Business context and reporting period
Intercontinental Exchange, Inc. (ICE) operates regulated exchanges and clearing houses, listings venues, and financial and commodity market data services. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2016. Following the December 2015 acquisitions of Interactive Data and Trayport, ICE reports Trading and Clearing and Data and Listings as its two operating segments.
Unless noted otherwise, amounts are in millions of dollars. The year-over-year comparison is affected by including the acquired businesses only from their December 2015 acquisition dates in 2016 results.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Total revenue | $1,504 | $1,096 | $3,058 | $2,276 |
| Revenue less transaction-based expenses | $1,129 | $797 | $2,283 | $1,647 |
| Operating income | $551 | $430 | $1,135 | $892 |
| Net income attributable to ICE | $357 | $283 | $726 | $598 |
| Diluted EPS | $2.98 | $2.54 | $6.07 | $5.34 |
| Operating margin | 49% | 54% | 50% | 54% |
| Operating cash flow | Not separately reported for the quarter | Not separately reported for the quarter | $1,103 | $770 |
- Q2 revenue less transaction expenses rose 42%; ICE-attributable net income rose 26%, and diluted EPS rose 17%. For the first half, those measures increased 39%, 21%, and 14%, respectively.
- Data services revenue was $497 in Q2 versus $205 a year earlier, and $974 for the first half versus $405. Interactive Data and Trayport contributed $265 in Q2 and $525 in the first half.
- Q2 operating expenses rose 58% to $578; first-half expenses rose 52% to $1,148. Management attributed most of the increase to acquired businesses, including $210 in Q2 and $428 in the first half. Depreciation and amortization also increased substantially.
- Management’s non-GAAP adjusted operating margin was 56% in Q2 versus 59%, and 58% for the first half versus 60%. Adjusted diluted EPS was $3.43 in Q2 versus $2.90 and $7.12 for the first half versus $5.96. These are company-defined non-GAAP measures.
- First-half capital expenditures were $96 and capitalized software costs were $61. Operating cash flow less these expenditures was approximately $946, a derived figure, not a company-reported free-cash-flow measure.
Financial position, debt and liquidity
- At June 30, 2016, cash and cash equivalents were $390, down from $627 at year-end 2015. Restricted cash and investments totaled $984; clearing-member margin deposits and guaranty funds of $48,501 are matched by corresponding liabilities and are not ordinary corporate liquidity.
- Total debt was $6,530, down from $7,308 at December 31, 2015, including $1,811 of commercial paper and $4,719 of long-term debt. Commercial paper carried a 0.54% weighted-average rate and an 18-day weighted-average maturity. Interest expense was $90 for the first half, versus $46.
- ICE had a $3.4 billion revolving credit facility, with $1.8 billion required to backstop commercial paper and $1.6 billion available for general corporate purposes. No borrowings were outstanding under the revolver. A separate 364-day facility also had no borrowings.
- First-half financing cash outflow was $1,031, mainly commercial-paper repayments of $781 and shareholder dividends of $205. Cash declined by $237 during the period.
- ICE reported total assets of $75,224 and total equity of $15,330 at quarter-end. The balance sheet includes substantial goodwill and intangible assets, reflecting acquisitions.
Material changes, outlook and risks
- Acquisitions and strategic activity: ICE acquired a majority equity position in MERSCORP Holdings on June 30 and accounts for it as an equity-method investment. It had agreed to acquire SPSE and CMA, subject to regulatory approvals. In July, ICE agreed to sell certain Creditex U.S. voice-brokerage operations, also subject to regulatory approval.
- Trayport review: The U.K. Competition and Markets Authority review limits ICE’s ability to integrate Trayport and could require actions that reduce anticipated acquisition benefits; the timing and outcome were uncertain.
- Capital spending and dividends: ICE expected 2016 operational capital expenditures and capitalized software costs of $280–$300, plus $45–$55 of real estate capital expenditures. On August 3, it announced a $0.85-per-share third-quarter dividend.
- Subsequent board actions: In August, the board authorized up to $1.0 billion of future share repurchases, without a fixed expiration date, but the authorization does not require repurchases. ICE also proposed pursuing a five-for-one stock split, subject to required approvals.
- Brexit and foreign exchange: The U.K. referendum weakened sterling. First-half foreign-currency translation reduced equity by $199, and accumulated translation loss was $244 at June 30. Management said the business and regulatory effects of the U.K.’s departure from the EU remained uncertain; a hypothetical 10% sterling decline would reduce equity by an estimated $160.
- Other risks and contingencies: Key exposures include market volumes and volatility, competitive and pricing pressure, regulation, technology and cybersecurity, acquisition integration, clearing-house operations and counterparty defaults, foreign exchange, and litigation. Clearing-house collateral and ICE’s own guaranty-fund contributions are exposed to clearing-member default risk. Management said ordinary-course legal matters were not expected to materially affect the company, while acknowledging developments could adversely affect results. No significant new risk factors were reported.
- Management’s liquidity view: ICE stated that cash on hand and operating cash flows were expected to be sufficient to repay debt as it matures and fund operations and capital needs, while noting future financing might not be available on favorable terms. No earnings guidance was provided in the supplied filing text.
Important facts for investors to verify
- How much reported growth reflects acquired businesses versus organic growth, and whether integration benefits offset acquired operating costs and amortization.
- Whether margins and cash generation improve as acquisition integration proceeds, and how management’s non-GAAP adjustments compare with GAAP performance.
- Commercial-paper refinancing and interest-rate exposure, debt repayment capacity, and the availability of committed liquidity facilities.
- Regulatory outcomes for Trayport, SPSE/CMA, and the proposed stock split, as well as execution of the Creditex sale and any MERS purchase-option or put-option obligations.
- The financial and operating impact of Brexit, including sterling exposure, regulatory changes, and clearing-house capital requirements.
- Trading-volume, market-share, subscription renewal, customer concentration, clearing-member default, and technology-continuity trends.