Intercontinental Exchange, Inc. — Q1 2019 Form 10-Q
Business context and reporting period
For the three months ended March 31, 2019, ICE operated regulated exchanges and clearing houses and provided data and listings services. Its reportable segments are Trading and Clearing and Data and Listings. Financial comparisons below are with Q1 2018 unless otherwise noted; amounts are in millions except per-share data.
Financial and operating highlights
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Total revenue | $1,583 | $1,580 | Up 0.2% |
| Revenue less transaction-based expenses | $1,270 | $1,225 | Up 4% |
| Operating income | $665 | $650 | Up 2% |
| Operating margin | 52% | 53% | Down 1 percentage point |
| Net income attributable to ICE | $484 | $464 | Up 4% |
| Diluted EPS | $0.85 | $0.79 | Up 8% |
| Operating cash flow | $654 | $573 | Up 14% |
- Adjusted operating income, a non-GAAP measure, was $742 million, up 2%; adjusted operating margin was 58%, down 2 points. Adjusted net income was $527 million versus $525 million, and adjusted diluted EPS was $0.92 versus $0.90. These measures exclude specified items, principally acquisition-related intangible amortization.
- Trading and Clearing revenue less transaction-based expenses was $613 million, up 3%; segment operating income was $385 million, down 1%. Data and Listings revenue was $657 million, up 4%, and segment operating income was $280 million, up 7%.
- Data-services annual subscription value was $1.979 billion, up 5.6% year over year; this indicator excludes certain non-subscription revenue and is not a forecast.
- At March 31, cash and cash equivalents were $653 million; restricted cash was approximately $1.2 billion. Current assets and liabilities include substantial customer margin and guaranty-fund balances, which were each $64.6 billion and substantially offset.
- Total debt was $7.497 billion, including $1.005 billion of commercial paper and $6.492 billion of long-term debt. The $3.4 billion revolving credit facility had no borrowings; $2.3 billion was available for general corporate purposes after backstop and other commitments. Commercial paper had a 2.54% weighted-average rate and 22-day weighted-average maturity.
- Cash flow from operations was $654 million; investing activities used $40 million and financing activities used $596 million. Financing outflows included $440 million of share repurchases and $157 million of dividends. Cash, cash equivalents and restricted cash increased $19 million to $1.891 billion.
Material changes versus Q1 2018
- Data and Listings growth, including stronger data-service subscription revenues, supported the increase in net revenue; Trading and Clearing revenue declined 3% before transaction-based expenses, but lower transaction-based expenses contributed to higher net revenue.
- Trading and Clearing transaction and clearing revenue fell 4%. Futures and options contracts traded declined 9% overall, including declines in energy (12%) and financial products (8%); fixed income and credit revenue rose 54%, partly reflecting growth in that business.
- Operating expenses rose 5% to $605 million. Depreciation and amortization increased 15% to $158 million, partly due to acquired assets; compensation and benefits increased 3%. Q1 2018 included $12 million of acquisition-related transaction and integration costs, versus none in Q1 2019.
- Interest expense increased to $71 million from $52 million, reflecting the 2018 bond refinancing and higher short-term rates. The effective tax rate fell to 21% from 23%, primarily due to tax provisions affecting non-U.S. income and state apportionment changes.
Outlook, risks, contingencies and unusual items
- Management expected 2019 capital expenditures and capitalized software-development costs together to be $290–$320 million. It stated cash on hand and operating cash flows were expected to be sufficient to repay debt, while noting future funding needs could depend on acquisitions, growth and capital allocation.
- The board announced a $0.275-per-share Q2 2019 dividend, payable June 28 to holders of record June 14. The $2.0 billion repurchase authorization had $1.56 billion remaining at March 31; repurchases are discretionary.
- On May 1, 2019, ICE announced a definitive agreement to acquire Simplifile for $335 million in cash, with closing expected in Q3 2019 subject to regulatory approvals.
- Following SEC disapproval of the OCC capital plan, OCC returned $44 million of ICE’s original $60 million contribution during Q1; the remaining $16 million is expected to be returned when OCC capital requirements permit. ICE also recorded $19 million of additional equity earnings related to OCC’s 2018 results and $8 million for its estimated 2019 share.
- ICE adopted the new lease accounting standard on January 1, 2019, recognizing $359 million of operating lease liabilities and $308 million of right-of-use assets at March 31. Adoption did not affect opening retained earnings or the income statement.
- Three purported class actions filed in 2019 allege LIBOR manipulation conspiracy and seek unspecified treble damages. ICE said it intends to defend the cases and did not expect legal matters to have a material adverse effect, while cautioning that developments could affect results in a particular period.
- Key uncertainties include exchange and clearing regulation, Brexit and continued EU access to U.K. markets, the SEC Transaction Fee Pilot, trading volumes and market volatility, customer retention, cyber and technology resilience, acquisition integration, interest rates, foreign exchange and clearing-member defaults. Management reported effective disclosure controls and no significant new risk factors in the quarter.
Important facts for investors to verify
- Whether data-services subscription growth and retention continue, and how the $1.979 billion annual subscription value translates into recognized revenue.
- Trading-volume and revenue trends by product, including whether lower energy and financial futures activity persists and whether fixed income and credit growth continues.
- Drivers of rising expenses and depreciation, and the distinction between GAAP results and management’s adjusted non-GAAP measures.
- Debt refinancing, commercial-paper rollover and interest-rate exposure; cash and restricted-cash balances should not be treated as equally available for general use.
- Progress and regulatory approval for the Simplifile acquisition, OCC capital returns, and developments in LIBOR litigation and Brexit-related regulation.