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ICE Beats on Expense Management

Zacks Equity Research

IntercontinentalExchange Inc.’s (ICE) fourth-quarter 2012 operating earnings of $1.84 per share comfortably surpassed both the Zacks Consensus Estimate and the year-ago quarter’s earnings of $1.75 a share. Accordingly, operating net income climbed 5.1% to $135.1 million.

Operating net income excluded after-tax extraordinary items of $5.7 million in the reported quarter and $1.7 million in the year-ago quarter. Including these items, reported net income stood at $129.5 million or $1.76 per share compared with $126.8 million or $1.73 per share in the year-ago quarter.

The quarterly results of IntercontinentalExchange reflected a decline in transaction and clearing fee revenues driven by weak performance from the financial futures market 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 dipped 1.2% year over year to $323.4 million, although it slivered past the Zacks Consensus Estimate of $322 million. The downside was mainly attributable to a 3.6% decrease in consolidated transaction and clearing fee revenues to $277.1 million in the reported quarter. However, consolidated market data revenues improved 14.4% year over year to $37.3 million, while consolidated other revenues escalated 22.9% to $8.9 million.

Additionally, average daily futures volume slid 1% year over year to 3.1 million contracts and led to a decline of 2% in transaction and clearing revenues in the futures segment. Revenue from IntercontinentalExchange’s CDS business totaled $36 million, plunging 16% from the prior-year quarter.

On the other hand, total operating expenses slipped 1.1% year over year to $131.0 million, primarily due to decrease in compensation and benefit expenses coupled with lower selling, general and administrative expenses and professional service costs. These were partially offset by slightly higher depreciation and amortization expenses along with acquisition-related transaction costs based on the recent merger deal with NYSE Euronext Inc. (NYX).

Consequently, operating income edged down 1.2% year over year to $192.4 million. Meanwhile, reported operating margin stood flat at 59.5% from the year-ago period.

Highlights of Full-Year 2012

For full-year 2012, IntercontinentalExchange reported operating earnings per share of $7.60, beating the Zacks Consensus Estimate of $7.51 and $6.98 recorded in 2011. Operating net income grew 8.1% year over year to $557.3 million. Including extraordinary items, reported net income was $551.6 million or $7.52 per share in 2012 against $509.7 million or $6.90 per share in 2011.

Total revenue edged up 2.7% year over year to $1.36 billion and was in line with the Zacks Consensus Estimate of $1.36 billion. Total operating expenses rose marginally by 0.3% year over year to $536.0 million.

Operating income increased 4.3% year over year to $827.0 million, while operating margin stood at 60.7% in 2012 versus 59.7 in 2011. The effective tax rate was 29% against 31% in 2011.

At the end of 2012, consolidated operating cash flow grew 3% year over year to $733 million. Capital expenditures totaled $32 million, down from $57 million in 2011, while capitalized software development costs increased to $35 million from $30 million in 2011.

As of December 31, 2012, the company recorded unrestricted cash and investments of $1.61 billion (up from $823 million as of December 31, 2011), while total outstanding debt swelled to $1.13 billion from $888 million at 2011-end.

IntercontinentalExchange expanded its share repurchase authorization to $500 million during the third quarter of 2012. While $50 million worth of stock was bought back in reported quarter, $450 million remained available for repurchases at the end of 2012.

Guidance for 2013

For 2013, management anticipates its operating expense to be up by 3–5% over 2012. Depreciation and amortization expense in estimated within $135–140 million. Moreover, quarterly interest expense is projected to be $9–10 million, while tax rate is expected in the band of 27–30% in 2013.

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

The company is also expected to incur acquisition-related transaction costs worth about $10–12 million in the first quarter of 2013. Additionally, $4–5 million of duplicate rent expenses and lease termination costs are anticipated in the first half of 2013.

Diluted weighted average outstanding shares are projected to be within 72.6–73.8 million shares for the first quarter of 2013. For full-year 2013, shares outstanding are anticipated in the range of 72.8–74.0 million shares.


Both IntercontinentalExchange and NYSE carry a Zacks Rank #3 (Hold). Other strong performers in the financial sector include Moody’s Corp. (MCO) and HCC Insurance Holdings Inc. (HCC), both of which carry a Zacks Rank #1 (Strong Buy).

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