Intercontinental Exchange, Inc. quarterly report, Q1 FY2016

Intercontinental Exchange, Inc. — Q1 2016 Form 10-Q

Reporting period: Three months ended March 31, 2016. Unless otherwise indicated, amounts are in U.S. dollars; financial statement amounts are in millions, except per-share data. ICE operates regulated exchanges and clearing houses and provides data, connectivity and listings services.

Financial performance

Metric	Q1 2016	Q1 2015	Change
Total revenue	$1,554	$1,180	32%
Revenue less transaction-based expenses	$1,154	$850	36%
Operating income	$584	$462	26%
Operating margin	51%	54%	Down 3 pts
Net income attributable to ICE	$369	$315	17%
Diluted EPS	$3.08	$2.80	10%
Operating cash flow	$597	$465	28%

Management also reported non-GAAP adjusted operating income of $678 million (up 32%), adjusted operating margin of 59% (down 1 point), adjusted net income of $441 million (up 28%) and adjusted diluted EPS of $3.68 (up 20%). These measures exclude specified acquisition costs, acquisition-related intangible amortization and related tax effects; they are not GAAP measures.

Data and Listings drove much of the increase: segment revenue less transaction-based expenses was $580 million, up 93%, and operating income was $223 million, up 61%. Trading and Clearing revenue less transaction-based expenses was $574 million, up 4%, and operating income was $361 million, up 12%.

Cash, debt and liquidity

Cash and cash equivalents were $468 million at quarter-end, down from $627 million at December 31, 2015. Operating activities generated $597 million; investing used $59 million and financing used $697 million. Financing outflows included $543 million of net commercial-paper repayments and $102 million of dividends.
Total debt was $6.766 billion, down from $7.308 billion, including $2.048 billion of commercial paper and $4.718 billion of long-term debt. Commercial paper carried a 0.54% weighted average rate and 22-day weighted average maturity at quarter-end.
The $3.4 billion revolving credit facility had no borrowings; $2.0 billion supported commercial paper and $1.4 billion remained available for general corporate purposes. A separate $500 million 364-day facility was also undrawn.
Margin deposits and guaranty funds of $52.329 billion were matched by corresponding liabilities. These customer clearing balances are restricted to clearing obligations, not general corporate liquidity. ICE reported $919 million of restricted cash and investments.
Q1 dividend was $0.85 per share. On May 4, 2016, ICE announced a second-quarter dividend of $0.85 per share, subject to the stated record and payment dates.

Material changes and business developments

Q1 results included Interactive Data and Trayport, acquired in December 2015. ICE attributed $260 million of Q1 data-services revenue to these businesses. Their inclusion significantly affects year-over-year comparisons; associated Q1 operating expenses were $217 million.
Data-services revenue rose to $477 million from $200 million, principally reflecting the acquisitions, alongside customer and product growth. ICE reported 5,526 employees, versus 2,887 a year earlier, mainly due to the acquisitions.
Trading activity was mixed: total futures and options contracts increased 10%; cash handled volume rose 25%; and total equity-options volume rose 3%. Natural-gas volume declined 9%, while agricultural and metals volume rose 20%.
ICE moved from one reportable segment to two—Trading and Clearing, and Data and Listings—reflecting how management reviews the business.
ICE agreed to acquire S&P Securities Evaluations and Credit Market Analysis from McGraw Hill Financial. Closing was subject to regulatory approvals; ICE could pay in cash or shares.

Outlook, commentary and risks

Management expected 2016 operational capital expenditures and capitalized software costs of $270–$280 million, plus $45–$55 million of real-estate capital expenditures, primarily for Atlanta headquarters improvements. ICE stated it believed cash on hand and operating cash flow would be sufficient to repay debt as it matures.
Key sensitivities include trading volumes and volatility, customer demand and renewal rates for data services, pricing and competition, regulatory changes, acquisition integration and synergy execution, technology resilience and cybersecurity, clearing-house risk, and litigation or regulatory proceedings.
Commercial paper creates refinancing and short-term interest-rate exposure. ICE cited a hypothetical 100-basis-point rate increase on quarter-end commercial paper as reducing annual pretax earnings by $20 million. Foreign-currency movements also affect results and equity; a hypothetical 10% pound sterling decline would reduce equity by $189 million, and a 10% euro decline by $17 million.
Q1 included an $11 million income-tax benefit from early adoption of stock-compensation accounting guidance. The Cetip investment’s fair-value increase of $54 million was recorded in other comprehensive income, not earnings; ICE disclosed an unrealized gain of $28 million at quarter-end and a subsequent proposed Cetip merger agreement.
The filing reported no significant new risk factors compared with the 2015 Form 10-K. Management said ordinary-course legal matters were not expected to materially affect consolidated results or liquidity, while acknowledging future developments could adversely affect a particular period.

Investor verification priorities

Separate acquired-business contributions and integration costs from underlying organic growth and assess whether expected acquisition synergies are being realized.
Review the drivers of data-services growth, including customer retention, renewals and recurring-revenue performance.
Monitor commercial-paper refinancing, interest costs, debt reduction and liquidity available beyond the credit-facility backstop.
Track trading volumes, fee capture and rebates, especially where volume growth did not translate proportionately into revenue.
Check regulatory approvals and closing terms for the pending acquisition, and developments in clearing regulation and the Cetip merger.