ICE's 1Q Earnings Beat Est, Weak YoY

Zacks

IntercontinentalExchange Inc.’s (ICE) first-quarter 2013 operating earnings of $2.03 per share comfortably surpassed the Zacks Consensus Estimate of $1.98 but were only a penny higher the year-ago quarter’s earnings. Accordingly, operating net income inched up 0.6% to $148.8 million.

Operating net income excluded after-tax extraordinary items of $13.3 million in the reported quarter, related to merger costs and duplicate rent expense. However, no such items were recorded in the year-ago quarter. Including these items, reported net income stood at $135.4 million or $1.85 per share in the quarter under review.

The quarterly results of IntercontinentalExchange reflected a decline in transaction and clearing fee revenues driven by weak performance from the financial futures market and credit default swap (:CDS) business. This marred the top line, while higher expenses limited margin expansion and reduced operating cash flow. However, some cushion was provided by lower tax rate and growth in the company’s market data and other businesses.

Total revenue dipped 3.6% year over year to $351.9 million, although it slivered past the Zacks Consensus Estimate of $350 million. The downside was mainly attributable to a 7% decrease in consolidated transaction and clearing fee revenues to $299.7 million in the reported quarter. However, consolidated market data revenues improved 12.4% year over year to $40.9 million, whereas consolidated other revenues escalated 68.7% to $11.3 million.

Additionally, average daily futures volume slid 4% year over year to 3.6 million contracts. Revenue from IntercontinentalExchange’s CDS business totaled $33 million, plunging 16% from the prior-year quarter.

On the other hand, total operating expenses climbed 8.4% year over year to $151.8 million, primarily due to increase in depreciation and amortization expenses along with acquisition-related transaction costs based on the recent merger deal with NYSE Euronext Inc. (NYX). These were partially offset by a decline in compensation and benefit expenses coupled with lower selling, general and administrative expenses and professional service costs.

Consequently, operating income declined 11.1% year over year to $200.1 million. Meanwhile, reported operating margin stood at 56.9%, lower than 61.7% from the year-ago period. The effective tax rate was 28% against 30% in the year-ago quarter.

Financial Update

At the end of Mar 2013, consolidated operating cash flow decreased 19% year over year to $150 million. Capital expenditures totaled $16 million, up from $7 million in the year-ago quarter, while capitalized software development costs were flat at $9 million from the year-ago period.

As of Mar 31, 2013, the company recorded unrestricted cash and investments of $1.4 billion (down from $1.61 billion as of Dec 31, 2012), while total outstanding debt improved marginally to $911 million from $1.13 billion at 2012-end.

No shares were bought back during the reported quarter.

Guidance for 2013

Management projects to incur acquisition-related transaction costs worth about $10–12 million in the second quarter of 2013. Diluted weighted average outstanding shares are projected to be within 73.1–74.1 million shares for the second quarter of 2013.

In Feb 2013, IntercontinentalExchange laid out the outlook for 2013. Operating expense is anticipated to be up by 3–5% over 2012. Depreciation and amortization expense in estimated within $135–140 million. Moreover, quarterly interest expense is projected to be $9–10 million, while tax rate is expected in the band of 27–30% in 2013.

Additionally, $4–5 million of duplicate rent expenses and lease termination costs are anticipated in the first half of 2013. IntercontinentalExchange expects capital expenditures and capitalized software expenses within $60–70 million, including $20–30 million related to real estate costs in 2013.

For full-year 2013, shares outstanding are anticipated in the range of 72.8–74.0 million shares.

Others

Both IntercontinentalExchange and NYSE carry a Zacks Rank #3 (Hold). Other strong performers in the financial sector include Stancorp Financial Group Inc. (SFG) and Protective Life Corp. (PL), both of which carry a Zacks Rank #1 (Strong Buy).

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