Intercontinental Exchange, Inc. — Q2 2015 Form 10-Q
Business context and period. ICE operates global regulated exchanges, clearing houses and listing venues, and provides market data services. It reports one business segment. This unaudited filing covers the quarter and six months ended June 30, 2015; comparisons are with the corresponding 2014 periods unless noted.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Total revenue | $1.073 billion | $1.016 billion | $2.229 billion | $2.079 billion |
| Revenue less transaction-based expenses | $797 million | $750 million | $1.647 billion | $1.547 billion |
| Operating income | $430 million | $327 million | $892 million | $718 million |
| Operating margin | 54% | 44% | 54% | 46% |
| Net income attributable to ICE | $283 million | $226 million | $598 million | $487 million |
| Diluted EPS from continuing operations | $2.54 | $1.88 | $5.34 | $4.03 |
| Operating cash flow from continuing operations | Not stated for quarter | Not stated for quarter | $770 million | $836 million |
- Q2 revenue grew 6%, operating income 32%, and ICE-attributable net income 25%. Six-month revenue grew 7%, operating income 24%, and attributable net income 23%.
- Data services revenue rose 29% in Q2 and 24% for the first half; listing fees rose 12% in both periods. Transaction and clearing fees were flat in Q2 and up 3% for the first half.
- Operating expenses fell 13% in Q2 and 9% for the first half, chiefly as professional services and NYSE integration costs declined. Depreciation and amortization increased, reflecting technology, integration and facilities investments.
- Management’s non-GAAP adjusted diluted EPS was $2.90 for Q2 and $5.96 for the first half, versus $2.28 and $4.70, respectively. Adjustments include acquisition/integration costs, acquired-intangible amortization and, in 2015, litigation accruals; these measures are not GAAP.
Liquidity, debt and capital
- At June 30, cash and cash equivalents were $678 million, short-term investments $22 million, and restricted cash and investments $616 million. Cash was $652 million and short-term investments $1.2 billion at year-end 2014; the decline in short-term investments largely reflects repayment of the euro-denominated NYSE notes at maturity.
- Total debt was $3.263 billion, down from $4.289 billion at December 31, 2014. ICE repaid the $1.0 billion face-value NYSE euro notes on June 30 using matured term deposits. Commercial paper outstanding was $1.016 billion at a 0.23% weighted-average rate and 19-day weighted-average maturity.
- The $3.0 billion revolving credit facility had no borrowings. After $1.0 billion reserved to back the commercial paper and $303 million reserved for clearing-house resources, $1.7 billion was available for general corporate purposes.
- First-half operating cash flow was $770 million, down from $836 million. Investing activities provided $899 million, including $1.084 billion of investment/term-deposit proceeds; financing used $1.635 billion, including $918 million net debt repayments, $399 million in share repurchases, $158 million in dividends and $128 million to acquire the remaining NYSE Amex Options minority stake.
- ICE repurchased 1.745 million shares for $399 million in the first half. The remaining authorization was $398 million at quarter-end. The quarterly dividend was $0.75 per share; a $0.75 third-quarter dividend was announced after quarter-end.
Material changes and management commentary
- Growth in oil-related activity, U.S. cash equities, data services and listing fees was partly offset by weaker interest-rate futures/options and credit-default-swap activity. Futures/options contracts traded fell 7% in the first half; quarter-end open interest fell 11% year over year.
- Management attributed oil market activity to price volatility and supply uncertainty. European interest-rate activity remained subdued amid low rates and volatility. U.S. cash handled volume rose 11% in the first half, while NYSE equity-options volume and share declined amid business restructuring and a decision to exit unprofitable transactions.
- The stronger U.S. dollar reduced first-half revenue less transaction-based expenses by $34 million and operating income by $24 million versus the prior year. Management cited global market conditions, trading volumes, competition, volatility, technology investment and regulation as factors that can make results fluctuate.
- ICE expects 2015 operational capital expenditures and capitalized software development costs of $165–$175 million, plus $70–$80 million in headquarters leasehold improvements. Management stated cash and operating cash flow should be sufficient for debt maturities and foreseeable needs, while noting future financing may not be available on favorable terms.
Risks, contingencies and unusual items
- ICE recorded $19 million of litigation accruals in first-half and Q2 other expense, including its best estimate of a potential settlement in the ATG/ATS Brazil arbitration. The parties had agreed in principle on a settlement framework, but documentation was not final; the claim was at least 100 million Brazilian reais (about $32 million), and ICE denied liability.
- NYSE-related market-structure and market-data class actions remained in litigation. One group of market-data lawsuits was dismissed with prejudice, but the plaintiff appealed. ICE said losses for the other described proceedings generally could not be reasonably estimated.
- ICE clearing houses face counterparty risk. Their estimated one-day guarantee exposure was $65.4 billion, excluding margin and guaranty-fund protections; unsettled contracts had $2.4 trillion net notional value. ICE reported $77.0 billion of clearing-member collateral, including $43.351 billion in cash deposits recorded with equal liabilities. These customer/clearing balances are not ordinary corporate liquidity. ICE’s own guaranty-fund contributions of $228 million are at risk in a default.
- EMIR-related requirements were expected to increase ICE Clear Europe’s liquid regulatory capital requirement by $187 million when implemented; ICE anticipated funding this with restricted cash. The Bank of England’s review of ICE Clear Europe’s EMIR authorization was still pending. ICE also anticipated launching ICE Clear Singapore in Q4 2015.
- ICE invested $60 million in OCC under a new capital plan; implementation was automatically stayed following a petition for SEC review, delaying potential dividends and customer refunds. ICE could be required to contribute up to a further $80 million if specified capital thresholds are breached.
- Currency and interest-rate exposure remain relevant: a 100-basis-point increase in rates on commercial paper outstanding would reduce annual pretax earnings by an estimated $10 million; a hypothetical 10% decline in sterling and euro would reduce equity by $95 million and $11 million, respectively.
- Other notable items: ICE acquired the remaining 16% of NYSE Amex Options for $128 million on June 29; from July 1 it retained all of that business’s profits. ICE reported no goodwill or intangible-asset impairment and no material change in risk factors from its 2014 Form 10-K.
Important facts for investors to verify
- Whether transaction volumes, market share and per-contract economics—particularly in oil, interest rates, CDS and equity options—sustain the reported revenue growth.
- How much of operating-income and EPS growth is recurring versus driven by lower integration costs, non-GAAP exclusions and the changing comparison after 2014 divestitures.
- Progress and cost of NYSE integration, planned technology and headquarters spending, and the effect of amortization and depreciation growth.
- Commercial-paper refinancing and interest-rate exposure, debt repayment capacity, and the balance between repurchases, dividends and strategic investment.
- Outcomes of the Brazil arbitration and remaining litigation, EMIR authorization and capital requirements, and the OCC capital-plan review and potential additional funding obligation.