Interactive Brokers Beat Estimates - Analyst Blog

Interactive Brokers Group Inc.'s (IBKR) third quarter 2010 earnings of 26 cents per share beats the Zacks Consensus Estimate by 30%, surpassing the prior-year quarter earnings of 20 cents.

Results benefited mainly from a growth in the top line and lower non-interest expenses. Also, the balance sheet remained highly liquid with a relatively low leverage.

Interactive Brokers' net income available to common shareholders increased 30.6% from the prior-year quarter to $11.1 million.

Behind the Headlines

Interactive Brokers' net revenue rose 10.2% year over year to $299.1 million. The increase was primarily attributable to an increase in trading gains (up 9.1% year-over-year to $168.7 million), commissions and execution fees (up 1.2% year over year to $90.1 million) and interest income (up 41.8% from the prior-year quarter to $42.4 million). Net revenue was also significantly ahead of the Zacks Consensus Estimate of $280.0 million.

Net income (before income taxes and minority interest) was up 21.6% on a year-over-year basis to $161.9 million. Pre-tax profit margin for the quarter was 54%, compared with 49% in the prior-year quarter.

Total non-interest expenses fell 0.9% year over year to $137.2 million. The decline was primarily due to an 11.0% decrease in execution and clearing expenses and a 9% drop in occupancy, depreciation and amortization expenses, which were partially offset by a 15.3% increase in employee compensation and benefits expenses and an increase of 9.2% in general and administrative expenses.

Segment Performance

Market Making: Net revenue spiked 13.6% to $170.7 million from $150.3 million in the year-ago quarter. Income before income taxes came in at $103.9 million, up 39.3% compared with $74.6 million in the prior-year quarter. Pre-tax operating margin was 61%, showing a substantial rise from 50% in the prior-year quarter.

The market environment was challenging in the reported quarter, with continued tight bid/offer spreads and lower volatility. Hence, the options contract volume declined 12% over the prior quarter, but increased 7% compared with the year-ago quarter to 107,602.

Electronic Brokerage: Net revenue increased 6.4% year over year to $129.3 million. Income before income taxes inched up 2.1% year over year to $63.4 million. Pre-tax operating margin for this segment came in at 49% compared with 51% in the prior-year quarter.

Customer accounts grew 18% year over year to 151,000. Customer equity improved 41% year over year to $18.9 billion. Total customer daily average revenue trades (DARTs) surged 4% from the prior-year quarter to 320,000, driven by increased trading volumes in all products across the board.

Capital Evaluation

Consolidated equity capital as of September 30, 2010 was $5.11 billion compared with $4.87 billion as of December 31, 2009. The company also continues to maintain well over $1 billion in excess regulatory capital in its broker-dealer companies around the world.

Our Take

Though Interactive's fundamentals remain strong with a highly liquid balance sheet, strong capital position and high barriers to entry, significant international exposure and increased market risk could impact profitability in the upcoming quarters.

Interactive Brokers currently retains a Zacks #4 Rank, which indicates a short-term Sell rating. However, considering the fundamentals, we maintain our long-term Neutral recommendation on the shares.