Interactive Brokers Group, Inc. — 2011 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2011. The filing also provides unaudited fourth-quarter results. Unless noted, financial amounts below are in U.S. dollars; annual consolidated results include IBG LLC, of which the public company owned approximately 11.5% at year-end.
Business context
Interactive Brokers is a global electronic broker and market maker operating across more than 100 exchanges and trading venues. Its two principal businesses are electronic brokerage and market making. Brokerage provides trade execution and clearing services; market making supplies liquidity in exchange-listed products using the company’s own capital and proprietary trading and risk systems.
Key financial results
| Metric | FY 2011 | FY 2010 |
|---|---|---|
| Total revenues | $1,444.6 million | $988.3 million |
| Net revenues | $1,358.3 million | $922.1 million |
| Income before income taxes | $741.1 million | $337.4 million |
| Net income attributable to public-company common stockholders | $61.9 million | $(9.6) million |
| Diluted EPS | $1.39 | $(0.22) |
| Operating cash flow | $1,085.9 million | $1,693.4 million |
- Net revenues increased 47%; pre-tax income more than doubled. The reported pre-tax margin was approximately 55% of net revenues, versus 37% in 2010. Non-interest expenses rose 6% to $617.2 million.
- Electronic brokerage net revenues were $691.5 million, up 26%, and pre-tax income was $370.3 million, up 35%; segment pre-tax margin increased to 54% from 50%.
- Market-making net revenues were $698.5 million, up 84%, and pre-tax income was $413.2 million, compared with $88.2 million; segment pre-tax margin rose to 59% from 23%.
- Trading gains were $665.2 million, up 80%; commissions and execution fees were $456.2 million, up 18%; net interest income was $193.9 million, up 82%. Interest expense was $86.3 million.
- Customer accounts grew 20% to approximately 189,000; year-end customer equity increased 14% to $25.1 billion. Annual DARTs for cleared and execution-only customers rose 17% to approximately 444,000.
- Fourth-quarter unaudited results: net revenues of $307.9 million, pre-tax income of $152.2 million, and net income of $13.6 million. Diluted EPS was $0.30.
- At year-end, cash and cash equivalents were $1.695 billion; cash, cash equivalents and short-term investments totaled $12.141 billion, including customer and regulatory-segregated balances. Total assets were $30.404 billion, of which management classified $29.97 billion as liquid.
- Year-end debt was approximately $107.9 million: $101.4 million of senior notes and $6.5 million of short-term borrowings. The $100 million revolving facility had no balance outstanding. Excess regulatory capital was approximately $2.623 billion.
- Cash from operations was $1.086 billion; investing activities used $137.0 million and financing activities used $550.7 million. Cash and cash equivalents increased $341.3 million to $1.695 billion.
Changes versus the prior year and unusual items
- Results benefited from higher market volatility and trading volumes, wider options bid/offer spreads, and customer growth. U.S. exchange-traded options bid/offer spreads were reported approximately 33% wider than in 2010.
- Market-making trading gains included a substantial currency-translation swing: a $11.2 million gain in 2011 versus a $160.9 million loss in 2010. Management estimated currency translation effects from the GLOBAL currency basket improved market-making trading gains by $172.1 million year over year.
- 2010 reported EPS was materially affected by taxes triggered by a special dividend funded by a Swiss subsidiary. The company cited a $0.71-per-share impact; its non-GAAP reconciliation reported adjusted diluted EPS of $0.49. Comparisons with 2011 reported EPS should account for this unusual item and the different presentation of currency translation.
- The company recognized a $39.0 million loss on its MF Global investment after MF Global filed for bankruptcy in October 2011 and the investment was written down to zero.
- Operating cash flow was lower than in 2010, when it was $1.693 billion; management notes that cash flows vary with trading positions and customer cash and margin balances.
Outlook, risks and contingencies
- No quantified earnings or revenue guidance is provided. Management said 2012 gross capital expenditures were expected to be at a similar level to 2011, including data-center and backup-facility expansion.
- In January 2012, the company decided to discontinue its senior-notes program and intended to redeem all notes outstanding at December 31, 2011 by June 2012. It stated that available liquidity and operating cash flows should meet needs for more than 12 months.
- Management intended to continue quarterly dividends of $0.10 per share for the foreseeable future, subject to board discretion and debt-agreement restrictions.
- Key risks include dependence on trading activity, volatility and spreads; market-making losses and model or system failures; competition, including high-frequency trading firms; customer and clearing-counterparty credit risk; regulatory change and compliance costs; foreign-exchange exposure; and limited system redundancy, particularly outside the U.S.
- The company reported a pending patent-infringement lawsuit brought by Trading Technologies alleging infringement of 12 U.S. patents; damages were unspecified and the case was at an early stage. It also reported numerous regulatory inquiries, but no formal enforcement actions pending against its regulated entities other than matters specifically disclosed. Management expected regulatory fines to arise over time but could not estimate amounts or timing. Litigation reserves were not material.
- The filing disclosed an immaterial restatement of prior-period stock-compensation accounting that accelerated recognition of some expense. It also reported unqualified audit opinions and effective internal control over financial reporting.
- Founder and CEO Thomas Peterffy and affiliates controlled approximately 88.5% of voting power through the Class B structure, a governance and control consideration for public shareholders.
Most important facts for investors to verify
- How much of the 2011 market-making improvement reflects sustainable trading conditions versus the favorable currency-translation swing and wider spreads.
- How much of reported liquidity is available to the parent or for general corporate purposes, versus customer-segregated, regulated, pledged or locally held funds.
- Whether the planned redemption of senior notes by June 2012 occurred, and the resulting debt and liquidity position.
- The ongoing effects of the MF Global write-down, patent litigation, regulatory inquiries and any subsequent fines or settlements.
- The impact of the 2011 stock issuance, future IBG LLC redemptions and potential dilution; and the sustainability of the stated dividend policy.
- The full-year and fourth-quarter figures in the audited financial statements and the unaudited quarterly-results table, particularly given the disclosed prior-period restatement and 2010 special-dividend tax effects.