Key Takeaways From IntercontinentalExchange’s Q4 Earnings

After a fairly strong performance through Q3, IntercontinentalExchange (NYSE:ICE) reported somewhat mixed results for Q4. Revenue, which grew 4% year-over-year in the first three quarters, saw a 3% decline in Q4. In line with our expectations, the exchange’s dip in trading volumes across asset classes, such as Cash Equity, Equity Options and Derivatives, affected the company’s top line. The consistent decline in NYSE’s market share in equity options is a matter of concern, as rival NASDAQ’s strong position in equity options after the acquisition of ISE remains a competitive threat.

ICE’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 offset a part of the losses due to the muted performance of the trading segment. 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.

We have an $82 price estimate for Intercontinental Exchange’s stock, which is about 20% ahead of the current market price. Our interactive dashboard shows our expectations for the company’s FY’18 earnings; you can modify the key value drivers to see how they impact the company’s results.

Decline In Trading Volumes Across All Asset Classes

ICE’s clearing and transaction fees, which contributed around 41% of its overall revenues, dipped by nearly 7% from the prior year quarter. Equity options volumes saw a 2% year on year (y-o-y) decline in Q4, with a 130 basis point (3%) dip in its market share. The industry-wide equity options daily trading volumes grew by 6% during the period. ICE’s market share decline is likely due in part to competitor NASDAQ’s strong position in equity options after the acquisition of ISE in 2016. 

Cash equities volumes suffered the most, with a more than 14% drop in trading volumes and a 110 basis point drop in market share. The industry-wide volumes saw a 10% decline.

After a solid performance in the first three quarters of 2017, derivative trading volumes saw a year-over-year decline in Q4. Commodity volumes declined by 2%, and financial derivatives saw an 8% dip. Among commodities, energy derivatives were 2% below the year-ago figure. This is largely due to the fact that energy derivatives saw strong demand towards the end of 2016, with the surge in oil prices due to cuts in production. However, volumes did remain flat compared to the previous quarter.

Due to the rate hike in June 2016, and the expectations of further rate increases by the end of 2016 (which did occur), IntercontinentalExchange’s interest rate derivative volumes registered a sharp increase in Q4 2016. Consequently, Q4 2017 saw a decline in financial derivatives volumes due to the difficult year-on-year comparison.

Data Services Continued Growth Due To Global Demand, Acquisitions

ICE’s Data Services business generates around 45% of the company’s overall revenues. This business grew by around 2% in the fourth 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.

See the full Trefis analysis for Intercontinental Exchange