IntercontinentalExchange, Inc. (NYSE: ICE) reported consolidated net income for the second quarter of 2007 of $53.7 million, a 73.4% increase in quarterly earnings compared to $31.0 million in net income for the second quarter of 2006.
Consolidated revenues in the quarter increased 85.7% to a record $136.7 million, from $73.6 million in the second quarter of 2006. Diluted earnings per share in the second quarter were $0.75, a 44.2% increase compared to $0.52 in the same period in 2006.
The financial results for the second quarter of 2007 include $10.9 million in costs related to the company's proposed merger with the Chicago Board of Trade (CBOT) or $7.0 million after tax. Excluding these charges, net of tax, net income for the second quarter of 2007 was $60.7 million, an increase of 96.1% and diluted earnings per share were $0.85, a 63.5% increase compared to the same period in 2006.
Record revenues were driven by strong volume during the quarter at ICE Futures, the company's U.K. futures business segment; at NYBOT, ICE's U.S. futures business segment; and in ICE's global over-the-counter (OTC) business segment; as well as growth in the market data business segment. Company-wide average daily volume (ADV) for ICE's global futures and OTC markets was 1.4 million contracts in the second quarter of 2007.
ICE also announced that effective September 3, NYBOT will be renamed ICE Futures US, reflecting the successful integration of NYBOT with ICE's existing businesses and reinforcing ICE's comprehensive offering of products and services, and its emphasis on innovation, customer focus and growth. ICE's London-based FSA-regulated operations will be named ICE Futures Europe.
"During the second quarter, we expanded our range of strategic initiatives and added new business lines to our rapidly growing global marketplace," said ICE Chairman and CEO Jeffrey C. Sprecher. "We continue to build on our central role in global commodities markets by adding new products, customers and markets; by leveraging our technology platform, and through a combination of organic growth, acquisitions and partnerships."
Sprecher continued: "In the second quarter, we acquired the exclusive rights to futures and opties and options on futures for the benchmark Russell U.S. equity indexes; we began implementation of our comprehensive global clearing strategy; and we announced, closed on and integrated ChemConnect's trading business. At the same time, importantly, we increased our trading volume at sector-leading growth rates. We also began the implementation of a new architecture for the ICE platform, which is rapidly becoming the most sophisticated commodities trading platform globally. Together with our core business, our new initiatives and investments in technology and clearing offer a strong foundation for additional growth opportunities."
Second Quarter Results
In the second quarter of 2007, ICE's consolidated revenues increased 85.7% to $136.7 million compared to $73.6 million in revenues in the second quarter of 2006. Consolidated transaction fee revenues increased 84.4% to $117.4 million in the second quarter of 2007, from $63.7 million in the second quarter of 2006. Growth in transaction revenue was driven primarily by strong trading volume in both the European futures and global OTC business segments during the quarter, by new participants in ICE's markets, and through the addition of NYBOT's markets.
Transaction fee revenues at ICE Futures totaled $42.6 million in the second quarter of 2007, an increase of 44.1% over $29.6 million in the same period in 2006. In the second quarter of 2007, ADV for ICE Futures rose 56.5% to 522,294 contracts, compared to 333,668 contracts per day in the second quarter of 2006. The increased adoption of electronic trading in the global energy futures markets and strong performance of ICE Futures' global oil complex contributed to the solid growth in volume. Rate per contract (RPC) for ICE Futures was $1.29 in the second quarter of 2007, compared to $1.40 in the second quarter of 2006, and $1.29 in the first quarter of 2007.
Transaction fee revenues at NYBOT totaled $28.2 million in the second quarter of 2007. ICE introduced electronic trading of NYBOT's soft commodity futures contracts on February 2, 2007, which attracted new market users and produced new volume and open interest records, including an exchange-wide monthly volume record in June, exceeding six million contracts for the first time. NYBOT achieved record volume in the second quarter of 2007 with 15.3 million contracts. NYBOT also established a new quarterly ADV record with 241,966 contracts, a 26.3% increase compared to the second quarter of 2006. RPC in all NYBOT soft commodity products totaled $1.85 in the second quarter of 2007, compared to $1.55 in the second quarter of 2006, and $1.59 in the first quarter of 2007. The increase in NYBOT's RPC was primarily due to the adjusted exchange fee rates implemented in June of this year.
Second quarter 2007 transaction fee revenues in the OTC business segment increased 36.7% to $46.6 million, compared to $34.1 million in the same period in 2006, and average daily commissions increased 36.3% to $717,847, compared to $526,824 per day in the second quarter of 2006. Average daily commissions reflect daily trading activity in the company's OTC markets. ICE's OTC contract volume in the second quarter of 2007 increased 28.8% to 37.7 million contracts compared to 29.3 million contracts in the second quarter of 2006. Cleared contracts accounted for 83.5% of OTC contract volume during the second quarter of 2007 compared to 82.3% in the prior year's second quarter.
Consolidated market data fee revenues in the market data business segment increased 79.7% during the second quarter of 2007 to $15.8 million compared to $8.8 million in the same period in 2006. Consolidated other revenues increased $2.3 million during the second quarter to $3.4 million from $1.1 million in the same period in 2006.
Consolidated operating expenses for the second quarter of 2007 were $60.1 million, an increase of 129.7% compared to $26.2 million in the same period of 2006. The primary drivers of increased operating expenses were the inclusion of operating expenses and amortization of the intangible assets relating to NYBOT, and $10.9 million of non-recurring CBOT merger proposal transaction costs. Expenses relating to the establishment of ICE Clear Europe were $0.9 million during the second quarter.
Second quarter 2007 consolidated operating income was $76.5 million, up 61.4% compared to $47.4 million in the same period in 2006. The operating margin was 56.0% for the second quarter of 2007, compared to 64.4% for the same period in 2006. The operating margin decreased from the comparable prior year period due to the $10.9 million of CBOT merger proposal transaction costs.
The effective tax rate for the second quarter of 2007 was 28.6%, compared to 35.8% for the second quarter of 2006. The effective tax rate was reduced from prior guidance as a result of ICE's decision to indefinitely reinvest prior and current undistributed foreign earnings during 2007. The impact from this change includes a non-recurring benefit to net income of $3.6 million recognized in the second quarter related to the reversal of the tax liability on prior period foreign earnings and a sustainable improvement of roughly two percentage points in ICE's effective tax rate.
Capital expenditures in the second quarter of 2007 were $9.5 million, compared to $2.5 million in the same period of 2006. Capital expenditures related primarily to hardware purchases to enhance the company's electronic trading and clearing technology and related infrastructure, including the completion of the first phase of the company's relocation of its data center to a new Chicago hosting facility. Capitalized software development costs totaled $2.8 million in the second quarter, up from $1.8 million in the second quarter of 2006.
Unrestricted cash and investments were $231.2 million as of June 30, 2007. At the end of the second quarter, the company had $240.6 million in debt as a result of the NYBOT acquisition completed on January 12, 2007.
- The company forecasts the diluted share count for the third quarter of 2007 to be in the range of 71.0 million to 71.8 million weighted average shares outstanding, and the diluted share count for fiscal year 2007 to be in the range of 70.3 million to 71.3 million weighted average shares outstanding.
- The company's consolidated tax rate is expected to be in the range of 34% to 36% for the second half of 2007.
- ICE expects expenses relating to the formation of ICE Clear Europe to be in the range of $2.5 million to $3.0 million for the second half of 2007. ICE expects clearing revenues to be in the range of $25.0 million to $30.0 million in the second half of 2008.
- Updated guidance for capital expenditures for fiscal year 2007 is expected to be in the range of $30 million to $33 million.
- ICE expects total year-end headcount to be in the range of 480 to 500; a slight decline from the beginning of 2007 and reflecting synergies at NYBOT offset by additions through acquisitions and investments in clearing and technology enhancements.
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