Intercontinental Exchange : ICE) Q1 2022 Earnings Cal

Corrected Transcript

05-May-2022

Intercontinental Exchange, Inc. (ICE)

Q1 2022 Earnings Call

	Total Pages: 21
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Intercontinental Exchange, Inc. (ICE)	Corrected Transcript
Q1 2022 Earnings Call	05-May-2022

CORPORATE PARTICIPANTS

Mary Caroline Cowden O'Neal	Benjamin R. Jackson
Head-Investor Relations, Intercontinental Exchange, Inc.	President, Intercontinental Exchange, Inc.
Warren Gardiner	Joseph Tyrrell
Chief Financial Officer, Intercontinental Exchange, Inc.	President-ICE Mortgage Technology, Intercontinental Exchange, Inc.
Jeffrey Craig Sprecher
Chair & Chief Executive Officer, Intercontinental Exchange, Inc.

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OTHER PARTICIPANTS

Richard Henry Repetto	Kenneth B. Worthington
Analyst, Piper Sandler & Co.	Analyst, JPMorgan Securities LLC
Alex Kramm	Chris Allen
Analyst, UBS Securities LLC	Analyst, Compass Point Research & Trading LLC
Gautam Sawant	Kyle Voigt
Analyst, Credit Suisse Securities (USA) LLC	Analyst, Keefe, Bruyette & Woods, Inc.
Daniel T. Fannon	Brian Bedell
Analyst, Jefferies LLC	Analyst, Deutsche Bank Securities, Inc.

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MANAGEMENT DISCUSSION SECTION

Operator: Good day, and welcome to the ICE First Quarter 2022 Earnings Conference Call and Webcast. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded.

I would now like to turn the conference over to Mary Caroline O'Neal, Head of Investor Relations. Please go ahead.

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Mary Caroline Cowden O'Neal

Head-Investor Relations, Intercontinental Exchange, Inc.

Good morning. ICE's First Quarter 2022 earnings release and presentation can be found in the Investors section of theice.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 addition, the press release announcing the ICE and Black Knight transaction includes important disclosures that apply to this call. Please also note that this call does not constitute an offer to sell or buy or the solicitation of

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Intercontinental Exchange, Inc. (ICE)	Corrected Transcript
Q1 2022 Earnings Call	05-May-2022

any offer to buy or sell any securities, nor shall there be any sale of securities in any jurisdiction in which such offer, solicitation, or sale would be unlawful prior to registration or qualification under the securities law of any such jurisdiction. No offerings of securities shall be made except by means of prospectus, meeting the requirements of Section 10 of the Securities Act of 1933.

In connection with the proposed transaction, ICE will file 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 will include a proxy statement of Black Knight that also constitutes a prospectus of ICE. The definitive proxy statement prospectus will be sent to the stockholders of Black Knight, seeking their approval of the transaction and other related matters.

Before making any voting or investment decisions, investors and security holders of ICE and Black Knight are urged to carefully read the entire registration statement and proxy statement prospectus when they become available as well as any amendments or supplements to these documents because they will contain important information about the proposed 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 our core business performance. You'll find a reconciliation to the equivalent GAAP term 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 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 Joe Tyrrell, President of ICE Mortgage Technology.

I'll now turn the call over to Warren.

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Warren Gardiner

Chief Financial Officer, Intercontinental Exchange, Inc.

Thanks, MC. Good morning, everyone, and thank you for joining us today. I'll begin on slide 4 of the earnings supplement with some quick highlights from our first quarter results, and then I'll turn it over to Jeff to discuss the exciting transaction we announced yesterday afternoon.

First quarter adjusted earnings per share totaled $1.43, up 7% year-over-year, marking the best quarter in our company's history. Net revenues totaled a record $1.9 billion and increased 6% versus last year.

Total transaction revenues grew 4%, while total recurring revenues which accounted for nearly half of our business increased by 9%. Importantly, this is on top of 10% growth in the first quarter of 2021.

First quarter adjusted operating expenses totaled $746 million, in the middle of our guidance range. Had it not been for a few million dollars of severance, adjusted operating expenses would have been towards the low end of the range. Looking to the second quarter, we expect adjusted operating expenses to be in the range of $740 million to $750 million.

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Intercontinental Exchange, Inc. (ICE)	Corrected Transcript
Q1 2022 Earnings Call	05-May-2022

First quarter adjusted operating income increased by 9% to a record $1.2 billion, while free cash flow totaled $660 million which we largely deployed in the form of share repurchases of $475 million.

Now, let's move to slide 5 where I'll provide a quick overview of the performance of each of our segments. First quarter exchange net revenues totaled $1.1 billion, an increase of 12% year-over-year. This strong performance was driven by a 36% increase in our interest rate futures and a 16% increase in our energy revenues. Revenues within our global natural gas and environmental products, which represent approximately 40% of energy revenues, increased by 30% in the quarter. Recurring revenues which include our exchange data services and our NYSE listings business increased by 7% year-over-year including 13% growth in listings.

Turning now to slide 6, in our Fixed Income and Data Services segment, first quarter revenues totaled a record $509 million, a 9% increase versus a year ago. Transaction revenues increased by 28% including 9% revenue growth in ICE bonds and 33% growth in our CDS business driven by rising interest rates and macroeconomic uncertainty.

Recurring revenue growth, which accounted for nearly 85% of segment revenues, grew by 6% in the quarter, once again driven by double-digit growth in our index and consolidated fees businesses and strong performance from our ICE Global Network and Other Data services businesses. And importantly, annual subscription value, or ASV, enters the second quarter up over 6% year-over-year.

Shifting to Mortgage Technology on slide 7. First quarter revenues totaled $307 million. While total Mortgage Technology revenues declined year-over-year in the first quarter, we once again outperformed an industry that experienced a 40% decline in origination volumes including an 80% decline in term refi volume. Recurring revenues which accounted for over half of segment revenues totaled $156 million and grew 24% year-over-year.

As the mortgage origination backdrop continues to normalize, customers are in search of both automation and greater efficiency, a trend that contributed to one of the strongest sales quarters for our data and analytics product suite including the implementation of our analyzers by JPMorgan Chase.

In addition, based on the strong performance through the first quarter of 2022 and the visibility we have into the current sales pipeline, we believe our current revenue growth in our mortgage business is trending towards the high end of our low- to mid-teens guidance range.

In summary, while a rapid rise in interest rates may have weighed on mortgage transaction volumes during the quarter, that same macroeconomic factor also provided a tailwind to our interest rate, commodity, and fixed income businesses and, once again, alongside strong growth across our recurring revenue base, helped us deliver another record quarter for revenues, adjusted operating income, and adjusted earnings per share, a testament to the all-weather nature of our business model.

With that, I'll hand it over to Jeff.

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Jeffrey Craig Sprecher

Chair & Chief Executive Officer, Intercontinental Exchange, Inc.

Thank you, Warren. Good morning, everyone, and thank you for joining us. Today we're here to discuss the financial results of the best quarter in ICE's history along with our plan to continue our track record of growth with our agreement to acquire the public company, Black Knight.

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Intercontinental Exchange, Inc. (ICE)	Corrected Transcript
Q1 2022 Earnings Call	05-May-2022

Black Knight is an important piece of financial market infrastructure that we believe will allow us to continue to reduce the cost of home borrowing when coupled to the other US mortgage industry assets that we've built and acquired. This proposed acquisition is another step in a journey that ICE has embarked on since its founding.

As an early entrepreneur, I studied the exchange space and I discovered that the largest exchanges all had one asset class in common: interest rates. And what became abundantly clear during the financial crisis was that hedgers who thought they had effectively managed risk using legacy interest rate products were doing so very imperfectly.

Couple that with the analog to digital conversion that has been happening to markets more broadly, and we saw a powerful opportunity to redefine our exchange business, and we've been diligently working on this thesis for more than 15 years.

To compete with hedging products in the corporate borrowing area, we acquired Creditex in 2008, married it the Board of Trade Clearing Corporation in 2009, and launched a clear credit default swap market that this quarter generated $72 million of revenue and grew 33% year-over-year. We acquired the LIFFE Exchange in 2013 and revenue from its interest rate products grew 36% in the quarter.

We acquired Interactive Data Corporation in 2015 and married it to the Bank of America-Merrill Lynch Credit and Bond Index business in 2017 to build tools and launch a powerful suite of corporate borrowing indices and reference data. We doubled the revenue growth in those businesses to an average annual rate of 6%.

In the consumer lending area, because the largest amounts of consumer borrowing are tied to home mortgages, we pursued opportunities in the US mortgage space, acquiring the Mortgage Electronic Registry Service (sic) [Mortgage Electronic Registration Systems] (00:09:55) in 2018, Simplifile in 2019, and Ellie Mae in 2020.

When coupled together, these technologies can offer lenders the potential to shorten the time that it holds interest rate risk market exposure, from the time of the consumer rate lock until the time of wholesale funding, fundamentally changing the risk profile for lenders.

And by leveraging our data expertise across the company, we recently created the ICE Rate Lock Index and have announced that we're launching a futures contract on it in the coming weeks, creating an even more precise interest rate risk management tool.

Now, by adding Black Knight to our solution set, we have the potential to further improve the capital markets ecosystem that surrounds the funding of US home mortgages. De-risking these markets for participants by shortening the duration when interest rate risks are held, making data more transparent to the risk holders, and creating more efficient hedging markets for those involved should ultimately lower the cost for the entire market.

There's no question that our thesis of producing better interest rate products and tools has been proven out as we've transformed the way risk is managed in the markets we serve, and our thesis continues to compound on growth as we innovate new interest rate hedging tools.

But let me now ask you to turn to slide 6 of the ICE and Black Knight transaction deck. Yesterday afternoon, we announced that ICE has entered into a definitive agreement to acquire Black Knight for $85 per share or a market value of $13 billion. Consideration is expected to be in the form of a mix of 80% cash and 20% stock, and the transaction is expected to be accretive to adjusted earnings per share in the first full year following its completion.

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