Interactive Brokers Group, Inc. - Q2 2010 10-Q Summary
Business Context and Reporting Period
This report covers the quarterly period ended June 30, 2010. Interactive Brokers Group, Inc. (IBG) is a holding company owning approximately 10.8% of IBG LLC, an automated global electronic market maker and broker. The company operates two primary segments: Market Making (via Timber Hill subsidiaries) and Electronic Brokerage (via Interactive Brokers subsidiaries). As of June 30, 2010, the company employed 850 people worldwide.
Key Financial Metrics
| Metric | Q2 2010 (3 Months) | Q2 2009 (3 Months) | YTD 2010 (6 Months) | YTD 2009 (6 Months) |
|---|---|---|---|---|
| Total Net Revenues | $226.1 million | $332.1 million | $436.7 million | $628.4 million |
| Income Before Taxes | $72.1 million | $192.2 million | $137.0 million | $359.1 million |
| Net Income | $64.8 million | $166.9 million | $124.5 million | $322.0 million |
| Net Income Available to Common Stockholders | $3.8 million | $12.8 million | $7.7 million | $25.4 million |
| Diluted EPS | $0.09 | $0.31 | $0.18 | $0.61 |
| Cash and Cash Equivalents | $1.11 billion | $863.8 million (End of Q2 2009) | $1.11 billion | $863.8 million |
| Total Assets | $27.48 billion | $26.61 billion (Dec 31, 2009) | $27.48 billion | $26.61 billion |
| Senior Notes Payable | $230.9 million | $205.8 million (Dec 31, 2009) | $230.9 million | $205.8 million |
Material Changes vs. Prior Period
- Revenue Decline: Total net revenues decreased 32% in Q2 2010 compared to Q2 2009. This was primarily driven by a 65% drop in trading gains due to currency translation losses (strengthening U.S. dollar) and tighter bid/offer spreads.
- Segment Performance:
- Market Making: Income before taxes plummeted 97% year-over-year to $3.9 million. Pre-tax margins collapsed from 65% to 5% due to currency headwinds and market conditions.
- Electronic Brokerage: Income before taxes increased 17% to $72.3 million. Growth was driven by a 22% increase in Daily Average Revenue Trades (DARTs) and a 43% increase in customer equity to $16.4 billion.
- Interest Income: Net interest income surged 117% in Q2 2010, driven by higher customer cash balances and fully-secured margin borrowings.
- Expenses: Non-interest expenses increased 10% to $154.0 million, largely due to higher execution/clearing fees and employee compensation.
Outlook, Risks, and Management Commentary
- Currency Impact: Management highlighted a significant negative impact from foreign currency fluctuations. The strengthening U.S. dollar resulted in an estimated $72.0 million negative effect on market making earnings for the quarter.
- Market Conditions: The "flash crash" on May 6, 2010, and European debt concerns increased volatility, which generally benefits market makers but also led to increased bad debt expenses ($3.9 million increase in Q2).
- Liquidity: The company maintains a highly liquid balance sheet with $3.30 billion in aggregate excess regulatory capital. A new $100 million senior secured revolving credit facility was established in May 2010, with no borrowings outstanding as of June 30.
- Regulatory Environment: The company noted the passage of the Dodd-Frank Act and potential regulatory changes regarding derivatives and fee caps, viewing them as generally positive for market transparency.
Investor Verification Checklist
- Currency Hedging Strategy: Verify the effectiveness of the "GLOBAL" currency basket strategy in mitigating future translation losses given the volatility of the Euro and other major currencies.
- Market Making Margins: Monitor the sustainability of the 5% pre-tax margin in the market making segment and the impact of high-frequency trading competition on bid/offer spreads.
- Customer Growth Metrics: Confirm the continued growth in customer accounts (up 20% YoY) and customer equity (up 43% YoY) as the primary driver for the brokerage segment's stability.
- Bad Debt Exposure: Review the allowance for doubtful accounts in light of the increased bad debt expense attributed to the May 6 market volatility.
- Non-Controlling Interests: Note that the majority of net income ($60.9 million in Q2) is attributable to non-controlling interests (IBG Holdings LLC), leaving a small portion for common stockholders.