Interactive Brokers (IBKR) Q3FY24 Earnings Update

Disclosure: This is not financial advice. If you like the idea, conduct extensive research and consult a financial advisor before making any investment decisions. All investments, including this one, carry the risk of financial loss. I own Interactive Brokers stock, thus I am biased in favor of the company and one should view this article through that lens. This article comprises my personal beliefs and convictions around owning any securities mentioned, and is not intended to be used as a recommendation to buy or sell any securities. Please be careful everyone.

Hello all, I’m pleased to be writing the first of hopefully many earnings updates on IBKR. Though the stock was down a bit following the release, I think this was a solid quarter and it’s already re-traced half of the 4% down move we saw following the report.

Earnings highlights:

• revenues beat by 2%, EPS missed by 3.8% partially due to a few one-time expenses during the quarter

• commission revenues of $435mm, up 31% YoY. Interest income of $802mm, up 9% YoY. Other revenues of $72mm, up 38% YoY

• execution and clearing expenses of $116mm, up 18% YoY, driven partly by a higher SEC fee rate than last year

• G&A expenses of $75mm, up 67% YoY, driven partly by a one-time expense related to consolidation of the company’s European subsidiaries (IB Central Europe and IB Ireland), as well as a $9mm increase due to legal and regulatory matters. The $12mm one-time consolidation charge is expected to save them $7mm annually

• pretax profit margins of 72%, down 1 point YoY

• client accounts up 28% YoY to 3.12 million, client equity up 46% to $541.5Bn - their first quarter with over 1/2 trillion in client equity

• total DARTS up 42% YoY to 2.7 million

• client credits up 19% to $116.7Bn and margin loans up 28% to $55.8Bn

• $178mm quarterly gain due to their currency diversification strategy, as the US dollar value of the GLOBAL increased by 1.14%

• equity of $16.1Bn, ROE of 23.2% for the quarter

Call highlights:

• industry options volumes up 12% YoY, surpassing even the strong Q1. Futures volumes up 27% YoY as investors were eager to trade interest rate futures given the interest rate cuts we’ve been seeing. Equities volumes were up YoY but down slightly from Q2.

• IBKR volumes for options, futures, and equities were up YoY and all were up QoQ, save equities volumes

• added 196,000 new accounts in Q3, again only behind the meme stock days of 2021

• client accounts and equity grew fastest in Europe and Asia, led by individuals and followed by i-brokers and PTGS. Commissions growth was fastest with PTGs, while NII growth was led by individuals and financial advisors

• They opened a licensed office in Dubai, expanding their presence in the Middle East

• The launch of ForecastEx (ForecastTrader) was approved in August after a 2 1/2 year regulatory approval period. They’ve seen around 800 clients use the product so far, with trading volumes of $6mm at the time of the call. Most of the trading is related to election gambling, and they expect volume here to ramp up as we get closer to US elections. They say long term, they hope people will stick around for the economic and environmental contracts given that elections only happen every 4 years (duh)

One of the analysts mentioned that the stock was up very substantially this year, but that Peterffy hadn’t yet returned to selling shares. Peterffy said that if he gets some particularly large bidders, he may offer them shares, but he doesn’t like selling into the market generally because the stock has a habit of tanking as soon as news of him selling hits and he won’t get the prices he likes. Going forward, I would use these sales as a buying opportunity if the stock does indeed tank. Really, it does not matter one bit to me whether Peterffy owns 60%, 65%, or 70% - the man is 80 years old and he solely controls the company, more or less. A few sales here or there are really not substantial whatsoever. Him selling is probably (?) a good thing long term, as I explained in the previous article - when Peterffy eventually relinquishes more control, it will be easier for outside shareholders to pressure management to return more capital. IBKR still has 20% of it’s market cap in excess regulatory capital that could be returned to shareholders, so I expect to see more dividend increases down the road, and potentially buybacks depending on the valuation.

I would also say, it’s so fun to have a founder talk so openly or even joke about things like selling shares. The man is extremely honest, he just does not care whatsoever, even if talking more carefully would help the stock price short-term as others have pointed out. He’s like your grandparents that are so old they can say more or less whatever they want without getting called out… unrelated, but one of my great grandparents would curse like a sailor at family reunions, and it was hilarious. I get those same vibes from Peterffy and I love it. Owning this stock currently, you are more or less putting your faith in this man completely, and he continues to demonstrate honesty and a carefree attitude in his interactions with analysts, it’s great. There was one call last year where an analyst was asking about rate cuts and Peterffy actually laughed at him during the question, followed up with some remark like “Good luck if you think we’ll see a lot of rate cuts.” He’s like the final boss of sellside calls, and that analyst routinely sounds almost scared of the dude. It’s so fun to watch, man.

Overall, this was a solid quarter. Really, I don’t expect any crazy developments to happen with this company anytime soon. It’s a boring stock, a GARP play at these prices as I said previously. I really just expect them to continue quietly innovating and growing the company as they do.

I’ll see you all very soon for red violet’s earnings release in 17 days, and Rocket Lab’s release in 24 days. I’ve also been working on a writeup of Hyundai Motor Group, HYMTF. Unsure if I’ll actually end up releasing it, or if I’ll be buying the stock anytime soon, but it seems like a neat opportunity here as their auto business is doing well, and they own 80% of Boston Dynamics - their stock trades at a sizable discount to US auto stocks, and they’re seeing some solid tailwinds from the Korean Government’s corporate “value-up” strategy implemented earlier this year.

I’ve also created a mock portfolio to demonstrate the returns of stocks I write up over time. If there’s any interest I’d be more than happy to publish this regularly, maybe with the quarterly portfolio and performance updates. Currently, assuming a buy at the closing price of the trading day following my reports, the basket is up 23% so far, counting IOT, RKLB, RDVT, and IBKR, and excluding BMI as I no longer hold shares. As you could probably guess, the majority of these gains are from RKLB, up around 60% here from the day after my Deep Dive writeup. Anyway, that’s all for now and I’ll be writing you all again soon!