Business context and reporting period
Interactive Brokers Group, Inc. filed this Form 10-K for the year ended December 31, 2015. The filing reports full-year results, with unaudited fourth-quarter data presented separately. The company operates a global electronic brokerage and market-making business; IBG, Inc. consolidates IBG LLC, although it owned approximately 15.7% of IBG LLC at year-end, with the remaining 84.3% held by IBG Holdings LLC.
Financial performance and position
Amounts below are in millions of dollars, except per-share data and where noted.
| Metric | 2015 | 2014 |
|---|---|---|
| Total revenues | $1,256 | $1,115 |
| Net revenues, after interest expense | $1,189 | $1,043 |
| Income before income taxes | $458 | $506 |
| Net income | $415 | $459 |
| Net income available to common stockholders | $49 | $45 |
| Diluted EPS | $0.78 | $0.77 |
| Pre-tax profit margin | 39% | 49% |
| Net cash provided by operating activities | $725 | $417 |
| Cash and cash equivalents at year-end | $1,601 | $1,269 |
| Total assets / total liabilities | $48,734 / $43,390 | $43,385 / $38,200 |
Operating cash flow is affected substantially by changes in customer balances and trading positions; it should not be read as a simple measure of recurring free cash flow. Year-end total assets included $23.1 billion of cash, cash equivalents and short-term investments, much of it held for customers or subject to regulatory requirements. Management reported that 99.2% of assets were liquid. Total equity was $5.3 billion, including $4.5 billion of noncontrolling interests.
Electronic brokerage net revenues were $1,097 million, up 15%, with pre-tax income of $536 million and a 49% margin. Market-making net revenues were $298 million, up 5%, with pre-tax income of $130 million and a 44% margin. Customer accounts grew 18% to 331,000; customer equity rose 19% to $67.4 billion at year-end. Total daily average revenue trades increased 14% to 647,000.
Fourth-quarter 2015 net revenues were $271 million, pre-tax income was $127 million, net income available to common stockholders was $17 million, and diluted EPS was $0.25. In fourth-quarter 2014, the comparable figures were $208 million, $74 million, $8 million, and $0.12, respectively.
Material changes versus the prior comparable period
- Net revenues increased 14%, supported by commissions and execution fees (+12% to $617 million) and net interest income (+24% to $425 million).
- Pre-tax income fell 9% and the pre-tax margin declined to 39% from 49%, primarily because customer bad debt expense rose to $146 million from $3 million. This included $137 million associated with the Swiss franc event and $7 million associated with late-August market volatility.
- Electronic brokerage customer trade activity strengthened: total accounts grew 18%, DARTs rose 14%, and customer equity increased 19%. Average commission per cleared-customer DART decreased 2% to $4.07.
- Market-making pre-tax income rose 14%, reflecting higher volatility and trading activity; its relative contribution to the business has declined over time amid competition and pressure on spreads.
- Other income remained a loss, at $122 million versus $111 million, largely reflecting currency-diversification losses. The U.S.-dollar value of the GLOBAL currency basket fell about 5%; management said the strategy reduced comprehensive earnings by $269 million in 2015.
- Operating cash flow increased to $725 million from $417 million. Investing activities used $35 million and financing activities used $295 million; cash and cash equivalents rose by $332 million.
Outlook, risks, contingencies and unusual items
- The filing provides no quantified earnings or revenue guidance. Management describes brokerage as dependent on customer activity, account growth, assets and interest rates, and market-making results as inherently unpredictable and sensitive to trading volumes, competition and volatility.
- Management expected to continue quarterly dividends of $0.10 per share for the foreseeable future; the company declared a $0.10 dividend in January 2016. No variable-rate debt was outstanding at year-end, and short-term borrowings were zero. The $100 million revolving credit facility had been terminated in 2014.
- Regulated operating companies reported $3.4 billion of excess regulatory capital and compliance with their capital requirements. The company stated that operating cash flows, available cash and borrowings should cover liquidity needs for more than twelve months. Regulatory capital is held across regulated subsidiaries and is not equivalent to unrestricted parent-company cash.
- The Swiss franc shock on January 15, 2015 produced estimated losses of $119 million net of hedging and collection efforts. The company continued pursuing customer debt collection, so the ultimate impact remained uncertain.
- Approximately 57% of equity was denominated in currencies other than the U.S. dollar. A 0.25% decrease in benchmark rates was estimated to reduce annualized net interest income by about $24 million; rate increases could affect income and the market value of fixed-rate securities.
- Risks include trading-volume and spread pressure, market-making losses, customer and clearing-counterparty defaults, margin-credit exposure, foreign exchange movements, regulatory costs, litigation, and technology, cyber-security and system-disruption risks. The company reported that its disaster-recovery coverage was limited for non-U.S. operations and that it did not have fully redundant systems.
- Pending matters included patent litigation brought by Trading Technologies and a December 2015 purported class action alleging flaws in margin-liquidation systems. The company disputed the allegations; litigation reserves were not material. It also reported numerous regulatory inquiries and anticipated ongoing regulatory fines, without identifying a specific inquiry expected to have a material effect.
- The May 2015 Covestor acquisition expanded the online investing marketplace. The company also disclosed ongoing share issuances for redemptions of Holdings interests and a tax receivable agreement under which Holdings receives 85% of qualifying realized tax savings; the recorded payable was $291 million at year-end.
- Governance and ownership are concentrated: Holdings held 84.3% of voting power, and founder Thomas Peterffy and affiliates controlled Holdings. Future share issuances to acquire Holdings interests could be substantial and may dilute public shareholders.
Most important facts for investors to verify
- Reconcile the $119 million estimated Swiss franc loss, the $137 million bad-debt charge, subsequent recoveries and any remaining exposure.
- Assess whether brokerage growth and net interest income can offset lower commissions per trade, competition and interest-rate sensitivity.
- Review currency-diversification exposure and its reported effects on other income, other comprehensive income and comprehensive earnings.
- Distinguish customer and regulatory assets from cash available to the parent, and confirm subsidiary capital and liquidity constraints.
- Track outcomes of the margin-liquidation class action, patent case and regulatory inquiries, including any fines or control changes.
- Evaluate the effects of concentrated voting control, planned redemptions and share issuance, and the tax receivable agreement’s future cash payments.
The filing’s financial statements received an unqualified audit opinion, and the auditor reported effective internal control over financial reporting as of December 31, 2015.