Interactive Brokers Group, Inc. — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011; unaudited. IBG, Inc. is a holding company that owned approximately 11.5% of IBG LLC at quarter-end and consolidates the Group’s results, with the remaining ownership recorded as non-controlling interests. The Group operates electronic brokerage and market-making businesses across more than 90 exchanges and trading venues.
Key financial results
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net revenues | $385.5 million | $299.1 million | $1,050.4 million | $735.8 million |
| Income before taxes | $217.8 million | $161.9 million | $588.9 million | $298.9 million |
| Net income attributable to common shareholders | $22.5 million | $11.0 million | $48.3 million | $18.8 million |
| Diluted EPS | $0.50 | $0.26 | $1.10 | $0.44 |
| Pre-tax margin | 56% | 54% | 56% | 41% |
- Q3 net revenues rose 29% year over year. Trading gains increased 15%, commissions and execution fees 45%, and net interest income 91%. Management attributed growth to higher trading activity, wider options bid-offer spreads, favorable actual-to-implied volatility, and larger customer cash and margin balances.
- For the first nine months, net revenues increased 43% and pre-tax income nearly doubled. Trading gains rose 57%, net interest income 106%, and commissions and execution fees 20%. Market-making pre-tax income increased to $322.4 million from $113.3 million; electronic-brokerage pre-tax income rose to $284.6 million from $200.1 million.
- Q3 consolidated net income was $202.5 million, of which $180.0 million was attributable to non-controlling interests. The common-shareholder results therefore reflect the holding company’s minority economic interest in IBG LLC, not the Group’s full consolidated earnings.
- Q3 comprehensive diluted EPS, including currency translation effects, was $0.36 versus $0.52 a year earlier; nine-month comprehensive diluted EPS was $1.07 versus $0.58. A foreign-tax-credit benefit recognized in Q3 added an estimated $0.12 to diluted EPS.
Cash flow, balance sheet, and capital
- Nine-month operating cash flow was $674.4 million, down from $773.3 million in 2010. Investing activities used $105.9 million and financing activities used $340.4 million. Cash and cash equivalents increased $201.5 million to $1.556 billion.
- At September 30, total assets were $33.15 billion and total equity $4.63 billion. Cash and securities segregated for regulatory purposes were $10.30 billion; customer receivables were $6.82 billion.
- Senior notes payable were $125.9 million, down from $194.6 million at year-end 2010. Short-term borrowings were $151.8 million. The $100 million revolving credit facility had no borrowings outstanding, and the company reported compliance with its covenants. Senior notes had 3% or 5% interest rates and 15- or 18-month maturities.
- Management stated that approximately 98.7% of assets were liquid and that cash, operating cash flows, and available borrowing capacity should meet liquidity needs for more than 12 months. Aggregate excess regulatory capital was $2.33 billion; all operating companies were reported in compliance with their regulatory capital requirements.
Material changes, outlook, and risks
- Brokerage activity strengthened: Q3 customer accounts increased 22% year over year to about 184,000; customer equity rose 23% to $23.3 billion; total customer DARTs increased 39% to about 495,000. Market volatility and trading volumes were elevated amid uncertainty over the U.S. debt ceiling and European sovereign debt.
- Currency movements were material. Management estimated that the stronger U.S. dollar reduced Q3 comprehensive income by $108.7 million and market-making earnings by $22.7 million. The currency strategy targets equity exposure to a basket of currencies; on October 3, the company announced that the basket would expand from six to 16 currencies.
- No formal earnings guidance is provided. Management anticipated capital expenditures at a pace similar to the first nine months, including data-center and backup-facility expansion, and expected future technology-infrastructure spending to rise. It said spending could be adjusted to performance.
- On October 31, 2011, MF Global filed for bankruptcy. The company reported that its $16.7 million MF Global investment at quarter-end, together with subsequent investments, was written down to zero, recognizing a $28.8 million unrealized loss after quarter-end.
- Risks include market volatility and pricing-model performance, foreign-exchange and interest-rate movements, competition and pressure on market-making spreads, regulatory changes, and customer margin and short-sale exposures. Margin credit outstanding was $6.82 billion; management described potential losses in stressed or illiquid conditions as not quantifiable. Futures contracts also create off-balance-sheet exposure.
- Trading Technologies alleges infringement of 12 U.S. patents and seeks unspecified damages and injunctive relief; the case was at the pleadings stage. Management said it intended to defend the matter and did not expect pending litigation to materially adversely affect financial condition, though it could affect results in a period. Litigation reserves were not material. The filing also notes that regulatory inquiries may result in fines or sanctions.
- The company declared a further $0.10-per-share dividend in October, payable December 14, 2011. It reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of consolidated earnings and equity accrues to public shareholders given IBG, Inc.’s approximately 11.5% ownership of IBG LLC and the substantial non-controlling interest.
- The recurring earnings contribution versus market-dependent trading gains, currency translation, and the one-time estimated $0.12-per-share tax benefit.
- The final effect of the MF Global bankruptcy write-down and any related exposures not quantified in this filing.
- Liquidity and collateral availability after accounting for customer-protection segregation, pledged assets, and rapidly changing trading balances.
- Developments in the patent litigation, regulatory inquiries, and customer margin exposures, including outcomes that could differ materially from management’s current expectations.