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Article Excerpt
OPERATOR: We are about to begin. Good morning, ladies and gentlemen, and welcome to the fourth quarter and year-end 2008 IntercontinentalExchange earnings conference call. This call is being recorded.
I would now like to turn the presentation over to your host for today's call Ms. Kelly Loeffler, Vice President of Investor Relations and Corporate Communications. Please proceed.
KELLY LOEFFLER, VP, IR, INTERCONTINENTALEXCHANGE, INC.: Good morning. To obtain a copy of the fourth-quarter and year hend earnings release and presentation, visit the Investor section of our website at theice.com. These archives already archived, and our call will be available for replay.
Before we begin, please be aware that our comments may contain forward-looking statements, that represent our current judgement, and are subject to various risks, assumptions and uncertainties, as outlines in the Company's filings with the SEC, including our Form 10-K that we expect to file this week. For a description of the risks that could cause our result to differ materially from those that are described in the forward-looking statements, please refer to those filings. Actual results may differ materially from those that are expressed or anticipated in any forward-looking statement.
We will also discuss adjusted net income, adjusted earnings per common share, adjusted EBITDA, and adjusted operating expenses. These are non-GAAP financial measures that exclude certain nonoperating charges that we believe are not reflective of our normal operating performance.
The reconciliation of adjusted net income and adjusted earnings per common share to the equivalent GAAP results, and an explanation of why we deem these non-GAAP measures meaningful, appear in our press release and earnings presentation, the reconciliation of adjusted EBITDA and adjusted operating expenses to the equivalent GAAP results, and an explanation of why we deem these non-GAAP measures meaningful appear in our presentation.
With us today are our Chairman and CEO, Jeff Sprecher, Scott Hill, Chief Financial Officer, and Chuck Vice, President and Chief Operating Officer. At the conclusion of the prepared remarks, we will take your questions. I will now turn the call over to Scott.
SCOTT HILL, CFO, INTERCONTINENTALEXCHANGE, INC.: Thanks Kelly. And thanks to everyone for joining us this morning. We are pleased to report solid fourth quarter results, capping off a strong year, despite a challenging economic environment.
We delivered our fourth consecutive year of record consolidated revenues, net income, and cash flow. In addition to record financial performance, ICE accomplished each of the strategic objectives we established in 2008. These initiatives included achieving the integration and synergies related to our acquired businesses, the continued evolution of our technology infrastructure, the launch of ICE Clear Europe, the transition of Russell Index Futures, and new strategic acquisitions.
During 4Q '08 and for the fourth consecutive quarter, more than 100 million contracts were traded in ICE's marketplace, resulting in the highest quarterly revenues in our history. We also established our eighth consecutive record quarter in our market data segment. We believe that these significant accomplishments particularly amid this challenging operating environment, speak to our focus on meeting customer needs, and executing on innovative strategies.
Let's turn to slide 4, and review our fourth quarter performance. ICE's consolidated revenues of $207 million rose 30% over last year's fourth quarter. Consolidated operating income was $97 million, and our operating margin was 47%. Excluding a $16 million noncash charge related to our investment in NCDEX, non-GAAP net income was $60 million, and earnings per share were $0.82.
You may recall that in the fourth quarter of 2006 we invested $37 million for an 8% stake in the National Commodities and Derivatives Exchange, or NCDEX, in India. Given the change in valuations for publicly traded exchanges, and the possibility that we, like other investors, may be required to reduce our stake to 5%, due to a recently enacted Indian law, we believed it was prudent to reduce the carrying value of our investment to $21 million. This charge is reflected in the other expense line of our 4Q '08 income statement.
Finally though not reflected on the charts, our tax rate for the fourth quarter on a pro forma basis excluding the impact of the NCDEX charge was 38%. This is roughly 2 points above the tax rate in prior quarters this year, with each point roughly worth $0.01 per share of earnings in the quarter. This increase largely reflects the year-end true-up in the fourth quarter to our final full-year tax rate of 36%.
While our 2008 tax rate remains much lower than many of our peers, it was on the high end of our guidance, this was primarily due to an increase in the percentage of income taxable in the US at higher statutory rates, particularly New York. Looking forward to 2009, we anticipate that the combination of our expected business mix and lower tax rates in of our nonUS jurisdictions will result in a tax rate in the 34% to 36% range.
Moving next to slide 5, we will detail each of our three business segments. During 2008, 484 million contracts were traded in our futures and OTC energy market, surpassing last year's volume by 30%. This helped drive record revenue and operating income in 2008. The pie chart on this slide shows the increased product diversification we have achieved, which has allowed us to gain a foothold in new large markets, including equity indexes, foreign exchange, agricultural commodities, and credit Derivatives. You can see that our transaction revenue was split about evenly between futures and OTC.
The details of our revenue and expense categories are shown on Slide 6. Fourth quarter transaction revenues totaled $178 million, up 34% year-to-year. This includes nearly $36 million of revenue from Creditex, $57 million from our OTC energy markets, and $86 million from Futures transactions. ICE's Market Data revenues increased 16%, to a record $27 million for the fourth quarter.
On the expense side, fourth quarter consolidated operating expenses were $110 million, compared to $63 million in the fourth quarter of 2007. The $47 million increase in quarterly operating expenses, was primarily driven by $39 million of expenses related to credit apps, and $6.5 million related to amortization of the Russell license agreement, the fourth quarter was the first full quarter for both of these expenses.
As we discussed when we announced the Creditex transaction, and just as we have with all of our prior acquisitions, we have already identified opportunities to improve the operating leverage at Creditex. Given the current economic environment, our efforts to operate more efficiently extend across our entire business. We will tightly manage all discretionary spending and resource growth. We remain, however, a growth company. You will see us continue to invest in a disciplined manner, that any expense growth should continue to reflect and support our strategic initiatives.
Starting with slide 7, I will provide additional detail on our futures and OTC segment. Average daily volume, or ADV, for ICE Futures Europe 569,000 contracts, up 3% versus Q4 '07. Fourth quarter rate for contracts, or RPC, or Energy futures was $1.42. Our RPC included execution fees, and two months worth of clearing revenue in the quarter. In addition to the benefit of in-house clearing, growth in the energy futures was driven by crude and refined oils futures products, as well as our newer coal and emissions market.
We continue to see strength in our Energy Futures business in January 2009, with ADV up 14% from a year ago. This was driven by our benchmark Brent and Gas Oil contracts, and a great way to start the new year despite challenging comparisons. The three-month rolling average RPC in January, which now reflects three months of clearing revenues, was $1.54 at ICE Futures Europe.
Let's move to slide 8 to discuss the performance of our North American Futures business during 4Q. ADV was 362,000 contracts per day, up 65% year-to-year. This strong growth was driven by trading of our Russell Index Futures and options contract. 4Q RPC for agricultural commodity futures were stable at $2.25, and RPC for financial futures averaged $0.78.
Last week, we reported that January average daily volumes at ICE futures US was down 24%, the first quarter of '09 will be compared against what remains the strongest quarter on record for ICE Futures US. However the difficult compare will be mitigated somewhat by Russell volumes. Also while open interest in our ag products declined, due to the challenging market conditions in 2008, we are pleased overall with the growth at ICE Futures US.
Since we acquired the trade New York Board of Trade two years ago, Russell, Futures, and Options now trade exclusively on our exchange, Ag and soft commodity open interest is up 19%, and we have achieved double-digit compound growth in our global benchmark sugar contracts, and all of this growth is now supported by a much leaner operating model.
Turning to our OTC business on slide 9, you can see that the segment now includes Creditex revenues for a full quarter. OTC transaction revenues totaled $92 million in 4Q '08, an increase of 54% compared to 4Q '07. In ICE's OTC Energy business, an unprecedented 95% of our contract volume was cleared during the fourth quarter, and we have launched or will launch by the end of the current quarter over 70 new cleared energy products.
For the fourth quarter, average daily commissions in our OTC Energy markets were $872,000 per day, this is a 4% decline compared to 4Q '07, when we established what was at that time a quarterly record of $913,000. However with the exception of 2007, the fourth quarter has typically been the slowest quarter due to the holiday season. This year's fourth quarter was particularly impacted, given the tough comparisons and typical seasonal slowdowns, exacerbated by very challenging global market conditions.
However, our OTC Energy activity has picked up meaningfully in January and into February 2009. While the year-over-year comparisons and market conditions remain challenging, our OTC Energy performance through the first part of the new year, gives us confidence that the severe dislocation in the fourth quarter, was not indicative of any new trend or run rate.
Turning to Creditex. CDS transaction revenues $36 million, roughly flat compared to Creditex's stand-alone fourth quarter 2007 revenues. However, unlike the OTC Energy markets, the OTC credit markets have remained soft in January, as customers await greater clarity on the market structure, and regulatory matters currently under discussion. Overall, we remain confident in the growth opportunities available in the global credit markets, and in our position to best benefit from those opportunities. Jeff will discuss this in greater detail in a few minutes.
Now let's go to slide 10, and I will touch on a few 2008 highlights from a financial perspective. ICE's consolidated revenue increased by 42% in 2008 over 2007. Over the course of the year, ICE's futures ADV increased 10% for energy, and 52% in our agricultural and financial products. Our OTC business segment delivered 61% growth in revenue. Our strong revenue growth and disciplined approach to investment and spending in 2008, helped us generate a record $375 million of operating cash flow, an increase of 30% versus 2007.
We ended the year with $287 million in unrestricted cash and short-term investments, and our leverage remains low. Last September, we initiated the first share repurchase program in ICE's history. During September, we spent $300 million to repurchase 3.2 million shares of our common stock. Our share repurchase program remains in place, and we will...
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