IntercontinentalExchange (ICE)

Q4 2011 Earnings Call

February 08, 2012 8:30 am ET

Executives

Kelly L. Loeffler - Vice President of Investor & Public Relations and Corporate Communications

Scott A. Hill - Chief Financial Officer, Principal Accounting Officer and Senior Vice President

Jeffrey C. Sprecher - Founder, Chairman and Chief Executive Officer

Analysts

Kenneth B. Worthington - JP Morgan Chase & Co, Research Division

Richard H. Repetto - Sandler O'Neill + Partners, L.P., Research Division

Christopher Harris - Wells Fargo Securities, LLC, Research Division

Daniel Thomas Fannon - Jefferies & Company, Inc., Research Division

Roger A. Freeman - Barclays Capital, Research Division

Christopher J. Allen - Evercore Partners Inc., Research Division

Alex Kramm - UBS Investment Bank, Research Division

Matthew S. Heinz - Stifel, Nicolaus & Co., Inc., Research Division

Michael Carrier - Deutsche Bank AG, Research Division

Jillian Miller - BMO Capital Markets U.S.

Niamh Alexander - Keefe, Bruyette, & Woods, Inc., Research Division

Daniel F. Harris - Goldman Sachs Group Inc., Research Division

Jonathan E. Casteleyn - Susquehanna Financial Group, LLLP, Research Division

Brian Bedell - ISI Group Inc., Research Division

Rob Rutschow - Credit Agricole Securities (USA) Inc., Research Division

Presentation

Operator

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Good day, ladies and gentlemen, and welcome to the IntercontinentalExchange Fourth Quarter and Year End 2011 Earnings Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Kelly Loeffler, Vice President of Investor Relations and Corporate Communications.

Kelly L. Loeffler

Good morning. ICE's fourth quarter 2011 earnings release and presentation can be found in the Investor section of our website. These items will be archived and our call will be available for replay.

Today's remarks may contain forward-looking statements. These statements represent our current judgment and are subject to risks, assumptions and uncertainties. We undertake no obligation to update forward-looking statements. For a description of the risks that could cause results to differ materially from those described in forward-looking statements, please refer to our Form 10-K, which is filed with the SEC today.

The results presented today include our adjusted operating results. We believe that these are more reflective of our business performance. A non-GAAP reconciliation is included in the earnings materials. We explain why this information is meaningful and how management uses these measures.

With us on the call today are Jeff Sprecher, Chairman and CEO; Scott Hill, Chief Financial Officer; and Chuck Vice, President and Chief Operating Officer.

I'll now turn the call over to Scott.

Scott A. Hill

Thanks, Kelly. Good morning, everyone, and thank you for joining us today. We had a good end to another record year in 2011 and we're off to a very solid start in 2012, including January revenues that were up more than 10% over the prior year.

I'll begin this morning on Slide 4 by reviewing our full year 2011 results. ICE grew consolidated revenues 15% to a record $1.3 billion, our eighth consecutive year of revenue growth at/or above 15%.

Each segment contributed to our performance with ICE's future and OTC revenues increasing by 20% and 10%, respectively.

Strong top line, coupled with disciplined expense management, delivered expanding operating margins and a 25% increase in adjusted earnings per share.

These financial metrics distinguish ICE from our peers. Our operational achievements were equally strong. In order to continue to drive long-term growth, we expanded our post-trade footprint, we made strategic investments in Brazil and we added hundreds of new products for clearing, including sovereign CDS.

We executed on this diverse range of initiatives while delivering record operating cash flow and increasing our return on invested capital.

ICE's consistent growth is the result of our willingness to solve complex problems and to invest in growth-oriented initiatives in a disciplined manner throughout economic cycle.

Let's now move to Slide 5 while I discuss our fourth quarter results. Revenues rose 15% over the prior fourth quarter to $327 million. Combined with expense growth of just 5%, operating income grew 23% to $195 million and operating margin expanded 4 points to 60%. Adjusted diluted earnings per share increased 30% to $1.76.

For 2011, CapEx and capitalized software totaled $88 million and cash flow from operations were up 34% to a record $713 million. You'll also note that our full year tax rate came in at the low end of our guidance and our fourth quarter rate was only 29%. This is not the result of any single or fleeting factor. We continue to see strong growth in our non-U.S. businesses and U.K corporate tax rate continues to come down. Thus, we expect our tax rate for 2012 to be in the 28% to 31% range. And to be clear, as our tax rate improved, so does the net income we deliver for our shareholders.

Revenue and expense components for the fourth quarter are detailed on Slide 6. Starting on the left side of the slide, transaction and clearing revenues grew 14% to $287 million. Futures revenues grew 13% to $143 million. OTC Energy revenue increased 18% to $103 million and credit revenues grew 10% to $41 million. Finally, market data revenues increased 18% to a record $33 million.

Moving to the expense side of Slide 6, you can see that operating margin improvement was driven by modest increases and expenses. Core operating margin increased 2 points to 65%. You'll note that we provided additional detail on the expense side on this slide including a new line item for our technology and communication expenses, which we've separated out from SG&A. Given that it was the largest component of SG&A and that many of our growth initiatives contain technology elements, we believe this information will further enhance shareholders' understanding of our expenses.

We maintain a lean expense structure while we invest for future growth. Regardless of the global economic climate, this ensures that our spending remains focused on those initiative that generate return.

Based on our current business outlook, we continue to expect double-digit revenue growth in 2012 coupled with modest expense growth, which means profit should once again grow faster than revenues.

Specifically, we expect that expenses will be up slightly on a GAAP basis and up 3% to 6% on an adjusted basis, including compensation expenses rising 6% to 7%.

We've included additional financial guidance in our earnings release so please refer to it for more detail.

Let's turn to Slide 7 and review the fourth quarter performance of ICE's future segment. Volumes grew 11%, generating a 13% increase in revenue. Average daily volume at ICE Futures Europe grew 22%, contributing to the exchange's 14th consecutive year of record volume. This is further confirmation of the rising importance of our benchmark contracts and the critical function they perform around the world.

ICE Brent and Gasoil futures and options posted average daily volume growth of 36% and 21%, respectively, during the fourth quarter.

In January, the Brent contract achieved an important milestone, reaching $1 million contract in open interest.

Conversely, WTI volume has underperformed as idiosyncratic issues with the contract have made it less useful for hedging for customers with international price exposure.

ICE's emissions contract also continued to perform well as volumes grew 51% and open interest grew 26% over the prior fourth quarter.

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