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.