IB Reports Q4 Metrics, Mixed Results Send Stock Price Lower in After-Hours Session

The Connecticut-based multi-asset broker Interactive Brokers Group inc, operating numerous markets around the world under the Interactive Broker (IB) brand, has today reported Q4 2013 performance which also tallied up its results for the year.

YoY diluted earnings per share on a comprehensive basis was $0.67 per share and down from $1.13 for 2012. Net revenues were reported at $1.076 billion and income before income taxes was $451 million for the year, compared to net revenues of $1.131 billion and income before income taxes of $527 million for 2012, according to the release.

Although certain figures were positive, the drop in income sent shares in the after-hour session tumbling as much as 7% around time of coverage, and which since has recovered to a roughly 4% loss of nearly $1.00 from its main session closing price of $22.60 per share, to $21.65. While net revenues in Q4 were slightly higher YoY, from a full-year perspective 2013 was lower by $54.3 million, as can be seen in the excerpt below from the official press release.

Customer accounts up YoY 14%, Customer Equity up 39% during 2013

The firm's electronic brokerage segment reported income before income taxes (IBIT) which grew 15%, to $391 million, in 2013. Customer accounts grew 14% from the prior year and customer equity increased 39% during 2013(1). Commissions and execution fees increased 22%. Net interest income grew 24% from the prior year, to $228 million. Pretax profit margin was 48% in 2013, down from 51% in 2012. Excluding $64.3 million in expense related to an unusual item (see below), pretax profit margin was 56% in 2013.

Total DARTs(2), for cleared and execution-only customers, increased 18% to 486,000 in 2013, compared to 413,000 during 2012. Cleared DARTs were 441,000 in 2013, 15% higher than in 2012.

Market-Making Income Down 62%, Attributed to Low Volatility

The company's market-making segment had IBIT decrease 62%, to $72 million, in 2013. This decrease was driven by a market-making environment with persistent low volatility and low actual-to-implied volatility, and by a greater loss from holding the equity in a basket of currencies, as measured in U.S. dollars.

In 2013, IB's currency diversification strategy resulted in a reported loss of $89 million, compared to a $39 million loss in 2012. Currency translation effects are reported as part of trading gains in the market-making segment.

Including balance sheet effects, the currency strategy resulted in a loss of $116 million in 2013, as compared to a loss of $19 million in the prior year. Pretax profit margin decreased to 26% in 2013, from 41% in 2012. Market- making options contract volume decreased 12% in 2013. An excerpt of the firm's retail Forex segment shows the inclusion of Q4 which had the number of accounts rise, along with the percentage of profitable accounts, while the number of unprofitable accounts was countered in the opposite direction.

Business Highlights

• 42% pretax profit margin for 2013, or 48% without unusual item.
• 48% electronic brokerage pretax profit margin for 2013, or 56% excluding unusual item.
• 26% market-making pretax profit margin for 2013.
• Customer equity grew 39% from 2012 to $45.7 billion.
• Customer accounts increased 14% in 2013 to 239,000.
• Total DARTs increased 18% from 2012 to 486,000.
• Brokerage segment equity was $2.5 billion. Total equity was $5.1 billion.

Effects of Foreign Currency Diversification Resulted in $116 M Loss

As noted above, regarding the currency diversification loss was reported, the firm was determined to base its net worth in GLOBALs, a basket of 16 major currencies in which to hold its equity.

In 2013, the currency diversification program decreased IB's comprehensive earnings by $116 million, as the U.S. dollar value of the GLOBAL decreased by approximately 2.4%. The effects of currency diversification are reported as components of Market-Making Trading Gains and Other Comprehensive Income (“OCI”).

During this year, 76% of the GLOBAL effect was captured in Market-Making Trading Gains in the Net Income section of the Statement of Comprehensive Income, with the remainder reported as OCI in the separate Comprehensive Income section of the Statement of Comprehensive Income.

The Interactive Brokers Group, Inc. Board of Directors declared a quarterly cash dividend of $0.10 per share. This dividend is payable on March 14, 2014 to shareholders of record as of February 28, 2014.

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