Interactive Brokers Group, Inc. — Form 10-Q Summary
Period clarification: The supplied filing is for the quarter ended March 31, 2013 (first quarter), not 2013 Q3 as stated in the request metadata. Comparative figures are for the three months ended March 31, 2012. Financial amounts below are in U.S. dollars; millions unless otherwise noted.
Business context and reporting period
Interactive Brokers Group, Inc. is a holding company whose primary asset is an approximately 11.9% interest in IBG LLC; it consolidates IBG LLC, with the remaining 88.1% interest reported as noncontrolling interests. The Group operates electronic brokerage and market-making businesses across more than 100 exchanges and trading venues. It reported 888 employees at March 31, 2013.
Financial results and liquidity
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Total net revenues | $216.1 | $303.9 | Down 29% |
| Trading gains | $19.0 | $137.3 | Down 86% |
| Commissions and execution fees | $119.5 | $100.9 | Up 19% |
| Net interest income | $57.6 | $47.4 | Up $10.2, or 22% |
| Non-interest expenses | $133.9 | $154.2 | Down 13% |
| Income before income taxes | $82.2 | $149.7 | Down 45% |
| Net income | $75.3 | $140.9 | Down 47% |
| Net income attributable to common stockholders | $6.6 | $11.1 | Down 41% |
| Diluted EPS | $0.14 | $0.27 | Down 48% |
| Comprehensive income attributable to common stockholders | $2.8 | $13.7 | Down 79% |
The consolidated pre-tax margin was 38%, versus 49% a year earlier. Brokerage pre-tax income rose 33% to $111.0 million, with a 57% margin; market making swung to a $29.0 million pre-tax loss from $66.0 million income. The filing’s consolidated net income includes earnings attributable to noncontrolling interests; the public-company common-stockholder share was $6.6 million.
At March 31, 2013, total assets were $35.14 billion, liabilities $30.32 billion and total equity $4.83 billion. Cash and cash equivalents were $1.18 billion, down from $1.61 billion at year-end 2012. Cash and securities segregated for regulatory purposes were $12.50 billion. Customer receivables were $11.18 billion, versus $9.85 billion at year-end; customer payables were $23.06 billion, versus $21.42 billion. Management characterized approximately 98.8% of assets as liquid, principally marketable securities, customer cash and collateralized receivables.
Operating activities used $296.3 million of cash, compared with $53.9 million used in Q1 2012; investing activities provided $7.1 million, and financing activities used $129.9 million. Cash declined by $429.7 million during the quarter. Short-term borrowings were $18.8 million at quarter-end. No borrowings were outstanding under the $100 million revolving credit facility, and the company reported compliance with its covenants. Aggregate excess regulatory capital was $2.46 billion; all regulated operating companies were in compliance.
Material changes versus the prior comparable period
- Trading gains fell sharply amid subdued market-making conditions, lower volatility and narrower bid/offer spreads. The company also recorded a $60.8 million currency-translation loss in trading gains, compared with a $0.9 million loss in Q1 2012.
- Brokerage strengthened: customer accounts increased 11% to approximately 217,000, customer equity grew 23% to $35.6 billion, and total customer DARTs rose 9% to approximately 465,000. Cleared customer DARTs rose 8%.
- Commissions increased with higher cleared customer activity, while net interest income benefited from higher customer cash and margin balances and securities-borrowing/lending fees.
- Non-interest expense declined, primarily from lower compensation and market-making execution and clearing costs. Lower bonuses and the non-recurrence of a special January 2012 stock award contributed to the compensation decrease.
- Foreign-currency translation also reduced common-stockholder comprehensive income: other comprehensive loss was $3.7 million, versus $2.6 million of other comprehensive income in Q1 2012.
Outlook, risks, contingencies and unusual items
- No specific earnings or revenue guidance was provided. Management said operating cash flows, available cash and undrawn facility capacity should meet liquidity needs for more than 12 months. It expected 2013 gross capital expenditures to be lower than in 2012 as data-center and backup-facility expansion was completed, while continuing technology investment.
- Management cited low market volatility, one-directional markets and tight spreads as headwinds to market making; brokerage performance was supported by account, equity and cleared-volume growth. Results remain sensitive to trading volumes, volatility, actual-versus-implied volatility, interest rates, currency movements and market structure.
- Approximately 62% of equity was denominated in currencies other than U.S. dollars. A 0.05% decline in U.S. benchmark rates was estimated to reduce annualized net interest income by approximately $10.3 million.
- Customer margin credit was approximately $11.14 billion, excluding non-customers. Management warned that losses from customer margin and short-sale exposures could be significant and are not quantifiable; automatic margin monitoring and liquidation may not work in illiquid markets or certain other circumstances. Futures activity also creates off-balance-sheet risk.
- Pending litigation includes a patent-infringement action brought by Trading Technologies; the company said it intends to defend itself, but the outcome is uncertain. Litigation reserves were not material. The filing also describes regulatory discussions that could lead to sanctions, while stating management did not expect a material adverse effect.
- A material weakness in internal control over financial reporting related to review and interpretation of complex accounting issues had been reported as of December 31, 2012. Remediation was in progress and not complete; management nevertheless concluded the Q1 financial statements fairly presented the company’s position and results in all material respects.
- The company declared a $0.10-per-share dividend after quarter-end, payable June 14, 2013 to holders of record May 31, 2013. Existing legal reserves and clearing-member guarantees were disclosed; management characterized the likelihood of required payments under the guarantees as remote.
Important facts for investors to verify
- Confirm the requested period: this filing covers Q1 2013, despite the metadata’s Q3 designation.
- Review the source of the $60.8 million currency-translation loss and distinguish trading gains, net income and comprehensive income.
- Assess whether brokerage growth and higher customer balances can offset market-making sensitivity to volatility, spreads and trading conditions.
- Examine cash-flow volatility, customer-related balance-sheet movements, regulatory capital availability and the limited undrawn revolving facility.
- Track remediation of the accounting-control material weakness and any subsequent developments in litigation or regulatory matters.