Interactive Brokers Group (IBKR +1.50%) reported second-quarter 2018 results after the market closed on Tuesday, and there was a lot for investors to digest. Customers keep flocking to the broker, bringing billions in assets with them. But they aren't paying the same commissions they once were, which is hurting revenue.
Here's a look at the high-level numbers and what's going on operationally at Interactive Brokers.
Image source: Getty Images.
Interactive Brokers Group results: The raw numbers
| Metric | Q2 2019 | Q2 2018 | Change |
|---|---|---|---|
| Net revenue | $413 million | $445 million | (7.2%) |
| Net income | $32 million | $41 million | (22%) |
| Diluted EPS | $0.43 | $0.57 | (24.6%) |
Data source: Interactive Brokers Group Q2 2019 earnings release.
What happened with Interactive Brokers Group this quarter?
The headline numbers look bad, but when we dig deeper, we see the business is actually performing well. Here are some of the metrics investors should be watching.
- Income before taxes fell from $271 million a year ago to $225 million.
- Net interest revenue was up 15% from a year ago but was partially offset by commission revenue falling 4%.
- The big decline in net income you see above was driven by a $74 million mark-to-market loss on the company's investment in Tiger Brokers.
- On a segment basis, the company is performing well. Electronic brokerage net revenue was up 6.8% to $473 million and income before taxes increased 6.7% to $302 million. Market making continues to be a small business, with $20 million in revenue, down from $22 million a year ago, and $11 million in income before taxes, up $2 million from last year.
- Total accounts increased 19% versus a year ago to 645,000 and customer equity jumped 14% to $153.1 billion.
- Despite the growth in accounts, cleared daily active revenue trades (DARTs) were flat at 740,000. Commission per DART fell 5% to $3.68, leading to a 10% drop in revenue per average account to $2,863 on an annualized basis.
What management had to say
The big trend you see in earnings is falling commissions per trade. CFO Paul Brody explained the cause on the company's conference call: "Commission revenue declined 4% on lower volumes and smaller trade sizes, primarily in futures. As we noted earlier, the decline of our overall average cleared commission per DART at $3.68 reflected smaller trade sizes across most product segments."
Interactive Brokers continues to add customers at a rapid clip, but those users are also have fewer assets than the average legacy customer and are making fewer trades. That's what's causing commissions per account to slip.
Looking forward
The electronic brokerage business continues to be competitive and limits Interactive Brokers' ability to increase commissions per trade. On the flip side, the company keeps attracting new accounts that bring more equity into the fold, which is a positive trend. These two trends will continue to pull at each other, but long-term, Interactive Brokers is well-positioned in the electronic brokerage business and investors have to like the fact that customers love the platform.
