Interactive Brokers (IBKR) Q4 2021 Earnings Call Transcript | The Motley Fool

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Interactive Brokers (NASDAQ:IBKR)
Q4 2021 Earnings Call
Jan 18, 2022, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Thank you for standing by, and welcome to the Interactive Brokers Group fourth quarter financial results conference call. [Operator instructions] Please be advised that today’s conference may be recorded. [Operator instructions]. I would now like to hand the call over to your host, director of investor relations, Nancy Stuebe.

Please go ahead.

Nancy Stuebe — Director of Investor Relations

Thank you. Good afternoon, and thank you for joining us for our fourth quarter 2021 earnings call. Once again, Thomas is on the call, but asked me to present his comments on the business. He will handle the Q&A.

As a reminder, today’s call may include forward-looking statements, 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 statements filed with the SEC.

2021 was a good year for Interactive Brokers. Adjusted revenues were 2.78 billion, up 26% for the year, and expenses were well controlled, resulting in a pre-tax profit margin that improved from 61% to 67%, by far the highest in the industry. Adjusted diluted earnings per share for the year were $3.37, and that was 35% higher than the previous year. We look back at 2021 as one with unprecedented global investor engagement with the market.

The only better year we can see is 2022. Let me explain why. In 2021, we added more customers, over 600,000, and did more trades, over 2.5 million DARTs per day, than we ever have before. We introduced more products and more tools while also expanding many existing ones and to assist with our continuing growth we hired and trained nearly 450 new employees around the world.

Our year-on-year account growth was 56% this year. I’ve been saying for some time that after this unusually active period we have been experiencing, a period that seems to keep growing longer, we will see account growth closer to between 30% and 40% a year. But that does not mean that we will not do almost anything we can think of to try to keep it above those levels. We introduced more new products and expanded the capabilities of existing ones.

Recognizing our global customer reach, we introduced global analyst, which allows our clients to discover undervalued companies from a wide database of global stocks. We introduced our crypto offering. U.S. individuals, RIAs, hedge funds, and introducing brokers, as well as individuals in over 100 different countries can now all trade crypto through our partner, Paxos.

Very shortly, we will be offering crypto for our international financial advisors, ebrokers, and hedge funds in those countries, and we will add more countries continually. We charged just 0.12% to 0.18% of trade value with a minimum $1.75 per trade. We rolled out our ESG-focused IMPACT app, which brings transparency and a streamlined, simplified platform to help clients find and invest in companies that share their values. IMPACT also allows them to make cash donations to thousands of different U.S.

charities directly from the app. We also introduced U.S. spot gold trading. And these are just a few of the items we have been working on, and we have other exciting products and improvements in various stages in advance of being rolled out.

As 2021 drew to a close, IBKR was able to produce its second best quarter of the year after the hyperactive mean stock events of the first quarter. But the story of the mean stocks will fade in the minds of investors, while the most remarkable story of the year, the huge rise in popularity of options and more specifically, option spreads will remain. As someone who has spent the last 50 years trying to automate the options industry, I very much welcome this development. For a long time, Interactive Brokers was alone trying to stir up industry interest to computerize these markets.

But now finally, people are beginning to understand what fantastic versatile instruments options are. I am predicting further growth, especially internationally. Option spreads give traders the opportunity to assume very specific and limited risk-reward profile for specific periods of time. Please visit our probability lab on the IBKR website for a fun way to think about, learn about, and play with options.

As the year were on, listed options saw an average daily volume of nearly 40 million contracts and Interactive Brokers customers responsible for roughly 10% of daily options volume. This is even more than in equities, where we are only about 7%. Execution quality is most important for options traders, especially for options spread traders, where profits and losses tend to be limited and every penny matters. Even the minimum price difference of $0.01 amounts to $1 a contract and bid offer spreads in the market regularly get as wide as $0.05 to $0.10.

Interactive Brokers does not accept payment for order flow for IBKR Pro customer orders. We auction off each option order among 16 top market makers. We are always happy to welcome more to this group. These auctions last something on the order of 100 milliseconds, and the winner chooses which exchange it wants to use to trade with the order.

IBKR then posts the order for an exchange auction, and if nobody improves on the agreed-upon price, the original winner of the auction trades the contract at that price. This may sound like a rather involved process, but in practice it all happens in a fraction of a second. All participants use automated processes and they automatically feed the amount of price improvement they are interested in competing on for any specific option contracts they trade with at that specific point in time. In this way, our customers can take advantage of a leading-edge system designed to get them the best available price.

Having been the largest market makers and options for over 30 years, IBKR is very well versed in these processes, many of which we have retained from our Market Maker Day, and we have been keeping them up to date over the years. As new exchanges and new rules are continuously introduced, this is not an easy task, and we have a team of programmers regularly engaged in this activity. Imagine if payment for order flow were prohibited, and all brokers are forced to execute their own customer orders. Sophisticated mechanisms like the ones we developed and use would be expensive and take a long time for others to create.

While the idea is interesting to think about, I do not think that it is about to happen anytime soon. Another notable development for IBKR in 2021 was a 40% increase in margin loans over the course of the year. I think this growth will also continue into the future. With 7% inflation as the background, stock prices will have to rise by 7% just to retain the relative value.

I believe inflation will continue at a high rate. There is very little the Fed can do about it. They may raise interest rates to 1 or 2%. Who would not borrow at that rate and invest in leveraged assets.

Even if the Fed funds rate rises to 3%, Interactive Brokers will end at 3.75% to people who want to buy stock, whether or not they combine it with option strategies. The 3% is not likely. A slightly over 3% interest rate would add $1 trillion to annual U.S. debt service and to deficit spending, which would just further increase inflationary pressures.

Inflation is here to stay. We’ll have to learn to live with it and margin lending will continue to grow along with it. We aim to grow our businesses by growing our customer base. We will continue to introduce new platforms, products, and research and trading tools to attract new customers of the type that fit our target, serious, hard-working, and educated investors who come to us to succeed with the help of our execution quality and products and services.

With that, I will turn the call over to our CFO, Paul Brody. Paul?

Paul Brody — Chief Financial Officer

Thank you, Nancy, and welcome, everyone, to our IBKR fourth quarter results and then [Inaudible] starting with our revenue items on Page 3 of the release. We’re pleased the record results during the June quarter, we believe the robust growth of customer positions us well what our transaction [Inaudible]. Conditions continue to be strong, returning our second highest ever quarter investment [Inaudible] prior year. We’ve got substantially higher trading volumes, [Inaudible] options, [Inaudible] large [Inaudible] large [Inaudible].

Net interest income was strong, generating $295 million of revenue. Also our second highest quarter [Inaudible] and leading to a record full year NII of 32% of [Inaudible]. Margin lending remains strong. Investor confidence in market remains [Inaudible].

Securities list also [Inaudible] showing investment demand rolling broad range here in [Inaudible], lead by a growing [Inaudible]. We generated $58 million of revenue and other fees and services, 215 million for the year, 25% despite the midyear [Inaudible]. Strong client activity drove revenues higher [Inaudible]. Market data team reached $20 million, up 15% [Inaudible] exposure growth over [Inaudible] $15 million as higher volumes, [Inaudible] 0.3% higher [Inaudible].

Other income includes gains and losses on our investments, our current diversification strategy, and [Inaudible] transaction. Many of…