Intercontinental Exchange, Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. ICE operates regulated exchanges and clearing houses, listings venues, and data services through Trading and Clearing and Data and Listings segments. Figures are unaudited and in U.S. dollars; financial amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total revenue | $1,463 | $1,435 | $4,599 | $4,402 |
| Revenue less transaction-based expenses | $1,200 | $1,146 | $3,671 | $3,492 |
| Operating income | $602 | $596 | $1,907 | $1,787 |
| Operating margin on revenue less transaction expenses | 50% | 52% | 52% | 51% |
| Net income attributable to ICE | $458 | $371 | $1,377 | $1,293 |
| Diluted EPS | $0.79 | $0.63 | $2.37 | $2.17 |
| Cash provided by operating activities | Not stated for quarter | Not stated for quarter | $1,735 | $1,410 |
- Q3 revenue grew 2%; revenue after transaction-based expenses rose 5%. Q3 operating income increased 1%, while ICE-attributable net income rose 24% and diluted EPS rose 25%.
- For the first nine months, revenue after transaction-based expenses increased 5%, operating income 7%, ICE-attributable net income 6%, and diluted EPS 9%.
- Trading and Clearing nine-month revenue was $2,691 and operating income $1,108; Data and Listings revenue was $1,908 and operating income $799. Organic annual subscription value was $1.863 billion, up 6.6% year over year.
- Cash flows: operating activities provided $1,735; investing activities used $1,617, principally reflecting acquisitions and investments; financing activities used $19. Cash, cash equivalents and restricted cash totaled $1,662 at period-end, including $515 of unrestricted cash. Restricted customer and clearing balances are matched by liabilities and are not equivalent to freely available corporate liquidity.
- Total debt was $7,686, versus $6,100 at December 31, 2017. Short-term debt included $1,198 of commercial paper; long-term debt was $6,488. The $3.4 billion revolving facility had no borrowings, with approximately $2.1 billion available for general corporate purposes after required backstops and commitments. Commercial paper carried a 2.15% weighted-average rate and 23-day weighted-average maturity.
Material changes and significant items
- Trading and Clearing revenue after transaction-based expenses increased 9% for the nine months, supported by agricultural and metals, OTC activity, and cash equities/options. Energy futures volume declined 3% year to date, while energy revenue rose 4%, partly due to product mix and higher rates per contract.
- Data and Listings revenue increased 1% for the nine months. Pricing and analytics grew 8% and exchange data 4%, partly offset by a 13% decline in desktops and connectivity, reflecting divestitures including Trayport and IDMS.
- Q3 2018 effective tax rate was 16%, versus 33% in Q3 2017; nine-month rates were 21% and 29%. The reduction primarily reflects the U.S. federal tax rate change under the Tax Cuts and Jobs Act (TCJA); Q3 also benefited from tax estimate changes and tax benefits associated with the 2017 Trayport sale. ICE said its TCJA accounting was not final.
- Other income in the first nine months of 2017 included a $176 realized Cetip investment gain. Consequently, 2018 reported other expense was $125, versus $68 of other income in 2017; interest expense rose to $173 from $137, partly due to higher short-term rates and debt issuance.
- Acquisitions included BondPoint for $400 in January and TMC Bonds for $701 in July, as well as CHX Holdings in July. ICE acquired the remaining MERS interests on October 3, 2018, after quarter-end, and expected to recognize a $110 gain on its initial investment. ICE also acquired an additional 5.1% of Euroclear for $304; its total stake was 9.8%.
- ICE issued $2.25 billion of senior notes in August to refinance the October 2018 notes and acquisition- and investment-related commercial paper, among other general corporate purposes. It repurchased $1.059 billion of shares and paid $417 in dividends during the nine months. A new $2.0 billion buyback authorization takes effect January 1, 2019.
Outlook, risks and contingencies
- Management expected 2018 capital expenditures and capitalized software development costs of $270–$290. No earnings or revenue guidance is provided in the supplied filing text.
- ICE announced Bakkt, a digital-asset venture; its proposed physically delivered Bitcoin futures contract was expected to launch in Q4 2018, subject to CFTC review and approval. Additional solutions were expected from 2019.
- Key risks cited include trading-volume and market-volatility variability, competition and pricing, regulatory changes, clearing-house and counterparty risks, technology resilience and cybersecurity, acquisition integration, foreign-exchange exposure, and uncertainty around Brexit and evolving EU/U.S. rules. ICE reported $58.8 billion in margin, guaranty-fund and delivery-contract receivables, offset by corresponding payables; clearing collateral and default exposures remain important operational risks.
- Regulatory matters include MiFID II/EMIR implementation, potential changes to non-EU clearing-house oversight, position limits, capital requirements for clearing members, and a possible SEC transaction-fee pilot. ICE stated that it did not expect resolution of disclosed legal matters to materially harm its overall financial condition, results or liquidity, while noting developments could affect a particular period. NYSE and affiliated exchanges settled SEC matters in March 2018 for a $14 million penalty, previously accrued. The Supreme Court denied review of the exchange class-action matter in October 2018; a district-court motion remained pending.
- ICE’s disclosure controls were assessed as effective at September 30, 2018; the filing reported no significant new risk factors or material control changes during the quarter.
Important facts for investors to verify
- Whether organic ASV growth, data-customer retention and the desktop/connectivity trend persist, and how acquired businesses contribute after integration.
- Trading volumes, product mix, rebates and revenue capture, including the effect of lower energy volumes and the concentration of revenue from a major clearing member.
- Debt levels, commercial-paper refinancing and interest-rate exposure, alongside the distinction between corporate cash and restricted clearing/customer funds.
- Acquisition integration costs and outcomes, the completion and accounting for MERS, and the timing, approvals and funding needs for Bakkt.
- Final TCJA tax accounting, material lease-accounting effects expected upon adoption in 2019, and developments in litigation and financial-market regulation.