Intercontinental Exchange, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. ICE operates regulated exchanges, clearing houses and listings venues, and provides market data, mortgage and technology services. Its reportable segments are Trading and Clearing and Data and Listings. Amounts below are in U.S. dollars; financial statement figures are unaudited.
Financial performance and position
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenue | $1.663bn | $1.463bn | $4.880bn | $4.599bn |
| Revenue less transaction-based expenses | $1.336bn | $1.200bn | $3.904bn | $3.671bn |
| Operating income | $706m | $602m | $2.051bn | $1.907bn |
| Net income attributable to ICE | $529m | $458m | $1.485bn | $1.377bn |
| Diluted EPS | $0.94 | $0.79 | $2.62 | $2.37 |
| Operating margin | 53% | 50% | 53% | 52% |
| Operating cash flow | Not provided by quarter in the presented cash flow statement | $1.882bn | $1.735bn |
Q3 revenue increased 14%, revenue less transaction-based expenses 11%, operating income 17%, and ICE-attributable net income 16% year over year. For the first nine months, revenue less transaction-based expenses rose 6%, operating income 8%, and ICE-attributable net income 8%. Management reported adjusted diluted EPS of $1.06 for Q3 and $2.93 year to date; these are non-GAAP measures, versus GAAP diluted EPS of $0.94 and $2.62, respectively.
- Segment performance: Q3 Trading and Clearing operating income was $414m, up 26%; Data and Listings operating income was $292m, up 7%. Year-to-date segment operating income was $1.184bn and $867m, respectively.
- Cash generation and investment: Year-to-date operating cash flow was $1.882bn. Investing activities used $512m, including $352m for acquisitions, $87m of capital expenditures and $116m of capitalized software development. Financing activities used $1.251bn, including $1.120bn of share repurchases and $467m of dividends.
- Liquidity: September 30 cash and cash equivalents were $655m; restricted cash totaled $1.334bn ($945m short-term and $389m long-term). Restricted balances, including substantial customer clearing deposits, are not equivalent to cash available for general corporate use. ICE reported $269m of unrestricted cash at non-U.S. subsidiaries.
- Debt: Total debt was $7.825bn, up from $7.441bn at December 31, 2018, including $1.318bn of commercial paper and $6.496bn of long-term debt. The $3.4bn revolving credit facility had no borrowings; $1.9bn was available for working capital and general purposes after backstop and broker-dealer commitments. Commercial paper had a 2.2% weighted-average rate and 27-day weighted-average maturity.
- Margins and costs: GAAP operating margin improved to 53% for both the quarter and year to date. Operating expenses rose 5% in each comparison; depreciation and amortization and technology and communication costs increased. Q3 transaction-based expenses rose 24%, including higher Section 31 fees, which ICE says are offset by corresponding customer activity assessment fees.
Material changes and unusual items
- Trading and Clearing revenue growth included stronger fixed income and credit activity, acquisitions and higher Q3 energy, cash equities and financial futures revenues. Data and Listings revenue grew 4% in Q3, with data services up 4% and listings up 2%. Data services growth reflected customer retention, new customers, increased purchases and pricing. Annual Subscription Value was $1.995bn, up 4.9% year over year; ICE cautions this metric is not a forecast of the next 12 months’ revenue.
- ICE acquired mortgage-services provider Simplifile in June for $338m cash and launched Bakkt Bitcoin futures on September 23, cleared through ICE Clear U.S. Bakkt contributed $35m to the clearing house guaranty fund for potential digital-asset contract defaults.
- Beginning in Q2, certain third-party revenue-share amounts were presented as technology and communication expense rather than netted against transaction and clearing revenue. This presentation change affects comparability of those line items.
- Year-to-date other income included $51m of equity earnings from OCC, including a $19m adjustment for OCC’s 2018 earnings. OCC returned $44m of ICE’s original $60m capital contribution after the SEC disapproved its capital plan; ICE expected the remaining $16m in Q4 2019.
- ICE recorded a $16m impairment of promissory notes related to the Consolidated Audit Trail (CAT), citing implementation delays and increased risk that execution venues may not be reimbursed. The charge is included in other income/expense and excluded from ICE’s adjusted non-GAAP results.
- Lease accounting adopted January 1, 2019 added $339m of operating lease liabilities at September 30, with no income-statement impact on adoption. ICE reported no goodwill or intangible-asset impairment for the period.
Outlook, risks and contingencies
- ICE did not provide earnings or revenue guidance in this filing. It expected 2019 capital expenditures and capitalized software development costs together to total $315m–$320m. Management expects operating expenses to increase in absolute terms as the business grows, with annual variation depending on acquisitions, integration and investment.
- The board had authorized $2.0bn of repurchases effective January 1, 2019; $880m remained available at September 30. ICE declared a Q4 dividend of $0.275 per share, payable December 31, 2019, subject to the board’s quarterly dividend policy.
- Key operating and financial risks include trading-volume and volatility changes, competition, regulation, cybersecurity and technology resilience, acquisition integration, customer retention, foreign exchange and interest rates. A 100-basis-point rise in short-term rates on the commercial-paper balance at quarter-end would reduce annual pretax earnings by an estimated $13m, assuming debt levels and composition were unchanged.
- Regulatory uncertainties include Brexit and continued EU access to U.K. clearing and trading venues; proposed changes to oversight of non-EU clearing houses; capital requirements affecting clearing members and market makers; the SEC Transaction Fee Pilot; and EU market-transparency and benchmark rules.
- ICE disclosed LIBOR-related class-action litigation alleging benchmark manipulation, with motions to dismiss pending, and City of Providence litigation involving NYSE subsidiaries, with discovery underway. Management did not believe resolution of the legal matters would materially adversely affect consolidated financial condition, results or liquidity, but acknowledged developments could materially affect results in a particular period.
- Clearing operations involve substantial counterparty and liquidity exposure. Clearing houses held or were pledged $122.1bn of margin and guaranty-fund collateral; ICE estimated maximum clearing-house guarantee exposure of $105.6bn before considering margin, guaranty funds and collateral. These amounts reflect clearing-house risk, not ordinary corporate debt or available corporate liquidity.
Important facts for investors to verify
- Whether sustained Trading and Clearing growth and recurring Data and Listings growth support revenue and margin trends, including the effect of market volumes, product mix and the revenue-share presentation change.
- Cash availability after distinguishing corporate cash from restricted clearing funds, and ICE’s ability to refinance or repay short-maturity commercial paper.
- Integration costs, contributions and eventual economics of Simplifile and Bakkt, including Bakkt’s early operating performance and clearing-related risks.
- Progress and possible financial consequences of CAT implementation and reimbursement, OCC capital returns, the LIBOR and City of Providence litigation, Brexit and other regulatory changes.
- Reconciliation of GAAP results to adjusted non-GAAP measures, particularly acquisition-related amortization and the CAT impairment adjustment.