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

Great. All right. Well, thanks, everybody, for joining us for our next session. It's my pleasure to welcome Jeff Sprecher, Chair and CEO of Intercontinental Exchange. Over the years, ICE evolved from an energy platform into a network of trading data and mortgage solutions. Most recently, of course, ICE closed on the Black Knight acquisition, further solidifying its footprint in the mortgage space. With over half of its total revenues coming from recurring income, ICE remains focused on double-digit earnings growth over time. Now this is our 12th fireside chat. Actually, I have to go back and check how many times we've done this. So Jeff has been a long supporter of the conference, so really appreciate you being here and looking forward to this chat as always.

Also suggests you're a survivor in investment banking.

Let's not go there, yes.

I started the company. So I mean I can justify being there.

Well, if you really want to go there. My first question is actually about kind of how ICE has evolved. And I -- as I was writing these questions, I remember the first time we did this, ICE was an energy platform. It was also December, and then a couple of weeks later, I was grabbing a cocktail with a client friend of mine when the Wall Street Journal broke the news that ICE is buying New York Stock Exchange. And we kind of looked at each other, put the drink down or maybe finished it really quickly and like went back to the office. When you look at it today, ICE is really 3 very distinct businesses. They are connected by network. But you guys are in exchange, you guys are a data provider and you guys now are in mortgage business. As investors look out for the next sort of 3 to 5 years, should the market expect ICE to sort of drive deeper into the existing verticals? Or do you see room for further sort of horizontal expansion?

Yes. First of all, thanks for having me for the -- what, my 12th year?

Yes, 12th year.

And I hope I can be here for 13. The -- really, we have a very simple business, but it's made complicated by the way we financially report because we have segments, as you know, since you follow and model them. But we really just have digital businesses that match buyers and sellers. And then we provide a lot of information, either about the transactions to make them transparent or information that help people enter into the transactions. And to answer your question, these networks that we have just keep growing. And I think of it just like television network, which is we either want to do things that will make the network grow or we want to find programming that we can put on the existing network that if it's on our network, it will grow. And so there's sort of 2 levers there. And we've been fortunate to be doing this in a massive analog-to-digital conversion world where both have been growing, both our programming and what we offer across our networks have been growing. And just the size and scale of the networks have been growing. We don't talk about ourselves as being a cloud provider, but really, that's what that is. We have our own proprietary cloud. We're cloud-agnostic. So Goldman Sachs can come and do business with us on any one of the cloud providers because they're all hooked to us. But we also have our own cloud that we can control and manage the costs in. And that's really -- we call it a network, and then we probably should have renamed it a cloud. We'd probably trade at a higher multiple. But I just see that we'll keep pushing those 2 envelopes: more network, more content on the network.

Got it. All right. Well, let's talk about some of the content, I guess, on the network. Let's start with the mortgage business. So BKI, Black Knight, you recently closed the deal. Let's talk a little bit about how that integration is coming together. As you now own the business, what are you learning about the business? Any more attractive areas or revenue synergies that you guys are discovering?

First of all, the integration has gone fast and well, which is helpful. We've done a number of acquisitions, so we know what to do. The most important thing for us is to get our culture into that company quickly and make any staffing changes quickly. And we have -- getting close to 100 of my colleagues have moved to Jacksonville, Florida already in the last -- we've owned the company maybe a little more than 60 days. It helps that it's Florida. It's not Miami, but it is Florida. And so we've had a lot of people raise their hands and gone in there. So we've been able to quickly get cross-pollinization. The other thing that's kind of surprising -- pleasantly surprising for us is they ran their business in a number of verticals. We're a much flatter organization. And so by taking out some of the pieces in the middle, we've been able to get that existing team working together better. We're very focused on the data that they have. We're in an artificial intelligence data revolution going on right now. And so we were very, very interested in figuring out what data is inside a mortgage application and servicing and what housing information is in there. And we've been able to get the teams working on that very, very quickly. So that's been helpful. And lastly, we bought a company called Ellie Mae, which had loan origination software. And then we bought Black Knight, which has servicing, in other words, calculate your payments and property taxes and what have you. And we're putting those end to end. Both those were sort of legacy businesses, high market share legacy businesses that were largely green screen, COBOL, on-premises installed bank systems. And we've been moving them into our cloud. And we were fortunate to find that Black Knight had already been thinking about that. And so there were already a lot of tools in there that we were able to grab quickly and now we're leaning into to -- what we're going to end up doing is putting those systems in our data center. The COBOL green-screen stuff will go in our data center, and it will be behind our cloud. And then people will be attaching to it with a lightweight app, which is how people want to do business today, much more consumer-centric, easy-to-train people, easy to deploy. And so we've been pleasantly surprised that the architecture and the pieces that are in there is going to allow us to do that much faster than we had anticipated.

Got it. So moving along a little faster, I guess, is the timeline. Let's talk about some of the organic growth wins that you've had recently, particularly on the origination side. There's a couple of big ones that you've announced, one being JPMorgan selecting Encompass for their loan origination system. And then you had M&T and Fifth Third further expanding their relationship with ICE Mortgage. Can you frame what these mean for revenues in that business? And then more importantly, how do sales pipelines are forming with respect to other larger bank deals?

Yes. Let me start with the second one first because it's not intuitive that we're going to have our best year ever in selling loan origination software. I mean most people think we're in a mortgage recession because volumes are down. But in terms of people that are acquiring software, they're using this business cycle to replace legacy systems. And we're having our -- we probably will have our second-best year against 2017 in selling servicing systems. So you see the industry, it's indicative, I think -- the first part of your question, which is a lot of large lenders that hadn't embraced the cloud, had on-premises software, legacy stuff have bought into the vision that we have, which is an end-to-end platform, life-of-loan platform, customer-for-life platform so that the lender can stay attached to the consumer all through the home buying and payment process. They're buying into that. And so we've been very vocal about announcing some of these big lenders that have come on to our platform really as a way of signaling to the other big lenders that haven't come on our platform like you're falling behind your peer group, and it's going well. In terms of the way you, Alex, think about my company and many of you in the audience, it will take some -- we won't be able to recognize that as revenue for a while until we actually implement. And that means getting these big lenders off of their legacy stuff, getting their people trained, getting their files moved over and what have you. So as a manager, it bodes well for the -- for me, it bodes well for the company in future years because we've really locked in a heck of an earnings pipeline.

Yes. So let's think about maybe slightly longer-term revenue trajectory for the business. After you guys acquired Black Knight, you still talked about kind of a high single-digit revenue growth for the mortgage business combined over time. Let's unpack that a little bit. What is the growth algorithm to get you to that high single digit? And I know '24 is likely to be below that, and a lot of that is going to be a function of the environment. So if the environment is better, obviously, you'll be above that, probably low single digit -- low to mid-single digit as you talked about. But longer term, what are the key pieces to get you that high-single-digit revenue?

So if you think about what -- so we have acquired -- I've done 5 or 6 acquisitions in the mortgage space that put everything end to end. And what that really is, is now an end-to-end network. And so the lenders that are on that network, when they're talking to third-party vendors who provide things like title insurance or flood report or -- you name it, anything that goes into an underwriting decision on a mortgage, the wholesale lenders, all kinds of people, they say, just come on to that network. You don't have to -- I'm not going to build a separate pipe to you. I'm not going to put my firewall guys trying to figure out how to get you into my network. Just get on the ICE network and you can deliver it. And when -- and so we have, I think, 1,400 third parties that are doing business across our network because we get into the firewall. We -- that ICE cloud is already inside Goldman Sachs, and your people know how to manage that with us. When we do that, we usually charge a commission or a piece of the compensation of the third party using our network. So it turns out that, that part of our business will be very transaction-oriented. It will be very much levered one to one with the growth in refinancing and new loans. And then the bulk of the business, the network itself and all the software that we have, we are moving very quickly from what was a legacy business, that was paper-based business where everything was transaction-priced to subscription. We want to run our part of the business as being a growing, compounding subscription base. And we've done it like a mobile phone plan, where you buy a tier of minutes. And if you go above that tier, then we charge you by the minute. And so interesting for us is that this year, we've disclosed that 60% of the people that are coming up for renewal have gone to a higher tier, which is not -- again, not intuitive. 40% have stayed the same or gone to a lower tier. For the ones that have gone to a lower tier, to the extent that they do more business, then they break through the minute ceiling and that will raise our per transaction charge. So a long-winded way of saying, we'd like to sort of be a company that has this growing, compounding revenue, has very little downside risk to investors and us as managers and then -- but a lot of upside when transactions are rocking and rolling. It's -- we get all these estimates about housing and look at them and they're -- none of them are worth the paper they're written on. It's just amazing how poorly people forecast consumer behavior in housing. But the one thing I know and partly why we've leaned into this area is there is this massive demographic of millennials that are in their prime earning. These were all the people that 10 years ago we said were never going to leave their parents' basement, they were never going to buy a car, they were only going to Uber and all this stuff. These people are now in their 30s. They're married, they have kids. They don't want to live in their mom and dad's basement. Mom and dad want to give them the down payment so that they can get the grandkids out of the house. And that demographic is going to have to be dealt with by our society. And I don't know when it hits. There's -- obviously, we had COVID, supply chain issues, real issues in housing, housing policy, higher interest rates, but you can't deny that big demographic. And at some point, that group is going to buy more houses.

Yes. Another aspect of the deal or of this business we've talked about in the past is some of the interesting adjacencies that could come out. One of them -- the 2 that really always stood out to me is one is kind of modernizing mortgage trading in capital markets, and you guys know quite a bit about trading. And the second one being the consumer data that comes off on the back of this. I know it's not next year, maybe not the year after either, but as you start to think about new businesses that could come out for ICE on the back of this, either one of those avenues. What does that look like?

It's both. We have teams working on both. What's amazing...

SO it is a '24 revenue...

Well, what's -- well, I mean, these AI models now, we have a bunch of them running internally, and we're doing all kinds of things with them and testing them and what have you. It's amazing how quickly the -- I mean you read about it, but we see it internally. Like our people show up and they say, hey, look at this thing we just did last week. And we're like, oh my gosh. And so on the consumer side, there's no reason -- the velocity of mortgages should go up. There's no -- if we can underwrite you in real time -- if we have a digital file and your lender knows who you are and we know who you are and you're current on your house, we do all the house valuations. We provide the kind of data that goes to Zillow and what have you. We have the best information that you can have. If mortgages ticked down by 25 basis points, why can't you click a button and refi? The lender takes some fees, you refi, you go down. So on a declining -- right now, it's -- right now, the average consumer has to say, I wonder what my house is worth? And how much do I have left on my mortgage? Where are interest rates today? And I better go Google something and see -- and then I'm going to -- I found a website that has a calculator. And I mean what if we just in real time said, you can save -- hey, lender consumer, you can save money, boom, boom, boom. And so I think it will fundamentally change the capital markets because what goes into MBS will have duration in one environment that's different than another environment. So it's going to need to be hedged completely different. First of all, the whole TBA -- right now, it takes about a little less than 2 months to underwrite a mortgage. Like there's no reason we shouldn't be able to do that as you're filling out the application. So why do we need this TBA market? What -- again, I think that the opportunity to completely reshape those capital markets, which is why we got into this, by the way, it really is our domain. And we are a major provider to the MBS market. We do the valuations of MBS every day. We have 3 million instruments that we value every day and people use the mark-to-market. So we have connectivity to those people. The other weird thing, which I never knew until we started messing around with this, is that a lot of what goes into an MBS is just somebody said, I'll take your next 100 loans. And it's like you have 60 days to give me 100 loans. And boom, they go in a box. It's like there's no discretion. So what if we said we're going to have like a green bond that's going to target some low-income cohort, and that will go into an MBS? So what if we say we're going to design MBS the way we design ETFs? They're going to have all kinds of flavors. I don't see any reason why that won't happen, but you'll need the data and the specificity and the access, transparency, all of which I think is coming quickly. I mean we're definitely stripping all this stuff apart saying, wow, look what we found in the corner here. Those are the adjacencies. That's -- I really think it's increased velocity and much more data and information that will restructure the capital markets.

Yes. No, super interesting. All right. Let's switch gears a little bit. Let's talk about your original business, the energy trading business, which continues to grow at a really impressive clip. And it's really coming from a number of different sort of subverticals, which I would love to hit with you on. So let's start with oil first. Look, generally on track for another record year. And interestingly enough, not only driven by Brent, which is I think what we've all learned to kind of know about ICE, but a lot of other flavors, and particularly the one notable this year is WTI complex market share against CME has really picked up. So maybe help unpack what's been driving WTI performance this year and, of course, the runway you see for the rest of your oil complex.

Yes, sure. So we acquired the International Petroleum Exchange in year 2001. It was the very first deal I did, had Brent crude oil as its flagship. I didn't know anything about Brent really. It was tiny on a relative basis. The world sort of revolved around WTI, West Texas Intermediate crude. And that has really fundamentally changed. The world globalized on a commerce basis. It's deglobalizing right now and maybe on a commerce basis, but energy has so much more globalized and it's shipborne. And Brent crude is a grade of crude that comes out of the North Sea and never goes to land. It goes right from the derrick onto a ship. And so it's become the marker for oil at sea. And then we worked with some interest in the UAE, and we've launched Murban crude, which is Middle East crude -- high-grade Middle East crude on a ship in the Straits of Hormuz. And more recently, we've launched a contract we call HOU, Houston, which is WTI on a ship leaving the Gulf. And now you've got essentially Europe, U.S. and Middle East, there's grades of crude on boats. And it's really -- the notion of paid WTI at Cushing, Oklahoma in a pipe or whatever is less relevant. Fracking changed that. The fact that the margin -- the price of a barrel of oil is the marginal sale, and the marginal sale is probably going to somewhere, someplace outside the U.S. and probably delivered on a ship. And similarly, and you probably are going to ask me this, same thing has happened to the natural gas. We ended up with a lot of natural gas in the U.S. Europe had issues -- supply issues as a result of the Ukraine war. And suddenly, any capacity to take liquefied natural gas to Europe was -- went into play. And now the marginal molecule is probably an at-sea molecule. That oddly -- I think of -- I tell people this all the time. If you want to go buy a fishing rod, you go into some sporting goods store. They'll tell you, oh, yes, we don't have that model. We have supply chain issues. And still, this far after COVID, there are all these like supply chain issues from stuff that's getting built. The energy supply chain is turning on a dime. I mean people were projecting that Europe was going -- like people were going to die in their homes because they were going to not have any heating. And Europe just navigated that like nothing. Now prices moved around, but the supply chain for energy is unbelievably efficient and partly because it is a commodity, it's the same thing to everybody and it's at sea and people have ports. And it's just been fascinating. All of that is inured to the benefit of our platform. People are hedging, like new entrants. It's both new entrants, new products. I don't know, it's kind of a virtuous cycle. And it doesn't feel like -- particularly, as we're trying to become -- most Western economies are trying to become less carbon-based, there's a whole renewable element going on. 40% of our energy business today is either natural gas or carbon trading, which was tiny 15 years ago. Probably we'll -- everybody talks about oil because it's -- in the mind's eye, it's the flagship energy product in the world, but it may not be in another 15 years. So anyway, it just feels like the whole ecosystem, we're kind of right place, right time, right tools.

Yes. Let's talk about nat gas for a second, as you predicted. I definitely want to spend a minute here. TTF, huge success for you guys, took a little bit of a breather last year for a lot of kind of near-term margin issues, et cetera. Back at -- I don't know, up 100% year-over-year growth volumes or something like that, so big numbers. How has the customer base changed? We hear that there's more financial users starting to come in into that contract now, which increases velocity. And if so, how do you view the revenue TAM for TTF?

It's -- so first of all, if you haven't heard of TTF, it's European natural gas, and it's a contract that we found and worked with the Dutch to make into an index and make it more transparent. And it's really -- it was growing because the energy transition road map sort of moves through natural gas and -- in most economies. So it was growing. But then when they had the Russia pipeline shutdown, suddenly, there was a shortage of natural gas. And it started to be filled, as I mentioned, by moving gas from around the world. When it gets to Europe, they call it TTF. If you're going to hedge it there, you call it TTF. And so it's really a price that's sort of representative of a -- and Europe is really committed to energy transition. I mean they were on a road map to shut down those coal plants. And if you spend time there, it's serious. It's not -- this isn't like a top-down government thing. It -- the population itself is behind this. And so I think -- in other words, I think it's durable. And I just feel like that TTF marker -- also, we have one in Japan, too, by the way, that's similarly growing. I feel like those 2 markers, an Asian marker and a European marker of natural gas, is just going to keep growing. I don't know how big the TAM is, but I know their energy transition is serious. And I don't -- I think the population is not going to allow politicians to back away from it. That's my instinct there.

Yes. Got you. All right. Great. Why don't we switch gears. I want to hit on data and fixed-income data in particular. So that part of the business has grown, especially around data and analytics. It has been growing a little bit slower for you guys over the last couple of quarters. I think ASV has been essentially range-bound. And I'm sure there are some cyclical factors to that. But maybe try to separate the cyclical versus the more structural. And what are you guys doing there to reinvigorate growth in fixed-income data?

Yes. So we sell a lot of bond and MBS data that I mentioned. And those asset managers, the last couple of years were struggling a little bit. It -- we grew, but not as much as we had hoped because our customer base was feeling some pain. More recently, things feel like they're going back to normal again for us, number one. Secondly, what's been interesting is that, that market segment that Alex covers has grown for us because -- actually, the networking, the data itself was not -- is in demand, but the ability to take it on our cloud was in demand. And so much like, I suppose, some of the cloud providers that have really seen extreme growth, we saw growth in that segment. The distribution was more valuable than the data, I guess, is maybe the way to say it. I think that trend continues. We've really -- we use a lot of cloud -- not a lot, but we try to manage our cloud as best we can from third parties. And these guys keep hitting us with these double-digit price increases. And we've been much more sanguine with our customers on our proprietary cloud. But yet, it's still driven growth. And so I'm kind of thinking of it as 2 levers, which is when our customers are doing well and they want more data, we're going to make money there. If they're -- if it's not as in demand. The last thing I would just say to you is that the macro trend there is really the securitization of fixed income securities, in other words, putting them into ETFs. There seems to be real demand to buy bonds in the form of tradable equities. And the innovation going on there is huge. The big asset managers that are driving ETF growth there are leaning into it. We own -- not only do we own underlying data, reference data, we own a lot of the indices that we license. It's kind of a -- and obviously, we own the New York Stock Exchange where we list a lot of those. So it's kind of a virtuous circle for us that I think is a macro trend that's going to keep fixed income growing. I don't know what percentage it grows, but you just feel like it's got a trajectory behind it.

Yes, I got you. Staying on fixed income for a second. You guys own a couple of trading platforms. They're relatively small in the context of ICE, but they've been growing really nicely over the last couple of years now. Can you talk a little bit through the progress you're making on expanding institutional reach for these platforms and sort of how you envision this business continuing to grow into '24?

Yes. So we were late to get into fixed income trading. Chris Concannon, the company who were here in the session before, was in very, very early as was Tradeweb. And so my company is not a company that wants to be #3 at something. We tend to actually be the high price. Deliver better service at a higher price is kind of our attitude anyway. And so we looked for niches that we could exploit that our competitors were not -- or potential competitors were not. And so we went into the muni bond space. They were very focused on govies and corporate. And so we went into munis. The muni bond space is very retail-oriented. It's people that want to avoid own fixed income that's tax-advantaged. And so we have a lot of platforms that are used by lots of wealth managers and are distributed there. What you're referring to is more recently, we've seen institutional investors, they actually want to interact with that order flow that -- and as more ETFs are -- creative ETFs are being developed with different kinds of fixed income instruments in them and people developing different fixed income funds, suddenly, we're seeing much more institutional interest in the municipal bond space. Similarly, we're -- going to your earlier question, we're also -- we develop a lot of data and analytics that our data division does around that space. Because we have that trading platform and that natural constituency. We also think about what are the tools we can give them to get them to do more business or to help them do the business that they're going to do. We've been doing a lot of climate data, people that buy -- that are going to buy a municipal bond to finance a dam, want to know about what's going on with the water in that area, those kinds of things. So transmission lines in the West, is there -- are they in a fire area? So that kind of environmental data is becoming -- allowing people to be more precise in the way they price them, and we're exploiting that with the platform itself.

Got you. Great. I had a question on pricing. It doesn't come up that frequently with ICE, but you guys did increase pricing earlier this year on a handful of products. What's the broad approach to pricing from here? Any other enhancements you're thinking about into '24?

Yes. I mean, to put a point on it, I don't think we'd ever touch pricing on many of our products in 20 years. And so it really was, I think, this inflationary environment that we were in. Everything that we were buying from third parties was being inflated. And so we started to think, are we missing something? We started going through our own businesses. And in some cases, our costs went up, personnel costs, other things due to inflation. And so we just adopted a new mindset, which is we may be in a higher-for-longer interest rate environment where we've got to pay more attention to top line pricing. So we raised -- we tried -- we raised some prices on a few things. They were very targeted. That went well. Our customers appreciated the communication that we did and the way we tried to target it. I suspect if we're going to be higher for longer that that's going to be more of what we do. We try to deliver more value. I just feel like if you are asking your customers to pay more, you should deliver more. So we try to do it in the form of better bundling of certain services or -- you led me to talk about all the new products we're doing in energy. So if we've given you a bigger portfolio for the same cost, really, your per unit cost has gone down. So we're looking to be strategic and targeted in the way we do it, but it is now in our mindset. And as you know, a lot of our peers are doing the same thing. It's kind of an industry right now that's trying to find its water mark, its water level. And so I think we're all kind of watching each other as well to figure out what is the right value for what we provide.

Great. All right. Fair enough. We have a couple of minutes left on the clock. So if anybody has a question, just raise your hand and we'll get the mic over. I see one in the middle there. Second row. Mic, yes?

Jeff, can you give us a sense what percentage of your revenue today is annuity or subscription-based and strategically where you hope that might be in 4 or 5 years?

I think -- we went from damn near 0 to probably above 50% now. I would -- if I could go to 100, I would. I don't think we can, but just to give you an attitude. I went to business school, and maybe that's like a flaw that I have. But -- and I've never done what you guys do so take it with a grain of salt. But I would pay more for a company with compounding, growing subscription revenues than I would for something that is episodic on transactions. That's not always the case in financial services. I don't know why. I don't want to tell you how to do your business, but I just feel like as a manager, if I could lock in a customer base on longer-term contracts and grow the revenue, makes it an easier business to run, and I would think it's more valuable. I'm a shareholder. I'm -- because I'm a founder, I'm a large shareholder. It's more valuable to me as a shareholder. So maybe I am in your shoes in that regard. But I don't know if that answers your question. Is it possible that someday you all will have a subscription to the New York Stock Exchange and you can trade all you can eat? Probably. I don't know that the SEC would allow us to do that today. But I don't know why at some point that, that shouldn't happen. Because everything you do -- we all walk around with these mobile devices, and everything we're doing is subscription. And we -- sort of all Society moved past this pay per transaction. It's kind of annoying when you get your phone bill and you say, I used 32 minutes and 4 of them were international. And I just kind of want to like -- let me use the phone whenever I want to use it. Tell me what it costs. And so that's where I'm trying to drive the business. I hope you guys will look at -- and I know Alex and I talk a lot about it, that that's a better business, and it's been intentional on our part to drive it there.

Great. Well, that's perfect. I think we'll leave it there. Jeff, thank you so much.

Thank you, Alex.

Appreciate the time as always.

Well, thanks.