Interactive Brokers (IBKR) Q4FY24 Earnings Update
A roaring quarter to close out a record '24
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.
“We are not stopping here to rest on our achievements. We have many projects to work on, goals to achieve, and together with the Interactive Brokers team, we look forward to executing on them in 2025.” - IBKR CEO Milan Galik
Hello ladies and gentlemen, I’m pleased to be bringing you another update on my favorite broker, IBKR. This Q4 set numerous records for the company, including its first ever quarter of $1Bn in pretax income, its highest annual number of client account adds at +775K, and they’re ending the year with client equity at record highs, now well above the 1/2 billion mark at $568mm, up 33% YoY. For this quarter, we were treated to a marginal revenue beat and a 10% earnings beat, which sent the stock up 4% in after hours trading, now finally cresting the $200 level. To be quite honest with everyone, the re-rating here has surprised me in it’s extent, but after this record Q4, the company is trading at 24x full year net income, which really doesn’t sound so high valuation wise considering this company grew that net income by 21% and put up royalty-like 71% full-year pretax profit margins. I will say though, a few items in this release gave me pause, notably the record margin loan balances, and as always with brokerage businesses, there are some notable risks that we must remain aware of. But I’ll save the analysis until we’ve cleared the obligatory minefield of bullet points listed below.
Q4 results (all comps YoY):
Client accounts up 30% to 3.34 million, led by international and individual accounts
Total DARTs up 61% to 3.12 million - full year 2024 saw 24% higher DARTs/account
Margin loans up 45% to $64.2Bn
Commissions revenue up 37% to $477mm, a record, reflecting trading volumes in options up 32%, stocks up 65%, and futures down 3%
NII increased 11% to $807mm, a record, on higher customer credit balances and margin loan growth (the BS growth part of my thesis), despite multiple rate cuts across almost every major currency. Their NIM has compressed a small bit to 2.23%, down from 2.41% in the prior-year quarter, but their BS growth has more than offset that decline, as I suggested a few months ago
Other revenue up 47% to $81mm, mostly led by increases in risk exposure fees
Execution and clearing expenses up 15% to $115mm
SG&A expenses up 31% to $59mm, reflecting higher marketing spend
Q4 GAAP pretax profit margin was an astonishing 75%, up 3 points YoY - I did mention in my Deep Dive article that I could see potential for 75% pretax margins, but I really wasn’t expecting us to get there immediately following a load of rate cuts
Ending firm equity of $16.6Bn, still at 20% of the company’s market cap - again, a “controversial” amount of equity but we’ll get to that in a second here
saw a $266mm headwind from their currency diversification strategy, as the US dollar value of the GLOBAL decreased by 1.68%
compensation expense was 10% of revenue for the quarter, and they ended with 2,998 employees, up 2% YoY
During this year, IBKR released so many new features for traders of all kinds (across literally the entire globe) that you’d be really surprised to see that their pretax profit margin for the full year was 71%. They maintained these absurd profit margins, while growing net income 21% YoY, all the while continuing to innovate and release feature after feature to keep client accounts engaged and growing. Some of these features include:
24/5 trading of corporate and government bonds in dollar, euro, pound and Swiss franc denominations
OVERNIGHT + SMART order type to get clients better overnight executions
multiple features for financial advisors including customized indexes, a dedicated CRM, and a refreshed portal
gen-AI powered commentary creation feature, automating the creating of personalized performance summaries for financial advisors and other institutional types
translated their account applications page into French, Italian, Arabic, Hebrew, and Hungarian - truly, if you’re looking for a broker that’s likely to capture and maintain (by far) the majority of international market share, look no further than IBKR
added 4 new liquidity providers to their options ATS
added implied volatility algorithms to Hong Kong exchange options + Hong Kong crypto trading and enhanced account funding systems
the ForecastEx exchange was launched this year, created by IBKR to help clients hedge (or gamble) directly on risks like economic data releases, elections, and climate events/indicators
These guys are just so efficient that they can maintain such extreme client accounts growth, with such high margins, despite operating with 10x the regulatory burden of other brokers given that they operate in 34 different countries. The amount of regulatory hoops these guys have to be jumping through is truly insane, but as always, they handle it like the trained acrobat of the brokerage scene. I think the following quote from CEO Milan Galik sums up their unique strategy when it comes to regulatory burden:
“There are at least eight different regulatory projects that we are programming for around the world, as the many numerous jurisdictions we operate in create, add to, and update their regulations. We are on-time, or more often ahead of schedule on all of them. Our close ties to over 20 very different regulatory regimes in multiple languages and our ability to react and to program or reprogram our systems to comply on a continuous basis is one of our advantages that we take extremely seriously, with employees on the ground and programmers dedicated to these tasks.” - IBKR CEO Milan Galik
Just imagine for a second, Schwab trying to pull this off. Imagine Charles Schwab seamlessly integrating and managing a truly global brokerage business across almost the entire developed world, managing all the regulatory requirements, all the language barriers, all the different product and order types, 24 hours a day, even during intense volatility spikes that have traditionally shut them down. You can’t see it, can you? Me neither. IBKR is and has been running circles around Schwab and every other US-based brokerage for years, and it is my firm belief that they will continue to do so well into the future.
On capital allocation (the company’s massive equity stack), their CEO effectively ruled out stock buybacks at any point, which I can understand - I’d actually rather they not buy back shares at 5x book value, but tell that to the analysts that ask about the ever-increasing equity every quarter, I suppose. Judging by the way their CEO spoke on the call, I would rule out another dividend increase for a good while as well.
Though, there is good reason for this equity stack - such a high amount of firm equity is actually a great marketing tool for their larger institutional clients. All this equity is really helping to support the company’s new high-touch prime brokerage offering. Hedge funds have traditionally usually left IBKR once their assets cross the $100mm AUM mark, but their high-touch prime offering today has 34 hedge funds onboarded, with average AUM of $160mm. When researching for my Deep Dive article, I severely underestimated how much their high firm equity impacts large customer acquisition. A month or so ago I posted a meme on Twitter about IBKR’s capital allocation, and I got a lot of responses from people saying that they (or their firm) trust IBKR specifically because the company is so well capitalized.
As for risks going forward, I see margin loan de-risking as the most pressing factor, really. Their margin loans for this quarter rose a staggering 45%, and the company now has the highest nominal volume of margin loans it’s ever had. If you didn’t know, typically, big increases in margin borrowing across the board can indicate periods of heightened speculation and froth in markets. Now, we don’t know how much of that margin borrowing is long or short, but either way, increased speculation (and borrowing) like this is generally a bad sign for markets.
This quarter may end up being somewhat unique for the company for a while, with record trading volumes and margin balances. I think a decrease in both of these metrics is quite likely when markets eventually cool off, so I wouldn’t extrapolate this quarter’s impressive earnings forward very far. Their CEO also explicitly said on the call, “I would not expect that number to go up. That (high margin about above all else) isn’t what we optimize for.”
Founder and Chairman Peterffy previously mentioned that he thought equity prices were overextended by a good bit, and he expressed a wish that when equity prices do inevitably correct, they will do so gradually so traders and brokers alike can avoid margin calls. And on this most recent call, CEO Milan Galik mentioned that the recent action in crypto markets (Trump coin) was admittedly pretty concerning, that they really don’t like to see that sort of market action.
However, as far as brokers go, I would say IBKR is perfectly positioned to take advantage of market mania (see their 75% quarterly pretax margins and record numbers across the board), while being perhaps the most downside-protected brokerage out there with their massive equity cushion and volatility resilient systems across the board. Remember, IBKR’s margin system will auto-liquidate client accounts out of margin compliance, no call necessary, and they have a full-time staff that is constantly evaluating these margin liquidations on custom-built displays, round the clock. These guys get far more upside out of market mania periods than other brokers given that their DARTs are the highest in the world, they have the highest annual ARPU (I believe), and their margins are absurd, with what I believe to be far less downside risk than other brokers. Not to mention, the company’s assets remain primarily invested in short-duration treasury securities, so their cash will be fine no matter where yields end up going. The average duration on their treasury portfolio remains under 30 days for the Nth quarter in a row.
That’s not to conflate risks to the company as being risks to the stock price, though. I honestly have no idea where the stock price is headed. If markets decline across the board, IBKR shares will probably slide just as much, but the company itself will remain just fine, and that’s all I really care about.
Anyways, toodles for now. I’m currently working on a longer piece that covers American exchanges and other “market access” stocks as part of a broader financials theme. If I can pull it off how I’d like to, it should end up being some of my finer work to date, so stay tuned.