Intercontinental Exchange Inc

NYSE:ICE

Earnings Call Transcript 2021-Q4

[Operator]

Good morning, and welcome to the Intercontinental Exchange Fourth Quarter 2021 Earnings Conference Call and Webcast. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Mary Caroline O’Neal, Head of Investor Relations. Please go ahead.

[Mary Caroline O’Neal, Head-Investor Relations]

Good morning. ICE’s fourth quarter 2021 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 2021 Form 10-K and other filings with the SEC.

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 term 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 the NYSE and Chair of Fixed Income and Data Services.

I’ll now turn the call over to Warren.

[Warren Gardiner, Chief Financial Officer]

Thanks, MC. Good morning, everyone, and thank you for joining us today. I’ll begin on Slide 4 with some of the key highlights from our fourth quarter results. Adjusted earnings per share totaled $1.34, up 17% year-over-year, marking the best quarter in our company’s history. Net revenues totaled a record $1.8 billion and increased 10% versus last year. Total transaction revenues grew 11%, while total recurring revenues, which account for nearly half of our business, increased by 10%.

Fourth quarter adjusted operating expenses totaled $749 million, slightly higher than expected, driven by additional severance as well as higher performance-based compensation due to the strong results to finish the year. Adjusted operating income increased by 14%, totaling a record $1.1 billion. This strong operating performance contributed to a record full year free cash flow of over $2.8 billion, of which we returned $1 billion to shareholders through dividends and buybacks, while also reducing our gross leverage to 3x EBITDA, nearly a full year ahead of schedule.

Now let’s move to Slide 5, where I’ll provide an overview of the performance of our Exchange segment. Fourth quarter net revenues totaled $1 billion, an increase of 17% year-over-year. This strong performance was driven by a 71% increase in our interest rate business and a 29% increase in our energy revenues, both driven in part by rising inflation expectations.

Revenues within our global oil complex increased 29% year-over-year, while natural gas and environmental products, which represent approximately 40% of our energy revenues, increased by 36% in the quarter and were up 20% for the full year. Recurring revenues, which include our exchange data services and our NYSE listings business, increased by 8% year-over-year, including 10% growth in listings.

Turning now to Slide 6. I’ll discuss our Fixed Income and Data Services segment. Fourth quarter revenues totaled a record $480 million, a 7% increase versus a year ago. Recurring revenue growth, which accounted for nearly 90% of segment revenues, also grew 7% in the quarter.

Within recurring revenues, our fixed income, data and analytics business increased by 6% year-over-year, including another quarter of double-digit growth in our index franchise, while other data and network services grew 7% driven by continued demand for our ICE Global Network and consolidated fees offering. For the full year, data services revenue increased by 6%. And importantly, annual subscription value, or ASV, enters the first quarter up 5.5%, setting us up for yet another strong year of compounding revenue growth.

Let’s go next to Slide 7, where I will discuss our Mortgage Technology segment. Fourth quarter Mortgage Technology revenues totaled $346 million. Recurring revenues, which accounted for over 40% of segment revenues, totaled $149 million and grew 26% year-over-year. While total Mortgage Technology revenues declined slightly, down 1% in the fourth quarter, we outperformed an industry that experienced a roughly 30% decline in origination volumes.

For the full year, Mortgage Technology revenues grew 17% on a pro forma basis, reaching $1.4 billion well ahead of our initial expectations and on track to achieve our target of more than doubling revenues over a 10-year period.

I’ll conclude my remarks on Slide 8 with some additional guidance. We expect full year total recurring revenues to be between $3.68 billion and $3.75 billion. This includes approximately $30 million of headwinds related to FX, the planned phase-out of sterling LIBOR and Euronext post-Brexit decision to migrate certain connectivity services away from our UK data center and on to the continent.

It is worth noting that the majority of Euronext connectivity revenues are expected to be offset by a related reduction in costs. Adjusting for these items, we expect core growth in our recurring revenues, which again account for half of our business, to be approximately 6% to 8% for the full year.

This strong growth, which is on top of 10% growth last year, is expected to once again be led by our Mortgage Technology business, which we expect will grow in the low to mid-teens and importantly, is on top of an exceptional 30% growth in 2021. In addition, and supported by an ASV that exits the fourth quarter up 5.5%, we anticipate another year of 5% to 6% growth in our Fixed Income and Data Services recurring revenues.

Moving to expenses. We expect 2022 adjusted operating expenses to be in the range of $2.99 billion to $3.04 billion. Consistent with prior years, we will reward our employees for their contributions to our strong results and therefore, expect compensation expense, net of synergies and the resetting of 2021 performance awards, to increase by $25 million to $35 million.

Expenses tied to revenues are also expected to increase by $25 million to $35 million driven by higher license fees as well as investments in business and product development across all three of our segments. In addition, we expect an incremental $40 million to $60 million in support of productivity and efficiency initiatives across our technology and operations groups, a portion of which we are electing to fund through the net operating savings we realized following the IPO of Bakkt.

Lastly, and similar to last year, we expect roughly $30 million of incremental D&A expense related to purchase accounting and the rebuild of Ellie Mae CapEx. Please see Slide 12 in the appendix for a bridge reconciling our expense guidance to 2021.

Moving next to capital allocation and consistent with our track record of growing our dividend as we grow, we plan to increase our quarterly dividend by 15% year-over-year from $0.33 per share to $0.38 per share. In addition, and now that we are within our targeted leverage range, we expect to deploy approximately $475 million towards share repurchases in the first quarter, representing a nearly 20% increase versus the second quarter of 2020, the last full quarter of buybacks prior to our acquisition of Ellie Mae.

In summary, we delivered a record finish to another record year. We delivered double-digit growth in revenue, operating income and earnings per share. We also invested in an array of future growth initiatives, increased our dividend double digits and achieved our leverage target a year earlier than originally planned. As we kick off 2022, we’re focused on, once again, delivering growth and creating shareholder value against what is an ever evolving macro backdrop.

I’ll be happy to take your questions during Q&A. But for now, I’ll hand it over to Ben.

[Ben Jackson, President]

Thank you, Warren, and thank you all for joining us this morning. Please turn to Slide 9. We are pleased to report another record year for ICE. Our strong financial results reflect the tremendous efforts of my colleagues across the organization, the trust and expanding relationship we have with our customers and the ability of our business model to drive growth across a variety of macroeconomic environments.

I’d like to focus on the secular trends that are driving growth across our mortgage and energy markets. And we’ll turn it over to Lynn to discuss our position across fixed income, data and analytics and some highlights from our great year at the NYSE.

Our data, technology and network expertise position us well to accelerate the analog-to-digital conversion happening across the mortgage industry. As mortgage origination costs continue to increase, electronification is a trend we believe will continue in a variety of interest rate environments and regardless of mortgage origination volumes.

Our ability to capture this secular trend is evidenced by the strength and resiliency of our recurring revenues. Part of that growth is driven by our strategy to intentionally shift more business to recurring revenue. We also continue to see strong sales and new customers coming on to the platform.

And with connectivity to nearly every participant in the mortgage industry, we have the opportunity to cross-sell new products like eClose and AIQ to a captive customer base seeking efficiencies. This flywheel effect and the secular trend of electronification give us confidence in our ability to grow this business and capture the $10 billion addressable market.

Across our energy markets, we achieved record volumes in 2021, including in Brent, TTF and environmentals. The breadth and depth of our platform not only drove strong volumes and revenues, but more importantly, it positions us to capture secular tailwinds across our energy complex, including the globalization of natural gas in the clean energy transition.

We have built a global natural gas business, including our European marker, TTF. The globalization of natural gas and the rise of LNG have driven TTF to emerge as the global gas benchmark. And in 2021, record volumes on our platform grew 45% and drove revenue growth of 36%.

Our markets continue to be relied on by an increasing number of participants to manage risk and navigate volatile gas and power markets. We were also early to diversify into environmentals, acquiring the Climate Exchange in 2010 and building around those leading markets to develop a global environmental business. And in 2021, we reached record volumes across the complex, including in our EU, UK renewable greenhouse gas initiatives and California carbon allowances.

These record volumes contributed to a 56% increase in environmental revenues versus the prior year. As customers navigate the uncertainty and volatility related to the clean energy transition, we are well positioned as the venue of choice to manage risk and provide price transparency across the energy spectrum.

With that, I’ll now turn the call over to Lynn.

[Lynn Martin]

Thank you, Ben. With data and technology at our core, our goal is to provide solutions which add transparency to both commonly understood risks as well as emerging risks such as ESG. We continue to increase the breadth and coverage of our products and accelerate the delivery of our ESG reference data to the NYSE issuer community, providing non-opinion-based insights to market participants.

And in the fourth quarter, we expanded our climate change and alternative data capabilities with the acquisition of risQ and Level 11 Analytics. Combining geospatial data technology with our financial data will bring greater transparency to ESG risks across the financial markets, including our existing muni bond and mortgage-backed security offering. Our data, technology and leading marketplaces position us well to benefit from the secular trend towards sustainability and net zero carbon commitments.

Turning now to fixed income. Increased automation, flexibility of delivery and passive investing continue to drive demand for our proprietary data and rapidly growing index business. As a leading data provider to the fixed income market, we are uniquely positioned to drive automation.

Leveraging our proprietary evaluated prices, analytics and our growing suite of reference data, we’ve taken a business that historically served the back and middle office and created tools and analytics for the front office. These tools are critical to the pre-trade transparency needed in the opaque, less liquid fixed income markets as is evidenced by our front-office tools continuing to grow double-digits.

The growth in passive investing continues to be a tailwind for our business. The flexibility of our tools, quality of our pricing data and flexibility of our offering directly contributed to the five asset managers with funds of over $66 billion of AUM that transitioned to ICE indices during 2021 and an additional group of funds with AUM of $6.7 billion have planned transitions during Q1 2022. This strength drove double-digit revenue growth in our index business for the fourth consecutive year and positions us well for continued growth.

I’ll close with some highlights from the NYSE. 2021 was a record year for NYSE listings. We help connect innovators and entrepreneurs to nearly $120 billion in capital through 297 IPOs, including three of the four largest IPOs and the three largest tech IPOs.

And importantly, we continue to lead the market in ETF listings with more than 65% of new funds selecting us as their home. We also continue to prioritize our market-leading technology, which enables customers to better manage risk and provide our issuer community with significantly less volatility at the open and the close.

The performance of our technology was proven as recently as last week when we processed nearly 0.5 trillion messages in a single day with median response times of less than 30 microseconds across our equities complex, further cementing our position as the leading equity exchange group. Our leading data and technology coupled with our investments in sustainable finance, the secular trends across fixed income markets and the competitive differentiators of the NYSE will continue to drive our growth well into the future.

I’ll now turn the call over to Jeff.

[Jeff Sprecher, Chairman and Chief Executive Officer]

Thank you, Lynn, and thank you all for joining us this morning. Please turn now to Slide 10. 2021 marked our 16th consecutive year of record revenues and record adjusted earnings per share. This track record of growth reflects our strategy to diversify the business and position the company at the center of some of the largest markets undergoing an analog-to-digital conversion, a strategy that has made ICE an all-weather name, a business model that provides upside to volatility with less downside risk and importantly, a positioning that drives growth on top of growth. We have intentionally diversified across asset classes so that we are not tied to any one cyclical trend or one macroeconomic environment.

For example, in 2021, we saw record volumes across our energy complex driven in part by inflationary concerns and market speculation of central bank activity. Our European and UK interest rate business also benefited from interest rate volatility, driving a 15% increase in revenues in 2021 and more recently, a 34% increase in our January revenues. Our CDS clearing business grew 14% in the fourth quarter as rate volatility increased, driving demand for risk management and credit protection.

And even against this backdrop of rising interest rates, our Mortgage Technology business outperformed the broader market, including pro forma recurring revenue growth in 2021, up 31%, again, a reflection of the all-weather nature of our business model. As we begin 2022, we are better positioned than ever to capitalize on the secular and cyclical trends occurring across asset classes. And we remain focused on investing and executing on the many growth opportunities in front of us.

Before we end our prepared remarks, I’d like to thank our customers for their business and their trust in 2021, and I’d like to thank my colleagues at ICE for their continued efforts. Your hard work contributed to the best quarter in our company’s history combined with other excellent results, making it the best year in our company’s history.

With that, I’ll now turn the call back to Andrew, our operator, to conduct the question-and-answer session until 9:30 Eastern Time.

[Operator]

Thank you. We’ll now begin the question-and-answer session. [Operator Instructions] The first question comes from Rich Repetto with Piper Sandler. Please go ahead.

[Rich Repetto, Piper Sandler]

Yes. Good morning, guys. Good morning, Jeff. So my question is on the recurring revenue growth for mortgage. It was up 31%, and now you’re guiding to, I think, low-double digits. Could you give us more color on that? Is that just the large numbers? Any progress on metrics to sort of – that we can monitor that recurring revenue in mortgage? And then lastly, Jeff, I know you talked about the offset, but how do you think about the offset going forward? Is it simply interest rate futures offsetting what looks like a slowdown in origination volumes going forward?

[Ben Jackson, President]

Hi Rich, it’s Ben. I’ll start here. So the – you hit on it a bit in the way you answered the question. So you do have growth compounding on top of growth there in the subscription side of the business. But also, I mean, we are looking at macro headwinds. I mean, Warren brought up in his commentary that if you take a composite of where the industry analysts have volumes that you have volumes down 30%.

And in that environment, we could see some macro headwinds such as are there going to be a bunch of brand-new originators coming on to the scene? Potentially not. Could you see some industry consolidation? Potentially, we’ll see some of that. But despite those types of headwinds, we see an opportunity to grow this subscription business in the teens because we have great visibility to a phenomenal new business pipeline of new customers that we’re looking at right now.

We have the ability to cross-sell to that large stable of customers that we have solutions like our AIQ business, that will provide them more efficiency as well as our industry-leading point-of-sale solutions. And then the other dynamic that we have going on is that move towards subscription as customers renew.

We had a pilot program last year where we have roughly 20% of our customers renew in a given year. With a small percentage of those that renewed last year, we looked at shifting them more towards subscription. We’re successful doing that. And we’ve codified a program of this year to hit a much larger percentage of the roughly 20% that are renewing this year. So all of those, we believe, are tailwinds to offset the macroeconomic environments there and will lead to a teens grower in subscription revenue, which we feel great about.

[Jeff Sprecher, Chairman and Chief Executive Officer]

And Rich, this is Jeff. Yes, we’ve really thought hard over the last few years on how to position the company to be an all-weather name that will just grow on top of growth and in all macro environments and global geographies. And so our thinking is that inflationary pressures are what drive central banks to raise interest rates. And we have a lot of asset classes that we participate in and positioning of the company that will benefit from that volatility.

And we tend to see commodity businesses like energy and agricultural commodities be very volatile in inflationary environments. And therefore, there’s a lot of hedging, and we help people manage that risk. Similarly, obviously, in our interest rate businesses, which include interest rate futures and credit default swaps and fixed income data and services in a volatile interest rate environment, those businesses do well.

And even in the mortgage space, as Ben has been talking about, home inflation tends to drive people to do cash-out refinancings, which for us, refinancing a house versus buying a new house is the same transaction to our mortgage platform. So we really feel like we’ve positioned the company well in this environment. We also feel like we positioned the company well if there isn’t inflation, if there isn’t a lot of central bank activity.

The low interest rate environment is where we always felt vulnerable, and we’ve really done a number of things over the last few years that augment that base. So we hope you, in thinking about our company, will feel like you can safely purchase the stock for upside growth but limit your downside risk and that’s really how as managers, we’ve tried to position our company today.

[Rich Repetto, Piper Sandler]

Thanks, Jeff. Very helpful. The colors helpful. Thank you.

[Operator]

The next question comes from Dan Fannon with Jefferies. Please go ahead.

[Dan Fannon, Jefferies]

Thanks. Good morning. My question is on the environmentals complex. And wanted to think about the size of that market and maybe if you could address the customer base there, commercial versus financial kind of utilization and as we think about it versus some of your mature markets to kind of get a sense of where we are in the adoption phase of some of these products.

[Ben Jackson, President]

Hi Dan, this is Ben. I’ll take this one. We’ve been spending a lot of time thinking about this in terms of the size of that marketplace. And when we look at any of our derivatives markets, we look at the underlying physical market as really a proxy for it. And the estimates out there that in any given year, you have around 50 billion tons of carbon that’s emitted into the atmosphere around the world.

And in the geographies where we’re very strong and present right now, take North America, the EU and the UK, those geographies alone emit about 11 billion tons of carbon. And what we’ve seen in terms of the derivatives markets as they mature is that it’s common to see a derivatives market that would trade on top of the physical of around 10 times, if not more.

So if you just use 10 times as that market matures as a proxy for how you define a TAM in the markets that we are today, that’s around 110 billion tons equivalent of physical that can trade. And today, in the marketplaces that were strong, we traded 18 billion tons. So we’ve hit about 16% of that TAM.

And obviously, with that, there is a long runway to go in the geographies where we’re strong today. And what will help feed that growth is more sectors of the economy coming in and trading these products as well as voluntarily more companies that are measuring their Scope 1, 2 and 3 emissions coming in and also trading in those geographies. That adds more participants, adds more sectors of the economy and will lead to more transactions going on in the derivatives markets.

The other obvious area of growth is just more geographies around the world and global programs, if they do come in place will increase the size of that physical market. But given that we represent around 95% of the world’s trading that happen on our venues, we think we’re very, very well-positioned to capture that growth opportunity and that TAM that I just outlined.

[Dan Fannon, Jefferies]

Thank you.

[Operator]

The next question comes from Alex Kramm with UBS. Please go ahead.

[Alex Kramm, UBS]

Yes. Hey, good morning, everyone. I want to ask about inflation broadly. It’s been a big topic, obviously, this earnings season in the last few months for a lot of companies. Seems like on the cost side, you’re managing that pretty well, but I’m more interested on the revenue side. I mean, 50% of your business or so is subscription-based. So curious to what degree CPI is built into any of your subscriptions, to what degree that could help you or make pricing discussions easier? And then, of course, how much of that is baked into your recurring revenue forecast broadly? Thank you.

[Warren Gardiner, Chief Financial Officer]

Hey Alex, it’s Warren. So yes, there is an element of that to some extent, particularly on the CPI that is in terms of building some of the data contracts. I wouldn’t say it’s necessarily a huge part of it. But again, that’s going to be built into part of our guide there when we talk about 5% to 6% for the year. I think on the revenue side, really the more – it’s what Jeff and Ben have been talking about in terms of our exposure, if you will, to inflation, and that’s really going to come down to the commodities business; the interest rate business, which is off to a great start in January; the CDS business; the ags business within that commodities business. So I think that’s really more in terms of our leverage to inflation expectations, if you will, on the revenue side.

On the cost side, you’re right. There certainly – we were seeing some pockets of it. It’s third-party kind of services, as you would imagine, or pricing providers or things of that nature, things like utility costs, some technology costs like cloud providers and things like that, that are – that we’re seeing some uptick on, but that again, that’s all baked into our guidance that we provided you today. And then I think on the comp side, the way to be thinking about that is, look, we’ve always been a pay-for-performance culture.

We obviously had a really good year this year. We always want to monitor and retain kind of the best talent that’s out there. But I think we do have – we have built up some goodwill, if you will, both with employees and potential employees from that perspective. So we’re comfortable with that position on the comp side. And again, all of that’s baked into our expense guidance for the year, as you saw.

[Alex Kramm, UBS]

Fantastic. Thank you, guys.

[Operator]

The next question comes from Ken Worthington of JPMorgan. Please go ahead.

[Ken Worthington, JPMorgan]

Hi, good morning. Jeff, I wanted to pick your brain a little bit about crypto and blockchain, acknowledging that you and ICE were early and seeing the potential here with Bakkt and other investments. As we think about the mortgage process, is there a role you see for blockchain technology helping ICE digitize parts of the mortgage process or getting you closer to your vision in the mortgage area? And then it would seem like the information is indelible there to some of your comments at Alex’s conference late last year.

And then second, the crypto trading ecosystem is developing in a much more vertically integrated way. Do you see the crypto ecosystem moving more towards specialization over time like the cash equity world? Or is a chance that the cash equity ecosystem might evolve to look more like the crypto ecosystem? And does either of these have implications for the New York Stock Exchange?

[Jeff Sprecher, Chairman and Chief Executive Officer]

Those are two really thoughtful questions. Thank you for those, Ken. First of all, when we think about the blockchain, we think about its main value – well, it has two values in our mind. The main value is it creates an indelible record. And so to a certain extent, property rights are something that society views as an indelible record.

And it’s why we have title insurance, for example, in mortgages, so that we have an insurance wrapper around title to a property. And so you can imagine that an indelible record that’s accessed by many, many people, that would ensure property rights for both mortgages or homes or any other asset is something that could grow. And it’s an area that we definitely are focused on.

The second attribute of blockchain and the broader cryptocurrency environment is that it has captured mind share and has really been used as a marketing tool to move people from more analog brokerage houses to more digital brokerage houses and give customers direct access. So those brokerages that didn’t engage their customers digitally are seeing themselves somewhat being disintermediated by new brokers that are digital.

The interesting thing about your question, the third part of your question, which is really what our regulators want to do about this? And largely speaking, our whole infrastructure for regulation in the Western world has been that there is a broker that has a customer relationship, and they have the KYC and AML responsibility for their customers. They have to know their customers, and they have to do anti-money laundering checks and balances. And once having done that, they can then access the broader market.

And there’s been a blurring in the crypto space between the obligations of a broker-dealer and the obligations of exchange and the obligations of clearinghouse. Generally speaking, in the organized clearing markets, there are intermediaries that are providing credit amelioration to the customer. And it is the collective balance sheet of all of those brokers and clearing firms that backstop the market. And in the case of some of the crypto companies, that is not the case.

And so if those – if regulators decide to subject the straight-through processing companies to the same terms and conditions that they have subjected historical companies, those companies have some work to do around KYC, AML and credit amelioration and passing the IOSCO standards of a clearinghouse that has to be stress testing, which essentially is banking.

If the regulators say, you know what, maybe those issues aren’t as important as we had thought they were, and maybe having the consumer directly participate end-to-end is a better way, then you are going to see the legacy companies in our industry move more to opening up their clearinghouses to end users and opening up their platforms, matching engines and other platforms directly to end users and bypassing the brokerage community.

I think it’s too soon to predict what will happen there, but you can – to the extent that I’ve helped your thinking at all, you’ll see now as you read articles about what the various regulators are doing and saying that, that is the essential question that they’re wrestling with. Do they bring the legacy business towards the crypto space? Or do they bring the crypto space into the legacy business?

I’d make one last comment, which is largely speaking in the United States, we’re subject to the Securities Act of 1934. That act has withstood a lot of change in technology and in market structures and what have you. But based in the 1934 Act is the customer protection and fraud protection. And I suspect that notwithstanding there’s a lot of people wanting the 1934 Act to be updated, there’s a lot of tools in the 1934 Act for regulators to even deal with new technologies as they have done now over decades. But thank you for those questions. They’re very thoughtful.

[Ken Worthington, JPMorgan]

Thank you, Jeff.

[Operator]

The next question comes from Michael Cyprys with Morgan Stanley. Please go ahead.

[Michael Cyprys, Morgan Stanley]

Hey, good morning. Thanks for taking the question. I just wanted to ask about the cloud. I was hoping you might be able to remind us, which parts of your business today are on the cloud. And as you look forward, how do you think about the opportunity for migrating more of your business to the cloud? What benefits could you see, and which parts of the organization can make sense to do sooner versus which ones do you think would take a bit more time?

[Jeff Sprecher, Chairman and Chief Executive Officer]

It’s a great question. We – first of all, we use the cloud and are active in the cloud in a lot of our businesses. And the main attribute that the cloud brings us is it’s just another network where customers can get access to our products. We also run our own data centers, and we have our own network. And we’re hooked to a lot of third-party networks.

So our goal – and by the way, a lot of third-party screen providers and platform providers. So the cloud is important to us to the extent that we have clients that would prefer to receive services from us in the cloud. Where it is not as important to us is because of our scale and size, we are better able to control our costs when we’re managing our own technology and network infrastructure. We have done a lot of analysis around this.

And as, I think, Warren mentioned in his remarks to one of the inflationary questions, probably the highest inflation pressure that we’re seeing right now is in the services that are in the cloud. We don’t have good moats around our ability to control those costs notwithstanding. And so if clients, however, want to bear those costs, we’re happy to provide them access through the cloud. But I think you’ll see it as an important but augmented service that we have, not necessarily the key service.

And last thing I would mention to you is I think we’re different than some of our peers in that we have always felt that the way to control cost is to control our technology. It’s not something that at its core that we license to others. It’s not something at its core that we get from others, and it’s not something at its core that we run in other people’s infrastructures.

[Michael Cyprys, Morgan Stanley]

Great. Thank you.

[Operator]

The next question comes from Alex Blostein with Goldman Sachs. Please go ahead.

[Alex Blostein, Goldman Sachs]

Hey, guys. It’s Alex. So I wanted to go back to the mortgage question for a second. The – you gave some color about 2022 specifically. But clearly, it’s a pretty meaningful slowdown in growth in recurring revenues into low to mid-teens from well north of 20% over the last 12 months. Do you think this is just a 2022 dynamic and the reasons you sort of described earlier just really kind of relate to the next 12 months? Or for a variety of reasons, this is more of a reasonable run rate we should expect over the medium term? Thanks.

[Ben Jackson, President]

Alex, this is Ben. So when you look at that macro environment and again, Warren used that composite estimate of around – a backdrop of the business being down – or sorry, not the business, but the overall transaction volumes being down 30%. When I look at our strategy for this business in each of the segments that we have in this business, we are executing very, very well.

And what’s the evidence to that? Look at each of the segments underneath there. So despite that volume decline, our data and analytics business grew year-over-year. And we’ve talked on a number of these calls on how we see that playing out over time, and that will continue to be a growth driver as more of our customers adopt automation.

We also have our closing line item that’s grown year-over-year as we’ve invested a lot in – did a lot of brand-new innovations that the industry has not seen before over this past year. And as customers ramp on those, we’re starting to see some substantial ramp-up on that, and that’s leading to growth in that line item year-over-year.

And on the origination line item, we way outperformed what industry transaction volumes were. And underneath the covers there, it’s an explicit move towards more and more subscription. So we feel great about how the business is executing despite this near-term drop in volumes. It’s hard to predict how long those – the drop in volumes will play out, but we feel good on our ability to grow this business and to outperform the industry backdrop based on our strategy in each one of those.

And remember, on the – we just started that pilot program that was last year in terms of as every customer renews for a small percentage of them, we are shifting the revenue more and more towards subscription, and roughly 20% renew in a given year. And this year, we’ve really codified a program to hit a much larger percentage. We have a long runway, I mean, doing the math. We have a long runway to execute that over many, many years that we believe we’ll continue to lead to growth in that subscription line item.

[Alex Blostein, Goldman Sachs]

All right. Thank you.

[Operator]

The next question comes from Brian Bedell with Deutsche Bank. Please go ahead.

[Brian Bedell, Deutsche Bank]

Great. Thanks. Good morning, folks. Maybe, Ben, if I could just come back to the environmental complex question and your answer to a prior question on that. Two-parter. First, on the 110 tons – 110 billion tons of physical TAM that you mentioned, I just wanted to clarify if that is sort of a current TAM and then your expectations for that to grow over time as we move more into carbon transition.

And then secondarily, it looks like the environmentals complex is now north of 10% of your energy revenue. Nat gas is also inching up as well, 25% or so. What is your view on nat gas as a transition energy and whether if we want to think about a long-term carbon transition, should we be thinking about that nat gas to grow as a portion of your total energy revenue, just like the environmental is growing?

[Ben Jackson, President]

Yes. Okay. Thanks, Brian. So on that 110 billion tons of physical equivalent traded, yes. The estimate I used there, so that’s again just based on the geographies where we are now. So that’s North America, EU and UK and putting a 10x multiple on that. And as you picked up there and the way you asked the question, that’s as markets are maturing, we see it can get to 10% but even order of magnitude more than that. If you take very well-established benchmarks, it can be 2, 3x that easily.

So we see this as a market that as it matures can get bigger than that. So I see that as more of kind of a near to medium-term TAM that can be achieved in that environmental markets. But then also as more geographies get added around the world and as more of the overall $50 billion – sorry, 50 billion tons of carbon emissions that are happening around the world as more of that adds more programs, as more governments around the world add programs, we have an opportunity to go after that as well. So there’s an acceleration that could happen on that over time.

On the nat gas, you pointed out, environmental is at 10%, natural gas also continuing to grow. Our natural gas business is really the only global gas business around the world. Our TTF business continues to grow on top of growth. So you’ve seen that continue to compound and customers coming to us around the world to manage their risk and using natural gas as the cleanest of the fossil fuels to help with this energy transition.

And with the backdrop of industry estimates saying that energy demand is likely to double between now and 2050, we see that, that’s going to be an important element in this transition towards a cleaner environment. And that this transition is going to be bumpy. And we’re pleased to see that our customers are coming to as much – coming to us as much as ever to manage the risk in that environment.

[Brian Bedell, Deutsche Bank]

Great. Thank you.

[Operator]

The next question comes from Owen Lau with Oppenheimer. Please go ahead.

[Owen Lau, Oppenheimer]

Good morning and thank you for taking my question. Could you please talk about your balance sheet investment? What’s your plan to like maybe deconsolidate OCC and Bakkt? Or you will be more opportunistic to leverage your balance sheet to make additional investments? Thank you.

[Warren Gardiner, Chief Financial Officer]

Hey, Owen, it’s Warren. So with respect to Bakkt, as you probably recall, it was – we did deconsolidate that in the fourth quarter. It went public in October. So that is – certainly, we have a state that’s on our balance sheet. That’s an investment we’ve been making over a number of years that we’ve been very happy with and have a lot of confidence in the outlook for that business. So I don’t think there’s anything to update there in terms of any kind of plans on that front.

With respect to OCC, that is something that’s on our balance sheet. We hit – I don’t recall the exact mark of it, but it’s a small investment that we have there. So we’ll see if there’s any opportunity there. But I wouldn’t necessarily say that, that’s something we’re thinking about at the moment.

Certainly, it’s part of what we do in the options and equity side to begin with. So I wouldn’t be thinking about that. So we do, over time, as you know, with Euroclear and some of the other investments, we do look for opportunities that are within – that are sort of adjacent to what we do in our business. And so we will look for those opportunities and invest in those as we see it.

So I think you could expect us to continue to do that when those opportunities arise. But those 10 – those will be sort of minority investment, small minority investors for the most part, as you’ve seen with some of the ones we’ve done in the past.

[Owen Lau, Oppenheimer]

All right. Thank you.

[Operator]

The next question comes from Kyle Voigt with KBW. Please go ahead.

[Kyle Voigt, KBW]

Hi, good morning. I just wanted to ask a question still on the energy topic, specifically on Brent and Brent open interest. We’re seeing nice growth in the options OI in that complex, but Brent futures open interest specifically was down 17% year-on-year as of earlier this week.

So I guess with the price volatility we’ve seen the oil market over the past year, I just would have expected to see a bit stronger trends there. Just wondering if you could kind of opine on whether you think this is cyclical still related to kind of COVID normalization or whether there’s something more secular going on there that’s causing the decline would be helpful. Thank you.

[Ben Jackson, President]

Thanks, Kyle. Yes. So we do see this as temporary. If you look at Brent overall, open interest today is about 5% over last year. You got to remember last year was also another very volatile year, where we saw tremendous growth in that business. So you are looking at a compare that’s difficult. But on top of that, we’re still growing that business and growing that business nicely.

In addition, in oil overall, we have had a lot of success working with many of the physical industry participants in some brand-new innovations and ways for them to help manage their risk in the oil markets. The example would be ICE Futures Abu Dhabi that we launched last year to help people hedge and come up with a market price for hedging Murban crude oil that’s going to Asia.

And then just within two weeks ago, we launched our new HOU contract, which is Midland WTI American Gulf Coast contract, where we were selected by the industry to come up with a better way to price Midland TI as it gets to the Gulf and is going overseas. And both of those contracts have seen tremendous amount of pickup in physical market participants supporting it in early days, and we see those as highly complementary to the overall Brent complex.

So it’s an area we’re going to continue to invest. We do see the COVID environment and jurisdictions and geographies opening and closing, opening and closing, unfortunately, does create some gyrations in here. But overall, we feel great about the oil complex.

[Kyle Voigt, KBW]

Understood. Thank you.

[Operator]

The next question comes from Craig Siegenthaler with Bank of America. Please go ahead.

[Unidentified Analyst]

This is Ely on for Craig. I had a question for you on December’s leadership changes. Should we see those as a precursor to more meaningful strategy changes at NYSE? Or do you anticipate any changes will be more incremental? Specifically on listings, has the new team given any thought to lowering listing standards to help make the New York Stock Exchange a little more competitive in 2022 or maybe pivoting the brand to better appeal to all the new tech companies coming to public markets? Thanks.

[Jeff Sprecher, Chairman and Chief Executive Officer]

Sure. Good question. This is Jeff. I’m surrounded by a generation that’s younger than me, that’s incredibly talented, that delivered the best year in our history. And those changes were an opportunity to start to put leaders in that generation. And because the company is so broad now and so geographically diverse, we’re trying to give people in that leadership team opportunities to try their skills in different businesses and give them exposure to the markets. So I was thrilled to be able to ask Lynn Martin if she would lead the New York Stock Exchange. And I’ll let her tell you what she’s thinking.

[Lynn Martin]

Yes. Thanks, Jeff, and thanks for the question. I mean, it’s early days of me being in the seat at NYSE, but I continue to see a great opportunity to further cement NYSE as the home of global markets. We’ve got – as I think about this year, we’ve got a healthy pipeline of IPOs, although the timing of some of the companies coming to market is shifting a bit, given the macroeconomic environment.

But importantly, we really see the environment changing. And the drivers of capital raising last year may have favored our competitors. So we see that shifting, given the strengths of our model. The issuers that I have been talking to more recently, CEOs that are looking to come to market, they’re valuing different things. And they’re valuing stability in trading, lower cost of capital and strong governance, and that really favors the NYSE market model.

And our message around our market model, the differentiation and investment we’ve made in technology and also the broader technology assets that we’re bringing to bear through the various other ICE businesses are really resonating as differentiators for the New York Stock Exchange.

[Unidentified Analyst]

Got it. Thanks.

[Operator]

The next question comes from Simon Clinch with Atlantic Equities. Please go ahead.

[Simon Clinch, Atlantic Equities]

Hi, guys. Thanks for taking my question. I just wanted to do a housekeeping really on the CapEx guidance. I was wondering if you could give us a bit more color as to how to think about CapEx going forward? And particularly, what’s really driving that growth in – if you can tease out sort of the separate drivers for fiscal 2022?

[Warren Gardiner, Chief Financial Officer]

Sure. Hey Simon, it’s Warren. So right. So we were about $450 million, as you know, this year. That was kind of towards the high end of the range. Some of that is related to Bakkt. Of course, we had a full year of Ellie Mae.

As you’re looking at the guidance for next year, as you saw, it’s about $520 million to $490 million. We are planning some data center migrations and some upgrades. That’s adding about $80 million or so to that $590 million to – sorry, $520 million to $490 million. Those are going to result eventually in some cost savings. There’s revenue-related expansion product – project within that. So all kind of good things on the back end of that investment.

Within that guidance range of this year, probably around $100 million of Ellie Mae, too. So when you start to back – to peel off those pieces, well, you’re back down to sort of the 300, 350 range, which is where we’ll call it legacy ICE was and has been for a number of years prior to that acquisition and some of these productivity and efficiency investments that we’re going to be making around some of the data center.

[Simon Clinch, Atlantic Equities]

Great. Okay. Thank you.

[Operator]

And we have a follow-up from Alex Kramm with UBS. Please go ahead.

[Alex Kramm, UBS]

Yes. Hey, just a couple of quick follow-ups here. One on the mortgage side. Maybe I missed it, but can you give us an update in terms of where you stand with subscribers on eClose? And then also where we are in the subscription or subscription kind of like transition in terms of how many of your clients have now transitioned? I know it’s about 20% a year, but just maybe an update there.

And then also on the trading side, very quick. Obviously, with the contract transitions here in your IBOR, obviously, the rate book contract has been moving higher. We see that in your January number – numbers. I know it’s a three-month lag number, and I can probably do the math, but just wondering what’s a good RPC to use for the quarter or where we are running in January alone? Any color would be great. Thanks guys.

[Ben Jackson, President]

Alex, I’ll start on the mortgage side. I can give some color on the short-term interest rate transition as well. In terms of eClose, we’re continuing to see that ramp. So we went to – we were at 76 customers last quarter and the last update here. We’re now at 93. So we’re continuing to see that pick up and ramp up.

And we see as those customers ramp up, that’s going to be yet another area that grows that closing line item on a year-over-year basis as that closing line item is going to be heavily transaction-oriented because a lot of the costs associated to closing fees actually go on to the end closing statement of the customer. So that is important to highlight that. And as we deliver more and more of these innovations and solutions, we are able to capture more revenue per loan, which is something that’s important on that closing line item.

On the subscription line item, so last year is when we started that pilot program, and we did a small percentage of what renewed. So if you take a ballpark of around 10% of the 20% that renewed, that’s probably the right ZIP code of the number that we touched last year.

And based on what we learned through that pilot program, we’ve now codified a program that’s going to hit a much larger percentage of the 20% that are going to renew this year. So that gets you into the ballpark of what we have accomplished being a very small percentage and that we do have a long runway of being able to do this over multiple years ahead of us.

Just from the overall short-term interest rate transition and what we’re seeing in that marketplace, that transition went seamless for us in terms of the short sterling to SONIA transition. We’ve seen – we did have some trading volumes, some ARB trading volume that was trading short sterling versus SONIA. That obviously, when short sterling went away, came off.

But when you look at the overall complex and this rising rate environment that we’re in, in both the U.K. as well as the EU, the market overall is off to a great start in terms of both volumes as well as open interest. I’ll hand it off to Warren to talk about RPC.

[Warren Gardiner, Chief Financial Officer]

Yes, Alex, just quickly on the rates RPC. So yes, you’re seeing a little bit of lift there. As we kind of transition into SONIA, as you know, that’s a much bigger contract than what we had on the short sterling side. So there’s a equivalent benefit, if you will, from the RPC to kind of account for that.

So the revenue, if you were to look at it just on a revenue basis, that should be relatively neutral if you’re thinking about it on a notional level. The other impacting factor there – and so I think at this current level, you’re probably at a good place for that interest rate RPC moving forward.

Obviously, the impact can be for mix, medium-term versus short-term rates of our rates overall. And then, of course, there’s a component of FX that can flow through there as well. But again, all else equal, I think it’s kind of a good – what we reported this month is a good run rate to be kind of thinking about for that component of our future business.

[Alex Kramm, UBS]

Sounds good. I will follow up on that. Thanks.

[Operator]

And I understand there’s time for one more follow-up. That is from Kyle Voigt from KBW. Please go ahead.

[Kyle Voigt, KBW]

Hey, thanks for squeezing my follow-up. So just on the expenses, the midpoint of the expense guidance, I think, is 5% year-on-year growth comparing to the adjusted OpEx, excluding Bakkt. Just wondering if you could talk about how committed you are to delivering operating leverage in 2022 specifically?

Again, if we’re looking at the business on an adjusted basis, excluding Bakkt. And then given the business mix change over the past five years or so, just wondering if you can update us on your view of long-term expense growth, what’s the right expense growth rate long term for ICE? Thanks.

[Warren Gardiner, Chief Financial Officer]

Sure. Sure. Thanks, Kyle. Good question. So you’re right. At the midpoint, it’s about 5% growth. Again, as I said in my remarks, there’s a portion of that that we’re electing to invest related to the IPO of Bakkt. So some of the operating savings that we had from Bakkt, it’s about – if you include revenue, it’s about $75 million of savings that we got from Bakkt. We’re going to invest a portion of that this year in some of the tech and ops projects.

So that’s probably about a point of that, if you will, of that five at the midpoint that is coming from that. And those are things that certainly, we would have done, and we would do over time. But just given the opportunity we had with those savings, we chose to elect to do them now.

And so look, ICE has always been conscious about cost controls and being good on expense controls and things of that nature. And so we did take that opportunity to do that in order to kind of save that later.

But I think as you’re thinking about it longer term, it’s what it’s been in the past. And then we’ve talked about compensation expense being kind of lower single-digit growth in terms of merit annually. That’s about half of our expense base.

I think that when you think about noncomp expense, it’s probably in a similar range. So I think a lower single-digit kind of expense growth range on an organic basis is a fair place to be. And again, that’s against revenue.

We don’t give top line revenue growth overall for the business, but I think it’s safe to assume that within the context of revenues growing faster than expenses. I think for instance, this year, we added $500 million of incremental revenue, which yielded $380 million or so of operating income. That’s about a 75% incremental margin.

So I think, yes, we’re very much committed to that. Transaction business can certainly fluctuate here and there, but over the medium, long term, yes, we would certainly expect that operating leverage to flow through.

[Kyle Voigt, KBW]

Great. Thanks, Warren.

[Operator]

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

[Jeff Sprecher, Chairman and Chief Executive Officer]

Well, thank you, Andrew, for running the call, and thank you all for joining us this morning. We look forward to soon updating you as we continue to innovate for our customers and give you the results of our all-weather business model as we continue to drive growth. And with that, I hope you have a great day.

[Operator]

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.