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Interactive Brokers Earnings Lag on Higher Expenses

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A significant rise in general and administrative expenses dragged Interactive Brokers Group, Inc.’s (IBKR - Free Report) fourth-quarter earnings per share of 7 cents, which lagged the Zacks Consensus Estimate of 15 cents. Moreover, the reported figure was down 63.2% from 19 cents earned in the year-ago quarter.

Lower-than-expected results were primarily due to higher operating expenses. However, this was partially offset by marginal growth in revenues. Further, while the Electronic Brokerage segment witnessed continued improvement, the Market Making segment’s performance dented results.

Net income available to common shareholders in the reported quarter was $3.6 million, down 60.4% year over year.

For full-year 2013, net income was $37.0 million or 73 cents per share, down from $40.7 million or 89 cents per share in 2012. Earnings per share missed the Zacks Consensus Estimate of 75 cents.

Performance in Detail

Interactive Brokers’ net revenue in the quarter came in at $249.9 million, up 1.1% year over year. The rise was mainly driven by increase in commission and execution fees, as well as interest income and other income. Nevertheless, these positives were partly offset by fall in trading gains and higher interest expense. However, net revenue was below the Zacks Consensus Estimate of $317.0 million.

In 2013, net revenue was $1,076.2 million, down 4.8% from the prior year. Further, net revenue lagged the Zacks Consensus Estimate of $1,216.0 million.

Total non-interest expenses in the said quarter were $211.1 million, up 39.9% from the prior-year quarter. The increase was predominantly due to significantly higher general and administrative expenses.

Net income before taxes decreased 59.7% year over year to $38.8 million in the reported quarter. Similarly, pre-tax profit margin fell to 16% from 39% in the prior-year quarter.

As of Dec 31, 2013, cash and cash equivalents (including cash and securities segregated for regulatory purposes) were $15.2 billion, up 7.9% from $14.1 billion as of Dec 31, 2012. Total assets were $37.9 billion, up 14.1% from $33.2 billion as of Dec 31, 2012.

Total equity came in at $5.1 billion versus $4.8 billion as of Dec 31, 2012.

Quarterly Segmental Performance

Market Making: Net revenue fell 26.7% to $52.6 million from the prior-year quarter. Similarly, pre-tax income decreased 31.0% year over year to $5.8 million. Further, pre-tax profit margin was 11%, down from 12% in the prior-year quarter.

Electronic Brokerage: Net revenue improved 22.9% year over year to $211.5 million. However, pre-tax income fell 44.3% to $48.6 million. Further, pre-tax profit margin declined to 23% from 51% in the prior-year quarter. Additionally, total daily average revenue trades (DARTs) for cleared-only customers increased 19.8% year over year to 453,000.

Performance of Other Investment Brokers

The Charles Schwab Corp.’s (SCHW - Free Report) fourth-quarter 2013 earnings of 23 cents per share beat the Zacks Consensus Estimate of 21 cents. Results benefited from top-line growth and a benefit from provision, partially offset by higher expenses.

TD Ameritrade Holding Corp. (AMTD - Free Report) reported fiscal first-quarter 2014 earnings of 35 cents per share, which beat the Zacks Consensus Estimate of 32 cents. Better-than-expected results came on the back of increased revenues, partially offset by higher expenses.

Among other major investment brokers, E*TRADE Financial Corp. (ETFC - Free Report) is scheduled to report fourth quarter and 2013 results on Jan 23.

Our Viewpoint

Interactive Brokers’ healthy balance sheet and strong financials are expected to boost investors’ confidence in the stock. Further, the company’s strong market position and technological excellence will likely be tailwinds going forward.

Moreover, Interactive Brokers’ Market Making segment funds its dividend payments. The company is skeptical about its ability to consistently generate sufficient returns in the future. Further, mounting operating expenses remains a concern.

Interactive Brokers currently holds a Zacks Rank #5 (Strong Sell).

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