IntercontinentalExchange Earnings Preview: Trade Volumes To Drive Revenues, Margins

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ICE: Intercontinental Exchange logo
ICE
Intercontinental Exchange

IntercontinentalExchange Group (NYSE:ICE) is scheduled to announce its Q3 earnings on November 4. The exchange operator reported growth of over 100% year-on-year in net revenues to $750 million in the second quarter, with much of the growth coming from the NYSE acquisition in November of last year. ICE faced a year-on-year decline in trading volumes in its core derivatives trading business in the second quarter of the year, which the company attributed to low volatility levels in global markets. However, low trading volumes were offset by a corresponding increase in the rate per contract (RPC) earned by the company. [1]

ICE sold off its European equity trading business Euronext NV in June. The business contributed about $60 million to ICE’s net revenues in the first quarter. [2] The move to spin off Euronext should help ICE improve its margins in the coming years, since equity trading is typically a low-margin business. At the beginning of 2013, the combined operating margins of NYSE Euronext and ICE were estimated 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, and the company initially expected its full year margins to be around 49% through 2014. [3] However, the company reported operating margins of 50% for both the March and June quarters, with $108 million in expense synergies in the first half of the year. The company attributed the improvement in margins to “disciplined expense management” and believes that it can achieve expense synergies of almost $240 million for the full year. Going forward, the company expects margins to stay at 50-51% for the full year.

We have a $225 price estimate for IntercontinentalExchange Group, translating into a $25.9 billion market cap. Our price estimate is about 9% higher than the current market price.

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Q3 Volume Trends Across Europe And The U.S.

ICE’s U.S. trading platforms include futures and options traded across various asset classes. Derivatives volumes were low in the months of July and August, which management attributed to geopolitical unrest in certain areas including the Middle East and Russia. In the third quarter, 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]

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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Notes:
  1. ICE Q2 2014 Earnings Call Transcript, Seeking Alpha, August 2014 []
  2. IntercontinentalExchange Group 10-Q, SEC, May 2014 []
  3. ICE Earnings Call Presentation Q1 2014, ICE Investor Relations, May 2014 []
  4. ICE U.S. Futures Historic Monthly Volumes, ICE Group Investor Relations, October 2014 []