Interactive Brokers Group, Inc. (IBKR 0.56%) continues to attract thousands of new customers to its low-cost trading platform, and revenue is growing as a result. The company also had a big windfall from a currency diversification strategy that helped results short term.
But a tax cut passed by Congress hurt earnings -- an odd twist for corporations that wanted a tax cut -- so fourth quarter numbers didn't look as good as some investors hoped. Here's what you need to know about Interactive Brokers' recently released fourth-quarter results.
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Interactive Brokers: The raw numbers
| Metric | Q4 2017 | Q4 2016 | Year-Over-Year Change |
|---|---|---|---|
| Net revenue | $515 million | $193 million | 167% |
| Net income to shareholders | ($2 million) | $4 million | NM |
| Diluted EPS | ($0.02) | $0.07 | NM |
Data Source: Interactive Brokers Group, Inc. Q4 2017 earnings release. NM = not meaningful.
What happened with Interactive Brokers this quarter?
The top and bottom line numbers can swing wildly for Interactive Brokers, which is why digging into the operating metrics are key for investors. Here are the highlights from the quarter:
- Total customer accounts grew 25% over the past year to 483,000 and customer equity rose 46% to $124.8 billion.
- Total daily active revenue trades (DARTs) rose 14% to 730,000 and commission per DART only fell 2% to $3.92. As a result, net revenue per average account rose 4% to $3,318.
- Electronic brokerage revenue rose 33% to $390 million and income before taxes in the segment was up 50% to $252 million.
- Market making revenue dropped 44% to just $25 million and income before taxes in the segment fell by one-third to $8 million as most of the business has been divested.
- Other income was $127 million in the fourth quarter, driven by a $110 million gain on a currency diversification strategy. This was a sharp rise from a $134 million loss in other income a year ago.
- The tax bill recently passed by Congress had the effect of lowering quarterly earnings by $0.45 per share. Without that impact, earnings would have jumped more than six-fold to $0.43 per share.
- Interactive Brokers announced a dividend of $0.10 per share, which will be payable to shareholders of record on Mar. 1.
What management had to say
Interactive Brokers set the strategic goal of exiting the market-making business in favor of focusing on its higher-value brokerage customer base with the intent to build a more sustainably profitable business in the long run. Implementing that goal has required the brokerage company to take a number of one-time charges, but when you pull out those extraordinary items, it looks like Interactive Brokers has made progress toward enhancing its earnings. CFO Paul Brody put it like this:
Excluding the impact of the new tax law, market maker exit costs, currency translation effects and Treasury marks, net revenues were up 19% versus last year while pre-tax income was up 43% for a pre-tax margin of 64%.
Looking forward
Given the momentum of markets and customers toward the Interactive Brokers platform, it looks like the business is set up to succeed in today's trading environment. I don't see any slowdown in the trends driving revenue higher, and if operating leverage continues on the bottom line we should see sustainable earnings growth in 2018.
