IntercontinentalExchange Earnings: Derivatives Trading Volumes and Margins Improve

IntercontinentalExchange Group (NYSE:ICE) announced its Q4 and year-end results on February 11. This was the first set of results announced by the company after the NYSE Euronext acquisition. Management mentioned that the consolidated fourth quarter results include revenues generated by ICE for the full quarter, but include transactional revenues from NYSE for only the last seven weeks of Q4. So taking into account the full quarter of ICE’s business combined with seven weeks of NYSE revenues, the company reported net revenues of $612 million for the quarter. ^[1]

While ICE’s trading business originally just comprised of derivatives trading, the company now has a cash equity operation with the acquisition of NYSE Euronext. The acquisition has now made ICE the only operator in the world with exchanges across the U.S., Europe, Latin America (Brazil) and Asia (Singapore). With this global network, the company now has trading activity 24 hours a day. We currently have a $241 price estimate for ICE’s stock, which is about 10% higher than the current market price. We are in the process of updating our model for these earnings.

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Breakdown Of The Transaction-Based Business

ICE reported combined average daily trade volumes of 9.1 million per day for the quarter, 2% higher than the prior year period. On the whole, the company witnessed a surge in trading volumes across all individual derivatives segments mainly due to combined NYSE Euronext and ICE figures.

The company has not yet reported a revenue split among its various divisions within the transaction and clearing segment, which comprises of the following:

1. ICE Derivatives trading in U.S., which includes commodities derivatives such as oil, natural gas, metals and agricultural commodities.
2. NYSE Derivatives trading in U.S., which includes fixed-income interest-rate derivatives and equity options.
3. NYSE Euronext Derivatives trading in Europe, which includes equity index products, single stock equities, currencies and agricultural commodities.
4. Cash trading products, which mainly include equities (~97% by volume) along with bonds, exchange-traded funds (ETFs) and structured products.

Within these individual segments, oil and power derivatives average daily volume (ADV) for the quarter were up 8% and 23%, respectively, compared to Q4 2012, with these derivatives steadily gaining trading numbers throughout the year. Additionally, as we noted in our previous article, natural gas derivatives trading was subdued during the year. However, the cold wave during the end of the year increased demand for natural gas. Consequently, there was some volatility in natural gas prices and derivatives trading picked up. While natural gas ADV declined by more than 20% year-over-year for the first three quarters of 2013, it was nearly flat during the last quarter. Looking ahead, oil and natural gas derivatives might start trading even more in 2014, as volatility is expected to return to the natural gas market. ^{[2] [3]}

Cash trading volumes are declining across industry, with a similar 10% year-over-year decline observed in NYX U.S. cash products handled for Q4. However, we expect equity trading volumes to pick up in the long run as market sentiment gradually improves. Additionally, as algorithmic trading and high-frequency trading are increasingly being adopted by institutional investors, volumes are likely to increase by the end of our forecast period.

Margins Could Continue To Improve

At the start of the year, ICE estimated the combined operating margins of NYSE Euronext and ICE to be around 42%. During the year, the company realized $95 million in synergies, bringing the margins up to around 45%. The company intends to have an IPO for Euronext (the cash equity business) and sell off stagnating businesses within NYSE’s technology division. ^[4] This should help the company achieve its expected margins of around 49% for 2014 as cash equity trading is a low-margin business. According to management, if the company successfully maintains 70% of its targeted synergies on a run rate basis, it should generate margins of about 55% in 2015.

However, ICE is being forced by European regulatory authorities to maintain at least a 25% stake in the divested Euronext exchange for a minimum of three years. Going forward, the company’s margins should reach its targeted figure of 60% after it divests Euronext and other non-core businesses by 2016. ^[5]

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1. ICE Earnings Call Transcript Q4 2013, Seeking Alpha, February 2014 [↩]
2. Merrill Lynch Sees Volatile 2014 Oil Market, 24/7 Wall Street, January 2014 [↩]
3. US Natural Gas Futures Fall, Reuters, February 2014 [↩]
4. ICE Group To Sell Stake In Euronext Before IPO, Bloomberg, January 2014 [↩]
5. ICE Earnings Call Presentation Q4 2013, ICE Investor Relations, February 2014 [↩]