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

All right. Good afternoon, everyone, and thanks for joining us again. For this session, we have ICE, Intercontinental Exchange. I'm delighted to welcome back once again Jeff Sprecher, Founder, Chairman and CEO of ICE. Welcome back, Jeff, and thanks for participating in the conference.

Thank you, Christian. It's kind of interesting to be here and see all these gray and black suits in New York. It's like something I haven't seen in a long time. It's kind of old school.

I think you're wearing like a green jacket, something like that.

Yes, I kind of decided to mix it up. I get my suits out like twice a year now, right? It's like owning a tuxedo. It's like, oh, yes, I guess I do own a tuxedo.

All right. So before we get started, just a reminder, you can ask -- well, you can submit questions for Jeff. Do it by Pigeonhole, our system. That's pigeonhole.at, go to that site. And the passcode is SDC2023, and I'll try and get that to Jeff.

So maybe, Jeff, let's just start with some of the hows here to talk about the long-term growth algorithm of ICE. A really strong track record from the IPO, 16% type EPS growth CAGR. It felt like that's slown in the last couple of quarters here. How are you thinking about sort of intermediate-term growth for the company? Are there any self-help measures the company can take to sort of get back to that level of long-term growth?

That's a good question. I -- well, I really view my job and the job of any chief executive of setting a 5-year plan and on a plan of growth. And so really, for us, we've been thinking a lot about creating an all-weather kind of stock that can grow in any environment, not knowing what the environment is going to look like. And we're able to somewhat do that during these boom times, a 0% interest rate. So that now we have a portfolio that can grow in our minds in a high-interest rate environment or a low-interest rate environment or a recessionary environment and have some sort of equilibrium around it, that somewhere in the world where there is growth, that we have a position in it. So I actually say how do I think about it? I think well about it because I feel like we have a lot of tools as managers and also a lot of luck in the sense that the first exchange-traded contracts to go electronic in this country were in the late '70s. And those contracts are still growing today. And so it's amazing, in analog-to-digital conversion, it's amazing how long the legs of it are. It kind of defies logic. And so the base business that I helped create in year 2000 is still a strong growth driver for us. It's still having record open interest. We're having a fantastic quarter last quarter. We're making some upward price adjustments. And that's like the -- this kind of business that you would think at some point will have aged out, and we just don't see any signs of it. So anyway, long-winded way of saying I feel pretty good about the way we've positioned ourselves for a number of different eventualities.

Great. I want to dig into sort of the energy business and what you just talked about, but let's just quickly talk about capital allocation. You've acquired a few businesses over the last few years. And I thought you made an interesting comment on the last quarter call around potentially pruning the portfolio. So just talk through that, how are you thinking about opportunities to trim, reallocate resources and particular businesses? Just kind of help us think through that.

Sure. I think, first of all, when I step back and look at the macro environment, the macro environment for M&A is, I think, gotten much more difficult. We're in the middle of a, what would I call it, a disagreement with the U.S. government over our trying to buy the company, Black Knight. And I -- and so -- and maybe it's kind of immediacy bias but being immersed in that process, we're also seeing other companies having M&A issues in the U.K. and the EU. And I've built this company, my colleagues and I built the company in an environment where particularly for the last decade, we had pretty low cost of capital, very low cost capital and pretty open opportunity set in terms of doing M&A. And it feels like that window may have closed or be closing. And so that said, doing dispositions as well as acquisitions, any potential buyer may face that same dilemma on shedding assets. So we're doing a lot of thought about what should our footprint be? Are there future businesses that we should acquire or can we build? And are there future businesses that we should shed or should we reduce capital to them if we can't shed them? And so that balance is something we kind of enjoy because we're known -- we've done over 50 acquisitions. So we're known, and we think of ourselves, our DNA is looking at other businesses and thinking about how we would operate them better or more efficiently, including our own businesses. And things can kind of age out or the environment can change. And so we really do think a lot about pulling capital internally from businesses that aren't growing and putting them in areas where we do think we can organically grow. So it's kind of a nonanswer other than the sense the environment I think is a bit different right now for everybody in financial services.

Let me try and pin down on a more specific answer. Any of the segments where this would be more impactful? Is that Exchange segment, mortgage segment, fixed income?

No. I think when -- in doing a lot of acquisitions, part of the skill set there, the domain knowledge that we have as a company is convincing other entrepreneurs and business executives that our businesses coupled together will be more valuable to our customers than us apart. And so we look at all of our businesses thinking if our own businesses were paired with another management team or another asset pool, would they perform better? Would we -- I started ICE, I was the 100% owner, and I diluted myself down to be a minority owner. And so my own mindset, and I did this in the dot-com era, before you could have Class A, Class B shares and all this other stuff. My own mindset has always been, I'd rather be a smaller owner of a better business than a big owner of something that's not that interesting. And so I don't have a bias that we need to manage it or own it and haven't since we started the company, honestly. And so it's more about as an owner, more about how do we create more value.

Okay. Let's dig into your sort of energy business. A few challenges in 2022, Russia, issues in Europe. 2023 as...

I would call that a challenge.

Yes, yes. 2023 is off to a pretty good start here. Just talk through what's changed and then talk through how you think about the outlook for the energy market and energy in general.

Sure. So if you don't follow us closely, we have about 1,000 listed commodity contracts on our exchange. And to put that into context, we acquired the International Petroleum Exchange of London in year 2001, and it had 4 contracts. So in the last 20 years, the market has dramatically expanded the amount of tradable assets in the energy space. And the flagship contract used to be crude oil for energy. It still is crude oil. But if you say, what are those other 999 contracts? It is all about an energy transition that's going on, particularly energy transition away from petroleum products in the West and still emerging markets, China and Indonesia, Vietnam and other areas that are still projecting growth, that are still consuming largely fossil fuels. So there's a kind of -- we really represent a portfolio of products that the world can use to try to grow and transition simultaneously. And there's been so much more focus on that in today's world than there was 20 years ago that it's broadened the opportunity set. And consequently, going back to my opening comment, which is amazing how sometimes these markets can grow, it's really been growing by more product that is of interest to more people. So we've never felt better about the energy complex. And I throw in that environmental products, renewable energy, carbon emissions, SOx and NOx emissions. All of that is part of a broad portfolio of energy transition, which was tested last year by the Russia conflict and Europe having to scramble and sort of doomsday scenario where they weren't going to have enough energy, and people were going to have problems freezing in the winter and potentially chaos in society due to access to energy. And they navigated through that. A lot of it was this movement to a greener energy with globalizing natural gas. But simultaneously, Europe has a carbon cap and trade program. And there was a lot of talk, and the market price of carbon went way down because there was a lot of talk that Europe was going to be forced to abandon its emissions and energy goals. And as a both a society and a government, they did not abandon those. And now you see energy transition products coupled with the emissions products are kind of doing record volumes. So it was kind of the ultimate test, if you will, of would some of these products survive? And the answer, I think, is overwhelmingly yes, which gives us tremendous confidence I think and the market, tremendous confidence that this portfolio of products has got a lot of upside potential.

Great. Kind of one of the products that I think you've spoken about in terms of long-term opportunity is nat gas and the potential globalization of that product. Where are we in that evolution?

Yes. Natural gas when we first started the company was a regional product and delivered in pipeline in whatever region the pipeline went to. But now we always thought it was going to go global, which means that all prices get benchmarked against other prices relative to transportation costs and delivery costs. And so you did see Europe pulling a lot of liquefied natural gas as a way of bridging last year's issues. And the market was very calm about it, if you will. And at one point, the Europeans said, we're going to put price caps in and some other financial controls. And none of that had to be used. The market worked pretty flawlessly, actually. So I think say where are we? I think the globalization got tested and it worked. And the supply chain so quickly, we all kind of got used to after COVID, supply chains being interrupted. The energy supply chain, if you think about what went on in Europe, it -- quickly, tankers turned and went another direction. Gas was liquefied and moved. And God, it was almost instantaneous, the supply chain changes. And so I feel like it validated this notion of having a globalized energy market in ways that weren't necessarily obvious to everybody before.

And is there more of an opportunity -- revenue opportunity for ICE because of...

Yes, absolutely. Absolutely. And it's not just natural gas. We trade a crude oil grade called Brent, which is the world's price of oil in our mind. And we just -- and Brent was an oilfield in the North Sea off of Norway. And there's really no more Brent in the Brent Index that we trade. And we just recently with the industry are adding U.S. seaborne crude oil to Brent. And so now Brent is really the price of global oil, including U.S. oil. It really has evolved now. We always thought of it as the global price of crude internally because we have that ego. But now it truly is. And it is amalgamation of all these various grades, high-quality grades that can be moved around the world. So that U.S. crude will come out of the Gulf, be shipped out of the Houston area and make its way into the world. So you're having a more globalization of oil, globalization of natural gas. And I would tell you that this cap and trade regime for carbon trading, which is a European regime, has now been adopted after Brexit by the U.K. And because there's a lot of interest in voluntary reduction of carbon, you're seeing voluntary use of these regulated markets that we trade, which is global.

Okay. You mentioned taking some pricing action in the energy business. Can you just talk through, I mean, the feedback that you've heard so far from the industry? And then longer term, are there other opportunities to take more pricing maybe more frequently across all your trading businesses?

Yes. Well, the second part of that question is, I don't know. The first part is, for example, this Brent crude oil contract which we've traded now for 22 years at our company, we have never touched the prices essentially and never really even thought about it. And particularly, again, recently in more than a decade of a zero interest rate, low inflation environment, it sort of never crossed our mind. And it's only been recently, and I see this in other companies that are in our industry, it's only been recently where we're looking at our own cost rising due to inflation where we've started to say, well, gee, maybe we should be raising our prices and passing those on. Everyone else is raising prices on us and our costs have gone up. And so we've just started that. And part of your question is what have we heard. The only thing I've heard is in meetings here today with people that are running spreadsheets but no customers. I mean our price increases have been quite modest. And certainly if you run a business like ours where you have cloud costs, and you -- every once a year, the cloud provider comes in and tries to shock you at how high they can raise cloud prices, this is nothing. And so I think we've all, I think, in financial services has gotten used to, okay, there's increased pressure on costs, particularly in some of these tech areas. And maybe it's time we pass those on.

So does that inform you in terms of your pricing power and ability to take more pricing?

Yes. I mean I don't necessarily think of it as pricing power, but I do think there's an understanding by financial services industry that we're all having to deal with, our cost structure is changing. We have a bunch of employees that come in and say, "Well, we're going to get 7%, 8% raises this year, aren't we?" And you go like, "What?" And so anyway, I think there's a broad appreciation by our client base that we're all dealing with the same thing, and we're all going to be adjusting prices.

Let's switch over to your mortgage business. Just curious, where are we in terms of fully digitizing the U.S. mortgage process and then the sort of investments you need to make to get there?

Well, the U.S. mortgage market is in one word, it's a mess. And its own -- we want to digitize it. It's the most complicated transaction that a consumer will ever go through for a deal where they have the best collateral and a validated income against the borrower. Like it's crazy, like we can all go buy stupid stuff and get free credit and walk out of the shop with it or drive out of the shop with it. But when you go to buy a house that has a foundation that can't move, it's part of Pavlov's hierarchy of needs, safety and security. We're treated like we're aliens. And I don't know about you, even though it's like well, I have 20% down. And so anyway, that's what we're tackling. That's the root of Christian's question. The -- we have been working going state by state to lobby and change laws that will allow you to enter into a mortgage that's not a wet signature on a piece of paper. And there's still a number of states that don't allow you to do a digitized mortgage. And pretty much everything else you can do. You can run off to Vegas and get married in a drive-thru lane, but pretty much everything else you can do, you can click on something. But a mortgage in many instances, you have to have a lawyer by law. You have to have that paper documents. You have to have a wet signature. Those paper documents go into a box with a barcode into a mini storage warehouse that are just sitting there collecting dust, waiting for you to default or refi and for somebody to go figure out where that box is and try to go get it. And so it's still early days. There's only a single-digit percentage of mortgages today in this country that have gone through a digital note process. That's the opportunity. We've developed a digital now. We work with Fannie and Freddie. They accept our digital notes. A number of early adopter lenders that want to cater to people that don't want to buy a suit and go to a law firm to buy a house have been exploiting that. I think COVID accelerated that, the change in laws in a lot of states. It's a huge opportunity. And I -- our goal is to be able to provide software that can underwrite a mortgage while you're filling out the application. Right now, it's about a 60-day process even for the most eligible and capable. God forbid, you already own a house and you just want to refinance it. I mean I have a friend that was with one of the big banks, and they said, "Can you send us your bank statements?" And my friend said, "Well, I only have one bank account. It's with you." And they said, "Yes, can you print them out and send them to us?"

Right. Speaking of big banks, you recently signed, I think, a large deal or deal with a large bank to replace their mortgage systems. And clearly, if it's a friend's bank, we can see why. Can you talk through the sales cycle of sort of that kind of transaction? Maybe what resonated most with them for them to make that move? And then, I guess, I've never thought about large banks as really addressable market. Is that now becoming part of the addressable market?

Yes. I mean going back to the monologue about the mortgage industry, it is a standardized transaction. I mean more -- 99% of all mortgages are highly standardized. They get sold to Fannie and Freddie in the capital markets in standardized forms that people in our industry all understand. But yet, for some reason, thousands and thousands of lenders have all thought that they need to develop their own code and software and what have you. And our view is it has been, we should standardize this process. And for some high number of people, 80% of borrowers, you should be able to put them in a standardized product with digitized information that could be readily available to the decision-makers. And so a lot of that sales cycle is just going into these big banks that have these massive legacy systems and convincing them that this isn't all that hard. And you don't really -- and by the way, the rules, this is -- these are regulated federally, state and locally. The rules are constantly changing. Having a company like ours with broad resources that can be in all these jurisdictions, and as soon as these changes are required, we can make them on behalf of the industry. We can drive standards. We've stood up with Fannie and Freddie to the need to develop standards on data standards so that systems can talk to each other and people can understand each other. And we don't have to be e-mailing documents and sending PDFs to one another in a common database about a borrower. And so that is what resonated ultimately. And our value proposition has been that my company, only in New York Stock Exchange, we have connectivity to almost everyone in financial services, particularly in the Western world. We have contacts, relationships. We have developed trust. We -- the notion of the New York Stock Exchange just as an icon is that it's open, transparent, regulated, that we have cyber overlay. We deliver on what we do on time. I mean we have completely rebuilt the New York Stock Exchange over the last 5 years. There's -- the technology that's inside that company is not what was there 5 years ago. But nobody had -- it didn't fail. Nobody had to do big investments. Like we did that in a way that built confidence, I think, in the banking sector that we can handle complex projects, and you won't -- we'll take care of it all. You just plug into it. We'll deal with all of that and make it easy for you. And so I think it's a combination. The sales cycle was a bold vision to let's really standardize this on behalf of the industry and make the capital markets more efficient, and we have the credibility to do it. We've built the credit default swap clearinghouse and took all the credit default swap off the books of the banks after 2009. And when the government said they were toxic, we rebuilt the New York Stock Exchange. We bought this company called Interactive Data and completely moved it off of mainframes into our own private cloud. I mean we've just had these kind of major projects that have involved a lot of major market participants and over time, I think, earned their trust.