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ICE Tops Q2 Earnings, Revs Improve

Zacks Equity Research

IntercontinentalExchange Inc.’s (ICE) second-quarter 2013 operating earnings of $2.19 per share modestly exceeded the Zacks Consensus Estimate of $2.17 and the year-ago quarter figure of $1.95. Accordingly, operating net income increased 12.3% to $160.8 million.

Operating net income excluded after-tax extraordinary items of $7.6 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 $153.3 million or $2.09 per share in the quarter under review.

The quarterly results of IntercontinentalExchange reflected higher transaction and clearing fee revenues driven by improved performance from the financial futures market and credit default swap (:CDS) business. Alongside, market data and other businesses drove the top line, while higher expenses limited margin expansion.

Total revenue grew 5.8% year over year to $371.6 million, and breezed past the Zacks Consensus Estimate of $370 million. The upside was mainly attributable to a 3.9% improvement in consolidated transaction and clearing fee revenues to $318.9 million in the reported quarter. Furthermore, consolidated market data revenues increased 7.8% year over year to $40.1 million, whereas consolidated other revenues escalated 75% to $12.6 million.

Additionally, average daily futures volume improved 4% year over year to 3.5 million contracts. Revenue from IntercontinentalExchange’s CDS business totaled $40 million, climbing 11% from the prior-year quarter.

On the other hand, total operating expenses climbed 8.2% year over year to $146.9 million, primarily due to increase in expenses related to depreciation and amortization, compensation and benefits, rent and occupancy 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 selling, general and administrative expenses and lower professional service costs.

Subsequently, operating income climbed 4.3% year over year to $224.7 million. However, reported operating margin stood at 60.5%, lower than 61.3% from the year-ago period. The effective tax rate was 30%, almost at par with the year-ago quarter.

Financial Update

At the end of Jun 2013, consolidated operating cash flow increased 4% year over year to $382 million. Capital expenditure totaled $16 million, up from $9 million in the year-ago quarter, whereas capitalized software development costs of $9 million were a million higher from the year-ago period.

As of Jun 30, 2013, the company recorded unrestricted cash and investments of $1.5 billion (down from $1.61 billion as of Dec 31, 2012), while total outstanding debt improved to $803 million from $1.13 billion at 2012-end.

Share Repurchase Update

IntercontinentalExchange had expanded its share repurchase authorization to $500 million during the third quarter of 2012. With no shares were bought back in the first half of 2013, the company had shares worth $450 million available for repurchases at the end of Jun 2013.

Guidance for 2013

IntercontinentalExchange laid out the outlook for the third quarter of 2013, projecting acquisition-related transaction costs of $5–7 million, capital expenditure of $38.5 million related to purchase of office building in Atlanta. Diluted weighted average outstanding shares are projected to be within 73–74 million for the third quarter of 2013.

Management also revised expense guidance for 2013, anticipating operating expense to be up by 2–3% over 2012, lower than the prior band of 3–5%. Depreciation and amortization expense in now estimated within $130–135 million.

Moreover, quarterly interest expense is now projected to be higher at $10–11 million in the second half of 2013, while tax rate is expected in the band of 27–30% in 2013.

Meanwhile, IntercontinentalExchange maintained capital expenditures and capitalized software expenses projection within $60–70 million, including $20–30 million related to real estate costs in 2013. For full-year 2013, shares outstanding are estimated in the range of 72.8–74.0 million.


Both IntercontinentalExchange and NYSE carry a Zacks Rank #3 (Hold). Other strong performers in the financial sector include MarketAxess Holdings Inc. (MKTX) and HCI Group Inc. (HCI), both of which carry a Zacks Rank #1 (Strong Buy).

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