Interactive Brokers Books an Excellent Second Quarter

Interactive Brokers reported diluted earnings per share of $0.44 for the second quarter, compared to diluted earnings of $0.29 per share in the year-ago period.

Excluding other comprehensive income -- which includes gains or losses primarily from its currency diversification strategy -- diluted earnings were $0.37 per share, up from $0.26 in the year-ago period. The currency basket appreciated by roughly 1% on a falling U.S. dollar, adding $53 million to comprehensive income this quarter.

Banking on brokerageAs Interactive Brokers transitions from a market maker to a brokerage-driven business, the company's brokerage arm is becoming the most important driver of its earnings. Brokerage contributed $188 million to its total pre-tax earnings of $240 million, up 42% on a growing number of customer accounts, total trades, and rising net interest income from margin accounts.

  • Customer accounts grew 18% year-over-year to 310,000 accounts, up from 262,000 accounts last year.
  • Total daily average revenue trades (DARTs) grew 16% from the year-ago period, while cleared DARTs jumped 17% to 565,000.
  • Net interest income leaped 34% year over year to $106 million on a 24% increase in secured margin lending, according to the conference call. The company continues to expect that a modest 0.25 percentage point increase in overnight rates would add roughly $46 million in annual earnings.

Interactive Brokers' pre-tax margin also rose considerably from the same period last year. The company recorded a pre-tax profit margin in its brokerage segment of 65%, up from 59% last year. Helping the company here was a 12% year-over-year increase in net revenue per account, driven in part by a 6% increase in revenue per DART.

On the conference call, Interactive Brokers CEO Thomas Peterffy dismissed concerns about rising Chinese stock prices and its impact on earnings this quarter. He pointed out that Asia contributes roughly 25% of accounts and 25% of commissions, but wouldn't speculate about the impact of rising or falling stock prices on future quarters.

Peterffy dismissed concerns about margin losses from a recent slump in Chinese stocks. He noted that not one account had fallen into a negative equity balance, though margin borrowing fell about $2 billion. Based on that commentary, China doesn't seem to be a Swiss Franc-sized risk, like the one the company encountered in the first quarter of 2015. Remember, Interactive Brokers posted a loss in the first quarter after a rapid movement in the Franc left some customers with negative balances.

Its market making segment is inherently volatile, though the company reported that it generated $30 million in pre-tax income, up 15% over the second quarter of 2014. The increase came in part due to higher volatility and increasing trading volumes in Chinese stocks.

Some new initiativesPeterffy discussed some new opportunities to attract more advisors to its platform, who would trade on behalf of their clients. The company intends to roll out compliance support for advisors, helping them navigate complicated regulatory issues.

On the marketing front, it also plans to offer a service to create promotional websites for advisors in addition to customer relationship management systems to keep advisors in contact with their clients. The premise is that building a better business for its advisors will result in additional commissions and client balances for its brokerage business.

All in all it was a great quarter, but one metric really stood out: the runway for future growth. Peterffy, never shy in suggesting Interactive Brokers can become the biggest brokerage firm in due time, suggested that to date the company has only captured about 6% of what it believes to be its total addressable market. That's an intriguing number to think about, especially given that the company's total brokerage accounts have more than tripled since 2008.

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Jordan Wathen 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.

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