IntercontinentalExchange, Inc. Q4 2007 Earnings Call Transcript

IntercontinentalExchange, Inc. (ICE)

Q4 FY07 Earnings Call

January 31, 2008, 08:30 AM ET

Executives

Kelly Loeffler - VP, IR and Corporate Communications

Scott A. Hill - CFO

Charles A. Vice - COO

Jeffrey C. Sprecher - Chairman of the Board, CEO

Analysts

Daniel Harris - Goldman Sachs

Howard Chen - Credit Suisse

Richard Repetto - Sandler O'Neill

Ken Worthington - J.P. Morgan

Jonathan Casteleyn - Wachovia

Chris Allen - Banc Of America Securities

Niamh Alexander - Keefe Bruyette & Woods

Rob Rutschow - Deutsche Bank

Edward Ditmire - Fox-Pitt Kelton

Mark Lane - William Blair

Presentation

Operator

Good day everyone and welcome to the IntercontinentalExchange fourth quarter 2007 earnings conference call. Today's call is being recorded. At this time, I'd like to turn the conference over to Kelly Loeffler. Please go ahead.

Kelly Loeffler - Vice President, Investor Relations and Corporate Communications

Good morning. To obtain a copy of the company's fourth-quarter earnings release and presentation, please visit the investor and media section of our website, ice.com. These items will be archived and available for replay. Please be aware that our comments may contain certain forward-looking statements. These statements represent our current judgment and are subject to various risks, assumptions, and uncertainties as outlined in our filings with the SEC. Actual results may differ materially from those that are expressed or implied in any forward-looking statements.

With us on the call today are Jeff Sprecher, Chairman and CEO, Scott Hill, Chief Financial Officer, and Chuck Vice, Chief Operating Officer. Scott will begin with a review of ICE's financial performance, Chuck will provide an update on clearing and technology and Jeff will conclude with a brief overview of our growth initiatives. At the end of our prepared remarks, we'll take your questions. The call will be followed up with a Q&A and I'd now like to turn the call over to Scott.

Scott A. Hill - Chief Financial Officer

Thank you Kelly and thanks to everyone for joining us today. I'll begin by highlighting ICE's key financial and operating metrics for the fourth quarter and then I'll hand it over to Chuck and Jeff to discuss a few of our key initiatives for 2008.

Let's start on slide 4 with an overview of ICE's fourth quarter 2007 results. We delivered another solid performance in the fourth quarter including record consolidated revenues of $159 million, up 67% year-over-year. Our operating income increased 50% to $97 million during the quarter. Our operating margin was 61%. Net income for the quarter was $65 million, an increase of 32% and earnings per diluted share were $0.90.

I'd like to take a moment here to talk about a significant element of our 4Q results. ICE's culture is performance based and our compensation programs reflect this vital attribute. We closed out a great year, one in which we significantly grew revenues, profit, cash, and shareholder value on a strong note in the fourth quarter. Accordingly, we exceeded certain performance measures, which resulted in higher cash bonuses, investing levels, and performance based equity grants across our employee population.

Our 4Q results also reflect $4.1 million or roughly $0.04 per share of incremental non-cash compensation expense which reflects an accelerated method of expense recognition rather than an even straight-line approach that more closely track the actual vesting of those awards for employee. I'll be happy to provide further comments on this during Q&A.

Next on slide 5, I will provide some details about our fourth quarter consolidated revenues. Transaction revenues comprise our three regulated futures exchanges and our global OTC segment. Transaction revenues in the fourth quarter totaled $133 million, up 60% year-to-year. These revenues accounted for 83% of our consolidated revenues in the quarter. Consolidated market data revenue increased a 142% to $23 million and accounted for 15% of consolidated revenue. Each of these segments grew as the demand for access to commodity markets increased and as the number of customers in each rose steadily. We are particularly pleased with our market data revenues, which reflect a modification to our fee structure for view only screen and continued strong interest and demand for data in the markets we serve.

Turning to slide 6. Fourth quarter consolidated operating expenses were $63 million, up a 102% over last year's fourth quarter. As with prior quarters this year, the largest driver of the increase was the addition of expenses for ICE Futures U.S. to our consolidated results. At the end of 2007, the EBITDA margin at ICE Futures U.S. was improved by over 20 points and we expect continued margin improvement this year. You may recall that for 2007 we initially projected expense synergies in the $8 million to $9 million range related to the ICE Futures U.S. acquisition. We exceeded that target with realized synergies for the year in the $14 million to $15 million range.

For 2008, we are now forecasting additional synergies of $4 million to $6 million putting us in the $18 million to $20 million range, up from $14 million to $15 million projected last spring. Also as I mentioned previously, our expenses reflect higher cash and non-cash compensation due to the company's results relative to our 2007 performance targets and the performance based nature of our equity program. The impact of this to cash compensation in the fourth quarter was roughly $3 million to $4 million more than a typical run rate we expect entering 2008. We provided guidance on 2008 headcount and non-cash compensation in the earnings release this morning. Operating expenses also reflect the investments we are making to build our European Clearing House, which Chuck will discuss later in the call.

During 2007, we incurred approximately $4.5 million in expenses relating to the development of ICE Clear Europe. This includes $1.9 million recorded in the fourth quarter of this year