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Weak Volumes Melts ICE in 3Q

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IntercontinentalExchange Inc.’s (ICE - Free Report) third-quarter 2012 operating earnings of $1.79 per share modestly exceeded the Zacks Consensus Estimate of $1.72 a share. However, the results lagged the year-ago quarter’s earnings of $1.85 per share.

Accordingly, net income attributable to shareholders dipped 4.2% to $131.1 million compared with $136.9 in the year-ago quarter. Including extraordinary items, reported net income in the year-ago quarter was $132.6 million or $1.80 per share, while no such items were recorded in the reported quarter.

The quarterly results of IntercontinentalExchange reflected strong decline in transaction and clearing fee revenues driven by weak performance from the over-the-counter (OTC) segment and credit default swap (CDS) business. This not only marred the top line but also limited margin expansion. However, some cushion was provided by capital efficiency, strict expense control, lower tax rate and growth in the company’s market data and other businesses.

Total revenue fell 5.2% year over year to $323.3 million and also lagged the Zacks Consensus Estimate of $325 million. The downside was mainly attributable to a 7.4% increase in consolidated transaction and clearing fee revenues to $279.2 million in the reported quarter, primarily driven by significant declines in trading volumes in IntercontinentalExchange's power and energy future markets along with decreased credit default swap (CDS) clearing revenues.

However, consolidated market data revenues improved 11.5% year over year to $35.9 million, while consolidated other revenues escalated 14.2% to $8.1 million.

Additionally, average daily futures volume slid 4% year over year to 1.5 million contracts and led to a meagre 1% growth in transaction and clearing revenues in the futures segment. Also, average daily commissions in IntercontinentalExchange's OTC energy business reduced 9% year over year to 1.4 million in the quarter, due to which the transaction and clearing revenues in the total global OTC segment witnessed a 16% year-over-year decline. Revenue from IntercontinentalExchange’s CDS business totaled $33 million, plunging 28.3% from $46 million in the prior-year quarter.

However, total operating expenses slipped 5.6% year over year to $129.1 million, primarily due to decrease in compensation and benefit expenses coupled with lower depreciation and amortization expenses, acquisition-related transaction costs and professional service costs. These were partially offset by higher selling, general and administrative expenses

Consequently, operating income fell 4.9% year over year to $194.1 million, while operating margin stood flat at 60% from the year-ago period. The effective tax rate was 27% against 30% in the year-ago quarter.

Financial Update

At the end of the first nine months of 2012, consolidated operating cash flow grew 6% year over year to $573 million. Capital expenditures totaled $24 million, while capitalized software development costs increased to $26 million, both at higher than the first nine months of 2011.

As of September 30, 2012, the company recorded unrestricted cash and investments of $1.2 billion (up from $823 million as of December 31, 2011), while total outstanding debt slipped to $850 million from $888 million at 2011-end.

Meanwhile, IntercontinentalExchange expanded its share repurchase authorization to $500 million during the reported quarter. While $13 million worth of stock was bought back in October 2012, $487 million remained available for repurchases at the end of last month.

Guidance for 2012

Concurrently, management anticipates its expense for 2012 to be up by 0–2% over 2011. Diluted weighted average outstanding shares are projected to be within 73.0–74.0 million shares for the fourth quarter of 2012. For full-year 2012, shares outstanding are anticipated in the range of 72.9–73.9 million shares.

Previously, IntercontinentalExchange anticipated capital expenditures and capitalized software expenses are projected to be within $35–40 million, including $7–9 million related to real estate costs, during the second half of 2012.

Peer Take

On October 25, CME Group Inc. (CME - Free Report) reported third-quarter 2012 operating earnings per share of 70 cents, breezing past the Zacks Consensus Estimate by a penny but significantly lagging behind the year-ago quarter’s earnings of 95 cents. Results reflected strong expense control and stable average rate per contract that were more than offset by very feeble volumes and reduced clearing and transaction services along with market data revenue during the reported quarter. This also led to the top-line plunge.

Furthermore, another prime peer, NYSE Euronext Inc. is slated to release its financial results before the bell on November 6, 2012.

Currently, IntercontinentalExchange carries a Zacks Rank #4, implying a short-term Sell rating and a long-term Neutral recommendation.

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