Intercontinental Exchange, Inc. — Q1 2021 Form 10-Q
Business context and reporting period. This unaudited filing covers the three months ended March 31, 2021, compared with Q1 2020. ICE operates Exchanges, Fixed Income and Data Services, and Mortgage Technology businesses. Prior-period segment results were recast to reflect the three-segment structure adopted after the Ellie Mae acquisition.
Financial performance
Amounts are in millions, except per-share data and percentages.
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Total revenue | $2,429 | $2,115 | +15% |
| Revenue less transaction-based expenses | $1,797 | $1,559 | +15% |
| Operating expenses | $905 | $677 | +34% |
| Operating income | $892 | $882 | +1% |
| Operating margin | 50% | 57% | Down 7 points |
| Net income attributable to ICE | $646 | $650 | -1% |
| Diluted EPS | $1.14 | $1.17 | -3% |
| Adjusted diluted EPS (non-GAAP) | $1.34 | $1.25 | +7% |
| Cash from operating activities | $734 | $520 | +41% |
- Segment results: Exchanges revenue was $1,606, but revenue less transaction expenses fell 7% to $974 and operating income declined 10% to $653. Fixed Income and Data Services revenue rose 1% to $468; operating income was essentially flat at $133. Mortgage Technology revenue reached $355, versus $46, reflecting the inclusion of Ellie Mae, acquired in September 2020; operating income was $106.
- Cash flow and investment: Operating cash flow increased partly due to the timing of customer receivable collections following unusually high 2020 trading activity. Investing cash outflow was $116, including $40 of capital expenditures and $76 of capitalized software development; financing cash outflow was $583.
- Debt and liquidity: Total debt was $16.2 billion at quarter-end, down from $16.5 billion at December 31, 2020, including $2.1 billion of commercial paper. Cash and cash equivalents were $562; restricted cash and equivalents totaled approximately $1.5 billion. ICE reported $1.5 billion of remaining available capacity under its $3.8 billion revolver after commercial-paper backstop and other commitments.
- Margins and costs: Operating expenses rose mainly with Ellie Mae-related headcount, amortization and technology costs. Adjusted operating income was $1,068 and adjusted operating margin was 59%, versus $962 and 62% a year earlier; these are non-GAAP measures.
Material changes and management commentary
- Mortgage Technology’s reported growth reflects the acquisition of Ellie Mae; Q1 2020 did not include Ellie Mae results. ICE cited continuing growth in mortgage technology, fixed-income data and analytics, and other data and network services.
- Futures and options contract volume declined 19% overall. Management attributed weaker comparisons in several futures markets to elevated volatility in Q1 2020 associated with COVID-19 and market events. Cash equities and equity options activity increased.
- Operating cash flow improved by $214 versus Q1 2020, primarily due to receivables collection timing; it should not be read as solely reflecting recurring earnings growth.
- ICE expects 2021 capital expenditures and capitalized software development costs of $400–$430. Management said operating expenses are expected to increase in absolute terms as the business grows and invests.
- ICE paid a $0.33-per-share quarterly dividend in Q1 and announced the same per-share dividend for Q2, payable June 30, 2021. No shares were repurchased in Q1; $1.2 billion remained under the board-authorized repurchase program.
Outlook, transactions, risks and contingencies
- Bakkt: A business combination with VIH was expected to close by the end of Q2 2021, subject to approvals and other conditions. ICE expected to retain approximately 65% economic interest but minority voting interest, deconsolidate Bakkt, and account for it as an equity-method investment after closing. Bakkt remained consolidated at March 31.
- Coinbase investment: After quarter-end, ICE sold its investment for $1.24 billion on April 15 and said it would recognize an approximately $1.23 billion gain in Q2 2021. The investment’s carrying value at March 31 was $10 million; this gain is not part of Q1 results.
- Clearing risk: ICE clearing houses held or had been pledged $163.6 billion of member collateral. The reported $85.6 billion of margin and guaranty-fund balances is matched by corresponding member liabilities and is not equivalent to corporate cash. Excluding margin, guaranty funds and collateral, the estimated maximum one-day clearing-house exposure was $143.9 billion; actual exposure may differ materially.
- Legal matters: ICE said ordinary-course legal and regulatory matters were not expected to materially adversely affect consolidated financial condition, results or liquidity, but developments could materially affect a particular period. One Live Well-related financial institution creditor’s assertions remained unresolved; ICE denied wrongdoing. The filing states that a range of possible losses for certain cases could not be reasonably estimated.
- Other risks: The filing highlights market volatility and trading volumes, COVID-19 effects, regulation and Brexit-related uncertainty, clearing-house and counterparty risks, cyber and technology resilience, mortgage-market conditions, acquisition integration, and refinancing or commercial-paper rollover risk. A 100-basis-point increase in short-term rates was estimated to reduce annual pretax earnings by $33 million on the floating-rate debt outstanding at quarter-end.
- ICE disclosed no significant new risk factors during the quarter and reported effective disclosure controls and procedures.
Most important facts for investors to verify
- How much of the revenue and adjusted-EPS growth is sustainable versus attributable to Ellie Mae, acquisition-related accounting adjustments, and other non-GAAP exclusions.
- Whether mortgage technology growth and margins persist as integration proceeds and mortgage origination conditions change.
- How futures volumes, cash-equity activity, and transaction-based costs evolve relative to the unusually volatile Q1 2020 comparison.
- Commercial-paper refinancing needs, debt-service capacity, revolver availability, and planned capital spending, dividends, and any resumed repurchases.
- Completion and accounting treatment of the Bakkt transaction, and the Q2 recognition and use of proceeds from the Coinbase investment sale.
- Potential effects of clearing-member defaults, regulatory developments, litigation, cyber events, and foreign-exchange or interest-rate movements.