CME CME Group Inc

IntercontinentalExchange Inc.’s (ICE) fourth-quarter 2011 operating earnings of $1.76 per share were significantly ahead of the Zacks Consensus Estimate of $1.68 per share and $1.35 per share reported in the year-ago period.

Excluding certain net acquisition-related costs, net operating income of $129.3 million surged 29.4% year over year in the reported quarter. Net income attributable to shareholders was $126.8 million or $1.73 per share, compared with $99.1 million or $1.34 per share in the year-ago quarter.

The quarterly results of ICE benefited from favourable over-the-counter (OTC) execution and record futures trading that in turn led to strong top-line growth. The upside was also attributable to a lower tax rate, growth in the company’s core businesses, significant progress triggered on new initiatives and an increasing demand for commodities. However, this was partially offset by higher-than-expected operating expenses.

ICE’s total revenue escalated 14.8% year over year to $327.2 million and came in about in line with the Zacks Consensus Estimate of $327 million. The upside was mainly attributable to a 14.3% increase in consolidated transaction and clearing fee revenues to $287.3 million in the reported quarter, primarily driven by strong trading volumes in ICE's energy futures and OTC markets, new product introduction along with increase in credit default swap (CDS) clearing revenues.

Additionally, consolidated market data revenues grew 18.1% year over year to $32.6 million, while consolidated other revenues surged 21.7% to $7.3 million.

Average daily futures volume increased 12% year over year to 1.4 million contracts, while average daily commissions in ICE's OTC energy business grew 21% year over year to 1.6 million for the quarter, resulting to a 16% year-over-year ascent for the total global OTC segment and a 13% growth in futures segment. Besides, revenue from ICE’s credit default swap (CDS) business totaled $41 million, climbing 10% over the prior-year quarter.

Meanwhile, total operating expenses climbed 4.7% year over year to $132.4 million, primarily due to increase in compensation and benefit expenses coupled with higher professional service costs. These were partially offset by lower selling, general and administrative and flattish depreciation and amortization expenses.

Consequently, operating margin climbed to 59.5% from 55.6% in the year-ago period. The effective tax rate was 29% against 32% in the year-ago quarter.

Full-Year 2011 Highlights

For full-year 2011, ICE recorded net operating income of $523.4 million or $7.08 per share, which breezed past the Zacks Consensus Estimate of $7.01 per share and net operating income of $420.9 million or $5.65 per share recorded in 2010. Including certain net acquisition-related costs, net income attributable to shareholders surged to $509.7 million or $6.90 per share from $398.3 million or $5.35 per share in 2010.

Total revenue increased 15.4% year over year to $1.33 billion, which came in line with the Zacks Consensus Estimate. Total operating expenses ascended 7.3% year over year to $534.2 million. As a result, operating margin rose to 59.8% from 56.7% in 2010. The effective tax rate was 31% compared with 33% in 2010.

Financial Update

At the end of 2011, consolidated cash flow from operations, grew to $713 million, soaring 34% over 2010. Capital expenditures totaled $57 million in 2011, up from 422 million in 2010, while capitalized software development costs increased to $30 million from $26 million.

As of December 31, 2011, the company recorded unrestricted cash and investments of $823 million (up from $622 million as of December 31, 2010), although total outstanding debt increased to $888 million from $579 million at 2010-end.

Share Repurchase Update

In September 2011, the board of ICE had sanctioned a new stock repurchase program worth $300 million, to be carried on over a period of time depending on the market conditions, while it also had $85 million of share repurchasing capacity available from the prior authorization.

Meanwhile, during the reported quarter, ICE bought back shares worth $47 million, while a total of $175 million worth of shares were repurchased in 2011. Consequently, the company had $334 million of share repurchase capacity still in store at the end of 2011.

Guidance for 2012

Concurrently, management provided an extensive expense outlook for 2012. While total expenses are expected to be flat over 2011, adjusted expenses are estimated to rise by 3–6%. Compensation expense should be up by 6–7%. Consolidated tax rate is anticipated to be within 28–31% in 2012.

Additionally, ICE expects quarterly interest expense during 2012 in the range of $10–11 million, which includes interest expenses associated with its debt facility and Russell index license.

Capital expenditures, including capitalized software development costs, are projected in the range of $60–65 million. Furthermore, an additional capital expenditure of $30–35 million is expected on the back of real estate costs associated with consolidating multiple locations in London and in New York.

Concurrently, ICE's diluted weighted average outstanding share count for the first quarter of 2012 is expected to be in the range of 72.9–73.9 million shares outstanding and for 2012 is expected to lie in the range of 73.0–74.2 million shares.

Peer Take

On February 2, 2012, CME Group Inc. (CME) reported its fourth-quarter 2011 operating earnings per share of $3.55, below both the Zacks Consensus Estimate of $3.67 and $3.77 reported in the year-ago quarter. Operating net income also slipped 6.8% to $235.6 million. The decline was primarily attributable to reduced volume growth coupled with higher-than-expected expense.

Meanwhile, another prime peer, NYSE Euronext Inc. (NYX), is scheduled to release its earnings results before the market opens on February 10, 2012.

 
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