ICE’s Strong Q4 Driven By Increased Data Services Acquisitions And Recovery In Trading Volumes; Multiple Offerings To Ensure Growth Momentum In Future

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ICE: Intercontinental Exchange logo
ICE
Intercontinental Exchange

IntercontinentalExchange (NYSE:ICE) revenues jumped nearly 30% year over year in Q4 2016, with the full year revenue growth amounting to 35%. This is in stark contrast to 8% growth the company saw last year, and can be attributed to acquisitions and the ramp up in data services. The year 2016 wasn’t very impressive for trading due to the geopolitical turmoil during the first half of the year and increased competition. However, the acquisitions of SuperDerivatives , IDC and Trayport helped IntercontinentalExchange expand its market reach, add technology platforms and increase risk management, new data and valuation services. The company has indicated around 6% growth in data service revenue for the year ahead.

The fact that the company has a diverse product line will help it sustain its growth momentum in the year ahead.  It includes derivatives and equity products, along with the data services and risk management capabilities, all cashing in on the customer’s growing demand.  Additionally, the company intends to introduce “speed-bump” seeing the traction gained by IEX, which is likely to eliminate the advantage for investors and traders involved in high-frequency trading. This will possibly help the exchange in gaining the market share ahead of Nasdaq, which is still vehemently opposing the application of speed-bump.

Operating margins have gone down by 4 percentage points to around 48% for the year, primarily due to transaction and integration of the acquisitions it undertook over the year and Creditex customer relationship intangible asset impairment recorded in September 2016. As long as the company can ensure the consistent growth in top-line by a great percentage as witnessed in 2016, the decline in margins shouldn’t be a cause of worry to the investors as the net income growth stayed at 12%.

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The company also generated operating cash flow of $2.1 billion in 2016, up 64% from the prior year. Around $1 billion was used to reduce their debt to $6.4 billion and the company expects to repurchase shares worth of $200 million in the current quarter.

The clearing and transaction fees, which contributed around 55% of ICE’s overall revenues, recovered marginally this quarter after 6% decline in the prior quarter, due lack of investors’ interest in trading under uncertain macro conditions and investors looking for safer investment option. The commodities and financial derivatives trading volumes continued their phenomenal growth trend, with around 11% growth for the quarter. The U.S. economy  has seen improvement in GDP and employment rates and the recently concluded U.S. presidential election has contributed to increased volatility as well, which led to lesser year-over-year decline in the equity options and cash equity trading volumes in comparison to the prior quarters. However, the consistent loss of market share in these product lines is a cause of concern for the company as it offsets the overall growth in transaction fees.

Please refer to the full Trefis analysis for Intercontinental Exchange.

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