Interactive Brokers Group, Inc. - 10-Q Summary (Q3 2009)
Business Context and Reporting Period
This report covers the quarterly period ended September 30, 2009. Interactive Brokers Group, Inc. (IBG) is a holding company owning approximately 10.5% of IBG LLC, an automated global electronic market maker and broker. The company operates two primary segments: Market Making (providing liquidity on over 80 exchanges) and Electronic Brokerage (execution and clearing services for institutional and individual clients). As of September 30, 2009, the company employed 794 people worldwide.
Key Financial Metrics
| Metric (in thousands) | Q3 2009 | Q3 2008 | 9M 2009 | 9M 2008 |
|---|---|---|---|---|
| Total Net Revenues | $271,492 | $497,059 | $899,931 | $1,420,993 |
| Income Before Taxes | $133,267 | $347,454 | $492,322 | $980,878 |
| Net Income | $120,099 | $315,070 | $442,131 | $886,488 |
| Net Income Available to Common Stockholders | $8,410 | $27,147 | $33,850 | $72,686 |
| Diluted EPS | $0.20 | $0.65 | $0.81 | $1.75 |
| Cash and Cash Equivalents | $859,935 | $943,497 (Dec 31, 2008) | - | - |
| Total Assets | $28,845,475 | $28,356,635 (Dec 31, 2008) | - | - |
| Senior Notes Payable | $185,123 | $143,054 (Dec 31, 2008) | - | - |
| Customer Equity | $13.4 billion | $9.4 billion | - | - |
Material Changes vs. Prior Period
- Revenue Decline: Total net revenues decreased 45% in Q3 2009 compared to Q3 2008, and 37% for the nine-month period. This was driven primarily by a 57% drop in trading gains (Q3) and a 51% drop in net interest income due to the low interest rate environment.
- Trading Gains: Trading gains fell significantly due to tighter bid/offer spreads in the options market and an unusually low ratio of actual to implied volatility (approx. 67% in Q3).
- Brokerage Growth: Despite lower trading volumes, the Electronic Brokerage segment saw customer equity grow 43% year-over-year to $13.4 billion, and customer accounts increased by 20% to approximately 128,000.
- Expense Management: Non-interest expenses decreased 7% in Q3 and 7% for the nine months, largely due to lower execution and clearing costs, partially offset by increased employee compensation.
- Profitability: Pre-tax margins compressed to 49% in Q3 2009 from 70% in Q3 2008. Market making pre-tax margins dropped to 50% from 79%, while Electronic Brokerage margins improved slightly to 51% from 47%.
Outlook, Risks, and Management Commentary
- Market Environment: Management notes increased competition in the listed options market, including the rise of High Frequency Traders (HFTs), which has compressed spreads. The SEC's expansion of the "Penny Pilot" program is expected to further tighten spreads, though new rules classifying HFTs as professionals may benefit IBG's market share.
- Volatility Strategy: The company maintains a long volatility strategy. Profitability is sensitive to the ratio of actual to implied volatility; the unusually low ratio in Q3 negatively impacted earnings.
- Liquidity and Capital: The company maintains a highly liquid balance sheet with $3.07 billion in excess regulatory capital. A new $100 million senior secured revolving credit facility was established in May 2009, replacing a $300 million facility. No borrowings were outstanding under this facility as of September 30, 2009.
- Risks: Key risks include market volatility, interest rate fluctuations, credit risk from customer margin loans ($2.9 billion outstanding), and regulatory changes regarding short selling and securities lending.
- Unusual Items: A $6.4 million permanent impairment loss was recorded on investments in W.R. Hambrecht + Co. Inc. during the nine months ended September 30, 2009.
Investor Verification Checklist
- Non-Controlling Interests: Verify the impact of the 89.5% non-controlling interest held by IBG Holdings LLC on net income available to common shareholders ($8.4M vs $120.1M total net income).
- Volatility Ratios: Monitor the actual vs. implied volatility ratio, as this is a primary driver of market making profitability.
- Regulatory Capital: Confirm continued compliance with the $3.3 billion minimum consolidated shareholders' equity covenant on the new credit facility.
- Customer Growth vs. Revenue: Assess whether the 20% growth in customer accounts and 43% growth in customer equity will translate to revenue growth as market volumes recover.
- Interest Rate Sensitivity: Evaluate the impact of the near-zero interest rate environment on net interest income, which dropped 51% in Q3.