Interactive Brokers Group Inc.'s (IBKR 0.46%) earnings can be extremely volatile depending on how market making, stock trading, and a complex currency-diversification strategy goes. The fourth quarter of 2018 was no different, as the core business showed strong fundamentals, but currency trading took a big bite out of earnings

As always, taking a broad, long-term look at the company is what's most important, so let's dive into the numbers. 

Stock trader sitting at a desk. with computer screens all around him.

Image source: Getty Images.

Interactive Brokers Group: The raw numbers

Metric Q4 2018 Q4 2017 Year-Over-Year Change
Net revenue $492 million $515 million  (4.5%) 
Net income $43 million  ($2 million)  n/a 
Diluted EPS $0.57  ($0.02)  n/a 

Data Source: Interactive Brokers Group Inc Q4 2018 earnings release. EPS = earnings per share.

What happened with Interactive Brokers Group this quarter? 

The drop in revenue looks bad on the surface but isn't really indicative of the performance of the core business. The detailed breakouts below should give an indication of how the electronic brokerage is growing its customer base, which is ultimately what will drive earnings long term. 

  • Commissions revenue rose 20.6%, to $205 million, in the quarter and interest income was up 36.5%, to $385 million. But revenue declined because of a 70.9% drop in other income to $37 million and an 82.1% jump in interest expense -- which is deducted to calculate net revenue -- to $142 million. 
  • On the core electronic-brokerage side of the business, operations are going well. Total accounts increased 24% versus a year ago, to 598,000, and customer equity was up 3%, to $128.4 billion. Here you're seeing some of the impact of a declining stock market in the equity values. 
  • Cleared daily active revenue trades (DARTs) were up 26%, to 856,000. DARTs per account increased 17%, to 364, on an annualized basis and commissions per DART rose $0.01, to $3.79. 
  • Interactive Brokers' currency-diversification strategy lowered earnings by $18 million in the fourth quarter compared to a $5 million gain for Q4 2017. 
  • A 20% jump in net interest income was driven by customers expanding their margin-loan balances. 

Full-year results showed a jump in net income per share to $2.28 from $1.07 a year ago, helped by a lower corporate tax rate, which boosted earnings by $0.46 per share. 

What management had to say

One big topic for discussion was current CEO Thomas Peterffy's recent decision to retire later this year. Milan Galik is taking over as CEO, and Peterffy is confident he can continue to grow the company saying, "With Milan as CEO, the strength and quality of our platform will continue to grow, and he shares my goal of making Interactive Brokers the largest broker in the world."

Peterffy will continue to be involved in the company, and investors shouldn't expect any major strategic changes. Interactive Brokers will continue to be a low-cost electronic brokerage for high-volume traders. 

Looking forward

It's really business as usual for Interactive Brokers. The customer base is growing and commissions are relatively flat, which are both going to drive the business long term. Volatile areas like currency trading and customer equity tied to the stock market will be up and down, depending on the quarter, and in Q4, those two areas didn't look impressive. But long term, the company is well-positioned as an electronic brokerage and continues to add accounts that keep the business growing. 

Check out the latest Interactive Brokers Group earnings call transcript.