Intercontinental Exchange, Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. ICE operates Exchanges, Fixed Income and Data Services, and Mortgage Technology businesses. Comparisons below are year over year unless noted. Mortgage Technology results include Ellie Mae, acquired in September 2020, so comparisons with 2020 are not like-for-like.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Total revenue | $2.134bn | $1.966bn | $4.563bn | $4.081bn |
| Revenue less transaction-based expenses | $1.707bn | $1.395bn | $3.504bn | $2.954bn |
| Operating income | $799m | $744m | $1.691bn | $1.626bn |
| Operating margin | 47% | 53% | 48% | 55% |
| Net income attributable to ICE | $1.252bn | $523m | $1.898bn | $1.173bn |
| Diluted EPS | $2.22 | $0.95 | $3.36 | $2.13 |
| Adjusted diluted EPS (non-GAAP) | $1.16 | $1.04 | $2.50 | $2.30 |
| Operating cash flow | Not separately stated here | Not separately stated here | $1.607bn | $1.378bn |
Q2 revenue less transaction-based expenses rose 22%; operating expenses increased 39% to $908m, reflecting acquisition-related costs and higher compensation, technology, and amortization expenses. Adjusted operating margin was 56% for Q2 and 58% year to date, versus 59% and 60%, respectively, in 2020.
Q2 segment revenue less transaction-based expenses was $909m for Exchanges, $458m for Fixed Income and Data Services, and $340m for Mortgage Technology. Exchanges’ Q2 operating income declined 2% to $583m; Fixed Income and Data Services’ rose slightly to $121m; Mortgage Technology’s was $95m, with the year-over-year comparison affected by Ellie Mae’s acquisition.
Material changes and unusual items
- Q2 GAAP net income included a $1.227bn pre-tax gain on the sale of ICE’s Coinbase investment for $1.24bn. The gain was $898m after tax. Adjusted diluted EPS, which excludes the gain and other specified items, rose 12% in Q2 to $1.16.
- Exchanges revenue less transaction-based expenses declined 3% year to date, mainly reflecting lower trading activity versus elevated pandemic-related volatility in 2020. Q2 performance varied: cash equities revenue was weaker, while equity-options activity and some financial futures improved.
- Fixed Income and Data Services revenue increased 2% year to date, supported by data and analytics growth; execution and CDS clearing revenues fell from unusually active 2020 comparisons. Annual Subscription Value for this segment was $1.602bn, up 6.6% year over year.
- Mortgage Technology revenue was $695m year to date versus $102m in 2020, principally because 2021 includes Ellie Mae. Acquisition-related intangible amortization was $313m year to date, including $176m related to Ellie Mae.
- Interest expense rose to $213m year to date from $156m, largely following debt issued in 2020, including to finance Ellie Mae. The effective tax rate was 31% year to date versus 21%; the higher rate reflected the Coinbase sale and the U.K. corporate tax-rate increase enacted during the period.
Cash, debt, and liquidity
- At June 30, 2021, cash and cash equivalents were $602m; total debt was $14.453bn, down from $16.537bn at December 31, 2020. Debt included $12.9bn of fixed-rate senior notes, $1.2bn of floating-rate notes, $308m of commercial paper, and $10m of other short-term debt.
- ICE had a $3.8bn revolving credit facility with no borrowings outstanding. After commercial-paper backstop and subsidiary commitments, approximately $3.3bn remained available for general corporate purposes.
- Operating cash flow was $1.607bn for the first half. Investing activities provided $966m, primarily due to Coinbase sale proceeds; financing activities used $2.518bn, principally commercial-paper repayments and dividends. ICE repaid $2.1bn net under its commercial-paper program, using $1.2bn of Coinbase proceeds among other resources.
- Cash, cash equivalents, and restricted cash totaled $2.046bn, including $1.4bn of restricted cash. The $92.080bn of margin deposits, guaranty funds, and delivery-contract receivables on the balance sheet is matched by corresponding payables and is not ordinary corporate liquidity.
- First-half capital expenditures and capitalized software development costs totaled $240m. Management expected these categories to total $430m–$450m in 2021. ICE paid $374m in dividends in the first half and had $1.2bn authorized for future share repurchases; repurchases were suspended.
Outlook, risks, and contingencies
- Management stated that cash on hand and operating cash flows were expected to be sufficient to repay debt, while noting future funding needs depend on growth, acquisitions, technology investment, regulation, and capital returns. The filing provides no earnings or revenue guidance.
- ICE expected the Bakkt–VIH business combination to close in Q3 2021, subject to approvals. ICE expected to hold about 65% economic interest but a minority voting interest, deconsolidate Bakkt, and account for it as an equity-method investment after closing. ICE committed $50m to the PIPE.
- Key disclosed risks include market-volume and mortgage-market variability, competition, regulation across jurisdictions, Brexit-related uncertainty, clearinghouse and counterparty exposures, cyber and technology disruption, acquisition integration, and foreign-exchange and interest-rate risk. A 100-basis-point increase in short-term rates was estimated to reduce annual pre-tax earnings by $16m on the floating-rate debt outstanding; a 10% adverse currency move was estimated to cause a $16m transaction loss, absent changes in exposures or hedging.
- ICE reported an estimated clearinghouse maximum one-day guarantee exposure of $148.6bn before considering margin, guaranty funds, collateral, and insurance. Member collateral and clearinghouse resources are intended to mitigate this exposure, but actual market volatility could make exposure materially different.
- Legal proceedings arise in the ordinary course. ICE said it did not expect resulting liabilities to materially adversely affect consolidated financial condition, results, or liquidity, but noted a particular period could be affected by developments. Nearly all potential claims related to legacy fixed-income broker quotes from Live Well had been resolved by July 29, 2021; one financial-institution creditor’s assertions remained unresolved. ICE denied wrongdoing.
- Management reported effective disclosure controls and no significant new risk factors during the first half compared with its 2020 Form 10-K.
Investor verification priorities
- Separate recurring operating performance from the Coinbase gain; compare GAAP results with the company’s non-GAAP reconciliations and assess the tax effects of adjustments.
- Evaluate the sustainability and margins of Ellie Mae-driven Mortgage Technology growth, including integration costs, amortization, and mortgage-market sensitivity.
- Track trading-volume trends and the recurring data-services metric, including whether ASV growth continues.
- Confirm completion and accounting treatment of the Bakkt transaction, including final ownership, voting rights, funding, and deconsolidation effects.
- Monitor debt repayment, commercial-paper rollover capacity, capital spending against the $430m–$450m estimate, and the distinction between corporate cash and restricted or customer-related clearing balances.
- Review resolution of the remaining Live Well-related claim and regulatory developments affecting ICE’s markets, clearinghouses, benchmarks, and cross-border operations.