Will Client Growth Drive Interactive Brokers Group, Inc. Higher in Q2?

By Markets Fool.com

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Interactive Brokers Group, Inc.'s move to service a broader swath of the investment community has come with some strange side effects for the business. The company is increasing its customer count and the amount of customer equity it holds, but newer customers aren't trading nearly as frequently as older customers. For a company that's typically catered to high volume traders, that's a change for investors.

At the end of the day, brokerages are a business that relies on trade volume and customers borrowing money to make a profit and the new trends may lead to some weaker results than you might think when the company reports second quarter earnings on July 19.

What to watch for in Q2 results

One of the biggest things investors should watch for with Interactive Brokers is the number of accounts and the client equity in those accounts. And both of those metrics are growing nicely year over year, as you can see below.

The problem is that new customers aren't taking on margin loans at the rate of old customers and are trading less as well. Daily average revenue trades, or DARTs, indicates trade volume and you can see that the trend isn't good.

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Metric

June 2016

Y/Y Growth

Total Accounts

356,800

15%

Total Client DARTs

643,000

8%

Cleared Avg. DART per Account

419

-6%

Client Equity

$73.7 billion

12%

Client Margin Loans

$15.0 billion

-21%

Source: Interactive Brokers' monthly brokerage metrics report.

When earnings come out, investors should keep an eye on how these dynamics affect brokerage revenue. Revenue growth could take a step backward as a result of clients trading less or the company could grow as a result of higher overall volume from growing accounts.

The big unknown ahead of the earnings report is market making results. The market hasn't been terribly volatile the past three months, but the divergence among individual stocks can result in negative results, something we saw in Q1 when segment income before taxes fell 26% to $20 million.

The return to stability should help Interactive Brokers in 2016

One of the biggest negatives for Interactive Brokers last year was the sharp drop in the Swiss franc, which resulted in a $121 million loss early in the year. There haven't been the same wild moves in the market this year and an improved currency hedging program should help keep currency risk to a minimum.

What investors should be looking for is increasing revenue from the brokerage business. Client accounts and equity are up, but will that translate to higher revenue and profit given the decline in trades per account? Earnings reported on July 19 will tell us how the operational trends are affecting the business in 2016.

The article Will Client Growth Drive Interactive Brokers Group, Inc. Higher in Q2? originally appeared on Fool.com.

Travis Hoium has no position in any stocks mentioned. The Motley Fool recommends Interactive Brokers. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.