Interactive Brokers (NYSEMKT:IBKR) has been in the headlines over the past week for a reason unrelated to the release of its quarterly financial report, as the brokerage company found itself on the receiving end of about $120 million of losses related to customer foreign-exchange positions that left it exposed to volatile movements in the Swiss franc. Even though Interactive Brokers had a lot to celebrate in 2014, including solid numbers on the customer front, fears still abound about whether the company will be able to keep advancing into the future even if market conditions change dramatically. Let's take a closer look at Interactive Brokers and its 2014 results to learn what investors should keep an eye on during 2015.
Understanding Interactive Brokers' results
Looking at the headline numbers, Interactive Brokers produced mixed results. From a revenue standpoint, Interactive Brokers had a tough quarter, with total net revenues falling nearly 17% and pulling down full-year results by 3%. Yet the broker's expenses also fell precipitously, leaving net income for common shareholders nearly doubling from the year-ago quarter. Those figures produced quarterly earnings of $0.12 per share, which was well above the $0.06 per share that analysts had expected.
Yet when you look at Interactive Brokers' results on a comprehensive basis, you get a much different picture. Strength in the U.S. dollar hurts Interactive Brokers on this metric, and when you incorporate those losses, the broker's profits almost disappear, leaving earnings per share of just $0.02 for the quarter and $0.51 for the full 2014 year.
Still, a deeper dive into Interactive Brokers' operations tells yet another story. Total trades jumped 22% for the quarter from year-ago levels, with a 28% rise in brokerage-cleared trades leading the way higher for the company. Share-trading volumes soared 37%, and both options and futures volumes rose by double-digit percentage amounts as well.
Other metrics of trading activity looked stronger across the board. Total customer accounts soared 18% to 281,000, and customer equity rose $11 billion to $56.7 billion. Moreover, daily average revenue trade figures climbed by 24%, leading to a 10% jump in net revenue per account.
Yet investors instead focused purely on the short run, sending shares down 2% in the first hour of after-hours trading following the announcement. Although Interactive Brokers' results were part of the reason, investors also appear to remain concerned about the Swiss franc fiasco and what it means for the company's business model.
What's to come for Interactive Brokers this year?
One thing that stands out in Interactive Brokers' results was the disparity between its brokerage and market-making operations. Pre-tax profit margins on the brokerage end nearly tripled in the fourth quarter to 64%, yet margins from market-making activities plunged 11 percentage points to 28% and pre-tax income got cut almost in half.
Those results show that even as Interactive Brokers has built up a strong customer base, its internal market-making operations are holding the company back. At the same time, the increased reliance on its customer trading activity means that Interactive Brokers could have a tougher time dealing with the next market downturn if it leads to a reversal in that favorable trend going forward.
At the same time, investors are still reeling from the currency volatility that cost Interactive Brokers a nine-figure loss last week. Although Interactive Brokers was far from the hardest hit from the crisis, the reemergence of what amounts to systemic risk in the financial-services industry led to a brief exodus among shareholders before the stock recovered. The episode reminded investors that unforeseen risks can appear at any time, and the question for the brokerage firm is whether they'll respond by stepping up their trading or by withdrawing from the market entirely.
Interactive Brokers' results disappointed some traders, but from a longer-term perspective, the company is making smart moves to get customers more engaged on its trading platform. If more favorable market conditions arise, then Interactive Brokers looks to be setting itself up for what could become a much stronger 2015.