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ICE Earnings Top on Revenue Rise, Expenses Drag Margins

Intercontinental Exchange Inc. (ICE) posted third-quarter 2014 operating earnings of $2.15 per share, which outperformed the Zacks Consensus Estimate of $2.02, bringing the trailing four quarter average beat to 2.7%. Results also surpassed the year-ago quarter figure of $1.97 per share and despite a higher share count.

Intercontinentalexchange, Inc - Quarterly EPS (:BNRI) | FindTheBest

However, operating net income surged 69.4% year over year to $245 million. This excluded after-tax integration cost related to NYSE Euronext acquisition worth $29 million and non-controlling interest of $7 million in the reported quarter, while after-tax extraordinary items of $3.3 million comprising merger costs and banker fee relating to ICE Endex acquisition were excluded from the year-ago quarter.

Including these items, ICE recorded reported net income of $206 million or $1.80 per share versus $141 million or $1.92 per share in the year-ago quarter.

Results reflected incremental revenues from the NYSE acquisition (culminated in Nov 2013), which drove the top line noticeably. However, equally higher expenses and lower volumes limited margin expansion. Meanwhile, the sale of non-core NYSE technology businesses and successful completion of the initial public offering (IPO) of the Euronext business supported cash flows and capital position.

Total net revenues escalated about 120.4% year over year to $745 million, and beat the Zacks Consensus Estimate of $741 million as well.

The year-over-year upsurge was mainly attributable to a 59.6% spike in consolidated net transaction and clearing fee revenues, which were $447 million. However, total average daily volumes in total futures and options were down 17% year over year in the first nine months of 2014, while total contracts declined 14% in the reported quarter.

Consolidated market data fees revenues increased 162.5% to $105 million, whereas total listing fee revenues from NYSE Euronext were $86 million, slightly higher than $83 million in the prior quarter. Furthermore, consolidated other revenues, which now includes NYSE Euronext-related technology services revenues and fees from trading license, regulatory and listed company services, escalated to $107 million from a mere $18 million in the year-ago quarter.

Conversely, total operating expenses rose a massive 205% year over year to $415 million, primarily owing to increased operating expenses, compensation and benefits as well as acquisition-related transaction and integrations costs.

Operating income jumped 63.4% to $330 million. However, reported operating margin plunged to 44.3% from 59.8% in the year-ago period. The effective tax rate upped to 29% from 25% in the year-ago quarter.

Financial Update

At the end of Sep 2014, ICE’s consolidated operating cash flow surged to $922 million from $562 million in the year-ago period. Capital expenditures totaled $66 million, down from 76 million in the year-ago period, while capitalized software development costs grossed $56 million, up from $28 million in the year-ago quarter.

As of Sep 30, 2014, the company recorded unrestricted cash and investments of $638 million (down from $961 million at 2013-end). Excluding $1.2 billion that remained locked for redemption of 2015 Eurobonds, total outstanding debt stood at $2.9 billion from $5.1 billion at 2013-end.

Total assets rose to $67.3 billion at Sep 2014-end, while total equity grew to $12.64 billion, both from 2013-end levels.

Stock Repurchase Update

In Jul 2014, the board of ICE expanded its share repurchase program by $600 million. Meanwhile, $449 million worth of shares were bought back in the reported quarter. Additional shares worth $64 million have been repurchased so far in fourth-quarter 2014. The company has $537 million shares available for repurchases as on Nov 4, 2014.

Dividend Update

Concurrently, the board of ICE declared a fourth-quarter 2014 dividend of 65 cents, payable on Dec 31, 2014, to shareholders of record as on Dec 12.

On Sep 30, 2014, the company paid its third-quarter 2014 dividend of 65 cents to shareholders of record as on Sep 16. Notably, it has returned about $74 million to shareholders through dividends in the reported quarter.

Guidance for 2014

Management detailed its financial targets for 2014. The recently acquired SuperDerivatives (in Oct 2014) is expected to generate revenues of $15–16 million and expenses of $12–13 million in fourth-quarter 2014.

Total operating expense in the fourth quarter of 2014 is projected within $375–380 million. For full-year 2014, the ICE projects operating expenses of about $1.52–1.53 billion, and includes amortization of acquisition-related intangibles, lower than prior estimate of $1.55–1.56 billion.

Excluding amortization of acquisition-related intangibles, operating expenses are projected to be $344–349 million and $1.39–1.40 billion in fourth-quarter and full-year 2014, respectively.

Depreciation and amortization expense, amortization of acquisition-related intangibles, is expected in the band of $49–54 million in the fourth-quarter and $195–200 million in 2014.

Moreover, ICE anticipates capital expenditures and capitalized software expenses to be $43–53 million in fourth quarter and $165–175 million in 2014. The quarterly and yearly estimates also include $36–46 million and $75–85 million, respectively, related to real estate costs.

Shares outstanding are now estimated in the range of 113–114 million in the fourth quarter of 2014 and 114.5–115.5 million in 2014.

ICE also aims to realize about $265 million in synergies in 2014. Previously, about $23–24 million of quarterly interest expense was estimated for the second half of 2014, while consolidated tax rate was expected in the band of 27–30% for 2014.

Meanwhile, the company reduced its bonus accrual for 2014 expecting full-year results to be slightly below target. The full year reduction to compensation expense is $5 million, of which three quarters is reflected in the third quarter of 2014 with the remainder to be reflected in fourth-quarter 2014.

Zacks Rank

Currently, ICE carries a Zacks Rank #3 (Hold).

Stocks to Consider

Better-ranked exchange operators like CBOE Holdings Inc. (CBOE), Markit Ltd. (MRKT) and MarketAxess Holdings Inc. (MKTX), all having a Zacks Rank #2 (Buy),are worth considering.

Read the Full Research Report on ICE
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Read the Full Research Report on MKTX
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