Intercontinental Exchange, Inc. — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This is an annual filing, not a standalone Q4 report; quarterly figures are noted where useful. All amounts are U.S. dollars.
Business context
ICE operates regulated exchanges and clearing houses and provides market data and listing services. Its two reportable segments are Trading and Clearing and Data and Listings. In 2018, the segments contributed 49% and 51% of consolidated revenue, respectively. Data services are largely subscription-based; transaction revenues vary with trading volumes, product mix, and market conditions.
Financial performance and liquidity
| Metric | FY 2018 | FY 2017 | Change |
|---|---|---|---|
| Total revenue | $6.276 billion | $5.843 billion | +7% |
| Revenue less transaction-based expenses | $4.979 billion | $4.638 billion | +7% |
| Operating income | $2.583 billion | $2.379 billion | +9% |
| Operating margin | 52% | 51% | +1 percentage point |
| Net income attributable to ICE | $1.988 billion | $2.526 billion | -21% |
| Diluted EPS | $3.43 | $4.25 | -19% |
| Adjusted diluted EPS (non-GAAP) | $3.59 | $2.97 | +21% |
| Cash provided by operating activities | $2.533 billion | $2.085 billion | +21% |
Revenue less transaction-based expenses is ICE’s reported operating revenue measure. GAAP net income and EPS declined despite higher revenue and operating income, chiefly reflecting the prior-year tax benefit from the Tax Cuts and Jobs Act (TCJA), which included a $764 million deferred tax benefit in 2017. 2018 also included a $110 million gain on the remeasurement of ICE’s prior MERS investment. Adjusted results are non-GAAP measures and should be assessed alongside GAAP results.
- Segments: Trading and Clearing revenue less transaction-based expenses rose 14% to $2.420 billion; operating income increased 12% to $1.509 billion. Data and Listings revenue rose 2% to $2.559 billion; operating income increased 4% to $1.074 billion.
- Trading activity: Futures and options contracts traded increased 6% to 1.509 billion. Cash equities handled volume increased 14%, and NYSE equity options volume increased 43%. Data services revenue increased 1%; desktops and connectivity revenue fell 17%, largely reflecting prior divestitures.
- Q4 2018: Revenue less transaction-based expenses was $1.308 billion, operating income was $676 million, and net income attributable to ICE was $611 million. Q4 2017 net income was $1.233 billion, including substantial one-time tax and divestiture gains, so the comparison is not representative of underlying operating trends.
- Cash and debt: Cash and cash equivalents were $724 million at year-end, versus $535 million a year earlier. Total debt was $7.441 billion, up from $6.100 billion; $951 million was commercial paper and $6.490 billion was long-term debt. Interest expense rose to $244 million from $187 million.
- Liquidity: ICE had a $3.4 billion revolving credit facility with no borrowings outstanding; $2.3 billion was available for general corporate purposes after amounts reserved to back commercial paper and support broker-dealer commitments. Restricted cash and cash equivalents totaled about $1.148 billion.
- Capital returns and investment: ICE repurchased $1.198 billion of shares and paid $555 million in dividends during 2018. The annual dividend was $0.96 per share. Capital expenditures were $134 million and capitalized software development costs were $146 million.
The balance sheet reports $63.955 billion of margin deposits, guaranty funds, and delivery-contract receivables, with an equal payable liability. These clearing-related balances are not ordinary corporate liquidity. Clearing members’ cash and non-cash collateral totaled $121.4 billion at year-end.
Material changes versus the prior year
- Transaction and clearing revenue increased 11%, supported by higher futures and options activity and growth in cash equities, equity options, and fixed income and credit. Data services grew modestly, while the desktops and connectivity business continued to reflect the 2017 divestitures of IDMS and Trayport.
- Operating expenses increased 6% to $2.396 billion, including higher compensation, technology and communications, and depreciation and amortization. ICE cited acquisition-related costs, employee severance and retention, data-center work, hardware upgrades, and cybersecurity investments.
- Operating cash flow increased by $448 million. Investing activities used $1.755 billion, including $1.246 billion of cash paid for acquisitions net of cash acquired and $306 million of investment purchases.
- ICE issued $2.25 billion of senior notes in 2018, including notes due in 2023, 2028, and 2048; proceeds funded general corporate purposes, including redemption of $600 million of notes and refinancing acquisition-related commercial paper.
- ICE completed acquisitions of BondPoint, TMC Bonds, CHX Holdings, and the remaining interests in MERS. It also increased its Euroclear ownership to 9.8% and funded Bakkt, a digital-assets venture, with $183 million of initial funding.
Outlook, management commentary, risks, and unusual items
- Management described 2018 as a year of record consolidated revenue and futures and options volume. Its stated strategy is to grow data offerings, expand trading and clearing capabilities, sustain listings leadership, invest in technology, and pursue selected acquisitions and partnerships.
- ICE expected 2019 capital expenditures and capitalized software development costs together to be $290 million to $320 million. The filing does not provide numerical revenue or earnings guidance.
- For Q1 2019, ICE announced a $0.275 per-share dividend, payable March 29, 2019. A $2.0 billion share-repurchase authorization became effective January 1, 2019; repurchases are discretionary.
- Key business risks include sensitivity of transaction revenue to trading activity and volatility; competition and pricing pressure; extensive and changing regulation; cybersecurity and technology outages; clearing-member defaults and investment or liquidity risks at clearing houses; acquisition integration; debt and interest-rate exposure; and foreign-currency movements.
- Regulatory and policy uncertainties include Brexit and continued EU access to UK clearing houses, MiFID II access requirements, benchmark regulation, and the SEC’s transaction-fee pilot. Management said the effects of Brexit and related regulatory changes remained uncertain.
- ICE disclosed two proposed class actions filed in January 2019 alleging LIBOR-related antitrust conduct; ICE stated it intended to defend the matters. The filing says the potential loss range could not be reasonably estimated. Separately, NYSE-affiliated exchanges settled SEC matters in March 2018 for a $14 million civil penalty and non-monetary relief.
- ICE reported that it detected and contained exploitation of a legacy web server in September 2018, with no persistent network access or lateral spread identified. It stated that no cyber incident had had a material impact on operations or financial condition.
- Auditors gave unqualified opinions on the financial statements and internal controls; management also concluded internal control over financial reporting was effective as of year-end.
Important facts for investors to verify
- Reconcile the 2017 TCJA deferred-tax benefit and other unusual gains with reported GAAP earnings, and compare those results with non-GAAP adjusted earnings.
- Review debt maturities, commercial-paper rollover exposure, interest costs, and the assumptions behind management’s view that operating cash flow will meet debt and capital needs.
- Assess how much growth in Trading and Clearing depends on market volatility, major products, and clearing-member concentration; one clearing member represented 17% of segment revenue in 2018.
- Track recurring data-services subscription value: reported year-end annual subscription value was $1.922 billion, up 6.1%, excluding foreign-exchange and acquisition effects.
- Monitor the LIBOR litigation, SEC and other regulatory proceedings, Brexit-related market access, and any material developments in cybersecurity, clearing-house exposures, or Bakkt.
- Evaluate acquisition integration and returns, including the contribution and risks of 2018 acquisitions and the discretionary pace of buybacks and dividends.