Intercontinental Exchange, Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. Amounts are in U.S. dollars; financial figures are in millions except per-share data. ICE operates regulated exchanges and clearing houses and provides data services and listings through its Trading and Clearing and Data and Listings segments.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Total revenue | $1,556 | $1,496 | $3,136 | $2,967 |
| Revenue less transaction-based expenses | $1,246 | $1,180 | $2,471 | $2,346 |
| Operating income | $655 | $609 | $1,305 | $1,191 |
| Operating margin | 53% | 52% | 53% | 51% |
| Net income attributable to ICE | $455 | $419 | $919 | $922 |
| Diluted EPS | $0.78 | $0.71 | $1.58 | $1.55 |
| Operating cash flow | Not separately provided | Not separately provided | $1,236 | $1,099 |
- Q2 total revenue rose about 4%, revenue after transaction-based expenses 6%, operating income 7% and diluted EPS 10% year over year. For the first half, revenue after transaction-based expenses increased 5% and operating income 10%, while ICE-attributable net income was nearly flat.
- Q2 data services revenue was $526, listings $111 and transaction and clearing revenue $864. First-half figures were $1,046, $220 and $1,762, respectively. Organic annual subscription value was $1.846 billion, up 6.3% year over year.
- Adjusted diluted EPS, a non-GAAP measure, was $0.90 for Q2 and $1.80 for the first half, compared with $0.76 and $1.49, respectively. Adjusted operating margin was 60% in both periods, versus 58% in the comparable 2017 periods.
Cash, debt and liquidity
- Cash and cash equivalents were $532 at June 30. Restricted cash and cash equivalents totaled approximately $1.148 billion. First-half operating cash flow was $1,236; investing activities used $818 and financing activities used $301.
- Total debt was $6.916 billion, up from $6.100 billion at December 31, 2017. This included $2.045 billion of commercial paper and $600 million of senior notes due October 2018. Commercial paper carried a 2.06% weighted-average rate and an 18-day weighted-average maturity.
- ICE had a $3.4 billion revolving credit facility with no borrowings outstanding. After amounts backing commercial paper and broker-dealer commitments, approximately $1.3 billion remained available for general corporate purposes.
- Clearing-related margin deposits, guaranty funds and delivery contracts receivable/payable totaled $54.991 billion, with an equal corresponding liability. These balances are tied to clearing operations and should not be treated as corporate cash available for general use. Clearing member collateral received or pledged was $102.2 billion.
- During the first half, ICE spent $759 on share repurchases and paid $279 in dividends. The quarterly dividend was $0.24 per share; a further $0.24 dividend was announced August 2, 2018.
Material changes and unusual items
- Trading and Clearing revenue after transaction-based expenses increased 11% in both Q2 and the first half. Data and Listings revenue grew 1% in each period; pricing and analytics gains were offset in part by lower desktops and connectivity revenue, including effects of divestitures.
- Higher trading activity supported growth in several agricultural, metals, interest-rate and equity-options products. Data-services performance benefited from customer retention, new and expanded customer relationships, acquisitions and foreign exchange; divestitures partly offset these factors.
- First-half results included $32 of favorable foreign-exchange impact on revenue after transaction-based expenses. Interest expense increased to $107 for the first half, from $90, largely due to higher short-term rates and prior-year bond refinancing.
- Prior-year first-half other income included a $176 realized gain on the Cetip investment sale. This makes year-over-year comparisons of other income and pretax income less representative of recurring operations. The TCJA reduced the effective tax rate to 24% from 27% for the first half; ICE said its tax accounting remained subject to finalization.
- ICE acquired BondPoint for $400 on January 2 and bought an additional 5.1% stake in Euroclear for $304, bringing its holding to 9.8%. Subsequent to quarter-end, ICE acquired CHX Holdings on July 18 and TMC Bonds for $701 on July 23.
- ICE Futures Canada and ICE Clear Canada ceased operations after the canola business transitioned on July 30. ICE recorded a $4 impairment of related exchange-registration intangibles and $4 of related severance costs in the first half.
- NYSE and affiliated exchanges settled SEC investigations in March, agreeing to a $14 civil penalty and non-monetary relief; the company had accrued $14 in 2017. ICE did not expect legal matters to materially affect consolidated financial condition, results or liquidity, but noted developments could affect results in a particular period.
Outlook, risks and contingencies
- Management expected 2018 capital expenditures and capitalized software development costs of $300–$330. No earnings or revenue guidance is provided in the filing.
- Management said operating cash flow and available financing were expected to support debt repayment and operating and capital needs. It planned to refinance the $600 of notes due in October 2018 with new senior term notes; alternatives included commercial paper, the credit facility or operating cash flow if refinancing was unavailable or unfavorable.
- Key risks include market volatility and trading volumes, competition and pricing, regulatory changes in multiple jurisdictions, clearing-house default and liquidity exposures, technology resilience and cybersecurity, acquisition integration, foreign-exchange movements, interest-rate exposure and litigation. ICE cited potential impacts from MiFID II/EMIR implementation and other evolving market rules.
- TCJA accounting estimates were not final, and ICE had not yet elected how to account for taxes under the Global Intangible Low-Taxed Income provisions. The filing also describes clearing-member default protections and ICE-funded guaranty contributions, which remain exposed to potential clearing-house losses.
Important facts for investors to verify
- Whether trading volumes, pricing and recurring data-subscription growth persist, and whether data-services weakness in desktops and connectivity stabilizes.
- How ICE refinanced the October 2018 notes and reduced commercial-paper borrowings, including the resulting interest cost and leverage.
- The final TCJA and GILTI accounting effects, and whether subsequent acquisitions meet expected integration and financial objectives.
- Potential costs or business effects from regulatory proceedings, the Providence exchange litigation, clearing-member defaults, and the ICE Canada closures.
- How much reported cash is unrestricted and available for corporate purposes; clearing-related balances are substantial but largely matched by liabilities or otherwise restricted.