Interactive Brokers Group, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Unaudited consolidated results include IBG LLC, although Interactive Brokers Group, Inc. owned approximately 17.8% of IBG LLC at quarter-end; most consolidated earnings are attributable to noncontrolling interests.
Business context
Interactive Brokers is a global electronic broker offering execution, clearing, custody, securities and margin lending, and related services. It also operates a reduced market-making business after exiting most options market making. The company reported 1,310 employees and access to more than 120 exchanges and market centers.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Total net revenues | $445 million | $387 million | $972 million | $761 million |
| Income before taxes | $271 million | $204 million | $611 million | $417 million |
| Net income | $258 million | $187 million | $577 million | $382 million |
| Net income available to common stockholders | $41 million | $23 million | $87 million | $47 million |
| Diluted EPS | $0.57 | $0.32 | $1.20 | $0.67 |
| Pre-tax profit margin | 61% | 53% | 63% | 55% |
- Q2 commissions rose 16% to $185 million; interest income increased to $333 million from $206 million, while interest expense rose to $108 million from $51 million. Net interest income was $225 million based on the income statement. For the first half, statement-based net interest income was $442 million ($644 million interest income less $202 million interest expense).
- Q2 non-interest expenses declined 5% to $174 million, including general and administrative expense of $22 million, down 39%. The first-half expense total increased 5% to $361 million, mainly from execution and clearing and employee costs.
- Electronic brokerage Q2 net revenues were $443 million and pre-tax income was $283 million, versus $334 million and $198 million, respectively, a year earlier. Customer accounts increased 27% year over year to 542,000; customer equity rose 29% to $134.7 billion; total customer DARTs increased 19% to 797,000.
- Cash, cash equivalents and restricted cash totaled $10.2 billion at June 30, up $1.9 billion from year-end. First-half operating cash flow was $2.132 billion; investing outflow was $36 million and financing outflow was $119 million. Operating cash flow reflects substantial customer-balance and trading-position movements.
- Total assets were $60.3 billion and total equity $6.7 billion at June 30. Short-term borrowings were $193 million, compared with $15 million at year-end; the company reported no variable-rate debt outstanding. Aggregate excess regulatory capital was $5.1 billion, and regulated operating companies were in compliance.
Changes, outlook and key risks
- Growth was led by higher benchmark rates and larger customer credit and margin-loan balances, alongside increased customer trading and account growth. Management said the Federal Reserve had raised rates four times in the preceding 12 months.
- The options market-making wind-down continued to reshape results. The prior-year quarter included $22 million of exit costs; the first-half comparison included $23 million. Management expected approximately $40 million of annual net expenses to shift to electronic brokerage, with about 95% of related resources transferred by June 30. No specific earnings or revenue guidance was provided.
- Currency movements were a significant source of volatility: management said the GLOBAL basket’s decline reduced Q2 comprehensive earnings by $100 million. Separately, the income statement reported a $21 million Q2 loss from the currency diversification strategy. Q2 comprehensive income available to common stockholders was $28 million, versus $29 million a year earlier.
- During Q2, the company liquidated an Australian subsidiary and reclassified $32 million of accumulated translation adjustment to other income, with a related $1 million tax effect. The company also made a strategic investment in Tiger Brokers in June.
- Risks include changing trading volumes and volatility, commission competition, interest-rate and foreign-exchange movements, margin-loan/customer-default exposure, regulatory scrutiny and possible fines, and litigation. Management said pending litigation reserves were not material and expected no material effect on business or financial condition, while acknowledging possible period earnings impact. A customer class-action dismissal was on appeal, with oral argument scheduled for September 7, 2018; the Trading Technologies patent case remained stayed pending patent reviews and appeals.
- The Tax Act accounting remained provisional for certain items: the company disclosed a $62 million transition-tax obligation and a prior-year $115 million net reduction in deferred tax balances from the federal rate change. Management was continuing its analysis.
Important facts for investors to verify
- Reconcile the filing’s net-interest-income figures: the income statement implies $225 million for Q2 and $442 million for the first half, while MD&A supplemental NIM tables show $232 million and $454 million. Confirm the differing classification or calculation basis.
- Assess how much of earnings growth depends on higher rates, customer margin balances and customer activity, and whether these drivers persist.
- Review the effect of the market-making wind-down, the transfer of approximately $40 million in annual net expenses, and any future earn-out income under the Two Sigma agreement.
- Distinguish firm cash from regulatory-segregated customer funds and consider the liquidity and collateral demands of brokerage operations.
- Monitor regulatory inquiries, the customer class-action appeal, the patent litigation, and potential outcomes of the provisional Tax Act accounting.