Intercontinental Exchange, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023; comparisons are with the same 2022 periods. ICE operates Exchanges, Fixed Income and Data Services, and Mortgage Technology businesses.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenue | $2.336 billion | $2.413 billion | $4.808 billion | $4.872 billion |
| Revenue less transaction-based expenses | $1.888 billion (+4%) | $1.814 billion | $3.784 billion (+2%) | $3.713 billion |
| Operating income | $955 million (+10%) | $869 million | $1.924 billion (+3%) | $1.861 billion |
| Operating margin | 51% | 48% | 51% | 50% |
| Net income attributable to ICE | $799 million (+44%) | $555 million | $1.454 billion (+20%) | $1.212 billion |
| Diluted EPS | $1.42 (+43%) | $0.99 | $2.59 (+20%) | $2.16 |
Q2 GAAP net income growth substantially outpaced operating-income growth, alongside a lower effective tax rate: 4% versus 23% in Q2 2022. For the first half, the rate was 12% versus 22%. Management attributed the decrease mainly to favorable prior-year audit settlements, state apportionment changes and the GILTI high-tax exception, partly offset by the U.K. tax-rate increase. Adjusted measures are non-GAAP: Q2 adjusted diluted EPS was $1.43 versus $1.32, and first-half adjusted diluted EPS was $2.84 versus $2.75.
- Exchanges: Q2 revenue was $1.541 billion, down 4%; revenue after transaction expenses was $1.093 billion, up 9%. Energy and agricultural/metals activity grew, while cash equities and financial futures were weaker year over year.
- Fixed Income and Data Services: Q2 revenue rose 7% to $546 million and operating income rose 9% to $190 million. Growth in execution and CDS clearing helped; fixed-income data and analytics was nearly flat.
- Mortgage Technology: Q2 revenue fell 16% to $249 million, and the segment reported a $17 million operating loss versus a $6 million loss. Lower mortgage origination volumes, amid higher mortgage rates, weighed on transaction-based revenue.
Cash flow, debt and liquidity
- First-half operating cash flow was $1.805 billion, up from $1.725 billion. Free cash flow, a non-GAAP measure, was $1.602 billion; adjusted free cash flow was $1.652 billion.
- At June 30, cash and cash equivalents were $1.799 billion; restricted cash and cash equivalents totaled about $5.6 billion. ICE also reported $86.9 billion of cash and cash-equivalent margin deposits and guaranty funds held in its clearing operations. These customer/clearing balances are matched by related obligations and should not be viewed as freely available corporate liquidity.
- Debt was $18.128 billion, principally senior notes, with a weighted average maturity of 16 years and weighted average cost of 3.6%. No commercial paper or revolving-credit-facility borrowings were outstanding. Of the $3.9 billion revolving facility, about $3.7 billion was available for general corporate purposes after subsidiary commitments.
- First-half capital expenditures and capitalized software development costs totaled $203 million. The company paid $472 million in dividends and made no share repurchases in the period.
Material changes, outlook and risks
- Revenue after transaction-based expenses increased despite a decline in reported total revenue. Mortgage Technology remained pressured by lower mortgage activity; recurring data-related revenues provided comparatively stable growth.
- Management expects 2023 capital expenditures and capitalized software development costs of $450 million to $500 million. The filing provides no specific earnings or revenue guidance and describes the near-term macroeconomic environment as dynamic.
- The proposed Black Knight acquisition was valued at approximately $11.7 billion under the amended agreement, with $10.5 billion cash consideration and stock consideration that varies with ICE’s share price. ICE had separately raised approximately $4.9 billion net through senior notes, held as restricted cash pending the transaction; the notes include mandatory-redemption provisions if the acquisition is not completed within the applicable period. A $2.4 billion delayed-draw term loan was undrawn at quarter-end.
- The FTC’s court action had enjoined completion pending further proceedings. After ICE agreed to sell Black Knight’s Optimal Blue business for $700 million, the FTC withdrew its administrative complaint on July 25, 2023; the separate court litigation remained relevant, with a hearing scheduled for August 14. The proposed sale was contingent on the acquisition, the Empower divestiture, regulatory approvals and other conditions. ICE disclosed a potential $725 million termination fee and $11 million of accruals related to potential regulatory settlements.
- Key operating risks include trading-volume and market-volatility changes, mortgage market weakness, regulatory changes, cybersecurity and technology resilience, foreign exchange and interest-rate exposure, and clearing-member defaults. ICE estimated clearing-house maximum exposure of $161.8 billion for a hypothetical one-day market move, excluding the effects of margin, collateral, guaranty funds and default insurance; actual exposure could differ materially.
- Management said macroeconomic and banking-sector events had not materially harmed operations through June 30, but uncertainty remained. ICE also cited claims payments following a January 2023 NYSE system outage and regulatory-settlement accruals among first-half expenses. The company expects to cease CDS clearing at ICE Clear Europe in late 2023.
Important facts for investors to verify
- Progress, closing conditions, financing costs and divestiture terms for the Black Knight acquisition, including the status and outcome of FTC court proceedings.
- Whether mortgage origination activity recovers and how that affects Mortgage Technology revenue, profitability and recurring-versus-transaction revenue mix.
- Drivers and sustainability of earnings growth, particularly the unusually low 2023 effective tax rates and the reconciliation of GAAP to adjusted results.
- Corporate liquidity available after distinguishing unrestricted cash from restricted acquisition proceeds and clearing-member funds; also monitor debt and interest expense.
- Any further consequences, claims or regulatory costs related to the NYSE system outage and the disclosed potential regulatory settlements.