Interactive Brokers Group, Inc. — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011; compared with Q1 2010 unless otherwise noted. Dollar amounts are U.S. dollars. The consolidated statements include IBG LLC, although IBG, Inc. owned approximately 10.8% of IBG LLC at quarter-end; most consolidated earnings are attributable to non-controlling interests.
Business context
IBG operates global electronic market-making and brokerage businesses across more than 90 exchanges and trading venues. It reported two segments: market making and electronic brokerage. The company had 860 employees at March 31, 2011.
Financial performance
| Metric | Q1 2011 | Q1 2010 | Change / note |
|---|---|---|---|
| Total revenues | $385.6 million | $225.7 million | Up 71% |
| Net revenues | $367.9 million | $210.6 million | Up 75% |
| Income before taxes | $222.0 million | $64.9 million | Pre-tax margin 60%, versus 31% |
| Consolidated net income | $203.2 million | $59.7 million | Includes non-controlling interests |
| Net income available to common shareholders | $16.3 million | $3.9 million | EPS $0.38, versus $0.09 |
| Net cash used in operating activities | $36.7 million | $24.2 million | Negative in both periods |
| Cash and cash equivalents | $1.176 billion | $850.2 million | Q1 2011 cash declined $178.1 million from year-end 2010 |
Drivers and segments: Trading gains rose 149% to $200.3 million, attributed primarily to wider options bid/offer spreads and a more favorable actual-to-implied volatility relationship. Commissions and execution fees increased 19% to $109.2 million on higher customer activity. Net interest income rose 91% to approximately $41.0 million, principally reflecting higher customer cash and fully secured margin balances.
- Market making: Net revenues were $202.3 million and pre-tax income was $134.7 million, versus $82.8 million and $5.5 million, respectively. The reported pre-tax margin increased to 67% from 7%.
- Electronic brokerage: Net revenues were $163.7 million and pre-tax income was $90.1 million, versus $127.2 million and $64.4 million. The reported pre-tax margin increased to 55% from 51%. Total DARTs rose 16% to about 423,000; customer accounts increased 20% to about 168,000, and customer equity grew 49% to $24.8 billion.
Q1 2011 non-interest expenses were $145.9 million, broadly flat year over year, while expenses fell to 40% of net revenues from 69%. Execution and clearing costs decreased 5%; employee compensation increased 4% and general and administrative costs increased 16%.
Balance sheet, liquidity and debt
- At March 31, 2011, total assets were $30.05 billion, total liabilities $25.61 billion, and total equity $4.44 billion. Assets increased from $28.50 billion at December 31, 2010.
- Management classified approximately $29.60 billion, or 98% of assets, as liquid, principally marketable securities, customer cash and collateralized receivables. Cash and securities segregated for regulatory purposes were $8.26 billion.
- Aggregate excess regulatory capital across operating companies was $2.80 billion; all operating companies were in compliance with their applicable requirements.
- Senior notes payable were $200.9 million at quarter-end, all at a 5% stated rate and with 15- or 18-month maturities. The $100 million secured revolver had no outstanding borrowings; the company repaid $100 million on the facility during the quarter.
- Operating cash flow was negative $36.7 million, investing cash flow negative $35.0 million, and financing cash flow negative $113.3 million. Cash decreased by $178.1 million, ending at $1.176 billion.
Outlook, commentary and risks
- Management said cash flows, available cash and revolver capacity should meet liquidity needs for more than the next 12 months. No specific earnings or revenue guidance was provided.
- Management expected gross capital expenditures to remain around the Q1 level near term, with future spending potentially rising for technology infrastructure, data-center and backup-facility initiatives. Q1 property and equipment spending was $3.2 million.
- Market-making results remain sensitive to bid/offer spreads, volatility, currency movements and competition, including high-frequency traders. Management reported an estimated $54 million positive Q1 market-making earnings effect from the weaker U.S. dollar relative to other key currencies. Its non-GAAP presentation, which includes certain translation effects otherwise reflected in other comprehensive income, showed diluted EPS of $0.41 versus GAAP EPS of $0.38; Q1 2010 non-GAAP diluted EPS was $0.06 versus GAAP EPS of $0.09.
- Customer margin lending was $9.29 billion at March 31. The filing warns that sharp market moves, concentrated or illiquid collateral, or failed customer obligations could produce losses; automatic margin monitoring and liquidation may not work in all market conditions. Futures activity also creates off-balance-sheet liquidation risk.
- The company faces ordinary-course litigation and regulatory inquiries. A patent-infringement action brought by Trading Technologies sought unspecified damages and injunctive relief; the company said it intended to defend the case. Litigation reserves were not material, and management did not expect pending matters to materially adversely affect financial condition, while noting possible period-specific earnings effects.
- Subsequent events included a $25 million IBG LLC dividend paid April 18, of which IBG, Inc.’s share was $3.938 million, and a declared quarterly dividend of $0.10 per common share payable June 14, 2011.
Important facts for investors to verify
- Whether the exceptional market-making gains—supported by wider spreads and favorable currency translation—are repeatable under different market conditions.
- How consolidated performance translates to IBG, Inc. common shareholders, given its approximately 10.8% ownership and the $187.0 million of Q1 net income attributed to non-controlling interests.
- Whether customer growth, margin balances and interest income can be sustained, and how customer cash and collateral movements affect reported operating cash flow.
- Senior-note maturities and refinancing needs, regulatory-capital restrictions, and the availability of unpledged collateral and committed borrowing capacity.
- Developments in the Trading Technologies litigation, regulatory inquiries, and the company’s exposure to margin, clearing-member guarantees and off-balance-sheet obligations.