Interactive Brokers Group, Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; the filing also reports unaudited quarterly results, including fourth-quarter data. Unless stated otherwise, financial amounts below are in U.S. dollars.
Business context
Interactive Brokers is a global electronic broker and, on a substantially reduced basis, a market maker. Electronic brokerage generated 97% of combined segment net revenues and 98% of combined segment pre-tax income in 2019. The company served approximately 690,000 customer accounts, with access to more than 135 exchanges and market centers in 33 countries. IBG, Inc. is a holding company and owned approximately 18.5% of IBG LLC at year-end; Holdings owned the remaining 81.5%.
Financial performance and liquidity
| Metric | 2019 | 2018 | Change / context |
|---|---|---|---|
| Total revenue | $2.580 billion | $2.366 billion | Up 9% |
| Interest expense | $643 million | $463 million | Up 39% |
| Net revenues | $1.937 billion | $1.903 billion | Up 2% |
| Income before income taxes | $1.157 billion | $1.196 billion | Down 3%; pre-tax margin 60% vs. 63% |
| Net income | $1.089 billion | $1.125 billion | Consolidated amount, including noncontrolling interests |
| Net income available to common stockholders | $161 million | $169 million | Diluted EPS $2.10 vs. $2.28 |
| Net interest income | $1.083 billion | $929 million | Up 17%; net interest margin was 1.70% vs. 1.62% |
| Operating cash flow | $2.666 billion | $2.356 billion | Cash, cash equivalents and restricted cash rose to $12.282 billion |
| Total assets | $71.676 billion | $60.547 billion | 99.2% of 2019 assets were classified as liquid |
| Total equity | $7.940 billion | $7.156 billion | Includes $6.488 billion of noncontrolling interests |
Commissions fell 9% to $706 million as brokerage options, futures and stock volumes declined. Interest income rose to $1.726 billion, while interest expense also increased; net interest income benefited from higher average customer credit balances and benchmark rates. Non-interest expenses increased 10% to $780 million, chiefly reflecting the $42 million customer margin-loss charge and higher compensation, general and administrative, and occupancy costs.
Cash flow from investing activities was negative $89 million, including $74 million of capital expenditures; financing activities used $419 million, including $357 million of distributions to noncontrolling interests and $31 million of common dividends. Short-term borrowings were $16 million at year-end. The company reported no variable-rate debt outstanding and $6.363 billion of excess regulatory capital; all regulated operating subsidiaries were in compliance with requirements. Customer payables, securities-lending balances and repurchase agreements are substantial balance-sheet funding obligations and should not be conflated with conventional corporate debt.
Material changes versus prior year
- Customer accounts increased 15% to 690,000 and customer equity increased 36% to $174.1 billion, while total customer DARTs declined 3% for the year. Fourth-quarter total customer DARTs were down 16% year over year.
- Lower volatility and trading activity reduced commissions, while higher customer credit balances and average benchmark rates lifted net interest income. The Federal Reserve cut rates three times during 2019.
- Customer bad debt expense rose from $4 million to $44 million, including approximately $42 million of losses from a small number of customers with concentrated positions in one U.S.-listed security.
- The company discontinued its Canadian market-making activities during 2019 and continued winding down market making following the prior transfer of U.S. options market making operations to Two Sigma Securities.
- Capital expenditures increased to $74 million from $36 million, mainly for headquarters renovations and relocation of the primary data center. Adoption of lease accounting standard ASC 842 resulted in recognition of $124 million in lease liabilities at year-end.
Outlook, risks and contingencies
The filing provides no quantified earnings or revenue guidance. Management said cash flows from operations, available cash and borrowing capacity should meet liquidity needs for more than the next 12 months, and expressed an intention to continue quarterly dividends of $0.10 per share for the foreseeable future, subject to board discretion. Adjusted diluted EPS, a company-defined non-GAAP measure, was $2.27 versus $2.28; management’s adjustments exclude currency-diversification effects, investment mark-to-market and unusual bad debt expense.
Key risks include sensitivity to trading volumes, volatility, interest rates and commission competition; margin-loan and clearing-counterparty losses; foreign-currency movements; regulatory and legal exposure; and reliance on proprietary technology, third-party infrastructure and systems that are not fully redundant. The company is providing information to FINRA, the SEC, CFTC and U.S. Department of Justice in inquiries focused on anti-money-laundering and Bank Secrecy Act practices; management did not expect these inquiries to materially affect results, but outcomes remain uncertain. Other pending matters include patent litigation with a district-court trial scheduled for 2020 (subject to a motion to reschedule) and a customer class action alleging flaws in margin liquidations. Litigation reserves were not material at year-end; potential losses in these matters are not clearly quantifiable in the filing.
The company’s controlling shareholder structure is also material: founder Thomas Peterffy and affiliates control approximately 81.5% of voting power through Holdings. Future share offerings associated with purchases of IBG LLC interests could increase the public share count. The company is obligated under its Tax Receivable Agreement to pay Holdings 85% of qualifying tax savings actually realized.
Important facts for investors to verify
- How much of the approximately $42 million margin-loss event can be recovered, and whether exposure approaches the disclosed maximum loss of approximately $50 million.
- Whether regulatory inquiries or pending litigation result in fines, settlements, expenses or operational changes beyond currently recorded reserves.
- Whether net interest income can remain resilient as benchmark rates and customer balances change, and whether commission and trading-volume declines persist.
- How the continuing market-making wind-down, technology and data-center spending, and system-resilience investments affect costs and operating risk.
- Future share issuances, IBG LLC ownership redemptions, Tax Receivable Agreement payments and the sustainability of the stated dividend intention.
The auditor issued an unqualified opinion on the consolidated financial statements and internal control over financial reporting as of December 31, 2019. Income taxes were identified as a critical audit matter.