding the ground rules, at least in some of the oil-related contracts in Europe. And there's a debate going on now in Europe about natural gas and whether there should be price caps on it and how would they actually affect that given that they're a net importer of the world's natural gas, how would they go about convincing the rest of the world to sell them a marginal molecule at below market price? Not an easy dilemma. And so -- but what we've seen and the reason I started by saying we have a global footprint is, as you mentioned, we've seen Europeans who have exposure to the global energy markets hedging outside of Europe. And so they've been coming to the U.S. We also have a footprint in the Middle East. And so there's this supply chain rotation going on with fuels coming out of Russia and going to China and India and being replaced in Europe by molecules that are coming out of Northern Europe and the U.S. And all of that is part of a risk management trading platform that we're trying to provide the world.

Great. And if you think about some of the cyclical dynamics you talked about, maybe some certainty with respect to Russian oil. Any cyclical factors you can think about that could make the European nat gas situation easier in the foreseeable future? Or the environment is just still too uncertain?

It's a bit uncertain only in the sense that they're right now talking about could they do price caps, which is not completely popular in Europe because there are some countries that produce energy or that have built energy infrastructure and others that haven't. So there's -- some would be hurt by caps and others would be benefited. And it's a system there where they need unanimity in figuring out how to move forward. So very unclear what's going on other than there's a sense that by some countries that they need some kind of help or subsidies from the richer nations. And that's what's really playing out. I can't give you any perspective other than the market goes on. It's a world market. And so things are being routed in different places. It's creating different kinds of risks. One of the things that we've done over the last few years, we saw that Europe was going to become a large natural gas consumer and producer years ago, and we started investing in building this market that you referenced called TTF. More recently, we've been building a Gulf Coast market because we really think the U.S. market has largely been a market that -- in energy that was around pipelines and sort of domestic production and consumption. And increasingly, it's the coast that are going to be import/export, the marginal molecule. And similarly, we've been investing in the Middle East, building out platforms there because the Middle East, while many Westerners think of them as just being crude producers, are increasingly talking to us about hydrogen production, how they're going to meet their own ESG goals and carbon offset goals and how they can export that globally. So we're seeing sort of movement within the energy ecosystem that are the early stages of a completely different supply chain movement that we're capitalizing on by building products. We just launched, by the way, a number of new products in Europe for Europeans, the price of gas in France, the price of gas in Spain, the price of gas in Greece. These were markers that didn't exist. But when the countries themselves start talking about internal subsidies, they need to know what are the benchmarks that they can use, and we want to provide those benchmarks.

Maybe stepping away a little bit from the near-term dynamics in the market and think about sort of longer-term vision for the energy ecosystem. The one outcome [ that feels ] is likely going to come out of everything that happened over the last 12 months is greater use of LNG and greater focus on cleaner energy sources. So as you think about both of those mega themes, how is ICE positioned to participate in that? How are you thinking about creating a global LNG benchmark? Is that potentially a thing? And how would you position the company for that?

Yes. So we are the primary venue for liquefied natural gas trading. We have contracts that trade in Asia. And as I mentioned, we've been launching Europe contracts now in U.S. So we really do see seaborne gas as a big risk tool that are going to be needed. And similarly, we've been launching now freight, which is the -- directly related to trying to move gas by ship. We've always had the shipborne oil markers, and that's why I mentioned we've launched Gulf Coast, which is increasingly the U.S. importing and exporting through the Gulf for our energy needs. And then around that, sort of highly correlated are a whole number of carbon- and emissions-type contracts that the same people that are trying to get the cleaner conventional fuels are interested in renewable fuels and carbon and other ways of having a greener economy. So we have been launching all of that. We dominate the market and have about 90% of all emissions, global emissions contracts are traded through our venues. And what you see now and maybe many of you in the room like me as a manager are trying to figure out how to offset our own footprint and how to become more responsible managers. And so we've been launching a lot of nature-based carbon and other emissions contracts.

Great. Let's shift gears a little bit to the sort of second pillar of ICE's model. Let's talk about data and fixed income for a couple of minutes. So again, clearly, lots of volatility in fixed income markets this year. How does the current environment impact demand for data? And when you think about what you're offering in fixed income data and analytics, what's your -- what are your latest thoughts on kind of the growth algorithm between new customers, new products and pricing?

Yes. It's a great question. So first of all, I've always been very transparent that we were late to getting into the fixed income space. Market access and Tradeweb, who I see on the board out there following us and, to a certain degree, Bloomberg, have been in the execution space. And we're just not a company that wants to be #3 or #4 in a space, we tend to think of ourselves as be a premium brand. And so what we've done is moved into areas that seem obvious to us that they weren't particularly spending a lot of time and resource on. So by that, data, indices, infrastructure for the trend that's going on right now and the way people are consuming debt, both consumer debt in the form of mortgage and institutional or commercial debt in the form of bonds. And so we have been building an ecosystem -- interest rate ecosystem, if you will, underneath there and designed it specifically for some of the macro trends. One of the trends that's going on right now, which we're benefiting from is as the interest rate environment in the West is going up, there's more investment in muni bonds and government bonds that have some kind of tax orientation though if you step back and think about those, those tended to draw small hedge funds, high-net-worth individuals that are looking for tax savings in an interest rate environment. And as a result of that growth, we've been able to attract institutions that want to interplay with that flow,, and that's going really well right now. And so -- and then separately, we've been building out a lot of pricing tools and infrastructure tools for the movement that's going on as people are putting assets into exchange-traded funds. Our New York Stock Exchange is the largest lister of ETFs. And so we have a whole footprint there and familiarity with those markets. And so we continue to build out sort of these alternative access points for fixed income.

Right. So when you think about the growth algorithm in the fixed income business for ICE, you've sort of previously talked about new customers and products and pricing. So the new customer's angle sounds like just more demand for fixed income insurance with high yield is a net positive. Product evolution, it sounds like you guys are kind of continuously working on newer things. Where does pricing come in? And again, is the mid-single-digit growth rate that we've seen in the business both kind of the right number to think about?

Yes. We have, as a company, never really grown revenue by price increases. We -- while we have raised prices, we tend to do it when we're adding more features or more content to the thing that we're charging for. So we've been in a luxurious position in that we've been able to organically and grow through M&A and continue to grow our pipeline, where we get more customers and more products and not necessarily more unit price. And so that's at least the attitude we have going into 2023 as well, even though as your CEO said, it's a complicated environment as you look into '23. We feel pretty good about just continuing to be able to grow our pipeline without necessarily having to touch our pricing.

Yes. Makes sense. So one of the trends you mentioned that I would argue is a megatrend that sort of accelerated maybe in the last several quarters is the shift from mutual funds to ETFs, particularly around the fixed income side of the equation. We've seen record amount of fixed income mutual fund outflows this year. And you've definitely seen the opposite happen with ETFs, particularly in the last couple of months. I know you mentioned listing of ETFs. That's an obvious area. But if you think about the fixed income ecosystem and other things you guys could do a benefit from, from that shift, can you spend a couple of minutes on that?

Sure. We were -- again, we were fortunate because we have that listing ecosystem and also a lot of contacts in financial services. Years ago, we were told by a lot of ETF sponsors that they really thought that this macro trend was going to be the shift into ETFs and one of the underserved. And while it was obvious to people to put stocks in an ETF, one of the underserved areas was fixed income and some more complicated assets going into ETFs. And as you step back and think about it for an individual, for example, or a family office to buy stocks and create a ladder and to then worry about the tenor of those -- excuse me, buy bonds and worry about the tenor of those bonds, it's complicated. And if you can just go in and, as an equity, basically buy a series of fixed income assets that have the right tenor that you're looking for and the right makeup, it's so much easier to come in and get out. So you've just seen sort of the ETF-fication of a lot of assets. And what we've been doing is all those ETFs, they need indexes that they can benchmark against. They need the data -- underlying data that they can run those ETFs. They need to mark them to market, so they need pricing and they need the infrastructure in order to keep the inflows and outflows in balance with the portfolio of buys and sells and balancing. And so we have been building all of that underneath the fixed income space. More recently, what we're seeing is kind of other alternative assets going into the ETF space. Environmental and kinds of assets and other assets that are hard to go into the market and buy on your own, but that if somebody else can gather them and put them in a package that's easy for you to buy and sell, are attractive. So we continue to build out that infrastructure. Nobody else was really that focused on it, and it created a white space for us to operate in, that we're really doing well in.

Great. Let's spend a couple of minutes on the other piece of fixed income ecosystem that you guys built, which is around trading. And you mentioned that in one of your earlier comments that you really got into trading sort of later because you really wanted to start with data and then let that drive trading. You've made a couple of acquisitions in the space. The revenue backdrop there has been pretty stagnant for a couple of years. And then in the last few quarters, we've seen pretty material acceleration. So can you help expand on how much of that is just the environment has gotten more volatile? Or ICE is finally at a point where you could start launching more protocols, get more aggressive on pricing and gain share that way?

Sure. I mean you have to step back and say, one of the philosophies that we've had as a management team is to grow in all business cycles. And so that means inflationary cycles, central bank interest rate cycles, commodity cycles. It's our goal that every year we grow, produce a lot of cash flow and return it to shareholders. And so in thinking about all the various businesses that we have, we have some that do well in each of those environments. We figure it somewhere -- at some place somewhere in the world, some product is going to do well in good and bad times for people. And so anyway, to your point, we started investing in the muni bond space in an era when interest rates were low and taxes were low and people weren't necessarily that enthused about it. But now we're seeing this move where wealth managers are somewhat hiding out in fixed income, don't -- rotating into it. And as they do that, which has historically been a tax-oriented trade, a lot of institutions want to interact with that flow. And so what we've done is we've taken sort of retail platforms and then just built protocols and connectivity into them so that we can get them into institutions so that institutions can react to that. What our goal is, is to get that connectivity to those institutional investors because once we have that connectivity we can sell them data and some of these other services that I've talked about. And whether they end up trading muni bonds or government bonds or what have you is honestly somewhat irrelevant. What's more important to us is that they get into this ecosystem that we're building, so that in all of these different economic environments, we have a relationship with them and the connectivity to push something through that pipe that they'd be interested in.

Great. All right. Let's spend a couple of minutes on the third part of the model, third business, which is your newest business is mortgage technology. No doubt, very tough backdrop for this year, really started last year. As you think about industry volumes in the mortgage space remaining, hopefully some stable, not sure whether or not we're going to see a lot of growth given what rates have done, but logistics stable at current levels. Can ICE's mortgage revenues grow, resume into next year? And what are some of the things you're focused on from an organic perspective in that business over the next 12 to 18 months?

Sure. Again, I think contextually, if you step back, we built an energy business that really leaned into it after Enron collapsed. And then we built the fixed income business after the -- and credit business after the financial crisis. And now we're leaning hard into mortgage now that we're in a high interest rate environment. And so just as an entrepreneur, you can see that we believe the best time to build a business is when some of these things are out of favor and when your clients are looking for solutions. And so we have been leaning hard into the mortgage space and trying to build an infrastructure that can change the cost of writing a mortgage for the average consumer and doing that by automating the tools and then similarly, building tools for the wholesale funding of mortgages that can fundamentally change the capital markets. And it's going well. We have -- one of the odd things about a mortgage, many of you probably have bought a home or refinanced a home, given the pedigree of the people in the room. Everything in a mortgage was paper-based and à la carte. You would -- the bank or the lender would order a title report, and they would order a flood report and they would do a consumer credit report on you, and they would send somebody out to look at the house and everything had a multi-hundred dollar or $1,000 fee attached to it. And then on your closing statement, there would be this big charge. And we estimate that the cost of doing a mortgage right now is $6,000 to $8,000 -- $6,000 to $9,000 per mortgage. Well, if you're successful and you're fortunate enough to be able to buy a $1 million house, $9,000 may not mean anything. But if you're a first-time home buyer or somebody that's a disadvantaged class that's trying to get into home ownership, which is where most wealth is created; and for average Americans, a $50,000 mortgage with a $9,000 delta on it is troubling. So we really think we can collapse the time it takes to underwrite a mortgage, automate that, underwrite process and then fundamentally change the way the capital markets fund wholesale lending that goes into those markets. And we think now is the time to do it. And specific to your question, we're seeing that we're trying to move the model from an à la carte per mortgage model to a subscription model where a lender would simply have a subscription for a number of services, and maybe much like a car dealer, could charge more overhead to somebody buying a Rolls-Royce and less overhead to somebody buying an entry-level used car and -- but still be able to be responsive to both ends of the market.

There -- definitely merits to that as you sort of described it in terms of the sort of stand-alone growth and digitizing [ Morgan Chase ]. But another thing you talked about at the time of the LMA announcement is some of the interesting synergy opportunities that could come out of placing a mortgage originator with all that data on to your network. Can we get an update on how those initiatives are progressing? And one of the areas, in particular, where Ellie has not had a lot of presence was the bigger bank community, the big originators. And that was also, I think, part of the framework. At some point of time, maybe there's something to do there. So update on both of those, it'd be helpful.

Sure. So we've launched a number of new data products. And the most notable, I think, is we've put out an index, which is the end-of-day price that mortgages were locked, the rate of that mortgages were locked at the end of the day. It's been -- we have a large audience of mortgage-backed security data collectors, people that are pricing MBS hundreds really and that are already on our network. And so we're trying to give people a real-time view as to what's going on in the underwrite process to really -- it takes about 60 days on average between the time a mortgage -- you apply for a mortgage and you get the rate lock to when it actually makes its way into the capital markets. There's #1, a 60-day risk. And partly why I think we got into the space is I just think it's odd that you can go online and buy deodorant and when you're checking out, I'll say, "Do you want to buy now and pay later?" And it can underwrite credit for consumer good that's completely consumable in real time, but on a mortgage for a home where you might even have, let's say, a refi, where you have a history, a credit history in the home and it has a foundation and you can see it from Google Earth, we take 60 days. So there's something fundamentally wrong with the way credit is allocated versus assets. So anyway, we've been working on getting the data that would allow that to collapse, and not only the data but the tools that an underwriter would need to use that data. And so we have a product called AIQ, which is essentially an elegant PDF reader that can read documents and data and help fill out the underwriting forms and put some artificial intelligence around that so that it no longer requires people to do what we call stare-and-compare documents and has a lot of fat-finger protection in it. And we just announced recently that JPMorgan was going to build that -- we were going to build that into JPMorgan's mortgage platform. So an entrée, if you will, of using our data and analytics tools into one of the nation's largest lenders. And we hope it's a precursor for others and also additional things that we can do with the large banks. So a long-winded way of saying it's going really well.

Great. All right. Stay tuned for that. Let's spend a couple of minutes on maybe some of the current events. I would love to get your perspective on recent fallout of FTX. What that -- and are you surprised it took us so long to get to that? What the implications of that could really be for the crypto ecosystem. And I know ICE doesn't have a huge role in it today other than the partnership you have with that. But how do you see that ecosystem evolving? And does ICE have a place in that?

A couple of things. I personally think the biggest fallout will be consumer behavior, the sense that a lot of people that thought they were wealthy are going to wake up and not be as wealthy and worry about their day jobs and maybe I should get back to the office and put in the hard work to earn an income. And I feel like it's just another one of those kind of easy money. Everything was up and to the right, and everybody that was participating in crypto was seemingly making money. And I just think it will help, particularly with a generation of people globally saying there is no easy money. And I think that will be good for people like me that run a business that try to hire people and get them to come in to work. And I actually think that's going to be the outcome. I think in the U.S. ecosystem, Chairman Gensler has been saying for a long time, and people weren't necessarily listening to him, that he thought most of these tokens were securities. And I think you're going to see essentially tokens become security. I mean they probably already are, but they're going to be regulated and dealt like securities. And what does that mean? It means more transparency, it means segregated client funds, the role of the broker as a broker-dealer will be overseen and the exchanges will be separated from the brokers, the settlement and clearing will be separated from the exchanges. These are all concepts that exist and have long existed in finance that I think will be put into crypto. I'm not as convinced that there's going to be some massive law changes that the crypto community talks about. I think the laws already exist, and I think they're just going to be implemented more strongly on at least the existing ecosystem. We happen to run a securities exchange, so I could see us doing tokenized trading, if you will. Honestly, it's a ticker symbol. It's not that different than a stock or an ETF or any other security. And the trick will be in the settlement and the way these tokens get written to some kind of blockchain or not written to a blockchain, which is kind of what happened at FTX. They were held in custody, but not written, if you will. And so I think that will all get sorted out by players like ICE and Goldman Sachs and others that are -- that have traditional footprints in the securities world.

Great. Well, before turning it over to the audience, I'll ask one more. I would love to get your perspectives on ICE's broader M&A strategy. It's been an important part of the growth over time. You've sort of established 3 fairly distinct businesses. You got the exchange business, the data business on the fixed income side, you got the mortgage business with a kind of overarching pillar maybe as a whole, being ICE's network in kind of how these things come together. As you look forward, is there room for another sort of pillar within that? Or do you feel like this is enough for you guys to sustain that double-digit EPS growth that you've committed the company to over the years?

And then you're asking that in the context of we're in a merger agreement to buy a $13 billion mortgage company, right?

No.

And so yes, we have a kind of a buy versus build attitude. We have a vision on where we want to go. And if we can get there faster by buying something or acquiring talent that we don't have in order to move into the credit default swap market after, around the financial crisis, we bought the talent. We didn't know -- I didn't -- I read about credit default swap in the newspaper. I didn't know what it was. I didn't know what these toxic assets were really. And so sometimes we buy companies to buy customer relationships or talent or what have you. And sometimes we buy companies in order to accelerate a vision that we already had. So there's always room for that. We -- my team, we meet every 2 weeks, have a routine meeting every 2 weeks to go over our business plan and any potential M&A or investments or dispositions. We're also a company that exits assets if we're not doing well with them or we don't think they'll meet our growth profile. So yes, there's always room. But right now, we're very, very heads down. One thing about that 3-legged stool that you talked about is, to us, it's one thing. We run networks that have large databases that move information around. That's -- the New York Stock Exchange is a large Oracle database that does 350 billion transactions a day, but it's a high velocity, large database. The mortgage underwrite process is getting people on a network and a large database getting that information, that fixed income market, it's just a large database on a network. So our business is -- and to the extent there's another leg of a stool at some point in our future, it will be something that where a network and a large centralized pool of information can help the market grow.

Great. We've got a couple of minutes, so maybe if there's a question in the room. Yes. One up here, please.

This is probably a follow-on to Alex's question. But just given the digitization of the world as we see it today, should we assume, particularly given your own personal background, that the opportunity set broadly over the next 10 years should be somewhat greater than it's been the last 10 years or significantly greater?

Yes, that's a great question. I -- people ask all the time and ask -- you guys as well, like coming out of COVID, what's been the greatest change due to COVID. And people say, "Oh, remote work and work from home and life -- work-life balance changes." And I think that it was an acceleration of this trend that was already going on, which is a massive digitization. It just so happens now, we can digitize the office. But the real issue is just our ability to go direct-to-consumer with tools and have them embrace them. And we've been in a B2B space. My company is really in this network that we provide is really to people like Goldman Sachs, who actually has the client relationships, for example, which is partly why they've invited me here. And so anyway -- but we need to give them the tools. And what we're doing in mortgage is building a lot of white label tools for lenders to be able to engage customers directly and tools to -- for consumers to be able to understand when -- what their house is worth and when they should refi it and whether they should buy a house in this particular neighborhood. And those are the -- that kind of information at our fingertips is really driving the growth. And below it all is data. When we make a -- when we order a car to come pick us up, a taxi to come pick us up or make a restaurant reservation, it's just tons of data that's in there, in the system and also that we refer to in making an informed decision. And so that's where we're leaning into.

Great. Well, on that note, we're out of time. Jeff, thanks so much for being here. Always great to see you.

Thank you, Alex. Thank you all.