Interactive Brokers Group, Inc. - 10-Q Summary (Q2 2009)
Business Context and Reporting Period
This report covers the quarterly period ended June 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 (via Timber Hill subsidiaries) and Electronic Brokerage (via Interactive Brokers subsidiaries). As of June 30, 2009, the company employed 774 people worldwide and operated on over 80 electronic exchanges.
Key Financial Metrics
| Metric (in thousands) | Q2 2009 | Q2 2008 | 6 Months 2009 | 6 Months 2008 |
|---|---|---|---|---|
| Total Net Revenues | $332,098 | $395,415 | $628,439 | $923,934 |
| Income Before Taxes | $192,108 | $259,400 | $359,055 | $633,424 |
| Net Income | $166,917 | $230,807 | $322,032 | $571,418 |
| Net Income Available to Common Stockholders | $12,818 | $18,348 | $25,440 | $45,539 |
| Diluted EPS | $0.31 | $0.44 | $0.61 | $1.10 |
| Cash and Cash Equivalents | $863,769 | $943,497 (Dec 2008) | - | - |
| Total Assets | $26,443,664 | $28,356,635 (Dec 2008) | - | - |
| Senior Notes Payable | $159,639 | $143,054 (Dec 2008) | - | - |
| Senior Secured Credit Facility | $0 | $300,000 (Dec 2008) | - | - |
Liquidity: The company maintains a highly liquid balance sheet with approximately 98% of assets considered liquid. Aggregate excess regulatory capital for all operating companies was $3.12 billion as of June 30, 2009.
Material Changes vs. Prior Period
- Revenue Decline: Total net revenues decreased 16% in Q2 2009 compared to Q2 2008, and 32% for the six-month period. This was driven primarily by a 16% drop in trading gains (Q2) and a 59% drop in net interest income due to the low interest rate environment.
- Trading Gains: Trading gains fell $42.4 million (16%) in Q2 2009. Management attributed this to contracting bid/offer spreads in options markets and translation losses of $49.3 million on foreign currency balances, compared to gains of $48.9 million in the prior year.
- Brokerage Growth: Despite lower interest income, the Electronic Brokerage segment saw a 5% increase in income before taxes in Q2 2009. Customer accounts grew 18% to 122,000, and Daily Average Revenue Trades (DARTs) increased 6% to 345,000.
- Expense Management: Non-interest expenses increased slightly (3%) in Q2 2009 but decreased 7% for the six-month period, largely due to lower execution and clearing costs offset by higher employee compensation.
- Debt Structure: The company replaced a $300 million senior secured revolving credit facility with a new $100 million facility in May 2009. As of June 30, 2009, no borrowings were outstanding under the new facility.
Guidance, Outlook, and Risks
- Market Environment: Management notes that market making profitability is volatile and dependent on trading volume, competition, and bid/offer spreads. While spreads contracted in Q2, lower volatility levels were favorable for options market making systems.
- Interest Rate Sensitivity: Net interest income remains highly sensitive to the low interest rate environment. A decrease in US benchmark rates to zero would reduce net interest income by approximately $1.8 million on an annualized basis.
- Impairment Loss: The company recorded a permanent impairment loss of $6.4 million in Q2 2009 related to loans and warrants for W.R. Hambrecht + Co. Inc., reducing the book value of these investments to zero.
- Regulatory Capital: All operating companies were in compliance with regulatory capital requirements. Excess regulatory capital remains substantial ($3.12 billion).
- Forward-Looking Statements: The company cautions that future results may differ due to market structure changes, regulatory scrutiny, and the unpredictable nature of market making earnings.
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 ($12.8M vs $166.9M total net income).
- Foreign Currency Exposure: Assess the volatility of earnings due to significant translation losses ($49.3M in Q2) on foreign currency balances held by subsidiaries.
- Spread Compression: Monitor the trend of bid/offer spreads in options markets, which directly impacts the primary revenue driver (Trading Gains).
- Interest Rate Sensitivity: Evaluate the sustainability of net interest income given the near-zero Fed Funds rate environment.
- Debt Covenants: Confirm continued compliance with the new $100M credit facility covenants, specifically the minimum consolidated shareholders' equity of $3.3 billion.