Interactive Brokers Group, Inc.

Good day and thank you for standing by. Welcome to the Interactive Brokers Group first quarter financial results conference call. At this time, all participants are in the listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 1 on your telephone. Please be advised this call is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to your host today, Nancy Stubbe, Director of IR. Please go ahead.

Good afternoon, and thank you for joining us for our first quarter 2022 earnings conference call. Once again, Thomas is on the call, but asked me to present his comments on the business. Also joining us today is Milan Galic, our CEO. After prepared remarks, we will have a 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 reports filed with the SEC. The first quarter was one in which the only thing predictable was how unpredictable it would be, except for our continued growth. In the first three months of this year, the markets absorbed news on geopolitical issues that included the war in Europe and its impacts, both humanitarian and economic, as well as continuing supply chain issues, product shortages, levels of inflation not seen since the 1970s, and the first Fed funds rate hike since 2018, with expectations of many more to come. Persistent deficit spending in this country has limited the government's ability to respond to high inflation with high interest rates. As for each 1% rise, interest on U.S. debt increases by $300 billion as it gets refinanced, so inflation is likely to stay with us. Few markets were unaffected by these events, and most market indices worldwide were down in the first quarter. Despite this, we are very pleased with how our business performed and even with the headwinds we faced in the quarter. We ended the quarter with a record 1,809,000 accounts and that increase of over 480,000 from last March. We saw account growth in all client segments and all geographic regions with particular strength, 40% and 48% in Europe and Asia, which together represent three-quarters of our accounts. As our client base grows, darts have risen as well. In the first quarter, our darts were over 2.5 million, the second highest in our company's history. Volumes were up particularly this quarter in futures and options, products which carry a higher commission, though in the case of futures, they also carry a higher cost, with 56% of futures commissions taken up by exchange, clearing, and regulatory fees, likely due to a lack of competition in the largest futures market in the U.S. Higher darts led to commission revenues rising to $349 million, also the second highest in company history, behind only the unusually active trading period last year. As I mentioned on our fourth quarter call, options volumes continue to be strong. In the first quarter in the U.S., listed options volume for the industry, the average daily volume of over 42 million contracts, a record. In an unpredictable environment, Vertical option spreads give traders the ability to take on a very specific and limited risk-reward profile for a specific period of time. This appeals to many traders looking to invest in companies whose business and prospects they believe in at less cost than if they had to buy those shares outright. While in 2022 the impact of the coronavirus has faded, the resulting reliance by the public on electronic communications and Meeting from a distance and gathering and sharing ideas in larger asynchronous groups, including groups of investors, remains. The net effect of this trend, as far as IBKR and the online brokerage industry is concerned, is that even millennials and less technologically oriented people have become more friendly with online activities. As you may know, the average age of our customers is 42. Unexpectedly, this opens up a new segment of potential customers for us, 50 and above wealthier people. Most of these people have their investments managed by advisors on the conventional wealth management platforms of the larger brokers. Now that they are at ease with online activities, many of them would like to be able to see their accounts live, online, and sometimes would even like to do a trade by themselves and see it landing in their accounts. At Interactive Brokers, this is something they can do. Our task is to let them know that so that they would ask their advisors to move their accounts to IBKR. Interactive Brokers has become better at enabling our customers to navigate through our numerous high-quality features at ever greater efficiency, helping them to establish their own personalized work environments and tools. The superior customer experience our platform offers has become better known worldwide, spread by word of mouth as well as by our institutional sales team, as we continue to add customers at a rate of over 30%. In addition, our capital base has grown even stronger during this period, with total equity reaching $10.5 billion this quarter, up $1 billion since this time last year. This base funds our business, helps us to attract larger customers, and reassures the increasing number of clients looking to participate in the markets. We saw account growth once again in all five of the client types that we service. Individual account growth was fastest at 45%, followed by proprietary traders at 35%, introducing brokers at 23%, financial advisors at 16%, and hedge funds at 8%. We are excited about the opportunities we see in 2022. We continue to place enhanced focus on our marketing efforts, and we increased spending in this area over the past year and expect to continue again this year. We recently introduced Global Trader, a simple mobile trading app that allows investors to open an account in minutes and start trading on over 80 stock exchanges around the world in 23 different currencies, allowing for global diversification. It is integrated with our Global Analyst Scanner, which helps investors identify investment opportunities worldwide allowing global trader users to quickly take advantage of them. We also started Traders Insight Radio, a new podcast series featuring interviews with thought leaders across financial services, and that is available for free on our Trader Workstation, Client Portal, and IBKR Mobile, as well as via the popular podcasting services. Our leading ESG efforts continue and now include carbon offsets. Our clients can select from a list of preset activities, estimate their carbon footprint, and purchase the carbon credits to offset them, which we source and retire, all from their IBKR account. We believe in 2022, with the potential for higher inflation, that more people will come to the realization that holding onto their money as cash is a losing proposition. They will turn to equities worldwide to earn a return, and interactive brokers will serve them, with our innovative platform and educational materials. We aim to be the platform of choice for the best-informed, most successful investors. With that, I will turn the call over to our CFO, Paul Brody, who will go through the numbers for the quarter. Paul?

Thank you, Nancy, and as usual, thanks, everyone, for joining the call. I'll first review the first quarter operating results, and then we'll open it up for questions. Starting with our revenue items on page three of the release, We're pleased with the strength of our results this quarter, and we believe our robust growth in customer accounts positions us well for both commission and interest revenues in the quarters ahead. Commissions were strong, reaching their second highest quarterly revenue ever at $349 million. Options and futures volumes outpaced the first quarter of 2021, while stock volumes declined from last year's so-called mean stock spike. Net interest income of $282 million reflected higher margin loan interest on greater loan balances, as well as higher interest earned on our segregated cash portfolio as U.S. rates have recently moved up from near zero. These gains were offset by lower securities lending revenue, which reflected fewer opportunities in the marketplace. Other fees and services generated $53 million, with market data fees of $20 million, up 5%. and risk exposure fee revenue tripling to $15 million. Exchange liquidity payments remained at $10 million on consistent options volume. Declines in IPO fees and account activity fees, which we discontinued for most account types in 2021, reduced the total in this line item. Other income includes gains and losses on our investments, our currency diversification strategy, and principal transactions. Note that many of these non-core items are excluded in our adjusted earnings, and without these excluded items, other income was $8 million for the quarter. Turning to expenses, execution, clearing, and distribution costs rose 4% from last year, led by futures volumes, which carry higher fees. As a percent of commission revenues, execution, and clearing costs, which are driven by a combination of trading volume, exchange rebates, and changing fee schedules. We're at 16% this quarter, meaning that 84% of incremental commission revenue dropped to the bottom line. While this cost ratio will fluctuate over time with product mix and trading volumes, the factors that drive it lower over time remain in place, with exchanges offering rebates and competing on costs. which gives our smart router the opportunity to improve on execution quality for our IBKR Pro clients. Compensation and benefits expense, while up in dollar terms for the quarter as we expanded hiring to support our strong growth, was 16% of our adjusted net revenues, consistent with its historical level. Our headcount at quarter end was 2,683. G&A expenses were down versus last year, driven by a non-recurrence of $18 million in Brexit-related costs and lower legal expenses. This quarter also included a $1 million donation toward humanitarian aid in Ukraine. Our adjusted pre-tax margin was a robust 64%. Automation remains our key means of maintaining high margins. as well as continued expense control while we hire talented people and invest in the future of our business. $28 million of income taxes reflect the sum of the operating company's $11 million and the public company's $17 million. Moving to our balance sheet on page five of the release, our total assets were $114 billion at the end of the quarter, with growth over the last year driven by increases in our segregated cash and securities, and margin loans. Our consolidated equity capital was $10.5 billion and we have no long-term debt. Turning to our operating data on pages six and seven, our contract volumes for all customers were especially strong, reaching the second highest ever in options of 6% on the year and the highest ever in futures of 31% on the year. Stock share volume was down significantly versus last year's active first quarter, and the drop-off is largely attributable to trading in pink sheet and other very low-priced stocks. On page 7, you can see that our account growth remains robust with over 132,000 net account ads in the quarter and total accounts reaching 1.8 million, up 36% over the prior year. We are now adding accounts at a quarterly pace that is greater than our annual pace prior to 2020. Total customer darts were over 2.5 million trades per day, second highest in company history, surpassed only by last year's extreme first quarter activity, but up 4% from strong fourth quarter trends. Our cleared IPKR Pro customers paid an average of $2.57 commission per cleared commissionable order, up 11% from last year as our clients' volume mix included proportionately more futures than last year. These products carry higher pass-through fees charged by exchanges and clearinghouses. Page 8 presents our net interest margin numbers. Total GAAP net interest income was $282 million for the quarter. down 8% on the year-ago quarter, reflecting strength in margin lending offset by fewer opportunities in securities lending. The Federal Reserve raised interest rates by 25 basis points with about two weeks left in the quarter, which had a minor positive impact in a 12-week quarter, but will have a full positive impact in the next quarter. Margin loan interest was up 27% to $149 million. as average margin loan balances grew 18% over last year's first quarter. The higher Fed funds rate bodes well for our U.S. dollar-denominated balances, which are roughly three-quarters of the total. Net interest on segregated cash turned positive this quarter, and we earned $7 million on those balances due both to our opportunistic investment strategy as well as the mid-March Federal Reserve rate hike. Securities lending net interest was $110 million, down from $175 million in the unusually active year-ago quarter. There were fewer hard-to-borrow names that investors sold short in the first couple of months of the quarter, particularly in January and early February, though we began to see more opportunities open up in March. Interest from customer credit balances, or the interest we pay our customers, continues to be positive. Because in currencies where rates are negative, we pass through some of the interest costs to customers. We earned $9 million on these balances. Now, for our estimates of the impact of increases in interest rates, we expect the next 25 basis point rise in rates to produce an additional $124 million annually. Note that our starting point for this estimate is March 31st. when the first 25 basis point increase in Fed funds had already occurred. The $124 million estimate is for a second rate increase and is in addition to the $165 million increase for the first rate hike that we estimated last quarter. As current market expectations include larger rate increases, we note that a 50 basis point rise in rates would produce an additional $175 million annually. This does not take into account any change in how we may adjust our investment strategy to take advantage of newly higher rates or any change in our assets. About 28% of our customer cash balances are not in U.S. dollars, so estimates of U.S. rate change impact exclude those currencies. In conclusion, the first quarter produced a solid start to the year. reflecting our continued ability to grow our customer base, take advantage of opportunities as they arise, while managing the business effectively with strong expense control. And with that, we'll turn it over to the moderator, and we will open up for questions.