Intercontinental Exchange Inc.

Hello and welcome to today's iSecondQuarter 2023 earnings conference call and webcast. My name is Bailey and I'll be the moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you would like to ask a question please press star followed by one on your telephone keypad. We do request that each person asks one question and then rejoins the queue if they have any follow-ups. I would now like to pass the conference over to our host Katia Gonzalez, Manager of Investor Relations. Katia, please go ahead.

Good morning. ICE's second quarter 2023 earnings release and presentation can be found in the investor section of the ICE.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 are subject to risks, assumptions, and uncertainties. For a description of the risks that could cause our results to differ materially from those described in forward-looking statements, please refer to our 2022 Form 10-K, second quarter Form 10-Q, and other filings with the SEC. In addition, as we announced last year, ISIS agreed to acquire Black Knight. The transaction is still pending regulatory approval, and we expect to close in the second half of this year. In connection with the proposed transaction, ICE has filed with the SEC a registration statement on Form S-4 to register the shares of ICE common stock to be issued in connection with the transaction. The registration statement includes a proxy statement of Black Knight that also constitutes a prospectus of ICE. Please see the Form S-4 filing for additional information regarding the transaction. In our earnings supplement, we refer to certain non-GAAP measures. We believe our non-GAAP measures are more reflective of our cash operations and core business performance. You'll find our reconciliation to the prevailing GAAP terms in the earnings materials. 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. Throughout this presentation, unless otherwise indicated, references to revenue growth are on a constant currency basis. Please see the explanatory notes on the second page of the earnings supplement for additional details regarding the definition of certain items. With us on the call today are Jeff Sprecher, Chair and CEO, Warren Gardner, Chief Financial Officer, Ben Jackson, President, and Lynn Martin, President of the NYSE. I'll now turn the call over to Warren.

Thanks, Katya. Good morning, everyone, and thank you for joining us today. I'll begin on slide four with some of the key highlights from our second quarter results. Second quarter adjusted earnings per chair totaled $1.43, up 8% year over year, driven by total net revenues of $1.9 billion. This marked the best second quarter in our company's history. It was on top of 14% adjusted EPS growth in the second quarter of 2022. Second quarter adjusted operating expenses totaled $756 million, $7 million below the low end of our guidance range and up 2% versus the prior year. Higher SG&A, including an increase in spend related to an uptick in ITO activity late in the second quarter, as well as higher DNA and rent, both of which were driven by a handful of lease write-offs as we consolidate our real estate footprint, was offset by higher capitalized labor and lower professional fees. This strong performance helped to drive an adjusted operating margin of 60%, and a 5% increase in adjusted operating income to $1.1 billion, which was on top of 14% growth in the second quarter of 2022. Looking to the third quarter, we expect adjusted operating expenses to be in the range of $770 million, with the year-over-year increase driven by additional compensation and technology expense, as well as roughly $10 million of FX. As a result, we now expect that the full-year adjusted operating expenses will be between $3.04 and $3.06 billion and towards the lower end of our guidance range. Moving below the line, adjusted non-operating expense totaled $84 million in the quarter, improving sequentially due to higher cash balances as we build consideration for our acquisition of Black Knight, as well as higher interest rates on those cash balances. Shifting to the tax rate, as the increase in the UK tax rate became effective in April of this year, we confirmed our ability to make certain US tax elections, which primarily led to a second quarter adjusted tax rate of 22%. As a result, we now expect to be around the low end of our 24 to 26% guidance range for both the second half and full year. Now let's turn to slide five, where I'll provide an overview of the performance of our exchange segment. Second quarter net revenues totaled $1.1 billion, up 9% year over year. Transaction revenues of $736 million were up 12%, driven by 33% growth in energy revenues. This strong performance included 52% growth in global natural gas revenues, driven by a record quarter for both TTF volumes and participation, as well as 9% growth in our environmental revenues. In addition, we continue to see robust trends across our global oil business, particularly our crude oil benchmarks Brent, Mervin, Dubai, WTI, and Midland WTI, with ADV up 26% year-over-year, in the second quarter and open interest, as of the end of July, up 21% year over year. Importantly, this is helping to drive strong open interest trends across our global commodity futures and options complex, including 15% growth in global energy and 21% growth in ags. Recurring revenues increased by 2% year over year, including 6% growth in exchange data services, which was once again driven by double digit growth in the number of customers consuming our global energy and environmental data. This was partially offset by our listings business where capital markets activity through much of the first half was relatively muted. However, the IPO market started to open up towards the end of the quarter with the NYSE acting as the backdrop for 91% of total capital raised in the second quarter. In addition, The NYSE continues to lead the industry with a total of 12 operating companies transferring from other exchanges so far this year, representing a combined market cap of roughly $100 billion. Turning now to slide six, I'll discuss our fixed income and data services segment. Second quarter revenues totaled $546 million, up 6% versus a year ago. Transaction revenues increased by 23%, including 17% growth in ICE bonds and 25% growth in our CDS clearing business. Excluding the impact of the Euronext migration, both recurring revenues and ASV grew by 4%, driven by strong growth across our analytics, desktop, and feeds offerings. Within desktops, we continue to see strong demand from energy and environmental-focused customers, as well as continued robust growth in our ICE chat offerings. where the number of users has grown at a 15% CAGR over the last five years to nearly 120,000 at the end of two Qs. This growth has been driven by the investments we have made to reduce friction across the workflow, including the development and refinement of a proprietary large language model within IceChat. And as a result of these enhancements, through the first half of this year, we have seen a nearly 60% increase in energy volume executed through our IceChat platform. Lastly, within our consolidated feeds business, investments we have made to elevate and enhance our offering continues to pay dividends, evidenced by double-digit revenue growth and a number of wins, both in the quarter and first half, driven by displacements of larger multi-asset class incumbents. This collective performance is a key driver of our other data and network services business, which increased by 7% in the second quarter and 9%, excluding the impact of Euronext. In our fixed income data and analytics business, similar to the last few quarters, we experienced an extended sales cycle within our end-of-day pricing business. Somewhat offsetting was a return to year-over-year growth in our index business, driven by growth in ETF assets under management, to a record $526 billion as of the end of 2Q. Let's go next to slide 7, where I will discuss our mortgage technology segments. Second quarter mortgage technology revenues totaled $249 million. Recurring revenues, which account for nearly 70% of segment revenues, totaled $164 million and helped to drive out performance versus an industry that experienced a nearly 40% decline in origination volumes. While data and analytics recurring revenue grew double digits year over year and nearly two-thirds of our encompassed customers up for renewal during the quarter did so at higher minimums, Growth was offset by those electing to renew at lower levels, as well as reduced spend on ancillary products, such as our CRM and marketing solutions, which tend to be utilized by customers that are more refi-focused. Importantly, the vast majority of these customers not only remain on the Encompass and ICE Mortgage Technology platform, but have also signed multi-year contract renewals. While macro conditions appear to be stabilizing, and year-over-year pressure on forward-looking application volumes appears to be moderating, evidenced by a mid-teen decline in July applications compared to a nearly 30% decline in 2Q and a nearly 50% decline in the first quarter, current cyclical pressures are now likely to drive our recurring revenue growth into the low single-digit range for the full year. However, These same cyclical conditions and the need to re-examine legacy cost structures continues to attract customers that have not traditionally utilized the ice makers mortgage technology platform. As an example, the top five bank that elected to replace their in-house solution with Encompass as their system of record for the retail channel last quarter has now also signed on as an Encompass customer for their correspondent channel. In addition, cross-country mortgage, a top 15 lender, and an encompass user signed on to utilize our analyzers in what was one of the largest data and analytics fields in our history, following J.P. Morgan's adoption of our analyzer suite last year. While these wins will take time to implement and are therefore not expected to impact our 2023 recurring revenues, there's a clear example of the increasing need for workflow efficiencies, and we expect there to be continued momentum through the balance of this year and into 2024. Moving to slide eight, in summary, it was a record first half. We delivered revenue, operating income, earnings per share, and free cash flow growth. We continue to make strategic investments across our business and future profitable growth opportunities, and we are well-positioned to meet the evolving needs of our customers and create value for our shareholders. I'll be happy to take your questions during Q&A, but for now, I'll hand it over to Ben.