Intercontinental Exchange, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. ICE operates regulated exchanges and clearing houses, listings venues, data services, and mortgage technology businesses. Results reflect unusually high market activity amid COVID-19-driven volatility.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Total revenue | $2.115 billion | $1.583 billion | +34% |
| Revenue less transaction-based expenses | $1.559 billion | $1.270 billion | +23% |
| Operating income | $882 million | $665 million | +32% |
| Operating margin on revenue less transaction-based expenses | 57% | 52% | +5 percentage points |
| Net income attributable to ICE | $650 million | $484 million | +34% |
| Diluted EPS | $1.17 | $0.85 | +38% |
| Cash from operating activities | $520 million | $654 million | −21% |
- Segment results: Trading and Clearing revenue less transaction-based expenses rose 44% to $883 million, with operating income up 49% to $573 million. Data and Listings revenue rose 3% to $676 million, with operating income up 10% to $309 million.
- Drivers: Futures and options contract volume increased 44%; cash equities handled volume increased 45%; and heightened volatility supported trading and clearing activity. Data services grew 3%, while listings revenue was flat.
- Non-GAAP measures: Adjusted operating income was $962 million, adjusted operating margin 62%, adjusted net income attributable to ICE $708 million, and adjusted diluted EPS $1.28. These exclude specified items and are not GAAP measures.
Cash flow, balance sheet and capital
- Operating cash flow was $520 million. ICE attributed the year-over-year decline mainly to a $373 million increase in receivables associated with exceptional March trading activity, with collections occurring later, as well as higher taxes paid and prior-year bonus payments. Operating cash flow less capital expenditures and capitalized software costs was $461 million, versus $589 million in Q1 2019.
- Cash and cash equivalents were $583 million at March 31, compared with $841 million at year-end. Cash plus restricted cash and cash equivalents totaled $1.986 billion; restricted balances are not freely available for general corporate use.
- Total debt was $8.323 billion, up from $7.819 billion at year-end, including $1.814 billion of commercial paper and $6.5 billion of senior notes. The $3.4 billion revolving facility had no borrowings; approximately $1.4 billion remained available for general corporate purposes after required backstops and commitments.
- Current assets and liabilities each included $108.863 billion of margin deposits, guaranty funds and delivery-contract balances. These largely matched clearing-related assets and obligations and should not be treated as ordinary corporate liquidity.
- ICE repurchased 7.6 million shares for $699 million and paid $166 million in dividends. The quarterly dividend was $0.30 per share. The Board’s $2.4 billion buyback authorization had $1.7 billion remaining at quarter-end.
- ICE expected 2020 capital expenditures and capitalized software development costs of $300–$330 million. It planned to refinance or otherwise fund the $1.25 billion of senior notes due December 2020; no specific earnings or revenue guidance was provided.
Material developments, outlook and risks
- ICE acquired Bridge2 Solutions on February 21, 2020. Acquisition cash paid, net of cash acquired, was $249 million; the purchase was funded through commercial paper and operating cash flow. A $300 million Bakkt capital call was funded by ICE and minority investors. The acquisition-related market condition triggered $10 million of compensation expense.
- COVID-19 increased volatility and demand for some trading and risk-management services, but ICE said the pandemic’s ultimate effects could not be estimated. NYSE trading floors were temporarily closed and trading moved fully electronic; most employees worked remotely. The filing identifies potential operational, cybersecurity, customer-demand, funding-market and liquidity risks.
- Management reported no goodwill or intangible-asset impairment and no material COVID-19-related increase in bad-debt expense through March 31. ICE adopted the expected-credit-loss standard, recording a $10 million after-tax opening retained-earnings adjustment; the closing allowance for doubtful accounts was $22 million.
- Clearing collateral rose: ICE Clearing Houses held or had been pledged $168.6 billion in original-margin and guaranty-fund collateral, versus $126.0 billion at year-end. ICE estimated maximum clearing-house guarantee exposure, excluding margin and other collateral, at $149.5 billion, based on a hypothetical one-day market movement.
- Other risks include refinancing and commercial-paper rollover, regulatory change and Brexit-related access to U.K. clearing and trading venues, currency exposure, clearing-member defaults, and litigation. The LIBOR class-action complaint was dismissed on March 26, 2020; plaintiffs appealed on April 24. ICE said it would defend the appeal. The filing states that potential losses in the cited cases generally could not be reasonably estimated.
- ICE reported effective disclosure controls and no material change in internal controls during the quarter. It stated that legal matters were not expected to materially adversely affect financial condition, results or liquidity, while acknowledging that developments could affect particular periods.
Key facts for investors to verify
- Whether the exceptional trading-volume benefit persists as volatility and market conditions change.
- Collection of the large March receivables increase and its effect on subsequent operating cash flow and credit-loss provisions.
- Commercial-paper refinancing and the planned funding of the December 2020 note maturity, including access to capital markets.
- COVID-19 effects on recurring data demand, listings and IPO activity, customers, employees, vendors and operational resilience.
- Integration, costs and returns from Bridge2 Solutions and the broader Bakkt investment.
- Clearing-house exposure and liquidity management as margin requirements, collateral values and market volatility evolve.
- Developments in the LIBOR appeal, City of Providence litigation, Brexit-related regulatory access, and market-data and exchange-fee regulation.