After a hot start to 2018, Interactive Brokers Group Inc. (IBKR +4.49%) saw growth slow a little in the third quarter. Results released this week showed that customers are still flocking to the broker, but might be trading less than they used to.
Here's a look at the key metrics and trends from Interactive Brokers' third quarter:
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Interactive Brokers Group: The raw numbers
| Metric | Q3 2018 | Q3 2017 | Year-Over-Year Change |
|---|---|---|---|
| Revenue | $558 million | $487 million | 14.6% |
| Net income | $39 million | $31 million | 25.8% |
| Diluted EPS | $0.51 | $0.43 | 18.6% |
Data source: Interactive Brokers Group Q3 2018 earnings release.
What happened with Interactive Brokers this quarter?
The best way to judge Interactive Brokers' business is by looking at operating metrics like accounts and trades per account. If the number of accounts and equity in those accounts and trades are growing, the business should do well long term.
- Total accounts rose 26% versus a year ago to 576,000. Customer equity was also up 23% to $142.5 billion.
- Trading per account was down slightly, with daily active revenue trades (DARTs) down 15% on an annualized basis to 312, and commissions per DART down 5% to $3.78. The good news is that account growth covered up some of these trading declines.
- Electronic brokerage revenue was up 21% to $444 million, and income before taxes for the segment rose 29.8% to $292 million.
- Market-making continues to shrink as Interactive Brokers sells or closes down the business. Revenue fell by nearly half to $16 million, while income before taxes dropped from $11 million to $7 million in the third quarter.
- The other big factor that hurt earnings was Interactive Brokers' foreign currency diversification strategy. The basket of currencies the company holds is marked to market, which can mean wild swings in profits or losses depending on the quarter. This quarter, it resulted in a $27 million reduction in comprehensive earnings, which depressed net income for the quarter.
- Management also declared a dividend of $0.10 per share, payable Dec. 14, to shareholders of record on Nov. 30.
What management had to say
One of the most interesting comments from the third-quarter conference call was by CEO Thomas Peterffy, about commission-free trades other brokers are introducing:
The greener-grass syndrome is spreading through the industry. JPMorgan is offering free trades by selling their customers' orders to high-frequency traders, while we are offering high rates on deposits. Who's got more to gain or lose? I like our position.
Interactive Brokers is in the business of making active traders happy, and if competitors are offering free trades, it could threaten the business. But management thinks better-executed trades will more than offset that cost reduction, which could be the right play long term.
Looking forward
Metrics like customer accounts and equity continue to rise, which is great for Interactive Brokers. Investors should watch trading volume and the commissions the broker can charge customers, especially with free trades being offered by competitors. But right now, I see no reason to be concerned about this business long term.
