Q1 2022 Intercontinental Exchange Inc Earnings Call
Good day and welcome to the ice first quarter 2022 earnings conference call and webcast.
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Please note. This event is being recorded I would now like to turn the conference over to Mary Caroline O'neil head of Investor Relations. Please go ahead.
Good morning, Ice's first quarter 2022 earnings release and presentation can be found in the investors section of the ice dot com. These items will be archived and our call will be available for replay.
<unk> 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 referred to our 2021 Form 10-K.
And other filings with the SEC. In addition, the press release announcing the ice and Black Knight transaction includes important disclosures that apply to this call. Please also note that this call does not constitute an offer to sell or buy or the solicitation of any offer to buy or sell any securities nor shall there be any sale of securities in any jurisdiction in which such offer.
Or solicitation or sale would be unlawful prior to registration or qualification under the securities law of any such jurisdiction.
No offerings of securities shall be made except by means of prospectus meeting the requirements of section 10 of the Securities Act of $19 33 in connection with the proposed transaction ice will file with the SEC a registration statement on form S. Four to register the shares of ice common stock to be issued in connection with the transaction. The registration statement will include them.
Proxy statement of Black Knight that also constitutes a prospectus of ice data.
The definitive proxy statement perspectives will be sent to the stockholders of black Knight and seeking their approval of the transaction and other related matters before making any voting or investment decision.
<unk> and security holders of ice and Black Knight are urged to carefully read the entire registration statement and proxy statement prospectus when they become available as well as any amendments or supplements to these documents because they will contain important information about the proposed 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 in our core business performance, you'll find a reconciliation to the equivalent GAAP term in the earnings materials. When used on this call net revenue refers to revenue net of transaction based expenses and <unk>.
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, Chairman and CEO , Warren Gardiner Chief Financial Officer.
Ben Jackson, President and Joe Tyrrell, President of ice mortgage technology, I will now turn the call over to Warren.
Thanks, Nancy good morning, everyone and thank you for joining us today I'll begin on slide four of the earnings supplement with some quick highlights from our first quarter results and then I'll turn it over to Jeff to discuss the exciting transaction, we announced yesterday afternoon.
First quarter adjusted earnings per share totaled $1 43.
Up 7% year over year, marking the best quarter in our company's history.
Net revenues totaled a record $1 9 billion and increased 6% versus last year.
Total transaction revenues grew 4%, while total recurring revenues, which accounted for nearly half of our business increased by 9%.
Importantly, this is on top of 10% growth in the first quarter of 2021.
First quarter adjusted operating expenses totaled $746 million in the middle of our guidance range had it not been for a few million dollars of severance adjusted operating expenses would have been towards the low end of the range.
Welcome to the second quarter, we expect adjusted operating expenses to be in the range of $740 million to $750 million.
First quarter adjusted operating income increased by 9% to a record $1 $2 billion of free cash flow totaled $660 million, which we largely deployed in the form of share repurchases of $475 million.
Now, let's move to slide five where I'll provide a quick overview of the performance of each of our segments.
First quarter exchange net revenues totaled $1 1 billion, an increase of 12% year over year. This strong performance was driven by a 36% increase in our interest rate futures and a 16% increase in our energy revenues revenues within our global natural gas and environmental products, which represent approximately 40% of energy.
<unk> increased by 30% in the quarter.
Recurring revenues, which include our exchange data services, and our NYSE listings business increased by 7% year over year, including 13% growth in listings.
Turning now to slide six.
In our fixed income and data services segment first quarter revenues totaled a record $509 million, a 9% increase versus a year ago transaction revenues increased by 28%, including 9% revenue growth in ice bonds and 33% growth in our Cts business driven by rising interest rates and macro.
Economic uncertainty.
Recurring revenue growth, which accounted for nearly 85% of segment revenues grew by 6% in the quarter. Once again, driven by double digit growth in our index and consolidated feeds businesses and strong performance from our ice global network and other data services businesses.
And importantly annual subscription value or <unk> enters the second quarter up over 6% year over year.
Shifting to mortgage technology on slide seven.
First quarter revenues totaled $307 million, while total mortgage technology revenues declined year over year in the first quarter. We once again outperformed the industry that experienced a 40% decline in origination volumes, including an 80% decline in term refi volume.
Recurring revenues, which accounted for over half of segment revenues totaled $156 million and grew 24% year over year.
As the mortgage origination backdrop continues to normalize customers are in search of both automation and greater efficiency a trend that contributed to one of the strongest sales quarters for our data and analytics product suite, including the implementation of our analyzers by JP Morgan Chase.
In addition, based on our strong performance through the first quarter of 2022 and the visibility we have into the current sales pipeline. We believe recurring revenue growth in our mortgage business is trending towards the high end of our low to mid teens guidance range.
In summary, while rapid rise in interest rates may have weighed on mortgage transaction volumes during the quarter that same macroeconomic factor also provided a tailwind to our interest rate commodity and fixed income businesses and once again alongside strong growth across our recurring revenue base helped us deliver another record quarter for revenues adjusted op.
Operating income and adjusted earnings per share a testament to the all weather nature of our business model with that I'll hand, it over to Jeff.
Thank you Lauren good morning, everyone and thank you for joining US today, we are here to discuss the financial results of the best quarter in <unk> history, along with our plan to continue our track record of growth with our agreement to acquire the public company Black Knight.
Black Knight is an important piece of financial market infrastructure that we believe will allow us to continue to reduce the cost of home borrowing when coupled to the other U S mortgage industry assets that we built and acquired.
This proposed acquisition is another step in the journey that ice has embarked on since its founding.
As an early entrepreneur I studied the exchange space and I discovered that the largest exchanges all had one asset class and common interest rates and what became abundantly clear during the financial crisis was that hedgers, who thought they had effectively manage risk using legacy interest rate products, we're doing.
So very in perfectly coupled that with the analog to digital conversion that's been happening the markets more broadly and we saw a powerful opportunity to redefine our exchange business and we've been diligently working on this thesis for more than 15 years.
To compete with hedging products and the corporate borrowing area. We acquired credit acts in 2008 married it with the board of trade clearing Corporation in 2009, and launched a cleared credit default swap market that this quarter generated $72 million of revenue and grew 33% year over year.
We acquired the life exchange in 2013 and revenue from its interest rate products grew 36% in the quarter.
We acquired interactive data Corporation in 2015 and marrying it to the Bank of America Merrill Lynch credit and Bond index business in 2017 to build tools and launch a powerful suite of corporate borrowing indices and reference data.
We doubled the revenue growth in those businesses to an average annual rate of 6%.
In the consumer lending area, because the largest amounts of consumer borrowing are tied to home mortgages, we pursued opportunities in the U S mortgage space acquiring the mortgage electronic registry service in 2018 simpler file in 2019 in early May in 2020.
When coupled together these technologies can offer lenders the potential to shorten the time that it holds interest rate risks market exposure from the time of the consumer rate lock until the time of wholesale funding fundamentally changing the risk profile for lenders and by leveraging our data expertise across the company. We recently created.
The ice rate lock index and have announced that we're launching a futures contract on it in the coming weeks, creating an even more precise interest rate risk management tool.
Now by adding Black Knight to our solution set we have the potential to further improve the capital markets ecosystem that surrounds the funding of U S home mortgages b.
Derisking these markets for participants by shortening the duration when interest rate risks are held making data more transparent to the risk holders and creating more efficient hedging markets for those involved should ultimately lower the cost for the entire market.
There's no question that our thesis of producing better interest rate products and tools has been proven out as we've transformed the way risk is managed in the markets. We serve and our thesis continues to compound on growth as we innovate new interest rate hedging tools.
So let me now ask you to turn to slide six of the ice and Black Knight transaction deck.
Yesterday afternoon, we announced that ice has entered into a definitive agreement to acquire black Knight for $85 per share or a market value of $13 billion.
Consideration is expected to be in the form of a mix of 80% cash and 20% stock and the transaction is expected to be accretive to adjusted earnings per share in the first full year following its completion.
Warren will discuss the financials in more detail, but first I'll discuss the strategic rationale of this very exciting transaction.
Black Knight is a premier provider of integrated mission critical software solutions and data and analytics that serve the U S mortgage and real estate markets.
Knight suite of solutions span across the mortgage workflow and are highly complementary to ice's existing businesses.
By expanding our solution set beyond originations, we will be able to deliver a life of loan platform that reduces friction and drives transparency across the workflow.
The integration of our solutions will strengthen the overall mortgage ecosystem, bringing more choice and delivering efficiencies for lenders Servicers partners and ultimately the end consumer.
This combination will also expand the addressable market in our mortgage business to $14 billion and better positions us to penetrate our existing $10 billion Tam.
Knight will complement our all weather business model with a high growth and highly recurring revenue base and finally, we will leverage <unk> technology expertise to Modernise Black Knight's technology stack, while tightly integrating our offerings to enable the many opportunities that are in front of us.
Turning to slide seven.
Much like the history and culture at ice Black Knight's mission focuses on customer service and product excellence.
The expansive product suite and compelling value proposition Black Knight brings to its customer base has enabled consistent revenue and EBITDA growth a trend that we believe will only continue as a part of ice.
Moving now to slide eight you'll find a summary overview of our strategic rationale, which I will discuss in more detail with the subsequent slides beginning now on slide nine.
The opportunity we see in the mortgage space is much like the opportunities that we're executing against other interest rate markets and asset classes.
Integrating data and technology across the entire workflow to bring greater transparency and efficiencies to the broader ecosystem.
The very manual loan origination process and its extensive regulatory oversight has driven the cost to originate a U S home mortgage to nearly $9000 with approximately one quarter of that amount being related to customer acquisition costs.
As a result more lenders are beginning to retain the servicing rights of the mortgages that they originate to recapture of previous customers and reduce their acquisition costs by.
By connecting Black Knight servicing system to the underwriting automation and consumer engagement solutions at ice we have an opportunity to create a life of loan platform that will enable lenders to realize a customer for life.
This connection will lower the acquisition cost per lenders, enabling those savings to be passed on to the consumer.
Turning now to slide 10.
Data is a core competency at ice from our earliest days, we recognize the value of leveraging data to drive transparency and we continued to build on that expertise by broadening our datasets connecting data across asset classes and innovating for our customers. The data sets that exists the cost the complementary business.
As of ice and Black Knight presents an untapped opportunity to apply that same playbook within home mortgage.
With access to solutions, such as Black Knight's MLS listing services and real estate data, we will have a presence in the home search process. In addition, there is an opportunity to leverage black Knight's tax data and property valuation analytics to further enhance the underwriting process and provide our customers additional.
Insights into rapidly changing market dynamics will also have the opportunity to expand our existing ice mortgage technology solution set in the secondary markets, increasing the transparency for servicers and investors by enabling them to better understand their portfolio valuation performance and risk.
And by combining this rich data with Icf's expertise in fixed income and capital markets, we will be able to provide even greater transparency to the fixed income markets through transaction based data for more accurate pricing and prepayment modeling.
Turning now to slide 11.
As we've demonstrated in our other asset classes, the integration of data and technology across the mortgage workflow should enable greater automation and in turn reduce friction to help lower the cost to originate a home mortgage for all parties, ultimately, making alone more affordable and accessible for the American homebuyer.
By adding content to our consumer engagement solutions, we plan to provide consumers and investors greater clarity and insight into unique loan products and the key metrics that impacts homeownership, such as interest rate levels and lending policies ultimately improving the overall home buying experience for the <unk>.
Sumer.
Lenders will also be able to proactively underwrite current customers for future home lending opportunities by helping consumers lower their housing payments by refinancing out of additional interest rate overlays or reducing their risk adjustments to the original mortgage and leveraging common data sets across the entire mall.
<unk> cycle could reduce data entry errors and erroneous fees that today impact consumers directly.
We also see an opportunity to develop innovative analytics, helping lenders connect with potential buyers and historically underserved markets and identify minority bias in the home valuation process. These are just a few of the many examples of the many opportunities that we see to leverage our data and technology.
<unk> to support potential homeowners and make the dream of home ownership a reality.
Moving to slide 12, the workflow efficiencies. This combination will deliver underpin an expanded addressable market of $14 billion, including $2 billion from servicing solutions and an additional $2 billion within data and analytics.
Our combined businesses will bolster our point of sale and consumer engagement solutions, enabling us to better serve that portion of our existing Tam.
In order to provide you with additional transparency into this opportunity. We've separated this 2 billion dollar addressable market from the application processing and underwriting segment, which here is largely made up of our loan origination technology.
Black Knight also brings capabilities that will allow us to access part of our existing Tam that we don't have a solution for today, such as their hedging and trading platform <unk>.
These capabilities combined with our deep expertise in trading and clearing unlock a longer term opportunity to improve transparency for the secondary market participants in the form of a loan exchange.
And finally, we will be better positioned to monetize our current $10 billion Tam through opportunities to promote existing products across an expanded customer base.
Moving to slide 13 black.
Black Knight's highly recurring more predictable revenues will complement <unk> existing revenue streams and increase our mix of high growth recurring revenues within ice mortgage technology, our mix of recurring revenues will increase from roughly 50% to approximately 70% and total ice revenues, but without be over.
50% recurring on a pro forma basis.
Importantly, these high growth recurring revenues are underpinned by mission critical data and technology, that's embedded in our customers' workflows and by adding more stable revenue streams to our current mortgage technology revenues, we will improve the visibility and durability of our earnings and cash flow further comp.
Mentoring, our all weather business model.
Let me now turn the call back over to Warren and he'll discuss the financial details of today's transaction.
Thanks, Jeff Please turn to slide 14.
As Jeff noted yesterday, we announced we have entered into a definitive agreement to acquire black Knight for $85 per share or a market value of $13 billion. The.
The share prices in line with Black Knight 52 week High just achieved on December 32021 represents a fully synergize to EV to EBITDA multiple of approximately 15 times forward.
We anticipate the transaction will be accretive to <unk> adjusted earnings per share in the first year post close with adjusted earnings accretion accelerating thereafter.
Embedded within our purchase value or cost synergies of approximately $200 million with one third realized in year, one two thirds by year, three and 100% by year. Five these cost synergies are expected to be driven by the integration of corporate functions real estate optimization and a more efficient use of shared services across the combined platform.
When combined with the remaining Ellie Mae synergies total expected cost synergies represent approximately 15% of the pro forma IMT Black Knight expense base.
Shifting to revenues, we've underwritten and approximately $125 million of net revenue synergies by year, five representing roughly 1% of our expanded $14 billion addressable market.
These synergies will largely be driven by cross sell of existing products across our expanded customer base.
Transaction consideration will come in the form of 80% cash and 20% stock.
We plan to finance the cash component through a combination of peripheral paper newly issued debt and cash on hand at the time of close which we currently anticipate will be in the first half of 2023.
Gross leverage at close is expected to temporarily peak at approximately four one times pro forma EBITDA, which is below the four in a quarter peak leverage we reached with Ellie Mae.
We believe this financing structure demonstrates our commitment to maintaining a solid investment grade rating and as of this week, we've elected to suspend share repurchases until our leverage falls below three and a quarter times, which we anticipate will be towards the end of 2024.
You will note on appendix slide 24, our strong track record of deleveraging post acquisition.
As with Ellie Mae, we are targeting normalized leverage levels and a $2 75 to three range. We believe our enhanced cash flow generation will allow us to achieve this deleveraging path, even as we continue to invest in our business and our people while also continuing to grow our dividend.
Moving to slide 15.
Based on first quarter results and pro forma for Black Knight, we expect that our mortgage segment will represent approximately 30% of total ice revenues compared to 16% previously for.
Recurring revenues within our mortgage segment are expected to account for nearly 40% of total ice recurrent revenues from mortgage transaction revenues represent only 10% of total highest revenues.
In addition, upon close we anticipate providing additional metrics to help investors better understand the progress, we're making as a combined platform and the secular growth opportunities that underpin the analog to digital conversion occurring within the mortgage space.
With that I'll happy to take your questions in Q&A, but I'll first turn the call back over to Jeff for some closing comments.
Thank you Warren I'll conclude my remarks on slide 16.
Since our founding ice has operated with a strategy to build tools and markets for institutions and consumers, which operate in the white space of the inefficiencies of legacy markets and.
And we seek to do this smartly in a manner that enables us to grow our earnings in all economic and interest rate conditions. So that ice is truly an all weather road story something that does not exist in a single market or asset class alone.
This vision is one that we continue to organically build out ourselves, but one only has to look at our acquisition history, including my original acquisition of the founding company to ice to see that it's valuable assets become available to us at prices that meet our disciplined M&A criteria, then we'll accelerate our build out plans via.
<unk> and.
And through thoughtful integration leveraging the infrastructure and expertise of the acquired company, we advance our vision and accelerate our goals to fundamentally transform the markets in which we operate.
Our proposed acquisition of Black Knight is another important piece of this vision.
I'll now turn the call back to our moderator Betsy and will conduct a question and answer session.
Thank you.
We'll now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
You are using a speakerphone please pick up your handset before pressing the key.
<unk>.
Is it any time your question has been addressed and you would like to withdraw your question. Please press Star then two.
Please limit yourself to one question and jump back into the queue. If you have a follow up.
At this time, we will pause momentarily to assemble our roster.
The first question today comes from Rich Repetto with Piper Sandler. Please go ahead.
Yeah, Good morning, Jeff and good morning worn and congrats on the announcement of the acquisition.
I guess the <unk>.
Probably the first reaction we got from <unk>.
Investors in the space.
It was on the regulatory risks and the antitrust.
Potential issues. So I guess just the question is how comfortable are you.
With this.
Our trust risk.
The front end the yellow vest systems do you think youll have to divest of anything.
To get this deal through and.
And what kind of impact.
Would you expect if you do.
Rich joined here by Ben Jackson, and Joe Tyrrell, who are going to run these businesses for us So let me let.
Let me turn it over to Ben.
Hey, rich good question and obviously, it's a large deal. So we expect it to take time for regulators to understand.
The complementary nature of our two businesses.
But at the end of the day, we're confident that they'll come to the same conclusion.
But we did and also we had and as well as Black Knight had legal counsel look at this in detail.
And came to the conclusion that these are 100% complementary businesses that service different parts of the mortgage ecosystem.
And at the end of the day and you heard it through the prepared comments through Jeff's comments today that bringing these businesses together is the best way to further.
Advance innovation in the mortgage industry and bring efficiencies that are desperately needed to the servicers to originators and then through to the end customer.
And when I say that the businesses are complementary and Jeff referred to slide nine in the deck. When he was going through it which I think is a great picture of it.
You can see that with black Knight businesses they start.
Really in the front end on the real estate side, where we do not have assets and then they pick up again.
Post the closing process, where they have services and software that they provide helps it helps on the servicing side of the business to manage the relationship between the customer and the servicer through the life of the loan those are all services that we do not have today.
Jack Nice other core business is data assets. So they are proprietary data assets and very unique.
Capabilities, there that we do not have that we believe are going to be very beneficial to our clients.
Third they have complementary loan origination system, which is one of the things that you just highlighted but it's important to point out that the customer.
Customers that they cater to are fundamentally very different have a completely different mindset to the customers that we service today at ice mortgage technology.
They provide a service and it's installed service. It's a single instance for a single client it's very highly customized based on the experience that that lender may want to provide for their client, whereas at ice ours ours is a very standardized solution and all you can do is do some basic configuration around the.
Perimeter of it our plan is to support and invest in both to really help drive the efficiencies through the industry by providing a complete front tabak service.
And the last thing I would point out as Youll see in the expense synergy numbers that Warren went through by historical standards for us they are very low and as Warren pointed out.
Most of these synergies are in the areas of corporate real estate our location strategy as we found Jacksonville is a low cost place in the U S to do business and has a great resource pool.
So those are the key areas that youre going to see synergies coming out of the deal and again at 15% of the combined expense base, it's very low.
Great. Thanks for the response been.
Congrats Jeff as you try to influence another asset class.
The next question comes from Alex Kramm with UBS. Please go ahead.
Hey, good morning, everyone I'm, just going to ask a bunch of boring financial question. So on the deal one with interest rates, obviously heading higher would be curious what the interest rate is one that you're assuming in the deal mass.
Speaking of deal math curious when you talk about accretion in year one.
Is that against a.
And earnings expectations includes buybacks or not and then lastly.
What's the expected growth rate down the line for the business. When you did the Ellie Mae deal you said the mortgage mortgage business, where you should be growing in eight to 10 range I think black Knight has grown 8% historically I think that's in your presentation, so you're still comfortable that the mortgage.
<unk> for you is this 8% to 10 kind of long term grower or should we be thinking about that business differently in the future. Thanks.
Yeah. Thanks, Alex So I'll start with that last question first so so yeah short answer is yes. So I think if you think about what black Knight's outlined in this revealed and through our due diligence. We read the same thing that pointed to a guidance range of around 7% to 9%.
Over the long term largely recurring revenues to as you've heard US note a couple of times already in the prepared remarks, I think the first quarter two by the way is a great example of that where you were I noted in my prepared remarks that that mortgage volumes were down significantly.
Significantly, including term refi volumes down which are very rate sensitive down about 80%.
In that environment. They grew their revenues on an organic basis about 9% that released earnings. This morning. If you want to go check that out so I think it's a great example.
The resilience of that revenue stream against what was a pretty challenging macroeconomic backdrop. So so yes. So when you couple that with our 8% to 10% as you noted so that's what we've talked about over a longer longer period of time on average and throw it in the revenue synergies that we've outlined yeah youre very much solidly in that high single digit.
8% to 10% call it range for the combined business.
And so yes, you've got a very high single digit grower, that's still got a lot of recurring revenue.
And again collectively position to operate with an expanded addressable market.
Unlike we are today, so I think.
Very well positioned kind of moving forward.
For that business with a more resilient revenue stream as you well if you will in <unk>.
Terms of your first question sorry, if these ones because they are kind of quick ones. The rates were assuming there. So it's a mix of commercial paper and debt.
You can think about it on a blended basis kind of being in the 445 kind of.
Percent range.
In terms of what we assumed for financing.
And then on accretion year, one I think you asked if buybacks were included in the base and so yes. We did include those as part of the base in terms of how consensus would be looking at them hopefully that helps financials. Those questions. Thank you very much very helpful.
The next question comes from Gautam Sawant.
Golan from Credit Suisse. Please go ahead.
Good morning, and thank you for taking my question can you tell us how both companies are positioned against the rising mortgage rates and higher home price backdrop, I understand that black Knight has a higher mix of recurring revenues, but can you help us understand how you foresee the backdrop impacting revenues.
Yes, thanks for the thanks for the question this is Ben.
And when you.
When we look at think about the deal and we thought about why we should do this deal. We had we had conviction on it because as I as I mentioned before at the end of the day the combination of these two businesses.
Provides an opportunity to create a lot of efficiencies in a market, that's very inefficient and one of the one of the marketplaces in the industry Thats. The most inefficient thats. The most analog is the mortgage space and we think that this is an opportunity to take to rare sets of assets that are 100% complementary and bring them together.
And we see the revenue opportunities here with the business is that again the businesses are hundred percent complementary to one another.
Where were we and on the origination side and through the electronic closing side, they pick up with a great servicing business.
Black Knight is a tremendous set of data and proprietary data assets that we believe will be able to cross sell to our clients are going to be in high demand with our clients. Even in this rising rate environment and they have that complimentary loan origination system that we fully plan to.
Support.
The other side of it is that they have or they are going to help continue the journey. We've been on since we did the deal with ice mortgage technology to move more and more of the revenue towards recurring and you saw that in our results in the first quarter recurring revenue grew 24% again against that backdrop of a rising rate environment the mix as Jeff mentioned in his.
His prepared remarks of recurring revenue, that's counter cyclical and black Knight is substantially higher than ours, and we'll move our mortgage business to 70% recurring in.
In addition in this rising rate environment, we're going to be able to go after the expanded Tam of $10 billion go into 2000 14 billion.
And the components of that are adding a servicing tam of $2 billion and adding an additional $2 billion towards our data and analytics and give us the ability to accelerate going after.
The existing <unk> that we've seen so given the resiliency of that business model that Black Knight has continuing to shift more of the business towards recurring you have a millennial generation Thats just now coming into their home ownership years that has very substantial population in the U S. That's going to be entering the mortgage buying market do we see.
All of those as trends that will help support.
The long term goal of eight 7% growth for the business.
And then if I could add onto it then just mentioned we have two slides that somewhat.
Somewhat illustrate the points he was making in the appendices slide 30, which if you really look at that millennial home buying generation.
You see why we constantly are hearing about home shortages in the United States. There is an incredible demand for homeownership coming from that group that will be unabated and similarly, the slide before that 29, new look at the total U S housing stock and you can see the long term trend of continued growth.
In homeownership and those massive demographic trends are what give us confidence on moving our business to a more subscription based business.
That will essentially be attractive to lenders, who are trying to play against that trend.
Got it thank you.
Okay.
The next question comes from Dan Fannon with Jefferies. Please go ahead.
Thanks, Good morning wanted to follow up on the revenue mix of Black Knight and thinking about the servicing component what is the growth algorithm of that business is it kind of just loans outstanding I understand it's quite recurring but curious about pricing power in this business.
And then also <unk>.
<unk> talked about revenue synergies and the opportunity I guess give us the or what do you think are the most logical easiest kind of point to cross sell opportunities within the two product sets as you combine them.
Hey, Dan its warrant so I'll hit your servicing growth algorithm question first and I might hand, it over to Joe to talk about some of the revenue synergies so thinking about the servicing business, yes, it's kind of been a mid single digit grower I mean, its been fluctuating a little bit here and there it depends but but largely recurring revenue in nature, if not entirely recurring revenue in nature and base.
On subscription revenues, but also loans outstanding to as well, which as you see there's a slide in our deck around home stock in mortgages outstanding you see those pretty pretty consistent growth.
Over the last few years over the last number of years you can you can pick your time period frankly.
And it consistently grows and so that is that in addition to the introduction of new products.
And things of that nature sort of adding revenue per loan is how you get to a growth algorithm around that range for that business.
And this is Joe Terry I'll talk a little bit about the revenue synergies and the opportunities that this combination provides to us so more and talked about the opportunity to through these combined entities accelerate our penetration.
The original $10 billion Tam.
That comes to us because of the highly complementary product sets, we have available and actually the opportunity to cross sell products into both basis. So for example, we're able to take ice product solutions like our consumer engagement suite that has lead management and lead distribution capabilities as well.
Our point of sale system.
Also our underwriting automation tools that are getting a lot of adoption as Warren mentioned earlier, even chase's now deploying our analyzer solutions.
Their system as well as our market leading E recording capability. So those are all opportunities that we can sell existing IP solutions into the Black Knight base.
We can also take black Knight products and sell them into the ice data. So obviously servicing and I'll talk about the trend that we're seeing with lenders starting to retain more servicing in just a moment, but also the secondary marketing technology things like hedging and loan trading platform that they provide we.
We also now will have the opportunity to recognize I think of this as more of an MSRP versus some of the transactional fees that we've been able to generate on a network black Knight products are actually available today on our network one of the things that our network does it is it really enables access to choices for lenders and so we've had a law.
Long standing relationship with many black Knight solutions being available and we will now have the opportunity to realize kind of a list price for those fees instead of just the transactional components that we've had and then.
So that's true for things like Tech service property valuations and obviously optimal blue has been on our platform for many many years.
We also now have the opportunity to really expand how we've been thinking about data historically, our data Tam has really been focused on selling data within the mortgage industry now as we look at these highly complementary data sets. It gives us the opportunity to think about licensing. This data. So we've just recently released our firm.
<unk> kind of true data product using the mortgage data that had come from early may through our rate lock indices, and we've announced that we intend to put a futures contract against that as we are able to complement all of that origination data with the secondary marketing data that we get from Black Knight, coupled with the servicing and loan performance data.
We now have a really unique data set that has just mentioned is going to provide a completely different level of transparency and visibility into how the secondary market thinks about pricing a mortgage backed securities and certainly modeling out prepayment.
This also provides us the opportunity to enter new tamps. So obviously servicing as Ben talked about his $2 billion Tam that we now have access to that previously we've had no offerings and didn't include in our current Tam what.
What we're seeing there the servicing side as more lenders as Jeff mentioned are retaining the servicing rights, but what they've really lacked the ability to connect everything from the point of thought of engaging a consumer through the loan manufacturing process into servicing and keeping that as almost a closed loop ecosystem, where they're constantly monitoring.
Loans to identify opportunities to help consumers improve cash flow by getting out of some of those risk adjustments that were put in place at the time of origination by monitoring things like home value appreciation or changes in the.
Economic situation of those consumers, where now those lenders can proactively go out and help them.
Improve their cash flow, which ultimately lowers default rates for consumers, but enables those lenders to recapture that consumer without incurring that acquisition cost.
Also gives us the opportunity to enter into a realtor Tam.
That data is really interesting to us, especially on the multiple listing service side and so think about the opportunities. It's now combining data from consumer behavior to home listings all the way through the loan performance.
In the data Tam, we see that as that unique opportunity from a licensing perspective, which we believe increases our previous data Tam by another $2 billion.
And then lastly, I would just say that this really helps us to accelerate our shifts that we've already been engaging on to more of a recurring revenue a focus versus the transactional.
As interest rates rise what happens in the servicing business as those loans stick in the servicing longer so you have.
A more consistent recurring revenue base and servicing whenever interest rates increase now as interest rates decrease will be able to.
The capitalized on the monetization opportunities in the origination side. So it really gives US now this end to end somewhat counter cyclical recurring revenue stream.
Thank you.
The next question comes from Ken Worthington with Jpmorgan. Please go ahead.
Hey, good morning, and thank you for taking the question and we're restricted on the deal so I'll pivot to to.
Maybe European energy.
So I wanted to hear your thoughts about the impact that the Ukraine crisis could have on your energy business in Europe , and maybe the ice exchange business more broadly.
Really really trying to focus on the longer term.
The sourcing of European gas and oil maybe changing meaningfully for the longer term. So if we could start out maybe whats the changes in the sourcing of European oil mean for Brent is that largely a zero sum game or or is it a positive as Europe moves off a Russian oil.
Two same question on European gas as we see more north African gas and maybe LNG from the U S in Qatar.
Again as Euro sum game are more positive and then lastly, the ancillary impacts on the non European energy businesses. It seems like there could be a positive impact here on carbon freight showing yeah, Houston U S gas so.
Any thoughts on <unk>.
Collectively than the non European energy impact as well.
Yes, those are good set of questions.
So well, let me we had a great quarter.
Amongst all that uncertainty that existed in the energy market Senate Peel back.
What happened in the quarter it actually answers a number of the questions that you.
Postulated.
First of all.
We see record open interest in our energy space. So there's more engagement if you will of managing risk in the energy space, but when you Peel back well where did that open interest come from there is definitely some.
Trends that are engaging on on where your question is heading.
<unk>.
First of all we saw that.
A lot of price volatility obviously in Europe .
That happened quickly due to war and whenever Theres high price volatility.
That is an input into the margin model. Since you are essentially margining for the largest one day price movement.
And so margin rates go up and so what we saw was a movement towards the use of options.
And away from the underlying towards the option against the underlines why does that happen well, it's a little less expensive to control the risk in an option. It's also much less precise you're hedging a range of outcomes instead of a specific outcome. So people have.
Moved and it's probably somewhat temporary.
Because high prices themselves don't cause high margins, it's the price movements and the market is increasingly.
As you are alluding to.
Trying to figure out the long term ecosystem for energy in Europe , and and as they do that the prices will stabilize, albeit at most likely at higher rates.
Another thing that.
Has happened is that in a number of our products, particularly in Europe .
But even Brent oil globally.
People can deliver Russian energy into those indices or into the into those products that are physically delivered and wall.
Many of those Russian products are not subject to sanctions and in fact certain countries in Europe are even advocating the use of those products the market itself.
Due to moral and ethical issues. Many companies have decided not to participate in those and so we are.
Launching a whole new suite of.
Our products that are ex Russia energy and Theres been a lot of demand for those products and we've got regulatory approval and youre going to be seeing those rolling out we have very high expectations for those products given the.
Chad that's gone on in the way we've worked with the industry to develop those ex Russia Energy project then.
The last thing that you alluded to is that Youre seeing an increase volume.
Volume in the trading of U S. Natural gas again, we see Europeans who are sensitive to.
Hedging using European natural gas.
Because it may have rushed molecules in it.
Hedging their exposure somewhat in the United States.
Obviously, theres liquefied natural gas exports out of the U S. Those are relatively limited, but where where there is capability people are leaning into those capabilities and you've seen this increased.
In U S natural gas trading so all of that amalgamation.
Somewhat bodes well for our business in that.
In a world where markets are in contango Pi open interest foreshadows future volume and revenue growth for us in trading and we've got this new suite of products that the market is anxious to adopt.
And that's going to give us even more diversity in basis trading against our historical business. So we feel very good about the direction that the company is heading in even though we're helping people to manage risk in a very unfortunate situation.
Okay, great. Thank you so much for that.
The next question comes from Chris Allen with Compass point. Please go ahead.
Good morning, everyone. Thanks for taking my question I wanted to follow up on some prior questions maybe some different angles.
Just from a customer base perspective, where does this became just black Knight.
Ed any present, new opportunities from penetrate different customer bases I believe they've had some recent some recent success in penetrating some of the non bank originators, who used homegrown solutions and also when you put the the whole franchise together.
Who is going to be the main competition from a longer term perspective.
So this is Joe I'll give you the answers there.
When we think about the customer basis again, if you go back to Ben's comment regarding explaining the differences between encompass and empower these.
These two solutions really now give us the opportunity to address any technology philosophy that a lender might have someone once really a single tenancy highly customized solution. We will have an offering there if they want a more kind of commercial highly configurable, but multi tenant solution will have an offering there so because these <unk>.
<unk> are so complementary we believe as it gives us an opportunity to really accelerate that penetration of the current Tam.
There obviously are some customers that we haven't comment.
Does with within ice Theres, so many different products that we offer but what we really see is the cross sell opportunity into these two basis, so even where we might have a similar customer perhaps it's a customer that's using encompass and also using MSP. The servicing platform. There is still so many other.
<unk>, we now have available jointly that we can cross sell to that individual.
Under if you go back and look at slide nine.
This is a high level view of kind of solution sets, but within these sets there's multiple products and so there's so many different ways to monetize a single loan that goes through.
This this entire workflow and we're really excited about the opportunities we have of looking at our combined solution sets and being able to now make sure that we can provide efficiencies at literally every step of this manufacturing and servicing workflow and then lastly, the data is a huge opportunity for us very <unk>.
Complementary data sets between what we have on the front end and what Black Knight offers on the backend and for US. We think it's really just kind of tip of the spear. When we think about how we can monetize that data.
Thanks, Nicole on the competition.
Yes on the competition. It really has not changed this transaction doesn't change that our competition continues to be proprietary systems legacy technology that many lenders have had for a number of years I think we've been probably mentioned on previous calls that we've really started to see that get.
Unblocked that has a lot of those lenders are realizing as you go back to what Jeff pointed out on slide 34, whether a lender does one loan or a 1000 loans. They have to navigate all of this highly regulatory compliance requirements and so these lenders have realized that they've spent significant.
Mount of development dollars, just maintaining legacy systems to remain compliant.
Instead of really focusing on innovation. So we're engaged in a lot of great conversations with many of those lenders who have been using proprietary technology. This combination in these two offerings that we now have give us the opportunity to really be able to offer a solution for whatever technology philosophy, those lenders have coming.
Half of the proprietary technology, so that continues to be the area, where we will be chopping wood.
Thanks.
The next question comes from Kyle Voigt with Keyw. Please go ahead.
Hi, Good morning, I, just wanted to follow up on the potential combination of encompass and empower from your prior comments. It didn't sound like you expect those two businesses to really be fully integrated and expect to continue to invest in those separately.
Just to clarify or any of the total synergies you outlined on the revenue or the cost side attributable to the combination of those two LLS platforms.
And I understand a lot of the strategic rationale for the deal is really about pairing the origination and servicing businesses as well as expanding that data Tam is it fair to say that this deal is very strategically attractive to ice even without considering a combination of those LLS platforms.
Hi, Kyle it's Ben So, we 100% see those platforms as complementary and they service.
Completely different client with a completely different type of mindset and there is no part of our synergy case.
It assumes that those platforms would be combined one would get sunset in fact, it's the opposite we have put into our model significant investment.
Into that we know is going to be needed to help modernize certain parts of the technology bolt on MSP as well as.
And empower and we know that clients that have made decisions to go onto empower.
For very specific reasons for their strategy have decided to have.
A single instance on Prem highly customized version of the application.
So that there is against presented zero part of our business case here is around sunsetting, one of the technology, that's more about investment in the two and as Joe articulated it's about cross selling all of the other suites of services that we have.
Whether you've chosen empower or encompass cross selling all of those other services to be able to create that straight through customer for life experience from the point in time, when they're searching for home online to when they are selecting the right product that will meet their family's needs to automating the origination process and the manufacturing process of a loan to an.
Chronic closing to then the servicing relationship for the life of the loan and identifying optimal products for that client as their life situation changes.
That's what this.
Transaction is all about and we look forward to the benefits that we can provide to the end consumer servicers and originators.
And as you think about.
What Joe and Beth I've talked about of these cross sell opportunities that continues to play into our thesis that this can be done through recurring licenses. The more you have an end to end solution.
And customers are not having to go buy everything Ala carte.
It allows us to package really interesting suite of products under licensing arrangements that we think ultimately will be rewarded by the market.
The next question comes from Brian Bedell with Deutsche Bank. Please go ahead.
Great. Thanks. Good morning, Thanks for taking my question another one on Black Knight of course, maybe.
Maybe just looking at the.
The Tam the 14 billion Tam.
Combined revenue looks like it will begin to approach 3 billion out of that 14 billion, Kansas still really only have 20% share I guess first first is that.
Do you view that as a justification for this not being an antitrust issue given that youre still the minority of the overall Tam.
And as you.
Time penetrate that with a better solution, even if you're the dominant outsourcer.
I guess to what extent do you see that market share improvement being.
Incremental to the revenue synergies that you've you've outlined.
In the $1 25, and I guess, one other question would be just an investment and and in sales and any other CAD.
Capex investments that would be required to.
Change the BK I technology stack as she mentioned.
Yes.
Hi, Brian It's Ben I'll take a stab at it so.
When.
What I was articulating before in terms of the review we did our lawyers are black Knight's lawyers have done.
Literally quickly come to a conclusion that there is there is these businesses are 100% complementary we don't compete with one another.
And that what's the driver for this deal is that is really taking for the first time.
Services across the data space services in the origination space and the consumer engagement space, the closing space and in the servicing space, bringing them together to give that complete front to back solution.
And as you Peel through it.
And as we engage with the regulators were very confident theyre going to come to that conclusion that there's a ton of benefit to come from us and then also.
The business is just flat out.
<unk> compete with one another.
On the revenue side of it.
We see is that the pie is expanding because cause here.
The industry is so inefficient. It is the most analog space and asset class that we've seen as we've been on our journey of taking businesses from analog to digital that what's really driving this and when you think about that Tam or not taking market share from other people were taking market share from just complete.
CNC manual processing.
And.
<unk> costs that are rising on the end consumer costs that are rising for servicers and originators and the plan is to bring that all down.
So that's overall.
The first part of your question I know you had a question on Capex I think is well enough at that one.
Yeah, well in terms of Capex I think it was more on the technology side I missed kind of the end.
But around some of the technology spend so the capex for Black Knight spin around $100 million annually. I don't think you should be thinking about a whole lot different in terms of a run rate for that.
There is good as Ben mentioned, some incremental spend that we built into the amount of both opex and capex around some of the technology re platform that we plan to do over a number of years.
We've done this plenty of times in the past, whether it's with IDC or New York stock exchange and so we've got some pretty good sense about timing and amount there.
And that will that's something that we plan to do over the next number of years, So it's really spread out over sort of a.
Three to five to seven if not put more year period.
This concludes our question and answer session I would like to turn the conference back over to Jeff Sprecher, Chairman and CEO .
Go ahead.
Thank you Betsy and thank you all for joining us this morning, and I'd like to thank my colleagues for delivering the best quarter in our company's history.
Our customers for their business in this quarter and we look forward to updating you again soon as we continue to try to build out very innovative solutions to further advanced markets and deliver compounding growth to our shareholders have a great day.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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Yeah.