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ICE Beats on Q3 Earnings, Volumes Weak

ICE FLT HCI

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IntercontinentalExchange Inc.’s (ICE - Analyst Report) third-quarter 2013 operating earnings of $1.97 per share modestly exceeded the Zacks Consensus Estimate of $1.83 and the year-ago quarter figure of $1.79. Accordingly, operating net income increased 10.3% to $144.6 million.

Operating net income excluded after-tax extraordinary items of $3.3 million comprising merger costs and banker fee relating to ICE Endex acquisition. However, no such items were recorded in the year-ago quarter. Including these items, reported net income stood at $141.3 million or $1.92 per share in the quarter under review.

The quarterly results of IntercontinentalExchange reflected higher market data and other businesses that drove the top line, while higher expenses deterred margin expansion.  Meanwhile, transaction and clearing fee revenues stood flat due to weak volumes.

Total revenues grew 4.5% year over year to $337.9 million, and breezed past the Zacks Consensus Estimate of $335 million. The upside was mainly attributable to a 0.3% improvement in consolidated transaction and clearing fee revenues which stood at $279.9 million. Furthermore, consolidated market data revenues increased 12% year over year to $40.2 million, whereas consolidated other revenues escalated about 120% to $17.8 million.

Additionally, average daily futures volume dipped 1% year over year to 3.1 million contracts. Revenue from IntercontinentalExchange’s CDS business totaled $38 million, climbing 15% from the prior-year quarter.

On the other hand, total operating expenses rose 5.1% year over year to $135.7 million, primarily due to increase in expenses related to depreciation and amortization, selling, general and administration, along with acquisition-related transaction costs based on the recent merger deal with NYSE Euronext Inc. . These were partially offset by a decline in rent and occupancy expenses, compensation and benefits as well as lower professional service costs.

Subsequently, operating income climbed 4.2% year over year to $202.1 million. However, reported operating margin stood at 59.8%, marginally lower than 60% in the year-ago period. The effective tax rate was 25%, lower than 27% in the year-ago quarter.

Financial Update

At the end of Sep 2013, consolidated operating cash flow inched down 2% year over year to $562 million. Capital expenditures totaled $76 million, while capitalized software development costs increased to $28 million, both higher than the first nine months of 2012.

As of Sep 30, 2013, the company recorded unrestricted cash and investments of $1.57 billion (down from $1.61 billion at 2012-end level), while total outstanding debt improved to $791 million from $1.13 billion at 2012-end.

In Oct 2013, IntercontinentalExchange raised $1.4 billion from long-term notes in order to fund the NYSE acquisition. No shares were bought back in the first nine months of 2013.

Guidance for 2013

Management revised expense guidance for 2013, anticipating operating expense to be up by 1–2% over 2012, lower than the prior band of 2–3%. Shares outstanding are now estimated in the range of 73.2–74.2 million.

Previously, IntercontinentalExchange projected depreciation and amortization expense within $130–135 million. Moreover, quarterly interest expense was projected to be higher at $10–11 million in the second half of 2013, while tax rate is expected in the band of 27–30% in 2013.

Meanwhile, IntercontinentalExchange had maintained capital expenditures and capitalized software expenses projection within $60–70 million, including $20–30 million related to real estate costs in 2013.

Others

Both IntercontinentalExchange and NYSE carry a Zacks Rank #3 (Hold). Other strong performers in the financial sector include Fleetcor Tech Inc. (FLT - Snapshot Report) and HCI Group Inc. (HCI - Snapshot Report), both of which carry a Zacks Rank #1 (Strong Buy).

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