Hello, and welcome to today's ICE Second Quarter 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. [Operator Instructions] 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 Investors 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, ICE has 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 a reconciliation to the equivalent 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 Gardiner, Chief Financial Officer; Ben Jackson, President; and Lynn Martin, President of NYSE. I'll now turn the call over to Warren.

Thanks, Katia. Good morning, everyone, and thank you for joining us today. I'll begin on Slide 4 with some of the key highlights from our second quarter results. Second quarter adjusted earnings per share totaled $1.43, up 8% year-over-year, driven by total net revenues of $1.9 billion. This marked the best second quarter on our company's history and 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 IPO activity late in the second quarter, as well as higher D&A and rent, both of which were driven by 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 $760 million to $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 the full-year adjusted operating expenses will be between $3.04 billion 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.…

Thank you, Warren, and thank you all for joining us this morning. Please turn to Slide 9. Amidst the dynamic macro environment we've witnessed in the first half of 2023, our customers continue to rely on our leading technology, mission-critical data and transparent and accessible markets to manage their risk. Across our commodities markets, average daily volumes increased 17% in the quarter and were up 7% when compared with the first half of 2022, including a 16% growth in energy and a 27% growth in our agricultural portfolio in the second quarter as customers respond to changing weather patterns given the El Nino conditions and its impact on commodity supplies. In energy, the globalization of natural gas and the evolution towards cleaner energy are trends that we began investing in over a decade ago. And today, cleaner energy sources, including global natural gas and environmentals, make up over 40% of our energy revenues and have grown double digits on average over the past five years. This strong performance has contributed to an average annual growth rate of 8% in our energy platform over that period, growth that is a direct result of staying close to our customers, understanding their evolving risk management needs and expanding the breadth of the content that we offer across our energy network. In our oil markets, ICE's Brent benchmark, the largest crude oil futures and options market in the world, has undergone its latest evolution with the addition of Midland WTI into the Brent basket, creating a new Midland exposure for the oil market to manage. Reflecting this dynamic, ICE Midland WTI reached record volumes during the quarter, along with a series of open interest records in July. In addition, commercial customers continue to demand more additional, more precise hedging tools and that we are…

Thank you, Ben, and good morning, everyone. Thank you for joining us. Please turn to Slide 10. I'll begin by touching on our pending acquisition of Black Knight. While we are unable to answer any questions on this call relating to the pending litigation with the Federal Trade Commission, I'll briefly discuss our announcement to divest of Optimal Blue. On July 17, we announced that we entered into an agreement whereby contingent on the close of our acquisition of Black Knight, Constellation Software will acquire Optimal Blue for total consideration of $700 million. This consideration includes $200 million of upfront cash and $500 million in the form of a seller finance note, which we have committed to place into the market within six months following the transaction close. We intend to provide additional performance details upon the closing of Black Knight, but it's worth noting that we continue to target revenue synergies of $125 million and expense synergies of $200 million by year five. As a result of our agreeing to sell Optimal Blue, our federal trial was rescheduled to August 14. And we are in a dialogue with the FTC about potential resolution. The transaction with Constellation Software will keep Optimal Blue and the Empower loan origination system together under a single, highly credible owner. A related agreement will continue and expand our commercial relationship to facilitate Optimal Blue being made fully available to ICE's customers on our open network. As the largest distributor of Optimal Blue via our network, we remain very excited about the value and efficiencies that the combined ICE and Black Knight entities will bring to the end consumer as well as to other stakeholders across the mortgage ecosystem. Shifting to ICE's strong results, please turn to Slide 11. In the second quarter, we grew…

Thank you. [Operator Instructions] Our first question today comes from the line of Dan Fannon from Jefferies. Please go ahead, Dan. Your line is now open.

Thanks. Good morning. My first question is on the mortgage side. So curious as to what percentage of Encompass customers have gone through the renewal process. You've given some updates on the kind of renewal and what people have been doing. But curious about where you are in that full process. And then broadly looking forward on the mortgage side, there is an outlook that we've kind of bottomed in terms of activity. Looking at your guidance implies that we're still going to have some pressures for the remainder of this year, but as you think about the overall macro backdrop, are you anticipating volumes here in the second half to start to recover?

Hi, Dan, this is Ben. And great questions. Thank you. In terms of the first part of your question of what percentage of the customers have renewed, so we started this process really a couple of years ago. We've had the Ellie Mae business now for three years, and we started talking about this just a couple of years ago. Most customers are on agreements that are around four to five years in duration. So we're roughly halfway through that transition. In terms of how the business is doing from a longer term perspective, we feel great as we've been talking about on many of these calls, how we've been repositioning the ICE Mortgage Technology company to really unlock long-term growth potential. And underneath the covers, we've seen a lot of success towards that. The evidence to that effect is that over the last several quarters, we've mentioned that we've had success renewing more than 60% of our customers at higher subscriptions. And even when we do see that 40% or so or less that are renewing at lower subscription fees, the trade-off there is that we're getting a higher per-close loan fee on each of those. So when the market normalizes, that will be a tailwind towards our transaction revenues. The second thing is we have continued to see in the second quarter some headwinds from M&A consolidation and going out of business, although it's been relatively small. I think the other thing that we've seen in the first half that were in some of our prepared remarks were that there are some ancillary products that roll up into our origination line item that are not Encompass that are more CRM and marketing-oriented platforms that are very targeted towards helping our lenders identify refi opportunities with clients. And the…

Thank you. The next question today comes from the line of Benjamin Budish from Barclays. Benjamin, please go ahead. Your line is now open.

Hi there. Good morning and thanks so much for taking the question. I wanted to maybe follow up a little bit on the Mortgage segment. There's a lot of dialogue around sort of the ongoing digitization and sort of similar to the question in terms of the contract renegotiation cycle. I kind of wanted to ask about the cross-sell some of your existing products like AIQ in particular. Just curious where you are in terms of the penetration of the current customer base and how far you think that can go?

Thanks, Ben. This is Ben. So great name by the way. So from a cross-sell perspective, that's the beauty of this business that we've established that when you look across all of the offerings that we have across our ICE Mortgage Technology network, we touch almost every lender with some of our – with one of our services on our platform. And we have 3,000 of them that are on our Encompass platform. And we continue to have great success across the spectrum of bringing in new Encompass customers that are utilizing other services that we have on our network and getting new wins across all of the segments that we service. So think of whether it's a bank, a nonbank originator, a broker, a credit union, we continue to have success across each of those segments. And we've also leveraging the overall enterprise that ICE brings to bear. We've been able to leverage that to reposition and have some wins with large banks replacing legacy infrastructure that historically, the business wouldn't have been well positioned to win. So we feel great about that part of the business. In the environment that we're in, we have seen customers very focused on rightsizing their organizations rightfully so with the headwinds that they've seen. And they've been very focused on the core platforms that they run, and Encompass is one of the key ones. So that's why we continue to see great strength there. At the same time, innovative companies and entrepreneurs that are thinking ahead don't want to have to – as the market is going to turn, and it will turn at some point, don't want to have to chase volumes by hiring armies of people. Again, they want to try to automate and become as efficient as possible in their processing. And that's why we continue to have great success in areas such as AIQ, which we've now rebranded to our ICE data and document automation platform. And some of the examples that we talked about in the prepared remarks were JPMorgan Chase, obviously, significant bank selected us last year. They've just gone live on the platform this year. So we're starting to see some of that to come into our performance. And on the back of that, a top 15 lender and CrossCountry Mortgage has now selected us. So we see innovative companies out there looking to invest in efficiency and automation going into the future.

Thank you. Our next question today comes from the line of Alex Kramm, UBS. Please go ahead, Alex. Your line is now open.

Yes. Hey, good morning everyone. Just a quick one on pricing, actually. Last quarter, you obviously made some price moves on the energy trading side. It looked like that came through pretty nicely. So just wondering any lessons learned from there, and can you extend that into other areas is really the question? I mean, you didn't touch any other Futures businesses. Maybe broadly on the Exchange side, around market data and some of the success you're having in energy data in particular, are there more opportunities for pricing that you see now versus previously since you've gone through this experience on pricing here?

Yes. Alex, it's Warren. It's a great question. And so in terms of the pricing changes we made within the energy complex, as we said last quarter, those were a handful of oil contracts. So we didn't touch everything within energy, but certainly decided at that moment in time, it was a good moment in time to capture some of the value we brought to the asset class over the last number of decades, frankly. And so we spoke to you last quarter, mentioned there would probably be a few pennies of benefit to the RPC. I would say it's about – it was about $0.03 to $0.04, if you will, so in line with what we were expecting on that front in terms of the benefit from those price changes, all else equal. As we look across the rest of the futures platform and frankly, the rest of the ICE platform, the philosophy as we approach and apply here is going to be the same and has been the same since the beginning. And that's when we see opportunity to capture value that we've created for people and our customers and the asset classes that we operate, we'll think about doing that and frankly, be selective about it and pick our spots. And so I think as you're thinking about that as we move into next year and future years as well, we'll be taking that same approach. And so we did have some success with this on the energy side. Again, I think it's a recognition of, again, the value we created because we certainly see very strong volumes and very strong open interest continue. And I think you'll just see us take a similar approach across the rest of the ICE business as we move into our budget season this year and think about it into the future.

So more of a next year opportunity is what I'm hearing from you. Sorry for the quick follow-up.

So I wouldn't expect pricing changes this year. So yes, it will be next year and beyond.

Thank you. The next question today comes from the line of Simon Clinch from Atlantic Equities. Please go ahead, Simon. Your line is now open.

Hi. Thanks for taking my question. I was wondering if you could just talk a bit more about the environmental products business, and just how that's progressing right now. And so what it's going to take or when we should start to expect to see the growth rates really resume the kind of attractive pace that we saw in previous years prior to last year.

Thanks, Simon. This is Ben. As you know, we've been thinking about this space for well more than a decade and investing in it. And we feel great about the positioning that we have here, and we're just continuing – continue to be one of our most significant areas of investment across our futures business because we see that the world is going to continue to have this dynamic of moving towards a cleaner energy environment. That road is going to be bumpy. And the fact that we can enable customers to have on that journey a complete suite of products across oil, gas, power and environmentals, that positions us in a very unique way to help our clients in one place be able to do all of that. On the – how the performance of the business itself, we feel good about it. You got to remember, in particular, in Europe, there were some headwinds, obviously, last year, both in energy and in the environmentals sector with the unfortunate war in Ukraine. We continue to watch the health of those markets. Obviously, our energy markets have come back very strong. And we continue to monitor both open interest trends as well as market data subscriptions within our environmental complex, which is at a record. We're looking at – we continue to look at active market participants. That continues to grow in our environmentals. So underneath the covers, it's a very strong market. We have 98% market share of the EUA market space and of what's traded at 96% in North America. So all that underneath the covers is really good. There's some natural tailwinds I mentioned last quarter as well within the European market itself, where a little less than 40% of the sectors in the European economy are…

Thank you. The next question today comes from the line of Kyle Voigt from KBW. Please go ahead, Kyle. Your line is now open.

Hi. Good morning. Just regarding the elongated sales cycle you mentioned again this quarter, we're seeing some competitors that have also experienced a similar dynamic, but other competitors, including one including one that reported this morning, noted that they're not seeing that elongated sales cycle in their enterprise data business. I guess I just want to hear whether you think there are any competitive share shifts that are occurring in that Fits business that you can see, or whether the slower growth is really entirely driven by the macro environment that we're in. And then also, if you could give some commentary as whether you're seeing any light at the end of the tunnel there in terms of inflections that you're hearing from clients that we may be getting to a better sales cycle environment as we head into 2024.

Hi, Kyle, this is Lynn Martin. Thanks for the question. So on the elongated sales cycle, if you look at the Fixed Income and Data Services business, we're definitely seeing it abate when you look at the other data services line. As Warren mentioned in his prepared remarks, we've actually been able to take share from some of the larger incumbents as a result of the significant amount of investment that we've made over the past few years in the delivery, in modernizing the tech stack associated with that business. So you're definitely seeing the elongated sales cycle abate there, given the share we're taking. On the fixed income data and analytics side of the business, we still see some of the effects of the elongated sales cycle. But importantly, what you're seeing is we are taking share in our End of Day Pricing business. We're continuing to take share there. We're continuing to see good growth in some of the smaller line items that make up that overall line item, including the Index business, which, as Warren said in his prepared remarks, is now about $526 billion in AUM benchmarked against it and some of the products that really go along with the trend of automation. So let me just unpack that a little bit. If you look at the big buzz word of the year in the industry, it's really been around the development and implementation of large language models. We're seeing good demand for, and as Warren mentioned in his prepared remarks, the adoption of our proprietary large language models. And you're seeing the effects of that come through in not just our other data services line and the revenue attributed to that line, but you're also starting to see that in other parts of our segments,…

Thank you. The next question comes from the line of Craig Siegenthaler from Bank of America. Please go ahead, Craig. Your line is now up.

Hey, good morning everyone. My question is on the Fixed Income business. So given the higher interest rate backdrop, many are predicting large bond reallocations over the next few years. So I wanted to see if you could walk us through your Fixed Income and Data Services business and provide your perspective on how this reallocation could impact the growth trajectories of the verticals inside this business.

Hi. This is Lynn again. That's a great question. So a couple of areas as you think about where the yield profile continues to lead. Obviously, the attractive yields in treasuries more recently is what has really driven some of the outsized gains that I just mentioned on the execution side of the business for the treasury execution business and the money market products that we have. The contrary to that you've seen is on the fixed income index business, where our capture rate, as we talked about on some of the previous calls, tends to be lower on our treasury index business. So AUM continues to grow, but it doesn't have a direct correlation to the revenue growth. It's not a one-to-one relationship. As you're starting to see the issuance profile start to return to normal, you will see that in a reallocation of assets under management to the higher capture indices, that being our credit indices, the muni indices and obviously, with the equity markets doing well, our equity indices. But you'll also start to see that impact our pricing and reference data end-of-day business because you will start to see new fund families emerge, new asset funds emerge, which you've not really seen over the last year. In contrast, over the last year, you've seen – where it's been particularly tough for the fixed income asset managers, you've seen the number of funds decline. We're starting to see green shoots for the reemergence of new funds being created. So I think you'll see a positive impact on a variety of our line items. But again, this is why we've set up the business in the Fixed Income and Data Services segment, in particular, to be an all-weather name to benefit from a variety of macro trends. So treasuries do well. That's going to impact the segment in one way. If munis do well, it's going to impact the segment in another way.

Thank you. The next question today comes from the line of Brian Bedell from Deutsche Bank. Please go ahead, Brian. Your line is now open.

Great. Thanks very much for taking my question. Maybe just to come back to the ICE Chat offering and the proprietary large language models. And particularly in energy, I think you mentioned it was helpful in stimulating volumes so far this year. Maybe if you could just talk a little bit more about what's actually driving that, how does the Chat offering add volume. Is it bringing new customers into the mix such as market makers? And then where would you think you are on this journey? It sounds like it's relatively new, but do you think you've already sort of enhanced the volumes with this or there's a lot more to come in the future?

Yes. This is Lynn again. That's a great question. It's actually a topic we love talking about. So we've had the existence of large language models in our ICE Chat offering for quite some time now. We started with the early stages of it, I'd probably say about a decade ago. But it's really been refined over the last, call it, five years. It's become a contributor though to the energy markets across asset classes, across oil, across gas and across – starting to impact the utilities as well. Effectively, what it does is it allows for automation. It knows if you and I are talking about the fact that today is Thursday or it knows if we're talking about a trade idea through those models. If it detects a trade idea, it will allow for the seamless transmission of that trade to our clearinghouses and our trading platforms. Additionally, it will give you some fair value analytics and additional metrics around it to allow you to perform that trade with confidence that you're getting a good price. So it's really helping the trader to automate the workflow. It's why it's gained popularity, particularly over the last couple of years as those models have gotten smarter as the technology has improved, quite honestly. But I think we're still in the early stages of this. It's still a small contributor to our volumes, but it's something we're incredibly excited about the potential for not just in energy, but if you think about the rest of the Fixed Income and Data Services segment for fixed income where fixed income markets are desperately requiring automation. So we think this – the concept has applicability pretty much across all of the markets that we operate, but we're seeing the early-stage benefits in the energy markets, as Warren mentioned in his prepared remarks.

Thank you. Our next question today comes from the line of Patrick Moley from Piper Sandler. Please go ahead. Your line is now open.

Yes. Good morning. Thanks for taking my question. So I just wanted to go back to energy. As you mentioned earlier, you're seeing strong volumes, strong open interest growth. I think even though you've had some easier comps, I think it was still the strongest 2Q in your history. So just when we look at the macro landscape, I was hoping you could maybe give us your outlook for the back half of this year in energy. And I think my predecessor asked this on the last call, but is there anything out there right now that maybe you're keeping an eye on that could derail the strong momentum you're seeing in energy? Thanks.

Thanks, Patrick. This is Ben. So it's clear to us that you got several underlying trends going on in the industry. You continue to have well-publicized underinvestment in legacy energy infrastructure that can cause supply shocks. You've got overall and broadly, electronification, and energy markets continues to take hold. But each of the energy markets and the new innovations that we continue to launch are at various ends of the spectrum of how mature they are in adopting electronification. The energy markets are becoming more global. As supply chains continue to evolve and change, those markets are becoming global, and natural gas is now freely transported around the world in terms of LNG. You also have a trend around precision and risk management. Customers don't just want to trade big benchmark contracts, but they want to trade those in parallel to deep liquid markets that are at the point of production and consumption of where they're concerned about and have to actually buy the product. And there's no – questionably, the last trend would be a move towards greener energy. And we've built our business with a very long lens towards helping our customers manage risk through all of these. We have a deep liquid set of contracts, hundreds of them around the world. We have a lot of different pricing points across each of those sectors, whether it's commodities, energy, cleaner fuels, environmental markets, gas, power, you name it. We built our business with that diversification and with our customers' needs in mind. And we see the setup is great for us. You look at just the results that we've had. We're at or near an average daily volume market share high in crude oil and across our global oil complex. We're adding open interest market share high in…

Thank you. The next question today comes from the line of Alexander Blostein from Goldman Sachs. Please go ahead, Alexander. Your line is now open.

Hi. Good morning. This is actually Aditya filling in for Alex. Thanks for taking the question. Another question within fixed income on the execution side. We've seen continued progress in fixed income execution, although from a small base. You've been adding capabilities here with the recent launch of the Sweeps Protocol. Can you provide more KPIs for this business? What are your electronic markets like in IG and high yield? Where do you see it going over the next 12 months? And lastly, how does price compare to incumbent platforms and protocols that you compete in? Thanks.

Yes. This is Lynn. Thanks for the question. So traditionally, on the execution side, we've operated in the – our core market's really been the muni market. Now I think what's really encouraging about this quarter is you saw strong growth from us even though the muni markets have had muted volatility, muted activity this quarter. And I think that's really been attributable to the fact that we really have spent the last couple of years building out our distribution framework and focusing on building our distribution framework and getting access to the institutional users, but also continuing to gain share in retail and wealth. So despite the fact that the muni markets have been quieter in Q2 than over the last year, we were able to gain share, continue to gain share in the retail and wealth side of the business. Now importantly, because we had done the development efforts and the integration efforts into the institutional side of the business, the treasury markets, which had a much more attractive yield profile, were able to have outsized results, which drove the growth in this quarter, which you saw that coming from not just retail and wealth segments, but also the institutional side of the business. And as you noted, we have made significant investments in the technology because the distribution has been there into the institutional side of the business in addition to the traditional wealth and retail side of the business. When we upgraded the technology to perform our sweeps as we announced earlier this week, we've been able to start to gain a bit of share on the corporate side of the business, U.S. corporates in particular, particularly investment-grade over the last few months. Now that's still very early days, but we're optimistic because of the investments that we have made in the platform not just on the technology side, but also building the distribution over the last couple of months and doing it on a market-by-market basis.

Thank you. There were no additional questions waiting at this time. So I'd like to pass the call back over to Jeff Sprecher for any closing remarks. Please go ahead.

Well, thank you, Bailey. Thank you all for joining us this morning. And I'd also like to again thank my colleagues for delivering the best first half in our company's history. And I'd also like to thank our customers for their continued business and for their trust. We look forward to updating you again soon as we continue to innovate and build on this all-weather business model that generates growth on top of growth. And with that, I hope you all have a great day.

This concludes today's conference call. Thank you all for your participation. You may now disconnect.