After the bell on Tuesday, April 21, Interactive Brokers Group (IBKR 3.61%) reported a diluted earnings loss of $0.22 per share, excluding other comprehensive income, for the first quarter, well below the consensus estimate of a $0.07-per-share loss.
Earnings were negatively affected by a $121 million loss caused by sharp movements in the Swiss franc, which left many of its currency clients with negative equity balances. The company warned that it will pursue claims against its customers, but any recoveries will come much later in time, and "at a high legal cost," suggesting that the $121 million loss is unlikely to shrink significantly in the future.
In addition, the company reported $197 million in losses from its currency diversification strategy, which creates losses when the U.S. dollar strengthens broadly. Interactive Brokers keeps its total equity in a basket of 16 currencies to soften currency volatility over time, which it calls its "Global" bucket. A rising U.S. dollar resulted in losses when these movements were translated back into dollars for the period ended March 31. Including the full impact of currency fluctuations, Interactive Brokers posted negative diluted earnings per share of $0.24 in the first quarter.
Brokerage trends point in the right direction
In its core brokerage business, Interactive Brokers reported strong growth in accounts, customer equity, and cleared daily average revenue trades year over year and from the previous quarter.
- Total accounts rose to 296,000, up 17% year over year, and 5% sequentially.
- Customer equity ballooned to $61.2 billion, up 25% year over year and 8% sequentially.
- Cleared daily average revenue trades grew to 590,000, a new record, up 12% year over year and 5% sequentially.
Notably, commissions and execution fees grew 9% from last year, compared with a modest 2% increase in execution and clearing expenses, showcasing its ability to add marginal customers with minimal marginal expense growth.
Its market-making segment lagged, producing a mere $27 million in pre-tax profits, down 59% from the year-ago period. The company cited low volatility and growing competition as drivers for its weaker performance.
Kicking out one-time events
Removing the $121 million charge for losses related to the Swiss franc, Interactive Brokers' pre-tax profit margin in its electronic brokerage segment grew to 63% in the first quarter, up from 60% in the first quarter of 2014.
The conference call also revealed that electronic brokerage income would have otherwise grown 27% from the year-ago quarter if not for the charge taken for losses on the Swiss franc. Adjusted diluted earnings per share would have been $0.31 for the first quarter, equal to the $0.31 in adjusted diluted earnings per share in the first quarter of 2014.
Looking to the future
The company remains poised to benefit from an increase in interest rates. Interactive Brokers believes that a mere 0.25-percentage-point increase in overnight rates would result in an additional $45 million in annual pre-tax net interest income from margin lending.
Finally, the company is making inroads as a platform for other services and brokerages. It announced that it accepted roughly 1,000 accounts from Scottrade, most of which management described as being "sophisticated options traders" who would be better served with Interactive Brokers. If all goes to plan, the company believes it may be able to bring futures trading to current Scottrade clients, and eventually, Interactive Brokers could be a "white-label" brokerage on which other platforms can build.
The company also announced the acquisition of Covestor, a service that allows wealthy investors to automatically track trades by other proven investors and advisors in their own accounts for a flat fee based on a percentage of assets under management. Covestor previously routed trades through its platform, but the acquisition will give it the ability to pitch the combined Covestor and Interactive Brokers solution to advisors and portfolio managers in the future. Interactive Brokers declined to discuss the acquisition price on the conference call.
In all, it was a solid quarter for the brokerage firm. Ignoring one-time expenses from the Swiss franc episode and currency fluctuations, Interactive Brokers posted several new records in its most important electronic brokerage segment.
