ICE Sustains Momentum in 2Q

Zacks

IntercontinentalExchange Inc.’s (ICE) second-quarter 2012 operating earnings of $1.95 per share came a couple of pennies ahead of the Zacks Consensus Estimate of $1.93 a share, but it well outpaced the year-ago quarter’s earnings of $1.64 per share. Accordingly, net income attributable to shareholders escalated 18% to $143.2 million when compared with $121.4 in the year-ago quarter.

The quarterly results of ICE benefited from favourable futures markets, strategic initiatives in clearing, execution and record market data and other revenue, which in turn led to modest top-line growth. The upside was also attributable to capital efficiency, strict expense control lower tax rate and growth in the company’s core businesses.

Further, significant progress was triggered by new initiatives that led to margin expansion. However, this was partially offset by lower revenue from the over-the-counter (:OTC) segment and credit default swap (:CDS) business.

Total revenue climbed 8% year over year to $351.2 million and were in line with the Zacks Consensus Estimate of $351 million. The upside was mainly attributable to a 6.3% increase in consolidated transaction and clearing fee revenues to $306.8 million in the reported quarter. The upside was primarily driven by strong trading volumes in ICE's energy future markets, new product introduction along with increased credit default swap (:CDS) clearing revenues. Additionally, consolidated market data revenues accelerated 21.2% year over year to $37.2 million, while consolidated other revenues escalated 20% to $7.2 million.

Additionally, average daily futures volume increased 11% year over year to 1.6 million contracts that led to a 14% growth in transaction and clearing revenues in the futures segment. Even average daily commissions in ICE's OTC energy business climbed 3% year over year to 1.6 million in the quarter, although the transaction and clearing revenues in the total global OTC segment witnessed a 2% year-over-year decline. Revenue from ICE’s CDS business totaled $36 million, slipping 10% over the prior-year quarter.

Meanwhile, total operating expenses increased 6.9% year over year to $135.8 million, primarily due to increase in compensation and benefit expenses coupled with slightly higher rent and occupancy costs along with selling, general and administrative and other expenses. These were partially offset by lower depreciation and amortization expenses along with acquisition-related transaction costs.

Consequently, operating income rose 12.8% year over year to $215.4 million, while operating margin climbed to 61.3% from 58.7% in the year-ago period. The effective tax rate was 30% against 32% in the year-ago quarter.

Financial Update

At the end of the first half of 2012, consolidated operating cash flow rose 14% year over year to $366 million. Capital expenditures totaled $9 million during the reported quarter, while capitalized software development costs increased to $8 million, both at par with the year-ago period.

As of June 30, 2012, the company recorded unrestricted cash and investments of $1.1 billion (up from $823 million as of December 31, 2011), while total outstanding debt slipped to $863 million from $888 million at 2011-end.

Meanwhile, ICE had $331 million of share repurchase capacity still in store at the end of June 2012. However, no shares were repurchased during the reported quarter.

Guidance for 2012

Concurrently, management expects diluted weighted average outstanding shares to be within 72.9–73.9 million shares for the third quarter of 2012. Additionally, the company expects to incur $1–2 million acquisition-related expenses per quarter.

Further, capital expenditures and capitalized software expenses are projected to be within $35–40 million, including $7–9 million related to real estate costs, during the second half of 2012.

In February 2012, management provided an extensive expense outlook for 2012. While total expenses are expected to be flat with 2011 level, adjusted expenses are estimated to rise by 3–6% over 2011. Compensation expense should be up by 6–7%. Consolidated tax rate is anticipated to be within 28–31% in 2012.

Additionally, ICE expects quarterly interest expense during 2012 to be in the range of $10–11 million, which includes interest expenses associated with its debt facility and Russell index license.

Capital expenditure, including capitalized software development costs, is projected in the band of $60–65 million. Furthermore, an additional capital expenditure of $30–35 million is expected on the back of real estate costs associated with consolidating multiple locations in London and in New York. In addition, ICE's diluted weighted average outstanding share count is expected to lie in the range of 73.0–74.0 million shares.

Peer Take

Last week, CME Group Inc. (CME) reported second-quarter 2012 operating earnings per share of 89 cents, surpassing the Zacks Consensus Estimate of 82 cents and the year-ago quarter’s earnings of 88 cents. Results reflected strong expense control and stable average rate per contract that were offset by feeble volumes and reduced clearing and transaction services during the reported quarter.

Furthermore, another prime peer, NYSE Euronext Inc. (NYX) is slated to release its financial results before the bell on August 3, 2012.

Currently, ICE carries a Zacks Rank #3, implying a short-term Hold rating and a long-term Neutral recommendation.

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