Interactive Brokers Group, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; balance-sheet comparisons are with December 31, 2018. The filing is unaudited. IBG, Inc. consolidates IBG LLC, but owned approximately 18.1% of it; most consolidated earnings are attributable to noncontrolling interests. The company operates an electronic brokerage business and a significantly reduced market-making business.
Financial performance
- Revenue: Total revenue was $720 million, up 16% year over year; after $162 million of interest expense, net revenue was $558 million, up 6%. Commissions fell 21% to $173 million; interest income rose to $408 million from $311 million; trading gains declined to $7 million from $13 million; and other income increased to $132 million from $77 million.
- Profit: Income before tax was $339 million, essentially unchanged from $340 million. Net income was $324 million, versus $319 million. Net income available to common stockholders was $49 million, versus $46 million; diluted EPS was $0.64, versus $0.63.
- Margins and expenses: Consolidated pre-tax margin was 61%, down from 65%. Non-interest expenses rose 17% to $219 million, including $43 million of customer bad-debt expense versus $3 million a year earlier.
- Cash flow: Operating cash flow was $603 million, compared with $1.201 billion. Investing used $42 million and financing used $70 million. Cash, cash equivalents and restricted cash totaled $10.589 billion at quarter-end; this includes $8.043 billion segregated for regulatory purposes.
- Balance sheet and liquidity: Total assets were $63.526 billion, liabilities $56.100 billion and total equity $7.426 billion. Customer receivables were $25.868 billion and customer payables $50.742 billion. Short-term borrowings were $15 million. Management said 98.9% of assets were considered liquid and that available cash, operating cash flows and borrowings should meet liquidity needs for more than 12 months.
- Regulatory capital: Operating companies had $5.888 billion of excess regulatory capital and were in compliance with applicable requirements.
Material changes and operating trends
- Lower volatility and trading activity weighed on brokerage commissions: total customer DARTs fell 10% year over year to 848,000; options, futures and stock volumes declined 23%, 28% and 26%, respectively. Customer accounts grew 21% to 623,000 and customer equity rose 14% to $147.6 billion.
- Net interest income benefited from higher benchmark rates and customer credit balances, partly offset by lower margin loans. Management cited a 13% increase in electronic-brokerage net interest income; its supplementary net-interest table reports $255 million, while the income statement’s interest income less interest expense equals $246 million.
- Electronic brokerage pre-tax income fell 14% to $250 million, mainly reflecting lower commissions and the customer bad-debt charge. Market-making pre-tax income fell to $6 million from $9 million as the business continues to wind down.
- Operating cash flow was lower than the prior-year quarter, in part amid changes in segregated securities and customer balances. The filing notes these balances and trading positions substantially influence operating cash flow.
Outlook, risks and unusual items
- Unusual gains and losses: Other income included an approximately $103 million mark-to-market gain on the company’s Tiger Brokers investment, partly offset by a $19 million loss from its currency-diversification strategy. The Tiger Brokers holding was subject to a 180-day IPO lockup. Management’s comparison excluding specified currency, investment marks and bad debt showed net revenue and pre-tax income each down 5% year over year.
- Customer credit loss: A small number of customers incurred deficits after a sharp decline in a concentrated stock position. The company recognized an aggregate loss of approximately $42 million in the quarter; the stated maximum loss was approximately $51 million if the stock became worthless and no debt was recovered. Collection efforts remain uncertain.
- Outlook: The filing provides no specific earnings or revenue guidance. Management noted that lower volatility can constrain trading activity, while stable rates and a flatter yield curve limit opportunities to increase net interest income. It expects to transfer most remaining annual expenses associated with the market-making wind-down to electronic brokerage during 2019.
- Risks and contingencies: Key exposures include market and foreign-exchange movements, margin-loan defaults, customer concentration, counterparty and clearing risks, and off-balance-sheet obligations on certain futures and customer transactions. Management described litigation outcomes as uncertain; the Trading Technologies patent litigation had developments on appeal and a trial was scheduled for February 2020 for certain claims. Litigation reserves were not material. The company reported no material change to the risk factors in its 2018 Form 10-K.
- Management and controls: Management stated that liquidity was adequate for more than 12 months. Disclosure controls were deemed effective, and no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- How much of reported earnings and other income depends on the Tiger Brokers mark, currency movements and other non-core items.
- Recovery prospects and any additional losses related to the customer margin deficits, including the gap between the $42 million recognized loss and the $51 million stated maximum.
- The reason the supplementary net-interest table reports $255 million while income-statement interest income less expense is $246 million.
- Whether customer growth, asset inflows and higher interest income can offset lower trading activity, commission rates and margin-loan balances.
- Developments in the Trading Technologies and customer class-action matters, and any effects of regulatory capital requirements or customer-protection obligations.