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Interactive's EPS Lags, Revs Down

IBKR KCG

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Interactive Brokers Group Inc.’s (IBKR - Analyst Report) fourth quarter 2012 earnings of 19 cents per share missed the Zacks Consensus Estimate by 2 cents. In addition, this compares unfavorably with the year-ago quarter’s earnings of 29 cents.

For 2012, Interactive’s earnings were 89 cents per share, lagging the Zacks Consensus Estimate by a penny. Also, this was nearly 35% below the last year’s earnings of $1.37. After considering the effect of changes in the U.S. dollar value of Interactive’s non-U.S. subsidiaries, earnings came in at 92 cents in 2012 compared with $1.31 in 2011.

The quarterly results marginally lagged owing to a drop in Interactive’s top line, partially offset by slight decline in operating expenses. Further, though there was a slight improvement in Electronic Brokerage segment’s performance, Market Making segment’s performance was not up to the mark in the reported quarter.

Net income available to common shareholders was $9.1 million in the fourth quarter, plummeting 33.1% from $13.6 million in the year-ago quarter. In 2012, net income stood at $40.7 million, plummeting 34.2% year over year.

Performance in Detail

Interactive’s total net revenue in the fourth quarter stood at $247.1 million, declining 19.7% year over year. The dip was primarily attributable to lower interest income along with significant fall in trading gains as well as commissions and execution fees, partially mitigated by higher other income and lower interest expenses. Net revenues were 9.5% lower than the Zacks Consensus Estimate of $273.0 million.

For 2012, total net revenue were $1,130.5 million, falling 16.8% from $1,358.3 million in 2011. However, net revenues were 8.0% below the Zacks Consensus Estimate of $1,228.0 million.

Net income before taxes in the fourth quarter fell 36.8% year over year to $96.2 million. Similarly, pre-tax profit margin fell from 49% in the prior-year quarter to 39% in the reported quarter.

Total non-interest expenses were $150.9 million, down 3.1% from $155.7 million in the prior-year quarter. The decline was mainly due to lower execution and clearing expenses along with general and administrative costs. However, these were partially offset by higher employee compensation and benefits expenditure as well as communications costs.

Segment Performance

Market Making: Net revenue plunged 56.8% from the prior-year quarter to $71.8 million. Pre-tax income fell 90.7% from $90.8 million in the year-ago quarter to $8.4 million. Further, pre-tax profit margin dropped to 12% from 55% recorded in the year-ago period.

Electronic Brokerage: Net revenue improved 3.4% year over year to $172.1 million. Likewise, pre-tax income stood at $87.3 million, increasing 1.9% from the year-ago quarter. Yet, pre-tax profit margin was 51% down from 52% in the prior-year quarter. Additionally, total daily average revenue trades (DARTs) for cleared-only customers declined 8.0% year over year to 378,000.

Balance Sheet

As of December 31, 2012, cash and cash equivalents (including cash and securities segregated for regulatory purposes) was $14.1 billion, up 19.8% from $11.8 billion as of December 31, 2011. Total assets recorded were $33.2 billion, up 9.2% from $30.4 billion as of December 31, 2011.

Total equity came in at $4.8 billion as against negative equity of $0.5 billion as of December 31, 2011.

Dividend Update

Concurrent with the earnings release, Interactive declared a quarterly cash dividend of 10 cents per share. The dividend will be paid on March 14, to shareholders of record as of March 1.

Our Viewpoint

In spite of the lower-than-expected results, we believe that Interactive’s robust fundamentals and liquid balance sheet will continue to boost investors’ confidence in the stock. In addition, the company’s better-than-peer positioning and technological excellence make us optimistic.

Further, Interactive’s Market Making segment funds its dividend payment. However, off late the segment is underperforming and that makes us cautious about its ability to consistently generate sufficient returns to fund dividend payment. Also, with lower trading activity in the markets, the company’s financials may get adversely affected since its revenue is highly dependent on the trading volume at the stock exchanges.

Interactive currently holds a Zacks Rank #3 (Hold). Also, considering the fundamentals, we maintain a long-term Neutral recommendation on the stock.

Among Interactive’s peers, Knight Capital Group, Inc. (KCG - Snapshot Report) is expected to announce its fourth-quarter results on January 24.

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