Interactive Brokers Group, Inc. (IBKR) Q4 2011 Earnings Report, Transcript and Summary

Good day, everyone, and welcome to the Interactive Brokers’ Fourth Quarter 2011 Earnings Results Conference Call. This call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Ms. Deborah Liston, Director of Investor Relations. Please go ahead. Deborah Liston – Director, Investor Relations: Thank you. Welcome everyone and thanks for joining us this evening to review our 2011 results, which we just released at the close. Joining me today on the call are Thomas Peterffy, our Chairman and CEO; and Paul Brody, Group CFO. This conference is also being broadcast on the Internet and is available through the Investor Relations’ section of our website. Just a brief reminder that during the call, management will discuss some non-GAAP measures in talking about our performance. You can find a reconciliation of those measures to the nearest comparable GAAP measures in our press release. In addition, management may make forward-looking comments based on current expectations and assumptions which involve risks and uncertainties. Our actual results may differ materially due to certain risk factors that are described in our filings with the SEC. I’d also encourage you to review the forward-looking disclaimer in our press release. With that, I’ll turn the call over to Thomas. Thomas Peterffy – Chairman and Chief Executive Officer: The 4th quarter of 2011 was just slightly weaker than the average in this, eventful and for us, financially fairly stable year. We have made much progress in building and tightening up our platform and business processes on which we rely for efficiency more than other businesses do. Our unique business model works. As proof I would like to offer you the following: This year we executed, processed, settled and accounted for, very nearly one million trades on over 90…

Thank you, sir. (Operator Instruction) Our first questionnaire in queue is Rich Repetto with Sandler O'Neill. Your line is open. Please go ahead. Rich Repetto – Sandler O'Neill: Good evening, Thomas. Good evening, Paul.

Hi Rich. Rich Repetto – Sandler O'Neill: I guess the first question is for Paul. On the MF write-down so it was $29 million and you said it went to other income on the revenue side, but just trying to see why that so it only reflected $0.1 million loss there. I guess I would have thought it would have been, was an offsetting numbers to that. Did all the MF go into that line, I guess is the question.

The MF all went into that line, but that category has other normal other income items things like market data revenue and various other things that would ordinarily make up a positive number and that number was essentially driven to zero. Rich Repetto – Sandler O'Neill: Okay, good. The run rate in that line as usually been less than $20 million normally I guess the last few quarters, but….

Right. Well, the MF was all in that line and there are enough other line items that the net was about zero. Rich Repetto – Sandler O'Neill: Okay, okay. And then the next question Thomas, you’ve gone to great lengths to talk about the daily segregation and reconciliation. And I guess my question is so by doing that that ensures that on a daily basis all your client funds are separated and fully accounted for I guess just to understand exactly what daily segregation means? And then the second is there is semi crisis of confidence or it’s getting better, but in the industry what else can be done if you are taking this step, but can there be other steps that either you can take or regulators or the trustee or anybody else to help get the industry back on better footing?

Now you see, but I think there is generally a problem in the structure of business in the United States in which we have professional management who gets paid year-to-year based upon the performance of the company in that year. And so they are incentivized to take large risk, because if it works out, they get the piece and if it doesn’t work out so it’s not their loss that is the reason why I think that businesses where employees have a large share of the business are more solid than otherwise. But I don’t know what we could immediately do about that. As far as the daily segregation of funds, it is a much more solid and reliable way of taking care of customer funds. If they are segregated everyday then if they are only done so once a week because if a lot of money comes in the course of the week it doesn’t have to be segregated until the end of the week. Rich Repetto – Sandler O'Neill: Okay, okay. And one last question just about the macro environment out there, you generally have done better we have gone through this number of times, but in raising volatility and where the actual to the implied is one or better. But given that volatility was on the average roughly just slightly down in 4Q and that the peers borrowing another spike in some unexpected event that volatility is sort of dropping again, I don’t know where you would agree or disagree that it’s sort of trending or you might expect it to go to the high-teens like it has before. But is there things that you can do to improve the Market Making operations in a environment where you have the volatility just modestly dropping through the quarter?

The ratio of the implied to actual volatility may be somewhat more important for us than the general level of volatility. Is there anything that we can do about making the volatility higher? I guess, we wouldn’t want to, because that would not be allowed. Rich Repetto – Sandler O'Neill: Yeah, what I guess was but to improve your results in declining volatility I guess is the question?

Well, some people sell some options in preparation for declining volatility, but that’s not something we would do, because before volatility spikes up it always declines. Rich Repetto – Sandler O'Neill: Right.

So, it looks like it’s really, really crashing that’s the time when it suddenly sometimes turnaround and runs up. Rich Repetto – Sandler O'Neill: Understood. I get your – the risk management practices, you’ve used have been sound and tested. So anyway, thank you, but that’s all I had.

Thank you, sir. Our next questionnaire in queue is Ed Ditmire with Macquarie. Please go ahead. Your line is now open. Ed Ditmire – Macquarie: Can you give us any sense even if it’s anecdotal about how either your broader customer maybe in particular futures traders responded in the weeks and months following the MF Global bankruptcy in terms of their activities. You did mention that some clients took money out of their accounts?

Generally, trading volume went down. I wasn’t focusing on futures volume as such, but I would assume that the bulk of diminution in trading volume was in futures. So, first of all, a large number of locals were clearing through MF. So, as you know, they all became unable to conduct their regular daily activity and number of our customers have closed their accounts as I told you. And you say it’s anecdotal, I really don’t have any odd numbers. I cannot really characterize how much the diminution was due to the MF events in trading volume. Ed Ditmire – Macquarie: Okay, thank you. And question for Paul if I could, one, can you give any color on the rate per the average commission per DART in the 4Q and how it changed quarter-over-quarter?

Yeah, I think, we reported every quarter. It was for the quarter that was the $4.07. It was $4.29 in prior quarter, the sequential quarter, third quarter. Ed Ditmire – Macquarie: Yeah. Can you expand on what factors lead to that declining?

There are so many moving parts that go into that. I mean, we are trying to maximize our commission revenue.

If I may say the commodity commissions are usually higher because our commission figure includes the $1.40 per contract we pay to the exchange. So, when our commodity business becomes a smaller percentage in the mix, then you will see our average commission rate decrease. Ed Ditmire – Macquarie: Okay, thank you. And then one last question for Paul did you – forgive me if you said this on the call, but did you say what the net interest income and other revenue of the broker was?

I did give this proportion of or the amounts of the net interest income deriving from each segment of the $48 million net interest income total, $39 million of it came from brokerage, $6 million of it came from Market Making, and the remaining $3 million from corporate. Ed Ditmire – Macquarie: Okay, thank you.

And that, it has been majority coming from brokerage as balances grow and so forth. Ed Ditmire – Macquarie: Okay. I will jump back in the queue.

Thank you, sir. Our next questionnaire in queue is Mac Sykes with Gabelli and Company. Your line is now open. Please go ahead. Mac Sykes – Gabelli and Company: Good evening gentlemen. Just get back to the loss some of the assets in the fourth quarter, just can you give us some color from the customers that withdrew with retail or institutional, I mean, did they close their accounts outright and what sort of institutions did they transfer to? And any other color you can provide would be great?

Most of the folks that left did not move their money by ACAT, when they transferred it out, so we do not know where they went to and they were generally commercial type of accounts businesses. As I said in my statement that by early January this has reversed and right now we are about even. So, we don’t have any customer withdrawals, not withdrawals anymore. Mac Sykes – Gabelli and Company: Have you seen some of those customers refund their accounts at all?

Some of them have refunded, yes, and others were just replaced by new customers. Mac Sykes – Gabelli and Company: The new CFTC regulations on segregation, do you think they will impact the smaller brokerage, in the futures brokerage business model. Do you think you could pick up some share from those guys away from MF Global?

Paul?

I’m sorry, what was the question Mac? Mac Sykes – Gabelli and Company: Sir, I guess with the new CFTC regulations on segregation?

Yeah. Mac Sykes – Gabelli and Company: In terms of being able to make money on those balances, I mean will that impact the business model some of the smaller futures brokers. Do you think you could pick up shares from those guys?

It would be a guess on my part, but I would say the other brokers probably have tried to utilize the old rules to the fullest. Certainly some of those brokers MF included by all accounts to the newspapers. First of all to make them more level in terms of what you could invest your customer segregated funds in. We never exploited those rules. We maintain a very conservative profile and how we deposit and otherwise invest customer funds. So it's possible that with the new rules that might clamped down on some of those other types of investment. It might hurt the bottom line of the other brokers, because it would hurt their interest income. Mac Sykes – Gabelli and Company: Great. Thank you very much.

Thank you. Our next questioner in queue is from Niamh Alexander with KBW. Please go ahead. Your line is now open. Niamh Alexander – KBW: Hi, thank you for taking my questions. Thomas, if I could go back to your last presentation was I think at our conference and you talked about, we were asking about how you were building a lot of capital into the business again and market makers doing better than you expecting and its out earning the dividend? And I was wondering about maybe some increase in the distribution or regular one or more special one, but you talked about wanting kind of to get to the AA rating that you felt that kind of being AA minus and maybe with the bit of disadvantages. Is that something you’re very much targeting and can you help me think about do you know what the rating agency is or what kind of specific levers that they are looking towards, when you talk to them about getting the better rating?

Well, I think that with our performance has been extremely steady. We have had positive quarters, every quarter, ever since we have been rated by S&P. So, they frequently tell us that what they need is time to raise our rating. I think at this time our rating is fairly high relative to what they have been telling and promising us. So, I’m not optimistic that this year they will raise it further, but probably the following year they will. When we took the dividends last time, they said that, well, that's a small negative, but given our steady performance over the years, it's not big negative in their mind. Niamh Alexander – KBW: Okay, that’s helpful. Thanks, Thomas. And do you think that’s becoming maybe your rating as something that say for example the institutional finance you’re targeting, the hedge funds and do you think that’s a big factor for them moving their business and then do you think, do you expect to see more growth there or hoping for similar growth from those kind of clients this year?

We always hope for more growth. Obviously, the big, hurdle though still is that Interactive Brokers is not Goldman Sachs or Morgan Stanley in their minds, but I think that maybe gradually changing and I hope I will live long enough to see it really change. Niamh Alexander – KBW: Okay, fair enough. Thanks, Thomas. And then Paul if I could quickly, just the execution and clearing costs in the brokerage business, I noticed it kind of kicked up per product traded over the last couple of quarters in especially third quarter. Is that because you are mixing, you intentionally kind of moving away from some of the equity execution. Is that what’s kind of driving up that proportion expense?

It’s more probably sensitive to the actual products executed rather than how our routing is working. We always try to route to minimize our cost, but as Thomas mentioned before, if future volumes for instance goes up then there is a greater gross costs. There is a greater commission revenue that goes with it. But there is a greater number on the expense line that is associated with futures because the futures exchanges simply charge more. So, it’s more related to the product mix at any one-time. Niamh Alexander – KBW: Okay, fair enough. Thanks so much.

Thank you, ma’am. Next questionnaire in queue is Rob Rutschow with CLSA. Please go ahead. Your line is now open. Rob Rutschow – CLSA: Hi, good evening, guys. If I can circle back to the other income number, it looks like the MF loss to be about $29 million for the quarter and you mentioned that there is some odds and ends in there, but is that where the Interactive Brokers Information System revenues would be and if so, what percentage of that would those make-up?

The IBIS is a brand new product. So, it’s not generating a material amount yet, but there are a number of other items that always go into other asset, the other income line, that would be offsetting the MF piece. Rob Rutschow – CLSA: So, we should look at that sort of elevated number excess in assets as one-time non-recurring.

Yeah. Rob Rutschow – CLSA: Okay. Second question would be, it looks like the amount of equity per customer account has been declining a little bit this year particularly in the fourth quarter is that a reflection of as you mentioned the larger customers pulling funds or are you seeing a different sort of flow in terms of new customers?

Reason for that is that we have had some success in marketing our platform to introducing brokers and introducing brokers then to have smaller accounts. Rob Rutschow – CLSA: Okay. And last question just be on the tax rate I guess on a reported basis with little bit lower and is that just reflective of the MF loss or there is something else that we should consider?

The tax rate is most sensitive to where we are earning our income and when we earn of greater proportion outside of the United States and it tends to be lower tax rate. Rob Rutschow – CLSA: Okay. Thank you.

Thank you, sir. And that does conclude our time for questions and answers. I would like to turn the program back over to Ms. Liston for closing remarks. Deborah Liston – Director, Investor Relations: Thank you everyone for joining us and just a reminder an archive of this call will be available for 90 days on our website. Thanks again and have a great evening.

Thank you. Again ladies and gentlemen, this does conclude today’s program. Thank you for your participation and have a wonderful day. Attendees you may disconnect at this time.