Intercontinental Exchange (NYSE: ICE) - AT Goldman Sachs Financial Services Conference

Let's not go there. Yeah. I started the company, so I can justify being there.

First of all, thanks for having me for the 12th year. I hope I can be here for 13. Really, we have a very simple business, 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 helps people enter into the transactions. To answer your question, these networks that we have just keep growing. I think of it like a 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. There are two levers there. 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 it 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. That's really what we call a network, and we probably should have renamed it a cloud. We'd probably trade at a higher multiple. I just see that we'll keep pushing those two envelopes: more network, more content on the network.

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. We have getting close to a hundred of my colleagues have moved to Jacksonville, Florida already in the last, you know, we've owned the company for maybe a little more than 60 days. It helps that it's Florida. It's not Miami, but it is Florida. So we've had a lot of people raise their hands and go on in there. So we've been able to quickly get cross-pollination. 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, so we were 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 quickly. So that's been helpful. 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 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. We were fortunate to find that Black Knight had already been thinking about that. So there were already a lot of tools in there that we were able to grab quickly. And now we're leaning into 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. So we've been pleasantly surprised at the architecture and the pieces that are in there that are going to allow us to do that much faster than we had anticipated.

Let me start with the second one first because it's not intuitive that we are going to have our best year ever in selling loan origination software. 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. We probably will have our second best year against 2017 in selling servicing systems. So you see the industry, it's indicative I think of 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 we've been very vocal about announcing some of these big lenders that have come onto our platform really as a way of signaling to the other big lenders that haven't come on our platform that they're falling behind their peer group. 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 time. 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 company in future years because we've really locked in a heck of an earnings pipeline.

So if you think about what we have, we have acquired, I've done five or six acquisitions in the mortgage space to put everything end-to-end. And what that really is is now an end-to-end network. 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 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 build a separate pipe to me. 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.' We have, I think, 1,400 third-parties that are doing business across our network because we get into the firewall. 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 that part of our business will be very transaction-oriented, 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, where everything was transaction priced, to subscription. We want to run our part of the business as a growing compounding subscription base. 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. 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 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 long-winded way of saying we'd like to be a company that has this growing compounding revenue, has very little downside risk to investors and us as managers, but a lot of upside when transactions are rocking and rolling. We get all these estimates about housing and look at them, and none of them are worth the paper they're written on. It's 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 years. 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 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. That demographic is going to have to be dealt with by our society. I don't know when it hits. There were obviously supply chain issues, real issues in housing, housing policy, higher interest rates, but you can't deny that big demographic. At some point, that group is going to buy more houses.

It's both. We have teams working on both. What's amazing is it's a 24/7 market. 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. It's amazing how quickly, I mean, you read about it, but we see it internally. Our people show up and they say, 'Hey, look at this thing we just did last week.' And they're like, 'Oh my gosh.' On the consumer side, there's no reason the velocity of mortgages should go up. 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 you can have. If mortgages tick down by 25 basis points, why can't you click a button and refi? The lender takes some fees, you refi, you go down. 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 and where are interest rates today? I better go Google something and see.' Then I find a website that has a calculator. What if we just in real time said, 'You can save money. Hey, consumer, you can save money. Boom, boom, boom.' 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. 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? I think the opportunity to completely reshape those capital markets is why we got into this, by the way. It really is our domain. 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. 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'll go into an MBS? 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. We're definitely stripping all this stuff apart saying, 'Wow, look what we found in the corner here.'

Sure. So we acquired the International Petroleum Exchange in 2001. It was the very first deal I did. It 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. That has really fundamentally changed. The world globalized on a commerce basis. It's deglobalizing right now maybe on a commerce basis, but energy has so much more globalized and it's ship born. 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. So it's become the marker for oil at sea. We worked with some interest in the UAE and we've launched a Murban crude, which is Middle East crude, high-grade Middle East crude on a ship in the Straits of Hormuz. More recently we've launched a contract we call HOU Houston, which is WTI on a ship leaving the Gulf. Now you've got grades of crude on boats from Europe, US, and Middle East. The notion of WTI at Cushing, Oklahoma in a pipe is less relevant. Fracking changed that. The fact that the price of a barrel of oil is the marginal sale, and the marginal sale is probably going somewhere outside the US and probably delivered on a ship. Similarly, and you're probably going to ask me this, the same thing has happened to natural gas. We ended up with a lot of natural gas in the US. Europe had supply issues as a result of the Ukrainian war. Suddenly, any capacity to take liquefied natural gas to Europe went into play. Now the marginal molecule is probably an at sea molecule. 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, yeah, we don't have that model. We have supply chain issues.' Still this far after COVID, there are all these supply chain issues from stuff that's getting built. The energy supply chain is turning on a dime. People were projecting that Europe was going to have people dying in their homes because they were going to not have any heating. Europe just navigated that like nothing. Prices moved around, but the supply chain for energy is unbelievably efficient, partly because it is a commodity. It's the same thing to everybody. It's at sea, and people have ports. It's been fascinating. All of that has inured to the benefit of our platform. People are hedging, new entrants, new products. It's a virtuous cycle. As we're 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. 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. It just feels like the whole ecosystem, we're kind of right place, right time, right tools.

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. It was growing because the energy transition roadmap moves through natural gas in most economies. But then when the Russia pipeline shut down, 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. So it's really a price that's representative of Europe. Europe is really committed to energy transition. They were on a roadmap to shut down those coal plants. If you spend time there, it's serious. It's not a top-down government thing. The population itself is behind this. So I think it's durable. I feel like that TTF marker, also we have one in Japan too, by the way, that's similarly growing. I feel like those two markers, an Asian marker and a European marker of natural gas, are just going to keep growing. I don't know how big the TAM is, but I know their energy transition is serious. I don't think the population is going to allow politicians to back away from it. That's my instinct anyway.

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. 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 market segment that Alex covers has grown for us because actually the networking, the data itself was in demand, but the ability to take it on our cloud was in demand. Much like 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 try to manage our cloud as best we can from third parties, and these guys keep hitting us with 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. So I'm thinking of it as two levers: when our customers are doing well and they want more data, we're going to make money there. If it's not as in demand, the last thing I would say is that the macro trend there is really the securitization of fixed income securities, putting them into ETFs. There seems to be real demand to buy bonds in the form of tradable equities. 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 underlying data, reference data, we own a lot of the indices that we license. Obviously we own the New York Stock Exchange where we list a lot of those. So it's 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.

We were late to get into fixed income trading. Chris Concannon's company, if you were here in the session before, was in very early, as was Tradeweb. My company is not a company that wants to be number three at something. We tend to actually be the high price, deliver better service at a higher price, that's our attitude. So we looked for niches that we could exploit that our competitors were not. We went into the muni bond space. They were very focused on governments and corporate. So we went into Munis. The Muni bond space is very retail oriented. It's people that want to own fixed income that's tax advantaged. 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 actually want to interact with that order flow. As more ETFs are created 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, going to your earlier question, we also 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 tools we can give them to get them to do more business or to help them do the business they're going to do. We've been doing a lot of climate data. People that 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. Transmission lines in the West, are they in a fire area? That kind of environmental data is allowing people to be more precise in the way they price them, and we're exploiting that with the platform itself.

To put a point on it, I don't think we'd ever touch pricing on many of our products in 20 years. So it really was this inflationary environment that we were in. Everything that we were buying from third parties was being inflated, so we started to think, are we missing something? We started going through our own businesses, and in some cases our cost went up, personnel cost, other things due to inflation. 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 the top line pricing. So 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'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. 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, 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. 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 watermark, its water level. I think we're all kind of watching each other to figure out what is the right value for what we provide.

I think we went from damn near zero to probably above 50% now. I would go to 100 if I could. I don't think we can, but just to give you an attitude, I went to business school and maybe that's a flaw that I have, but I've never done what you guys do, so take it with a grain of salt. 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, it makes it an easier business to run and I would think it's more valuable. I'm a shareholder, 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. 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 know that the SEC would allow us to do that today, but I don't know why at some point that shouldn't happen. Everything you do, we all walk around with these mobile devices and everything we're doing is subscription. We sort of all as society moved past this 'I pay per transaction.' It's kind of annoying when you get your phone bill and you say, 'I used 32 minutes and four of them were international.' You just kind of want to let me use the phone whenever I want to use it. Tell me what it cost. That's where I'm trying to drive the business. I hope you guys will look at that. I know Alex and I talked a lot about it. That's a better business and it's been intentional on our part to drive it there.

That was fun. Enjoyed it.