Intercontinental Exchange, Inc. (NYSE:ICE) Q4 2022 Earnings Call Transcript

Intercontinental Exchange, Inc. (NYSE:ICE) Q4 2022 Earnings Call Transcript February 2, 2023

Operator: Hello, and welcome to the ICE Fourth Quarter 2022 Earnings Conference Call and Webcast. My name is Alex and I’ll be coordinating the call today. I’ll now hand over to your host, Katia Gonzalez, Investor Relations and Senior Analyst. Katia, please go ahead.

Katia Gonzalez: Good morning. ICE’s fourth quarter 2022 earnings release and presentation can be found in the Investors section of the ice.com. These items will be archived and our call will be available for replay. Today’s call may contain forward-looking statements. These statements which we undertake no obligation to update, represent our current judgment and are subject to risks, assumptions and uncertainties. For a description of the risks that could cause our results to differ materially from those described in forward-looking statements, please refer to our 2022 Form 10-K, and other filings with the SEC. In addition, as we announced last year, ICE has agreed to acquire Black Knight. The transaction is pending customary regulatory approval and we expect to close in the first half of this year.

In connection with the proposed transaction, ICE has filed with the SEC a registration statement on Form S-4 to register the shares of ICE common stock to be issued in connection with the transaction. The registration statement includes a proxy statement of Black Knight that also constitutes a prospectus of ICE. Please see the Form S-4 filing for additional information regarding the transaction. In our earnings supplement, we refer to certain non-GAAP measures. We believe our non-GAAP measures are more reflective of our cash operations and core business performance. You’ll find a reconciliation to the equivalent GAAP terms in the earnings materials. When used on this call, net revenue refers to revenue net of transaction-based expenses and adjusted earnings refers to adjusted diluted earnings per share.

Throughout this presentation, unless otherwise indicated, references to revenue growth are on a constant currency basis. Please see the explanatory notes on the second page of our earnings supplement for additional details regarding the definition of certain items. With us on the call today are Jeff Sprecher, Chair and CEO; Warren Gardiner, Chief Financial Officer; Ben Jackson, President; and Lynn Martin, President of the NYSE. I’ll now turn the call over to Warren.

Warren Gardiner: Thanks, Katya. Good morning, everyone. And thank you for joining us today. I’ll begin on Slide four with some of the key highlights from our fourth quarter results. Net revenues of $1.8 billion were driven by transaction revenues of $828 million and recurring revenues of $940 million, up 4% year-over-year. For the full year revenues totaled $7.3 billion, also up 4% versus last year. Fourth quarter adjusted operating expenses totaled $740 million, and we’re within our guidance range, including approximately $5 million of additional severance. This strong performance helped to drive fourth quarter adjusted earnings per share $1.25 and full year adjusted EPS of $5.30, an increase of 5% versus 2021. 2022, free cash flow totaled a record $2.9 billion, which enabled us to return nearly $1.5 billion to shareholders while also continuing to make strategic investments across our business.

In addition, we have received Board authorization to increase our quarterly dividend by 11% to $0.42 per share, beginning in the first quarter of 2023, extending our 10-year track record of double digit dividend growth. Now let’s move to Slide five, where I’ll provide an overview of the performance of our Exchange segment. Fourth quarter net revenues totaled $982 million. Transaction revenues of over $600 million were driven in part by 11% growth in agricultural commodities, and 13% growth in our equity derivatives business. Importantly, open interest trends remain strong across our futures and options in January, including 14% growth in global natural gas and 24% growth in LIBOR. Recurring revenues, which include our exchange data services, and our NYSC listings business increased by 5% year-over-year in the fourth quarter.

Customer growth, particularly within our energy exchange data was partially offset by slower growth in our listings business. While industry wide capital markets activity was relatively muted. It’s worth noting that despite a slower year for IPOs, across the globe, we had a record year for listing transfers was 34, including more operating companies in the last three years combined. For the full year exchange segment, revenues increased by 8%, including a 33% increase in our interest rate business, a 20% increase in equity derivatives, and an 8% increase in our global natural gas revenues. Turning now to Slide six, I’ll discuss our fixed income and data services segment. Fourth quarter revenues totaled a record $537 million up 13% versus a year ago.

Transaction revenues increased by 89%, including 182% growth in ICE bonds, and 66% growth in our CDS Clearing business. Similar to last quarter, this strong growth was driven by market volatility, higher interest rates and our continued efforts to build institutional connectivity to our bond platforms. Recurring revenue growth of 3% was driven by demand for additional capacity on ICE global network, as well as strong growth across our desktop, feeds and analytics offerings. We’re beginning to see a return on the investments we’ve made in both enhance content and functionality. This performance is a key driver of our other data and network services business which increased by 8% in the fourth quarter, and 10%, excluding the impact of the Euronext migration.

Somewhat offsetting with slower growth in our end-of-day pricing business, we’re experiencing a slower sales cycle and pressure from asset base revenues in our index business, which declined double digits year-over-year, as investors shifted out of higher fee risk assets, such as equities and corporate bonds, and communities and treasury ETFs. For the full year, total segment, revenues totaled a record $2.1 billion up 13%. While adjusted operating margins expanded by 500 basis points, as anticipated recurring revenue grew 4% for the year and it was up 5% after adjusting for Euronext. Let’s go next to Slide seven, where I’ll discuss our Mortgage Technology Segment. Fourth quarter Mortgage Technology revenues totaled $249 million. Recurring revenues which accounted for two-thirds of segment revenues totaled $164 million and grew 10% year-over-year.

These strong recurring revenues continue to drive out performance versus an industry that experienced a nearly 60% decline in origination volumes. Importantly, they’ve now less revenues increased by over 30% year-over-year. For the full year, Mortgage Technology revenues totaled $1.1 billion, including a 16% increase in our recurring revenues, and a 24% increase in our data analytics revenues. And while industry volumes were actually below those seen three years ago in 2020 — in 2019, pro forma 2022 Mortgage Technology revenues are higher by nearly 50%, representing a CAGR of roughly 14%. I’ll conclude my remarks on Slide eight with some additional guidance. Recurring revenues in 2023 were once again be led by our Mortgage Technology segment, where we are expecting mid to high single digit growth, a testament to the continued adoption of automation across the mortgage workflow.

Photo by Damir Kopezhanov on Unsplash

In our fixed income and data services segment, we expect recurring revenue growth, excluding headwinds of approximately $15 million related to FX and the Euronext data center migration to once again be in the mid-single digits. And lastly, in our Exchange segment, we expect recurring revenue growth excluding a $20 million headwind from the cessation of LIBOR to be in the low single digits. As continued growth in our energy exchange data services is offset by fewer IPOs and the tapering of 2021 initial listing fees. Moving to expenses, we expect 2023 adjusted operating expenses to be in the range of $3.04 to $3.09 billion. Consistent with prior years, we will reward our employees for their contributions to our strong results, and therefore expect cash compensation expense to increase by approximately $20 to $40 million.

Strategic investments in technology operations and revenue related initiatives are expected to increase by $40 to $50 million, driven by higher licensees as well as investments across all three of our segments. In addition, we expect roughly $45 million to $55 million of incremental noncash expense, including $25 million of D&A related to the rebuild of Ellie Mae CapEx. And lastly, we expect an FX benefit to our adjusted expenses by approximately $5 million to $15 million when compared to 2022. In summary, we delivered another record year of revenues, operating income, free cash flow and earnings per share. Across our business, we made strategic investments in future growth and as we enter 2023, we are well positioned to meet the evolving needs of our customers, once again, deliver profitable growth and create value for our shareholders.

I’ll be happy to take questions during Q&A. But for now, I’ll hand it over to Ben.

Benjamin Jackson: Thank you, Warren, and thank you all for joining us this morning. Please turn to Slide 9. 2022 was a year marked by rising inflation, rising interest rates and continued geopolitical and macroeconomic uncertainty. Amidst this dynamic macroeconomic environment, we once again grew revenues, operating income and earnings per share, record results that are a testament to the resiliency and durability of our strategically diversified business model. In our financial futures markets, rising inflation and central bank activity across the globe presented an interest rate environment that has not been seen in generation, helping us drive 20% volume growth in our interest rate complex and 15% growth in our equity derivatives business.

Across our global energy markets, the events unfolding across North America, Europe, Russia and Asia have triggered a reshaping of the global energy supply chain, creating new risks and uncertainties for market participants to navigate. In our global natural gas markets, an evolving energy supply chain in Europe has led to increased demand for global liquefied natural gas, or LNG, and has helped us drive a 17% increase in global gas volumes in 2022. This includes 24% growth in our North American gas business, which has benefited not only from increased commercial engagement with our Henry Hub contract but also our North American basis markets. These trends have continued into January with global natural gas open interest up 14% year-over-year, including 21% growth in North America.

Although our European carbon markets experienced headwinds in 2022 due to the aforementioned factors, the secular trend towards cleaner energy continues and is a growth trend we are uniquely positioned to capture, as evidenced by the record year in our North American environmental markets with volumes up 5% year-over-year in 2022. As we look out over the longer term, corporates and market participants remain committed to environmental policy to reduce carbon emissions. This is an evolution that we’ve long envisioned and is one of the largest providers of environmental products, including renewable fuel contracts, carbon allowances, nature-based solutions, renewable energy certificates as well as the wealth of climate data and related into season analytics.

We are excited about the many future growth opportunities that lie ahead. Moving to our Fixed Income and Data Services business. Our comprehensive platform continues to generate compounding revenue growth and delivered another year of record revenues in 2022. This strong growth was underpinned by both recurring and transaction revenue growth, again a testament to the strategic diversification of our business and our ability to deliver growth through an array of macroeconomic environments. Rising market uncertainty and interest rates are driving an increase in demand for credit protection, and we have seen this lead to increasing trading activity in our bonds business. These factors, coupled with our continued efforts to build institutional connectivity to our bonds platforms, continued to record full year revenues — to record revenues in our ICE Bonds business in 2022 up nearly 100% year-over-year.

Turning now to our Mortgage business, increased workflow efficiency through continued electronification is a secular trend we believe will continue through a variety of mortgage origination environments. Our ability to capture this secular trend is evidenced by the strength and resiliency of our recurring revenues, which increased 16% in 2022. This continued strength is a result of executing against our strategy of leveraging our mission-critical technology and data expertise to accelerate this analog to digital conversion. As mortgage origination volumes have normalized, customer conversations have increasingly centered on efficiencies and automation. In the fourth quarter, we had our strongest quarter of last year in terms of sales to new customers of our loan origination system with wins across each major segment we service.

In addition, there continues to be increased interest in our data and analytics products, which increased 31% in the quarter and 24% for the full year in 2022. Through our AIQ solution and analyzer tools customers can save thousands of dollars per loan by leveraging our data and analytics tools to drive automation in the loan manufacturing process. We are pleased that the value of our offerings continues to resonate with lenders, and we remain optimistic about the long-term opportunity to accelerate the analog to digital conversion. I’ll now turn the call over to Jeff.

Jeff Sprecher: Thank you, Ben. Good morning, everyone, and thank you for joining us. Please turn to Slide 10. I want to begin by touching on our pending acquisition of Black Knight. As communicated, when making the announcement, we continued to believe that this transaction will close during the first half of this year. Our respect for the Federal Trade Commission’s work on this matter, and as we cooperate with them to gain regulatory approval, we do not intend to comment further on the transaction. But importantly, we remain excited about the efficiencies that the combined entities will bring to the end consumer and to other stakeholders across the mortgage ecosystem. In that vein, and shifting to what was yet another successful year, 2022 marked our 17th consecutive year of record revenues, record operating income and record adjusted earnings per share.

This track record of growth reflects on the quality of our strategy and, more importantly, on the execution of that strategy. We’ve intentionally diversified across asset classes and geographies, so that we’re not tied to any one cyclical trend or macroeconomic environment. We’ve deliberately positioned the company to have a mix of transaction and compounding subscription revenues to provide upside exposure while hedging our downside risk. We’ve placed the company at the center of some of the largest markets undergoing an analog to digital conversion. The combination of these factors is what has made ICE an all-weather name and a business model that provides upside to volatility with less downside risk and, importantly, a business model that generates growth on top of growth.

For example, in 2022, inflationary concerns and market speculation of central bank activity benefited our European and U.K. interest rate business, driving a 33% increase in revenues for the full year. These conditions also contributed to record full year revenues in our credit default swap clearing business, up 61% year-over-year, as rate volatility drove increased demand for risk management and credit protection. Across our mortgage business, even against this backdrop of rising interest rates, our business outperformed the broader market driven by strong recurring revenue growth, up 16% for the full year. Again, this is a reflection of the all-weather nature of our business model. As we look to 2023 and beyond, we’re positioned to capitalize on the secular and cyclical trends occurring across asset classes, and we remain focused on executing on the many growth opportunities that are in front of us, extending our track record of growth.

I’d like to conclude by thanking our customers for their business and for their trust in 2022, and I want to thank my colleagues for their contributions to the best year in our company’s history. And with that, I’ll turn the call back over to our operator, Alex, who will conduct a question-and-answer session until 9:30 Eastern Time.

See also 21 Best Dating Apps of 2023  and 10 Hot EV Stocks To Buy .

Q&A Session

Operator: Our first question for today comes from Rich Repetto from Piper Sandler. Rich, your line is now open. Please go ahead.

Richard Repetto: Yes, good morning, Jeff and Ben and Warren. I wanted to ask about energy and more specifically natural gas. Ben, you made a lot of comments about how strong the U.S. natural gas markets are. You can see it in the volumes. But one issue it seems coming up is in the European natural gas and the TTF contract want to put in the right perspective, it’s only 15%, I think, of the natural gas volumes but this whole deal with price caps that have been implemented and what you’re going to do about it. And I guess it ties into the bigger question of politics and regulation impacting the markets, Jeff, as well. But anyway, the question on natural gas and sort of this broader intervention of government or regulation.

Benjamin Jackson: Rich, it’s Ben. Great question. To start, you got to remember that gas used to be a commodity that was highly dependent upon wellheads and pipeline infrastructure. So supply chains used to be a natural gas, very attached to that type of infrastructure. And whenever there was a disruption to that type of infrastructure, it’s very difficult to adjust to rebalance those supply chains is all very localized, not really a global energy product. Fast forward to today, natural gas is very much a global energy product. It’s a global energy supply chain, especially with the advent of LNG. And today, LNG can be freely flowed pretty much anywhere around the world as long as there’s regasification capacity to do this. We saw this many years ago, and we’ve been investing in a global natural gas business that provides benchmarks around the world, has LNG contracts around the world that continue to expand as well as LNG freight contracts.

So if you look at last year in GTF specifically, you had the unfortunate event where Russia invades Ukraine, and we saw significant energy supply disruptions where Russia was a significant supplier of oil, gas oil and natural gas, in particular, to Europe. And those supplies were effectively cut off. It created a very difficult trading situation for many of our market participants. At the same time, we saw market data subscriptions continue to grow in that part of our business. We saw more and more high balls and more of our community was growing around this. Fast forward to 2023, those supply chains have readjusted because natural gas is now a global commodity. And you have a significant amount of U.S. LNG and Middle Eastern LNG flowing now to Europe, backfilling a lot of those lost Russian gas supplies.

So this market clarity has helped bolster confidence in trading products like ETF, and you see it already year open interest is up 10%. Volumes are up roughly 4% off of a comp of last year, which was actually pretty strong for TTF at the beginning of the year. Now for gas specifically, you have all kinds of macroeconomic environments that people need to manage risk around right now, but it’s important to point out these are tradable events. Things like regasification coming online in Europe, so there’s more and more gas that can come into Europe more efficiently. You’ve got storage — gas storage facilities across Europe that have been filled. Weather so far hasn’t been an issue this year in Europe. European demand is down. So you have a potential for a recession that’s looming.