Interactive Brokers Group, Inc.’s (IBKR) second quarter 2011 earnings per share came in at 22 cents, substantially lower than the Zacks Consensus Estimate of 30 cents. However, this compares favorably with earnings of 9 cents in the year-ago quarter.
Including the full effect of currency translation, the company reported earnings of 31 cents during the quarter. This reflects the new GAAP convention that requires currency translation results contained in Other Comprehensive Income as part of reportable earnings.
Results benefited mainly from improved top line and lower non-interest expenses. However, the positives were partially offset by higher interest expense. Net income attributable to non-controlling interests was also substantially higher during the reported quarter.
The company’s brokerage business continued to perform well and the performance of the Market Making segment was impressive. Also, the balance sheet remained highly liquid.
Quarter in Detail
Interactive Brokers’ net income available to common shareholders came in at $9.5 million compared with $3.8 million in the prior-year quarter.
Net revenues increased 31% year over year to $296.9 million. The increase was primarily driven by a boost in trading gains (up 55% year over year to $120.6 million) and a rise in interest income (up 93% year over year at $79.3 million). However, net revenues were substantially lower than the Zacks Consensus Estimate of $314.0 million.
Net income (before income taxes and minority interest) was up 107% on a year-over-year basis at $149.1 million. Pre-tax profit margin was 50% compared with 32% in the prior-year quarter.
Total non-interest expenses decreased 4% from the year-ago quarter to $147.8 million. Employee compensation and benefits increased 6%, while execution and clearing expenses decreased 12%.
Segment Performance
Market Making: Net revenue increased 54% to $125.8 million from $81.7 million in the year-ago quarter. Pre-tax income came in at $59.3 million compared with $3.9 million a year ago. Pre-tax profit margin increased to 47% from 5% in the prior-year quarter.
Electronic Brokerage: Net revenue increased 17% year over year to $169.7 million. Pre-tax income shot up 23% year over year to $89.0 million. Pre-tax profit margin came in at 52% compared with 50% in the prior-year quarter.
Capital Position
Consolidated equity capital as of June 30, 2011 was $4.59 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 its Market Making segment’s ability to consistently generate sufficient returns to fund dividend payment. Also, there are concerns related to Interactive’s dependence on IBG LLC and its wide international exposure.
Interactive Brokers currently retains a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating. However, the company’s peer Knight Capital Group Inc. (KCG) retains a Zacks #5 Rank (a short-term ‘Strong Sell’ rating).
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