IntercontinentalExchange Inc.’s (ICE) second quarter operating earnings of $1.42 per share surpassed the Zacks Consensus Estimate of $1.36 per share and grew 20% year over year from $1.18 per share reported in the year-ago period.
Adjusted net income of $105.9 million excludes $9.6 million of net Climate Exchange acquisition costs in the reported quarter. Including this, net income attributable to shareholders was $96.3 million or $1.29 per share, compared with $87.5 million or $1.18 per share in the year-ago quarter.
The quarterly results of ICE benefited from favorable over-the-counter (OTC) execution, sweeping regulatory reforms and record futures trading that led to strong top line growth. The upside was also attributable to growth in the company’s core businesses, significant progress from new initiatives and increasing demand for commodities. However, this was partially offset by higher operating and interest expenses.
ICE’s net revenues increased 12.1% year over year to $287.1 million, almost in line with the Zacks Consensus Estimate of $287 million. The growth was mainly attributable to 11.9% increase in consolidated transaction and clearing fee revenues to $256.1 million in the quarter, primarily driven by strong trading volumes in ICE’s futures and OTC markets along with increase in credit default swap (CDS) clearing revenues.
Additionally, consolidated market data revenues grew 10.4% year over year to $27.5 million while consolidated other revenues increased dramatically by 40% to $3.5 million as compared to $2.5 million in the year-ago quarter.
Average daily futures volume increased 20% year over year whereas average daily commissions in ICE’s OTC energy business climbed 9% in the quarter boosting the total global OTC segment by 5% from the year-ago period. However, transaction, processing and clearing revenues in ICE’s credit derivative business was $42 million against $43 million in the year-ago period.
Total operating expenses increased dramatically by 16.6% to $135.6 million, primarily due to Climate Exchange acquisition costs and increase in compensation and benefit expenses, and other administrative and depreciation costs. As a result, operating margin dipped to 53% from 55% in the year-ago period. However, the effective tax rate was 32% compared to 37% in the year-ago quarter.
As of September 30, 2010, the company recorded unrestricted cash and investments of $541 million (up from $335 million as of June 30, 2010) while total outstanding debt increased to $634 million from $480 million as of June 30, 2010.
Consolidated cash flow from operations, at the end of September 30, 2010, grew to $379 million, up 25% compared with $303 million in the year-ago period. Capital expenditures totaled to $17 million while capitalized software development costs totalled to $20 million at the end of the reported quarter.
Share Repurchase Update
At the end of the reported quarter, ICE had $210 million remaining in its share repurchase capacity according to the share repurchase program that was approved during the fourth quarter of 2009. The company bought back 90 million of common stock during the reported quarter.
Guidance
As of September 30, 2010, ICE had 947 employees, which it expects to increase by 1%-2% by the end of 2010.
For the fourth quarter of 2010, CDS clearing revenues are expected to range within $14-$16 million. Besides, ICE estimated its depreciation and amortization expenses in the range of $32-$34 million. About $5 million of this expense would be related to Climate Exchange acquisition.
In relation to this acquisition, ICE projects to incur interest expense of $7-$8 million per quarter. ICE expects its tax rate to be between 32% and 35% in the fourth quarter of 2010 and in 2011.
ICE’s diluted weighted average outstanding share count for the fourth quarter of 2010 is expected to be in the range of 73.8-74.4 million shares outstanding and for fiscal year 2010 is expected to be in the range of 73.9-74.9 million shares.
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