Q4 2019 Interactive Brokers Group Inc Earnings Call GREENWICH Jan 23, 2020 (Thomson StreetEvents) -- Edited Transcript of Interactive Brokers Group Inc earnings conference call or presentation Tuesday, January 21, 2020 at 9:30:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Nancy Enslein Stuebe Interactive Brokers Group, Inc. - Director of IR * Paul Jonathan Brody Interactive Brokers Group, Inc. - CFO, Treasurer, Secretary & Director * Thomas Pechy Peterffy Interactive Brokers Group, Inc. - Founder & Chairman ================================================================================ Conference Call Participants ================================================================================ * Christopher John Allen Compass Point Research & Trading, LLC, Research Division - Analyst * Christopher Meo Harris Wells Fargo Securities, LLC, Research Division - Director and Senior Equity Research Analyst * Kyle Kenneth Voigt Keefe, Bruyette, & Woods, Inc., Research Division - Associate * Macrae Sykes Morgan Group Holding Co. - Research Analyst * Richard Henry Repetto Piper Sandler & Co., Research Division - MD & Senior Research Analyst * William Alfred Nance Goldman Sachs Group Inc., Research Division - Research Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Ladies and gentlemen, thank you for standing by, and welcome to the Interactive Brokers Group Fourth Quarter and Full Year Financial Results Conference Call. (Operator Instructions) As a reminder, today's program may be recorded. And I'd now like to introduce your host for today's program, Nancy Stuebe, Director of Investor Relations. Please go ahead. -------------------------------------------------------------------------------- Nancy Enslein Stuebe, Interactive Brokers Group, Inc. - Director of IR [2] -------------------------------------------------------------------------------- Good afternoon, and thank you for joining us for our year-end 2019 earnings conference call. Once again, Thomas is on the call and will handle the Q&A, but asked me to present the rest of his comments. As a reminder, today's call may include forward-looking statements, which by -- which represent the company's belief regarding future events, which, by their nature, are not certain and are outside of the company's control. Our actual results and financial condition may differ, possibly materially, from what is indicated in these forward-looking statements. We ask that you refer to the disclaimers in our press release. You should also review a description of risk factors contained in our financial reports filed with the SEC. Interactive Brokers, again, ended the year with record numbers with client equity up 35% to over $174 billion, double that of 2016. Accounts were 690,000, up 15% and brokerage pretax margin was 65%. On the balance sheet side, margin loans rose to $31 billion, tying our previous record, while our total equity is now over $7.9 billion. Importantly, our net revenues adjusted for our usual noncore items of currency translation and treasury portfolio marks were up 1% to $503 million in the fourth quarter despite events that people believe were likely to lead to a decrease in revenue, such as lower volatility, lower interest rates and the introduction of 0 commissions. Despite the Federal Reserve lowering interest rates 3 times this year, our net interest income rose 18%. Commission revenue was $205 million, down 18%, which is to be expected in a quarter where average volatility, which has a big effect on how much our client's trade, fell 33%. There are now 2 ways for clients to trade at Interactive Brokers. Our IBKR Pro platform offers our full capabilities and technology with best price execution and our extremely low commission and margin rates ranging from 1.85% to 3.05% based on loan size, or you can use IBKR Lite, which we introduced in September, where we offer clients 0 commissions and low-margin rates, currently 4.05%, but we let them know that we will route their orders to high-frequency traders and return for payment. So far, we have about 5,600 Lite customers, 3,600 of whom switched from Pro and about 10% have chosen to switch from Lite to Pro in the less than 3 months since the introduction of Lite. Because we tend to have a more sophisticated client base that is well aware of the benefits to performance of best price execution on orders, they have chosen to stay with IBKR Pro, and we have not seen a major impact on our business. We are very pleased that third-party information firm IHS market, analyzed U.S. stock execution and has, once again, shown Interactive Brokers execution advantage. We executed orders at $0.43 per round lot better, meaning cheaper than the industry average. That translates to major savings for our IBKR Pro customers who experienced better performance by lowering their trading costs. For the calculation, we include all our market orders over 100 shares, we do not pick and choose data. We achieved this price improvement for IBKR Pro through our superior technology and our founding practice of never selling our customers' orders. Instead, we searched through many venues for the best available price, which is often hidden as traders do not want to reveal their buying or selling intentions. During our search, we constantly refreshed accumulated statistical information about the likelihood of finding a better price for any specific stock at any specific venue. This software is expensive to develop and maintain, but it pays for itself in generating loyal customers who tend to trade more often and accordingly, benefit the most from superior execution. Our business is now primarily electronic brokerage. And in 2019, the brokerage segment earned a record $1.2 billion in pretax profits and achieved a 65% pretax margin. There is no other broker who comes close to our levels of profitability, and we achieved this while offering state of the art technology, low-margin rates and high interest rates on customer cash. Because we are automated and can program for the different currencies, regulations and requirements of other countries, Interactive Brokers has always been an international company. More than 60% of our accounts come from outside the Americas. Over the last year, while our accounts grew 15%, by country, that growth was just over 6% in the U.S., 9.5% in China and 23% everywhere else. So everywhere else is a place where we see ourselves growing more in future. As the majority of our new customers come to us by recommendation of existing customers, the more we do to give our customers a successful experience, the more people who sign up as clients, and the more likely they will enthusiastically recommend our platform to others. This helps us achieve faster growth. The more new clients we onboard now, the more customers they will bring to us in the following weeks and months. Now I will go over our 5-client segments. Individual customers posted the strongest account growth in 2019, up 18% over last year and make up 50% of our accounts, 35% of our client equity and 1/2 of our annual commission. This is a lucrative and well-diversified customer segment that had client equity growth of 36% for the year. So as would be expected with significantly lower volatility, saw commissions decline 9% for the year. The worldwide increase in securities markets in the fourth quarter helped our customers' account performance, and we were pleased to see particularly strong account growth internationally. Introducing brokers posted account growth of 16% and are 31% of our overall accounts. Client equity grew 47% over the past year and is 23% of our total, while commission saw a slight decline of 2% and are 9% of our total. Smaller and midsized brokers as well as international ones continue to find it difficult both to justify building and maintaining their own technology and to offer the global access that customers want, so they come to us to white brand our state of the art technology and capitalize on our low cost. As competitive pressures increase and as agencies in various countries increase their compliance oversight of the financial services industry, the commitment and costs required only grow over time, encouraging more brokers to come to us. We have not yet seen any change in the ability of our Mainland China accounts to fund. Up until the end of last year, we had extremely fast account growth in China and then it suddenly slowed significantly. We hear, there are roughly 8,000 people a week who try to open an account with us, and only about 15% of them are able to fund. We do not have any reason to believe this will change in the near future.
With other words: time for a nasty "correction". Veteran ET members know what that means! It´s not personal - it´s just "business".....!