Interactive Brokers Group, Inc.'s (IBKR) third-quarter 2014 adjusted earnings per share of 5 cents largely missed the Zacks Consensus Estimate of 23 cents. Also, the reported figure came in a massive 84% lower than the year-ago quarter earnings.
Substantial trading losses in the Market Making as well as the Corporate segment resulted in the overall poor performance of the company. Higher expenses further weighed on the results. However, sustainable performance of the Electronic Brokerage segment as well as improvement in daily average revenue trades (DARTs) were the redeeming factors to some extent.
On a comprehensive basis, net loss available to common shareholders came in at $7.6 million or 13 cents per share compared with a net income of $20.1 million or 39 cents per share in the prior-year quarter.
Performance in Detail
Interactive Brokers' net revenue plunged 47.6% year over year to $171.0 million. The decline was primarily driven by significant trading losses, partly offset by an increase in commission and execution fees as well as interest income. Moreover, it compared unfavorably with the Zacks Consensus Estimate of $287.0 million.
Total non-interest expenses summed $131.5 million, up 1.2% from the year-ago quarter. The rise was mainly attributable to higher employee compensation and benefits as well as general and administrative expenses. However, these were slightly mitigated by a reduction in execution and clearing as well as communications expenses.
Income before income taxes declined 79.9% year over year to $39.5 million. Similarly, pre-tax profit margin fell to 23% from 60% in the prior-year quarter.
As of Sep 30, 2014, cash and cash equivalents (including cash and securities set aside for regulatory purposes) totaled $16.3 billion compared with $15.2 billion as of Dec 31, 2013. As of Sep 30, 2014, total assets grew 9.9% to $41.6 billion from the Dec 31, 2013 figure.
As of Sep 30, 2014, total equity rose 2.0% to $5.3 billion versus the Dec 31, 2013 figure.
Segmental Performance
Market Making: Net revenue came in at a negative figure of $70.4 million compared with the positive figure of $130.9 in the prior-year quarter. Similarly, pre-tax loss amounted to $111.8 million compared with the pre-tax earnings of $87.5 million in the year-ago quarter. Further, pre-tax margin reflected a negative return of 159% compared with a positive return of 67% in the year-ago quarter.
The weak performance of this segment was triggered by the prevailing competitive situation, lower average volatility, elevated M&A activity as well as a trading error which resulted in a loss of $16 million during the quarter.
Electronic Brokerage: Net revenue improved 24.8% year over year to $243.0 million. Pre-tax income escalated 40.6% to $152.4 million. Further, pre-tax profit margin rose to 63% from 56% in the prior-year quarter. Additionally, total DARTs for cleared-only customers increased 14% year over year to 485,000.
Our Viewpoint
Interactive Brokers' quarterly results suffered mainly due to weak performance of the Market Making segment. The increasing competitive environment, Market Making segment's high sensitivity to the fluctuating volatility as well as Interactive Brokers' exposure to certain risks associated with international operations are bound to make it difficult for the company to turn this dismal performance around.
Nonetheless, Interactive Brokers' healthy balance sheet with low leverage and strong financials are expected to enhance investors' confidence in the stock. Moreover, the company's focus on diversification and technological excellence will likely aid growth going forward.
Interactive Brokers currently carries a Zacks Rank #3 (Hold).
Among other major investment brokers, Cowen Group, Inc. (COWN) is slated to report third-quarter 2014 results on Nov 6. Moreover, on Oct 28, TD Ameritrade Holding Corp. (AMTD) and GFI Group Inc. (GFIG) are scheduled report their fourth-quarter fiscal 2014 results and third-quarter 2014 results, respectively.
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