Intercontinental Exchange, Inc. — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017; includes unaudited fourth-quarter results. Amounts are U.S. dollars unless stated otherwise.
Business context
ICE operates regulated exchanges, clearing houses and listings venues, alongside data and connectivity services. Its two reportable segments are Trading and Clearing and Data and Listings. Data subscriptions and listings provide recurring revenue, while transaction and clearing revenue is more sensitive to trading activity, volatility, product mix and rebates.
Financial performance
| Metric | FY 2017 | FY 2016 | Change |
|---|---|---|---|
| Total revenue | $5.834 billion | $5.958 billion | Down 2% |
| Revenue less transaction-based expenses | $4.629 billion | $4.499 billion | Up 3% |
| Operating income | $2.379 billion | $2.167 billion | Up 10% |
| Operating margin | 51% | 48% | Up 3 percentage points |
| Net income attributable to ICE | $2.514 billion | $1.422 billion | Up 77% |
| Diluted EPS | $4.23 | $2.37 | Up 78% |
| Adjusted diluted EPS | $2.95 | $2.78 | Up 6% |
| Cash from operating activities | $2.085 billion | $2.149 billion | Down 3% |
Reported net income and EPS benefited substantially from a $764 million deferred tax benefit following U.S. tax reform, plus gains on the Cetip investment sale and Trayport divestiture. ICE reported adjusted net income attributable to ICE of $1.752 billion, up 5%; adjusted measures are non-GAAP.
Segments: Trading and Clearing generated $2.128 billion in revenue less transaction-based expenses, up 1%, and $1.349 billion of operating income, up 6%. Data and Listings generated $2.501 billion in revenue, up 4%, and $1.030 billion of operating income, up 16%. Data Services Annual Subscription Value was $1.8 billion at year-end, up 6% organically.
Fourth quarter: Revenue less transaction-based expenses was $1.144 billion; operating income was $592 million; and net income attributable to ICE was $1.225 billion. Fourth-quarter diluted EPS was $2.08. Net income included the $764 million tax benefit and $110 million Trayport gain; the quarter also included the Cetip gain earlier in the year, not in Q4.
Cash, debt and capital allocation
- Year-end cash and cash equivalents were $535 million. Restricted cash and cash equivalents totaled $1.033 billion and are not generally available for corporate use.
- Total debt was $6.1 billion, including $1.233 billion of commercial paper and $600 million of 2.50% notes due in 2018. Commercial paper carried a 1.49% weighted-average rate and 18-day weighted-average maturity.
- The $3.4 billion revolving credit facility had no borrowings outstanding. After commercial-paper backstop and clearing commitments, approximately $2.1 billion was available for general corporate purposes.
- Operating cash flow was $2.085 billion. Capital expenditures were $220 million and capitalized software development costs were $137 million.
- ICE repurchased $949 million of shares and paid $476 million in dividends during 2017. The annual dividend was $0.80 per share; a first-quarter 2018 dividend of $0.24 per share was announced.
Material changes, outlook and notable items
- Transaction and clearing revenue fell 7% to $3.131 billion, while transaction-based expenses declined 17% to $1.205 billion. Cash equities and equity options activity weakened; futures volumes rose 10% overall, led by energy and interest-rate products.
- Data Services revenue increased 5%. Pricing and analytics grew 13%, while desktops and connectivity declined 5%. Management cited customer retention, new customers, product expansion and acquisitions as contributors to data growth.
- ICE sold Trayport in December for total consideration of $733 million, including cash and the acquisition of NGX and Shorcan Energy; it recorded a $110 million net gain. It also sold its Cetip investment and recognized a $167 million realized net investment gain. These gains are not representative of recurring operating performance.
- Other significant transactions included the acquisitions of TMX Atrium and BofAML’s index business, and a 4.7% Euroclear stake; ICE agreed to acquire an additional 5.1% stake, subject to approval. BondPoint was acquired for $400 million on January 2, 2018, after the reporting period.
- Management expected 2018 capital expenditures and capitalized software costs of $300 million to $330 million, and said operating expenses may increase in absolute terms with acquisitions and business growth. It expected cash on hand and operating cash flow to be sufficient to repay debt as it matures, while noting future financing availability and terms are not assured.
- Risks include trading-volume and volatility declines, intense competition, regulatory change and divergence across jurisdictions, cybersecurity and systems disruptions, clearing-member defaults and collateral risks, foreign-exchange exposure, acquisition integration, and substantial debt. Brexit and the planned phase-out of LIBOR were identified as sources of uncertainty.
- Legal and regulatory matters include the City of Providence securities class action, remanded for further proceedings after an appellate decision, and the SEC’s Wells Notice concerning the 2015 NYSE outage. ICE recorded $14 million in aggregate accruals for ongoing investigations and inquiries; outcomes remain uncertain.
- The Tax Cuts and Jobs Act reduced the U.S. federal corporate tax rate to 21% from 35%. ICE’s tax accounting remained subject to further analysis. Adoption of ASC 606 in 2018 was expected to accelerate recognition of certain listing fees; the filing’s illustrative retrospective adjustment increased 2017 revenue by $10 million and diluted EPS by $0.02.
Most important facts for investors to verify
- Separate recurring operating performance from the $764 million tax benefit and divestiture/investment gains; compare GAAP results with the company’s non-GAAP reconciliations.
- Track organic data subscription growth and retention, as well as the effects of acquisitions and divestitures on reported segment results.
- Assess trading volumes, equity market share, rebate costs and the sensitivity of transaction revenue to volatility and product mix.
- Review commercial-paper refinancing and 2018 maturities, available revolver capacity, and whether cash generation supports debt service, investment and shareholder returns.
- Monitor the class action and NYSE outage investigation, regulatory developments, clearing-house exposures, and integration and performance of acquired businesses.