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Interactive Brokers Group, Inc. (IBKR) Q1 2024 Earnings Call Transcript (Updated)

Interactive Brokers Group, Inc. (NASDAQ:IBKR) Q1 2024 Earnings Call Transcript April 16, 2024 4:30 PM ET

Interactive Brokers Group, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Executives Thomas Peterffy - Chairman Milan Galik - President, CEO & Director Paul Brody - CFO Nancy Stuebe - Director, IR   Analysts Craig Siegenthaler, Bank of America/Merrill Lynch Ben Budish, Barclays James Yaro, Goldman Sachs Daniel Fannon, Jefferies Patrick Moley, Piper Sandler Chris Allen, Citi Kyle Voigt, KBW Macrae Sykes, GAMCO Brennan Hawken, UBS   Operator Good day, and thank you for standing by, and welcome to Interactive Brokers Group First Quarter 2024 Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Nancy Stuebe, Director of Investor Relations. Please go ahead.   Nancy Stuebe Good afternoon, and thank you for joining us for our First Quarter 2024 earnings call. Joining us today are Thomas Peterffy, our Founder and Chairman; Milan Galik, our President and CEO; and Paul Brody, our CFO. I will be presenting Milan’s comments on the business, and all three will be available at our Q&A. As a reminder, today's call may include forward-looking statements, which represent the company's belief regarding future events, which by their nature, are not certain and are outside of the company's control. Our actual results and financial condition may differ, possibly materially, from what is indicated in these forward-looking statements. We ask that you refer to the disclaimers in our press release. You should also review a description of risk factors contained in our financial reports filed with the SEC. This quarter, many of the same major trends we saw in 2023 continued to play out. With market indexes on the rise worldwide and the popularity of investing growing, we see global interest from investors who increasingly want broad portfolios, with some invested in securities in their home markets, but a more significant portion invested overseas, particularly in US securities. Product-wise, industry options contract volumes - both individual securities and 0DTE - were up as their popularity continued. Since the pandemic, average daily volume in OCC options has more than doubled, from about 20 million contracts a day in 2019 to 40 million in 2022, and now a record 47.5 million in the first quarter. CME futures volumes, though down slightly from last year when investors were trading actively on the direction of interest rates, are up versus last quarter and meaningfully above pre-pandemic levels. And on the equities front, nearly every stock market around the world was up this quarter, with the exceptions of Hong Kong and China. This is a similar pattern to what we saw in 2023. The popularity of the “Magnificent Seven” technology names continues, which has meant that many investors hold onto their positions and are distinctly not looking to make any changes like selling them and buying new names. The Magnificent Seven are not gripping the index quite as firmly as last year – when they represented 75% of the S&P 500’s first quarter performance, versus 43% in this quarter – but their stock price strength means investors have not needed to look elsewhere for gains, and as happened in 2023, industry equities volumes are down again as a result. What all of the above has meant for our business starts with strong account growth as we add more investors to our platform, both institutional and individual. In the first quarter, we added 184,000 new accounts, second only to the meme stock days of the first quarter 2021. We added, in this one quarter, twice the number of accounts we added in all of 2019. New accounts meant more cash in those accounts, which helped raise our client credit balances to a record $104.9 billion. Our client equity was up 36% to $466 billion, meaning we are approaching half a trillion dollars of client assets. Volume-wise, we saw strong contract volumes in options, up 24% in the quarter and significantly ahead of the industry; and slightly weaker volumes in futures and equities, similar to the industry. However, rising equity markets have led clients to feel more comfortable with taking on risk, so they took on more assertive positions, which increased our exposure fee revenue; and took on more leverage to bolster their positions, increasing our margin loans – which exceeded $50 billion for the first time since 2021 - and our margin interest income. This translated into strong financial results.  Commission revenue was second only to the meme-stock spike of the first quarter of 2021, and net interest income reached a record, as did total revenues. We always focus on our expenses, meaning our pretax income also reached a record, and our pretax profit margin remained at an industry-leading 72%. In recognition of this, and as a sign of our confidence in our business model and growth potential, we revisited the amount of dividend we pay, and decided to increase it to $0.25 a quarter. We recognized that the dividend was unchanged since we initiated it at $0.10 in 2011, a time when we had 170,000 accounts, quarterly earnings of $222 million and capital of $4.4 billion. Today we enjoy a strong capital position, which will allow us to be opportunistic in the M&A space should the right opportunity arise, but we would like to acknowledge our shareholders by returning some capital to them. In terms of how the business looked on the client front, our accounts and client equity grew fastest in Europe and Asia, similar to what I mentioned earlier - growing numbers of investors worldwide wanting access to international, and particularly US, markets. Individuals saw the fastest account growth among our five client segments, with introducing brokers and proprietary traders close behind. On the client equity side, financial advisors grew the fastest, followed by individuals and i-brokers. Proprietary traders had the fastest commission growth, while net interest growth was led by introducing brokers, followed by hedge funds and individuals. Speaking of introducing brokers, our pipeline of potential clients remains healthy. There are several of these opportunities-- about a couple dozen of them - at various stages. Some are in the testing stage; others have started onboarding so-called “Friends and Family accounts”, where they test the waters and make sure that everything is working; while others are in the prospect stage to figure out what the optimal way for them to interface with us is. This can take time, since we offer a variety of ways for an introducing broker to come onto our platform:  on the one hand, it can be as simple as a broker White-Labeling our services, in which case the startup is very quick; or on the other it can be quite complex for i-brokers who want to have their own client-facing user interfaces, so they take longer to integrate with us. In between these two there are many different setups with varying degrees of nuance and distinctions, as the broker picks and chooses the level of integration and coupling that works best based on its needs and on what it is able to support in-house. In terms of new product introductions, we had a busy quarter. We are pleased to introduce our High Touch Prime Brokerage Service, which we announced last week. Hedge funds in our High Touch program will have a dedicated relationship manager, and direct access to subject matter experts as well as to an in-person 24x5, global outsourced trading desk. We consider the mission of the High Touch Service to be “Find a Way to Yes” for our clients’ requests. For those hedge funds listening – I am sure there is a piece of your portfolio you could consider allocating to us. Regarding our platforms, we introduced IBKR Desktop, a streamlined, simpler-to-use, next-generation desktop trading application, for Windows and Mac. IBKR Desktop is now sufficiently resource-rich, stable and available to our clients. We’ve added multisort screeners, option analysis and other enhancements, to name a few. For our flagship Trader Workstation, we added a multi-stock tax loss harvesting tool. And for IBKR Mobile, we re-engineered information architecture and navigation from the ground up. Our registered investment advisor clients got a host of new tools this quarter, including an improved Message Center, a reworked Advisor Portal menu with new features for managing contacts, accounts and portfolios, and ways for the platform to assist with filing their Form ADVs. Automating substantial parts of the brokerage business for client success is the heart of what we do.  There is much we are looking forward to, and much work to be done, as there always is, and as every software developer will tell you.  We are as busy as we’ve ever been and continue to see global demand for access to all markets. This trend, and our ability to serve it with a much lower cost structure and a much broader product and tool set, is what sets us apart, and will continue to do so in the years ahead. With that, I will turn the call over to Paul Brody. Paul?   Paul Brody Thank you, Nancy. Good afternoon, everyone. I will review our first quarter results, and then of course, we’ll open it up for questions. Starting with our Revenue items on page 3 of the release, we are pleased with our financial results this quarter, as we again produced record net revenues and pretax income. Commissions rose versus last year’s first quarter, reaching $379 million. This quarter, we saw higher trading volumes from our growing base of active customers, particularly in options, which set a new quarterly volume record. Net interest income also reached a quarterly record of $747 million, reflecting a risk-on environment in the quarter versus last year that led to more margin borrowing as well as higher yields on our margin loans and segregated cash portfolio. These were partially offset by the higher interest paid to our customers on their cash balances. Interactive Brokers passes through to them all rate hikes above the first 50 basis points on their qualified funds, which makes us attractive compared to other brokers and banks and competitive with money market funds. Other fees and services generated $59 million, up 37% from the prior year, driven by the risk-on positioning of customers in the quarter. As we report in the Financial Highlights on page 1 of our earnings release, the primary factor was an increase in risk exposure fees, with a contribution from FDIC sweep fees as well. Other income includes gains and losses on our investments, our currency diversification strategy and principal transactions. Note that many of these non-core items are excluded in our adjusted earnings. Without these excluded items, Other income was $31 million for the quarter. Turning to expenses, Execution, Clearing and Distribution costs were $101 million in the quarter, up 6% over the year-ago quarter on higher volumes in options, which carry higher fees. As a percent of commission revenues, Execution & Clearing costs were 21% in the first quarter for a Gross Transactional Profit margin of 79%. We calculate this by excluding from "Execution, Clearing and Distribution” $21 million of non-transaction-based costs, predominantly market data, which do not have a direct commission revenue component. Compensation & Benefits expense was $145 million for the quarter, for a ratio of Compensation expense to Adjusted Net Revenues of 12%, down slightly from last year’s quarter. We remain focused on expense discipline, as reflected in our slowing the staff increase to 3% over the prior year. Our headcount at March 31st was 2,956. G&A expenses were $50 million, up from the year-ago quarter on higher advertising and legal expenses. Our pretax margin was 72% for the quarter. Income Taxes of $71 million reflects the sum of the public company’s $36 million and the operating companies’ $35 million. The public company’s adjusted effective tax rate was 17.2%, within its usual range and similar to the prior year. Moving to our balance sheet on page 5 of the Release, the consistent strength of our business and our healthy balance sheet supports our raising the dividend from $0.40 per year to $1.00, returning capital to shareholders while still maintaining an ample capital base for the current business and future opportunities. Our total assets ended the quarter 11% higher at $132 billion, with growth driven by margin lending to both new and existing customers. We continue to have no long-term debt. We maintain a balance sheet geared towards supporting growth in our existing business and helping us win new business by demonstrating our strength to prospective clients and partners. In our operating data, on pages 6 and 7, our contract volumes in options for all customers rose 24% over the prior-year quarter, well above industry growth. Futures contract volumes and stock share volumes declined, as they did across the industry. The decrease in stock share volume occurred in tandem with clients gravitating to larger, higher quality names, with lower trading in pink sheet and other very low-priced stocks. In fact, despite the decline in share volume the total notional value of brokerage shares traded was up in many markets, particularly in the US. On page 7, you can see that total Customer DARTs were 2.4 million trades per day, up 14% from the prior year and especially strong in options, followed by stocks and foreign exchange. Commission per Cleared Commissionable Order of $2.93 was down from last year, due to a mix of smaller average order sizes in stocks and options and larger in futures. Stocks and options contributed higher overall volumes but smaller average order sizes, while futures contributed lower volume with a larger average order size. Page 8 shows our Net Interest Margin numbers. Total GAAP net interest income was $747 million for the quarter, up 17%, while our NIM net interest income was $762 million, or $15 million higher. In the NIM computation, we include some income that for GAAP purposes is classified as Other Fees or Other Income, but we believe is more appropriately considered interest. Our Net Interest Income reflects strength in margin loan and segregated cash interest, partially offset by higher interest expense on customer cash balances. Most central banks around the world, including the Federal Reserve, held interest rates steady this quarter. Exceptions included a rate rise in Japan from negative 10 basis points to zero to positive 10 basis points, and a 25-basis point rate cut in the Swiss franc benchmark. Reflecting the rise in benchmark rates over the year, our segregated cash interest income rose 26% on a 2% increase in average balances, while margin loan interest rose by 42% on a 19% increase in average balances. The average duration of our portfolio remained at less than 30 days. With the US dollar yield curve continuing to be inverted, we have been maximizing what we earn by focusing on higher short-term yields, rather than accept the significantly lower yields of longer maturities. This strategy allows us to maintain a relatively tight maturity match between our assets and liabilities. Securities lending net interest has not been as strong as in prior quarters for three main reasons:

  • First, throughout the industry, overall demand for shorting stocks has fallen. An extremely strong stock market, up in the US nearly 30% in the past year, and 10% in the first quarter alone, means fewer people are looking to put on shorts when the overall market trend is so soundly upward.

  • Second, there are fewer “hard to borrow” names industry-wide, not only because the overall market is rising sharply, but also due to weakness in some of the drivers relevant to securities lending, including significantly fewer IPOs, low market volatility, and less merger & acquisition activity.

  • Finally, as noted on previous calls, higher average interest rates versus prior year periods means more of what we earn from securities lending is classified as interest on “segregated cash”. To more accurately compare our securities lending revenue with last year, we estimate that if the additional interest earned on cash collateral were reported under “Securities Borrowed and Loaned”, it would have been $12 million higher, or $38 million.

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Interest on Customer Credit Balances, the interest we pay to our customers on the cash in their accounts, rose on both higher rates in nearly all currencies and higher balances from new account growth. As we have noted many times in the past, the high interest rates we pay on customer cash – currently 4.83% on qualified US dollar balances - is a significant driver of new customers. Fully rate-sensitive customer balances were about $18.5 billion this quarter, versus $17.2 billion in the year ago quarter. And firm equity, most of which consists of interest-earning assets, increased 20% over the prior year. Now, for our estimates of the impact of changes in rates. Given market expectations of rate cuts sometime in 2024, we estimate the effect of a 25-basis point decrease in the benchmark Fed Funds rate to be a $58 million reduction in annual net interest income.

A skilled senior trader executing an order in a fast paced trading environment.
A skilled senior trader executing an order in a fast paced trading environment.

Note that our starting point for this estimate is March 31st, with the Fed Funds effective rate at 5.33%, and balances as of that date. Any growth in our balance sheet and interest-earning assets would reduce this impact. About 25% of our customer cash balances is not in US dollars, so estimates of a US rate change exclude those currencies. We estimate the effect of decreases in all the relevant non-USD benchmark rates would reduce annual net interest income by $18 million for each 25-basis point decrease in those benchmarks. At a high level, a full 1% decrease in all benchmark rates would decrease our annual net interest income by about $304 million. This takes into account rate-sensitive customer balances and firm equity. In conclusion, we started the year with another financially strong quarter in net revenues and pretax margin, reflecting our continued ability to grow our customer base and deliver on our core value proposition to customers while scaling the business. We raised our dividend in recognition of our financial strength. Our business strategy continues to be effective: automating as much of the brokerage business as possible and expanding what we offer while minimizing what we charge.

With that, I'll turn it over to the moderator, and we'll open up the line for questions.

See also

10 Best Beverage Dividend Stocks To Buy Now and

15 Best Monthly Dividend Stocks To Buy Right Now.

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