Interactive Misses Ests, Rev Down

Interactive Brokers Group Inc.’s ( IBKR - Analyst Report ) second quarter 2012 earnings per share of 17 cents lagged the Zacks Consensus Estimate by a nickel. Also, this compared unfavorably with the year-ago quarter’s earnings of 22 cents.

After considering the effect of changes in the U.S. dollar value of Interactive’s non-U.S. subsidiaries, earnings came in at 9 cents per share compared with 31 cents in the year-ago quarter.

Interactive’s results were impacted by deterioration in net revenue along with higher operating expenses. Moreover, the performance of the Market Making segment was on the downside with substantially lower revenue. However, slightly better revenue in the Electronic Brokerage segment was a positive.

For the quarter under review, Interactive’s net income available to common shareholders was $8.0 million, down 15.7% from $9.5 million in the year-ago quarter.

Behind the Headlines

For the reported quarter, Interactive’s net revenue came in at $260.9 million, declining 12.1% year over year from $296.9 million. The dip was primarily attributable to lower interest income along with significant fall in trading gains, partially mitigated by higher commission and execution fees. Net revenue was also much lower than the Zacks Consensus Estimate of $287.0 million.

Net income before taxes dropped 27.2% year over year to $108.5 million. Pre-tax profit margin was 42% in the quarter as against 50% in the prior-year quarter.

Total non-interest expenses were $152.4 million, up 3.1% from $147.8 million in the previous-year quarter. The rise was mainly due to higher employee compensation and benefits along with execution and clearing charges, partially offset by a reduction in general and administrative expenses.

Segment Performance

Market Making: Net revenue decreased 27.4% to $91.3 million from $125.8 million in the previous-year quarter. Pre-tax income fell 59.5% year over year to $24.0 million as a result of currency translation loss. Further, pre-tax profit margin declined to 26% from 47% recorded in the year-ago period.

Electronic Brokerage: Net revenue inched up 1.0% year over year to $171.4 million. Similarly, pre-tax income stood at $90.2 million, marginally growing 1.3% from the previous-year quarter. Pre-tax profit margin was 53% compared with 52% in the prior-year quarter. Additionally, total daily average revenue trades (DARTs) for cleared and execution-only customers grew 5.0% year over year to 427,000.

Dividend Update

Concurrent with the earnings release, Interactive’s Board of Directors declared a quarterly cash dividend of 10 cents per share. The dividend will be paid on September 14, to shareholders of record as on August 31.

Our Viewpoint

Despite poor results, we believe that Interactive’s strong fundamentals and highly liquid balance sheet will enhance investors’ confidence on the stock. Moreover, the company has been constantly declaring dividends, which reflects its healthy capital base.

However, with lower trading activity in the markets, Interactive’s financials may get adversely affected as its revenue is highly dependent on the trading volume at the stock exchanges.

Interactive currently holds a Zacks #4 Rank, which translates into a short-term Sell rating. Considering the fundamentals, we maintain a long-term ‘Neutral’ recommendation on the stock.

Among Interactive’s peers, GFI Group Inc. ( GFIG - Snapshot Report ) and Stifel Financial Corp. ( SF - Snapshot Report ) are expected to announce their second quarter results on July 24 and August 6, respectively.