Strong Data Services Performance Should Boost ICE’s 2019 Profits Despite Higher Outlay Costs

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ICE: Intercontinental Exchange logo
ICE
Intercontinental Exchange

Intercontinental Exchange (NYSE: ICE) released its first quarter results late last week, and its total revenues remained largely unchanged from the $1.5-billion figure it reported a year ago. However, the company’s net revenues witnessed a growth of 4% thanks to notable gains for its Data Services segments. Per Trefis estimates, ICE’s shares have a fair value of $80, which is in line with the current market price. You can view our interactive dashboard on How has ICE’s revenues and expenses fared and what’s the impact on its stock?  to observe quarterly revenue trends and modify key drivers to gauge the impact on the share price. You can also find more of our financial services data here.

A Quick Look at ICE’s Revenue Sources

Intercontinental Exchange reported $6.2 billion in Total Revenues for full-year 2018. This included four revenue streams:

  • Trading and Clearing: $3.4 billion in FY2018 (55% of Total Revenues). It comprises of ICE’s electronic trading fees, private transaction surcharge, and other volume-related charges.
  • Data Services: $2.1 billion in FY2018 (34% of Total Revenues). It comprises of data distribution revenues from subscribers.
  • Listing Revenues: $444 million in FY2018 (7% of Total Revenues). A listing fee is charged on an annual basis along with a fee related to other corporate actions such as stock splits.
  • Other Revenues: $234 million in FY2018 (4% of Total Revenues). It includes interest income on margin deposits, facility usage fee, market maker service fee, etc.
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Trading Volumes Declined Across Asset Classes

ICE’s trading volumes declined across asset classes in Q1 2019, which in turn resulted in a sequential 10% decline in its transaction fees.

  • Energy Derivatives form the largest asset class by revenue for ICE, primarily because of the benchmark Brent Crude contracts. Although there was a 12% decline in trading volumes for energy derivatives, revenues from them remained flat because of an increase in European natural gas contract volumes (which have a higher contract price).
  • Financial Derivatives include interest-rate contracts, government bond derivatives, and benchmark index contracts which are responsible for the highest trading volume on ICE’s exchanges when taken together. Revenues from these derivatives declined by 9% due to a corresponding drop in transaction volume.
  • Cash equities and equity options revenues fell 7% year-on-year due to lower volumes and reduced revenue capture. While the rate per contract for cash equities has been trending downwards for several quarters now due to increased competition, this key metric fell a steep 15% in Q1.

Increased Market Share Had a Positive Impact on Data Services Revenues

ICE’s Data and Listings segment reported $657 million in revenues for the quarter – an increase of 4% year-on-year. Although the U.S. government shutdown weighed on Listing revenues for the quarter, Data Services gained 5% year-on-year due to NYSE’s increasing market share. Data Services offerings have seen robust growth over recent years due to an increase in demand, and we expect the trend to continue for the rest of the year.

Bakkt-Related Costs Will Lead To Higher Expenses The Second Half Of 2019

Total operating expenses for the quarter came in at $605 million – representing a 5% increase year-on-year, which was largely in line with growth in the company’s net revenues. Notably, ICE’s management lowered its expense guidance for full-year 2019 as expenses for the quarter were well below what was expected. However, the company’s operating expenses for subsequent quarters are likely to be elevated because of Bakkt-related technology investments. Bakkt is a regulated, digital-asset trading platform with custodial solutions which received $183 million in funding from ICE along with prominent crypto hedge funds such as Pantera Capital last August.

We expect ICE to report an EPS of $3.50 for full-year 2019. Taken together with a estimated forward P/E multiple of 23, this works out to a $80 price estimate for the company’s stock as detailed in our interactive dashboard.

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