IntercontinentalExchange, Q2 2010 Earnings Call Transcript

IntercontinentalExchange, Q2 2010 Earnings Call Transcript
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IntercontinentalExchange, (ICE)

Q2 2010 Earnings Call

August 4, 2010 8:30 a.m. ET

Executives

Jeffery Sprecher – Founder, Chairman and Chief Executive Officer

Scott Hill – Chief Financial Officer, Principal Accounting Officer and Sr. Vice President

Charles Vice – President and Chief Operating Officer

Kelly Loeffler – Vice President, Investor Relations & Corporate Communications

Analysts

Richard Repetto – Sandler O’Neill

Howard Chen – Credit Suisse

Roger Freeman – Barclays Capital

Dan Fannon – Jefferies & Company

Michael Carrier – Deutsche Bank

Michael Vinciquerra – BMO Capital Markets

Christopher Allen – Ticonderoga Securities

Ken Worthington – JP Morgan

Alex Kramm – UBS

Matthew Heinz – Stifel Nicolaus

Niamh Alexander – KBW

Don Fandetti – Citigroup

Jonathan Casteleyn – Susquehanna Financial Group

Rob Rutschow - CLSA

Presentation

Operator

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» IntercontinentalExchange Q1 2010 Earnings Call Transcript
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Please stand by. Good day, everyone, and welcome to the IntercontinentalExchange Q2 2010 earnings call. Today’s conference is being recorded. At this time I’d like to turn the conference over to Kelly Loeffler. Please go ahead, ma’am.

Kelly Loeffler

Good morning. Welcome to ICE’s Q2 earnings call. For a copy of the earnings release and presentation please visit the investor’s section of our website at

www.theice.com

. These items will be archived and our call will be available for replay.

Today’s call may contain forward looking statements that represent our current judgments and are subject to various 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 filings with the SEC including our form 10Q. We provide our reconciliation of non-GAAP financial measures and why explanations of why we deem this information to be meaningful in our earnings release and presentations. These adjusted financial measures exclude certain charges that we believe are not reflective of normal operating performance.

With us today are Jeff Sprecher, Chairman and CEO; Scott Hill, Chief Financial Officer; and Chuck Vice, our President and COO. I’ll now turn the call over to Scott.

Scott Hill

Thanks, Kelly. Good morning and thank you all for joining us today. During the Q2 we delivered our seventh consecutive quarter of record revenue and our best quarter ever for operating income and adjusted earnings per share. We are executing on a number of strategic initiatives and we see ample opportunity for continued growth.

I’ll start on slide 4 this morning with some highlights from the first half of this year. We’ll focus on our non-GAAP or adjusted operating results, as these are more indicative of our business performance. As you can see, ICE continues to deliver consistent top and bottom line growth. In the first half of 2010 we grew revenues 20% and adjusted expenses only 6%, resulting in adjusted net income attributable to ICE growing 32%, and operating cash flows up 42%.

This performance is a result of our focus on meeting the needs and demands of our customers and our disciplined approach to investments. Our business model’s global reach, product diversity, and extensive clearing infrastructure differentiate our opportunity set and distinguish ICE from our competitors. We provide solutions today and offer key building blocks for the solutions required tomorrow to help our customers navigate the evolution of regulations and markets.

Moving now to slide 5, I’ll review our Q2 results. ICE’s consolidated revenues grew 18% to a record $296 million over last year’s Q2. Adjusted net income attributable to ICE grew 35% to a record $113 million. Adjusted diluted earnings per share rose 34% to a record $1.51. We’ve highlighted a few of the drivers of our performance on the right side of this slide. Our global energy business remains strong, and growth in our financial futures markets continues to improve. And importantly, the extensive work we’ve done on integrating acquisitions over the past three years is enabling operating margin expansion even as we continue to grow.

If you’ll turn to slide 6, I’ll cover our revenue and expense detail. Q2 transaction and clearing revenues rose 19% to $265 million. This includes $130 million from our Futures segment and $135 million from our OTC segment. I also want to point out that our data business remains a solid contributor, with record revenues of $27 million in the Q2. This is driven by the entry of new participants in our market and the resulting demand for our data.

Shifting to the right side of the slide, Q2 adjusted operating expenses increased just 1% versus Q2 ’09. Adjusted operating margin improved to 61% compared to 54% in the Q2 of 2009. Our non-brokerage operating margins improved to 67%.

It’s worth noting that we continue to drive increases in our operating efficiency at Creditex despite the soft credit market. For example, Creditex compensation as a percent of revenue actually improved in Q2 versus Q1 despite a sequential decline in revenues. Our strategy of retaining the top brokers with mutually beneficial agreements while weeding out underperformers continues to pay off. In terms of customer surveys and market share our Creditex team continues to rank highly and is recognized for their expertise, electronic capabilities, and service.

In terms of compensation expense, we believe our paper performance culture is one of the keys to our success. First, it is an investment in our ability to execute and innovate. Second, it ties each employee’s compensation to the long-term success of our company. These incentives largely come in a form of multi-year equity compensation rather than a one-time cash payout. This provides continuity, stability and a highly specialized staff, and importantly, an employee population whose interests are fully aligned with our shareholders’. While our average compensation per employee is higher than our competitors’, our employees also deliver more revenue, more profit, and more cash per person; or said more simply, our team delivers industry-leading returns on the investments we make in them.

Now let’s review each of our business segments, starting with the performance of our Global Futures Business on slide 7. Consolidated Futures revenues were up 23% to $130 million over last year’s Q2. Average daily volume was 1.4 million contracts, which was up 36% year-to-year. We believe the current global economic uncertainty has increased the level of hedging in risk management by a wide range of industries globally. During the Q2 and despite relatively lower volatility, sustained demand from Asia coupled with economic uncertainty drove continued volume growth in crude and refined oil products.

We also saw continued improvement from our Financial Futures market, with record volumes in our Russell and US Dollar index futures. Ag. futures were relatively flat following sugar’s sharp price decline in the Q1 of this year. And yesterday, we reported a 13% increase in July 2010 average daily volume for ICE’s futures market. Year-to-date through July average daily futures volumes is up 29%.

I’ll walk through the Q2 performance in our OTC business, our eighth consecutive quarter of record revenues, on slide 8. Consolidated OTC transaction revenues rose 15% in the Q2 to $135 million. Average daily commissions in our Energy business rose 26% to $1.4 million. Despite relatively low price volatility, each product class in our OTC Energy markets – gas, power, and oil – grew year-to-year. With the successful introduction of new cleared oil products over the past 18 months we have continued to diversify our OTC business. Oil revenues once again came in at record levels, with meaningful growth in all of our nuclear products. And finally, in our OTC Energy business, July average daily commissions were $1.4 million, up significantly from last year and roughly consistent with our strong year-to-date performance.

In our CDS business, Q2 revenues totaled $43 million, down from $45 million last year. This includes $27 million from Creditex and $16 million from ICE’s global CDS clearing business. Creditex’s electronic transaction services accounted for 45% of our Q2 Creditex revenue. Activity in the CDS Index and Single Name business remain soft, given the uncertain regulatory environment, and despite the relatively stronger performance in niche and more volatile sovereign and emerging market products.

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