Intercontinental Exchange, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. ICE operates exchanges, fixed-income and data services, and mortgage technology businesses.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $2.429B | $2.387B | $7.237B | $7.259B |
| Revenue less transaction-based expenses | $2.003B | $1.811B | $5.787B | $5.524B |
| Operating income | $845M | $913M | $2.769B | $2.774B |
| Net income attributable to ICE | $541M | $(191)M | $1.995B | $1.021B |
| Diluted EPS | $0.96 | $(0.34) | $3.55 | $1.82 |
| Operating margin | 42% | 50% | 48% | 50% |
| Adjusted diluted EPS (non-GAAP) | $1.46 | $1.31 | $4.30 | $4.06 |
- Q3 revenue rose 2%, while revenue less transaction-based expenses increased 11%. Nine-month revenue was approximately flat, but revenue less transaction-based expenses grew 5%.
- Q3 operating income declined 7%; reported net income improved from a prior-year loss, principally because prior-year results included substantial equity-method investment losses. Nine-month net income attributable to ICE increased 95%.
- Q3 segment revenue: Exchanges $1.540B, Fixed Income and Data Services $559M, Mortgage Technology $330M. Exchanges and fixed-income/data operating income was $801M and $201M; Mortgage Technology recorded a $157M operating loss.
- Operating cash flow was $2.573B for the first nine months, compared with $2.462B. Free cash flow, a non-GAAP measure, was $2.247B; adjusted free cash flow was $2.452B.
- At September 30, cash and cash equivalents were $1.799B; total debt was $23.299B, including $2.257B of commercial paper and a $2.0B term loan. The $3.9B revolving facility had approximately $1.4B available for general purposes after backstops and commitments.
Material changes and notable items
- ICE completed its Black Knight acquisition on September 5 for approximately $11.8B of consideration, 90% cash and 10% ICE stock. Black Knight contributed $87M of revenue and $139M of operating expenses from acquisition through quarter-end.
- ICE sold Black Knight’s Optimal Blue and Empower businesses in connection with FTC consent orders. The sale generated $241M cash proceeds; a $500M purchaser note was valued at $235M, with sale proceeds to be held through an FTC-appointed trustee pending sale and approval.
- Acquisition-related transaction and integration costs were $155M in Q3 and $201M for the nine months. Depreciation and amortization rose 20% in Q3, including $34M of amortization from acquired Black Knight intangibles.
- Mortgage Technology revenue increased 20% in Q3, including Black Knight, but declined 7% for the nine months. Excluding Black Knight, management attributed declines to lower mortgage origination activity amid higher interest rates.
- Cash flows and balance-sheet totals are substantially affected by customer margin and guaranty-fund balances, which are matched by liabilities and are not equivalent to unrestricted corporate liquidity. Those cash balances fell to $79.3B from $142.0B at year-end, primarily reflecting lower commodity prices and reduced volatility.
Outlook, management commentary and risks
- No earnings or revenue guidance is provided. ICE expects 2023 capital expenditures and capitalized software development costs together to be $500M–$525M.
- Management described the macroeconomic environment as dynamic. Volatility and higher rates supported activity in several trading and fixed-income businesses, while higher mortgage rates weighed on mortgage origination-related revenues. The company reported no material operational impact from the cited geopolitical conflicts or early-2023 banking-sector events.
- Key risks include trading-volume and market volatility changes; persistent high mortgage rates; acquisition integration and realization of Black Knight benefits; technology resilience and cybersecurity; regulatory changes affecting clearing, energy markets, benchmarks and data products; and counterparty and clearing-member defaults.
- Black Knight’s FTC matter was resolved through the agreed divestitures and consent orders. The PennyMac arbitration decision was expected by November 30, 2023. ICE disclosed a $10M accrual related to a potential regulatory settlement and stated that other legal and regulatory matters were not expected to materially affect the company, though outcomes remain uncertain.
- Commercial paper had a 5.62% weighted-average rate and 20-day weighted-average remaining maturity. Management identified rollover risk, mitigated by the revolving credit facility; short-term rates and refinancing needs can affect interest expense.
Important facts for investors to verify
- Whether Black Knight integration, synergies and the preliminary purchase-price allocation develop as expected; the allocation remained subject to finalization.
- Mortgage Technology performance excluding the acquired business, and the sensitivity of transaction-based revenues to mortgage rates and loan volumes.
- Debt reduction plans and financing costs, particularly commercial-paper rollover, term-loan repayment and the effect of floating short-term rates.
- Reported versus adjusted results: adjusted measures exclude specified acquisition, amortization, investment-loss and other items and are non-GAAP.
- Developments in the PennyMac arbitration, regulatory matters and the FTC-supervised sale of the promissory note.