IBKR

Interactive Brokers Group, Inc. (IBKR)

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Interactive Brokers Group, Inc. (IBKR)

Q2 2011 Earnings Call

July 21, 2011 4:30 PM ET

Executives

Thomas Peterffy – Chairman, CEO and President
Paul Brody – CFO, Treasurer and Secretary
Deborah Liston – Director, IR

Participants

Niamh Alexander – Keefe, Bruyette & Woods
Ed Ditmire – Macquarie
Rich Repetto – Sandler O’Neill
Mac Sykes – Gabelli & Company

Operator

Good day, everyone, and welcome to the Interactive Brokers Second Quarter 2011Earnings 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. Welcome, everyone, and thank you for joining us today. Just after the close of regular trading, we released our second quarter financial results. We’ll begin the call today with some prepared remarks on our performance that complements the material included in our press release and allocate the remaining time to Q&A. Our speakers are Thomas Peterffy, our Chairman and CEO, and Paul Brody, Group’s CFO.

At this time, I just like to remind everyone that today’s discussion might include forward-looking statements. These statements represent the company’s belief regarding future events that by the nature are not certain and outside the company’s control. The company’s actual result and financial condition may differ possibly materially from what’s indicated in these statements. For a discussion of some of the risk and factors that could affect the company’s future results, please see the description of those factors in our filings made with the SEC. I’d also direct you to read the forward-looking disclaimers in our quarterly release.

With that, I’ll turn the call over to Thomas Peterffy.

Thomas Peterffy

Good evening. Before I get into the quarterly results, I would like to start regarding the GLOBAL effect on OCI out of the way. In the past quarter downward movement of the US dollar against our basket of currencies the GLOBAL had a favorable impact on our earnings to the tune of $50 million. This was counterbalanced by OCI or Other Comprehensive Income. That deducted $56 million of reported earnings but not from comprehensive income or net earnings. Had none of this had happened, our pre-tax earnings for the quarter would have been $155 million instead of $149 million reported. So this is one of those rare quarters in which the currency effects almost balance each other, our and reported earnings are fairly close to the actual operating results.

Pre-tax profit from our Brokerage segment increased by 23% year-over- year. Although lighter trading volumes on global exchanges kept commissions at roughly the same level. We had an increase in the net interest income which rose 109% over the prior year and now accounts for nearly a third of Brokerage net revenues. This is directly related to the 111% increase in customer margin balances that have grown in response to our extremely low financing rates, which currently range from half of 1% to 1.6%.

Customer account growth remains strong and steady growing 21% year-over-year to 176,000 accounts. The equity our customers hold grew by 57% to 25.7 billion. We typically see account growth slow in the second quarter and dip in June, which was the case this quarter. Still our growth rates continue to exceed our peers by a wide margin and the reason is quite simple.

We offer our customers an unrivaled value by allowing them to trade a multitude of asset classes globally in several currencies using sophisticated trading tools and our refined technology at industry low costs.

And importantly, we do not sell our customer to internalizers which ensures that we achieve the best price executions. Operating in the best interest of our customers is the principle we have built our business around, and we have never strayed from this strategy. The results speak for themselves.

If you have been following our progress over the past several quarters, specifically the graph we published that shows the growth of our broker expenses compared to other e-Brokers over the past few years, you will see that we have exceeded our peers on all measures. This includes percentage growth in DARTs, number of accounts, customers’ deposits, margin loans and average account size.

You also may recall that in my comments at a recent investor conference I have stated that one of our goals is to become the largest online broker in terms of total trades. Well, I’m pleased to report that we have accomplished this goal for the first time in May when our DARTs or daily average revenue trades exceeded those of every one of the largest e-brokers, and this also happens to be the case for the entire second quarter, so that as of the second quarter of this year Interactive Brokers is the largest electronic broker as measured by daily average revenue trades.

We reached this goal despite only having a small fraction of the number of accounts they have. We’ve been able to attain the status because we have always focused on attracting quality accounts - to us that means financially sophisticated active traders and investors.

To illustrate, our typical customer in the second quarter made an average of about 140 trades compared that to our larger peers who have millions of accounts, but their average customer made only an average of three or four trades in the latest quarter. Thanks to our highly automated business model we can service our active customer base efficiently and realize significant economies of scale, as we continue to grow this business. In fact, the Brokerage profit margin rose to 52% for the quarter compared to 50% in the year-ago quarter.

Read the rest of this transcript for free on seekingalpha.com