EUR 850.00 For Business Accounts Only

Morningstar | ICE Continues to Leverage Its IP and Cost Advantage to Create New Products

Wide-moat Intercontinental Exchange produced few surprises during the seasonally quiet third quarter. For the period, total revenue net of transaction-based expenses grew nearly 5% from the previous year. Trading and clearing net revenue grew by 6.7%. Growth in trading revenue was driven largely by a 40% year-over-year increase in over-the-counter and other transaction revenue, which now includes the acquisitions of BondPoint and TMC Bonds. Beyond exchange revenue, data revenue grew 6% from the previous year on an organic basis, while listing revenue generated 7% organic growth. Most of this quarter’s top-line growth fell to the bottom line; the company earned $0.78 per diluted share, about a 10% increase from the previous year. Though the SEC announced the successful appeal of some New York Stock Exchange data fees, it didn’t seem to affect management’s tone or the performance of the data business. For now, we’ll be maintaining our fair value estimate of $73 per share.

During the call, we were intrigued by Intercontinental's promotion of its ETF Hub and believe this is just the latest example of leveraging its data assets to create a new product that will drive growth. In addition, the company has introduced a portfolio rebalancing service. For now, it appears that ETF Hub will target fixed-income exchange-traded funds. Since Intercontinental already owns the data that underpins the related benchmarks and the pricing of the individual securities, it would have a nearly insurmountable cost advantage in this business. Once these products are adopted by customers, we suspect the company will benefit from high switching costs and minimal competition. Given this, we suspect it will have a long runway for price increases and growth. This is a playbook we think Intercontinental will continue to use throughout its business.

Unfortunately, the company didn’t provide much clarity about the ongoing debate over access and market data fees. Thus far, CEO Jeffrey Sprecher remains defiant, maintaining that data prices are the result of vigorous competition, which we are inclined to doubt. In addition, he promised that he would show up with an “army of litigators” at the SEC to fight changes on data pricing, which we don’t doubt. Furthermore, Sprecher said that this fight over data pricing might actually result in higher prices. That’s certainly the argument we’d expect Intercontinental to make. If additional regulation results in higher costs for exchanges, we admit it’s a possibility. Both sides present facts and statistics that are highly supportive of their arguments, which at times seem to be red herrings. For now, we’re not anticipating a significant decrease in data fees. However, we think it will be hard for exchanges to raise prices significantly. In addition, we are confident that if and when any rules are enacted to limit data pricing, the exchanges will try to circumvent them, which is the whole purpose of hiring an “army of litigators.” That’s why we think this will be such a hard issue to regulate. We'll be looking at this issue much closer in the coming months and expect it will have an impact on our fair values.

Ronan Ryan, president of IEX Group, is scheduled to present at the Management Behind the Moat conference held at Morningstar's Chicago office on Nov. 7-8, 2018. If you are interested in attending the conference, please reach out to your sales representative for registration information.