EUR 850.00 For Business Accounts Only

Morningstar | Investors Shouldn't Draw too Many Conclusions From ICE's Slowing Growth in Data

There was not much in wide-moat Intercontinental Exchange's second quarter that would materially alter our opinion of the company or its long-term prospects. During the quarter, the company generated $1.2 billion in net revenue, representing year-over-year growth of 5.8% and sequential growth of 1.7%. Understandably, after the strong start to the year in trading, gross revenue from transaction and clearing declined 3.8% from the first quarter. Nevertheless, transaction and clearing revenue during the period was still 5.8% greater than a year ago. Investors may have been modestly disappointed in organic growth in data revenue. For the quarter, the company's data segment produced 4% organic growth, about 2% slower than what management was forecasting for full-year 2018. Based on management's updated guidance, ICE's total data revenue will only be about 1.5% greater than in 2017. Overall, we do not find this that concerning. Outperformance within transaction and clearing so far has more than offset slower data growth. Long-term, we still believe in ICE's ability to resume its faster growth within data. For now, we'll be maintaining our fair value estimate at $70 per share.

As mentioned, growth slowed within data. We’ll remind investors that this is only one quarter and people shouldn’t draw too many conclusions from softer growth. Most of this deceleration can be attributed to the company’s desktop connectivity which saw total revenues decline 12% from the previous year, partly due to the divestiture of Trayport, while producing 3% organic growth. Exchange data was flat to up from the previous year, while pricing and analytics, data's largest subsegment, produced year-over-year organic growth of 8%.

The company made comments about the value of exchange data declining over time and this quarter’s anemic growth in exchange data would support that. Nevertheless, we still think ICE has some pricing power, which is partly why we believe ICE's exchange data will resume growing. In addition, we continue to be impressed by ICE's IDC business which potentially gives the company multiple avenues for growth.

We found the company's commentary around BondPoint and TMC interesting and can see how these assets are additive to ICE's existing intangible assets in bond data. Though it remains to be see how much revenue this can generate, facilitating bond trading through a central order book is a potentially exciting opportunity for the company. By partnering with BlackRock, this gives ICE's open-source bond trading platform significant credibility, and we think this could be an avenue for growth within trading.