Intercontinental Exchange, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. ICE operates regulated exchanges and clearing houses and provides market data and listings services. Amounts below are in U.S. dollars; financial statement amounts are in millions except per-share data.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Total revenue | $1,469 | $1,554 | Down 5% |
| Revenue less transaction-based expenses | $1,164 | $1,154 | Up 1% |
| Operating expenses | $582 | $570 | Up 2% |
| Operating income / margin | $582 / 50% | $584 / 51% | Income approximately flat |
| Net income attributable to ICE | $502 | $369 | Up 36% |
| Diluted EPS | $0.84 | $0.62 | Up 35% |
| Cash provided by operating activities | $611 | $597 | Up 2% |
| Cash and cash equivalents at quarter-end | $360 | $407 at Dec. 31, 2016 | Down $47 sequentially |
| Total debt at quarter-end | $6,248 | $6,364 at Dec. 31, 2016 | Down $116 sequentially |
Q1 included a $176 million realized gain from the Cetip investment sale, recorded in other income. Excluding this and other specified items, ICE reported adjusted net income of $441 million and adjusted diluted EPS of $0.74, both unchanged from Q1 2016. GAAP net income growth therefore substantially reflects the investment gain rather than growth in adjusted earnings. The effective tax rate was 30% in both periods.
Cash used in investing activities was $108 million, including $32 million of capital expenditures and $34 million of capitalized software development. Cash used in financing was $551 million, including $229 million of share repurchases, $120 million of dividends, and $117 million of net commercial-paper repayments.
Segments and material changes
- Trading and Clearing: Revenue less transaction-based expenses was $538 million, down 6%; operating income was $322 million, down 11%. Cash equities and equity-options trading were weaker: handled cash-equities volume fell 26%, and NYSE equity-options volume fell 28%. Total futures and options contracts traded rose 6%, with interest-rate futures and options volume up 23% and oil volume up 5%.
- Data and Listings: Revenue was $626 million, up 8%, and operating income was $260 million, up 16%. Data-services revenue increased 9%, supported by customer retention, new and expanded purchases, product development, and acquisitions; listings revenue increased 2%.
- Consolidated revenue less transaction-based expenses grew modestly despite a 14% decline in transaction and clearing revenue. Lower transaction-based expenses partly offset weaker trading revenue. The stronger U.S. dollar reduced this net revenue measure by $20 million and operating expenses by $11 million versus the prior-year quarter.
Liquidity, debt, and outlook
Total debt was $6.25 billion, comprising $2.38 billion of short-term debt and $3.87 billion of long-term debt. Commercial paper outstanding was $1.525 billion, with a 0.95% weighted-average rate and 21-day weighted-average maturity. ICE had a $3.4 billion revolving credit facility, with $1.9 billion available for general corporate purposes after the commercial-paper backstop. The $851 million NYSE Notes mature in October 2017; management planned to refinance them with new senior notes, with commercial paper or the credit facility as alternatives.
Management expected 2017 operational capital expenditures and capitalized software costs of $280–$300 million, plus $40–$45 million of real-estate capital expenditures. It stated that cash on hand and operating cash flows should be sufficient to repay debt as it matures. ICE planned to use approximately $438 million of net cash and stock proceeds from the Cetip/B3 transactions to reduce commercial paper and fund share repurchases. A $0.20-per-share Q2 2017 dividend was announced after quarter-end.
Notable items, risks, and contingencies
- The U.K. Competition Appeal Tribunal upheld the order requiring ICE to divest Trayport. ICE was seeking permission to appeal; if unsuccessful or not permitted to appeal, it would be obligated to sell. The sale price and timing were uncertain, and ICE said it would not integrate Trayport pending a final decision.
- ICE acquired National Stock Exchange, renamed NYSE National, in January 2017; a relaunch as a trading venue was expected in 2017. ICE sold Interactive Data Managed Solutions to FactSet on March 31, with no gain or loss recognized.
- ICE recorded a $10 million accrual related to ongoing investigations and inquiries. The company said it did not believe resolution of legal matters would materially adversely affect its financial condition, results, or liquidity, while cautioning that future developments could affect results.
- Key business risks include trading-volume and market-volatility changes, competition, regulatory developments, clearing-house and technology resilience, customer retention, and foreign-exchange exposure. MiFID II/EMIR implementation and the U.K.’s EU withdrawal could bring uncertain regulatory and currency effects.
- ICE clearing houses held $52.4 billion of cash margin and guaranty-fund deposits on the balance sheet, matched by liabilities to clearing members; these are not ordinary corporate liquidity. ICE also reported $97.7 billion of cash and non-cash collateral received or pledged for margin and guaranty funds. Clearing-house default risk and the potential use of ICE’s own $253 million guaranty-fund contributions remain relevant.
- Management identified a 100-basis-point increase in commercial-paper rates as reducing annual pre-tax earnings by an estimated $15 million, assuming debt levels and composition remain unchanged. A hypothetical 10% fall in sterling would reduce equity by $144 million, and a 10% fall in the euro by $11 million.
Most important facts to verify
- How much of reported earnings growth is attributable to the $176 million Cetip gain, and whether adjusted earnings trends persist.
- Trading-volume, market-share, and revenue-capture trends, particularly in U.S. cash equities and equity options.
- The outcome and potential financial impact of the Trayport appeal and any required divestiture.
- Refinancing terms for the October 2017 NYSE Notes and commercial-paper exposure to short-term rate increases or rollover risk.
- The nature and potential exposure from regulatory investigations, and developments affecting MiFID II/EMIR and Brexit-related regulation.
- Whether management’s capital-spending outlook and planned use of Cetip/B3 proceeds align with debt reduction and repurchases.