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Analyst Blog

Interactive Brokers Group, Inc.’s (IBKR - Analyst Report) third quarter 2011 earnings per share of 50 cents doubled the Zacks Consensus Estimate. This also compares favorably with earnings of 26 cents in the year-ago quarter. 

Including the effect of changes in the U.S. dollar value of Interactive’s non-U.S. subsidiaries, the company reported earnings of 36 cents compared with 52 cents in the year-ago quarter. This reflects the new GAAP convention that requires the posting of currency translation results contained in Other Comprehensive Income as part of reportable earnings.

Results benefited mainly from improved interest and non-interest income, partially offset by higher interest and non-interest expenses. Net income attributable to non-controlling interests was also substantially higher during the reported quarter. The company’s Electronic Brokerage and Market Making segments continued to perform well with an impressive pre-tax income. Also, the balance sheet remained highly liquid.

Quarter in Detail

Interactive Brokers’ net income available to common shareholders came in at $22.5 million compared with $11.1 million in the prior-year quarter.

Net revenue increased 29% year over year to $385.6 million. The growth was primarily driven by a boost in trading gains (up 15% year over year to $193.8 million), higher commissions and execution fees (up 45% over the year-ago quarter to $130.6 million) and a rise in interest income (up 74% year over year to $73.8 million). Net revenues also surpassed the Zacks Consensus Estimate of $296.0 million.

Net income (before income taxes and minority interest) was up 35% on a year-over-year basis at $217.8 million. Pre-tax profit margin was 56% compared with 54% in the prior-year quarter.

Total non-interest expenses increased 22% from the year-ago quarter to $167.8 million. Execution and clearing expenses increased 33%, while employee compensation and benefits increased 13%.

Segment Performance

Market Making: Net revenue increased 20% year over year to $204.3 million. Pre-tax income came in at $128.5 million, up 24% from $103.9 million a year ago. Pre-tax profit margin increased to 63% from 61% in the prior-year quarter.

Electronic Brokerage: Net revenue increased 48% year over year to $191.7 million. Pre-tax income shot up 66% year over year to $105.5 million. Pre-tax profit margin came in at 55% compared with 49% in the prior-year quarter. Total daily average revenue trades (DARTs) for cleared and execution-only customers increased 39% year over year to 495,000.

Capital Position                                                               

Consolidated equity capital as of September 30, 2011 was $4.63 billion compared with $4.22 billion as of December 31, 2010.

Our Viewpoint

Though Interactive’s fundamentals remain strong with a liquid balance sheet, sturdy capital base and high barriers to entry, we remain concerned about the Market Making segment’s ability to consistently generate sufficient returns to fund dividend payment. 

Interactive Brokers currently retains a Zacks #2 Rank, which translates into a short-term ‘Buy’ rating. The company’s peer Knight Capital Group Inc. (KCG - Snapshot Report) also retains a Zacks #2 Rank.

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