Interactive Brokers Group, Inc. 10-Q Summary
Business Context and Reporting Period
This report covers the quarterly period ended June 30, 2011. Interactive Brokers Group, Inc. (IBG, Inc.) is a holding company owning approximately 11.0% of IBG LLC, an automated global electronic broker and market maker. The company operates two primary segments: Electronic Brokerage (execution and clearing services) and Market Making (providing liquidity on global exchanges). As of June 30, 2011, the company employed 857 people worldwide.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2011 | Six Months Ended June 30, 2011 |
|---|---|---|
| Total Net Revenues | $296.9 million | $664.8 million |
| Net Income | $136.6 million | $339.9 million |
| Net Income Available to Common Stockholders | $9.6 million | $25.8 million |
| Diluted EPS (Common) | $0.22 | $0.60 |
| Comprehensive Income (Common) | $13.4 million | $30.9 million |
| Cash and Cash Equivalents | $1.42 billion | $1.42 billion |
| Total Assets | $30.64 billion | $30.64 billion |
| Senior Notes Payable | $178.3 million | $178.3 million |
| Short-term Borrowings | $43.0 million | $43.0 million |
Note: The company maintains a significant non-controlling interest (approx. 89% of IBG LLC). Net income attributable to non-controlling interests was $127.1 million for the quarter and $314.1 million for the six months.
Material Changes vs. Prior Period
- Revenue Growth: Total net revenues increased 31% for the quarter and 52% for the six months compared to the prior year periods. This was driven primarily by a 136% increase in net interest income (quarterly) and a 55% increase in trading gains.
- Trading Gains: Trading gains rose significantly due to a reduction in currency translation losses. Translation losses decreased from $116.5 million in Q2 2010 to $33.8 million in Q2 2011.
- Interest Income: Net interest income surged due to a 52% increase in average customer cash balances and a 117% increase in fully secured margin borrowings.
- Profitability: Pre-tax margins improved to 50% for the quarter (from 32% in 2010) and 56% for the six months (from 31% in 2010).
- Segment Performance:
- Electronic Brokerage: Income before taxes increased 23% (quarter) and 31% (six months). Customer equity grew 57% to $25.7 billion.
- Market Making: Income before taxes increased 1,421% (quarter) and 1,963% (six months), largely due to reduced translation losses and wider bid/offer spreads.
Outlook, Risks, and Commentary
- Currency Hedging: The company manages global currency exposure by maintaining equity in a basket of major currencies ("GLOBAL"). The weakening of the U.S. dollar relative to other currencies positively impacted comprehensive income by approximately $50 million in the quarter.
- Market Conditions: Trading volumes in global exchange-traded derivatives declined slightly. However, the company noted that retail broker-dealer participation fluctuates and is not predictable.
- Regulatory Capital: Aggregate excess regulatory capital for all operating companies was $2.81 billion as of June 30, 2011. All subsidiaries were in compliance with regulatory requirements.
- Liquidity: The company maintains a highly liquid balance sheet with 98.5% of assets considered liquid. A $100 million senior secured revolving credit facility was available but had no outstanding balance.
- Legal Proceedings: A patent infringement lawsuit filed by Trading Technologies International, Inc. remains in the pleadings stage. Management believes it has meritorious defenses and does not expect a material adverse effect on financial condition.
Investor Verification Checklist
- Non-Controlling Interest Impact: Verify the distinction between total net income and net income available to common stockholders, as the latter represents only ~11% of the consolidated entity's earnings.
- Currency Translation Volatility: Assess the sensitivity of earnings to foreign exchange rates, as translation gains/losses significantly impacted trading gains and comprehensive income.
- Customer Equity Growth: Confirm the sustainability of the 57% year-over-year growth in customer equity, which drives net interest income.
- Trading Volume Trends: Monitor global trading volumes, as the company noted declines in options and futures contracts despite revenue growth.
- Legal Exposure: Track the status of the Trading Technologies patent litigation for potential future liabilities.