The ups and downs of revenue and earnings at Interactive Brokers Group, Inc. (IBKR +0.45%) struck again in the first quarter of 2017. Trading and market making were down versus a year before, but the company still reported a profit and is making long-term adjustments that could make the business more profitable for investors.
Here's a look at what Interactive Brokers reported on Tuesday after the market closed, and where the business is trending.
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Interactive Brokers Group, Inc. results: The raw numbers
| Metric | Q1 2017 | Q1 2016 | Year-Over-Year Change |
|---|---|---|---|
| Net revenues | $374 million | $489 million | (24%) |
| Net income to common stockholders | $24 million | $33 million | (27%) |
| Diluted EPS | $0.34 | $0.51 | (33%) |
Data source: Interactive Brokers Group, Inc.
What happened with Interactive Brokers Group, Inc. this quarter?
There's more to the story at Interactive Brokers than the declines in the metrics above. There were some positive developments, particularly in the electronic brokerage business. Here are the highlights:
- Electronic brokerage was once again the bright spot of the business, accounting for $314 million in net revenue and $185 million in income before taxes. However, these results were lower than in the same period last year, when the division brought in $347 million in net revenue and $235 million in income before taxes.
- The number of brokerage accounts rose 18%, to 406,000, and customer equity was up 38%, to $96.8 billion. Commission per daily active revenue trade (DART) rose 4%, to $4.01, but DARTs per average account fell 25%, to 385, and revenue per average account dropped 15%, to $3,157. These figures drove the decline in the brokerage business in the quarter.
- Market-making revenue plunged from $59 million a year ago to just $8 million, and there was a $22 million loss in the segment.
- Partly due to the losses, options market-making activities will be shut down globally, and management expects to incur $25 million in one-time restructuring costs as a result. But $39 million in net expenses will be moved from market making to the electronic brokerage business.
- Corporate revenue and income before taxes were $52 million and $50 million, respectively, reflecting gains from Interactive Brokers' currency hedging strategy.
- A dividend of $0.10 per share was announced and will be payable on June 14, 2017 to shareholders of record on June 1, 2017.
What management had to say
The two big shifts management has made are generating higher commissions per trade, which is helping offset the company's decline in trades per account. But the decline in trading generally is a burden on the bottom line.
It's also become clear that market making isn't what it once was. After extremely volatile results in the last few years, management doesn't see a long-term advantage in the business. Getting out of market making will likely make Interactive Brokers' revenue and earnings a little less volatile and help focus the business on its strengths long term.
Looking forward
What investors should really take away from this earnings report is Interactive Brokers' move to focus on electronic brokerage, the growth in accounts and equity, and the rising commissions per trade. If trading volume bounces off its current low, the company's revenue and earnings will surge as well. But a quiet market isn't great for brokerage volume, which is a big reason the first quarter wasn't as good as a year ago.
