Interactive Brokers Group, Inc.’s (IBKR) fourth-quarter earnings of 6 cents per share were substantially short of the Zacks Consensus Estimate of 25 cents. Earnings were also down 87.8% from 49 cents in the prior-year quarter.
As a result of constrained liquidity and other challenges in the market as a whole, Interactive Brokers experienced lower operating results during the reported quarter. Results for the quarter have been largely impacted by competitive pressure on spreads. However, the balance sheet remained highly liquid with relatively low leverage. Interactive Brokers actively managed its excess liquidity and maintained significant borrowing facilities through the securities lending markets and banks. Both revenue and earnings were down sequentially as well as year-over-year.
Estimate Revisions Trend
Over the last 7 days, five of the eight analysts covering the stock lowered estimates for full year 2010, while one moved inthe opposite direction. Currently, the Zacks Consensus Estimate for 2010 is a gain of $1.19 per share, which would be a substantial improvement over full-year 2009 earnings of 87 cents. In 2008, Interactive Brokers had earned $2.24 per share.
The lower number of estimate revisions for 2010 in the upward direction indicates a likelihood of downward pressure on theperformance of the stock in the upcoming quarters. As a result, the stock retains its Zacks # 5 Rank, which translates into a short-term ‘Strong Sell’ rating. However, considering the current fundamentals of Interactive Brokers, we maintain a long-term “Neutral” recommendation on the stock.
With respect to earnings surprises, the stock has fluctuated substantially over the last four quarters, with only one positive and three negative surprises. For fourth quarter 2009, the earnings surprise was negative 76%. However, the average remained negative at 37%. This implies that Interactive Brokers has fallen short of the Zacks Consensus Estimate by 37% over the last four quarters. The current Zacks Consensus Estimates for the first quarter and full-year 2010 are earnings of 19 cents and $1.19, respectively. The downside potential of the estimate for full-year 2010, essentially a proxy for future earnings surprise, currently stands at 13%.
Quarter in Detail
Interactive Brokers’ net revenues for the quarter decreased 53.3% year-over-year to $200.4 million. The decrease in net revenues was mainly due to a 74.8% decrease in trading gains to $75.1 million and a 49.7% decrease in interest income to $31.9 million. Commission and execution fees for the quarter were up 2.2% on a year-over-year basis to $89.5 million.
Net income (before income taxes and minority interest) decreased 80.6% on a year-over-year basis to $52.2 million. Pre-tax profit margin for the quarter was 26%, compared to 63% in the prior-year quarter.
Total non-interest expenses for the quarter decreased 7.5% year-over-year to $148.2 million. The decrease in non-interest expenses was due primarily to a 8.8% decrease in execution and clearing expenses and a 57.2% decrease in general and administrative expenses.
Interactive Brokers’ net income available to common shareholders decreased 88.7% year-over-year to $2.3 million.
Market Making: During the reported quarter, net revenues in this segment decreased to $75.2 million from $308.8 million in the year-ago quarter. Loss before income taxes came in at $3.5 million, compared to an income of $221.6 million in the prior-year quarter. Pre-tax operating margin for this segment decreased to negative 5% from positive 72% in the prior-year quarter. The options contract volume for this segment decreased 23.5% year-over-year to 97,520 contracts.
Electronic Brokerage: During the quarter, net revenues in this segment increased 5.4% year-over-year to $125.1 million. Income before income taxes increased 43.3% year-over-year to $61.6 million. Pre-tax operating margin for this segment came in at 49% compared to 36% in the prior-year quarter. Customer accounts during the quarter increased 20.7% year-over-year to 134,000 and customer equity grew 70.8% year-over-year to $15.2 billion. Total customer daily average revenue trades (DARTs) were down 7.0% year-over-year to 346,000. The year-over-year growth in income was driven by robust customer trading and a greater number of customer accounts.
Interactive Brokers continues to maintain a highly liquid balance sheet with low leverage and a strong capital position. Though the company’s fundamentals are strong with lower barriers to entry, sizeable international exposure and the ongoing weakness in equity markets will continue to impact profitability in the upcoming quarters.
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