Interactive Brokers Group, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; unaudited. Interactive Brokers is a global electronic brokerage and clearing business operating across more than 150 exchanges and market centers. IBG, Inc. owns approximately 23.5% of IBG LLC; the remaining 76.5% is reported as noncontrolling interest.
Key financial results
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Total net revenues | $645 million | $893 million | Down 28% |
| Net interest income | $282 million | $305 million | Down 8% |
| Commissions | $349 million | $412 million | Down 15% |
| Other income (loss) | $(39) million | $120 million | Down $159 million |
| Non-interest expenses | $251 million | $254 million | Down 1% |
| Income before income taxes | $394 million | $639 million | Down 38% |
| Net income | $366 million | $586 million | Down 38% |
| Net income available to common stockholders | $73 million | $107 million | Down 32% |
| Diluted EPS | $0.74 | $1.16 | Down 36% |
| Pretax profit margin | 61% | 72% | Down 11 percentage points |
Management-reported non-GAAP adjusted net revenues were $692 million versus $796 million, adjusted pretax income was $441 million versus $542 million, and adjusted diluted EPS was $0.82 versus $0.98. Adjustments principally remove currency-diversification effects and investment mark-to-market gains or losses; these are non-GAAP measures.
Cash flow: Operating activities provided $2.125 billion, compared with $3.734 billion in Q1 2021. Investing activities used $14 million and financing activities used $105 million. Cash, cash equivalents and restricted cash increased $1.965 billion to $27.248 billion. Operating cash flow is heavily affected by changes in customer balances and regulatory-segregated assets.
Financial position and liquidity: At March 31, total assets were $114.423 billion, total liabilities $103.941 billion, and total equity $10.482 billion. Cash and cash equivalents were $2.667 billion; cash segregated for regulatory purposes was $24.581 billion. Customer receivables were $48.306 billion and customer payables $91.097 billion. Short-term borrowings were $11 million; the company issued no senior notes during the quarter. Management classified approximately 99.1% of assets as liquid and stated available cash, operating cash flows and borrowings should meet needs for more than 12 months. Aggregate excess regulatory capital was $7.4 billion, and regulated subsidiaries were in compliance.
Material changes and business drivers
- Customer stock share volume declined 69% year over year, following unusually high Q1 2021 activity; options volume increased 6% and futures volume increased 31%. Total customer DARTs declined 24%, while total accounts increased 36% to 1.809 million.
- The decline in other income reflected the absence of a $99 million prior-year gain on the Tiger Brokers investment, a $29 million mark-to-market loss on U.S. government securities, and a larger loss from the currency-diversification strategy.
- Net interest income fell despite higher average margin loans and customer credit balances: weaker securities-lending income more than offset gains from margin lending and segregated cash. Net interest margin declined to 1.10% from 1.26%.
- Non-interest expenses were nearly flat. Higher compensation, execution costs and occupancy costs were largely offset by lower general and administrative expense, including the non-recurrence of prior-year Brexit-related onboarding costs.
Outlook, risks and unusual items
No specific earnings or revenue guidance was provided. Management cited volatility, inflation, geopolitical uncertainty and the start of U.S. interest-rate increases as factors shaping market activity and interest income. It noted that higher rates may benefit net interest income, while rapid increases can create mark-to-market losses on fixed-rate securities; those losses would generally reverse if the securities are held to maturity, as intended. A modeled unexpected 0.25 percentage-point U.S. rate increase was estimated to raise net interest income by approximately $104 million in the first year; a comparable decrease was estimated to reduce it by approximately $152 million. These are scenario estimates, not forecasts.
Key risks include volatile trading volumes and retail participation, intensified pricing competition, regulatory scrutiny of payment for order flow and order routing, international political and regulatory uncertainty, foreign-exchange exposure, and customer margin-credit risk. Management highlighted uncertainty related to the Russia-Ukraine war and U.S.-China tensions, while stating direct and indirect Russia-Ukraine exposures were not material. Margin loans were $48.3 billion; the company relies on real-time collateral monitoring and liquidation, which may be less effective in illiquid markets.
Legal matters include the Trading Technologies patent case: a jury awarded $6.6 million in damages, with $2.1 million in prejudgment interest and additional post-judgment interest; appeals were filed and remain unresolved. A customer class-action matter concerning margin liquidations is also pending. Management said legal and regulatory accruals were not material and generally could not estimate potential losses. The company also disclosed clearing-house and customer-settlement guarantees whose possible exposure is not quantifiable, though management considers payment under clearing-member guarantees remote.
Important facts for investors to verify
- Whether lower stock trading activity and DARTs persist, and whether growth in options, futures and accounts offsets that weakness.
- How changes in benchmark rates, customer balances and securities-lending demand affect net interest income and the stated interest-rate sensitivities.
- The composition and variability of other income, including currency-diversification and securities mark-to-market effects; compare GAAP results with the company’s non-GAAP adjustments.
- The status and potential financial impact of the Trading Technologies appeal, the customer class action and ongoing regulatory matters.
- How consolidated results translate to IBG, Inc. common shareholders, given the 76.5% noncontrolling interest in IBG LLC, and whether regulatory capital and liquidity remain sufficient as customer balances change.