Intercontinental Exchange, Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. ICE operates regulated exchanges and clearing houses, listings venues, and market-data businesses. Amounts are in U.S. dollars; financial statement figures are in millions unless noted.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Total revenue | $1,432 | $1,416 | $4,395 | $4,474 |
| Revenue less transaction-based expenses | $1,143 | $1,078 | $3,485 | $3,361 |
| Operating income | $596 | $474 | $1,787 | $1,609 |
| Net income attributable to ICE | $369 | $344 | $1,289 | $1,070 |
| Diluted EPS | $0.62 | $0.57 | $2.17 | $1.79 |
| Operating margin | 52% | 44% | 51% | 48% |
- Q3 revenue increased 1%, while revenue after transaction-based expenses rose 6%; operating income increased 26% and ICE-attributable net income rose 7% year over year.
- For the first nine months, total revenue declined 2%, but revenue after transaction-based expenses increased 4%. Operating income grew 11% and ICE-attributable net income grew 21%.
- Data and Listings revenue increased 5% year to date, led by pricing and analytics. Trading and Clearing revenue after transaction-based expenses increased 2%; stronger oil and interest-rate activity was offset in part by weaker cash equities and agricultural markets.
- The nine-month GAAP results include a $176 million realized Cetip investment gain in other income. Management’s non-GAAP adjusted diluted EPS was $2.22 for the nine months and $0.73 for Q3; these measures exclude specified items and are not GAAP measures.
Cash flow, balance sheet and liquidity
- Operating cash flow was $1.410 billion for the nine months, down from $1.508 billion. Management attributed the decline primarily to a $136 million pension contribution, versus $10 million in the prior-year period; the contribution brought the pension plan to 99% funded.
- Capital expenditures were $136 million and capitalized software development costs were $104 million year to date. Cash and cash equivalents were $419 million at September 30, 2017, compared with $407 million at year-end 2016. Restricted cash and investments were about $1.0 billion and are not equivalent to unrestricted liquidity.
- Total debt was $6.062 billion, down from $6.364 billion at December 31, 2016. Commercial paper outstanding was $1.197 billion, at a weighted-average rate of 1.23% and 29-day weighted-average maturity; long-term debt was $4.865 billion.
- The $3.4 billion revolving credit facility had no amounts drawn. After reserving $1.2 billion to backstop commercial paper, $2.2 billion remained available for general corporate purposes. The facility maturity was extended to August 2022.
- ICE issued $1.0 billion of senior notes in August, principally using proceeds to redeem the $850 million NYSE Notes. It repurchased $709 million of stock and paid $358 million of dividends in the first nine months. A new $1.2 billion repurchase authorization becomes effective January 1, 2018.
Material changes, outlook and risks
- Market activity diverged by product: total futures and options contracts traded increased 15% year to date, including 37% growth in interest-rate contract volume and 18% growth in oil volume. Cash handled volume fell 18%; lower U.S. equity volatility also weighed on cash and equity-options revenue.
- Data Services Annual Subscription Value was $1.7 billion at September 30, up 6% year over year. Management cited customer retention, new and expanded products, and acquisitions as contributors.
- Trayport was classified as held for sale following the U.K. competition authority’s divestiture order. On October 27, ICE agreed to sell it to TMX Group for £550 million, with consideration comprising cash and the proposed acquisition of TMX subsidiaries NGX and Shorcan Energy, subject to regulatory approvals. ICE expected to recognize a gain at closing; the amount was not stated.
- After quarter-end, ICE agreed to acquire Virtu BondPoint for $400 million cash, acquired a 4.7% Euroclear stake for €275 million, and acquired BofAML’s fixed-income index business. The BondPoint deal was expected to close in Q1 2018 subject to regulatory review.
- Management expected 2017 operational capital expenditures and capitalized software costs of $280–$300 million, plus about $50 million of non-operational expenditures, primarily New York headquarters improvements. The filing provides no earnings or revenue guidance.
- Key risks include market-volume and volatility changes, competition, technology resilience and cybersecurity, clearing-member defaults, interest-rate and foreign-exchange exposure, and evolving regulation. MiFID II/EMIR implementation, Brexit-related changes, and proposed EU oversight of non-EU clearing houses could affect operations; impacts were uncertain.
- ICE recorded $14 million of expense accruals for ongoing regulatory investigations and inquiries during the first nine months ($4 million in Q3). Management did not expect legal matters to materially adversely affect the company, while noting outcomes could affect results in a particular period.
- Other unusual items include the $6 million loss on the NYSE Governance Services sale and a $136 million pension contribution. The Q3 effective tax rate was 33%, versus 21% a year earlier, partly reflecting the absence of a prior-year U.K. deferred-tax benefit and an Illinois tax-rate increase.
Investor verification priorities
- Assess the sustainability of data-services growth and the sensitivity of transaction revenue and margins to trading volumes, product mix, and rebates.
- Reconcile GAAP earnings growth with the $176 million Cetip gain and management’s non-GAAP adjustments.
- Track unrestricted liquidity, commercial-paper refinancing and interest-rate exposure, debt covenants, and planned buybacks, dividends, and strategic spending.
- Verify completion, regulatory approvals, final consideration, and realized gain for the Trayport sale and related NGX/Shorcan transactions; also track the announced acquisitions and Euroclear investment.
- Monitor regulatory inquiries and accruals, clearing-house collateral and default exposure, and potential effects of European regulatory changes and Brexit.