Intercontinental Exchange, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; comparison is with the three months ended March 31, 2017 unless otherwise stated. Amounts are in U.S. dollars. ICE operates regulated exchanges and clearing houses and provides market data and listings services through its Trading and Clearing and Data and Listings segments.
Financial performance
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Total revenue | $1.580 billion | $1.471 billion | 7% |
| Revenue less transaction-based expenses | $1.225 billion | $1.166 billion | 5% |
| Operating expenses | $575 million | $584 million | (2)% |
| Operating income | $650 million | $582 million | 12% |
| Operating margin | 53% | 50% | Up 3 points |
| Net income attributable to ICE | $464 million | $503 million | (8)% |
| Diluted EPS | $0.79 | $0.84 | (6)% |
| Cash provided by operating activities | $573 million | $611 million | (6)% |
- Adjusted, non-GAAP measures: Adjusted operating income was $731 million, up 9%, and adjusted operating margin was 60%, versus 57%. Adjusted net income attributable to ICE was $525 million, up 19%, and adjusted diluted EPS was $0.90, versus $0.74. These measures exclude specified items and should be considered alongside GAAP results.
- Segment results: Trading and Clearing revenue was $951 million and operating income was $389 million, up 13% and 15%, respectively. Data and Listings revenue was $629 million, essentially unchanged, while operating income rose 7% to $261 million.
- Business drivers: Transaction and clearing revenue increased 12% to $898 million, including growth in cash equities and equity options, OTC and other transactions, and agricultural and metals contracts. Data services revenue was flat at $520 million: pricing and analytics grew 7%, while desktops and connectivity declined 15%. Listings revenue was $109 million, up 1%. Organic Annual Subscription Value was $1.826 billion, up 6.5% year over year.
- Margins and expenses: Trading and Clearing operating margin was 65% versus 63%; Data and Listings was 42% versus 39%. The overall expense decrease included lower compensation and selling, general and administrative costs, partly offset by higher technology and communication expense and foreign-exchange effects.
- Tax and unusual comparison: The effective tax rate fell to 23% from 30%, primarily reflecting the U.S. corporate tax rate reduction under the Tax Cuts and Jobs Act. Q1 2017 included a $176 million realized Cetip investment gain; its absence materially affects the year-over-year comparison of GAAP other income and net income. The company said its TCJA accounting estimates were not final.
Cash, debt and liquidity
- Cash and cash equivalents were $523 million at March 31, 2018, versus $535 million at year-end. Short- and long-term restricted cash totaled about $1.135 billion; clearing-related restricted funds should not be treated as freely available corporate cash.
- Total debt was $6.892 billion, up from $6.100 billion at December 31, 2017. This included $2.023 billion of commercial paper and $600 million of senior notes due October 2018. Commercial paper carried a 1.86% weighted average rate and 19-day weighted average maturity.
- ICE had a $3.4 billion revolving credit facility with no amounts drawn. After commercial-paper backstop and broker-dealer commitments, approximately $1.3 billion was available for general corporate purposes.
- Operating cash flow was $573 million. Investing activities used $755 million, principally reflecting the $400 million BondPoint acquisition and $304 million purchase of an additional Euroclear stake. Financing provided $270 million, including $789 million of net commercial-paper proceeds, offset in part by $300 million of share repurchases and $140 million of dividends. Cash, cash equivalents and restricted cash together increased $90 million.
- Capital returns included a $0.24 per-share quarterly dividend and $300 million of repurchases; $900 million remained under the then-current repurchase authorization at quarter-end. Management expected 2018 capital expenditures and capitalized software costs of $300–$330 million and stated that operating cash flow and cash on hand were expected to be sufficient to repay debt and meet needs, while noting possible future borrowing or equity issuance.
Developments, outlook and risks
- ICE acquired BondPoint on January 2 for $400 million cash. The preliminary allocation included $267 million of goodwill and $130 million of identifiable intangibles.
- ICE owned 9.8% of Euroclear after investing a further $304 million in February; its total investment was $631 million. The investment was accounted for using the measurement alternative for equity securities without readily determinable fair value; no Q1 carrying-value adjustment was recorded.
- On April 5, 2018, after quarter-end, ICE agreed to acquire CHX Holdings, parent of the Chicago Stock Exchange. Closing was expected in Q2, subject to regulatory approvals.
- The filing gives no earnings or revenue forecast. Management’s stated 2018 capital spending and software-development range is $300–$330 million; the company also announced a $0.24-per-share Q2 dividend payable June 29, 2018.
- Key operating sensitivities include trading volumes and volatility, product mix and pricing, competition, data-service renewals, technology reliability and cybersecurity, acquisition integration, foreign exchange, and changing regulation. ICE highlighted evolving MiFID II/EMIR requirements and possible effects of position limits, clearing access and capital rules.
- Interest-rate exposure includes floating-rate commercial paper: management estimated that a 100-basis-point increase would reduce annual pretax earnings by $20 million, assuming debt levels and composition remained unchanged. Currency movements also affect earnings and equity; a hypothetical 10% decline in sterling was estimated to reduce equity by $105 million.
- NYSE and affiliated exchanges settled SEC investigations in March, agreeing to a $14 million civil penalty and non-monetary relief; the company had recorded related accruals in 2017. ICE said it did not expect outstanding legal matters to materially adversely affect consolidated financial condition, results or liquidity, but acknowledged developments could affect individual periods.
Most important facts for investors to verify
- Reconcile GAAP and adjusted earnings, particularly the prior-year Cetip gain and current-period acquisition-related amortization and other excluded items.
- Track whether Trading and Clearing growth, including volume, product mix and rebate costs, persists; assess the flat reported data-services revenue against 6.5% organic ASV growth.
- Monitor commercial-paper refinancing and short-term maturities, interest-rate expense, and the actual availability of revolving credit after required backstops.
- Review BondPoint integration, CHX approval and transaction terms, and any observable valuation changes or other developments affecting the Euroclear investment.
- Follow final TCJA accounting, including international tax provisions, and regulatory or litigation developments following the SEC settlement.
- Distinguish corporate liquidity from restricted clearing and customer margin balances when evaluating cash and liquidity.