Intercontinental Exchange Fourth Quarter 2021 Earnings ICE - Summary Transcript

Mary Caroline O’Neal: Good morning. ICE’s Fourth Quarter 2021 Earnings Release and Presentation can be found in the Investor 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 2021 Form 10-K, and other filings with the SEC.

 

In our earnings supplement, we refer to certain non-GAAP measures. We believe, our non-GAAP measures are more reflective of our cash operations in core business performance. You'll find a reconciliation to the equivalent GAAP term in 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 the 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, and Chair of Fixed Income and Data Services.

 

I'll now turn the call over to Warren.

 

Warren Gardiner: Thanks, MC. 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.

 

Adjusted earnings per share totaled $1.34, up 17% year-over-year, marking the best quarter in our company's history. Net revenues totaled a record $1.8 billion and increased 10% versus last year. Total transaction revenues grew 11%, while total recurring revenues, which accounts for nearly half of our business, increased by 10%.

 

Fourth quarter adjusted operating expenses totaled $749 million, slightly higher than expected, driven by additional severance as well as higher performance-based compensation due to the strong results to finish the year.

 

Adjusted operating income increased by 14%, totaling a record of $1.1 billion. This strong operating performance contributed to a record full year free cash flow over $2.8 billion, of which we returned $1 billion to shareholders through dividends and buybacks, while also reducing our gross leverage to 3 times EBITDA, nearly a full year ahead of schedule.

 

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 $1 billion, an increase of 17% year-over-year. This strong performance was driven by a 71% increase in our interest rate business and a 29% increase in our energy revenues, both driven in part five rising inflation expectations.

 

Revenues within our global oil complex increased 29% year-over-year, while natural gas and environmental products, which represent approximately 40% of our energy revenues, increased by 36% in the quarter and were up 20% for the full year.

 

Recurring revenues, which include our exchange Data Services and our NYSE listings business increased by 8% year-over-year, including 10% growth in listings.

 

Turning now to slide six, I'll discuss our Fixed Income and Data Services segments. Fourth quarter revenues totaled a record $480 million, a 7% increase versus a year ago. Recurring revenue growth, which accounted for nearly 90% of segment revenues, also grew 7% in the quarter.

 

Within recurring revenues, our Fixed Income Data and Analytics business increased by 6% year-over-year, including another quarter of double-digit growth in our index franchise. While Other Data and Network Services grew 7%, driven by continued demand for ICE Global Networks and consolidated feeds offering.

 

For the full year, Data Services revenue increased by 6%. And, importantly, annual subscription value or ASV, enters the first quarter up 5.5%, setting us up for yet another strong year of compounding revenue growth.

 

Let's go next slide seven, where I will discuss our Mortgage Technology segment. Fourth quarter Mortgage Technology revenues totaled $346 million. Recurring revenues, which accounted for over 40% of segment revenues, totaled $149 million and grew 26% year-over-year. While total Mortgage Technology revenues declined slightly, down 1% in the fourth quarter, we outperformed an industry that experienced a roughly 30% decline in origination volumes.

 

For the full year. Mortgage Technology revenues grew 17% on a pro forma basis, reaching $1.4 billion, well ahead of our initial expectations and on track to achieve our target of more than doubling revenues over a 10-year period.

 

I'll conclude my remarks on slide eight with some additional guidance. We expect full year total recurring revenues to be between $3.68 billion and $3.75 billion. This includes approximately $30 million of headwinds related to FX, the planned phase out of sterling LIBOR and Euronext post-Brexit decision to migrate certain connectivity services away from our UK data center and onto the continent. It’s worth noting that the majority of Euronext connectivity revenues are expected to be offset by a related reduction in cost.

 

Adjusting for these items, we expect core growth in our recurring revenues, which again account for half of our business, to be approximately 6% to 8% for the full year. This strong growth, which on top of 10% growth last year is expected to once again be led by our Mortgage Technology business, which we expect will grow in the low-to-mid teens. And, importantly, is on top of an exceptional 30% growth in 2021. In addition, and supported by an ASV that exits the fourth quarter up 5.5%, we anticipate another year of 5% to 6% growth in our Fixed Income and Data Services recurring revenues.

 

Moving to expenses, we expect 2022 adjusted operating expenses to be in the range of $2.99 billion to $3.04 billion. Consistent with prior years, we’ll reward our employees for their contributions to our strong results and therefore expect compensation expense, net of synergies and the resetting of 2021 performance awards to increase by $25 million to $35 million.

 

Expenses tied to revenues are also expected to increase by $25 million to $35 million, driven by higher license fees as well as investments in business and product development across all three of our segments. In addition, we expect an incremental $40 million to $60 million in support of productivity and efficiency initiatives across our technology and operations groups, portion of which we are electing to fund through the net operating savings we realized following the [IPO-backed]. Lastly, and similar last year, we expect roughly $30 million of incremental D&A expense related to purchase accounting and the rebuild of Ellie Mae CapEx. Please see slide 12 in the appendix for a bridge reconciling our expense guidance of 2021.

 

Moving next to capital allocation and consistent with our track record of growing our dividend as we grow, we plan to increase our quarterly dividend by 15% year-over-year from $0.33 per share to $0.38 per share. In addition, and now that we are within our targeted leverage range, we expect to deploy approximately $475 million for share purchases in the first quarter, representing a nearly 20% increase versus the second quarter of 2020. The last full quarter of buybacks prior to our acquisition of Ellie Mae.

 

In summary, we delivered a record finish to another record year. We delivered double-digit growth in revenue, operating income and earnings per share. We also invested in array of future growth initiatives, increased our dividend double-digits and achieved our leverage target a year earlier than originally planned.

 

As we kick off 2022, we're focused on once again delivering growth and creating shareholder value against what is an ever-evolving macro backdrop.

 

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

 

Ben Jackson: Thank you, Warren. And thank you all for joining us this morning. Please turn to slide nine. We are pleased to report another record year for ICE. Our strong financial results reflect the tremendous efforts of my colleagues across the organization, the trust and expanding relationship we have with our customers and the ability of our business model to drive growth across a variety of macroeconomic environments.

 

I'd like to focus on the secular trends that are driving growth across our mortgage and energy markets and will turn it over to Lynn to discuss our position across Fixed Income Data and Analytics, and some highlights from our great year at the NYSE.

 

Our data, technology to network expertise position us well to accelerate the analog to digital conversion happening across the mortgage industry. As mortgage origination costs continue to increase, electronification is a trend we believe will continue in a variety of interest rate environments, and regardless of mortgage origination volumes. Our ability to capture this secular trend is evidenced by the strength and resiliency of our recurring revenues.

 

Part of that growth is driven by our strategy to intentionally shift more business to recurring revenue. We also continue to see strong sales and new customers coming onto the platform. And with connectivity to nearly every participant in the mortgage industry, we have the opportunity to cross-sell new products like eClose and AIQ to a captive customer base seeking efficiencies. This flywheel effect and the secular trend of electronification give us confidence in our ability to grow this business and capture the $10 billion addressable market.

 

Across our energy markets, we achieved record volumes in 2021, including in Brent, TTF and environmentals. The breadth and depth of our platform, not only drove the strong volumes in revenues, but more importantly it positions us to capture secular tailwinds across our energy complex, including the globalization of natural gas and the clean energy transition.

 

We have built a global natural gas business, including our European marker TTF. Globalization of natural gas and the rise of LNG have driven TTF to emerge as the global gas benchmark. And in 2021, record volumes on our platform grew 45% and drove revenue growth of 36%. Our markets continue to be relied on by an increasing number of participants to manage risk and navigate volatile gas and power markets.

 

We were also early to diversify into environmentals, acquiring the Climate Exchange in 2010, and building around those leading markets to develop a global environmental business. And in 2021, we reached record volumes across the complex, including in our EU, UK renewable greenhouse gas initiatives and California Carbon Allowances. These record volumes contributed to a 56% increase in environmental revenues versus the prior year.

 

As customers navigate the uncertainty and volatility related to the clean energy transition, we are well positioned as venue of choice to manage risk and provide price transparency across the energy spectrum.

 

With that, I'll now turn the call over to Lynn.

 

Lynn Martin: Thank you, Ben. With data and technology at our core, our goal is to provide solutions, which add transparency to both, commonly understood risks as well as emerging risks such as ESG. We continue to increase the breadth and coverage of our products and accelerate the delivery of our ESG reference data to the NYSE issuer community, providing non-opinion based insights to market participants. And, in the fourth quarter, we expanded our climate change and alternative data capabilities with the acquisition of risQ and Level 11 Analytics.

 

Combining geospatial data technology with our financial data will bring greater transparency to ESG risks across the financial markets, including our existing muni bond and mortgage-backed security offerings. Our data, technology and leading marketplace has positioned us well to benefit from the secular trend toward sustainability and net zero carbon commitments.

 

Turning now to Fixed Income. Increased automation, flexibility of delivery and passive investing continue to drive demand for our proprietary data and rapidly growing index business. As a leading data provider to the fixed income market, we are uniquely positioned to drive automation, leveraging our proprietary evaluated prices, analytics and our growing suite of reference data, we've taken a business that historically served the back end middle office and created tools and analytics for the front office. These tools are critical to the pre-trade transparency needed in the opaque, less liquid fixed income markets, as is evidenced by our front office tools continuing to grow double digits.

 

The growth in passive investing continues to be a tailwind for our business. The flexibility of our tools, quality of our pricing data and flexibility of our offering, directly contributed to the five asset managers with funds of over $66 billion of AUM that transitioned to ICE indices during 2021. And, an additional group of funds with AUM of $6.7 billion have planned transitions during Q1 2022. This strength drove double-digit revenue growth in our index business for the fourth consecutive year and positions us well for continued growth.

 

I'll close with some highlights from the NYSE. 2021 was a record year for NYSE listings. We helped connect innovators and entrepreneurs to nearly $120 billion in capital through 297 IPOs, including three of the four largest IPOs and the three largest tech IPOs. And importantly, we continue to lead the market in ETF listings with more than 65% of new funds selecting us as their home.

 

We also continue to prioritize our market leading technology, which enables customers to better manage risk and provide our issuer community with significantly less volatility at the open and the close. The performance of our technology was proven as recently as last week, when we processed nearly half-a-trillion messages in a single day with median response times of less than 30 microseconds across our equities complex, further cementing our position as the leading equity exchange group.

 

Our leading data and technology, coupled with our investments in sustainable finance, the secular trends across fixed income markets and the competitive differentiators of the NYSE will continue to drive our growth well into the future.

 

I'll now turn the call over to Jeff.

 

Jeff Sprecher: Thank you, Lynn, and thank you all for joining us this morning. Please turn now to slide 10. 2021 marked our 16th consecutive year of record revenues and record adjusted earnings per share. This track record of growth reflects our strategy to diversify the business and position the company at the center of some of the largest markets undergoing an analog to digital conversion.

 

Our strategy that has made ICE an all-weather name, a business model that provides upside volatility with less downside risk, and importantly a positioning that drives growth on top of growth. We have intentionally diversified across asset classes, so that we're not tied to any one cyclical trend or one macroeconomic environment. For example, in 2021, we saw record volumes across our energy complex, driven in part by inflationary concerns and market speculation of Central Bank activity.

 

Our European and UK interest rate business also benefited from interest rate volatility, driving a 15% increase in revenues in 2021. And more recently, a 34% increase in our January revenues. Our CDS clearing business grew 14% in the fourth quarter as rate volatility increased, driving demand for risk management and credit protection. And even against this backdrop of rising interest rates, our Mortgage Technology business outperformed the broader market, including pro forma of recurring revenue growth in 2021 of 31% Again, a reflection of the all-weather nature of our business model.

 

As we begin 2022, we are better positioned than ever to capitalize on the secular and cyclical trends occurring across asset classes and we remain focused on investing and executing on the many growth opportunities in front of us.

 

Before we end our prepared remarks, I'd like to thank our customers for their business and their trust in 2021, and I'd like to thank my colleagues at ICE for their continued efforts. Your hard work contributed to the best quarter in our company's history, combined with other excellent results, making it the best year in our company's history.

 

With that, I'll now turn the call back to, Andrew, our operator, to conduct the question and answer session until 9:30. Eastern Time.

 

Q&A

Disclaimer: The transcripts on this site may not be accurate. Do not unduly rely on the transcript. The best efforts have been made to make it as accurate as possible. We make these transcripts freely available for you. However, you can always contact us and make a fee/payment as you wish, so that we can keep up the good work.