Interactive Brokers Group, Inc. 10-Q Summary
Business Context and Reporting Period
This report covers the quarterly period ended September 30, 2013. Interactive Brokers Group, Inc. (IBG, Inc.) is a holding company owning approximately 12.4% of IBG LLC, an automated global electronic broker and market maker. The company operates two primary segments: Electronic Brokerage (execution and clearing services) and Market Making (providing liquidity on global exchanges). As of September 30, 2013, the company employed 878 people worldwide.
Key Financial Metrics
| Metric (in millions) | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Total Net Revenues | $326.3 | $318.6 | $826.3 | $883.4 |
| Income Before Taxes | $196.4 | $172.6 | $412.5 | $430.8 |
| Net Income (Total) | $186.0 | $157.9 | $381.3 | $396.4 |
| Net Income Attributable to Common Stockholders | $16.5 | $12.5 | $33.4 | $31.6 |
| Diluted EPS (Common) | $0.32 | $0.26 | $0.67 | $0.70 |
| Comprehensive Income EPS (Common) | $0.39 | $0.30 | $0.59 | $0.71 |
| Total Assets | $36,277.0 | $33,199.6 | - | - |
| Cash and Cash Equivalents | $1,548.5 | $1,614.6 | - | - |
| Short-term Borrowings | $2.6 | $110.4 | - | - |
| Customer Equity | $41.4 billion | $31.5 billion | - | - |
Material Changes vs. Prior Period
- Revenue Growth: Q3 2013 net revenues increased 2% year-over-year, driven by a 20% increase in commissions and execution fees and higher net interest income. This was partially offset by an 18% decrease in trading gains.
- Segment Performance:
- Electronic Brokerage: Income before taxes increased 34% to $108.4 million, fueled by a 21% increase in Daily Average Revenue Trades (DARTs) and a 31% increase in customer equity.
- Market Making: Income before taxes decreased 3% to $87.5 million. Trading gains fell due to a lackluster environment with low volatility (VIX down 12%) and a lower ratio of actual to implied volatility.
- Currency Impact: The weakening of the U.S. dollar against the company's "GLOBAL" currency basket resulted in a $46.2 million currency translation gain in Q3 2013, boosting comprehensive earnings. Conversely, the nine-month period saw a $57.3 million currency translation loss due to the strengthening dollar earlier in the year.
- Expense Reduction: Non-interest expenses decreased 11% in Q3 2013, primarily due to lower execution/clearing fees and a 23% drop in employee compensation (excluding a one-time stock grant in 2012).
Outlook, Risks, and Unusual Items
- Subsequent Event (Customer Losses): In early October 2013, a small number of customers holding large positions in four Singapore Exchange securities suffered losses exceeding 90% of their value. This resulted in aggregate account deficits of approximately $68 million, with a maximum potential loss of $84 million if securities fall to zero and debts are uncollected. The company is pursuing collection efforts.
- Market Volatility: The company notes that profitability in the market making segment is highly correlated with market volatility. Low volatility environments continue to weigh on trading gains.
- Internal Control Weakness: Management disclosed a material weakness in internal control over financial reporting related to the review and interpretation of complex accounting issues. A remediation plan is underway, but the weakness persisted as of September 30, 2013.
- Liquidity: The company maintains a highly liquid balance sheet with $2.91 billion in excess regulatory capital. No borrowings were outstanding under the $100 million senior secured revolving credit facility.
Investor Verification Checklist
- Customer Default Exposure: Verify the status of the $68 million customer deficit related to the Singapore Exchange securities and the progress of debt collection efforts.
- Volatility Sensitivity: Monitor the VIX and the ratio of actual to implied volatility, as these are primary drivers of the Market Making segment's profitability.
- Currency Hedging: Review the composition and performance of the "GLOBAL" currency basket, as currency translation significantly impacts comprehensive income.
- Internal Controls: Track the progress of the remediation plan for the material weakness in internal controls over financial reporting.
- Customer Growth Metrics: Confirm the sustainability of the 13% growth in customer accounts and 31% growth in customer equity.