What To Expect From ICE’s Q3 Earnings

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ICE: Intercontinental Exchange logo
ICE
Intercontinental Exchange

IntercontinentalExchange (NYSE:ICE) had a solid first half of 2018, as the exchange managed to grow its revenue by 6%. We expect the growth momentum to continue when it announces its Q3 earnings on October 31. Consensus estimates call for the company to report revenue of $1.2 billion and adjusted EPS of 80 cents. This positive performance is primarily attributable to the growth in the company’s Trading and Clearing fees. Trading volumes saw strong growth across most of its asset classes – Cash Equity and Equity Options. Since transaction fees account for over 54% of ICE’s revenue, a robust growth in quarterly volumes should likely boost the company’s top line. Additionally, we expect further near-term growth in revenue driven by the improved strength of its Listing and Data Services segments. Further, ICE’s multiple acquisitions should broaden its offerings and expand its presence in the Data Services segment. Consequently, these acquisitions will provide decent medium term growth. However, we expect ICE to report higher expenses due to its various strategic investments, which should slightly dampen its bottom line in the near term.

 We have a $72 price estimate for Intercontinental Exchange’s stock, which is about in line with the current market price. Our interactive dashboard on what to expect from Intercontinental Exchange in Q3 details our expectations for the company’s Q3 earnings; you can modify the key value drivers to see how they impact the company’s results.

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ICE’s Q3 equity options average daily volumes (ADV) grew by nearly 30% y-o-y to slightly over 9.2 million, as a result of increased volatility. Consequently, it saw a 194 basis point (roughly 2%) rise in its market share. The industry-wide equity options daily trading volumes grew by 17% during the period. ICE’s continued strength in the segment – coupled with growth in equity market share – should propel its Q3 results. Cash equities volumes also gained, with a more than 7% growth in trading volumes and a 43 basis point increase in market share. The industry-wide volumes saw a 6% increase.

After a decent performance in the first half of 2018, derivative trading volumes saw a nearly 2% year-over-year decline in Q3. Commodity volumes declined by 4%, and financial derivatives were largely flat y-o-y. Among commodities, energy derivatives were 6% below the year-ago figure due to tougher year-on-year comparison. This is largely due to the fact that energy derivatives saw strong demand towards later half of 2017, with a sharp decline in oil prices due to cuts in production. Further, volumes fell by nearly 10% compared to the previous quarter.

ICE’s Data Services business holds significant growth potential due to increasing demand for data-driven insights and the company’s wealth of market data. Further, ICE’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. Additionally, the host of newer acquisitions – BondPoint, Chicago Stock Exchange, and TMC – should expand its geographic and product presence, offer advanced and diverse fixed income solutions, improve technology platforms, provide new data and valuation services, and provide for strong growth opportunities. 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.

As a result of the reduction of the corporate tax rate in the U.S., we forecast the effective tax rate for the company to fall for fiscal 2018. For the first six months of 2018, the effective tax rate declined to 24%, compared to 27% in the corresponding period last year. Moreover, in the first half, ICE has undertaken $760 million of share repurchases, and expects to fully utilize the approximately $440 million remaining in the program in the second half.

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