Interactive Brokers Beats Q1 Earnings Ests - Analyst Blog

A significant rise in the top line drove Interactive Brokers Group, Inc.'s IBKR first-quarter 2014 adjusted earnings per share of 34 cents, which surpassed the Zacks Consensus Estimate of 29 cents. Moreover, the reported figure was up from 14 cents earned in the year-ago quarter.

Better-than-expected results were mainly due to appreciable growth in revenues, partially offset by a slight rise in expenses. Results were also aided by solid performance of both the Electronic Brokerage and Market Making segments.

Our quantitative model had also conclusively projected that Interactive Brokers would beat the Zacks Consensus Estimate, as it had the right combination of two key components – a positive Earnings ESP and a Zacks Rank #1 (Strong Buy).

Net income available to common shareholders in the reported quarter was $19.1 million, up significantly from $6.6 million in the prior-year quarter.

Performance in Detail

Interactive Brokers' net revenue in the quarter came in at $354.9 million, up 64.2% year over year. The rise was mainly driven by substantial trading gains as well as higher commission and execution fees and interest income, partly offset by a fall in other income and higher interest expenses.

Total non-interest expenses were $136.8 million, up 2.2% from the prior-year quarter. The increase was primarily due to rise in employee compensation and benefits, communications expenses as well as general and administrative expenses. These negatives were partly offset by a fall in execution and clearing expenses, occupancy costs along with lower depreciation and amortization expenses.

Income before income taxes rose from $82.2 million in the year-ago quarter to $218.1 million. Similarly, pre-tax profit margin increased to 61% from 38% in the prior-year quarter.

As of Mar 31, 2014, cash and cash equivalents (including cash and securities set aside for regulatory purposes) were $16.6 billion, up 9.0% year over year. Total assets were $39.0 billion, up 2.9% year over year.

Total equity came in at $5.2 billion versus $5.1 billion as of Mar 31, 2013.

Segmental Performance

Market Making: Net revenue grew from $23.6 million in the prior-year quarter to $133.1 million. Similarly, pre-tax income was $88.1 million compared with a pre-tax loss of $29.0 million. Further, pre-tax profit margin was 66% compared with a pre-tax loss margin of 123% in the year-ago quarter.

Electronic Brokerage: Net revenue improved 14.5% year over year to $223.7 million. Pre-tax income increased 21.0% to $134.3 million. Further, pre-tax profit margin rose to 60% from 57% in the prior-year quarter. Additionally, total daily average revenue trades (DARTs) for cleared-only customers increased 25.0% year over year to 527,000.

Our Viewpoint

Interactive Brokers' healthy balance sheet with low leverage and strong financials are expected to boost investors' confidence in the stock. Further, the company's increased focus on diversification and technological excellence will likely aid growth going forward.

However, rise in Interactive Brokers' interest expenses as well as non-interest expenses are causes of concern.  Still a significant increase in customer accounts and higher average trading activity in the Electronic Brokerage segment are catalysts.

Performance of Other Investment Brokers

The Charles Schwab Corp.'s SCHW first-quarter 2014 earnings of 24 cents per share beat the Zacks Consensus Estimate of 22 cents. Results benefited from strong revenue growth and prudent expense management, partially offset by decline in benefit from provisions.

Among other major investment brokers, E*TRADE Financial Corp. ETFC is slated to announce results on Apr 23 and TD Ameritrade Holding Corp. AMTD is scheduled to report second-quarter fiscal 2014 results on Apr 24.