IntercontinentalExchange Earnings Preview: Higher Transaction Rates To Offset Slump In Volumes

ICE: IntercontinentalExchange logo

IntercontinentalExchange Group (NYSE:ICE) is scheduled to reported its Q2 results on August 7. ICE witnessed a surge in its net revenues in the March quarter, with much of the growth coming from the NYSE Euronext acquisition last year. The contribution of the NYSE Euronext businesses led to a 150% inorganic increase in trade-based revenues. ICE faced a year-on-year decline in trading volumes in its core business, including natural gas (-14%), oil (-10%) and interest rate (-26%) derivative classes in the March quarter. The company’s transaction-based revenues were resilient as a result of the influx of clearing revenues as well as a rise in the rate per contract (RPC) charged by the exchange operator. The relatively higher RPC led to 10% organic growth in trading and clearing revenues. [1]

In the month of June, ICE announced that its has spun off Euronext NV, its European equity trading business. Euronext’s cash equity trading generated about $60 million in revenues in the March quarter. [2] The move to spin off Euronext should help ICE improve its margins and enhance its profitability, since equity trading is typically a low-margin business. Our $225 price estimate for IntercontinetalExchange Group is nearly 20% ahead of the current market price.

See Our Full Analysis For IntercontinentalExchange Group

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Derivative Trading Volumes Decline

Most derivative classes traded on the ICE platform saw a decline in volumes compared to the prior year quarter. Trading activity declined significantly for energy derivatives (-26%), agricultural commodities and metals (-9%), short and long-term interest rate derivatives (-25%), foreign exchange products (-47%) and equity options in the U.S. (-21%) compared to the year ago period. Equity derivatives in Europe witnessed a mild 4% year-on-year growth in trading volumes. [3] As a result, the overall average daily volume (ADV) exchange traded derivatives at ICE declined by 17% y-o-y to 6.2 million contracts a day. Despite comparatively lower volumes, the company earned a higher rate per contract (RPC) during the quarter. RPC for commodities and energy derivatives was 15% higher than the year ago period while the rate per contract for interest rate derivatives was almost 50% higher.

International Businesses

Euronext will operate as a separate entity for the first time since 2007, when it was acquired by NYSE Group, operator of the New York Stock Exchange. Euronext was operated by the ICE Group for seven months following the ICE-NYSE merger in November 2013. Euronext contributed to ICE’s European equity trading business, with a revenue contribution of nearly $50 million per quarter in 2013 and about $60 million in Q1. ICE management decided to spin the business off because eliminating Euronext’s revenue stream could improve company-wide margins. At the beginning of 2013, the combined operating margins of NYSE Euronext and IntercontinentalExchange Group were estimated by ICE management to be around 42%. During the year, the company realized $95 million in synergies, bringing the margins up to around 45%. Comparatively, Euronext’s operating margins stood at around 41% last year, due to which the company initially expected its full year margins to be around 49% through 2014. [4]

However, the company reported operating margins of 50% for the March quarter. The company attributed the improvement in margins to “disciplined expense management” by successfully achieving expense synergies of over $220 million on a run rate basis. Going forward, the company expects margins to stay at 50-51% for the full year. Given that the company is successfully maintaining its targeted synergies on a run rate basis, we expect the company to meet its target of generating margins of over 55% in 2015.

Comparatively, the high-margin European derivatives trading business contributed about $66 million to ICE’s top line. The company has retained NYSE’s Liffe exchange to focus on derivatives trading in Europe. The company intends to transfer Liffe contracts to its platform and incorporate it with ICE Futures Europe by the end of the year. The platform will compete with LCH.Clearnet, Deutsche Boerse’s Eurex and CME Europe. Trading participants could favor the ICE platform in the coming quarters since a single clearing house for both Liffe and other ICE products could imply lower clearing charges.

Additionally, 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). SMX has now been renamed ICE Futures Singapore and the clearing house is now called ICE Clear Singapore. The company expects strong growth in Asia in the long run, which it intends to capitalize on with its Singapore-based exchange and clearing house.

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  1. ICE Q1 2014 Earnings Call Transcript, Seeking Alpha, May 2014 []
  2. IntercontinentalExchange Group 10-Q, SEC, May 2014 []
  3. ICE Combined Historical Monthly Volumes, ICE Investor Relations, July 2014 []
  4. ICE Earnings Call Presentation Q1 2014, ICE Investor Relations, May 2014 []