Currency Headwinds a Drag on Interactive Brokers Group, Inc. Earnings

Interactive Brokers Group, Inc. (IBKR -1.11%) continues to be an attractive trading platform for funds and smaller investors, growing its active accounts and equity once again in the fourth quarter of 2016. But top- and bottom-line results didn't show the same improvement that brokerage statistics would indicate. Here's a look at what investors need to know about the recently announced quarterly results. 

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Interactive Brokers Group, Inc. results: The raw numbers

Data source: Interactive Brokers Q4 2016 earnings release.

What happened with Interactive Brokers Group, Inc. this quarter?

As usual, Interactive Brokers results aren't as they appear on the surface. The figures above imply a rapidly declining business, but that's not what took place at the brokerage in 2016. Breaking down the different market segments can be helpful in understanding how the business performed.

• Electronic brokerage revenue jumped from $219 million a year ago to $294 million in the fourth quarter and for the full-year revenues were up from $1.10 billion to $1.24 billion. Segment profit margins also expanded on both a quarterly and yearly basis, ending at 57% for the quarter and 61% for the full year.
• Improvement in the brokerage business was driven by continued growth in accounts. Interactive Brokers ended 2016 with 385,000 customer accounts with $85.5 billion in customer equity, up 16% and 27%, respectively.
• Commission per daily average revenue trade (DART) also increased 5% year over year to $4.01, partially offset by DARTs per account falling 12% to 394.
• Market making wasn't as kind to Interactive Brokers, with revenue falling from $69 million a year ago to $45 million in the fourth quarter. Income before taxes fell from $27 million to $12 million. This continues a decline in the market-making business throughout 2016, which was a drag on year-over-year comparisons for the business.
• A currency hedging program, put in place after sharp losses when the Swiss franc fell suddenly in January 2015, was also a big drag on quarterly results. Corporate net revenue was negative $146 million and loss before taxes was $152 million, accounting for most of the overall decline in revenue and income you see above.

What management had to say

Management was happy with the overall growth in customers and equity in customer accounts, which is what keeps the core brokerage business moving. And a revenue increase per trade has had a positive impact on the business as well.

What's really hurt has been a rapidly rising dollar through most of the second half of 2016. That's led to losses in the currency hedging program. What investors should keep in mind long term is that eventually these losses will likely reverse. The dollar is already on the decline in 2017, and if there are dislocations in the currency market, Interactive Brokers is more prepared than it used to be. Right now, hedging is a drag on results, but that won't continue forever.

Looking forward

Results may be lumpy, but the core brokerage business continues to grow rapidly for Interactive Brokers and that will be the earnings driver going forward. Market-making is a shrinking business and it has been difficult to gain traction, so investors will want to keep an eye on whether it takes away from or augments the core brokerage business.

I would also watch currency changes because that could shift from headwind to tailwind in 2017. If currency starts to help earnings, the stock would look a lot cheaper than its current 30 price-to-earnings ratio.