Intercontinental Exchange since May 2021. For the prior four years, Warren ran ICE's investor relations team, and before joining ICE in 2017, Warren was a senior research analyst at both Evercore and Barclays. Warren, thank you for joining us.
Thanks, Craig. Thanks for having me.
So ICE is a leading global futures exchange and financial data provider. In an industry where most of its major competitors are a century old, ICE is the new kid on the block with just over 20 years. ICE has gone from an idea to an $80 billion futures behemoth by pioneering electronic trading and financial markets. In addition to futures with its recent $12 billion purchase of Black Knight, it also is the major player in mortgage technology with the largest servicing and largest origination software platforms in the United States. Warren, let's get started on the macro. Can you provide us a state of the union of the business given what we're seeing on the macro front with both declining rates, rising equity markets, and actually a third characteristic, we've seen lower volatility still?
Sure. And I think that's a great place to start. And so, yeah, you've got certainly an uncertain backdrop across the board and across asset classes. And you have higher interest rates, although coming down, coming up, left, right, hard to predict on that front. And so these kinds of environments are good for certain areas of the business. They're more challenging for other areas of the business. And so, for instance, in the mortgage business, of course, it's more difficult on the origination front. But at the same time, you've got people looking for efficiency and looking for efficiency through technology, which has been good for us. So you've got sort of some offsetting factors that are going on on that front.
On the fixed income side, certainly leveling off of interest rates, less volatility, if you will, if that's where we are and where we stay, that may be more muted trading volumes, but that's actually been a good sign for our fixed income data business where we've seen a lot of fixed income managers who had been, I think, sitting on their hands a little bit as interest rates rose so sharply over the last couple of years start to reengage with an asset class that starts to become really attractive at these kinds of interest rate levels. And so that's started to reemerge on our Fixed Income and Data Services segment side. On the New York Stock Exchange, for instance, you've got when you do have higher volatility, that's great for trading. Sometimes it's more muted on the listing side.
When you have lower volatility, listing starts to pick up and maybe trading's a little more muted. So there's a great balance there ultimately. And it's why you hear us talk about ICE broadly as this all-weather business. And it's not that we intentionally diversified for diversification's sake. I think really it was Jeff's always thought of ICE being able to do a lot more than just be an energy futures platform. And we really have a core expertise in technology and data services that we've looked over the years, and you've seen us do this, expand and leverage those areas of expertise into adjacent opportunities, adjacent asset classes. And the result of that has become this diversified business that's got, I think, a very strong mix of recurring revenues, about 55% or so, and transaction revenues that also are very much diverse across asset classes.
It's a good thing because I think shareholders appreciate that diversification, that resiliency that comes with that. But it's also great for us, of course, running the business because it gives us a lot of confidence in being able to use that very resilient and compounding cash flow stream to, of course, continue to invest in our asset classes that we're in and really set ourselves up for future growth as we look out into the future. So it really is that mix of those asset classes, in particular, I should say, in asset classes that maybe at times are under pressure, which is the best time to invest. It's one of, I think, the real competitive advantages that ICE has really being together in that way.
Warren, we think one of the misunderstood traits with ICE really is the linkage between your three main businesses, exchange, mortgage technology, fixed income, and also how technology and data really link them all together. What's your thought on this comment, and really how do you leverage data and technology in similar ways across those three businesses?
Yeah, that is a great question. I agree with the statement that is really those are our core competencies ultimately at the end of the day. Really it's the common thread that runs throughout the business. You can see it in our reporting, frankly. When you look at each of the segments, has a data services line in some way, shape, or form. So maybe some examples too of that. I mean, you think about the evolution of ICE, and one thing that we've done and been really good about is replatforming technology when we acquire an asset. There are a lot of operations and technology that goes into doing that. One of the first ones we did was the Liffe migration.
A lot of things that we learned in migrating Liffe was used to help build and inform what we did when we rebuilt the platform for the New York Stock Exchange and brought all of that disparate technology together into what you've probably heard us refer to as NYSE Pillar. That project then helped inform a lot of what we did with the IDC acquisition and moving off of the mainframe that, again, was helping to modernize that technology. A lot of learned things there through that experience. That all will then translate and help inform what we do with Black Knight and the ICE Mortgage Technology business over the next number of years in terms of modernizing that technology and enhancing that technology.
And so these are kinds of the things that as you kind of go through these processes, you really build an institutional knowledge that's really important. It can range from better understanding how to onboard customers to developing a world-class cybersecurity overlay. I mean, all these kinds of things are critical components of that broader technology stack, if you will, that really help inform what we're doing there. And so I think that's really the core of ICE at the end of the day. You guys probably don't see that as much as sort of investors. You're looking at the top line and certainly our expenses to a degree. But I think so that's really the core at the end of the day.
I think if you were to think about some of the areas of our business that maybe you're maybe more familiar with in some ways, think about our index business, for instance. That was actually somewhat relevant. We purchased from Bank of America back in 2017. It didn't really have any revenues at the time. We combined that with our pricing and reference data business. We combined it with the sales force that we had. And we combined it with the broader relationships that ICE has on the futures side and equity side and really developed into more of a multi-asset class index platform. It was really previously more just a fixed income platform. And it still very much is today still too.
But we've taken that and now we've got carbon indices that are obviously really benchmarked off of our environmental futures complex, that ETFs track, and of course, we trade the futures. We've launched Mortgage Rate Lock Indices that we also have futures that we trade off of. So we've done all these things kind of under the covers there and really leveraging a lot of the existing infrastructure to get us there that I think is really important and unique as us having kind of all these assets under one umbrella. And I think as we look sort of towards the future, and to be clear too, that business now today, which didn't really have a whole lot of revenue, as I said back in 2017, is about a $100 million revenue business today. So certainly been making some progress on that.
The other area where I think there's a lot of opportunity would be on the mortgage side. I mentioned some of the rate lock indices, but there's a lot of raw data that Black Knight has on its servicing platform. A little over half of the mortgages in the United States are serviced on that technology. Same thing on the origination side with our Encompass platform where about half of the mortgages in the United States are originated on that platform. And much like the New York Stock Exchange or our futures exchanges, a lot of raw data, exhaust as maybe you've heard us call it in the past, comes off of that. And one thing that Black Knight or Ellie Mae never really had was the ability to take a lot of that raw data and package it and productize it.
That's one thing that we're working on that I think will be really important for the ecosystem around mortgages, the primary market, if you will, but also the secondary market and the capital markets where in our fixed income and data services segment, we've got connectivity to 1,000 or so customers that today already take end-of-day MBS pricing from us that are going to be probably pretty interested in any kind of additional transparency we can bring to them through some of the things we're seeing on our mortgage platform. Those are just some of the few examples. I think mortgage, obviously, a more recent one, but certainly there are plenty across the platform that I think are exciting.
Okay. Well, let's move on to now your biggest business. We'll start there, not your smallest business, but we'll start with the exchange business. Last year you raised pricing across your energy products. Did you notice any change in the competitive landscape from that? And also given that it is a fairly mature business, how do you think about the long-term growth trajectory in the futures business?
Yeah, I don't know that it's too mature. Certainly on the energy side, I don't know that maybe not there could be other areas of futures you may have that sense, but certainly on the energy side, I don't think it's mature. It's an asset class that's been evolving for centuries, and actually energy consumption is expected to double over the next 30 years or so. One of the things that we've done and tried to really position ourselves throughout the history of ICE is for that evolution to help our customers address the pain points that evolve as that evolution occurs. That's really what you've seen us develop. It started with a few benchmarks in gas and oil a couple of decades ago, and now is thousands of contracts across the globe and across all these different sources of energy.
You look at something like the oil complex where Brent is really that cornerstone. We've developed hundreds of other oil contracts around that key benchmark. Certainly in the gas space, we had a few benchmark contracts and we developed that complex. Then environmental is certainly more of a, relatively speaking, more nascent, but certainly an opportunity as, again, the energy complex evolves for us. So I think from a competitive standpoint, our strength has really been more on the development of new products and the adoption of those existing products, that continued adoption of those existing products over time.
Great. Let's go a little deeper in the energy futures business. There has been some nice long-term share gains there. I think the global tilt of your business has definitely helped. You also have more of a tilt towards natural gas and renewables, which probably also likely helped. Can you give us maybe reasons and some perspective on maybe why these share gains could continue in the future?
So I think our success, our growth in energy, as I said earlier, is more the product adoption, the existing product adoption, and the creation of those new products. And alongside that, I should say, some smart acquisitions along the way that I don't know that were fully appreciated at the time. It comes to mind as Endex, which really was the acquisition that brought us the TTF contract that's now really that global benchmark for gas, and then the Climate Exchange, which was really the foundation for our environmental business, which today is about a $100 million of revenue or so. And together, natural gas, and to your point, natural gas and environmentals is about a little over 40% of our total energy revenue today. So we've really done a good job kind of expanding out of those early days of really being more focused on oil.
But at the same time, you've seen a lot of growth and evolution on the oil side. And Brent has really continued, and this has been a trend for quite some time, but continued to really evolve into that global index or global price for oil. And some recent index inclusions of WTI in particular, which is a contract, we've launched a new product off of our Houston contract. That being included into the Brent Index is, again, another just evolution of that product, of that index suite, but again, something that's really helped kind of continue to drive adoption of that broader index and that broader oil suite. And that's something we're also seeing on the gas side, and I think you can expect us to see over time on the environmental side. It's the same playbook just being repeated across those different sources of energy ultimately.
Warren, let's pivot the conversation into your second largest business, the fixed income platform, which spans across data, analytics, index, and trading. So I think many maybe have forgot or missed that we just had a three-year bond market, bear market, and there's record cash on the sidelines. So there's very significant potential for duration extensions, which means bond flows could get a lot stronger here. So if we see the ecosystem expanding, PIMCO, BlackRock getting bigger, hiring people, creating funds, maybe talk about what that does to your fixed income business.
It'd be great. You're right. We did go through a period. It was a generational move in interest rates and somewhat painful, I think, for a lot of fixed income managers. And for that period of time, we did see customers, as I said a little bit earlier, sit on their hands and maybe hesitate to make some decisions. But we're now at a point where I think we're seeing the signs of that shifting a little bit. And that, again, you've got interest rates at a level that are pretty attractive. I think you're starting to see some strong fund flows, broadly speaking, and that's going to be good for the ecosystem overall. And I think people will start to invest in. I mean, this is how asset managers tend to work, and they will invest in that asset class.
That will mean new products and demand for data and demand for more tools around that, and that's going to be good for us. I also think alongside all of that, you will continue to see the adoption growth in fixed income ETFs where we are the second largest provider of fixed income ETF indices in the world. So I think you see AUM flow into those products as well that, again, will be good for us from a growth perspective as well. I think a healthier ecosystem is probably somewhat obviously going to be good for a provider like us at the end of the day.
So if we break up the various fixed income businesses, do you view some of them as more leading, like the index business, certainly the trading business, which is already heated up relative to data analytics where there's still somewhat elongated sales cycles? So that could be more backend loaded in terms of the bond flow recovery?
Yeah. I wouldn't want to necessarily predict that with 100% certainty, but yeah, I think that that's a fair way to think about it because you are going to see that money start to, more likely than not, and you're seeing a little bit now, start to flow into those products. And once that's more at a sustained level, you start to see people make the decisions around the new products and purchasing new analytic products and new data sets and things of that nature. And we've seen that a little bit already. I mean, the first, or sorry, the fourth quarter, we saw a return to double-digit growth in our index business, which had been pressured again by that really challenging macro environment for the prior number of quarters, at one point down double- digits.
And so a big swing from what we had been used to from a growth rate perspective. So it was nice to see that get back to where we expected to be.
So let's jump into mortgage tech. It's really interesting because we might get 85% of our questions on this business despite it only being 15% of your profits. But I don't know if you have an explanation why you think that is. But also I wanted an update on your long-term strategy now that Black Knight is closed, now that we had a quarter of data between when it closed and today.
Sure. Well, so on the first question on why that might be is, look, I think it's a really exciting opportunity. We were talking about this a little bit earlier. I mean, the mortgage as an asset class is one of the biggest out there. And as everybody knows, it's also one of the most inefficient processes that one can go through, which is somewhat stunning given that a lot of people have a mortgage and a lot of people go through that process and it's been around for a long time. And you would have thought that we'd be a little bit ahead of where we are today, certainly are in other types of lending products. And so I think from that perspective, in addition to the fact we did a couple of big acquisitions, the investor interest, I think, is very understandable.
In terms of what our strategy is though, it's the same as we've had, the same blueprint that we've applied across the other asset classes we're in, in that we're going to use data and technology to bring efficiency to the workflow. We really like to start as best we can with a foundational network, if you will, really across that workflow. I think we really had that in a very powerful way when it comes to the servicing platform that Black Knight brings us and then the origination technology platform that Ellie Mae brought us, in addition to obviously MERS and Simplifile as well that were acquisitions that we had done prior to those two. So we've really stitched together from the initial customer acquisition all the way to the secondary market and the servicing of that loan in a way that just hasn't really existed before.
It's going to position us to not only continue to sell, I think, what is an existing unique product suite, but also develop new products as that workflow continues to evolve. I think do that because we're going to stay close to the customer. We're going to better understand the pain points that they face and develop products on top of that to help them with that. Again, I tell people too that one way to kind of think about it is look at energy and look what that's the evolution of our energy platform over the last 20 or so years. That's kind of like, if you want to know what mortgage is going to look like, that's kind of it. Obviously, energy is a different asset class, but it's the same blueprint that we would apply and are going to apply to it.
It really is, again, all underpinned by really great technology and really unique data sets and again, bringing efficiency to people's workflows and transparency to those workflows and to those asset classes.
How powerful is it now to have the number one servicing software offering with the number one origination software offering under the same roof, and you've had some really big wins recently, but where clients can really consolidate the relationship?
Yeah. I mean, look, it's unique in that it is truly end-to-end. We have pretty significant presence across workflows in other asset classes, but I'm hard-pressed to really think of one where we have this like a presence like this. And so it is an opportunity, I think, like we haven't seen to do a lot of the things that we've done in other asset classes in a really unique way. And again, against an asset class that is one of the largest ones that exists. And so maybe to help sort of frame it too, if we think about our revenues today, we're around $2 billion of revenue. We already do touch in some way, shape, or form almost every participant in that ecosystem. And we think it's somewhere around a $14 billion addressable market.
There is a huge runway for growth, I think, for us within this asset class. It's because of that foundation that we have to then go create product, cross-sell product, upsell product to our customers along the way. I think it's a huge runway for growth for us.
What parts of the mortgage tech offering do you think are the most underappreciated by the markets? Is it really the ability to save $1,000 per mortgage, save people time, remove wet signatures, or is it the potential to build a mortgage futures and index business that you can market back to your mortgage clients?
I don't know that I could pick one of those because I think it's kind of all of the above. I think really what probably is more underappreciated than all of that is really if you bring all of that together though, it's just that this is the same blueprint, as I've said earlier, that we've run across all these other asset classes pretty successfully. And again, it's a very large asset class. So I think that this is basically what ICE does, and we've got a big opportunity in front of us. And I think that while all of those are very much a part of what I think is underappreciated, I think it really is the power of that technology platform or technology expertise that we have and the operations expertise that we have that really is going to power this.
Post the Black Knight transaction, you are digesting elevated debt levels, and you've given us some targets around this. But in light of this, how should we think about the near-term potential for M&A and also share repurchases?
Sure. So I mean, look, so we ended the quarter around 4.1x gross leverage, gross debt to EBITDA. We've got a target of around 3.25x before we would have the option to begin buying back some stock. We want to get to 3x leverage ultimately. And so once we hit 3.25x, it would be about a bit of a hybrid, if you will, to getting to that 3.0x or roughly 3x target. You have seen us though over time do bolt-on M&A while we're deleveraging. So there's been certainly moments, whether it was with Ellie Mae or some of the other transactions we've done, where we've done some small bolt-on acquisitions. And so we do have a cash flow profile that is robust enough to allow us to do a little bit of both in that sense.
And if we see an opportunity, we don't want to be constricted by that. So I think we're always looking and looking for opportunity, and we do have the flexibility and again, the cash flow profile, I think, to execute on those when they arise. So I think that that would be the way to think about it is really to look at history.
So since we're on the topic of M&A, I just wonder if you could summarize how ICE has used M&A to evolve its business really from the financial crisis when it was more of just a pure exchange and fast forward today with this kind of all-weather business model where you really never had a negative EPS growth year over?
So it's been a tool, and I think it's a tool we've utilized really well. And the larger deals, of course, you could define what you think is large, but there's a handful of them, right, that we've done over our history. And those are the ones that get, again, they get the headlines, but we've probably done close to 40 M&A transactions over the history of ICE as well. So the vast majority of those have really been smaller, medium-sized kind of bolt-on deals. And they've been bolt-on deals largely into asset classes that we were already in. And again, it went through a vetting process, was do we want to buy this solution or do we want to build this solution? And that's the way we think about this as we build out the networks that we're in.
And again, as I said a little bit earlier, we start with that foundational network and then we go and build around it. And again, I think energy is really the best example where it's been really a combination of organic growth and some inorganic bolt-on acquisitions that have positioned us to where we are today. And I think, again, a blueprint that anyone can take and look and use as to how we'll continue to approach probably energy futures, but also probably more so fixed income data services and of course in the mortgage business as well where I don't think there's anything we necessarily need, but we certainly, workflows will evolve and there will be pain points, as I said, and we'll want to address those for our customers. And we'll do that in a way that is, do we want to build this solution?
Do we want to buy it? I think you'll see a similar approach as we do that.
Warren, let's pivot into operating efficiency. How does your leadership team think about balancing investing and spending versus the operating margin? And what is really the long-term objective for the operating margin given that you have a collection of businesses, some with really high margins, but arguably maybe slower growth, and some with much lower margins, but offer higher growth too?
Yeah. I mean, look, the goal ultimately is grow revenues faster than expenses. So I don't know that I'd set a margin target. We've got some pretty, I think, healthy and strong margins as of today, but we're also going to want to continue to expand those. And we do that. And I'm blessed too that I've got, I work with a team that is very thoughtful around being efficient and running the businesses efficiently. Every time we want to have, we want to invest in a new opportunity or build a new product or whatever it might be, the first thought that everyone across the organization has is how can I fund this with some of the existing resources that we have? How can we be creative and fund this before kind of adding an incremental resource? And it's really, I think, built into the DNA of the company.
I take no credit for that. It's been built and it's been there long since I got there. It's one thing that is why we, I think, operate the way we do and are successful on that front. The other area of it too is oftentimes those products and those opportunities that we're looking at and evaluating are things that are adjacent or tied to existing infrastructure in some way, in shape, or form. A lot of times it's build something once, sell it many times when you've got a lot of the cost base in place already. That too, of course, is very helpful on that front in terms of how to run the business and how we manage the business.
I think that it's definitely top of mind for us, but at the end of the day, the top line growth is the most important thing. I can't think of a time that an opportunity from an investment standpoint that we felt had the return profile that we would expect and hope for, do expect and hope for, that we didn't or weren't able to invest in. We've never really constrained ourselves or felt we need to constrain ourselves for whatever reason on that front. I would be more than happy to get on a conference call and explain to you why we were spending a certain amount of money on something, even if it was outside the realm of expectations a little bit, if we believed in it.
I think investors and we certainly value the longer-term growth potential over maybe some short-term efficiency, if that makes sense, so.
It does. Warren, with that, let's just check to see if there's any questions from the audience because we only have a few minutes left. If you have a question, please raise your hand and we'll get you on mic. We have one in the front row.
I was curious how you're thinking about the stock's valuation at this point because for a while, I think there was a conglomerate discount because of the BKI overhang. There's been a little bit of a rerating, but I wonder if when you look at how the stock is trading, you still think there's businesses you aren't getting credit for?
I do. I don't think the mortgage business is getting the credit that it deserves. I still don't think the futures business and the energy business gets the credit it deserves and what we're doing there. And so I think that there's certainly some upside there. And frankly, I don't think that the, you said conglomerate discount. I think from our perspective, it should be a premium because of all the things we've just been talking about and the 1 + 1 = 3 opportunities that are in front of us with all of this under one roof. And so certainly the last couple of weeks or so, it feels like we're starting to get a little bit of recognition for that. I think people are starting to start to look forward on the mortgage side and see the potential there. Certainly, we've had success on that front.
A lot of that success has come from the ICE relationships that exist. A lot of the future success that I think people are underwriting are things that ICE is bringing to the table in that business. Certainly, you saw on the fixed income data side, that started to pick up and inflect from a relatively tough year last year. And I think that's been obviously received positively. And then energy just continues to just chug. That's probably an understatement, is an understatement, but is fantastic hitting record levels of open interest and volumes, of course, being strong as well. So I think we're in a really good place from that perspective in some of the really key areas, but certainly it feels like from the growth and the opportunity we see in front of us, there's more.
You even left out the fixed income data business where I think there's a little bit of negative sentiment because it's been a three-year bond.
Oh, sorry. That's what I meant. I meant on the fixed income side. That was the area that it started to inflect and get better in the fourth quarter versus some of the prior quarters. Yeah.
I have time for one more question here. We're going to hit on defense. So given the defensive qualities really of all three businesses and the diversification benefit, how should we think about the defensiveness of ICE overall? And I think maybe the proof is really in the pudding given that ICE has generated positive EPS growth every single year in your existence.
Yeah. And I think you're right. The compounding nature of the cash flows and earnings per share that we've demonstrated through really a dramatically different macroeconomic environments is all the evidence that you need, I think, at the end of the day to understand the defensive, but defensive growth nature, if you will, of the business. And I think, look, we're positioned across a lot of different very critical, mission-critical asset classes, and we are mission-critical within those asset classes: energy, mortgage, fixed income, equities. And so I think from that perspective, the resilience of that, again, the resilience of that revenue stream, our ability to continue to be efficient and how we run that business and generate the cash flows that we've generated and generate the growth that we've been able to generate has been proof, and the history is the proof of that.
I think that will continue well into the future.
Great. With that, we're out of questions out of time. But Warren, on behalf of all of us at Bank of America, thank you very much.
Thank you, Craig.