Interactive Brokers Group, Inc. — Q2 2014 Form 10-Q
Business context and reporting period
Unaudited results for the three and six months ended June 30, 2014, compared with the same 2013 periods. Interactive Brokers is a global electronic broker and market maker operating across more than 100 exchanges and trading venues. IBG, Inc. is a holding company that owns approximately 14.1% of IBG LLC and consolidates the Group; most consolidated earnings are attributable to noncontrolling interests.
Key financial metrics
| Metric | Q2 2014 | Q2 2013 | H1 2014 | H1 2013 |
|---|---|---|---|---|
| Total net revenues | $309.3 million | $283.9 million | $664.2 million | $500.0 million |
| Income before taxes | $174.2 million | $133.9 million | $392.3 million | $216.1 million |
| Net income | $160.8 million | $120.0 million | $362.0 million | $195.3 million |
| Net income available to common stockholders | $15.2 million | $10.4 million | $34.3 million | $16.9 million |
| Diluted EPS | $0.26 | $0.21 | $0.60 | $0.35 |
| Comprehensive diluted EPS | $0.29 | $0.14 | $0.64 | $0.20 |
| Pretax margin | 56% | 47% | 59% | 43% |
Q2 revenue growth reflected trading gains and net interest income. Trading gains were $84.0 million, up 42%, while commissions and execution fees fell 10% to $124.4 million. Net interest income rose 33% to $83.0 million. Non-interest expenses declined 10% to $135.1 million, primarily on lower execution and clearing costs and compensation.
For H1, trading gains increased to $211.5 million from $78.1 million; net interest income rose 29% to $154.7 million. Commissions and execution fees grew 1% to $261.0 million, and non-interest expenses decreased 4% to $271.9 million.
- Segments: Electronic brokerage pretax income was $131.4 million in Q2 and $265.7 million in H1, versus $123.3 million and $234.3 million. Market making pretax income was $46.5 million in Q2 and $134.6 million in H1, versus $7.6 million and a $21.4 million loss.
- FX effects: Management attributed $15.2 million of Q2 trading gains to currency translation, compared with a $42.9 million loss a year earlier. H1 translation contributed $36.1 million versus a $103.7 million loss. Excluding translation, market-making results were weaker in Q2 year over year and trading gains were approximately 3% lower for H1.
- Operating indicators: Customer accounts increased 17% year over year to 262,000 and customer equity increased 44% to $53.9 billion. Q2 total customer DARTs rose 5%, although total trading volume declined 4%; brokerage commissions per cleared DART fell 11%.
Balance sheet, cash flow, debt and liquidity
- At June 30, 2014, total assets were $40.16 billion, total liabilities $34.88 billion, and total equity $5.28 billion. Cash and cash equivalents were $999.6 million, down from $1.21 billion at year-end 2013.
- Customer receivables, principally margin loans, were $15.33 billion, compared with $13.60 billion at year-end. Customer payables were $28.41 billion. The filing describes 98.9% of assets as liquid, mainly customer cash, collateralized receivables and marketable securities; much of this balance is customer-related or restricted, not unrestricted corporate cash.
- H1 operating cash flow was negative $203.8 million, versus negative $172.3 million. Investing cash flow was positive $215.5 million and financing cash flow negative $239.9 million. Cash decreased $213.6 million. Operating cash flow reflects substantial movements in segregated funds, customer receivables and payables, and trading positions.
- Short-term borrowings were $15.2 million. No borrowings were outstanding under the $100 million secured revolving facility at June 30; IBG LLC terminated the facility on August 8, 2014. The company reported $3.23 billion of excess regulatory capital, with regulated subsidiaries in compliance.
- H1 dividends paid to stockholders were $11.2 million; the company declared a further $0.10-per-share dividend in July, payable September 12, 2014. H1 distributions to noncontrolling interests were $203.5 million.
Outlook, risks and unusual items
- No specific earnings or revenue guidance is provided. Management expects 2014 gross capital expenditures to exceed 2013 levels as it expands network, data-center and backup facilities; it expects to fund these from operating cash and cash on hand.
- Management cited subdued markets, the quarter’s lowest average volatility since Q1 2007, lighter customer activity and lower actual-to-implied volatility as headwinds, particularly for market making. It also noted continuing customer growth and increasing customer balances. Results remain sensitive to trading volumes, volatility, interest-rate spreads and foreign-exchange movements.
- The company maintains equity in a 16-currency basket called GLOBAL; approximately 62% of equity was denominated in currencies other than U.S. dollars. A 0.05% decline in benchmark rates was estimated to reduce annualized net interest income by approximately $13.1 million. Margin lending, market dislocations, customer defaults, and limits of VaR models are material risks.
- A small number of customers’ concentrated positions in four Singapore-listed stocks collapsed in October 2013, creating customer deficits. The company reported cumulative losses of approximately $79.2 million through June 30, 2014; maximum aggregate loss was estimated at approximately $84 million if prices fell to zero and no debts were collected. Collection efforts continue.
- Pending matters include a patent-infringement action brought by Trading Technologies against IBG LLC and Interactive Brokers LLC; the company says it intends to defend the case, but the outcome is uncertain. Litigation reserves were not material. Clearing-house guarantees and customer settlement obligations may expose the company to losses not recorded as liabilities; management considers payment under member guarantees remote.
Important facts for investors to verify
- How much reported earnings growth depended on currency translation, and whether market-making performance excluding those effects is sustainable.
- Whether interest income growth can continue amid very low benchmark rates, and how customer balances, margin lending and securities-lending fees evolve.
- The status and recoverability of the Singapore customer deficits, including actual collections and any further recognized losses.
- The availability of liquidity and regulatory capital for corporate use, distinguishing customer or segregated assets from unrestricted funds; also confirm implications of terminating the revolving facility.
- Developments in the Trading Technologies litigation, regulatory inquiries and other contingencies, and any material change in reserves or exposure.