IntercontinentalExchange CEO Discusses Q3 2010 Results - Earnings Call Transcript
IntercontinentalExchange, Inc. (
)
Q3 2010 Earnings Call
November 1, 2010 8:30 AM ET
Executives
Kelly Loeffler – VP, Investor and Public Relations
Jeff Sprecher – Chairman and CEO
Scott Hill – Chief Financial Officer
Chuck Vice – President and COO
Analysts
Howard Chen – Credit Suisse
Roger Freeman – Barclays Capital
Rich Repetto – Sandler O’Neill
Alex Kramm – UBS
Michael Vinciquerra – BMO Capital Markets
Michael Carrier – Deutsche Bank
Chris Brendler – Stifel Nicolaus
Ken Worthington – J.P. Morgan
Chris Harris – Wells Fargo
Niamh Alexander – KBW
Jonathan Casteleyn – Susquehanna
Mark Lane – William Blair & Co.
Patrick O’Shaughnessy – Raymond James
Daniel Harris – Goldman Sachs
Presentation
Operator
Please standby. Good day. And welcome to the IntercontinentalExchange Third Quarter 2010 Earnings Conference Call. Today’s call is being recorded.
And now at this time, I would like to turn the conference over to Ms. Kelly Loeffler. Please go ahead, ma’am.
Kelly Loeffler
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Intercontinental Exchange Q3 2009 Earnings Call Transcript
Good morning. ICE’s third quarter earnings release and presentation can be found in the Investor section of our website at the ice.com. These items will be archive and our call will be available for replay.
Today’s call may contain forward-looking statements. These statements represent our current judgments and are subject to risks, assumptions and uncertainties. For a description of the risks that could cause our results to differ materially from those described in the forward-looking statements, please refer to the company s SEC filings, including Form 10-Q and Form 10-K.
In our earnings material, we provided a reconciliation of non-GAAP financial measures as well as an explanation of why we deem this information to be meaningful and how management uses these measures. These adjustments reflect certain charges that we believe are not reflective of normal operating performance.
With us today are Jeff Sprecher, Chairman and Chief Executive Officer; Scott Hill, Chief Financial Officer; and Chuck Vice, President and Chief Operating Officer.
I’ll now turn the call over to t Scott.
Scott Hill
Thanks, Kelly. Good morning, everyone and thanks for joining us today. We’re pleased to have delivered another solid quarter and to provide an update on our strategic initiatives. Our continued strong performance is driven by our global reach, product diversification and investment discipline, together with an innovative customer focused culture we continue to develop solutions relied upon by other industry under the dynamic financial services and risk management backdrop.
I’ll start this morning on slide four, where I’ll recap the first nine months of 2010. Please note that the numbers discussed this morning refer to our adjusted operating results, which we believe are more reflective of the performance of our business.
In the first nine months of this year, revenues increased 17% and adjusted expenses rose just 6%. This operating leverage enabled a 28% increase in adjusted net income attributable to ICE. Our operating cash flow also grew significantly through the first nine months, up 25% year-over-year.
ICE’s revenue growth reflects the rising demand for commodities, particularly from emerging economies and the clearing and risk management services we offer our customers. These are fundamental elements of the business model we have constructed to enable us to consistently generate strong returns for our shareholders.
Let’s move to slide five and discuss our third quarter results. Consolidated revenues grew 12% to $287 million over last year’s third quarter. Consolidated net income attributable to ICE was $96 million. On an adjusted basis, net income attributable to ICE grew 21% versus 3Q ‘09, diluted earnings per share grew 20% to $1.42.
Our positioning in the global commodity market continues to generate strong volume and revenue expansion. And our investments in CDS clearing are now contributing to our bottom line even in advance of regulatory implementation. We are live with a profitable business.
Importantly, our disciplined approach to expenses once again enabled us to grow the bottom line faster than the topline even as we integrated our latest acquisition and continue to invest in our key strategic initiatives.
While I do not usually spend a lot of time talking about our tax rate, I’m sure you note that it was 32% in 3Q and has been up or below the low end of our guidance range all year. Some of the improvement relates to cleanup of prior acquisitions in efforts to improve the efficiency of our tax structure. The more fundamental driver though is the continued strong growth of our business outside the U.S.
We run global operations and serve global customers in local jurisdiction. We have screen distributed in over 70 countries. We offer trading of commodities and clearing service that are globally relevant. In short, we have built perhaps the most global derivatives exchange and one important benefit of this model is that we continue to invest and grow in these lower tax jurisdictions. We are able to generate higher net margins and better overall returns.
We expect this trend will continue. Therefore, we believe that we will sustain a tax rate between 32% and 35% for the foreseeable future, a significant improvement from our prior guidance, which reflects our global business. It may seem like a minor point but improving our tax rate over the long run is yet another means of enhancing shareholder return.
Turning now to slide six, I’ll walk through the components of our revenue and expenses. Third quarter transaction and clearing revenues increased 12% to $256 million. Our OTC segment contributed $132 million and our futures segment contributed $125 million. Our market data business achieved record revenues of $28 million for the quarter.
On the expense side, third quarter operating expenses of $136 million included transaction and severance charges related to our acquisition of the Climate Exchange or CLE. On an adjusted basis operating expenses of $123 million increased 6% versus 3Q ‘09. All of the increase was contributed by the integration of CLE in 3Q. Adjusted operating margin improved at 57%, compared to 55% in the third quarter of 2009. Non-brokerage operating margins were 63%.
With regard to Creditex, we continue to deliver improved operating efficiencies even as we maintain our leadership position in our key products. We saw this benefit again in the third quarter, which enabled us to reduce our compensation expense line and provide improved guidance for the balance of the year.
Starting on slide seven, I’ll walk through our key business segments. In our global Futures business, consolidated transaction and clearing revenues grew 20% year-to-year to $125 million. Average daily volume for Q3 also grew 20% to $1.3 million contracts.
ICE Futures Europe, numerous article continued to highlight an increasing commercial preference for Brent Crude as the global benchmark for Light Sweet Crude Oil. Also our Gas Oil contract which is European Heating Oil is rapidly becoming a global benchmark to the refined oil market. Each of these contracts has seen not only strong volume growth but also strong growth in open interest. This has contributed to an overall 25% year-to-year increase NOI ICE Futures Europe through October.
In our European Emissions Futures market, where we completed the acquisition of the Climate Exchange in July, volume increased a healthy 15%. We are pleased with the leadership that the ECX products tab in the very nascent but competitive European environmental market.
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