Zacks_Analysts' Blog : Interactive Brokers: Mixed Bag - Analyst Blog

Interactive Brokers Group’s (IBKR) second-quarter earnings of $0.31 per share were almost in line with estimates, though, down 29.5% year over year from $0.44. As a result of constrained liquidity and other challenges in the market as a whole, the company experienced lower year over year operating results during the 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. IBKR actively managed its excess liquidity and maintained significant borrowing facilities through the securities lending markets and banks. Both revenue and earnings were down on a year over year basis, but improved sequentially.

Net revenues for the quarter increased 12.1% sequentially but decreased 16.0% year over year to $332 million. The year over year decrease in net revenues was mainly due to 15.9% decrease in trading gains to $224 million and 59.2% decrease in net interest income to $11 million. Commission and execution fees for the quarter were up 7.0% sequentially and 5.5% on a year over year basis to $90 million.

Net income (before income taxes and minority interest) increased 15.2% sequentially but decreased 25.9% on a year over year basis to $192 million. Pre-tax operating margin for the quarter was 57.9%, compared to 65.6% in the prior-year quarter.

Total non-interest expenses for the quarter increased 8.1% sequentially and 2.8% year over year to $140 million. Net income available to common shareholders increased 1.6% sequentially but decreased 30.1% year over year to $13 million.

Long-term debt to capitalization at June 30, 2009 was 3.3%, down substantially from 9.1% at December 31, 2008. The company has repaid borrowings on its senior secured credit facility. The consolidated equity capital at June 30, 2009 was $4.64 billion.

 

Market Making: During the reported quarter, net revenues in this segment decreased 19.4% year over year to $219 million. Income before income taxes decreased 29.9% year over year to $141 million. Pre-tax operating margin for this segment decreased to 65% from 74% in the prior-year quarter. The options contract volume for this segment increased 0.4% year over year to 112,490 contracts.

 

Electronic Brokerage: During the quarter, net revenues in this segment decreased 3.1% year over year to $120 million. Income before income taxes increased 4.6% year over year to $62 million. Pre-tax operating margin for this segment came in at 51% as compared to 48% in the prior-year quarter.

Customer accounts during the quarter increased 18.4% year over year to 122,000 and customer equity grew 12.7% year over year to $11.5 billion. The year over year growth in income was driven by robust customer trading and a greater number of customer accounts.

 

IBKR’s strong capital base and highly liquid balance sheet with low leverage set it apart from its competitors -- Jefferies Group (JEF), Investment Technology Group (ITG) and optionsXpress Holdings (OXPS) -- particularly in view of the ongoing challenges in the markets.

Despite competitive pressure on spreads, the company experienced higher overall trade volumes and stable volatility levels during the quarter. We anticipate the volatility in the equity and derivatives markets to remain at a high level in the near-to-medium term, resulting in a very high volume for the derivatives exchanges and increased spreads, which will continue to benefit the top line of the company.

As such, we are maintaining our Hold rating on the shares.