Interactive Brokers Group, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; comparative period is Q1 2013. Amounts are U.S. dollars. IBG, Inc. is a holding company that owned approximately 13.6% of IBG LLC; the consolidated statements include IBG LLC, with most consolidated earnings attributable to noncontrolling interests.
Business context and results
The company operates electronic brokerage and market-making businesses across more than 100 exchanges and trading venues. At quarter-end it had 901 employees and approximately 252,000 brokerage accounts.
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Total revenues | $369.2 million | $228.9 million | +61% |
| Net revenues | $354.9 million | $216.1 million | +64% |
| Income before income taxes | $218.1 million | $82.2 million | +165% |
| Consolidated net income | $201.2 million | $75.3 million | +167% |
| Net income available to common stockholders | $19.1 million | $6.6 million | +191% |
| Diluted EPS | $0.34 | $0.14 | |
| Comprehensive diluted EPS | $0.35 | $0.06 | |
| Pretax margin | 61% | 38% |
Trading gains rose to $127.5 million from $19.0 million; commissions and execution fees were $136.6 million, up 14%, and net interest income was $71.6 million, up 24%. Non-interest expenses increased 2% to $136.8 million. Income tax expense was $17.0 million. The company declared a $0.10-per-share dividend payable June 13, 2014.
Financial position, cash flow and capital
- At March 31, total assets were $39.0 billion, total liabilities $33.7 billion, and total equity $5.24 billion. These figures include substantial customer and collateral-related balances and should not be read like those of a conventional non-financial company.
- Cash and cash equivalents were $991.4 million, down from $1.21 billion at December 31, 2013. Cash and securities segregated for regulatory purposes were $15.58 billion and are not equivalent to unrestricted corporate cash.
- Cash flow from operating activities was negative $259.1 million, versus negative $208.9 million in Q1 2013. Investing activities provided $87.5 million; financing activities used $53.7 million. Cash decreased $221.8 million during the quarter.
- Short-term borrowings were $33.6 million. The $100 million senior secured revolving credit facility had no borrowings outstanding; the company reported covenant compliance. Aggregate excess regulatory capital was $3.26 billion, and all regulated operating companies were compliant.
- Management stated that available cash, operating cash flows and facility availability should meet liquidity needs for more than 12 months. It reported approximately 98.9% of assets as liquid, while noting liquidity is actively managed and customer-related balances are a major component.
Material changes and management commentary
- Market making generated $88.1 million pretax income, versus a $29.0 million loss in Q1 2013. The improvement reflected stronger trading gains, higher volatility and a more favorable actual-to-implied volatility relationship. Excluding currency translation, market-making trading gains were up approximately 34%.
- Currency translation was a significant year-over-year factor: trading gains included a $20.9 million translation gain versus a $60.8 million loss a year earlier. Management says approximately 62% of equity is denominated in non-U.S. dollar currencies under its GLOBAL currency strategy.
- Electronic brokerage pretax income increased 21% to $134.3 million. Customer accounts grew 16% to 252,000; customer DARTs increased 25%; customer equity rose 38% to $49.0 billion, with management noting that about 8% of the increase reflected account reclassification. Commission per cleared DART declined 10% to $4.14.
- For 2014, management expected gross capital expenditures to exceed 2013 levels as it expands network, data-center and backup facilities; it expected to fund these with cash on hand and operating cash flows. No earnings or revenue guidance was provided.
Risks, contingencies and unusual items
- A Q4 2013 Singapore-listed-stock event involving a small number of customer accounts had produced a cumulative loss of approximately $77 million by March 31, 2014. The disclosed maximum aggregate loss was approximately $84 million if the securities became worthless and no customer debt was recovered; collection efforts were ongoing.
- Customer margin lending and short positions expose the company to potentially substantial losses, especially during rapid market moves, concentrated positions or illiquid markets. Margin credit outstanding was approximately $14.4 billion; automated monitoring and liquidation may not work in all market conditions.
- Market-making results are sensitive to volatility, actual versus implied volatility, spreads, pricing-model assumptions, equity prices, interest rates, dividends and foreign exchange. Management cautions that quarter-end marks may show large temporary swings in integrated positions.
- The company disclosed off-balance-sheet settlement risks on futures and certain OTC contracts, and guarantees to clearing organizations whose potential amount is not quantifiable; management considered payment under the guarantees remote.
- Pending litigation includes a patent-infringement action by Trading Technologies seeking unspecified damages and injunctive relief. The matter was at an early stage; litigation reserves overall were not material. Management said legal matters could affect a particular period’s results, although it did not expect a material adverse effect on financial condition.
Key facts for investors to verify
- Whether market-making gains and reported earnings remain strong when volatility and currency-translation effects normalize.
- The recoveries, if any, on the Singapore customer deficits and the ultimate loss versus the disclosed $84 million maximum.
- Trends in customer accounts, DARTs, customer equity, margin balances and commission per trade, including the effect of the disclosed account reclassification.
- Liquidity available for corporate use after distinguishing unrestricted cash from segregated customer/regulatory assets, and the drivers of operating cash outflows.
- Regulatory-capital levels, facility renewal or maturity arrangements, and outcomes of litigation or regulatory inquiries.