Interactive Brokers Group, Inc.

Good day, and thank you for standing by. Welcome to the Interactive Progress Group Fourth Quarter 2024 Earnings Conference Call. At this time, all participants are in a 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-1-1 on your telephone. You will then hear an automated message advising your hand is raped. To answer your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to turn the conference over to your speaker for today, Nancy Stubbe. Please go ahead.

Thank you. Good afternoon, and thank you for joining us for our fourth quarter 2024 earnings call. Joining us today are Thomas Pederphy, our founder and chairman, Milan Galic, our president and CEO, and Paul Brody, our CFO. I will be presenting Milan's comments on the business, and all three will be available at our 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. In the fourth quarter, Interactive Brokers clearly demonstrated the power and leverage of a diversified, fully automated global platform. The international interest in securities markets continues. We added 775,000 accounts in 2024, a record number of annual ads. 217,000 came on board in the fourth quarter alone. Our client equity was up 33% to $568 billion, an increase of $142 billion from last year and the first time we finished a year with over half a trillion dollars. Rising markets and the anticipation of lower rates led clients to actively trade securities and to be comfortable with taking on risk. In addition to increasing their exposure to various markets, They chose to take on more leverage using margin loans and to take on more assertive positions, which increased our exposure fee revenue. This translated into strength in our financials. Our quarterly pre-tax income was a record, reaching over $1 billion for the time, while our gap pre-tax margin rose to 75% for the quarter. For the full year, we earned over $5 billion in net revenues for the first time and achieved a 71% pre-tax margin. by far the highest in the brokerage industry. Over the past several quarters, we have added multiple new products and enhancements worldwide. We have spent a great deal of time to understand the needs of our various client types. For financial advisor clients, we enhanced our advisor portal with features that improve portfolio management and client communication. We added a multi-stock tax loss harvesting tool that helps reduce clients' tax burdens. We added models and model rebalance tools that simplify applying consistent strategies across multiple accounts. We integrated a generative AI-powered commentary builder feature, which automates the creation of personalized performance summaries and is integrated with our portfolio analyst tool, allowing FAs to generate reports showing clear, detailed portfolio data and commentary. To date, thousands of our users have generated commentaries. There will be more to come here in 2025. For our clients who trade options, we have added four new liquidity providers to our options ATS, increasing its depth and capability to achieve better pricing. For after-hours traders, our stock scanners now support price movement in the overnight trading session, so our clients can see top gainers and losers and other groupings during the session. For international individual accounts, We have previously introduced an alphabet soup of popular savings products, like ISA accounts in the UK and TPSC accounts in Hungary. And this year, we added PEA accounts in France, and we are the first non-French brokers to do so. More will be coming. Broken down by geography, the majority of our accounts are based outside of the United States. To make it easier for prospective clients to come on board, we have translated our account application into more languages. including French, Italian, Arabic, Hebrew, and Hungarian, opening doors for investors who may not be as comfortable with English. Our application is now available in 13 languages, facilitating global outreach for potential customers. By client geography, in the fourth quarter, our accounts and client equity once again grew fastest in Asia, followed by Europe, as growing numbers of investors worldwide want access to international, and in particular U.S., Of our five client segments, the fastest account growth was again seen with individuals, with introducing brokers a close second. On the client equity side, individuals again grew the fastest, followed by financial advisors and iBrokers. Commission growth was fastest for proprietary traders, while net interest income growth was led by individuals, followed by financial advisors. Overall, we experienced another productive quarter. We launched trading on the Saudi exchange, which follows our launch in Malaysia last quarter. We added IB algorithms for Hong Kong exchange options. As a note, we began offering cryptocurrencies in Hong Kong also this year, back in May. We have focused on making it easier for clients to fund accounts, and this quarter began to offer EBDA for Hong Kong dollars and offshore Chinese yuan deposits. open banking for Euro deposits, and Plaid for Euro and British pound account funding. Our clients around the world, particularly younger ones, are used to the convenience of trading crypto 24-7 and will expect the same from other asset classes. We consider meeting these expectations vital. We already offer over 10,000 U.S. stocks and ETFs during overnight hours. And in 2024, we expanded ours to 24-5 for corporate and government bonds in U.S. dollar, euro, British pound, and Swiss franc denominations, and expanded them for U.S. stock contracts for difference. This quarter, we also expanded our order types and introduced a new one called Overnight Plus Smart to specifically cover overnight trading hours. For other products like options and futures, which trade only on exchanges, We await only the willingness of the exchanges to extend trading hours. We will be ready when they are. There are at least eight different regulatory projects we are programming for around the world, as the many numerous jurisdictions we operate in create, add to, and update the regulations. We are on time or, more often, well ahead of schedule on all of them. Our close ties to over 20 very different regulatory regimes in multiple languages and our ability to react to and program or reprogram our systems to comply on a continuous basis is one of our advantages that we take extremely seriously, with employees on the ground and programmers dedicated to these tasks. And finally, a special note on ForecastX. We created this exchange, which is regulated by the CFTC, and allows trading on predictions that have measurable, third-party verified outcomes. This is an entirely new asset class, one that provides a market-driven way to quantify real-world expectations on measures like economic, political, and climate outcomes. Another significant broker now offers access to our exchange. We were ready with election trading when it became permissible. We believe the greater ambition, ForecastX becoming the most accurate marketplace for predicting significant events, will occur over time. Our pipeline of new business and new initiatives remains as strong as ever, and our products set clearly has resonated with people around the globe. We are not stopping here to rest on our achievements. We have many projects to work on, goals to achieve, and together with the Interactive Brokers team, we look forward to executing on them in 2025. We are eager to share our new products and enhancements as we introduce them. With that, I will turn the call over to our CFO, Paul Brody. Paul?

Thanks very much, Nancy. Thank you, everybody, for joining the call. We're going to start with our revenue items on page three of the release. We're pleased with our financial results this quarter as we again produced record net revenues and pre-tax income for the quarter and also for the year. Commission revenues rose to a record $477 million this quarter. For the full year, commissions were $1.7 billion, up 25% from last year. In 2024, we saw higher trading volumes across the major product categories, as well as 24% higher darts per account. Net interest income also reached a quarterly record of $807 million and a yearly record of 3.1 billion, despite multiple rate cuts in nearly all the major currencies. A continued risk on environment in the quarter led to a significant increase in margin borrowing and strong net customer deposits led to higher segregated funds balances. These revenues were partially offset by the interest paid to our customers on their cash balances. Other fees and services generated 81 million for the quarter and 280 million for the year, up 47% and 42% respectively. This was primarily driven by the continued risk on positioning of customers, which has been reflected in rising risk exposure fees over the course of 2024. And to a lesser extent, by both higher FDIC sweep fees and by higher payments for order flow from options exchange mandated programs. Other income includes gains and losses on our investments, our currency diversification strategy, and principal transactions. The primary factor here, was our previously reported October sale of a portion of our interest in Tiger Brokers, which led to a one-time realized gain of $34 million. Together with a 10 million mark-to-market unrealized loss for the quarter, the Tiger investment contributed a net gain of $24 million to other income. Several of the items in this line are considered non-core and therefore excluded in our adjusted earnings. without these excluded items. Other income was a $59 million gain for the quarter and $132 million for the year. Turning to expenses, execution, clearing, and distribution costs were $115 million in the quarter and $447 million for the year, up versus last year due to higher trade volumes in stocks and options. Overall, Commissions rose faster than execution costs, however, thanks to higher rebates earned from the exchanges that pay for liquidity-enhancing orders. Execution and clearing costs were 19% of commission revenues in the fourth quarter for a gross transactional profit margin of 81%. We calculate this by excluding from execution, clearing, and distribution $21 million of non-transaction-based costs. mainly market data fees, which do not have a direct commission revenue component. Compensation and benefits expense was $138 million for the quarter, up slightly from the year-ago quarter. Due to the capitalization rather than expensing under GAAP of some software development this quarter, compensation expense is about $5 million lower than usual. Adjustments of this nature may be made periodically. For the quarter, the ratio of compensation expense to net revenues was 10%, and would have been 10.3% had that $5 million of capitalized software been included as comp expense. For the year, this ratio was 11%, down from 12% in 2023. Our headcount at December 31st was 2,998, up 2% for the year. G&A expenses were $59 million, up from the year-ago quarter. For the full year, G&A was $314 million, up 49%, primarily due to a one-time litigation expense in the third quarter. Excluding this, G&A for the year was $236 million, up 12%, primarily on higher advertising expenses. Our pre-tax margin was a record 75% for the quarter as reported and 76% as adjusted. Income taxes of $71 million reflects the sum of the public company's $34 million and the operating company's $37 million. The public company's effective tax rate was 14% below its typical range, primarily due to a benefit from the annual revaluation of our deferred tax asset. Moving to our balance sheet on page five of the release, our total assets end of the year 17% higher than last year at $150 billion, driven by strong growth in margin lending. New account growth also helped propel our customer credit balances by 14% to a new record level. We believe that our strong financial standing and competitive interest rates provide customers with an attractive place to hold their uninvested cash. We continue to have no long-term debt and healthy profitability drove our firm equity up 18% to $16.6 billion. In recognition of this growth, we allocated capital due a dividend increase in the second quarter of 2024. We maintain a balance sheet geared towards supporting growth in our existing business and helping us win new business by demonstrating our strengths to prospective clients and partners. In our operating data on pages six and seven, we had record customer volume in options with our contract volumes up 32% over the prior year and also up 32% for the full year, well ahead of industry volumes. Futures contract volumes declined 3% for the quarter, but rose 4% for the full year, while stock share volumes rose 65% for the quarter and 22% for the full year. Stock share volume generally increased versus last year as clients gravitated to larger, higher quality names and traded relatively less in Pink Sheet and some other very low priced stocks. Growth in the notional dollar value of shares traded in the quarter was about even with the growth in our share volumes overall. On page seven, you can see that total customer darts were 3.1 million trades per day in the quarter, up 61% from the prior year, and commission per cleared commissionable order of $2.72 was down from last year, primarily due to smaller average order sizes across all product classes and a shift to proportionally more trading in stocks versus options and futures from last year. Page 8 shows our net interest margin numbers. Total GAAP net interest income was $807 million for the quarter, up 77 million or 11% from the prior year, while our net interest margin net interest income was $830 million or 91 million higher. In the NIM computation, we include some income that is classified as other fees or other income on our income statement, but we believe is more appropriately considered interest. Our net interest income reflects strength in margin loan interest, partially offset by lower segregated cash interest and higher interest expense on customer cash balances. Many central banks made cuts to their benchmark rates this quarter, including the US, Europe, the UK, Switzerland, Canada, and Hong Kong. Reflecting multiple rate cuts in most benchmark rates this year, Our overall segregated cash interest income declined at 2% despite a 10% increase in average balances, while margin loan interest rose by 26% on a 41% increase in average balances. The average duration of our U.S. Treasury portfolio remains at under 30 days. With the U.S. dollar yield curve continuing to be inverted during the first part of the quarter, though flattening somewhat in the medium term by quarter end, we continue to maximize what we earn by focusing on higher short-term yields rather than accepting the lower yields and added risk of longer maturities. This strategy allows us to maintain a relatively tight maturity match between our assets and liabilities. Securities lending net interest does not appear as strong as in prior years for three main reasons. First, As benchmark interest rates rose from near zero beginning in 2022, more of what we earned from securities lending became classified as interest on segregated cash. We estimate that if the additional interest earned and paid on cash collateral were included under securities borrowed and loaned, then securities lending net revenue would have been about $182 million this quarter versus $156 million in last year's fourth quarter on the same basis. Second, we've seen strong stock market performance with the S&P up over 20% in each of the past two years, which tends to reflect a smaller proportion of clients looking to put on shorts. Third, there are fewer hard to borrow names industry-wide, both because the overall market is rising sharply, and due to weakness in some of the typical drivers of securities lending, including IPOs, market volatility, and merger and acquisition activity. Despite this trend, we were successful in raising the total notional value of what we loaned out. Interest on customer credit balances, the interest we pay to our customers on the cash in their account, rose on higher balances from new account growth. As we have noted in the past, the high interest rates we pay on customer cash, currently 3.83% on qualified U.S. dollar balances, is a significant attraction to new customers. Fully rate-sensitive customer balances ended the current quarter at $19.1 billion versus $17.8 billion in the year-ago quarter. Now, for our estimates of the impact of changes in rates, Given market expectations of further rate cuts in the future, we estimate the effect of a 25 basis point decrease in the benchmark Fed funds rate to be a $64 million reduction in annual net interest income. Note that our starting point for this estimate is December 31st, with the Fed funds effective rate at 4.33% and balances as of that date. Any growth in our balance sheet and interest-earning assets would reduce this impact. About 25% of our customer cash balances is not in U.S. dollars, so estimates of a U.S. rate change exclude those currencies. We estimate the effect of decreases in all the relevant non-USD benchmark rates would reduce annual net interest income by about $22 million for each 25 basis point decrease in those benchmarks. At a high level, a full 1% decrease in all benchmark rates would decrease our annual net interest income by about $339 million. This takes into account rate-sensitive customer balances and also firm equity. In conclusion, we posted another financially strong quarter in net revenues and pre-tax margin leading to a record year. This reflects our continued ability to grow our customer base and deliver on our core value proposition to customers while simultaneously scaling the business. Our business strategy continues to be effective, automating as much of the brokerage business as possible, continuously improving and expanding on what we offer while minimizing what we charge. And with that, we will open up the line for questions.