Intercontinental Exchange, Inc. — Q2 2017 Form 10-Q
Business context and period. ICE operates regulated exchanges and clearing houses, listings venues, and market-data businesses. This unaudited filing covers the three and six months ended June 30, 2017; comparisons are with the corresponding 2016 periods. Amounts are in U.S. dollars unless stated otherwise.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $1.494B | $1.504B | $2.963B | $3.058B |
| Revenue less transaction-based expenses | $1.178B | $1.129B | $2.342B | $2.283B |
| Operating income | $609M | $551M | $1.191B | $1.135B |
| Operating margin | 52% | 49% | 51% | 50% |
| Net income attributable to ICE | $418M | $357M | $920M | $726M |
| Diluted EPS | $0.70 | $0.60 | $1.54 | $1.21 |
| Cash from operating activities | Not presented by quarter | Not presented by quarter | $1.098B | $1.103B |
- For Q2, revenue declined about 1%, while revenue less transaction-based expenses rose 4%; operating income increased 11% and ICE-attributable net income rose 17% year over year. For the first half, revenue fell about 3%, while net revenue increased 3%, operating income 5%, and ICE-attributable net income 27%.
- Q2 segment results: Trading and Clearing revenue less transaction-based expenses was $550M, up 4%, and operating income was $336M, up 7%. Data and Listings revenue was $628M, up 4%, and operating income was $273M, up 15%.
- Data services grew 5% in Q2, led by pricing and analytics; transaction and clearing revenue declined 5%, reflecting weaker cash equities and equity options activity. Total futures and options contracts traded increased 25% in Q2, including strength in oil and interest-rate contracts.
- Interest expense was $45M in Q2 and $90M for the first half. The effective tax rate was 25% in Q2 and 27% for the first half, versus 30% in each comparable 2016 period.
Financial position and liquidity
- At June 30, 2017, cash and cash equivalents were $398M; total debt was $5.897B, down from $6.364B at year-end 2016. Debt included $1.173B of commercial paper and $850M of NYSE notes due October 2017.
- ICE had a $3.4B revolving credit facility with no borrowings outstanding; $2.2B remained available for general corporate purposes after backing the commercial paper. Commercial paper carried a 1.16% weighted-average rate and 21-day weighted-average maturity.
- Management planned to refinance the October 2017 notes with new senior notes; commercial paper and/or the revolving facility were alternatives if new issuance was unavailable or unfavorable. The company reported confidence that cash on hand and operating cash flows would fund debt maturities.
- Cash from operating activities was essentially flat year over year at $1.098B for the first half. Investing activities provided $209M, including $438M of net proceeds from the Cetip/B3 transaction; financing activities used $1.321B, including $469M of commercial-paper repayments, $469M of share repurchases, and $239M of dividends.
- Current assets and liabilities include $53.585B of clearing-member margin deposits and guaranty funds, with matching liabilities; these balances are restricted to clearing obligations and are not ordinary corporate liquidity. Clearing houses held or were pledged $96.4B of total cash and non-cash margin and guaranty-fund collateral.
- Shareholders’ equity was $15.9B. ICE repurchased 7.83M shares for $469M in the first half; $481M remained authorized. First-half dividends were $0.40 per share. A $0.20-per-share third-quarter dividend was announced August 3, 2017.
Material changes, outlook, and risks
- One-time investment gain: ICE recorded a $176M realized gain in first-half other income from the Cetip merger and sale of B3 shares. This materially contributed to GAAP net income growth; adjusted first-half net income was $889M, up 4%, compared with GAAP ICE-attributable net income of $920M, up 27%. Adjusted measures are non-GAAP and exclude specified items.
- Portfolio changes: ICE acquired TMX Atrium and NYSE National, bought minority interests in ICE Endex and ICE Clear Netherlands, and sold NYSE Governance Services and Interactive Data Managed Solutions. NYSE Governance Services generated a $6M divestiture loss.
- Trayport divestiture: Following unsuccessful appeals of the U.K. competition authority’s order, ICE was obligated to sell Trayport and classified it as held for sale at June 30. Its net assets were carried at $610M including currency translation; fair value less disposal costs was estimated to exceed that amount. The estimate remains exposed to bids, operating results, market conditions, and sterling exchange rates.
- Spending outlook: ICE expected 2017 operational capital expenditures and capitalized software costs of $280M–$300M, plus $40M–$45M of real-estate capital expenditures. No full-year revenue or earnings guidance is provided in the filing.
- Regulatory and operational risks: Management highlighted evolving U.S. and international regulation, MiFID II/EMIR implementation, Brexit-related uncertainty, and a European Commission proposal that could affect non-EU clearing houses. Other stated risks include trading-volume and market-volatility changes, competition, technology resilience and cybersecurity, acquisition integration, data-service renewals, and foreign-exchange movements.
- Legal matters: ICE recorded a $10M accrual for ongoing investigations and inquiries. It said it did not expect legal matters to materially adversely affect consolidated financial condition, results, or liquidity, but noted future developments could materially affect results in a particular period. No significant new risk factors were reported.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- How much of earnings growth reflects recurring operations versus the $176M Cetip gain and other adjustments; review GAAP and non-GAAP reconciliations.
- Whether growth in recurring Data and Listings revenue can offset weaker cash-equity activity and fluctuations in transaction-driven revenues.
- How the October 2017 NYSE note maturity was refinanced, and subsequent commercial-paper, debt, and liquidity levels.
- Progress, sale terms, and any carrying-value adjustments for the mandated Trayport divestiture.
- Developments in the investigations underlying the $10M accrual and in regulatory changes affecting clearing, exchanges, and market data.