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IntercontinentalExchange Inc.’s (ICE - Analyst Report) first-quarter 2012 operating earnings of $2.02 per share were in line with the Zacks Consensus Estimate, but surpassed the year-ago quarter’s earnings of $1.74 per share. Accordingly, net income attributable to shareholders escalated 14.7% to $147.9 million when compared with $128.9 in the year-ago quarter.

The quarterly results of ICE benefited from favorable over-the-counter (OTC) execution and record market data revenue that in turn led to strong top-line growth.

The upside was also attributable to capital efficiency, lower tax rate, growth in the company’s core businesses, significant progress triggered by new initiatives and increasing demand for commodities. This was partially offset by lower volumes-generation from the futures segment and higher-than-expected operating expenses.

ICE’s total revenue climbed 9.2% year over year to $365.2 million and also exceeded the Zacks Consensus Estimate of $362 million. The upside was mainly attributable to a 7.7% increase in consolidated transaction and clearing fee revenues to $322.1 million in the reported quarter, primarily driven by strong trading volumes in ICE's energy OTC markets, new product introduction along with increased credit default swap (CDS) clearing revenues.

Additionally, consolidated market data revenues accelerated 23.8% year over year to $36.4 million, while consolidated other revenues grew 13.6% to $6.7 million.

However, average daily futures volume reduced 3% year over year to 1.6 million contracts that led to a 1% growth in transaction and clearing revenues in the futures segment. Nevertheless, average daily commissions in ICE's OTC energy business surged 20% year over year to 1.95 million for the quarter, resulting in a 15% year-over-year ascent for the transaction and clearing revenues in the total global OTC segment. Revenue from ICE’s credit default swap (CDS) business totaled $40 million, climbing 2% over the prior-year quarter.

Meanwhile, total operating expenses increased 6.9% year over year to $140.0 million, primarily due to increase in compensation and benefit expenses coupled with slightly higher professional service costs along with selling, general and administrative and other expenses. These were partially offset by lower depreciation and amortization expenses.

Consequently, operating income rose 10.8% year over year to $225.2 million, while operating margin climbed to 61.7% from 60.8% in the year-ago period. The effective tax rate was 30% against 34% in the year-ago quarter.

Financial Update

At the end of the reported quarter, consolidated operating cash flow jumped 19% year over year to $186 million. Capital expenditures totaled $7 million, up from $5 million in the year-ago period, while capitalized software development costs increased to $9 million from $8 million in the year-ago quarter.

As of March 31, 2012, the company recorded unrestricted cash and investments of $968 million (up from $823 million as of December 31, 2011), while total outstanding debt slipped to $875 million from $888 million at 2011-end.

Share Repurchase Update

In September 2011, the board of ICE had sanctioned a new stock repurchase program worth $300 million to be carried on over a period of time, depending on the market conditions, while it also had $85 million of share repurchasing capacity available from the prior authorization.

Meanwhile, during the reported quarter, ICE bought back shares worth $47 million, while a total of $175 million worth of shares were repurchased in 2011. Consequently, the company had $334 million of share repurchase capacity still in store at the end of 2011. However, no shares were repurchased during the reported quarter.

Guidance for 2012

Concurrently, management expects diluted weighted average outstanding shares to be within 72.9–73.9 million shares for the second quarter of 2012. Additionally, the company expects to incur $3–4 million in acquisition expenses during the second quarter of 2012.

In February 2012, management provided an extensive expense outlook for 2012. While total expenses are expected to be flat over 2011, adjusted expenses are estimated to rise by 3–6% over 2011. Compensation expense should be up by 6–7%. Consolidated tax rate is anticipated to be within 28–31% in 2012.

Additionally, ICE expects quarterly interest expense during 2012 to be in the range of $10–11 million, which includes interest expenses associated with its debt facility and Russell Index license.

Capital expenditure, including capitalized software development costs, is projected in the band of $60–65 million. Furthermore, an additional capital expenditure of $30–35 million is expected on the back of real estate costs associated with consolidating multiple locations in London and in New York. ICE's diluted weighted average outstanding share count is expected to lie in the range of 73.0–74.2 million shares.

Peer Take

Last week, CME Group Inc. (CME - Analyst Report) reported first-quarter 2012 operating earnings of $4.02 per share, which were at par with the Zacks Consensus Estimate but lagged the earnings of $4.36 reported in the year-ago quarter.

Earlier this week, another prime peer, NYSE Euronext Inc. reported its first-quarter 2012 operating earnings per share of 47 cents, which fell shy of the Zacks Consensus Estimate of 49 cents and were substantially lower than 68 cents recorded in the year-ago quarter. Consequently, operating net income plunged 31.6% year over year to $121 million from $177 million in the year-ago quarter.

Nevertheless, both of ICE’s peers were severely marred by weak volumes and sluggish clearing and transaction services during the reported quarter, which also negatively impacted the top line of both CME and NYSE.

Currently, ICE carries a Zacks Rank #3, implying a short-term Hold rating and a long-term Neutral recommendation.

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