Key Takeaways From ICE’s Q2 Earnings

After a mixed start to the year, IntercontinentalExchange (NYSE:ICE) reported solid quarterly results, with revenue of $1.18 billion coming in 4% above the prior year quarter. In line with our expectations, the exchange’s strong growth in derivative trading volumes more than offset the losses due to declines in trading volumes across equity options and cash equities. Among derivatives, interest rate derivative volumes saw a massive surge supported by the rate hikes in recent months. A consistent decline in NYSE’s market share in equity options is a matter of concern, however, as rival NASDAQ’s strong position in equity options after the acquisition of ISE remains a competitive threat.

The company’s move to strengthen its Data Services segment worked well amid competitive pressure on the trading business, as the growth from this segment managed to boost the company’s top line and margins (+2.8 percentage points year over year growth in operating margins). The company remains bullish on its Data Services segment, as these services are complementary to its core trading business, and a strong global footprint should drive sustained growth. Our expectation of nearly 5% growth from the segment for the full year is in line with the company’s guidance.

Derivative Trading Volumes Saw Growth; Equities Remained Under Pressure

ICE’s clearing and transaction fees, which contributed around 43% of its overall revenues, grew by over 3% from the prior year quarter. Among asset classes, the growth in financial derivatives was largely driven by the phenomenal growth (+49% y-o-y) in interest rate derivative volumes. With the expectations of another rate hike, we expect the growth momentum to sustain in the near term. Among commodities, energy derivatives saw a significant surge (+21% y-o-y). The market saw increased volatility in oil prices due OPEC’s decision to cap production, which led to trading momentum.

Equity options suffered the most, with more than an 8% drop in trading volumes. As industry-wide volumes remained largely unchanged, the company’s market share losses are a concern.

Data Services Continued Growth Due To Global Demand, Acquisitions

ICE’s Data Services business generates around 44% of the company’s overall revenues. This business grew by around 5% in the second quarter. With increasing demand for data-driven insights and analytics-driven recommendations, the company’s acquisitions such as YellowJacket, NYSE, Interactive Data and TMX Atrium have helped it expand its market reach and add technological capabilities as well as new data and valuation services. As industry competition has intensified, the exchange’s focus on strengthening its Data Services segment makes sense as a way to offset losses from declines in trading commissions.

Please refer to the full Trefis analysis for Intercontinental Exchange.

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