Interactive Brokers Group, Inc.’s (IBKR) first quarter 2011 operating earnings per share came in at 41 cents, far better than the Zacks Consensus Estimate of 27 cents. This also compares favorably with the prior-year quarter’s earnings of 6 cents. Results for the reported quarter include the effects of currency translation.
On a GAAP basis, Interactive Brokers’ first quarter earnings were 38 cents per share compared with 9 cents in the prior-year quarter. This reflects the GAAP convention that shifts currency hedging results from reportable earnings to Other Comprehensive Income.
Results benefited mainly from improved top line, which was partially offset by higher-than-expected interest and non-interest expenses. The company’s brokerage business continued to perform well during the quarter. Also, the balance sheet remained highly liquid with a relatively low leverage.
Quarter in Detail
Interactive Brokers’ net income available to common shareholders came in at $16.3 million compared with $3.9 million in the prior-year quarter.
Net revenues increased 75% year over year to $367.9 million. The increase was primarily driven by a boost in trading gains (up 149% year over year at $200.3 million) and a rise in commissions and execution fees (up 19% year over year at $109.2 million). Net revenues were also substantially ahead of the Zacks Consensus Estimate of $276.0 million.
Net income (before income taxes and minority interest) was up 242% on a year-over-year basis at $222.0 million. Pre-tax profit margin for the quarter was 60% compared with 31% in the prior-year quarter.
Total non-interest expenses were almost flat with the year-ago quarter at $145.9 million. While execution and clearing expenses decreased 5%, employee compensation and benefits increased 4%.
Segment Performance
Market Making: Net revenue increased 144% to $202.3 million from $82.8 million in the year-ago quarter. Income before income taxes came in at $134.6 million compared with $5.5 million a year ago. Pre-tax profit margin increased to 67% from 7% in the prior-year quarter.
Electronic Brokerage: Net revenue increased 29% year over year to $163.7 million. Income before income taxes shot up 40% year over year to $90.1 million. Pre-tax profit margin for this segment came in at 55% compared with 51% in the prior-year quarter.
Capital Position
Consolidated equity capital as of March 31, 2011 was $4.44 billion compared with $4.22 billion as of December 31, 2010. The company continues to maintain well over $2 billion in excess regulatory capital in its broker-dealer companies around the world even after paying $1 billion in dividend, last December.
Dividend Update
Concurrent with the earnings release, the board of directors of the company declared a quarterly cash dividend of 10 cents per share. The dividend will be paid on June 14 to shareholders of record as of May 27.
Our Viewpoint
Though Interactive’s fundamentals remain strong with a liquid balance sheet, sturdy capital base and high barriers to entry, we believe that the company’s dependence on IBG LLC as well as increased market risk due to significant international exposure remain causes for concern in the near-to-medium term.
Interactive Brokers currently retains a Zacks #2 Rank, which translates into a short-term ‘Buy’ rating. The company’s Zacks rank and rating are shared by its peer E*TRADE Financial Corporation (ETFC).
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