Intercontinental Exchange, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. ICE operates regulated exchanges and clearing houses, listings venues, and market data services. Its two segments are Trading and Clearing and Data and Listings. Figures are in U.S. dollars; amounts are in millions unless stated otherwise.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenue | $1,634 | $1,556 | $3,217 | $3,136 |
| Revenue less transaction-based expenses | $1,298 | $1,246 | $2,568 | $2,471 |
| Operating expenses | $618 | $591 | $1,223 | $1,166 |
| Operating income | $680 | $655 | $1,345 | $1,305 |
| Operating margin | 52% | 53% | 52% | 53% |
| Net income attributable to ICE | $472 | $455 | $956 | $919 |
| Diluted EPS | $0.84 | $0.78 | $1.68 | $1.58 |
| Operating cash flow | Not provided by quarter | Not provided by quarter | $1,382 | $1,236 |
Q2 total revenue increased 5% year over year; revenue less transaction-based expenses and operating income each rose 4%. Q2 diluted EPS increased 8%. For the six-month period, revenue less transaction-based expenses rose 4%, while operating expenses rose 5% and operating margin declined one percentage point. Data and Listings operating income grew 12% in Q2; Trading and Clearing operating income declined 2%.
Q2 revenue drivers included data services (+5%), transaction and clearing revenue (+5%), and fixed income and credit revenue (+77%, from a comparatively low base). In the six-month period, energy futures and options volume fell 8% and financial futures and options volume fell 14%; lower activity was partly offset by higher rates per contract in some product areas. Data services revenue grew 5% in both Q2 and the six-month period, supported by customer retention, new customers, increased purchases, and pricing. Data-services annual subscription value was $1.984 billion at June 30, up 5.4% year over year; management cautions that this is an indicative metric, not a revenue growth forecast.
Cash flow, liquidity and capital
- Six-month operating cash flow was $1,382, up $146 year over year. Investing cash outflow was $402 and financing cash outflow was $782. Cash, cash equivalents, and restricted cash totaled $2,071 at period end; unrestricted cash and cash equivalents were $837.
- Total debt was $7,797, including $1,303 of short-term debt and $6,494 of long-term debt. Commercial paper outstanding was $1,298, at a weighted-average rate of 2.56% and maturity of 26 days. Debt increased from $7,441 at December 31, 2018.
- ICE had a $3.4 billion revolving credit facility with no borrowings outstanding; approximately $2.0 billion was available for working capital and general purposes after backing commercial paper and subsidiary commitments. Management said cash on hand and operating cash flow were expected to be sufficient to repay outstanding debt, while noting future financing needs could vary.
- Six-month capital returns included $780 of share repurchases and $312 of dividends. ICE had $1.2 billion remaining under its $2.0 billion repurchase authorization. The Board announced a Q3 dividend of $0.275 per share. 2019 capital expenditures and capitalized software development were forecast at $290–$320.
Material changes, outlook and unusual items
- ICE acquired mortgage-services provider Simplifile on June 12 for $338 in cash, funded in part by commercial paper; preliminary purchase accounting recorded $218 of goodwill. Bakkt also acquired two companies during the six-month period.
- Interest expense rose to $71 in Q2 from $55, and to $142 for six months from $107, primarily reflecting the 2018 bond refinancing and higher short-term rates. The effective tax rate was 24% in Q2 and 23% for six months; the six-month rate benefited from state tax changes and apportionment adjustments.
- ICE recognized $19 of additional OCC equity earnings in the six-month period following the SEC’s disapproval of OCC’s 2015 capital plan. OCC returned $44 of ICE’s original $60 contribution; the remaining $16 was expected to be returned when capital requirements permit.
- Beginning in Q2, certain third-party revenue-share payments were classified as technology and communication expense rather than netted against transaction and clearing revenue. This presentation change affects comparability of those line items.
- Adoption of the new lease standard in January 2019 added operating lease liabilities; at June 30, total operating lease liability was $352. The adoption did not affect the income statement or opening retained earnings.
- No specific full-year earnings or revenue guidance was provided in the supplied filing text. Management cited expected growth-related operating expenses and identified trading volumes, market conditions, regulation, competition, data-subscription renewals, technology reliability and cybersecurity, acquisitions, and foreign exchange as factors that may affect results.
- Regulatory uncertainties include Brexit and EU access to U.K. clearing services, proposed EMIR 2.2 oversight of non-EU clearing houses, Basel III capital rules, the SEC Transaction Fee Pilot, and EU commodity-derivatives transparency requirements. ICE noted that impacts remain uncertain.
- Legal matters include LIBOR-related purported class actions seeking unspecified treble damages and the City of Providence litigation. ICE said it did not expect resolution of legal matters to materially adversely affect consolidated financial condition, results, or liquidity, but acknowledged developments could affect results in a particular period.
Key facts for investors to verify
- Whether trading volumes, particularly energy and financial futures, stabilize and how product mix affects revenue capture.
- Whether data-services subscription growth and customer retention continue, and how to interpret the ASV metric alongside reported revenue.
- Acquisition integration, Simplifile’s contribution, and ongoing amortization and related costs.
- Commercial-paper refinancing and short-term interest-rate exposure, including the $13 annual pre-tax earnings sensitivity to a 100-basis-point rate increase on outstanding commercial paper.
- Clearing-house exposure and safeguards: the filing estimates $96.9 billion of maximum potential exposure on a hypothetical one-day market move before collateral and guaranty-fund protections; clearing-member collateral and guaranty fund balances should be reviewed in context.
- Developments in LIBOR litigation, the City of Providence case, Brexit-related access and regulation, and the OCC capital-plan return.