Intercontinental Exchange (ICE +0.65%) is one of the leading global operators of financial exchanges. The company operates the New York Stock Exchange in addition to several other exchanges, clearinghouses, and listing venues. While Intercontinental's bread and butter has historically been trading commissions, the company has also been able to monetize the data generated by its exchanges in a very meaningful way. In fact, Intercontinental has been so successful at monetizing its data assets that revenue generated by data and subscription-based software now accounts for a majority of the company's business.
42 consecutive quarters of growth from selling data
Intercontinental Exchange's business involves facilitating trades through its exchanges, settling trades through clearinghouses, and selling data to market participants to gain better insights into what is driving price movements.
Image source: Getty Images.
Trading data is extremely valuable to traders because having a data edge can directly translate into more profitable trading. Because Intercontinental owns the exchanges that traders use, it also owns the data that traders generate and is in the best position to repackage that data as a product.
The company's Data and Listings business segment houses its data and exchange listing services that include pricing and reference data, exchange data, analytics, feeds, index services, and more. The revenue from this segment of the business is mainly subscription-based, so the revenue is recurring. For 2019, this segment accounted for approximately 51% of the company's overall revenue, generating approximately $2.7 billion.
Data source: Intercontinental Exchange Quarterly Investor Presentation.
In the second quarter of 2020, the revenue for data services rose 4% year over year and recorded a record figure of $574 million. The remarkable thing about Intercontinental's data business is how consistent the growth has been over time. In fact, this past quarter marked the 42nd consecutive quarter of year-over-year (YOY) data services revenue growth. The company expects this long-lasting trend to continue forward into the third quarter of 2020 and beyond.
Data sales smooth out volatile trading results
The data segment of the company's business adds a plus, with the fact that it is a much more stable line of business when compared to the Trading and Clearing segment. Its revenue is not as dependent on market transactions, since it is a subscription-based service.
The Trading and Clearing segment, on the other hand, can be quite lucrative but is also at the discretion of market conditions. Trading and Clearing revenue was up 13% year over year, totaling $710 million. This segment has largely benefited from higher market volatility, caused by uncertainty related to the COVID-19 global pandemic.
More uncertainty increases the number of trades that are taking place, which in turn means more trading commissions and clearing fees charged by ICE. This is how the company makes money from owning the New York Stock Exchange, as well as commodity exchanges and fixed-income operations. The downside is that if markets become quieter, then those fees diminish.
Opportunity in mortgage data
Intercontinental Exchange's success in monetizing its trading data is an exciting trend that should continue, but the company has recently identified a new market for growth.
In recent years the company has created a business segment called Mortgage Services that operates the Mortgage Electronic Registration System (MERS). This is a national electronic database that tracks changes in mortgage servicing and beneficial ownership interests for U.S. residential loans.
In 2020, Intercontinental made the bold decision to significantly expand its Mortgage Services segment through the $11 billion acquisition of Ellie Mae. This acquisition follows Intercontinental's acquisition of Simplifile in 2019 for $335 million. Ellie Mae is a popular loan origination system, and Simplifile serves as an electronic liaison, streamlining local recording of residential mortgages.
If Intercontinental's strategy in financial exchanges is any indication (it is!), then observers should expect the company to transform the mortgage market into a tradable exchange where it can generate revenue through transactions (trades) and monetize the data. This is a massive opportunity that is just plain ambitious. Should the company pull this off and become a major player in the mortgage origination and lending market, it will result in huge financial gains.
Looking ahead
Many investors make the mistake of thinking about Intercontinental Exchange as just a financial exchange operator. They would be surprised to learn that a majority of its business now stems from subscription-based data and software fees.
It has been said that once is luck, twice is a coincidence, but three times is a pattern. If that is the case, then 42-quarter year-over-year growth in data service revenue must be pretty impressive. There is clearly no reason for this trend to change; in fact, it should only get stronger. It is well known that everything is becoming more digital, and with that comes a hunger for more data. This presents Intercontinental with a very strong revenue stream that it can rely on for years to come.
