IntercontinentalExchange Earnings Preview: Derivatives Trading And Technology In Focus

IntercontinentalExchange Group (NYSE:ICE) is scheduled to announce its fourth quarter results on February 11. This will be the first set of quarterly results that the company will release after completing the acquisition of NYSE Euronext. The predominant trend across the industry during 2013 was a sustained surge in derivative trading volumes versus a decline in equity trading, which is also reflected in ICE’s figures for the year. ^[1] The falling volumes of cash-traded products can be attributed to a maturing equities market, whereas high-margin derivatives trading is on the rise. We estimate that around 60% of the company’s value is driven by derivatives trading, with the growing trade volumes expected to contribute significantly to the company’s top line in the coming years.

We have a $241 price estimate for ICE’s stock, which is about 10% higher than the current market price.

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Impact Of NYSE Euronext Acquisition

ICE has acquired major exchanges such as the International Petroleum Exchange, the New York Board of Trade, the Winnipeg Commodity Exchange, the European Climate Exchange and more recently, NYSE Euronext at regular intervals over the last decade. The company also announced the acquisition of the Singapore Mercantile Exchange a few months back. ^[2]

The NYSE Euronext acquisition mainly benefits ICE on two fronts. Firstly, it more than doubles ICE’s combined trading volumes in the fast-growing derivatives trading segment. Secondly, it diversifies the trading products offered by ICE to include European fixed income and interest rate products, equity futures and options as well as commodity derivatives.

Transaction Business To Be Driven By Derivatives

ICE’s competitors, NASDAQ OMX Group (NASDAQ:NDAQ) and CME Group (NASDAQ:CME), reported an increase in derivatives trading revenues in their respective fourth quarters. Moreover, NYSE Euronext also posted derivative trading revenues of about $290 million in Q3 – 30% higher than the prior year period. However, trading volumes in the ICE derivatives segment were negatively impacted by subdued trading for natural gas derivatives in 2013 due to reduced volatility. These derivatives might start trading more in 2014, as volatility is expected to return to the oil and natural gas market. ^{[3] [4]}

On the other hand, ICE’s cash-products trading declined in 2013, with trading volumes decreasing by 12% over the prior year period – in line with the industry trends. Similarly, Euronext’s cash-equity trading volumes also dropped by about 9% for the full year. ICE’s management intends to spin off the European cash trading division into a new company called Euronext with an initial public offering by mid-2014. ^[5] European regulatory authorities are forcing ICE to keep at least a 25% stake in the newly separated Euronext exchange for a minimum of three years after the IPO. Given ICE’s intention of reducing its focus on equity trading, it is likely that the company does something similar with its U.S. cash trading business.

ICE’s Non-Transaction Businesses Growing Faster Than Their NYSE Counterparts

As a part of our new coverage for the company, we have combined NYSE Euronext’s data and technology business with ICE Data. According to our estimates, the combined market data and technology segment accounts for about one-third of the company’s value. Within the segment, ICE Data grew significantly in 2013, with an 11% year-over-year increase in revenues during the first three quarters of the year. Comparatively, NYSE’s Market Data and technology segment, which generated about four times the revenues of its ICE counterpart, declined by 4% in the same period compared to 2012. Continuing the trend for the first nine months in 2013, we can expect the combined market data and technology segment to remain nearly flat for the full year compared to the previous year. Going forward, we expect the technology business to be more profitable since the company has announced that it will sell off stagnating parts of NYSE’s technology segment, including Appia, NYFIX and Wombat. ^[6]

ICE and NYSE Euronext both report “other” revenues, which include interest income, certification fees and fees for services such as Euronext historical and analytical data, TradeCheck and WhenTech subscriptions, and ICE chat service. These revenues have also been flat for the first three quarters of the year, with a slight growth observed in the smaller ICE portion of the segment. Overall, these ancillary revenues should remain flat for the full year. In the long run, we expect these revenues to moderately increase through the end of the decade.

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1. ICE Combined Historical Trading Volumes, ICE Investor Relations, January 2014 [↩]
2. ICE To Buy Singapore Mercantile Exchange For $150 Million, Bloomberg, November 2013 [↩]
3. Merrill Lynch Sees Volatile 2014 Oil Market, 24/7 Wall Street, January 2014 [↩]
4. US Natural Gas Futures Fall, Reuters, February 2014 [↩]
5. ICE Group To Sell Stake In Euronext Before IPO, Bloomberg, January 2014 [↩]
6. NYSE Euronext Integration, CNBC, November 2013 [↩]