Intercontinental Exchange Earnings: Strong Energy Futures Offset Weakness in Mortgage Technology

Wide-moat Intercontinental Exchange ICE reported solid second-quarter earnings as strong trading revenue offset continued weakness in the mortgage technology business. Net revenue increased 4% from last year to $1.9 billion. Intercontinental’s bottom-line results benefited from strong cost management and an unusually low tax expense, with net income rising 44% year over year to $799 million. While these were good results, they were driven by high futures trading volume in the firm’s exchange segment, and volume can vary significantly from quarter to quarter based on market conditions. As we incorporate these results, we do not plan to alter our $136 fair value estimate for Intercontinental Exchange.

Intercontinental’s exchange segment grew 9% from last year to $1.1 billion. The increase in revenue was primarily due to strong performance in the firm’s energy segment, with revenue increasing 34% from last year to $355 million. The firm benefited from a recovery in global natural gas futures trading, which was disrupted last year by extreme volatility in the European market, with natural gas trading revenue up more than 50%. On the other hand, the firm’s recurring revenue in the exchange segment posted less attractive results, with revenue up only 2% from last year. Listing revenue continues to be affected by low IPO volume industrywide, though higher market valuations do raise prospects for better conditions in the future.

The firm continued to show strong expense management during the quarter, with operating expenses falling 1.3% from last year to $933 million, leading the company’s operating margin to expand to 51%. The culprit behind the decline was lower acquisition and integration expenses, which fell to $25 million from $53 million last year. However, even excluding this line item, operating expenses still increased only 1.8% year over year. Intercontinental enjoys a mostly fixed cost base, which generally leads to good operating leverage as revenue rises.