Intercontinental Exchange, Inc. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016. ICE operates regulated exchanges and clearing houses, listings venues, and market-data businesses. Following the December 2015 Interactive Data acquisition, ICE reports two segments: Trading and Clearing, and Data and Listings. 2016 results include acquired businesses after their acquisition dates; prior-period comparisons therefore are not fully like-for-like.
Financial performance
- Third quarter: Revenue was $1.416 billion, up 19% year over year; revenue less transaction-based expenses was $1.078 billion, up 32%. Operating income was $474 million, up 8%; net income attributable to ICE was $344 million, up 12%. Diluted EPS was $2.86, up 4%.
- First nine months: Revenue was $4.474 billion, up 29%; revenue less transaction-based expenses was $3.361 billion, up 36%. Operating income was $1.609 billion, up 21%; net income attributable to ICE was $1.070 billion, up 18%. Diluted EPS was $8.93, up 10%.
- Margins: GAAP operating margin was 44% in Q3 (54% in Q3 2015) and 48% year to date (54% in 2015). Management’s non-GAAP adjusted operating margin was 55% in Q3 (59%) and 57% year to date (59%). Adjusted measures exclude specified items and are not GAAP measures.
- Segments: Q3 Data and Listings revenue less transaction-based expenses was $595 million, versus $310 million, and operating income was $236 million, versus $163 million; growth primarily reflected acquisitions. Trading and Clearing revenue less transaction-based expenses was $483 million, down 4%, and operating income was $238 million, down 14%.
- Cash flow and investment: Nine-month operating cash flow was $1.508 billion, versus $890 million. Investing activities used $306 million; capital expenditures were $166 million and capitalized software development costs were $88 million. Financing activities used $1.366 billion, including $1.006 billion of net debt repayments and $307 million of dividends. Cash and cash equivalents ended at $458 million, down from $627 million at year-end 2015.
- Debt and liquidity: Total debt was $6.305 billion, down from $7.308 billion at December 31, 2015, including $1.585 billion of commercial paper and $4.720 billion of long-term debt. A $3.4 billion revolving credit facility had no borrowings; $1.8 billion was available after backing the commercial paper outstanding at quarter-end. The filing reports $49.832 billion of margin deposits and guaranty funds as both current assets and liabilities; these are clearing-member funds, not ordinary corporate liquidity.
- Shareholder returns: ICE paid $2.55 per share in dividends during the first nine months. The board authorized up to $1.0 billion of future repurchases; repurchases began in October 2016. A five-for-one stock split was declared after quarter-end.
Material changes, outlook and risks
- Interactive Data and Trayport contributed $786 million of data-services revenue in the first nine months. Their inclusion also contributed substantially to operating-expense growth; total operating expenses rose 55% year to date. Interest expense increased to $134 million from $67 million, primarily due to acquisition financing.
- On October 17, 2016, the U.K. Competition and Markets Authority ordered divestment of Trayport. ICE intends to appeal; the process may be lengthy, and an unsuccessful appeal could require a sale at an uncertain price. ICE said it would not integrate Trayport during the appeal.
- ICE acquired a majority interest in MERS in June 2016 and acquired SPSE and Credit Market Analysis for $431 million on October 3, funded with commercial paper. The SPSE services are to be operated separately from existing ICE fixed-income evaluated-pricing services until further notice, under an SEC order.
- ICE recorded a $33 million impairment of the Creditex customer-relationship intangible asset after selling U.S. voice-brokerage operations and discontinuing U.K. voice brokerage. The remaining asset was $15 million at quarter-end, to be amortized through August 2020.
- Currency translation reduced equity by $245 million year to date, primarily from sterling weakness following the U.K. referendum to leave the EU. Management said the effects of Brexit and related regulatory changes remain uncertain. Other risks include market volatility and trading volumes, competition and pricing, regulation, technology and cybersecurity, clearing-member defaults, acquisition integration, and commercial-paper rollover and interest-rate exposure.
- Management expected approximately $300 million of 2016 operational capital expenditures and capitalized software development costs, plus approximately $80 million of real-estate capital expenditures. No earnings or revenue guidance is provided in the supplied filing text. Management stated that cash on hand and operating cash flows should be sufficient to repay debt as it matures.
- The Q3 effective tax rate was 21%, compared with 27% a year earlier, partly due to a deferred tax benefit from a future U.K. tax-rate reduction. The nine-month rate was 27% in both years. ICE reported effective disclosure controls and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- How much of revenue and profit growth is organic versus attributable to Interactive Data and Trayport, and whether Data and Listings margins improve as integration proceeds.
- The outcome and financial consequences of the Trayport appeal, and the terms and funding impact of the October 2016 acquisitions.
- Commercial-paper refinancing, interest-rate sensitivity, upcoming note maturities, and liquidity available after facility backstops and clearing-house needs.
- Trading volumes, market share, pricing and rebates, particularly the softer Q3 cash-equities and equity-options activity and declining Trading and Clearing segment results.
- The treatment of acquisition costs, amortization and the Creditex impairment in non-GAAP measures; compare those measures with GAAP results.