ICE Q4 profit slides on Indian write-downs

Source: InterContinentalExchange

IntercontinentalExchange(R), Inc. (NYSE: ICE), a leading operator of regulated global exchanges and over-the-counter (OTC) markets, reported that consolidated revenues in the fourth quarter rose to a record $207 million, a 30% increase over fourth quarter 2007 revenues of $159 million. Consolidated net income for the fourth quarter of 2008 was $49 million, a 24% decrease compared to $65 million for the prior fourth quarter. Adjusted to exclude the $16 million pre-tax, or $11 million after-tax, impairment charge related to ICE's(R) investment in the National Commodity and Derivatives Exchange (NCDEX) of India, non-GAAP net income for the quarter was $60 million, a decrease of 7% compared to the fourth quarter of 2007. Diluted GAAP earnings per share (EPS) in the fourth quarter were $0.67. Adjusted to exclude the NCDEX impairment charge, non-GAAP diluted EPS for the quarter were $0.82, down 9% compared to the prior year's fourth quarter.

IntercontinentalExchange Reports Record Full-Year 2008 Revenues, Net Income and Operating Cash Flow; Record Fourth Quarter 2008 Revenues

-- 4Q08 Revenues Rise 30% to $207 MM; 2008 Revenues Up 42% to $813 MM -- 4Q08 Operating Income $97 MM, up 1%; 2008 Operating Income Up 40% to $494 MM -- 4Q08 GAAP Diluted EPS of $0.67; 4Q08 Adjusted Non-GAAP Diluted EPS of $0.82, Excluding $16 MM Impairment Charge Related to NCDEX; 2008 GAAP Diluted EPS of $4.17, Up 23%; Excluding Impairment Charge, 2008 Adjusted Non-GAAP Diluted EPS of $4.33, Up 28% -- Record Annual Revenues for Futures, OTC and Market Data Segments -- Record Operating Cash Flows Up 30% to $375 MM in 2008
For the year ended December 31, 2008, ICE achieved record revenues for the fifth consecutive year, reporting a 42% rise in consolidated revenues to $813 million compared with $574 million in the prior year. Consolidated GAAP net income increased 25% to a record $301 million in 2008 from $241 million in 2007, and diluted EPS for 2008 increased 23% to $4.17. Adjusted to exclude the NCDEX impairment charge, non-GAAP net income for 2008 was $312 million and non-GAAP diluted EPS were $4.33, up 30% and 28% over 2007, respectively. Consolidated cash flow from operations grew 30% to a record $375 million in 2008.

Volume in ICE's consolidated futures segment, comprising ICE Futures Europe(R), ICE Futures U.S.(R) and ICE Futures Canada(R), reached a record 237 million contracts in 2008, an increase of 21% over 2007. In 2008, average daily volume (ADV) for ICE Futures Europe was 590,541; ADV for ICE Futures U.S. and ICE Futures Canada was 331,317 contracts. Average daily commissions (ADC) for ICE's OTC energy markets during 2008 increased to a record $1.1 million, a 32% increase over 2007. Creditex(R) Group Inc., ICE's wholly-owned credit derivatives subsidiary, had brokerage revenues of $52 million, which are also reflected in ICE's OTC segment for the period of September 2008 through December 2008. ICE completed its acquisition of Creditex on August 29, 2008.

"We excelled in a challenging year by responding to the needs of customers, expanding the markets we serve and executing on our strategic and financial objectives," said ICE Chairman and CEO, Jeffrey C. Sprecher. "As we enter 2009, we again have a range of initiatives, market opportunities and plans for growth based on the strong global risk management infrastructure ICE has established. Extending further into the OTC markets by developing CDS clearing is just one initiative designed to leverage our infrastructure. While we anticipate another challenging year in the global markets, we believe we are well positioned to meet our customers' risk management needs amid volatility and change."

"Our long-standing disciplined approach to managing our financial performance has served us well, particularly given the global economic climate of the past 12 months," said ICE CFO Scott Hill. "We have an excellent balance sheet, including low leverage and strong cash flow, as well as a business model that is diversified across futures and OTC markets, geographies and customer types. Our focus on smart growth and disciplined investment has allowed us to produce excellent results for our shareholders while weathering uncertainty in the broader markets."

Fourth Quarter 2008 Results

ICE's fourth quarter 2008 consolidated revenues increased 30% to $207 million compared to $159 million in the fourth quarter of 2007. Consolidated transaction and clearing revenues increased 34% to $178 million in the fourth quarter of 2008, from $133 million during the same period in 2007. The increase in transaction and clearing revenue was driven primarily by new products, strong trading volume in ICE's futures and global OTC segments, the launch of ICE Clear Europe in November 2008, an increase of participants in ICE's markets and the Creditex acquisition.

Transaction and clearing revenues in ICE's consolidated futures segment totaled $86 million in the fourth quarter of 2008, an increase of 18% over $72 million in the same period in 2007. Fourth quarter 2008 volume for all ICE futures exchanges increased to 60 million contracts, which is a 22% increase compared to the fourth quarter of 2007. ICE Futures Europe recorded quarterly volume of 37 million contracts. ADV for ICE's European futures business was 569,140 contracts, an increase of 3% over the fourth quarter of 2007. The average rate per contract (RPC) for ICE Futures Europe in the fourth quarter was $1.42. ICE Futures U.S. and ICE Futures Canada recorded fourth quarter volume of 23 million contracts and 0.7 million contracts, respectively. ADV for ICE Futures U.S. was 350,395 contracts in the fourth quarter of 2008, a 74% increase compared to the fourth quarter of 2007. Total volume for ICE Futures U.S. represented the highest quarter in exchange history, due in part to the successful transition of the Russell Index futures complex in September. RPC for ICE Futures U.S. agricultural futures and options contracts was $2.25, and the RPC for financial contracts averaged $0.78 for the fourth quarter of 2008. ADV for ICE Futures Canada was 11,625 contracts during the quarter compared to 17,347 in the year-ago period.

Fourth quarter 2008 transaction and clearing revenues in ICE's global OTC segment increased 54% to $92 million, compared to $60 million in the same period in 2007. In ICE's OTC energy markets, ADC were $872,440, a decline of 4% from $912,967 in the same period of 2007. Cleared contracts accounted for 95% of OTC energy contract volume during the fourth quarter of 2008. In ICE's credit derivative markets, fourth quarter revenues were $36 million, roughly flat versus the same period in 2007 on a pro-forma basis. ICE did not own Creditex in 2007.

Consolidated market data revenues increased 16% during the fourth quarter of 2008 to a record $27 million compared to $23 million in the same period in 2007. Consolidated other revenues were $2 million during the fourth quarter of 2008.

Consolidated operating expenses increased $47 million to $110 million for the fourth quarter of 2008 versus $63 million in the same period in 2007. The increase was primarily driven by $33 million of expenses relating to Creditex's business following ICE's acquisition during the third quarter of 2008 and continued investment in growth initiatives. Amortization expenses on acquired intangibles were $16 million for the fourth quarter of 2008 compared to $3 million in the same period of 2007, and included $6 million related to the Creditex acquisition and $6 million related to ICE's exclusive Russell license. Depreciation expense, primarily related to technology investments, was $9 million in the fourth quarter of 2008, an increase of 30% over the fourth quarter of 2007.

Fourth quarter 2008 consolidated operating income was $97 million, an increase of 1% compared to the fourth quarter of 2007. Consolidated operating margin was 47% for the fourth quarter of 2008, compared to 61% for the same period in 2007.

ICE has taken a pre-tax, non-cash impairment charge of $16 million related to its 8% equity ownership in NCDEX, a derivatives exchange located in Mumbai, India. ICE acquired its stake for $37 million in 2006. In response to political pressure regarding high commodity prices, the Indian government suspended trading in several key agricultural contracts traded on NCDEX during 2007, and that ban remains in place. The Indian government also announced a law that may require foreign entities, including ICE, to divest holdings above an imposed limit of 5% total ownership in Indian commodities exchanges. This may result in ICE reducing its stake in NCDEX from 8% to the 5% threshold by June 30, 2009. Considering these factors and current valuations in the global exchange sector, management determined that its cost method investment in NCDEX is impaired under U.S. GAAP standards. ICE continues to work closely with NCDEX as a key strategic partner, which provides access to an important emerging market.

The effective tax rate for the fourth quarter of 2008 was 39.8% compared to 32.7% for the fourth quarter of 2007. The increase in the tax rate was primarily the result of the tax effect of the NCDEX impairment charge and an increase in the percentage of income taxable in the U.S. at higher statutory rates, such as in New York State.

Full-Year 2008 Results

For the year ended December 31, 2008, consolidated revenues increased 42% to $813 million compared to $574 million in 2007. Consolidated transaction and clearing revenues increased 41% to $693 million in 2008 from $490 million in 2007. The increase in transaction and clearing revenues was driven primarily by new products, strong trading volume in ICE's futures and global OTC segments, an increase of participants in ICE's markets and the Creditex acquisition.

Transaction and clearing revenues in ICE's consolidated futures segment totaled $352 million in 2008, an increase of 26% over $279 million in 2007. In 2008 volume for all ICE futures exchanges totaled 237 million contracts, a 21% increase over 2007. ICE Futures Europe achieved record volume of 153 million contracts during 2008. ADV for ICE's European futures business was 590,541 contracts, an increase of 10% compared to 2007. ICE Futures U.S. and ICE Futures Canada recorded 2008 volume of 81 million contracts and 3 million contracts, respectively. Total volume for ICE Futures U.S. in 2008 represented the highest 12-month period in exchange history. ADV for ICE Futures U.S. was 318,085 contracts in 2008, a 48% increase over 2007. ADV for ICE Futures Canada was 13,232 contracts during the year, a 5% decrease compared to 2007.

Transaction and clearing revenues in ICE's global OTC segment increased 61% to $342 million in 2008 compared to $212 million in 2007. ADC for ICE's OTC energy business increased 32% to $1.1 million in 2008 compared to $845,572 in 2007. Cleared contracts accounted for 91% of OTC energy contract volume during 2008. Creditex contributed $52 million in brokerage revenues from September 2008 through December 2008, representing a 10% increase over Creditex's results during the same period in 2007, on a pro-forma basis. ICE did not own Creditex in 2007.

Consolidated market data revenues increased 46% in 2008 to a record $103 million compared to $70 million in 2007. Consolidated other revenues were $17 million for the year, up from $14 million in the same period in 2007.

Consolidated operating expenses during 2008 were $320 million, an increase of 45% compared to $221 million in 2007. The increase was driven by $47 million of expenses relating to Creditex's business following ICE's acquisition and continued investment in growth initiatives. Spending associated with the development of ICE Clear Europe(R) was $8 million in 2008, compared to $4 million in 2007. Depreciation related primarily to technology investments was $31 million in 2008, an increase of 37%. Amortization expenses on acquired intangibles, including $8 million related to the Creditex acquisition and $7 million related to ICE's exclusive Russell license, were $30 million in 2008 compared to $10 million in 2007. Non-cash compensation for the year, excluding Creditex, increased to $32 million, compared to $24 million for 2007.

Consolidated operating income for the full year was $494 million in 2008, an increase of 40% compared to $354 million in operating income in 2007. Operating margin was 61% for the year ended December 31, 2008, compared to 62% for the same period in 2007.

The effective tax rate for 2008 was 36.4% compared to 32.9% in 2007.

Consolidated cash flow from operations was $375 million in 2008, up 30% from $288 million in 2007. Capital expenditures for 2008 were $30 million, compared to $31 million in 2007. Capital expenditures primarily related to ICE Futures Europe's new London headquarters and hardware purchases to enhance ICE's electronic trading and clearing technology and related infrastructure. Capitalized software development costs totaled $18 million for the full year, compared to $12 million in 2007.

Unrestricted cash and investments were $290 million as of December 31, 2008. At the end of the year, ICE had $379 million in outstanding debt.

Guidance and Additional Information

-- Expense synergies from the Creditex acquisition are expected to be in the range of $8 million to $10 million on an annualized basis beginning in 2009.

-- ICE had 795 employees at the end of 2008. ICE expects headcount to decline between 5% and 7% during the first quarter of 2009. ICE expects to incur a charge of $2 million to $3 million associated with the headcount reductions primarily in the first quarter. For the full year, headcount is expected to be flat to down 5% from current levels, excluding any personnel additions relating to merger and acquisition activity in 2009.

-- ICE expects non-cash compensation expense in the range of $42 million to $46 million for 2009, assuming the achievement of certain Board-approved financial objectives.

-- ICE expects 2009 capital expenditures in the range of $30 million to $34 million driven by continued investments in trading and clearing technology and data centers.

-- ICE expects depreciation and amortization for 2009 in the range of $108 million to $114 million, including approximately $26 million related to the amortization of payments for the exclusive Russell Index license and $24 million for the amortization of intangibles associated with the Creditex acquisition.

-- ICE's consolidated tax rate is expected to be in the range of 34% to 36% for 2009.

-- ICE's diluted share count for the first quarter of 2009 is expected to be in the range of 73.8 million to 74.4 million weighted average shares outstanding, and the diluted share count for fiscal year 2009 to be in the range of 73.5 million to 74.5 million weighted average shares outstanding. ICE's remaining capacity in its share repurchase program is approximately $200 million.

-- As previously announced, ICE is working with nine major dealers to develop and launch a central counterparty clearing house for credit default swaps. In addition, ICE has announced plans to acquire The Clearing Corporation (TCC) as part of this initiative. Regulatory approvals are pending and are expected to be received during the first quarter. ICE will provide further details on the timing and financial impacts of CDS clearing upon closure of the TCC transaction and receipt of regulatory approvals.

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