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Interactive Brokers Lags Estimates

Zacks Equity Research

Interactive Brokers Group Inc.’s (IBKR) first-quarter 2012 earnings per share came in at 24 cents, significantly below the Zacks Consensus Estimate of 32 cents. Also, this compared unfavorably with the year-ago quarter’s earnings of 38 cents.

Including, the effect of changes in the U.S. dollar value of Interactive Brokers’ non-U.S. subsidiaries, the company reported earnings of 30 cents per share compared with 41 cents in the year-ago quarter.

Interactive Brokers’ results were negatively impacted by deterioration in net revenue along with higher interest and non-interest expenses. Moreover, the performance of Market Making and Electronic Brokerage segments was on the downside withsubstantially altered pre-tax income.

For the quarter under review, net income available to common shareholders was $11.1 million compared with $16.3 million in the year-ago quarter.

Quarter in Detail

For the reported quarter, net revenue was $304 million, substantially below the Zacks Consensus Estimate of $339 million. This also declined 17.4% year over year from $368 million. The decline was primarily driven by lower commission and execution fees along with a fall in trading gains, partially mitigated by higher interest income.

Net income before taxes came down 32.5% year over year to $150 million. Pre-tax profit margin was 49% in the quarter as against 60% in the prior-year quarter.

Total non-interest expenses grew 5.7% to $154.2 million from $145.9 million in the previous-year quarter. The rise was mainly due to higher employee compensation and benefits (up 19.7% year over year to $62.7 million in the quarter), partially offset by a decrease in general and administrative expenses (down 10.3% year over year to $11.3 million) along with execution and clearing charges (down 2.5% year over year to $64.6 million).

Segment Performance

Market Making: Net revenue decreased 29.6% to $142.4 million from $202.3 million in the previous year quarter. Pre-tax income fell 51% year over year to $66 million. The fall was caused primarily by fluctuations in currency translation gains. Moreover, pre-tax profit margin also declined to 46% from 67% recorded in the year-ago period.

Electronic Brokerage: Net revenue was marginally down 2.7% year over year to $159.3 million. Similarly, pre-tax income stood at $83.4 million, down 7.4% from $90.1 million in the previous year quarter. Pre-tax profit margin was 52% compared with 55% in the prior year quarter. Total daily average revenue trades (DARTs) for cleared and execution-only customers inched up 1% year over year to 428,000.

Capital Position

As ofMarch 31, 2012, Interactive Brokers’ consolidated equity capital was $4.82 billion compared with $4.68 billion as of December 31, 2011.

Our Viewpoint

Despite poor results, we believe that Interactive Brokers’ strong fundamentals and highly liquid balance sheet will enhance investor confidence in the company. Moreover, the company has been constantly declaring dividend, which reflects its sturdy capital base.

However, with lower trading activity in the markets, the company’s financials may get adversely affected as its revenue highly depends on the trading volume at the stock exchanges.

Interactive Brokers’ currently holds a Zacks #3 Rank, which translates into a short-term Hold’ rating. However, the company’s peer Gleacher&Company, Inc. (GLCH) retains a Zacks #2 Rank (short-term ‘Buy’ rating).

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