Business context and reporting period
Intercontinental Exchange, Inc. (ICE) filed this unaudited Form 10-Q for the quarter ended September 30, 2015. ICE operates regulated exchanges, clearing houses and listing venues, and provides market data services; it reports as one business segment. Comparisons below are to the corresponding 2014 periods unless stated otherwise. Dollars are in millions except per-share amounts.
Financial performance and liquidity
| Metric | Nine months ended September 30 | Three months ended September 30 |
|---|---|---|
| Total revenue | $3,380; up 9% | $1,151; up 14% |
| Revenue less transaction-based expenses | $2,463; up 7% | $816; up 10% |
| Operating income | $1,332; up 27% | $440; up 33% |
| Operating margin | 54%, versus 46% | 54%, versus 44% |
| Net income attributable to ICE | $904, versus $693 | $306, versus $206 |
| Diluted continuing-operations EPS attributable to ICE | $8.10, versus $5.93 | $2.76, versus $1.89 |
| Operating cash flow from continuing operations | $890, versus $922 | Not separately stated in the filing summary |
Revenue growth reflected higher data-services and listing fees, stronger U.S. cash equities activity, and growth in Brent and other oil contracts. Interest-rate futures and options revenue declined, as did some emissions and credit-related activity. A stronger U.S. dollar reduced revenue less transaction-based expenses by $45 for the nine months and $11 for the quarter.
Operating expenses fell 9% in both comparison periods, mainly due to lower NYSE integration, professional-services and other costs; depreciation and amortization increased. The reported operating margin is GAAP; ICE’s adjusted operating margin was 59% for both the nine-month and quarterly periods, versus 54% in each 2014 period. Adjusted measures are non-GAAP.
Cash and cash equivalents were $687 at September 30, 2015, versus $652 at year-end 2014. Short-term investments were $21, down from $1,200, primarily because euro term deposits were used to repay the NYSE euro notes at maturity. Total debt was $3,500, down from $4,289; it included $1,253 of commercial paper and $2,247 of long-term debt. ICE had a $3.0 billion revolving facility with no borrowings; after commercial-paper backstop and clearing-house reserves, $1.4 billion was available for general corporate purposes.
Cash from continuing operations was $890; investing activities provided $846, including $1,084 of proceeds from term deposits and investment sales; financing activities used $1,692, including $605 of share repurchases, $242 of dividends and $681 of net debt repayments. The filing attributes lower operating cash flow mainly to working-capital timing and higher cash taxes.
Material changes versus prior periods
- Nine-month revenue less transaction-based expenses rose 7%, while operating income rose 27%, reflecting revenue growth and lower operating expenses. Attributable continuing-operations earnings per diluted share increased 37%.
- Futures and options contracts traded declined 2% for the nine months, despite growth in U.S. cash equities handled volume of 19%. ICE’s U.S. cash market share increased to 24% from 22%; interest-rate futures and options volume declined 21%.
- ICE repaid the $1.0 billion principal on the NYSE euro notes on June 30, 2015, using previously set-aside euro deposits. It also purchased the remaining 16% of NYSE Amex Options for $128, bringing ownership to 100%.
- Accumulated other comprehensive loss widened to $191 from $46, including a $126 decline in available-for-sale securities, primarily reflecting the Brazilian real’s depreciation and the fall in the value of the Cetip investment.
Outlook, commentary, risks and unusual items
- ICE gave no specific earnings or revenue forecast. It expected 2015 operational capital expenditures and capitalized software development costs of $165–$175, plus $70–$80 of real-estate capital expenditures.
- Management said cash on hand and operating cash flows should be sufficient to repay outstanding debt as it matures. The company announced a fourth-quarter dividend of $0.75 per share, payable December 31, 2015.
- After quarter-end, ICE agreed to acquire Interactive Data Holdings Corporation for a stated value of $5.2 billion: $3.65 billion in cash and $1.55 billion in ICE shares, with potential additional shares depending on ICE’s share price. Completion and anticipated benefits were subject to risks and conditions.
- ICE Futures Singapore and ICE Clear Singapore were expected to begin operations November 17, 2015, subject to final regulatory approval. ICE also expected EMIR-related requirements to increase ICE Clear Europe’s restricted regulatory capital by $187 million.
- Key risks include trading volumes and volatility, competition and pricing pressure, regulation, technology and cybersecurity, acquisition integration, litigation, foreign exchange movements and commercial-paper rollover risk. A 100-basis-point increase in commercial-paper rates would reduce annual pretax earnings by an estimated $13, assuming balances remain unchanged.
- Clearing houses reported a $69.0 billion estimated maximum exposure to a hypothetical one-day price movement in unsettled contracts, excluding margin and guaranty-fund protections; this is not a forecast of likely loss. Clearing-member cash and non-cash collateral totaled $81.3 billion.
- ICE recorded $15 million of litigation settlements and accruals for the nine months, including the settled ATG/ATS arbitration; a $4 million insurance recovery was recorded in the third quarter. The City of Providence market-structure lawsuit was dismissed with prejudice, but plaintiffs appealed. Other market-data lawsuits were dismissed and appeals were pending.
Most important facts for investors to verify
- Whether revenue growth and margin expansion persist, particularly amid lower interest-rate activity and competitive pressures in trading and data services.
- Final financing, share issuance, regulatory approvals, closing conditions and integration costs for the Interactive Data acquisition.
- Commercial-paper refinancing and liquidity capacity, debt levels, and the timing and amount of required clearing-house regulatory capital.
- Developments in litigation appeals, regulatory proceedings, and the OCC capital-plan review, which remained pending.
- The sensitivity of reported results and equity to foreign-currency movements and the valuation of the Cetip investment.