IntercontinentalExchange Group Earnings Preview: European Volumes Surge In Q4

IntercontinentalExchange Group (NYSE:ICE) is scheduled to announce its Q4 earnings on February 5. The exchange operator reported growth of over 120% year-on-year in net revenues to $745 million in the third quarter, with much of the growth coming from the NYSE acquisition in November 2013. After acquiring all of NYSE-Euronext’s businesses, ICE sold off its European equity trading business Euronext NV in June of last year. Euronext NV contributed about $60 million to ICE’s net revenues in the first quarter of 2014. The company witnessed a 100% rise in European derivatives trading volumes to a total of nearly 160 million contracts traded during the December quarter. On the other hand, consolidated futures and options trading volumes in the U.S. in Q4 were flat over the year-ago period at 97 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 in the third quarter. ^[1]

The move to spin off Euronext should help ICE improve its margins in the coming years, since equity trading is typically a lower-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 its 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. ^[2] 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. However, its operating margin stood at about 44.3% in the third quarter due to low trade volumes. The company expects margins to stay around 50-51% for the full year.

We have a $222 price estimate for IntercontinentalExchange Group, which is slightly higher than the current market price.

See Our Full Analysis For IntercontinentalExchange Group

Q4 Volume Trends Across Europe, 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 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. Trade volumes surged in Q4 with  almost 160 million contracts traded through the quarter – over 100% higher than the prior year period. ^[3]

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1. IntercontinentalExchange Group 10-Q, SEC, November 2014 [↩]
2. ICE Earnings Call Presentation Q1 2014, ICE Investor Relations, May 2014 [↩]
3. ICE U.S. Futures Historic Monthly Volumes, ICE Group Investor Relations, January 2015 [↩]