All right, we're at the top of the hour, we can go ahead and get started. Thanks everybody for joining us this morning. I'm Patrick O'Shaughnessy, the capital markets technology analyst here at Raymond James. Up next we have Intercontinental Exchange, on their behalf, we have CFO Warren Gardiner. Just to get the elephant in the room out of the way, ICE is unable to speak to the pending transaction of Black Knight, I'm sure you guys want me to ask all sorts of questions about it, the answer is gonna be the same. We can't say anything about it. Instead of doing that, we'll go a different route with our Q&A.
To kick us off, Warren, if maybe you can just provide an introduction of the company for people who are a little bit less familiar with ICE.
Sure. Thank you, Patrick. Thanks for having us. We always enjoy coming back here, particularly honored this year to be following the host company in our fireside chat here. When I think about ICE and when we think about ICE, what is ICE? We're a data and technology company. We use data and technology across the different asset classes that we're in and apply that data and technology across the asset classes we are in to the workflows that our customers utilize and to help them make them more efficient. I'll give some examples. Think about energy, for example. One of our oldest, if you will, asset classes that we're in. We started a couple of decades ago, and it was largely an analog asset class at the time.
We had a couple of energy contracts. You know, today, fast-forward, we've helped digitize that asset class and at the same time through organic and inorganic growth. We've got a platform today that spans the globe in terms of our presence across that asset class and spans the number of the different types of sources of energy, the different use cases of energy, if you will, with thousands of products. As a result, you've seen compounding growth in that asset class on our platform over the last five, 10 years, however you want to cut it, and certainly over the last 20 years or so that we've been present in the asset class.
It's a blueprint that we apply as we have over the last number of years as we move into adjacent opportunities in other asset classes. That's a blueprint we apply as we do that. You know, we're leveraging a presence through our the foundational network, if you will, that we have as an end-of-day price provider in fixed income markets to build pre and post-trade tools, analytics, and things of that nature, as well as provide a matching engine with our Bonds platform to really be present across that workflow and to help that workflow further digitize, become more efficient. Mortgage, also another a newer asset class for us, if you will.
One that we got into back in 2017 to start with a small acquisition by a company named MERS. It's the same idea, and we started to build up a presence across the workflow and be as present as we can across that workflow to really address the different pain points that exist for our customers. With our recent acquisition of Ellie Mae back in 2020, we've now got from point of sale all the way through to the closing process, a presence across that workflow to really help customers further digitize, bring more efficiency to their workflow, reduce the time it takes to originate a mortgage and ultimately reduce the cost to originate a mortgage and through that share in some of those savings.
While, yes, there are differences in terms of originating a mortgage and what one needs to do to accomplish that relative to maybe hedging natural gas exposure on our energy side, the blueprint across these asset classes and some of the commonalities and the common thread, if you will, that exists for us is really the data and technology that we're able to apply. That's the expertise we bring to the asset class to make them more efficient over time.
Got it. Appreciate that intro. Building off of that, what do you think ICE does better than any other company?
I think it comes back to data and technology. you know, that 50% or so of our employee base, if you will, is our technology and operations. We've really developed an expertise over time, which is compounded as the size and the presence we've had across different asset classes that increased, compounded over time in terms of our expertise to really address all these different pain points that exist across the different workflows. The other thing that I think and somewhat related to that is that we've always taken the approach of wanting to be really close to the customer. Again, understanding their pain points and where we can provide solutions for them. I think it's one thing particularly is energy, to go back to that example.
The way we've developed that platform over the last number of decades is staying close to that customer, understanding how that asset class is evolving through their eyes and developing product and developing solutions around that to make things, frankly, easier for them. I think when we think about what we do best, it's leveraging the data, leveraging technology, harnessing raw data oftentimes to create product that will make the workflow more efficient for our customer base.
As you think about leveraging the data and the technology and staying close to your customers, how has that translated to how ICE is faring competitively? Maybe you can address that across the different businesses.
Sure. Really well. I think, you know, evidenced frankly by the growth that we've had over the last number of years, we've grown earnings per share every year since we've been public. I think, you know, in terms of our competitive positioning, it's certainly been, we've been on the winning side of that. Think about areas like energy. You can look at our revenue share within the energy business, it's near all-time highs. You know, the New York Stock Exchange, for instance, last year, we had a record year in terms of transfers. Of course, it was a difficult year for capital markets overall in terms of IPOs, but we actually had more companies transfer to the New York Stock Exchange than we did in the last three or four years combined.
Really, you know, doing a lot within an environment that was obviously challenging from a new IPO perspective. You know, within our data business, we continue to gain share in the index business through index transfers and things of that nature. You can also see within our recurring revenue growth from the data side, that continues to compound as well. Leveraging that foundational network or that pricing network to kind of build out in areas like indices, like feeds. We've also had a really good year in feeds in 2022. Again, kind of being able to kind of leverage the position we have as sort of a, you know, a superstore, if you will, of data services for people across the industry.
That's been another area that's done well for us. Also desktops has been a, you know, a positive area within our other data network services, where we've made some investments in that business over the last number of years, particularly around some of the energy data that we've had, and we've had some success from there as well. You know, really across the business, I think we're doing well, in what is, you know, increasingly sort of a choppy and challenging macro environment. That's where I think we can really come in, and work with customers, to find solutions to the issues they're having and maybe help them save some money, but spend more with us.
Frankly, I think, you know, over a longer period of time, it's important to understand that the diversification of ICE that we have across all these different asset classes enables us to invest through a lot of different cycles, and put ourselves in a better position competitively, you know, as a result of that. Whereas as a standalone competitor in any of the asset classes that we might be in any given cyclical environment or downturn may have to pull back a little bit more where we can invest through it. I think it's a really important competitive advantage that we have, being across all these different asset classes that we're in.
How integrated are your three different segments with each other? There's exchanges, there's fixed income and data, and then there's Mortgage Technology.
It's a really important concept for us. ICE is a very flat culture. There's a lot of collaboration across the segments and across the different businesses. From our perspective, it's, you know, as the business has gotten bigger, as we've expanded into new asset classes, the opportunity or the sandbox, as I sometimes have said, has expanded. The opportunity for product creation and importantly, unique product creation, things that others aren't able to do, has only expanded with it. I think, you know, an example for instance, is in the mortgage business where Ellie Mae, of course, as you're familiar, it's a loan origination platform. They have nearly half of the mortgage in the United States that originated on that platform.
There's a lot of raw data that runs through that there's a real-time data on what's happening in the United States mortgage market. We've been able to take a lot of that data, and as I said a little bit earlier, one of the things we're really good at is harnessing raw data and creating product out of it. We're gonna take a lot of that raw data and create a data product that helps with people better understand prepayment trends related to mortgage-backed securities. It's kind of a unique data set that either platform on a standalone basis really wouldn't have been able to do. You know, another thing that we've done too is you may have seen our Rate Lock Indexes that we've launched.
Again, we took some of the mortgage data that we have on the Ellie Mae platform. We leveraged the index business, the infrastructure, and the expertise that we have on that platform that's in our fixed income and data services segment to create an index. We launched a futures contract on that. That futures contract will really help people more precisely hedge a lot of mortgage exposure that they might have as they're going through that origination product. Again, it's a unique product that one of those platforms on a standalone basis would have a difficult time doing and one we were able to launch pretty quickly after the acquisition of Ellie Mae back in 2020.
Every quarter, ICE's earnings presentation finishes with a slide that displays ICE's long-term EPS growth, and it shows at this point, I guess it's in the past at this point, a 16% CAGR from 2006 through 2022. That said, EPS growth did slow to mid-single digits in 2022, and the current consensus estimate calls for low to mid-single digits in 2023. How confident are you that 2022 and 2023 are the aberration rather than the new norm going forward?
Well, look, it's pretty good growth. It's a pretty good track record that, you know, over that long period of time, and we've always think about it over the longer term. You know, you're all probably familiar with my boss, and our Founder, Chairman and CEO, Jeff Sprecher. He's always one that has not thought in quarters or years, but in generally in decades, if not longer. We do think about the long-term growth, and that is what's important to us, and we're willing to invest in growth in opportunities now to secure growth in the future. When I think about that track record, it's really impressive.
I think when I think about more recently, you may have thought it was a little bit weaker growth in that particular year, but given the environment, I think pretty impressive. Certainly many others that I think are ascribed a higher multiple that did not grow in that particular period. When I think about, you know, the period of 2020 or 2021 relative to 2022, you had a completely different macroeconomic environment. You had in the prior period, 2020, 2021, low interest rates, mortgages doing well. You know, our CDS business, our ICE Bonds business, our interest rate business maybe not doing as well. You fast-forward to 2022, and that flips. We grew in both situations.
Again, I think it's a real testament to the all-weather nature of the business model and our ability to grow through a lot of different macroeconomic environments. Again, it comes back to what I was saying a little bit earlier. That ability to do that and the resiliency of that revenue stream is what enables us to then invest in these businesses and invest in these growth opportunities when standalone entities may not be able to do so. Again, it comes back to, I think, the real competitive advantage we have with the model that we've built.
When you think about ICE's revenue growth going forward, do you think most of that comes from products and solutions and asset classes that are already on the platform? How much of your growth do you think is gonna come from innovations that don't currently exist?
Yeah. It's a, it's a really good question. It's both, frankly. That's how it's been since the beginning of time for us in terms of how we've driven growth. You know, I come back to energy, and I think it's always a really good example because it's a great blueprint of how ICE thinks about asset classes. Again, we started with a few products. Those products still exist today, and they're still growing today. We only had a handful at the time. Now we've got a couple thousand, and those are growing too. We've positioned ourself within an area like energy across the asset class globally and from a product perspective, so that, you know, we can really...
We are in a position, as long as we stay close to our customers, which we've always done, to really evolve as that asset class evolves. That's the approach we take, and I think you can say the same thing for what we'll do in fixed income and in mortgage as well. You know, we've got a foundational network in each of those asset classes to bolt on and to add capabilities inorganically, but to also do it organically, which sometimes I don't know that we get as much of the headlines or credit for, but certainly something that has happened under the covers for many years and across the entire business.
A bit more than half of ICE's revenue in 2022 came from recurring sources. Do you have a view on how you expect recurring versus transactional revenues to how you expect that mix to change over time, if at all? Do you expect recurring to grow faster or slower than transactional?
You know, it's a tough question because we don't necessarily but a good one. We don't necessarily target a certain percentage either today or in the future. You know, we do expect both of those revenue streams, if you will, to grow and to grow at attractive rates. I don't know that I have an answer on that. But that's only because I think we've got a very strong outlook, a positive outlook for the asset classes we're in and the various products that we have supporting those asset classes, both whether they're transaction or recurring in nature. You know, certainly The Street and investors seem to appreciate recurring revenues a little bit more for certain companies.
You know, where we have opportunity and it does make sense, we will look for those opportunities to go to push more recurring. Ultimately, you know, I think that there's opportunity across both and we just wanna be there to sort of support our customers and drive growth overall for the business at the end of the day.
It's no secret that the Mortgage Technology business struggled in 2022. Obviously, it's relatively origination volume dependent. Are you seeing anything out there in the origination space right now that would move you guys off of that 8%-10% growth outlook that you had for Mortgage Technology at the time that you spoke to at the time that you bought Ellie Mae?
No. You know, it's when we announced that acquisition and subsequently closed it a month or so later, we expected there to be a decline in origination activity at a macro level, if you will, at some point. It was a little more in 2021 and then in 2022 some more. It turned out being a little bit sharper than we anticipated, but we certainly have expected that to normalize, and that's what's happening. The truth of it all, though, is that this wasn't about 2021 or 2022 in terms of why we entered into this space, and what we want to get out of that in that sense.
This was about bringing efficiency to an asset class today that is a huge asset class, that I think as many in the room I'm sure know is still very inefficient, and costly. It costs somewhere close to $10,000 to originate a mortgage, whether that's a $1 million mortgage or a $50,000 mortgage. The opportunity for us is to bring some efficiency through data and technology, collapse the time that it takes to originate a mortgage today, and take costs out of that system to lower that for all consumers, and our customers as well. Obviously that would then pass through to consumers. I think, you know, we have the platform to do it.
This is a multi-year opportunity similar to what we've seen in other asset classes, where we can really apply the expertise we have both on a data and technology side to bring that efficiency for customers and consumers alike. No, it doesn't change that outlook, because frankly, mortgages aren't going anywhere. They're the underpinnings of shelter, a basic human need. You know, we're confident in that and looking forward to continue to execute against that.
Gotcha. We focused mostly so far on the revenue side of the equation, but maybe shifting to margins. In 2022, ICE achieved a 59.5% adjusted operating margin. Obviously, a pretty high level, slightly off your peak, but still, probably higher than most of the other companies presenting at the conference today. How do you think about ICE's margin progressing going forward, and how do you think about how margin expansion plays into the EPS growth algorithm for the company?
Yes, it's a good question. I think, you know, it's slightly off peak margins, but peak margins, we would have had less than $1 billion or so of operating income, where today we've got $4.5 billion of operating income. We've got a business that's much bigger that we've grown substantially over that period of time. And of course, a lot of that has come both organic and inorganic growth, but as we've done that, we've done a really good job in terms of investing in profitable growth opportunities. That's why you're seeing the margin, you know, at the level that we're at. As we're thinking about the future here, we will continue to do that.
We'll continue to look and invest in those opportunities that are gonna drive profitable growth for us. You know, you've seen us certainly in areas like mortgage, where back in 2019, the pro forma business had margins in the 30s, and today we're in the mid-40s, you know, despite having similar levels of loan volume running through the platform. You know, again, profitable growth is the goal for us. While we will certainly take a long-term view and invest for the future, you know, we're very conscious of the margin and the returns that we wanna deliver for our shareholders over time.
Are the incremental margin profiles across the three segments meaningfully different from each other?
Well, it depends on the particular business within that, to some extent. The, you know, the transaction businesses, or the transact products with transaction fees, some have actually had both, but a transaction fee, if you will, is gonna have a higher incremental margin, generally speaking, than a recurring revenue. Pretty much across the board, these are high margin businesses. What we'd like to do is not do bespoke products, not do customization, things of that nature. It's really build it once, sell it many times. That, and that obviously lends for some pretty attractive incremental margins regardless of the product or asset class that we're in.
How does management at ICE think about the company's return on invested capital? Has that thinking changed at all given the rising cost of capital?
It's an important metric for us. Again, it comes back to profitable growth and how we're thinking about that. You know, the cost of capital today is in the mid to high single digits or so. I think when we talked about double-digit target returns for investments that we're making. I don't know that today that that's something that needs to be under consideration, but certainly we would consider that. We I mean, at the end of the day, as I said earlier, the idea for us is to create shareholder value, to create economic value, and you need to certainly over a period of time, have a return that exceeds your cost of capital to do that.
I don't know that there's much to update on that here today, but certainly if that were to be the case in the future, it would be something that we would consider.
What's your perspective on pricing power across the various businesses, particularly in the backdrop where your primary futures exchange competitor introduced a greater than typical pricing increase in 2023? We're hearing from some of the other information services providers, they're leaning into pricing a little bit as well.
Sure. Yeah, the philosophy around price at ICE, apologies, has always been that we wanted to deliver value for the customer and charge for that value once we did. That is how we approach it across the board, across the segments. We want to know that we've created value with specific products before we do anything along those lines. We are looking at those things. You know, certainly there have been some competitors, you know, in the exchange space and on the data side that have taken action recently. We're looking at that. But generally that's been the approach we've had, you know, in terms of how we think about pricing and our philosophy on pricing.
Yeah. With that, why don't I pause and see if there's any questions in the audience. Go ahead.
Thanks for doing this. Last year, I asked you to connect to view of BTC and the production community as well, and where do you see things and moving fast types of mining and how you're involved with that?
Just for the webcast, let me summarize the question. What is ICE's approach to digital assets right now?
Yeah. Yeah.
Before that, you think those should be?
Correct, tZERO. Bakkt would be the other investment that we've made in digital assets over the last number of years. You know, you think about Bakkt, what Bakkt. The definition, if you will, or the inspiration I should say, behind the name was that backed by a reputable institution, a regulated institution, that was the general philosophy there in terms of what we were trying to build within an asset class. That if it were to institutionalize and really become a bigger asset class, you know, a lot of that would have to happen in some way, shape, or form.
We felt that ICE with the technology and the expertise we have running markets, and certainly the relationships and connectivity we have to regulators and things of that nature, we would be uniquely able to build something along those lines. That's what we did. You know, today we'll see how that asset class further develops. I mean, part of what we were thinking too at the time was that we wanted to have a better understanding of blockchain technology. I think we've accomplished that. We'll see where that asset class goes. It's obviously at a macro level, if you will. I don't even know if I can call it that, given it's been more around FTX and things of that nature.
It is certainly a choppy time, and so we'll see how things trend for that asset class. I think, you know, from our perspective, the idea of Bakkt
Was really addressing the problems that I think of or some of the problems that have been arising around some of what's happened with FTX. Yeah. Right. Exactly. That's how we've been thinking about it. It's just that, you know, it's an asset class that's going to be a little volatile for the time, I think we've got some investments there that are encouraging.
You mentioned your European energy franchise earlier, and that's been I think a great long-term growth story for ICE. How much of that is just a function of you have the right product set that's globally relevant versus execution, or can you not really disentangle those two elements?
I think it's tough to disentangle. you know, I wasn't at ICE, when they invested in Endex, which is sort of the foundation for what we have there in European energy. The view was that natural gas would globalize much like oil had globalized. The idea and the premise there was a contract like TTF had some similarities to a Brent, which is the global benchmark for oil. We were attracted to that contract, for the same reasons we felt like Brent and had had success with Brent.
We've been able to take that benchmark, much like we did with Brent, and then go build around it, adding other sort of basis markets and locational spreads, things of that nature that has helped develop what today is a global gas market for us. What we also have are the U.S. basis markets, North American basis markets. All the different delivery points around North America for natural gas as well as the source Henry Hub, which is the North American benchmark. We also have JKM, the Japan-Korea Marker, which is an important LNG benchmark, but obviously an important market for Asia. We have a Gulf Coast marker as well. We really had this global platform that it's not as much where the gas is coming from or where it's going.
We have a presence and the ability to help our customers manage risk around the world. As you've seen somewhat of a reconfiguration of the supply chains over in Europe, where LNG is now starting to replace Russian gas that had been coming over previously. For what it's worth, it's been amazing to see the evolution, the quick evolution over in Europe, where they've rebuilt regasification facilities and storage facilities to make this possible. But we're really in a unique position as Europe becomes a bigger consumer of LNG to help facilitate those trade flows, the risk management of those trade flows.
I think it's a really exciting opportunity for us that has obviously come to the front as a result of something very unfortunate, but certainly one that we've been positioned for quite some time here and why we've developed all the product sets and all the data and analytics that we have behind all that.
Maybe one last one from me before we wrap it up. One of the best growth stories in 2022 for ICE was your fixed income execution platforms. The retail bond trading platforms, some institutional flow in them now, CDS clearing. Can you maybe speak to why those were so strong in 2022 and what your expectations are moving forward?
Sure. On the ICE Bonds side, it's the fixed income trading, municipal bonds, corporate. That had largely been a retail platform when we purchased them, two platforms that are part of it, purchased them back in 2018, I want to say, or so. What we've done over the last couple of years is really start to build out more institutional connectivity to those platforms. you know, during that period, we had really low interest rates, there wasn't a whole lot of volume going through those pipes as we were building them. As the interest rate environment started to improve this year, you know, that infrastructure, if you will, had been put in place. We saw some of those volumes start to come through.
Institutions and retail, for what it's worth, come to the platform more so than they were before. In fact, in the fourth quarter, the percent of activity on our platform from institutions was double the percent it was only just two years ago. You know, and again, it's just a testament to the efforts that we had undertook to build and start to transform those platforms. That was a key part that I think, you know, as we're thinking about the go forward, we still have a lot of opportunity to continue to build on. Certainly, I think now proven that there's been success there. So, obvious some more to go.
On the CDS side, you know, what you've really seen there, and we've continued to add new instruments as we've launched products like options. There's opportunities for us to continue to grow there on more of a structural growth basis. Certainly in an environment where interest rates are moving higher and, you know, credit risk is more at the forefront. You have recession headlines, things of that nature. It certainly is something where demand for CDS is increasing. That certainly helps, you know, volumes on that platform as well. It's a really good result and to help that overall segment grow for the year double digits. Grew operating income by 30% for the year. Margins expanded by 500 basis points.
It was, you know, a really nice outcome and I think a testament to the all-weather, again, nature of the business, even at a segment level in this case.
All right. Terrific. Well, on that note, we will wrap it up. Thank you, everybody, for joining us. Thank you, Warren.
Yeah. Thanks, Pat.