Interactive Brokers Group Earnings Call Insights: Unlocking Value and Record Growth

Interactive Brokers Group (NASDAQ:IBKR) recently reported its first quarter earnings and discussed the following topics in its earnings conference call.

Unlocking Value

Christopher Harris – Wells Fargo: The first question I want to kind of get out is the topic of kind of gradually morphing into a pure play broker and just curious if you guys have ever thought about or entered into any discussions with any other parties about potentially selling the market maker and the reason I asked that even if you had to take a substantial discount on that sale. It seems like you could unlock a lot of values. So, curious to say have you guys thought about that if it’s anything you explored?

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Thomas Peterffy – Chairman, CEO and President: By discount you mean discount to the cash we have in the business?

Christopher Harris – Wells Fargo: Discount the book value.

Thomas Peterffy – Chairman, CEO and President: Well, I would just write it down.

Christopher Harris – Wells Fargo: Why not just do that and…

Thomas Peterffy – Chairman, CEO and President: I told you. I try to make it very, very sure that you all pay attention to the idea that I know that you want me to close this up, but I’m not so sure that this is finished. So, I would like to take my time and do we it slowly maybe it will reawaken.

Christopher Harris – Wells Fargo: I guess the other question relates to dividend, Thomas you had mentioned the dividend is based on what happens with the market maker. Does that mean if conditions continue to deteriorate, could you possibly be looking to cut the dividends or could you just base it or allocate capital from the broker to pay the dividend?

Thomas Peterffy – Chairman, CEO and President: We will not cut the dividend. We will continue to pay the dividend from the market maker.

Christopher Harris – Wells Fargo: Right, if the market maker goes away then I guess you don’t have anything to pay the dividend whether unless you…

Thomas Peterffy – Chairman, CEO and President: Well, then we have $2.7 million.

Christopher Harris – Wells Fargo: All right. So, you could use the broker for that. All right, so last…

Thomas Peterffy – Chairman, CEO and President: No, we’ll have the broker and after the market maker has done away about $2.7 million of the market maker that is left behind, yes.

Christopher Harris – Wells Fargo: Yeah. Okay, I got it. A real quick last question then for the Brokerage business you guys are definitely getting momentum there, but I’m just kind of curious as to why growth is even better and I know that’s kind of an unfair question to ask because you guys are growing faster than anybody else, but it just seems like your value proposition is so much stronger. I would think that you guys would be taking even more share than you really are. So, as you talk to clients, or prospective clients, what are the kind of the objections to moving more accounts or capital to your broker?

Thomas Peterffy – Chairman, CEO and President: The objections are always the same. Some people do not believe the value proposition. Some people who manage money for others say that their customers do not know Interactive Brokers and they will be ready to be exposed to us even though we explain to them that our credit seems to be uplift by FNB seems to be valued higher than that of Goldman or Morgan Stanley they say that some people say that (indiscernible). It’s a slow push, but as you’ll see is we are getting down. I think the growth is quickening. And I think that this as I said I think it’s going to quicken even further. So, our growth is curving up.

Record Growth

Richard Repetto – Sandler O’Neill: Well, so the Brokerage is setting all new records here. And I guess I am assuming it’s come from incrementally more from institutional, would that be correct and any of these tools that you talked about last quarter like the Money Manager marketplace or anything else helping you with the record growth here or the growth?

Thomas Peterffy – Chairman, CEO and President: I mean it’s hard to tell what is exactly that’s helping, but as Chris said before our value proposition is definitely better than anybody else in this business and slowly but surely it will be brought back into acceptance.

Richard Repetto – Sandler O’Neill: Is it fair to say that it has come in incrementally more from the institutional side.

Thomas Peterffy – Chairman, CEO and President: That is correct. There is institutional accounts are growing at the higher rates and money in institutional accounts is growing at a percentage of total money and commission derived from institutional accounts are also growing higher than the overall commissions.

Richard Repetto – Sandler O’Neill: Have you grown the sales force at all or anything else – is it still just plainly the value product – the value proposition rather than…?

Thomas Peterffy – Chairman, CEO and President: The sales force has grown some, not a great deal, but maybe we added – we grew another 10%. So, we added about three sales people in that course of the last few years. So, we are around 33, if I am correct…

Richard Repetto – Sandler O’Neill: I guess my last question Thomas is, so when you say the gradual transformation, we know you have the mechanism of the dividend and I fully understand it, and I respect the idea that this thing did earn the $1.2 billion not too long ago. The gradual mechanism, the gradual processes that you are talking about, is it the same processes that we are aware of where the dividend eats into the capital or is there something else that you have in mind?

Thomas Peterffy – Chairman, CEO and President: No, eats into capital other things being equal, we could have another special dividend. I’m not saying that I’m thinking about it, but that would be a possibility and though I am not planning it. So, if we completely stop the Market Making business, which I don’t think we’ll do, at least not in the near future, but if we did, then we would pay up with special dividend.

Richard Repetto – Sandler O’Neill: Then just the capital at the Market Making, the 2 point I think it was 7.3 or 7-something. Paul, how did that change quarter-to-quarter?

Paul J. Brody – CFO, Treasurer, and Secretary: Well, in the end of the year we gave about $400 million out and then it’s didn’t change much over the quarter other than the fact that we paid the regular, about $40 million in the regular quarterly dividend and lost a little bit of money.

Richard Repetto – Sandler O’Neill: When is the timeframe when you say gradual and again respecting the profitability prior of this unit, so is this something that’s a year or two year process, or am I thinking about correctly, or what timeframe is gradual to you?

Thomas Peterffy – Chairman, CEO and President: It all depends on how, what is going to happen in the next and the next quarter and next quarter. We remain flexible, and so how it goes. We are not (indiscernible) if it really doesn’t work at all, then we’ll have to think about shutting it down. But I don’t think that chances are that will add.

A Closer Look: Interactive Brokers Group Earnings Cheat Sheet>>