Interactive Brokers Group, Inc. (IBKR 2.99%) continues to ride a rising stock market and a growing customer base to better financial results. It's a good time to be in the brokerage business, particularly for a low-cost provider like Interactive Brokers.
Second-quarter 2018 results were released on Tuesday, and there's a lot to like about the report. Here's a look at the biggest takeaways for investors.
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Interactive Brokers Group, Inc.: The raw numbers
| Metric | Q2 2018 | Q2 2017 | Year-Over-Year Change |
|---|---|---|---|
| Sales | $553 million | $438 million | 26.3% |
| Net income | $42 million | $23 million | 82.6% |
| Diluted EPS | $0.58 | $0.32 | 81.3% |
Data source: Interactive Brokers Group, Inc. Q2 2018 earnings release.
What happened with Interactive Brokers Group, Inc. this quarter?
The headline numbers are clearly outstanding, but they can often be misleading for Interactive Brokers, given the complexity of the business and the ups and downs of trading. Therefore it's important to dig a little further into the business. Here are the key operating metrics for the quarter:
- Total customer accounts increased 27% from a year ago to 542,000, and customer equity jumped 29% to $134.7 billion.
- Daily average revenue trades (DARTs) per account on an annualized basis were down 6% from a year ago to 350, and commission per DART fell 4% to $3.86.
- Electronic brokerage revenue grew 32.6% to $443 million, driven by the growing number of customers. Income before income taxes from the segment increased 42.9% to $283 million.
- Net interest income, which is part of the electronic brokerage business, rose 49.7% to $232 million as customers increased the amount of trading they're doing on margin. Rising interest rates have also helped to boost revenue from margin trading.
- Market making continues to be a shrinking percentage of the business, generating just $22 million of revenue, down from $23 million a year ago, and $9 million of income before income taxes.
- The quarter did include a loss of $21 million in the company's currency diversification strategy. There can be wild swings in this currency hedging strategy, but in the long term, it's intended to smooth out earnings and mitigate the risks that can come with trading in different parts of the world.
- The board of directors declared a $0.10 dividend per share, payable on Sept. 14, 2018, to shareholders of record as of Aug. 31, 2018.
What management had to say
One of the reasons Interactive Brokers' results have improved so much recently is a focus on the brokerage business. Management sold some of its market operating operations last year and continues to shut down the business, with the earnings release saying:
Market making segment income before income taxes increased to $9 million in the quarter ended June 30, 2018, as compared to a pre-tax loss of $24 million in the year-ago quarter, during which we continued to wind down operations in this segment.
Not only will getting rid of the market making business make operations more stable, but it will reduce operating costs and should help overall margins long-term.
Looking forward
Interactive Brokers seems to be making all of the right moves, selling off its market making business and focusing on growing electronic brokerage. As long as the market keeps going up and margin trading rises, the stock should benefit as well. Trends will eventually shift, but for the foreseeable future, the company looks to be on an unstoppable growth path.
