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Interactive Brokers (IBKR) Q3 Earnings Miss, Revenue Falls


Interactive Brokers Group, Inc. IBKR reported a negative earnings surprise of 6.3% in third-quarter 2016. Adjusted earnings per share of 30 cents lagged the Zacks Consensus Estimate by 2 cents. Moreover, earnings compared unfavorably with the prior-year quarter tally of 35 cents.

Decline in revenues, increased expenses and dismal performance of the Market Making segment led to the unfavorable result. However, on the upside, the company experienced notable increase in net interest income, gain on currency diversification strategy and growth in customer equity.

The results for the quarter included a gain of $13 million due to the company’s currency diversification strategy. The weakening of the U.S. dollar against all other major currencies was primarily responsible for this gain.

On a GAAP basis, net income available to common shareholders amounted to $20 million or 30 cents per share, compared to $22 million or 35 cents per share in the prior-year quarter.

Interest Income Growth Fails to Offset Higher Expenses

Total net revenue was down around 4% year over year to $345 million. The top line declined primarily because of a drop in trading gains and lower commissions and execution fees, partially offset by a 28.7% surge in interest income. However, the figure surpassed the Zacks Consensus Estimate of $344 million.

Total non-interest expenses were up 3.2% from the year-ago quarter to $162 million due to a rise in all components, except execution and clearing, and customer bad debt component.

Income before income taxes came in at $183 million in the quarter, down 9.4% year over year. Similarly, pre-tax profit margin was 53%, compared with 56% in third-quarter 2015.

Capital Position Strengthens

As of Sep 30, 2016, cash and cash equivalents (including cash and securities set aside for regulatory purposes) totaled $26.8 billion, compared with $22.9 billion as of Dec 31, 2015. As of Sep 30, 2016, total assets amounted to $55.06 billion, compared to $48.7 billion as of Dec 31, 2015, while total equity was $5.9 billion compared to $5.3 billion on Dec 31, 2015.

Segment Performance

Electronic Brokerage: Net revenue decreased 4% year over year to $288 million due to lower commissions and execution fees and mark-to-market losses. This was partially offset by higher net interest income. Pre-tax income also declined 12% to $162 million.

Total DARTs for cleared and execution-only customers decreased 11% to 609,000. Pre-tax profit margin shrunk to 56% from 61% in the prior-year quarter.

Market Making: Net revenue plunged 52.2% year over year to $43 million. Pre-tax income also plummeted 85% to $7 million, resulting in a 16% contraction in the pre-tax margin, from the year-ago level of 51%.

Moreover, the Corporate segment reported pre-tax income of $14 million as compared with pre-tax loss of $28 million in the prior-year quarter. Net revenue amounted to $14 million, compared to a loss of $31 million in the year-ago quarter.

Dividend Announcement

Interactive Brokers has declared a quarterly cash dividend of 10 cents per share. The dividend will be paid on Dec 14, 2016 to shareholders of record as of Dec 1.

Our Take

Interactive Brokers is poised to capitalize on growth scopes backed by its market-leading position, technological advancement and optimization of resource allocation across global electronic networks. Also, a strong liquidity and capital position will continue to support its expansion initiatives.

However, stiff competition and increasing volatility may continue to hamper the company’s near-term profitability.

INTERACTIVE BRK Price, Consensus and EPS Surprise

Currently, Interactive Brokers carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Among other investment brokers, The Charles Schwab Corp.’s SCHW reported third-quarter 2016 adjusted earnings of 34 cents per share, beating the Zacks Consensus Estimate by a penny. Results excluded litigation proceeds of nearly $14 million, related to the company’s non-agency residential mortgage-backed securities portfolio. Revenue growth, lower level of fee waivers and stable provisions acted as tailwinds. However, higher expenses remained a concern.

We now look forward to TD Ameritrade Holding Corp. AMTD and Raymond James Financial, Inc. RJF which is scheduled to report their results on Oct 25 and Oct 26, respectively.

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