IntercontinentalExchange Earnings: Non-Transaction Businesses Drive Earnings As Trading Volumes Recover

IntercontinentalExchange Group (NYSE:ICE) announced its Q3 earnings on November 4, reporting a 120% year-on-year increase in net revenues to $745 million. The surge in the company’s top line is attributable to the NYSE acquisition in November of last year. After acquiring all of NYSE-Euronext’s businesses, ICE sold off its European equity trading business Euronext NV, which contributed about $60 million to ICE’s net revenues in the first quarter, in June. ICE’s current transaction-based businesses include derivatives trading in Europe and the U.S. and equity trading in the U.S. The company acquired the Singapore Mercantile Exchange (SMX) and clearing house earlier in the year, making it the only operator in the world with exchanges across the U.S., Europe, Latin America (Brazil) and Asia (Singapore). ICE has rebranded SMX as ICE Futures Singapore, with the exchange operator announcing a launch date for the Asian marketplace of March 2015. ^[1]

The company witnessed a 5% rise in European derivatives trading volumes to a total of 84 million contracts traded during the quarter. On the other hand, consolidated futures and options trading volumes in the U.S. in Q3 were lower than the year-ago period by over 10% at 81 million contracts. Consolidated revenues generated by the trading of various asset classes – including oil, natural gas, power, energy, agricultural commodities and interest rates – rose by about 5% to $232 million for the quarter. ^[2] Furthermore, the exchange operator witnessed inorganic growth in the U.S. equity trading business and the market data segment, owing to the addition of the corresponding NYSE divisions. Revenues generated by cash equity and equity options trading stood at $338 million in Q3, while consolidated market data revenues were up by over 150% over the year-ago period to $105 million. ICE generated $86 million from its listing business, up by 11% compared to Q3 2013 on a pro forma basis.

We have a $225 price estimate for IntercontinentalExchange Group, which is slightly higher than the current market price.

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Trading Metrics Across ICE Platforms

Low volatility levels in oil prices, and low interest rates across Europe in July and August, kept volumes nearly flat over the prior year quarter. However, trading volumes picked up in September, due to which the combined trade volumes of futures and options traded on ICE Europe were up by almost 5% to 84 million contracts traded for the full quarter. ^[3] Trading activity could continue to rise through the end of year as there is growing speculation among traders about possible changes in monetary policies from the European Central Bank. Consequently, the exchange operator could witness a significant improvement in revenues in the coming quarters.

Derivatives volumes on ICE U.S. were also low in July and August, especially for gas and power derivatives, which was partially attributable to geopolitical unrest in certain areas including the Middle East and Russia. Trade volumes of financial derivatives – including equity derivatives, interest rate products and currency derivatives – picked up, particularly in the month of September, while gas and power derivatives volumes remained low. The Fed announced that it was ending its QE program, which could help increase Treasury yields as it eventually raises interest rates. As a result, traders are now speculating about future interest rates, driving volumes of traded derivatives. Despite the slight recovery in volumes in September, consolidated U.S. volumes for ICE for the full quarter were lower than the year-ago period by over 10% at 81 million contracts. ^[4]

Positive Outlook For Margins

ICE incurred $415 million in operating expenses during the quarter. At the beginning of 2013, combined operating margin for NYSE Euronext and ICE were estimated to be around 42%. During the year, the company realized $95 million in synergies, bringing the margin up to around 45%. Comparatively, Euronext’s operating margin stood at around 41% last year, and the company initially expected its full year margin to be around 49% through 2014. ^[5] Although the company reported operating margins of 50% for the first two quarters, with $108 million in expense synergies in the first half of the year, it was about 44.3% for Q3. The move to spin off Euronext should help ICE improve its margins, since equity trading is typically a low-margin business. Management mentioned that the company intends to shave-off about $100 million from its operating expenses in 2015 as a result of cost synergies.

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1. Intercontinental Exchange to Launch in Singapore from March, Financial Times, November 2014 [↩]
2. IntercontinentalExchange Group 10-Q, SEC, November 2014 [↩]
3. ICE Europe Historic Monthly Volumes, ICE Group Investor Relations, November 2014 [↩]
4. ICE U.S. Futures Historic Monthly Volumes, ICE Group Investor Relations, November 2014 [↩]
5. ICE Earnings Call Presentation Q1 2014, ICE Investor Relations, May 2014 [↩]