Intercontinental Exchange Inc.

Good morning and welcome to the Intercontinental Exchange fourth quarter 2018 earnings conference call. All participants will be in listen only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Warren Gardner, Vice President of Investor Relations. Please go ahead.

Good morning. ICE's fourth quarter 2018 earnings release and presentation can be found in the investor 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 our subject to risk, assumptions, and uncertainties. For description of the risk that could cause our results to differ materially from those described in forward-looking statements, please refer to our 2018 Form 10-K, which we filed this morning. In our earnings supplement, we refer to certain non-GAAP measures, including adjusted income, EPS, operating income, operating margin, expenses, effective tax rate, organic data revenue, free cash flow, and EBITDA. We believe our non-GAAP measures are more reflective of our cash operations and core business performance. to find a reconciliation to the equivalent gap terms in the earnings materials and an explanation of why we deem this information to be meaningful, as well as how management uses these measures in our Form 10-K. 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. Please see the explanatory notes on the second page of the earnings supplement for additional details regarding the definition of certain items. Also with us on the call today are Jeff Sprecher, Chairman and CEO, Scott Hill, Chief Financial Officer, and Ben Jackson, our President. I'll now turn the call over to Scott. Thanks, Warren.

Good morning, everyone, and thank you for joining us today. I'll begin on slide four with some of the key highlights from our record fourth quarter performance. ICE's consolidated fourth quarter net revenues increased 14% year-over-year to a record $1.3 billion. Trading and clearing net revenues were a record $657 million. And data and listings revenues totaled a record $651 million, underpinned by organic constant currency growth of 6%. Adjusted operating expenses totaled $553 million in the quarter. Our fourth quarter expenses included a $5 million increase in our performance-related compensation, reflecting the strong end to a good year. In addition, the quarter included around $3 million related to organizational restructuring and a few million dollars of non-recurring items. These items weren't contemplated in our original guidance and aren't expected to be recurring. Continuing with our fourth quarter highlights, adjusted operating income grew 14% year over year, and we delivered record adjusted earnings per share of 94 cents, a 25% increase versus the fourth quarter of 2017. Importantly, that strong earnings growth combined with reduced CapEx spend generated record free cash flow of $2.3 billion, up 32% versus the prior year. I'll discuss the way we put that cash to work on slide five. During the fourth quarter, we deployed the remaining $140 million of our 2018 $1.2 billion repurchase authorization. When combined with the $555 million in dividends we paid The capital return to shareholders during 2018 totaled nearly $1.8 billion. That record capital return is 23% higher than last year and nearly double what we returned just a few years ago. We did all of this while maintaining our target leverage and investing over a billion dollars in strategic initiatives, including fixed income, mortgages, and, along with our partners, the launch of BACT. The strong cash generation of our business model will continue to support our disciplined approach to investment and capital return once again in 2019. As we've indicated in the past, we're committed to growing our dividend as the company grows. Reflecting that commitment, our board authorized a 15% increase in our quarterly dividend to 27.5 cents per share. And, as we noted on our third quarter call, our board has approved a $2 billion share repurchase authorization from which we've already deployed around $115 million in January. Now let's move to slide six, where I'll provide an overview of the fourth quarter performance of our trading and clearing business. Trading and clearing revenue, which increased 14% for the full year, grew to $657 million in the fourth quarter, with both energy and ag revenue up 13% and financials revenue up 28%. Fourth quarter ADV and our futures business increased 21% year over year as energy, ag, rates, and equity index products all increased versus the prior year. While January volumes across our futures and option complex are down year over year, they're up sequentially versus an unusually strong December. And importantly, open interest continues to build with OI at the end of January 4% higher than a year ago, led by continued strength in oil and interest rate products. At the NYSE, transaction revenues increased 35% year-over-year, driven by higher industry volumes and market share gains across cash equities and options, as well as the acquisition of CHX. ADV in our cash equities business increased 45% year-over-year in the fourth quarter, and average daily volume in our options business was up 44%. This momentum carried into January with cash equity volumes up 19% year over year. Moving to fixed income and credit, which includes CDS clearing, our fixed income trading businesses, and ICE mortgage services, revenue totaled $83 million for the quarter. CDS clearing revenue increased 25% year over year and has grown at a compound growth rate of 15% since 2012. New participants, new products, and the need for additional credit protection remain catalysts for that business. Turning next to slide seven, I'll discuss the data and listing segment. Fourth quarter data services revenue grew 6% on an organic constant currency basis to a record $539 million. For the full year, data services revenues grew 5% on an organic constant currency basis, including 6% growth in products included in our ASV, which account for roughly 90% of our data services business. Within data services during the fourth quarter, revenue from an exchange data and fees grew 7% and desktops and connectivity grew 1% each on an organic constant currency basis. Please note that beginning with the fourth quarter, we've moved our fees business out of desktops and connectivity and into exchange data. This better distinguishes the exchange related content we sell from our distribution capabilities and it provides a better comparison to our data services peers. We've provided a restatement of historical data services results to reflect this change in the appendix. Revenues from pricing and analytics, which represent half of our data revenues and nearly a quarter of our total revenues, were up 7% on an organic constant currency basis for the third consecutive quarter. As you can see on the slide, our pricing and analytics revenue growth has accelerated from nearly 4.5% in 2016 to more than 5% in 2017 and now to over 6.5% in 2018. This accelerating growth reflects contributions from every component of our revenue model, new customers, new products, increased consumption from existing customers, and targeted price increases. And importantly, ASV for pricing and analytics entering 2019 is up 7%, giving us confidence and continued momentum. Finally, in our listings business, revenues grew 8% in the fourth quarter, and the NYSE listed 16 IPOs despite heightened market volatility. And for the year, we were once again the leading U.S. exchange in terms of capital formation, helping our customers raise $30 billion in IPO proceeds. I'll conclude my remarks on slide eight. On the left-hand side of the slide, you can see a recap of our strong 2018 performance. Revenues grew 7%, adjusted operating income grew 8%, adjusted earnings per share grew 21%, and free cash flow grew 32%. On the right-hand side of the slide, you'll note a few points of guidance for 2019. We expect full-year data services revenues to be between $2.19 and $2.24 billion. This includes $540 to $545 million in the first quarter, with sequential improvement each quarter thereafter. This also reflects the impact of a stronger dollar versus both the euro and pound, which is currently expected to reduce 2019 data revenues by roughly $5 to $10 million. And of note, with no material data acquisitions in 2018, currency fluctuations are the only adjustments that should be required to calculate our 2019 data revenue growth. Moving next to expenses, we anticipate full-year adjusted operating expense to be between $2.15 and $2.2 billion. 2018 acquisitions in our trading and clearing segment will generate roughly $35 to $40 million in incremental expense, net of around $15 million in actions already taken to reduce the cost of those acquired businesses. In addition to the cost savings, the expense will be more than offset by over $100 million of incremental revenue. On top of the cost savings for the recently acquired businesses, we will deliver the final $30 million of synergies related to IDC, which means we will have achieved our original commitment of $180 million in total synergies. Next, Consistent with past years, we will once again reward our employees for their strong contributions as a part of our pay-for-performance philosophy, which will increase compensation expense by $35 to $40 million. Investments in technology, as well as expenses tied to revenue growth, will add around $30 to $35 million. And finally, our investment in VACs will generate $20 to $25 million of expense based upon the run rate in the first quarter. We will update you on progress at BAC and the level of investment as we move through the year. We delivered another record year in 2018, and we have momentum entering 2019. I'll be happy to take your questions during Q&A, but for now, I'll hand it to Jeff to expand on our strategic plans entering the new year.

Thank you, Scott, and good morning to everyone on the call. Let me begin on slide nine. We're pleased to report what was the best year in ICE's history. and that marks our 13th consecutive year of record revenues and record-adjusted earnings per share. Our track record of growth is a testament to the strategic approach that we've taken since our inception to build a globally diverse platform that enhances our customers' workflows using technology to bring efficiency, transparency, and reliability to markets. In our futures markets, we're strategically positioned in major market centers around the world, with six central clearinghouses across North America, the UK, Europe, and Asia. It's a footprint that gives our customers choice, helps insulate us from regulatory and political risk, and provides a platform for product development that enables us to swiftly capitalize on growth opportunities as they emerge around the world. Our exchanges and clearinghouses operate on common technology, providing our markets with the flexibility to move jurisdictions, if desired, often as quickly as over a weekend. These markets run on proprietary technology designed to meet the comprehensive workflow needs of a wide range of market participants. On top of this technology and our global distribution are the critical benchmark contracts that traders, investors, and commercial participants rely upon to manage their everyday risks. In our oil markets, Brent crude is the global benchmark for nearly two-thirds of the internationally traded oil that moves around the world each day. Once again, Brent generated record revenues in 2018, and it remains a cornerstone of our energy product development, as well as for customer acquisition and retention in our energy business. Brent's relevance to our oil complex is complemented by our gas oil contract. Gas oil has been one of the fastest-growing energy benchmarks, with open interest up 11% per annum on average over the last five years. Gas oil has become a key benchmark for the refined barrel, including diesel and jet fuel. And the upcoming IMO marine fuel regulations, which are set to take hold in 2020, could provide additional risk management tailwinds to our oil complex. In our natural gas markets, we offer a suite of liquid global benchmarks, a platform that is unmatched in the marketplace. In fact, roughly two-thirds of our natural gas revenue is now derived from products other than the US Henry Hub, a benchmark that is losing relevance to commercial customers as other global benchmarks grow. As natural gas globalizes, our customers' participation in these markets has accelerated. with open interest across our 58 North American natural gas basis markets up 17% year over year. Our European TTF natural gas contract, with open interest at near record levels, up 64% year over year. And with our JKM contract, which is the benchmark for Asian natural gas, achieving record trading volumes in January. We see a similar dynamic in our financial futures business, which includes European interest rates and equity indices. Brexit uncertainty and the shifting expectations around global economic growth continue to drive increased hedging activity, with interest rate average daily volumes increasing 14% year over year and open interest up 8% through the end of January. And our alternative interest rate complex is also benefiting from increased adoption, with over 1.6 trillion of Notional cleared in our Sonia products since its launch just over a year ago. In our equities futures business, average daily volume in our MSCI index has grown at a CAGR of 34% since 2014 and was up 40% in January. In particular, as trade tensions in the US and China continue to build, so too is open interest in the MSCI Emerging Market Index. As of the end of January, open interest stood at 1.4 million contracts, and for comparison purposes, this represents over 20% of the total notional outstanding in the S&P 500 e-mini contract, an amount which was less than 5% only five years ago. In addition to our futures markets, we're continuously working to bring efficiency, transparency, and reliability to the U.S. cash equities markets. At the NYSE, we've been rolling out our Pillar technology, a technology that has the capacity to handle 80 billion messages a day, and which should improve the customer execution and access experience to our seven distinct equities trading venues. When combined with our hybrid designated market maker model, we provide customers with a differentiated platform that reduces volatility, provides tighter bid offer spreads, and offers an all-in cost of trade that is significantly lower than the average dark pool or dark venue like the IEX exchange. Our model of compensating designated market makers to protect and manage stocks is a unique value proposition. that shines brightest amidst market volatility, such as we've seen in December. As the average quoted spreads on NYSE listed and traded stocks were approximately 180 basis points tighter, and volatility was over 50% lower on the open and 60% lower on the close than our closest listing competitor. And finally, in our data services business, we continue to build on our unique platform as the leading provider of mission-critical derived data and analytics. The results of these efforts are best illustrated by the performance in our pricing and analytics business, which grew nearly 7% in 2018. Demand for our pricing and reference data, analytics, and indices is accelerating. Active managers continue to search for better tools and data to drive alpha. as there's a shift towards passive investing, which continues. These two trends have provided a tailwind to our business, in particular to our index business. At the end of January, following the transition of the iShares preferred stock ETF, ICE had $175 billion of fixed income ETF assets tracking our indices, a whopping 80% increase from just a year ago. Turning to slide 10, As I noted at the beginning of my prepared remarks, 2018 was yet another record year for ICE. A strong top-line contribution from our transaction business was complemented by compounding growth in our data and listings business. Coupled with strong expense management and our synergy execution, we produced double-digit EPS growth, reinforcing our conviction that we have in our long-term strategy. And as we look to 2019 and beyond, we're excited about the opportunities that lie ahead, not only for our core business, but also for our newer initiatives, such as ICE Mortgage Services, our fixed income businesses, and BACT, which recently raised over $180 million in its first round of funding. I'd like to conclude by thanking our customers for their business and for their trust in 2018. And I want to thank my colleagues for their efforts, that contributed to yet another very strong year for ICE. I'll now turn the call back to our operator, Carrie, and she'll conduct the question and answer session until 9.30 Eastern Time.

We will now begin the question and answer session. To ask a question, you may press star, then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. We do ask that you limit yourself to one question. If you have additional questions, you may re-enter the question queue. At this time, we will pause momentarily to assemble our roster. The first question will come from Rich Rapetto of Sandler O'Neill. Please go ahead.

Good morning, Jeff. Good morning, Scott. I guess my question is going to be a broad question on some of the external sort of forces you're bumping into both in Europe and the U.S. And I guess in Europe, when you look at Brexit, Jeff, you mentioned some of the benefits that people are needing to hedge more. But could you give us a recap of where do you think you stand on Brexit? There's this issue of, I know, the tax on commodities potentially being forced by the EU. And then in the U.S., you know, the external forces where these ideas of, you know, a new competing exchange, as well as, you know, the scrutiny on data. Do you think that we've moved on beyond that, or what points would you highlight to investors in those areas?

Wow, welcome to my world, Rich. You basically asked me to describe my job. So let's start with Brexit. First of all, as you've mentioned, unfortunately, we benefit from Brexit because of volatility that government actions impose on companies, force them to manage their risk, and we're in the risk management business. So there's really an overarching positive impact on our revenues and income. That said, as you know, we've long – felt that we shouldn't consolidate all our businesses geographically and we have a trading and clearing operation in the UK and we also have a trading and clearing operation in the EU and we put both of them on common technology so that we have to move quote unquote business around. It's really just a database move inside of our company and not a physical move. And as I mentioned in my prepared remark, that's something we can do over a weekend. That said, there's a lot of political back and forth going on, including now revisiting tax issues. On the tax issues specifically, this has been going on for over a decade. It's remanded to the courts now, the EU courts. In 21 months or so, the UK theoretically is no longer bound by the EU courts, so I don't know that this is going to have any practical impact other than another negotiating ploy that's going on over a complicated relationship between the UK and the EU as it relates to Brexit. It's something that everybody, our whole industry, has lived with forever, but ICE has always maintained optionality to move contracts and to locate business where our customers want to be, and if if certain things would have to move or be relocated in order to minimize the impact of that, we certainly would do that. We'll take our cue from the industry. With respect to the U.S. and the members' exchange, let me just set the table, if I could, because for some reason there seems to be an incredible amount of concern about this press release. You have to go back to a decade or so, and we've had the automation of trading, particularly in the equities world. We had the Flash Boys book and the quote-unquote Flash Boys phenomenon. And as a result of that, we saw the SEC a couple years ago order the exchanges to do what they called a tick pilot, which was essentially widen out or narrow the spreads of certain stocks to see how they would trade. And really what that is doing is affecting the behavior of high frequency traders that make their income by trying to capture the bid offer spread. That pilot has finished and the data is being analyzed and you next see the SEC trying to promulgate something called the fee pilot. It's not that well named in my mind because it actually doesn't impact the fees or the capture rate of the exchanges, but it changes theoretically over a number of different buckets the amount of rebate that can be paid to high-frequency market-making firms and brokers. There are a lot of people in our industry that are looking at the retail equity market and saying the next leg of that stool if one follows the SEC's actions, may be to investigate and change the way retail payment for order flow operates. And Rich, I think you know that retail order flow that comes through retail brokers is largely sold directly to high-frequency market makers. It never goes to exchanges. And what we saw is a group of high-frequency market makers that participate in the retail space organize up all of the retail brokers that they pay these fees to and try to quickly move to set up an exchange that we believe is to try to get in front of what may be the trend of eliminating and changing their business model. Now, for us at the New York Stock Exchange, unfortunately, we don't see any of that retail order flow. We don't believe that that behavior impacts us at all. In fact, to the extent that those orders are not executed on after they're sold to the market makers, the exhaust, which are basically people consider to be toxic because these are bids and offers that are off-market, are routed to an exchange that is not us. So we have very little impact with what's going on over there. That said, we believe that we support what they're doing. We will not... to what they're doing because we think it has spillover benefits to the New York Stock Exchange. First of all, we don't compete for any retail order flow. And if the idea is that they're no longer going to be able to sell order flow directly to market makers and it's going to have to be public competition to the retail consumer for the best bid offer, we would like to compete for that. And if there's going to be a new exchange that thinks they can compete for it, we believe we can compete for it. We have amongst the lowest cost of trading, all-in cost of trading anywhere, cheaper than dark pools, cheaper than the newer exchanges that have formed up, and we believe that the new exchange is going to have to cover its costs. For us, this order flow would be incremental, and we believe we could offer low-cost trading that would be accretive to high shareholders and very, very competitive to the end user for the bid offer. Secondly... A new exchange is going to continue to fragment order flow, even if there's no business there. Bids and offers that are sent there are going to have to be viewed. That's going to increase the capacity, the network capacity needed to manage that. That means the data spend wallet of end users is going to go up, not down. And we run networks, and we can compete to provide that increased capacity. That's a factor. a big part of the growth of this business. So we see the wallet going up. And lastly, one of the techniques that the SEC uses to promulgate these changes is to essentially order the exchanges to adopt rules Instead of going through a large public rulemaking, which takes a long time and has a lot of comments and difficulty getting through, oftentimes the SEC will just order the exchanges to adopt the rule, given that we have rulemaking capability. So this is the case, for example, in the consolidated audit trail. The exchanges were ordered to build a consolidated audit trail by filing individual rules at each exchange that would allow that to happen. There's a lot of complaints in the market over who got the vote on that consolidated audit trail, for example. People that were not exchanges didn't get a vote. Now, we know the reason that the buy side and the sell side would like to have a vote is they want to make sure that they don't have to pay for it or that they can at least cap the cost. In the consolidated audit trail case, there is no budget. It is an unlimited spend. It is one of the most technically difficult projects that has ever been attempted in our industry, managing billions and billions of data points that have consumer information that can be captured, time-stamped on an atomic clock, and can be readily searchable for trends is a daunting challenge, and it has been a huge spend on behalf of the exchanges. So we would welcome... others to come in and help defray those costs and have a vote in that matter because they also would be pregnant with the obligations of that matter. The reason the exchanges have been fighting people having votes is that they don't have the underlying obligation. So long story short, we see that we may have an opportunity to compete for retail order flow. We believe there's going to be an increased date of wallet spend and we believe that this could finally align interest in the industry And so in that regard, I don't see why in any event anyone should consider it a negative impact on our company. I think it will ultimately accrue positive.

The next question.

Thank you for listening to that one-winded answer, but that is my role.

The next question will come from Ken Worthington of J.P. Morgan. Please go ahead.

Hi. Good morning. On the data side, Your ASV is up 6%. Your revenue guide for 2019 is up 3.5% to a little under 6%. Can you help us bridge the gap between the two? Clearly FX is a part, but I think some of the information Scott gave showed that it was really a small part. So what are the other factors in the gap between ASV and the data revenue guide? And where is BAML in these figures now on the organic side, and where is it not?

So, Ken, first of all, the guidance range we gave constant currency is roughly 4% to 6% year over year. So just to take any concerns or questions out regarding what a constant currency guide is in those dollar terms, If you think about ASV at 6%, remember that's 90% of our revenue. As I said in my prepared remarks, in 2018, our overall data business grew 5%. Our ASV revenue grew 6%. And so, you know, the elements that aren't inside ASV, things like NMS, session fees, et cetera, haven't been and we don't expect will become big growth drivers in the overall business. So I actually think if you take the absolute value ASV and you consider it as 90% of our revenue, it gives you – it pushes you right into the middle of our range. So I feel like we're set up very well to deliver, you know, another year of solid growth in the data business. The mix of that's going to look a little different. The pricing analytics business, as I mentioned – has moved up from four and a half to over five to six and a half, and I think it's headed to seven this year. You know, connectivity on the other side, capacity growth has been tremendous over the last couple of years. I think that'll likely slow a little bit this year as customers consume that capacity. But again, you're seeing that content coming through the additional capacity and pricing and analytics growth. But, you know, connectivity itself is likely to be you know, closer to a 1% to 2% growth. And then exchange data is going to be in the middle of those two, with our futures exchange data continuing to be in strong demand, some additional value capture from oil products that we were able to add to our energy packages. And so overall, I feel like 2019 sets up to be a very good year, and I actually think the ASV aligns perfectly with what the guidance suggests.

The next question will come from Dan Fannin of Jefferies. Please go ahead.

Thanks. Good morning. One more question on the data. Just looking back at the pie chart from the investor data broke down the kind of mid to high single digit growth and the components of that. Can you talk about the breakdown between pricing, new customers, incremental consumption, kind of the various buckets that you had outlined and kind of how that fits today as you look at 19 where we're looking pretty much squarely at like a mid single digit number versus that mid to high?

Yeah, thanks for the question. So the interesting thing about that model is there are parts of the business where, you know, as you look at 19 expectation, it fits perfectly. You know, there's a very good balance in the pricing and analytics business, which I just said I think is going to go around 7% for the year, new product. your reference data products, indices. By the way, Ken, the answer to your question is the Bank of America Merrill Lynch indices are fully organic this year. Everything is because there weren't data acquisitions last year. So all our growth in 2019 will be organic. But we've got new products that are driving growth, new customers. The Method 2 introduced us to a lot of small to medium-sized European customers. who are now buying the breadth of our products, not just things like the liquidity indicator that solved an existing need. Existing customers buying more, those MIFID II products that really drove great growth in Europe. You'll look at the back of the slide and see that our mix to Europe has actually moved back to 20%. You know, where it was 21, 22 back when we had trade ported, it dipped below 20, now it's back. those new customers buying more, but then those new products, existing customers in the U.S. are buying because they need liquidity indicators and best execution indicators. And so that's driving growth. And then, again, you know, we are seeing a contribution from price. I'll note one thing. You know, in that model, if you pull it out, it included roughly a point of growth from M&A, and we don't have that this year. If you look back over the last couple of years and exclude the businesses we divested, Our inorganic growth, if you will, was close to 7%. So, you know, I look at 2019 as a year where we're going to deliver very solid growth with the 10% element that relates to M&A not present at all, and then a very strong balance across pricing, across new customers, across new products, et cetera, and a fairly even contribution, again, in inside pricing and analytics. If you look at exchange data, Yeah, that really is our existing customers buying more on the future side and growth in the number of customers consuming those products. And on the connectivity side, even though I think it'll slow versus where it was, we continue to see capacity growth, which, again, is existing customers buying more with, in fact, an actual price reduction there because as they buy the larger ports, the actual price per gig comes down a little bit. So it mixes across the elements, but I think that revenue model is still very indicative other than, again, in 2019, we don't have the point contribution from M&A.

The next question will come from Alex Blostein of Goldman Sachs. Please go ahead.

Hey, guys. Good morning. Just a question around the, I guess, fixed income business. So maybe get an update on initiatives you guys have lined out for 2019 and credit trading on the back of the platforms that you purchased. I think on the last call, maybe the call before that, you talked about that being called a $100-ish million kind of trading annual run rate. Where does that stand today, and what are some things you guys are working on to get that going higher?

Let me have Ben Jackson answer that for you. Thanks, Alex. So our platforms had a very strong Q4 when you look at TMC and Bondpoint. As a lot of you know, volatility came back to U.S. corporates and munis in the fourth quarter, and we were a beneficiary of that, where volume on Bondpoint and TMC was up over 9% over the prior quarter and 20% over the prior year. And in notional terms, what was traded, we were up 12% over the prior quarter and 50% over the prior year. And note that I was highlighting there that notional is greater than volume, which means the average trade size is also increasing on the platform. So one of the things I've talked about on prior calls is that odd lot trading, so trades of north of 100 bonds per trade, has continued to increase. And last year, we saw on bond point, a 50% increase on an annual basis of odd lot trading, and 23% increase on TMC. The other thing I'd highlight is you've got to remember we've owned these platforms for a short period of time. So BondPoint we've had for about a year, TMC about six months, and our integration effort is well underway. Just in the last few weeks, we've combined our business and technology teams across TMC, BondPoint, CreditX into one team, now called IceBonds. And we're executing with a single mission, direction, leveraging technology across the group for efficiencies and scales. So we're starting to realize some of what I had mentioned on prior calls is getting the operating income of those businesses in line with where we see our other trading businesses. The other thing I'd say is you've got to take a step back because buying those businesses wasn't about just fixed income execution in isolation. It's really about providing our customers a complete, integrated, comprehensive solution to real challenges that there are in fixed income. When you combine real-time and end-of-day pricing, we're the market leader, providing for 3 million instruments around the world, not only end-of-day prices but real-time prices. With our reference data business, where we're providing reference data, the golden record of the terms and conditions for bonds for 13 million instruments, a leader in that space. We have index expertise in fixed income that came on board with the Ice Bank of America Merrill Lynch index business that's growing fast, as mentioned in the commentary. We also have analytics leadership in the fixed income space where customers trust us with a trillion dollars in assets to run through our analytical platforms to understand the return attribution, to identify the next optimal trade opportunity, and to identify liquidity risks that they have in their portfolio, et cetera. And last but not least, you add on to that the choice of execution protocols that we have from central order book and streaming protocols that's core to the businesses that we bought, and that's the most difficult protocols to establish. When you have to manage 100 million price updates a day on BombPoint, 77 million price updates on TMC, you have securities that you can provide customers that On 10,000 securities, you can provide markets that have 250 bonds up on the best bid and best offer at any given point in time. We have 23,000 securities with two-way markets. You have to manage best execution, manage connectivity, manage latency. All these are real challenges in building out those streaming protocols, and we have that well established in our business. In addition, I've highlighted that we're building out RFQ and auction capabilities, and it already represents 20% of the volume on those platforms and will be instrumental as well when the ETF Hub project comes to life later this year that I've also talked to this group about. And the ETF Hub project gives us an opportunity to be at one of the hottest and highest growth area in the fixed income space, which is passive investing, which has had a 30% CAGR over the last 10 years. That gives you a little bit of a flavor of the initiatives that we have coming down the pipe.

The next question will come from Michael Carrier of Bank of America. Please go ahead.

All right. Thanks. Good morning. Scott, just on some of the guidance on the expenses, in terms of like some of the buckets that you gave, just I think it was like $30 million, $35 million on tech investment, you know, for new growth, and then the $20 million, $25 million on VAC. I just wanted to get your sense on, like, what are those, you know, maybe initiatives? What are the expected, you know, returns, you know, or, like, revenue growth, you know, associated, you know, with some of those expenses, whether it's a 19, you know, or further out?

Yes, it's a good question. And hopefully you found the guidance pretty consistent with what we've done in prior years. And as I looked at kind of the average expectations, I think there are, in terms of 2019 expense, I think they're pretty consistent as well with two adjustments. I think right now you guys on average are expecting us to be somewhere around 2160, 55 or 60. We told you that we went to work on the businesses we acquired last year and have already taken out $15 million of cost there, which if you would just use the run rate would be new news. And then additionally, as you point out, we did note that we would be investing, based on our first quarter run rate, $20 to $25 million. And I said we'd keep you updated on that as we move through the year. Specifically, with regards to the revenue and the technology investments, I think those will continue to support revenue growth that likely overall is going to be in kind of that mid-single-digit range in total. That's all subject to volatility. But I definitely think those investments, just as they did in 2017 and 2018, will support continued revenue growth. I think BACT is really an investment, and I'll hand it over to Jeff to talk a little bit about it, that's more about the future and revenue and market opportunities that we see in the future and less about 2019 top line.

Yeah, BACT is a unique – structure for us in that we've actually set it up as a separate company with a separate name, its own management team, and separate capitalization. Right now, ICE is the majority investor in the company. I expect that we'll do other rounds of financing. We'll make a decision as it goes forward whether we stay majority or allow it to spin free of us. We believe that what ICE has, if you step back and look at us, is we have obviously trading, clearing, We have settlement capabilities, warehouse and custody management capabilities, large treasury operations, banking connectivity, and a global infrastructure that is in many, many jurisdictions, regulatory jurisdictions around the world, with a massive cyber overlay. That infrastructure... has attracted a lot of very, very interesting companies that have come, some that have invested in BAC, some are just working with BAC, to try to tap into that infrastructure for some new use cases that will involve blockchain and digital assets and other things that we can provide these people. Obviously, we've announced our work with Starbucks and Microsoft who have very, very large retail franchises, global connectivity to end users that we hope will be brought into that ecosystem and could create a very, very valuable company out of that initiative if our business plan plays out. So it's a bit of a moonshot bet, and it's been organized. in a manner that is very different than the way ICE typically does business. BAC has its own offices, its own management team, et cetera, and then we've entered into agreements with it to provide services, as I've described, over that ICE overlay. So we'll see how it goes. They're well along in building out an infrastructure that I think you'll see launched later this year, and I'll let Back talk more about how it wants to go about and what the business use cases are, its revenue model, et cetera, as it unfolds.

And then the only other thing I'd add is in addition to separate teams, separate office, it's separately funded. We and our partners have put cash aside to fund this business, and so While it won't generate revenue in the current year, it also doesn't impact our leverage. It's already funded. It doesn't impact our capital returns. We increased the dividend 15%. We've already bought back over $115 million of shares in the quarter. And so it is funded in a sense, even though it's incremental expense on top of what you would have anticipated, it is funded by cash that we and our partners have already put aside.

The next question will come from Kyle Voigt of KBW. Please go ahead.

Hi. Good morning. I'm just on M&A. You know, over the past few years, you know, more of the M&A for ICE has been targeted on deals that are more bolt-on in nature. So I guess my question is really on the large-scale M&A and the exchange space. I think you previously cited uncertainty around Brexit, uncertainty more broadly around the regulatory environment as an impediment to that occurring in the future. along with the political environment, but it seems like we've gotten some clarity, at least on the Brexit side, for clearing. Can you give us an update on whether you still see the regulatory environment and this uncertainty more broadly as an impediment to large-scale M&A in the sector? Thank you.

I think, you know, the sort of leading aspect of your question I think is correct, is that things are clearing up from a regulatory standpoint, from a market structure standpoint. People have, you know, the large exchange groups have sort of set their footprints, and it becomes more obvious where other acquisitions should flow, in my mind. In our industry, you know, we've seen, obviously, the formation of large exchange groups like ICE and our peers. We've also seen a consolidation in traders, right? Particularly high-frequency trading has consolidated, and we've seen a consolidation in brokers. Order flow tends to go to a more limited number. You know, the MIFID impact of... providing analysis and analytics in your space has concentrated people. So we've been seeing a concentration across the entire financial services market that we serve. You can throw data in there as well, a number of large data companies formed up. So I do think that there will be continued M&A in our space and maybe more obvious as to where these large companies will will touch one another. That said, M&A for us has to be disciplined. We've done a lot of M&A that's been opportunistic. Large M&A has been opportunistic when it's been obvious that we should get together with somebody. That's fed into our model where we target returns above our cost of capital. make sure that these deals work with shareholders. And as you know, we've been very disciplined on our synergy cases, and we hold ourselves to high regard to deliver the synergies that we promise. And so M&A is not easy as companies get larger. But all that said, I do believe that some of the impediments are clearing.

Yeah, and just in the event you missed it on my first slide, to validate Jeff's point on the financial discipline that we've executed on our past deals, our return on invested capital is now back to 9% in total. It's 300 basis points above our cost of capital. And if you look at kind of outside IDC, it would have been back at 10%. And so when we say we're committed to doing deals that generate 10% returns, you see it in the result on our overall return on invested capital, which again, as Jeff said, is that capital base has grown. Moving that needle continuously higher, which we've done, requires us to continue to grow profit, which we've done.

The next question will come from Ben Herbert of Citi. Please go ahead.

Hi, good morning. Thanks for taking the question. I just wanted to go back to the data and particularly pricing analytics, just within fixed income, how do you feel positioned to continue to accelerate growth there? I mean, can we see more of that as you further integrate the ecosystem you've built? Or, you know, I know you give the M&A guidance for 19, but, I mean, is there an opportunity, do you think, to be a bit more acquisitive in the fixed income side? Thanks.

Hi, Ben. It's Ben. I think one of the places I'd start with is some of the commentary that I mentioned before in that our strategy when we looked at fixed income is we took a different approach to it than many others where we looked at what is the comprehensive solution that people need to solve the real issues in fixed income, issues like how do I get a fair price? How do I figure out for something that doesn't trade all that often, what is the price of that instrument? How do I keep on top of all of the vast ocean of reference data I need to understand in trading that? How do I find people that when I identify a trade I want to do, how do I find somebody that has inventory that indeed wants to trade? And then on the execution side, being able to offer a number of different protocols for someone to execute. The thing I'd highlight that I think is a good sign that we're heading down the right path here is that ETF Hub project that I mentioned. Because it really, in order to deliver that, you have to have all those pieces. And we're uniquely positioned to do that. And when you think about it, for the first time later this year when we launched the ETF Hub, again, one of the hottest areas of growth in the fixed income market. For the first time, if you're an authorized participant or a market maker and you want to create or redeem a share of an ETF, you're going to be able to, for the first time, connect to a single portal And in that single portal, you'll be able to connect to multiple issuers, as opposed to having 12 different interfaces that you're dealing with to interface with the issuers. Second, you'll be able to gather the index constituents for each issuer's ETF. So think of the hundreds of ETFs that they have multiplied by the number of issuers. That's all going to be able to be done in a single portal. Third, you'll be able to view that day's basket constituents to be able to create or redeem a share. Every day, those constituents change for each one of those funds and each one of those issuers. So you can see the problem compounds on itself as you think about it and the way that things are done today. Fourth, you'll be able to gather market data, data from us. We're the leading price provider in the space to be able to understand what are the trading levels of the constituents and the baskets that could be created or redeemed in that day. Next, you'll be able to negotiate what is acceptable to submit through a create or redeem. In order to do that, you have to have instant messaging capabilities, which we have a well-established instant messaging capabilities to be able to underpin this. And last but not least, you'll be able to execute via our streaming protocols, our RFQ, our auctions, as well as third-party venues to choose to connect through this portal. To me, that's a pretty powerful sign of a place in the market that's growing very fast, where market participants are pulling us into it because they see us uniquely positioned with the combination of assets that we have to solve this problem and to help the paths of investing fixed income space go to that next level of growth.

The next question will come from Brian Bedell of Deutsche Bank. Please go ahead.

Great. Thanks very much. I just got on the data revenue guidance on the constant currency basis from 4% to 6%. What do you see as the biggest drivers between the difference of the 4% to 6%? Is it mostly in pricing or actually new customers? And then if I could just ask a couple of timing questions just on Ben. I think you said launching the RFQ and ETF hub later this year when you think that might start contributing from a revenue perspective if that's later this year or 2020. And then just one on timing of Memex development, Jeff. Thanks for your answer prior on that. Do you think that is – the members exchange is something that actually gets up and running and can begin to affect the markets later this year, or is that more of a 2020 type of event?

Yeah, so I'll start. I think there were three questions embedded in there. The 4% to 6%. Look, I went into last year, and I gave you guys a fairly tight data guidance and said we had good visibility into it, which I still believe is the case. But I think that it got interpreted to something like 99.5% certainty in February. And so the range is a little wider this year, just acknowledging what happened in 2018. There were some places where You know, we had some erosion that we didn't expect on the downside in the desktop business, some audits that we didn't anticipate in certain quarters as we moved through the year. And so the reality is that all of those things worked out to a year where we grew the business 5%, and as I mentioned, ASB revenues actually grew 6%. But there was some churn that ran through the stock because, you know, of a $2 or $3 million difference in any given quarter and a $15 or $20 million difference on $2 billion of revenue for the year. And so I thought it was prudent to try and take some of the volatility out around people who are trying to guess at $1 million on $500 million in the quarter. As I said on the call, I feel very confident that if you look at the ASV number, that's going to point you right to the middle of our range. And then inside that, it's going to be driven by growth in pricing and analytics. I've been laid out a very compelling case for overall fixed income investments. But, you know, that is effectively the IDC business that used to grow 2% to 3%. And I'm telling you it's going to grow, you know, two and a half times faster than that just a few years later. And the ASV supports that. And there's a lot of momentum in the product that we've got. So I feel very good about the business. I think the only thing you should interpret in the widening of the range is just a little bit more, hey, it could be plus or minus 1% versus plus or minus a half percent last year.

And Brian, I'll pick up on the RFQ ETF questions that you had. So on RFQ, we have that capability now. So in your question, you said, is that going to be coming later this year? You have to remember, from being a long-time exchange and clearinghouse market operator in a number of different asset classes, we have expertise in the RFQ auction space in many of our markets. So we leverage a lot of that expertise, and we're able to get those RFQ capabilities established on both BondPoint and TMC very rapidly. So that capability and functionality is there now. And now it's about leveraging our network and our distribution capabilities to get that out. which we're very well able to do as we have brought those businesses together with our CreditX business that I mentioned and also leveraging all of the touch points we have in the fixed income community through our ICE data services business. For the ETF hub that we'll launch later this year, that's our targeted timeframe with our steering committee. We have completed the requirements definition around that. We have the design well underway. We have a lot of the – most of the major issuers that are on board helping us with this, as well as the major APs and market makers that are helping and assisting with that design. And that has enabled us to really lock that down, and now we're looking at later this year. So you'll see contribution on this targeting 2020.

And lastly, on the members exchange, I guess if – I'm not aware that there's management or anybody working on anything, but that's really not their obligation to discuss it with us. But that said, if I was in their position, if I wanted to get the market fast, I'd probably just copy verbatim somebody else's rulebook. That probably is a one-year-ish process, one, maybe two. Of course, by copying somebody else's rulebook, it doesn't give you anything that's unique that exists And I would suspect that there's going to be a lot of scrutiny around the very issue that many pundits are talking about, which is are the members going to try to bias their business towards the exchange rather than seek the best price for their customers in the marketplace? And that will come a long way in the last few years in terms of of disclosure and auditability of that behavior, but it's not completely done yet, so I suspect there'll be a fair amount of conversation and review of just how is order flow intended to be routed. All that said, nothing moves fast in a regulatory world, and I can tell you that I'm watching back try to stand up its regulatory footprint and things are not moving necessarily fast right now in the United States.

The last question for today will come from Chris Allen of Compass Point. Please go ahead.

Good morning, guys. I think most of my questions have gotten answered. Just a quick numbers question just on the other revenues, which were boosted by $5 million in fines and 3Q. I have a question again for Q. I'm just kind of wondering what's been driving that over the course of the year and kind of the outlook there.

So the other revenue, Chris, is where we've got the revenues associated actually with the interest we earn on our clearinghouse deposit. And so as the Fed has moved rates up and the balances have grown and they tend to grow at year end, people like to park cash at our clearinghouses at year end. That's what drove it up. And so... depending on what the rate environment is as we move through 19, you could see a similar dynamic. If rates hold constant, it'll all correlate to the actual levels of collateral, cash collateral specifically, that are clearing out. It's nothing more than that.

This concludes our question and answer session. I would now like to turn the conference back over to Jeff Sprecher for any closing remarks.

Thank you, Kerry. Thank you all for joining us on the call, and we'll look forward to really a guided up year again for 2019, and we'll talk to you in the next quarter.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines. Have a great day.