Intercontinental Exchange, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. ICE operates exchanges and clearinghouses, data and listings businesses, and mortgage technology services. Results include Ellie Mae from its September 4, 2020 acquisition.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $1.930B | $1.663B | $6.011B | $4.880B |
| Revenue less transaction-based expenses | $1.411B | $1.336B | $4.365B | $3.904B |
| Operating income | $627M | $706M | $2.253B | $2.051B |
| Operating margin | 44% | 53% | 52% | 53% |
| Net income attributable to ICE | $390M | $529M | $1.563B | $1.485B |
| Diluted EPS | $0.71 | $0.94 | $2.83 | $2.62 |
| Operating cash flow | Not separately provided | Not separately provided | $1.815B | $1.882B |
For Q3, revenue grew 16% and revenue less transaction-based expenses grew 6%, while operating income declined 11% and ICE-attributable net income declined 26%. The reported effective tax rate was 32%, versus 16% a year earlier; a U.K. tax-rate change added $65M of deferred tax expense in the quarter. Q3 adjusted diluted EPS, a non-GAAP measure, was $1.03, down from $1.06. For the nine months, adjusted diluted EPS was $3.37, up from $2.93.
Trading and Clearing revenue less transaction-based expenses increased 20% to $2.304B for the nine months and 6% to $711M in Q3. Data and Listings revenue rose 4% to $2.061B for the nine months and 5% to $700M in Q3; subscription data-services revenue increased 5% and 6%, respectively. Q3 trading results varied by product: cash equities and equity options were strong, while energy, agricultural and financial futures revenues declined year over year.
Cash, debt and capital
- Operating cash flow was $1.815B for the nine months, down 4% year over year. Investing used $9.702B, mainly for acquisitions; financing provided $7.709B, mainly from debt issuance and commercial paper.
- Cash and cash equivalents were $610M at September 30, 2020. Total debt was $17.332B, up from $7.819B at year-end 2019, largely to finance Ellie Mae. Debt included $2.460B of commercial paper and $14.869B of long-term debt.
- ICE had a $3.7B revolving credit facility with no borrowings outstanding; $2.5B supported commercial paper and $171M supported subsidiary commitments, leaving about $1.0B available for general purposes. Commercial paper carried a 0.39% weighted-average rate and 53-day weighted-average remaining maturity.
- Nine-month capital returns included $1.247B in share repurchases and $500M in dividends. Repurchases were suspended in early August in connection with Ellie Mae. The filing reports $1.2B of remaining authorization. ICE announced a $0.30-per-share Q4 dividend payable December 31, 2020.
Material changes, outlook and risks
- ICE acquired Ellie Mae for approximately $11.4B, funded with cash, 18.4 million ICE shares, senior notes, commercial paper and a term loan. Ellie Mae contributed $75M of revenue and $56M of operating expenses from acquisition through quarter-end. Purchase accounting remained preliminary; $7.688B of goodwill and $4.431B of identifiable intangibles were provisionally recorded.
- Bridge2 Solutions was acquired in February 2020. Acquisition-related costs were $90M for the nine months, including $76M in Q3. Higher expenses, acquisition costs, amortization and the tax charge contributed to lower Q3 GAAP operating income and EPS.
- Management stated that it could not estimate the pandemic’s ultimate effect. COVID-19-related volatility increased activity in some markets, but prolonged disruption could affect trading, data demand, mortgage activity, customers, vendors, operations and liquidity. Most employees were working remotely.
- Management expected 2020 capital expenditures and capitalized software development costs of $410M–$420M. It stated cash on hand and operating cash flows were expected to be sufficient to repay debt, while noting future financing needs could vary with acquisitions and other requirements.
- Other key exposures include commercial-paper refinancing and floating-rate interest costs; clearinghouse counterparty and liquidity risks; cybersecurity and operational continuity; and evolving regulation, including Brexit and EU access to U.K. clearing and trading venues. Clearinghouse balance-sheet margin deposits are matched by corresponding payables and are not equivalent to unrestricted corporate cash.
- Legal matters include an SEC investigation and possible settlement concerning legacy broker quotes at ICE Data Pricing & Reference Data; the company accrued a probable amount but did not disclose its value. Potential related civil claims and a CME SPAN trademark dispute had damages that could not be reasonably estimated.
- Effective October 1, 2020, ICE reorganized reporting into three segments: Exchanges, Fixed Income & Data Services, and Mortgage Technology. Prior-period segment information was to be recast.
Most important facts for investors to verify
- Ellie Mae’s post-acquisition growth, integration costs, synergies, final purchase-price allocation and effect on leverage.
- Debt reduction plans, commercial-paper rollover capacity, interest-rate exposure and cash available after clearing-related and other restrictions.
- Whether elevated trading activity and transaction revenue persist, and how transaction-based expenses affect margins.
- The sustainability of recurring data-service growth and the impacts of COVID-19, mortgage-market conditions and regulatory changes.
- Developments and potential costs in the PRD investigation and CME litigation, along with clearinghouse and operational risks.