Key Takeaways From ICE’s Q1 Earnings

IntercontinentalExchange (NYSE:ICE) reported a timid start to the year, with revenue of $1.16 billion, about in line with the prior year quarter. In line with our expectations, a massive decline in trading volumes across equity options and cash equities was a primary deterrent to growth. However, that is primarily because of a tough year-on-year comparison due to the volatility seen in the global economy at the beginning of 2016 resulting from uncertainty around oil prices, a slowdown in China and slow GDP growth in the U.S. at the time. Interest rate derivative volumes saw a massive surge supported by a couple of rate hikes in the past 4 months. However, this growth offset only a part of the overall decline in trading commissions for the exchange. The company’s move to strengthen its Data Services segment worked well amid distressed trading business, as the revenue growth from this segment managed to offset the decline in trading commission. The company remains bullish on its data services segment, as these services are complementary to its core trading business and a vast global footprint is likely to ensure significant growth in this division. Our expectation of nearly 5% growth from the segment for the full year is in line with the company’s guidance.

Trading Volumes Remain Under Pressure

The company’s clearing and transaction fees, which contributed around 43% of ICE’s overall revenues, declined by over 9% from the prior first quarter. Among the various asset classes, equity options suffered the most with over a 28% drop in trading volumes. Although we attribute a part of it to the industry-wide decline in a relatively less volatile quarter, we are concerned about the significant loss of market share from Q1 2016 by over 5 percentage points to around 14%

Among  commodities, energy derivatives saw marginal growth. Without much volatility in oil prices and OPEC’s stance on capping production, trading activity in the asset class has been fairly muted. The growth in financial derivatives was largely driven by the significant surge in interest rate derivative volumes. With the expectations of a few rate hikes, we expect the growth momentum to sustain in the near term.

Data Services Continued Growth Due To Global Demand, Acquisitions

ICE’s data services business generate around 45% of the company’s overall revenues. This business grew by around 9% in the first quarter. A third of the growth in this segment is attributed to these acquisitions made by ICE in the prior year. With increasing demand for data-driven insights and analytics-driven recommendations, we believe these acquisitions have helped it expand its market reach, add technology platforms and increase risk management, new data and valuation services. As the competition for trading has intensified, the exchange’s move in strengthening its data services segment seems like a good move to offset the losses from decline in trading commissions. Moreover, its diverse asset class and global expanse bear a great potential to expand this business.

Please refer to the full Trefis analysis for Intercontinental Exchange.

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