Business context and reporting period
Interactive Brokers Group, Inc. filed this unaudited Form 10-Q for the three months ended March 31, 2016. The company operates an automated global electronic brokerage business and a market-making business, supported by corporate activities. IBG, Inc. owned approximately 15.7% of IBG LLC; the remaining 84.3% was held by noncontrolling interests.
Financial results and key metrics
Amounts are in U.S. dollars unless stated otherwise.
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Total revenues | $507 million | $187 million |
| Net revenues | $489 million | $172 million |
| Income (loss) before taxes | $337 million | $(111) million |
| Net income (loss) | $310 million | $(109) million |
| Net income (loss) available to common stockholders | $33 million | $(13) million |
| Diluted EPS | $0.51 | $(0.22) |
| Operating cash flow | $122 million | $(220) million |
- Pre-tax margin was 69%, versus negative 65% a year earlier. Management also reported adjusted results excluding currency-strategy effects, U.S. government securities mark-to-market gains, and the prior-year Swiss franc losses: net revenues of $368 million, up 12%; pre-tax income of $216 million, up 17%; and a 59% pre-tax margin.
- Revenue drivers: commissions and execution fees were $166 million, up 11%; interest income was $145 million, up 34%; interest expense was $18 million, leaving net interest income of $127 million, up 37%. Trading gains were $52 million, down 16%.
- Other income was $144 million versus a $132 million loss, including an $84 million gain from the currency diversification strategy compared with a $187 million loss in Q1 2015.
- Non-interest expenses were $152 million, down 46%, primarily because the prior-year quarter included $139 million of Swiss franc-related customer bad debt expense. Execution and clearing costs rose 13% to $62 million; employee compensation and benefits rose 2% to $58 million.
- At March 31, total assets were $50.186 billion, total liabilities $44.523 billion, and total equity $5.663 billion, including $4.766 billion of noncontrolling interests. Cash and cash equivalents were $1.747 billion. Short-term borrowings were $4 million; securities loaned were $2.401 billion. Customer payables of $38.390 billion were a major operating liability.
- Management said approximately 99% of assets were liquid. Aggregate excess regulatory capital was $3.772 billion, and all regulated operating companies complied with their requirements. The filing does not provide a conventional current ratio or a single corporate debt measure that captures the brokerage financing balances.
- Cash increased $146 million during the quarter, to $1.747 billion. Investing activities provided $23 million; financing activities used $38 million. The company paid a $0.10-per-share dividend in March and declared another $0.10-per-share dividend payable in June 2016.
Material changes versus the prior comparable period
- Reported results swung from a loss to substantial profit, but the comparison is heavily affected by two unusual items: the prior-year $139 million customer bad debt charge tied to the Swiss franc move and the reversal in currency-strategy results.
- Electronic brokerage net revenues grew 20% to $347 million; pre-tax income rose to $235 million from $51 million. Total customer accounts increased 17% to 345,000, customer equity rose 15% to $70.1 billion, and total customer DARTs increased 15% to 748,000.
- Market-making net revenues declined 12% to $59 million and pre-tax income fell 26% to $20 million. Management attributed weaker trading gains to divergent price behavior among many individual stocks, despite higher market volatility.
- Customer margin loans were down 13% year over year, while higher average customer cash balances supported brokerage net interest income. The filing reports customer receivables of $15.222 billion at quarter-end, down from $17.050 billion at December 31, 2015.
Outlook, management commentary, risks and unusual items
- No specific earnings or revenue guidance was provided. Management said operating cash flows, available cash and borrowing capacity should meet liquidity needs for more than the next 12 months. It expects to fund technology-related capital expenditures with operating cash and cash on hand, and intends to consider acquisitions opportunistically; no material acquisition agreement was in place.
- The company’s currency diversification strategy holds equity exposure across a 16-currency basket. Approximately 58% of equity was denominated in currencies other than the U.S. dollar at quarter-end. The strategy increased comprehensive earnings by $123 million in Q1 2016, compared with a $197 million decrease in Q1 2015.
- The January 2015 Swiss franc event produced estimated cumulative losses of approximately $119 million, net of hedging and collection efforts. The company continues to pursue customer debt collection; the ultimate recovery and financial effect remain uncertain.
- Key risks include market, foreign-exchange and interest-rate movements; market-making pricing-model and volatility risks; customer margin-credit and liquidation exposure; counterparty and clearing risks; and competitive and regulatory pressures. Margin-credit exposure is described as potentially unlimited and not quantifiable. Futures and certain other contracts may create off-balance-sheet loss exposure.
- Pending matters include Trading Technologies patent litigation, for which the company is defending itself and has sought a stay while patent reviews proceed, and a purported customer class action alleging flaws in the system for liquidating margin-deficient accounts. Management considers the claims without merit but says litigation outcomes are uncertain; litigation reserves were not material. Clearing-house guarantees are also disclosed, with potential obligations not quantifiable, though management considers payment remote.
- Management 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 the reported earnings improvement reflects recurring brokerage performance versus currency-strategy gains, securities mark-to-market effects, and the absence of the prior-year Swiss franc charge.
- Recoveries on the approximately $119 million Swiss franc-related customer losses and any resulting change in the estimate of cumulative losses.
- Whether customer account, equity and trading-volume growth continues, and how lower commissions per trade and margin borrowing affect profitability.
- Market-making earnings sensitivity to stock-price dispersion, actual versus implied volatility, and interest rates.
- Developments in the Trading Technologies matter, the customer class action, regulatory inquiries, and contingent clearing-house obligations.
- Liquidity and capital available to the publicly traded parent, considering regulatory restrictions, customer-related balances, and the fact that IBG, Inc. owns only about 15.7% of IBG LLC.