Interactive Brokers Group, Inc. (IBKR)

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Interactive Brokers Group, Inc. (IBKR)

Q4 2012 Earnings Call

January 15, 2013 4:30 p.m. ET


Thomas Peterffy - Chairman and Chief Executive Officer

Paul Brody - Group Chief Financial Officer

Deborah Liston - Director, Investor Relations


Rich Repetto - Sandler O'Neill

Chris Harris - Wells Fargo

Niamh Alexander - KBW

Ed Ditmire - Macquarie

Mac Sykes - Gabelli



Good day, everyone, and welcome to the Interactive Brokers’ Fourth Quarter 2012 Earnings Results Conference Call. This call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Ms. Deborah Liston, Director of Investor Relations. Please go ahead.

Deborah Liston

Thank you, operator, and welcome everyone. Hopefully by now you’ve seen our fourth quarter and full year 2012 results press release which was released today after market closed and which is also available on our website. Our speakers today are Thomas Peterffy, our Chairman and CEO, and Paul Brody, our Group CFO. They’ll begin with some prepared remarks about the quarter and then we’ll take some Q&A.

Today’s call may include forward-looking statements which represent the company’s belief regarding future events and by their nature are not certain and outside the company’s control. Our actual results and financial condition may differ possibly materially from what’s indicated in these forward-looking statements. We ask that you also refer to disclaimers in our press release. You should also review a description of the risk factors contained in our financial reports filed with the SEC.

I’d now like to turn the call over to Thomas Peterffy.

Thomas Peterffy

Good evening everyone. I apologize for my voice. I have a cold, so please bear with me. Our results this quarter reflect the continuation of the subdued market environment we have seen all year. Investors endured an extended period uncertainty through 2012 which continued in to the fourth quarter ahead of the Presidential election followed by the subsequent focus on the looming fiscal cliff. And despite of such uncertainty, the market remains fairly calm with persistently low volatility. Only around the election and in the final days of December did the VIX creep anywhere close to 20.

Exchange traded volumes have been weaker all year as well. The OCC, for instance, reported that average daily volume for the fourth quarter fell 9% compared to the year ago quarter. Similarly our total customer DARTs have decrease 9% for the same period. The environment has dampened the revenues in both our business segment as you know market volatility is not only a key ingredient for our market making business but it also have to drive our customers trading volumes which fuel commission revenues. Moreover, we usually see higher account add when the markets are particularly active.

Our business thrives on a combination of volatile markets, rising exchange traded volumes and wide bid and offer spreads. Yet despite softer top line results in 2012, our efficient business model allowed us to maintain a healthy 47% profit margin for the group which certainly stands out amongst other companies in our sector. We are seeing the effects that this difficult trading environment is having on other financial institutions, consolidation, layoffs and in some cases firms exiting certain business segments altogether. By contrast, our brokerage business is expanding albeit at slower pace than we would like to see and we have been able to substantially grow our equity capital through retained earnings. Therefore, we are able to return some of this capital to shareholders at the end of the year.

We normally prefer to keep a comfortable amount of excess capital in the business, especially in the current environment with capital requirements increasing for financial institutions. Yet the imminent increase to dividend taxes gave us reason to declare a special dividend of $1 per share, which was paid in December. This approximated $409 million and was distributed out of certain of our Market Making subsidiaries from earnings already taxed in the U.S. As such, there was no additional tax due as there was with the December 2010 $1 billion special dividend. We also continued to pay the $0.10 quarterly dividend from our Market Making segment.

Before we get into segment discussions, I would like to review our currency diversification strategy which worked well for us this year. By keeping our equity in the basket of 16 currencies, we call the GLOBAL, we have minimized the currency risk that we would otherwise be exposed to as an international diversified firm trading products in 27 different countries. In the fourth quarter, the value of the GLOBAL declined by 0.6% relative to the U.S. dollar which resulted in a decrease of our comprehensive earnings by about $30 million. Also $38 million is reflected in trading gains with an offsetting gain of $8 million reported below the line in other comprehensive income, or OCI. For the full year, the large swings we saw in transaction gain and loss from quarter-to-quarter largely cancelled out, netting only about $19 million decrease in comprehensive earnings which is less than one half of our total equity -- 2.5% of our total equity capital.

And now I'll review the business segments starting with electronic brokerage. 2012 was a very good year in terms of boosting our brand recognition and attracting more institutional accounts. We also continued to maintain our position as the largest broker as measured by a number of revenue traits. This is due to our very active customer base that trades on average at about 40 times per month versus the other large e-brokers where the average customer trades about one time per month.

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