Interactive Brokers Group, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; unaudited. Interactive Brokers is a global electronic broker operating across more than 150 exchanges and market centers. IBG, Inc. owns approximately 24.5% of IBG LLC; the remainder is reported as noncontrolling interests.
Financial performance and condition
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Total net revenues | $1.056 billion | $645 million | +64% |
| Net interest income | $637 million | $282 million | +126% |
| Commissions | $357 million | $349 million | +2% |
| Income before income taxes | $761 million | $394 million | +93% |
| Net income | $700 million | $366 million | +91% |
| Net income available to common stockholders | $148 million | $73 million | +103% |
| Diluted EPS | $1.42 | $0.74 | +$0.68 |
| Pretax profit margin | 72% | 61% | +11 percentage points |
Adjusted diluted EPS, a non-GAAP measure, was $1.35 versus $0.82; adjusted net revenues were $1.015 billion versus $692 million. Management says these measures exclude currency-diversification effects and investment mark-to-market gains or losses.
Higher benchmark rates and customer credit balances drove the increase in net interest income. The average federal funds effective rate was 4.51%, versus 0.12% a year earlier; net interest margin was 2.24%, versus 1.10%. Other income was a $19 million gain, compared with a $39 million loss, including a year-over-year improvement in U.S. government securities portfolio results and currency-diversification results. Non-interest expenses rose 18% to $295 million, mainly reflecting higher execution and clearing fees and compensation.
At March 31, total assets were $119.5 billion, total liabilities $107.2 billion, and total equity $12.2 billion. Cash and cash equivalents were $3.2 billion; cash, cash equivalents and restricted cash totaled $27.6 billion. Short-term borrowings were $10 million; the filing reports no variable-rate debt outstanding. Customer payables were $94.9 billion, reflecting the scale of customer brokerage balances. Management classified approximately 99.2% of assets as liquid and reported $9.0 billion of excess regulatory capital; all regulated subsidiaries were compliant with capital requirements.
Operating cash flow was negative $923 million, versus positive $2.125 billion in Q1 2022. The company attributed the current-period outflow largely to increased securities segregated for regulatory purposes and customer margin receivables, partly offset by increased securities lending, other receivables and customer credit balances. Investing cash flow was positive $6 million and financing cash flow was negative $137 million. Capital expenditures were $17 million.
Material changes and operating trends
- Customer options and futures volumes rose 2% and 4% year over year, respectively, while stock share volume fell 22%. Total customer DARTs declined 19%.
- Total accounts increased 21% year over year to 2.195 million; customer equity decreased 4% to $343.1 billion.
- Net interest income benefited from higher rates and higher average customer credit balances. Management noted that rising rates also increase interest expense paid on eligible customer cash.
- Non-GAAP adjusted pretax margin was 71%, versus 64% a year earlier. These figures are management-defined measures and should be considered alongside GAAP results.
Outlook, risks and unusual items
The filing provides no specific 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. It expects to fund technology and infrastructure investment from operating cash and cash on hand, with flexibility to adjust spending.
Management cited uncertain trading activity, market volatility, interest-rate and monetary-policy changes, pricing competition, regulatory scrutiny of payment for order flow and order routing, and international political and regulatory risks. A 25-basis-point rate change, assuming reinvestment of maturing instruments, was estimated to change annualized net interest income by approximately $50 million for U.S. dollar rates and $26 million for relevant non-U.S. dollar rates, up or down.
Legal and regulatory matters include a pending appeal in the Trading Technologies patent case, where a jury awarded $6.6 million plus interest; a customer class-action case concerning margin liquidations; and a Department of Justice inquiry related to historical anti-money-laundering matters. The company said it does not expect the DOJ inquiry to have a materially adverse financial effect. It is also cooperating with SEC and CFTC requests concerning records preservation for business communications on unapproved messaging channels. Management reported no material accruals for legal, regulatory or governmental proceedings and stated that outcomes and potential losses may be difficult to estimate.
In March 2023, IB LLC certified adoption of all recommendations in the independent consultant’s final report on its enhanced anti-money-laundering controls. Crypto-asset safeguarding assets and corresponding liabilities were each $109 million at quarter-end; the company reported no identified loss events. The assets are held by third-party providers, not in the company’s custody.
Important facts for investors to verify
- How much of the sharp increase in earnings depends on prevailing rates, customer cash balances and continued interest spreads.
- How brokerage customer and regulatory balances explain the negative operating cash flow, and how these balances evolve in later periods.
- Whether lower stock volumes and DARTs persist despite account growth and stronger sequential customer activity.
- The assumptions behind management’s non-GAAP adjustments and rate-sensitivity estimates.
- Developments and potential financial consequences from the patent appeal, customer class action, DOJ inquiry and SEC/CFTC records-preservation inquiries.