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As I highlighted in my earnings preview for Interactive Brokers Group, Inc. (IBKR 1.09%), the company has done a great job of attracting new customers and capital to the electronic brokerage business so far in 2016. But since those clients aren't trading nearly as much as the company's traditional customers used to, that could be a negative for the bottom line.
When second-quarter results came out after the market closed on Tuesday, we saw some of those negatives come to fruition. But there's a reason not to worry long term.
The numbers
Net revenue in the second quarter declined 4.7% to $369 million and income before taxes fell 11.3% to $213 million. Net income available to common stockholders did rise 17.4% to $27 million, or $0.40 per share.
The decline on the top and bottom lines were driven by lower market making revenue and a 5% reduction in daily average revenue trades to 648,000. Trading is where the company generates a majority of its revenue and earnings, so the drop in volume hurt operations.
How electronic brokerage grew in Q2
With daily average revenue trades down in the quarter, it's impressive that the brokerage business saw revenue grow 8% to $310 million and segment income before taxes increase 2% to $191 million. The driver of the growth was an 11% increase in net interest income, or margin on trading, and a 56% increase in other income, which was driven by marked-to-market gains on the investments of customer funds.
While the core trading operation didn't have a great quarter as customers traded less, it is positive that customer accounts grew 15% to 357,000 and customer equity was up 12% to $73.7 billion over the past year. Trading trends will go up and down, but having a larger customer base will give Interactive Brokers lasting earnings power, which is what investors should be looking at in the second quarter.
Market making continues its roller-coaster ride
The real reason for Interactive Brokers' dip in revenue was the decline in market making. Revenue from market making was just $43 million in the quarter, down from $72 million a year ago, and income before taxes was also down $25 million to $5 million.
It shouldn't come as a surprise that market making has been turbulent. That's the nature of the market-making business and after a massive loss a year ago due to the sudden drop in the Swiss franc, the company may be pulling back on the market-making business in favor of the steadier brokerage business.
A mixed bag so far in 2016
Depending on the metric you're looking for at Interactive Brokers, the first half of 2016 could be good or bad. The company is definitely attracting more customers and has a growing stable of customer equity, but they are trading less than its prior clientele. That could be a temporary shift or a long-term trend the company will have to deal with. Time will tell what the real story is.
While some investors may be concerned with the decrease in trading volume, Foolish investors should look at the long-term focus on attracting customers and keeping them happy with low fees. That's what will drive value in the long term.
