ICE Profits Jump, Beats Ests - Analyst Blog

IntercontinentalExchange Inc.’s (ICE) second quarter adjusted net income of $113.0 million or $1.51 per share came in way ahead of net income of $83.4 million or $1.13 per share in the year-ago period. This also surpassed the Zacks Consensus Estimate of $1.41 per share. After including $11.4 million in Climate Exchange acquisition costs in the reported quarter, net income attributable to shareholders was $101.7 million or $1.36 per share, compared with $72.1 million or 97 cents per share in the year-ago quarter. 

The quarterly results of ICE benefited from favourable OTC execution, sweeping regulatory reforms, disciplined cost management and record futures trading. The upside was also attributable to growth in the company’s core businesses, significant progress from new initiatives and stronger margins. However, this was partially offset by higher interest and tax expenses. 

ICE’s net revenues increased 18.3% year over year to $296.2 million. The growth was mainly attributable to 18.8% increase in consolidated transaction and clearing fee revenues to $264.9 million in the quarter, primarily driven by strong trading volumes in ICE's futures and OTC markets. As well, consolidated market data revenues grew 6.7% year over year to $27.2 million while consolidated other revenues increased dramatically to $4.1 million as compared to $2.0 million in the year-ago quarter.
Average daily futures volume increased 36% year over year whereas, average daily commissions in ICE's OTC energy business jumped 26% in the quarter boosting the total global OTC segment by 15% from the year-ago period. However, total transaction and clearing fees declined 3% year over year due to lower CDS execution revenues.

Total operating expenses increased marginally by 2.1% to $117.9 million, primarily due to a $3 million increase in compensation and benefit expenses. Operating margin rose to 60% from 54% in the year-ago period. The effective tax rate was 34% compared to 39% in the year-ago quarter.
As of June 30, 2010, the company recorded unrestricted cash and investments of $335 million (down from $614 million as of March 31, 2010) while total outstanding debt totalled to $480 million (up from $285 million as of March 31, 2010). Consolidated cash flow from operations, at the end of June 30, 2010, grew to $259 million, compared with $183 million at the end of June 30, 2009. Capital expenditures totalled to $7 million while capitalized software development costs totalled to $6 million during the reported quarter. 

Business Update

On July 8, 2010, ICE completed the acquisition of Climate Exchange plc, a leading operator of global emissions markets, for a total of about $597 million. The payment included $377 million from cash and $220 million from ICE's existing credit facilities. Climate Exchange is now a wholly-owned subsidiary of ICE.

While the acquisition is expected to increase ICE’s capital efficiency, cross-selling and product development opportunities, it is also projected to enhance ICE’s long term growth strategy across technology, clearing and operations. Although the acquisition is expected to adversely impact the earnings in 2010, ICE projects earnings accretion from 2011 onwards.

Guidance 

As of June 30, 2010, ICE had 866 employees, which it expects to increase by 8%-10% by the end of 2010. ICE expects to record a charge of $4-$5 million in the third quarter of 2010 in relation to staff reduction that came as an aftermath of the Climate Exchange acquisition.

ICE estimated its depreciation and amortization expenses in the range of $$64-$68 million for the second half of 2010. About $9-$12 million of this expense would be related to Climate Exchange.
In relation to the Climate Exchange acquisition, ICE projects to incur transaction costs of $6-$7 million in the third quarter and interest expense of $7-$8 million per quarter.

ICE's diluted weighted average outstanding share count for the third quarter of 2010 is expected to be in the range of 74.5-75.1 million shares outstanding and for fiscal year 2010 is expected to be in the range of 74.4-75.4 million shares. 

For 2011, ICE anticipates synergies for Climate Exchange in the range of $13-$14 million or about 60% savings against the run-rate operating expenses recorded in the first half of 2010.

At the end of the reported quarter, ICE had $300 million remaining in its share repurchase capacity according to the share repurchase program that was approved during the fourth quarter of 2009.
 
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