Interactive Brokers Group Earnings Call Nuggets: Taxes and Challenges

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

Taxes

Richard Repetto – Sandler O’Neill: The first question is for Paul. I believe you mentioned $0.07 of tax benefits for 2012. I guess the question is I believe were all those taxed, the $0.07 you spoke of all realized in the fourth quarter?

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Paul J. Brody – CFO, Treasurer, and Secretary: They were – about $0.05 of it was recognized in the fourth quarter as tax benefits related to prior periods. The other $0.02, have to with the accounting restatements that was already recognized earlier in the year but $0.07 would apply it for the full year, Rich.

Richard Repetto – Sandler O’Neill: So $0.05 in quarter. Thomas I don’t want you to get you to speak too much seeing that you are not feeling well but you too got a question. On the – you had made reference in the prior call to acquisitions and I guess is there still the opportunity – was there any – I know you probably won’t name them but were the things you were looking at and on the 3Q call are they still opportunities that are possibilities now I guess is the question.

Thomas Peterffy – Chairman, CEO and President: I’m not sure if this is a trick question. Did I really talk about opportunities?

Richard Repetto – Sandler O’Neill: As we talked about the special dividend and you’re weighing whether paying a special dividend or working out…?

Thomas Peterffy – Chairman, CEO and President: Yeah, right, right, right. Yeah, right. I confess that we have looked at some opportunities and we found them to be wanting.

Richard Repetto – Sandler O’Neill: You found them to be – excuse me?

Thomas Peterffy – Chairman, CEO and President: Wanting.

Richard Repetto – Sandler O’Neill: Then the very last question then, Thomas, when you look at how you pay the special dividend out of the – and this is I guess for Paul too, you paid it out of the U.S. subsidiary, was that purely for tax purpose – so you wouldn’t absorb the taxes and have to repatriate the taxes or was it to keep – I was going to say, uses of capital overseas, is there any – was it just specifically keep in abundance the capital overseas or was it purely just the tax issue?

Paul J. Brody – CFO, Treasurer, and Secretary: So, we funded the dividend from the entities that are most accessed – from the Market Making entities that had the most access. It was not strictly from the U.S. entity; it was from retained earnings that had been previously taxed in the U.S. So, some of our foreign operations are structured such that their income is taxed on a current year basis each year in the U.S. And so, because those were the entities that had built up excess over the years, that was the logical place to fund the dividend fund.

Challenges

Chris Harris – Wells Fargo: So, it was obviously a challenging quarter for Market Making. We know that the environment was pretty difficult given the volatility, other things you mentioned. I’m curious to get your perspective, is there really any organic growth opportunities for this business any longer or are we just looking at a business whose results are primarily going to be driven by volatility at this point going forward?

Thomas Peterffy – Chairman, CEO and President: I do not see much of volatility for organic growth. As you know, the exchanges are listing new products, which one would believe that would – trading those products would contribute to our growth in the business, but at the same time…

there are more and more hedge funds and high frequency traders coming into this space. So, I think it’s – the newcomers pretty much counterbalance or maybe even overrun the advantage of new products.

Chris Harris – Wells Fargo: Then, in the Brokerage business, I know its early days in the first quarter here, but we’re seeing better fund flows and it seems like retail investors are starting to feel a little bit better about the market. Are you guys seeing light pick-ups in your trading activities so far in Q1? And what are you hearing generally from your Brokerage clients?

Thomas Peterffy – Chairman, CEO and President: Relative to the fourth quarter, there is some pickup, but it’s not really overwhelming. It appears that we had some little higher inflows than usually in the first few days. So, in other words, it looks good, but it’s not exceptional.

Chris Harris – Wells Fargo: So, it sounds like it’s pretty similar to exchange volumes than I guess – that’s kind of how those have been trending?

Thomas Peterffy – Chairman, CEO and President: Yeah, maybe.

Chris Harris – Wells Fargo: Last one from me. Thomas, you had mentioned in your prepared comments that regulations potentially coming out of the SEC. Are there any couples specifically that you’re looking to over the next year or two?

Thomas Peterffy – Chairman, CEO and President: I’m really looking for some regulations that hopefully keep the markets without the kinds of incidents that we had in this past year. Hopefully, there will be some technology solutions to these issues as ordered by the SEC and that may or may not give us some advantage, but that’s basically it.

Chris Harris – Wells Fargo: What do you think the odds of something here over the next year on the regulation side, low, medium, high?

Thomas Peterffy – Chairman, CEO and President: 40%.

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