IntercontinentalExchange Group Earnings: Trade Volumes Drive Revenue Growth

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ICE: Intercontinental Exchange logo
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Intercontinental Exchange

IntercontinentalExchange Group (NYSE:ICE) announced its Q4 earnings on Thursday, February 5, reporting a nearly 75% growth in net revenues to $1.1 billion for the quarter. Much of the growth was attributable to 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. The company witnessed a 70% growth in transaction-based revenues to $811 million in Q4. Additionally, the exchange operator witnessed a 74% year-on-year increase in data services revenues to $174 million in the December quarter. Similarly, ICE’s full year revenues rose by almost 150% y-o-y to $4.2 billion – with predominantly inorganic growth, while transaction and clearing services revenues were up by over 100% y-o-y to $3 billion for the full year. [1]

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] The company’s operating margin stood at about 44.3% in the third quarter due to low trade volumes. However, the trend reversed in Q4, with the company reporting an adjusted operating margin of about 55% in Q4. The company posted healthier margins on account of higher-than-expected top line growth driven by high trading activity during the quarter. The move to spin off Euronext should help ICE improve its margins in the coming quarters, since equity trading is typically a lower-margin business. The Euronext IPO helped the company generate about $1.5 billion in cash, of which it returned $1 billion to shareholders through stock repurchases. Additionally, the company used about $500 million in strategic investments which included the SuperDerivatives acquisition.

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

The company witnessed a 100% rise in European derivatives trading volumes to a total of nearly 160 million contracts traded during the December quarter. [4] Management mentioned that with QE announced in Europe, the company could witness low volumes of interest rate products in the short term. However, it is likely to impact only Euro-denominated trading. Management further mentioned that Pound-denominated products actually witnessed growth in the December quarter and the company expects to sustain growth in the coming quarters.

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Notes:
  1. ICE Q4 2014 Results, ICE Press Release, January 2015 []
  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 []
  4. ICE Europe Historic Monthly Volumes, ICE Group Investor Relations, January 2015 []