Intercontinental Exchange, Inc. Q3 FY2024 earnings call

Management Statement and Operational Highlights

• Record third quarter results: Third quarter net revenues totaled a record $2.3 billion, including record transaction revenues of $1.1 billion and record recurring revenues of $1.2 billion. Adjusted operating expenses totaled $960 million, up 1% year-over-year on a pro forma basis, and adjusted pro forma operating income increased by 12% versus the prior year, reaching a record $1.4 billion with adjusted earnings per share totaling a record $1.55.
• Exchange segment details: Transaction revenues of $890 million were up 17%, driven by a 34% increase in interest rate business and record energy revenues. Recurring revenues included Exchange data services and NYC listings business. The NYSE helped raise $14 billion in new proceeds with 43 new operating companies listed.
• Fixed Income and Data Services segment details: Revenues totaled a record $586 million, including transaction revenues of $125 million. Recurring revenues grew 6% year-over-year. Fixed income data and analytics revenues increased 6% to a record $295 million, driven by growth in pricing and reference data and index business. Other data and network services revenues increased 5%.
• Mortgage Technology segment integration: Assembled a true life-of-loan offering spanning from consumer acquisition to secondary capital markets. Integrated various technologies, enhanced underwriting tools, pricing systems, and servicing systems, and connected to major entities like Fannie, Freddie, and Ginnie Mae for seamless pricing inquiries.

Segment Performance

• Exchange segment: Third quarter net revenues totaled a record $2.3 billion, including record transaction revenues of $1.1 billion and record recurring revenues of $1.2 billion. Third quarter net revenues for the Exchange segment were a record $1.3 billion, with transaction revenues of $890 million up 17%, and recurring revenues (including Exchange data services and NYC listings business) totaling $364 million. Revenue growth in recurring revenues was underpinned by broader Exchange data services expansion, and the NYSE helped raise $14 billion in new proceeds with 43 new operating companies listed.
• Fixed Income and Data Services segment: Third quarter revenues totaled a record $586 million, including transaction revenues of $125 million. Recurring revenues totaled $461 million, growing 6% year-over-year. Fixed income data and analytics revenues increased 6% to a record $295 million, driven by growth in pricing and reference data and nearly 30% growth in the index business. ETF AUM tracking ICE indices ended the third quarter at a record $674 billion. Other data and network services revenues increased 5% in the third quarter.
• Mortgage Technology segment: Third quarter revenues totaled $509 million, with recurring revenues totaling $387 million. While recurring revenues declined year-over-year, they stabilized relative to the second quarter. Transaction revenues totaled $122 million, up slightly year-over-year. The fourth quarter is expected to have total IMT revenues between $495 million and $505 million.

Guidance

• Fourth quarter OTC and other revenue expected to be in the range of $75 million to $80 million, with cash equities business regulatory fee holiday expected to reduce OTC and other revenues by $15 million to $20 million.
• Fourth quarter adjusted operating expenses expected to be in the range of $977 million to $987 million, including approximately $10 million to $15 million of non-recurring items.
• Full year CapEx now expected to be in the range of $700 million to $740 million, largely driven by key data center investments originally planned for 2025, expected to yield expense efficiencies upon project completion in 2026.

Risks

• Market volatility: Fluctuations in energy, interest rate, and other markets could impact revenue and performance.
• Regulatory changes: Changes in regulatory requirements could affect business operations and compliance costs.
• Competitive landscape: Intense competition in the financial markets could impact market share and revenue.

Question and Answer

• Q: I'm just going to start with an unanswerable question, I think, as I think about the energy business. As we think about the end of the year and into 2025, obviously, a lot of detail here in terms of the structural opportunities. And clearly, that's reflected in the open interest growth that we've seen and, obviously, volumes this year, too. But look, clearly, it's been a solid environment as well from a trading perspective, in particular, in the fourth quarter with some of the volatility we've seen from the Middle East. So clearly, there's been some beta help here as well. So I'm just wondering, I know it's very difficult, if you can separate the alpha and the beta a little bit and how you think about that heading into 2025, what's repeatable and where are you a little bit worried that the trading environment may not be as good?

A: Stuart Williams responded that open interest is a good indicator of future volume. Geopolitical events create new supply chains which leverage parts of the energy matrix product setup. The focus has been to create a network of markets providing pricing points. Energy consumption is set to continue growing with about 80% of the world's population in non-OECD countries, and contracts like JKM and TTF are critical in managing price risks in these areas.

• Q: We had a question on the new partnership between ICE Bonds and MarketAxess. So how will this partnership enhance your liquidity pool and client value proposition? And will we see it translate into stronger market share trends? If I could just squeeze one more in. Could this lead down the road to a closer relationship with MarketAxess ranging from a full acquisition or a strategic minority equity investment?

A: Chris Edmonds responded that the partnership with MarketAxess gives access to different liquidity pools. It's still early days but has gone well, and they will look to add other instruments as the market evolves. He avoided the question about a closer relationship like acquisition or strategic minority equity investment.

• Q: I just wanted to dig in a little deeper to the fourth quarter IMT guidance. It looks like -- at least I know you tend to be a little bit more conservative than the MBA forecast but they show sort of an expected pickup between refis and purchases together. So just curious if you could kind of comment on that. And then, maybe could you perhaps remind us how should we be thinking about your overall sensitivity to pickup in transactions given there's a minimum component? Like how would you describe the current level of activity? Are most of your customers below that minimum level such that incremental transactions don't add as much? Like how should we sort of be thinking about that in Q4 and into next year?

A: Warren Gardiner responded that the fourth quarter guidance assumes a slower purchase market, a typical pattern due to weather. The MBA may not have captured the recent sharp move in interest rates. A significant portion of customers are below their minimums, but it's improving with an improving loan market and customers renewing towards lower minimums, leading to better transaction revenue.