Intercontinental Exchange, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparisons are with Q1 2022 unless otherwise noted. ICE operates Exchanges, Fixed Income and Data Services, and Mortgage Technology businesses. Unless stated otherwise, figures are in U.S. dollars.
Financial performance
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Total revenue | $2,472 million | $2,459 million | Up 1% |
| Revenue less transaction-based expenses | $1,896 million | $1,899 million | Flat |
| Operating income / margin | $969 million / 51% | $992 million / 52% | Income down 2%; margin down 1 point |
| Net income attributable to ICE | $655 million | $657 million | Flat |
| Diluted EPS | $1.17 | $1.16 | Up 1% |
| Adjusted operating income / margin (non-GAAP) | $1,156 million / 61% | $1,153 million / 61% | Income flat |
| Adjusted net income / diluted EPS (non-GAAP) | $791 million / $1.41 | $804 million / $1.43 | Down 2% / 1% |
| Cash from operating activities | $653 million | $756 million | Down 13% |
| Free cash flow (non-GAAP) | $568 million | $653 million | Down 13% |
| Adjusted free cash flow (non-GAAP) | $673 million | $660 million | Up 2% |
Interest income was $91 million versus $1 million, while interest expense increased to $176 million from $103 million. The effective tax rate was 21%, compared with 20%. ICE declared and paid $0.42 per share in quarterly dividends, totaling $236 million; it made no share repurchases in the quarter.
Segments and material period changes
- Exchanges: Revenue less transaction-based expenses rose 1% to $1,097 million; operating income declined 2% to $765 million. Agricultural and metals activity benefited from market volatility, while energy revenue declined and cash equities activity was lower. Data and connectivity revenue increased 8%.
- Fixed Income and Data Services: Revenue rose 11% to $563 million and operating income rose 42% to $220 million. Higher fixed-income execution and CDS clearing revenue reflected market volatility and stronger client clearing. Data services annual subscription value was $1.708 billion, up 2.6% year over year.
- Mortgage Technology: Revenue fell 23% to $236 million and the segment reported a $16 million operating loss, versus $53 million of income. Higher mortgage rates and reduced origination volumes weighed on transaction-based revenue; recurring revenue increased 6%.
- Recurring revenue across ICE was $953 million, up 4%; transaction revenue, net, was $943 million, down 4%. Foreign exchange movements reduced revenue less transaction-based expenses by $22 million year over year.
Cash, debt, and liquidity
- At March 31, 2023, cash and cash equivalents were $2.1 billion, restricted cash was $6.6 billion, and cash and cash-equivalent margin deposits and guaranty funds were $102.1 billion. Clearing-member collateral balances fluctuate with market conditions and are substantially matched by related liabilities; they should not be read as unrestricted corporate liquidity.
- Total debt was $18.1 billion, comprising senior notes with a 16-year weighted-average maturity and 3.6% weighted-average cost. No amounts were outstanding under the commercial paper program, revolving credit facility, or delayed-draw term loan at quarter-end. Approximately $3.7 billion remained available under the revolving facility for general corporate purposes, subject to stated commitments.
- Operating cash flow declined primarily due to working-capital timing, including higher Section 31 fee payments. Adjusted free cash flow adds back the timing effect of Section 31 fees and is a non-GAAP measure.
- Management expected 2023 capital expenditures and capitalized software development costs of $450–$500 million. The filing provides no full-year earnings or revenue guidance.
Outlook, risks, contingencies, and unusual items
- Black Knight acquisition: The amended transaction was valued at approximately $11.7 billion, including $10.5 billion in fixed cash consideration and stock consideration representing 10% of the value. ICE expected closing in the second half of 2023, subject to regulatory approvals and other closing conditions. Black Knight shareholders approved the amendment on April 28, 2023.
- FTC litigation: The FTC challenged the transaction, and a federal court entered a temporary restraining order on April 21, 2023, preventing completion until it rules on the FTC’s preliminary-injunction motion. ICE and Black Knight denied the allegations and said they would vigorously defend the transaction. ICE disclosed a potential $725 million termination fee if specified conditions apply.
- Management said rising rates and market volatility supported activity in several exchange and fixed-income products, but higher mortgage rates reduced mortgage demand and transaction revenue. It expected a dynamic near-term macroeconomic environment and reported no material operating impact from recent banking-sector events or the conflict in Ukraine as of the filing.
- Other considerations include evolving regulation of European energy and derivatives markets, cyber and platform resilience, clearing-house counterparty and liquidity risks, interest-rate and currency exposure, and the potential effects of mortgage-market weakness. ICE reported net unsettled contract notional of $2.4 trillion; its estimated one-day clearing-house exposure before collateral and other protections was $174.6 billion.
- Q1 unusual items included $21 million of acquisition-related transaction and integration costs and $16 million of other items excluded from adjusted results, including claims following a January NYSE system outage and an accrual related to a potential $10 million regulatory settlement. ICE also recorded $35 million of net losses from equity-method investments, primarily Bakkt, partly offset by OCC profits.
Important facts for investors to verify
- The status and ultimate outcome of FTC proceedings, the acquisition closing timetable, final transaction financing, and any termination-fee exposure.
- Whether mortgage origination activity stabilizes, and how recurring mortgage technology revenue performs against transaction-based revenue.
- Whether growth in data services and fixed-income clearing persists as volatility and interest-rate conditions change.
- Cash generation and debt levels after acquisition-related funding, alongside the planned $450–$500 million of 2023 capital and software investment.
- How clearing-member collateral requirements, regulatory changes, and the disclosed clearing-house exposure evolve; distinguish these collateral flows from ICE’s corporate cash and liquidity.