Intercontinental Exchange, Inc. — Q1 2015 Form 10-Q
Business context and reporting period
Quarter ended March 31, 2015. ICE operates regulated exchanges and clearing houses and provides market data services. It reports one business segment. Results are compared with Q1 2014; Euronext and certain other divested businesses are presented as discontinued operations in the prior-year comparison.
Financial results and key metrics
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Total revenue | $1,156 million | $1,063 million | +9% |
| Revenue less transaction-based expenses | $850 million | $797 million | +7% |
| Operating expenses | $388 million | $406 million | -4% |
| Operating income | $462 million | $391 million | +18% |
| Operating margin | 54% | 49% | +5 points |
| Income from continuing operations | $323 million | $261 million | +24% |
| Net income attributable to ICE | $315 million | $261 million | +20% |
| Diluted EPS attributable to ICE | $2.80 | $2.27 | +23% |
| Operating cash flow, continuing operations | $465 million | $537 million | -13% |
Adjusted operating income, a non-GAAP measure, was $514 million versus $447 million; adjusted diluted EPS was $3.06 versus $2.53. These exclude specified NYSE transaction and integration costs, banker success fees and acquisition-intangible amortization, with related tax effects.
Cash and cash equivalents were $752 million at quarter-end, and short-term investments were $1.073 billion. About $1.0 billion of short-term investments was earmarked to repay the June 2015 NYSE euro notes and final coupon. Total debt was $4.193 billion, including $1.946 billion short-term and $2.247 billion long-term. The $3.0 billion revolving facility had no borrowings; approximately $1.8 billion was available for general corporate purposes after commercial-paper backstop and clearing-house reserves.
Q1 cash flow from investing activities was a use of $86 million, including a $60 million additional investment in OCC; financing activities used $268 million, including $196 million of share repurchases and $73 million of dividends. Cash increased by $100 million during the quarter. The $45.6 billion of margin deposits and guaranty funds on the balance sheet is matched by corresponding liabilities to clearing members and is not ordinary corporate liquidity.
Material changes and drivers
- Net revenue growth reflected higher data-services and listing fees and stronger Brent and other oil trading and clearing revenue, partly offset by weaker interest-rate futures and options. A stronger U.S. dollar reduced revenue by $18 million year over year.
- Operating expenses fell mainly because of lower professional-services and NYSE integration costs; higher depreciation and amortization partially offset the savings. Operating cash flow declined primarily with higher receivables and payment timing for liabilities.
- Derivatives contracts traded fell 7% year over year. Brent futures and options volume rose 43%, while interest-rate futures and options volume fell 27%. U.S. cash handled volume rose 10%; U.S. equity-options volume fell 8%, and NYSE’s options market share fell 6 points.
- Comprehensive income attributable to ICE was $208 million, down from $366 million, reflecting a $107 million other comprehensive loss, including currency translation and available-for-sale investment valuation changes.
Outlook, risks and unusual items
- ICE expected 2015 operational capital expenditures and capitalized software development costs of $165–$175 million, plus $70–$80 million of leasehold improvements, primarily for NYSE headquarters. No earnings guidance was provided.
- The board announced a second-quarter dividend of $0.75 per share, payable June 30, 2015; the Q1 dividend was $0.65 per share. The company planned to repurchase the remaining 16% interest in NYSE Amex Options in Q2 2015 and had raised its repurchase authorization to $600 million, effective April 1.
- Key regulatory uncertainties include European derivatives clearing and margin rules under EMIR, MiFID II open-access requirements, and bank leverage-ratio rules that could raise clearing costs or affect trading activity. ICE anticipated a 2015 EMIR-related increase of $187 million in ICE Clear Europe’s restricted regulatory capital.
- Clearing houses reported a $67.1 billion maximum estimated one-day counterparty exposure before considering margin and guaranty-fund protections; this is a modeled exposure, not a recorded liability. ICE reported $76.8 billion of member collateral and $228 million of its own guaranty-fund contributions at risk in specified default scenarios.
- Other exposures include foreign-exchange movements, market volatility, competition, technology and cybersecurity, and litigation. A Brazilian arbitration asserted damages of at least 100 million reais (about $31 million); the company said the possible loss range could not be reasonably estimated. The OCC capital plan supporting ICE’s $60 million investment was stayed pending SEC review, leaving dividends and customer refunds suspended until the stay is lifted or approval is reconfirmed.
- The company stated disclosure controls were effective and that there were no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether revenue growth and margin improvement persist, particularly given lower aggregate derivatives volume and weakness in interest-rate and equity-options trading.
- Repayment of the June 2015 NYSE euro notes and the extent to which the earmarked deposits fully cover principal and interest.
- Cash conversion, working-capital movements, and the distinction between corporate liquidity and clearing-member margin balances.
- Actual 2015 capital spending, the NYSE Amex Options buyout, planned repurchases, and the announced dividend.
- Regulatory decisions affecting European clearing access and required capital, and the outcome of the OCC capital-plan stay and disclosed legal proceedings.