| 26 April 2010

Interactive Brokers (IBKR) reported their Q1 earnings late Thursday, giving us the weekend to peruse the material and conclude that they missed their earnings estimates by a mile. Actually, we're just kidding. Everyone figured that out immediately once they published the fact that earnings were 53% less than their projected $0.19 per share estimate.

We should recall that thier Q3 earnings dropped 70% and they also missed those estimates. And their Q4 earnings came in about 70% less than estimates. So this is becoming somewhat of a trend for the firm.

Despite this, the firm's CEO Thomas Petterfy remained upbeat. "Our global brokerage business is proceeding to grow along a very high trajectory that remains unparalleled in the industry,” he said in a statement. So instead we chose to take the weekend to take a closer look at those metrics. 

First we perused the firm's Daily Average Revenue Trades, we see the slide in activity that's been occuring since January. The question now is whether the firm can stabilize the drop and hold trading levels above last summer's low. By the way, if you compare this trend to the results we saw from E*TRADE and TD Ameritrade, both firms saw a bump up in activity in March.

But the subtext to the DARTs numbers is whether trades will ever make money for firms like Interactive Brokers the way they one did. Remains to be seen.



Net new accounts for the firm did find a bit of a floor and in fact crept back up last month. While this number tends to bounce around a bit for all brokers we like to see it in a 20-30% range all things being equal. Marketing spend is arguably the biggest factor affecting the net new account number. Unfortunately, as far as we could tell, Interactive Brokers is one ofthe few firms that does not break out its advertising expense. It's currently lumped into G&A.

Given that the brokerage segment is now nearly as big as the market marking segment, and given that the firm seems to be placing a lot of emphasis on its core brokerage business, this (advertising expense) is something we would like to see broken out in the future. It helps clarify the growth in new new customer accounts and the effectiveness of the firms marketing operations.



Finally we take a look at Total Customer Assets. Here Interactive Brokers has seen steady growth. More steady, in fact, than what we've seen from E*TRADE (ETFC) and optionXpress (OXPS), for example. But as we noted in detail in our analysis of Schwab's earnings, much of the increase in assets is due to overall growth in the markets, which filters down into customer accounts. 



Clearly Interactive Brokers is a firm in transition. Since the margin rug hasbeen pulled out from under them they are scrambling to refocus efforts. As Mr. Petterfy said in his earnings call, "Our market-making business continued to suffer with volatility while our brokerage business continued its rapid growth in customer deposits in spite of the slow and uneventful market."

The clock is ticking at Interactive Brokers, to be sure. But the new set of proposed rules (PDF) coming out of the SEC could actually help the firm, if implemented. As Mr. Petterfy said on his call, "All of these developments taken together, the loss of priority, having to pay exchange fees, elimination of maker sponsored access and trader identification are all positive for our business because they will put our undeclared competitors on a more even playing field with us."

In the meantime we'll keep a close eye on their brokerage segment.