Business Context and Reporting Period
Intercontinental Exchange, Inc. (ICE) filed this Form 10-K for the fiscal year ended December 31, 2019. The filing is an annual report, not a standalone fourth-quarter filing; it also provides unaudited quarterly results. ICE operates regulated exchanges and clearing houses and provides data, listings, mortgage and technology services. Its two segments are Trading and Clearing and Data and Listings.
Financial Performance and Liquidity
| Metric | 2019 | 2018 |
|---|---|---|
| Total revenue | $6.547 billion | $6.276 billion |
| Revenue less transaction-based expenses | $5.202 billion | $4.979 billion |
| Operating income | $2.673 billion | $2.583 billion |
| Operating margin | 51% | 52% |
| Net income attributable to ICE | $1.933 billion | $1.988 billion |
| Diluted EPS | $3.42 | $3.43 |
| Adjusted diluted EPS (non-GAAP) | $3.88 | $3.59 |
| Cash flow from operating activities | $2.659 billion | $2.533 billion |
Data and Listings produced $2.660 billion of revenue and $1.164 billion of operating income; Trading and Clearing produced $3.887 billion of revenue, or $2.542 billion after transaction-based expenses, and $1.509 billion of operating income. Data services revenue rose 5%, supported by customer retention, new customers, higher purchases and pricing. Futures and options contract volume fell 7% overall, including an 11% decline in financial futures and options volume. Fixed income and credit revenue rose 52%, largely reflecting acquisitions.
Fourth-quarter 2019 revenue less transaction-based expenses was $1.298 billion, operating income was $622 million, net income attributable to ICE was $448 million, and diluted EPS was $0.80. Fourth-quarter 2018 net income attributable to ICE was $611 million and included a $110 million gain related to the MERS acquisition.
At year-end, cash and cash equivalents were $841 million; total debt was $7.819 billion, comprising $6.5 billion of senior notes and $1.3 billion of commercial paper. ICE had a $3.4 billion revolving credit facility, with $1.9 billion available for general corporate purposes after required backstops and commitments. The balance sheet included $64.987 billion of clearing margin, guaranty fund and delivery-contract receivables, matched by an equal payable; these amounts are not ordinary corporate liquidity. Operating cash flow funded investment, dividends and repurchases. ICE repurchased $1.46 billion of stock and paid $621 million in dividends during 2019.
Material Changes Versus 2018
- Revenue less transaction-based expenses increased 4%, while operating expenses rose 6%; operating margin declined one percentage point.
- ICE net income fell 3%, reflecting, among other items, higher interest expense and the absence of the 2018 MERS acquisition gain. Adjusted net income attributable to ICE increased 6% and adjusted diluted EPS increased 8%; both are non-GAAP measures.
- Operating cash flow increased 5%. Investing cash outflow narrowed to $594 million from $1.755 billion, partly because 2018 included larger acquisition and investment spending.
- Debt increased to $7.819 billion from $7.441 billion, including higher commercial paper borrowings. Cash and cash equivalents rose to $841 million from $724 million.
- ICE acquired Simplifile for $338 million in cash in June 2019. Bakkt Bitcoin futures launched in September and options on Bitcoin futures in December; reported 2019 trading activity was limited.
Outlook, Commentary, Risks and Unusual Items
Management cited growth in data demand, market access and risk-management needs as opportunities, while emphasizing continued investment in technology, cybersecurity, products and acquisitions. ICE expects 2020 capital expenditures and capitalized software development costs of $290 million to $320 million. A $2.4 billion share-repurchase authorization became effective January 1, 2020, and the company announced a first-quarter 2020 dividend of $0.30 per share. These are plans and authorizations, not guarantees of future results.
- Unusual charges and accounting: ICE recorded a $31 million impairment of ICE Futures Singapore exchange-registration intangible assets and a $16 million impairment of promissory notes associated with the Consolidated Audit Trail (CAT) in 2019. The company said reimbursement of CAT implementation costs remained uncertain.
- Market and regulatory exposure: Trading activity depends partly on volatility, trading volumes and customer demand. Management identified potential effects from Brexit and access to U.K. clearing houses, MiFID II, EMIR 2.2, market-data fee regulation, capital rules and differing cross-border requirements.
- Benchmark transition and litigation: The filing notes uncertainty around transition from LIBOR, expected after 2021, and proposed class actions alleging manipulation of USD LIBOR. ICE said it would defend the litigation; outcomes and potential losses were not clearly estimable.
- Operational and clearing risks: ICE reported coordinated DDoS attacks in 2019 that its response measures mitigated, and noted ransomware incidents affecting three vendors. Clearing operations face member-default, collateral, investment, liquidity and sovereign-security risks; ICE had contributed $404 million to clearing guaranty funds and obtained $250 million of default insurance for specified clearing houses.
- Other risks: The filing highlights competition, cyber threats, acquisition integration, foreign-exchange exposure, debt service and Bakkt’s execution, regulatory, custody and digital-asset risks. A $2.574 billion debt principal amount was scheduled for repayment in 2020.
ICE stated that it did not believe resolution of its disclosed legal matters would materially adversely affect consolidated financial condition, results or liquidity, while cautioning that developments could materially affect results in a particular period. The auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Important Facts for Investors to Verify
- Review the drivers and sustainability of adjusted earnings growth against GAAP net income, including acquisition-related amortization and other adjustments.
- Assess the 2020 maturity and refinancing plan for debt, commercial-paper rollover exposure, and remaining revolving-facility capacity.
- Track trading volumes and revenue trends by asset class, particularly declining financial futures activity, alongside recurring data-services growth.
- Monitor the CAT cost-recovery outcome, LIBOR transition and litigation, and regulatory developments affecting data fees and cross-border clearing access.
- Evaluate Simplifile integration and Bakkt adoption, performance and risk controls; the filing gives no assurance that expected returns will be achieved.