Interactive Brokers Group, Inc.

Good day, and thank you for standing by. Welcome to the Interactive Brokers Group first quarter 2025 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there'll be a question and answer session. To ask a question during the session, you'll need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw 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 Nancy Stubbe, Directors of Investor Relations. Please go ahead.

Thank you. Good afternoon, and thank you for joining us for our first quarter 2025 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. We saw in the first quarter the value of a global automated platform that can leverage its low costs and offer a broad range of products and markets. After a solid January buoyed by post-U.S. election enthusiasm, market indexes around the world reached peaks in February in the U.S. and early March everywhere else, after two years of nearly unbroken market increases. After that, cracks in the market began to show. News of DeepSeek and its less capital-intensive AI caused the market to give back half its gains in February. Talk about tariffs further accelerated the decline in March. The S&P 500 ended the quarter down 5%, but it was off 9% from its February peak. Six of the magnificent seven, the seven stocks that have dominated investor attention, fell significantly more than the market this quarter. However, Interactive Brokers does not need up markets to generate revenue. Our customers were active and remained faithful to their favorite names. Of our 25 most active names, 22 saw net buying activity. We also saw global interest from investors, both institutional and individual, in opening accounts. Internationally, it remains the case that investors want broad portfolios, with some invested in securities in their home markets and a more significant portion overseas. Product-wise, the popularity of options continued, with our contract volumes up 25% to a quarterly record. Futures volumes are up 16% also to a record, and stock share volumes are up 47%. Our volume growth rates were ahead of industry volumes. What all of the above has meant for our business starts with strong account growth as we add more investors to our platform. In the first quarter, we added 279,000 new accounts, a record that well surpassed even the meme stock days of the first quarter 2021. Total account growth was 32%, with even faster growth internationally. New accounts meant more cash in those accounts. which helped raise our client credit balances 19% to a record $125.2 billion. Our client equity rose 23% versus 2024 to $573.5 billion and was up 1% in the quarter, despite the drop in the market. This translated into strong financial results. Quarterly commission revenue was a record, reaching half a billion dollars for the first time, as were total net revenues. We do not only focus on the top line, however. Our expenses remained well-controlled, and our adjusted pre-tax profit margin was an industry-leading 74%. The eighth time, our adjusted pre-tax margin reached 70% or more. In recognition of this, and as a sign of confidence in the strength of our business model, its growth potential, and of our capital base, we revisited our allocation of capital and decided to increase the amount of dividend we pay to 32 cents a quarter. We will also split the stock four for one to achieve greater liquidity in our float and to make it more affordable for shareholders to buy round lots in the company. With respect to M&A, we have not stopped looking at potential acquisitions. Realistically, there is a dearth of opportunities at a price that makes sense for us. In most cases, because target companies charge more and pay less interest than we do, when we run their accounts using our pricing, The income we estimate and put a multiple on is lower than what they wish. We will keep looking, but in the meantime, for now, returning capital to shareholders via the dividend makes sense. In terms of how the business looked on the client front, our accounts and client equity once again grew fastest in Asia, with Europe a close second. Again, the trend of growing numbers of investors worldwide wanting access to international and particularly U.S. markets has not waned. Individuals saw the fastest account growth among our five client segments, with introducing brokers and proprietary traders not far behind. On the client equity side, individuals grew fastest with introducing brokers and proprietary trading clients just behind them. Commission-wise, individuals saw the fastest growth, followed closely by proprietary traders, while net interest growth was led by individuals, followed by financial advisors. Regarding introducing brokers, our pipeline of potential clients remains healthy. We are onboarding iBrokers to the platform and adding prospective ones to it at a steady pace. Onboarding iBrokers can take time since we offer a variety of ways for them to come onto our platform. The more complex the iBroker, the more time needed. We customize our offering for larger iBrokers needs with many needing special programming on our part to make sure their client's investment, tax, and compliance needs are met. we are up to the task. In terms of new product introductions, we had a busy quarter. We began offering our ForecastX contracts in Canada, as well as across the EEA for professional clients, and we will soon roll them out to the general EEA population. We added to our growing portfolio of country-specific savings and investment accounts, launching Canadian first home savings accounts this quarter. We added four new cryptocurrencies, Solana, Cardano, Ripple, and Dogecoin, and last week introduced three more, Chainlink, Avalanche, and SUI, bringing our total offering to 11 cryptocurrencies. We launched trading of Nifty 50 Index futures in Singapore and of equities in Slovenia. We recently made Forecast Trader available so clients using our IBK or desktop or Trader Workstation platforms can simultaneously use Forecast Trader side-by-side. We continue to see increasing activity in our overnight trading hours. We offer over 10,000 U.S. stocks and ETFs, as well as U.S. equity index futures and options, and on the fixed income side, global corporate bonds plus U.S. Treasury and European and U.K. government bonds. We added a focused overnight plus day order type so clients can submit an order in the overnight hours that will remain open until the end of the next regular trading session. Overall, our overnight volumes grew 250% from first quarter 2024 to first quarter 2025. We spent significant time this quarter on our client service and onboarding projects, our compliance and regulatory projects, and on further automating our internal operations to make them run more efficiently. We are as busy as we have ever been, with multiple projects touching all client types and geographic regions. We are excited to introduce them to you in the quarters ahead. Automating substantial parts of the brokerage business for client success is the heart of what we do. While market direction may appear significant in the short run, the long-term trend towards more global investing across multiple customer types and jurisdictions continues. This trend and our ability to serve it with a much lower cost structure and a much broader product and tool set is what sets us apart and will continue to do so in the years ahead. With that, I will turn the call over to Paul Brody. Paul?

Thank you, Nancy. Thanks, everyone, for joining the call again. We'll start with our revenue items on page three of the release. We are pleased with the financial results this quarter as we again produce record net revenues and pre-tax income. Commissions rose 36% versus last year's first quarter, reaching over a half billion dollars for the first time. We saw higher trading volumes from our growing base of active customers with stock share volume up 47% and new quarterly volume records in both options and futures. Net interest income rose 3% year on year to $770 million, driven by higher balances and partially offset by lower benchmark interest rates. We saw strength from margin borrowing and from a decline in interest paid to customers partially offset by lower yields on our segregated cash portfolio. Other fees and services generated $78 million, up 32% from the prior year, primarily driven by higher risk exposure fees with contributions from forecast X fees and from 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. Note that many of these non-core items are excluded in our adjusted earnings. Without these excluded items, other income was $34 million for the quarter. Turning to expenses, execution, clearing, and distribution costs were $121 million in the quarter, up 20% over the year-ago quarter on higher volumes across all product classes. Execution and clearing costs were 19% of commission revenues in the first quarter for a gross transactional profit margin of 81%. We calculate this by excluding from execution, clearing, and distribution 19 million of non-transaction-based costs, predominantly market data fees, which do not have a direct commission revenue component. And as a note for the upcoming quarters, the SEC reduced its fee rate to zero effective this coming May 15th, which should be a tailwind for execution and clearing costs thereafter. SEC fees total $27 million for the current quarter. Compensation and benefits expense was $154 million for the quarter for a ratio of compensation expense to adjusted net revenues of 11%, down slightly from last year's quarter. We remain focused on expense discipline as reflected in our modest staff increase of 3% over the prior year. Our headcount at March 31st was 3,027. G&A expenses were $62 million up from the year-ago quarter, mainly on expansion of advertising. Our pre-tax margin was 74% for the quarter, as reported, and 73% as adjusted. Income taxes of $91 million reflects the sum of the public company's $47 million and the operating company's $44 million. This quarter, the public company's adjusted effective tax rate was 18.2% within its usual range. This is a return to expected tax levels from the fourth quarter, which benefited from the annual revaluation of our deferred tax asset and from some foreign tax credits. Moving to the balance sheet on page five of the release, The consistent strength of our business and our healthy balance sheet support our raising the dividend from $1 per year to $1.28, returning capital to shareholders while still maintaining an ample capital base for the current business and future opportunities. Our total assets ended the quarter 19% higher at $158 billion, with growth driven by margin lending and rising cash balances. We have no long-term debt. Profit growth drove our firm equity up 19% to $17.5 billion. We maintain a balance sheet geared towards supporting growth in our existing business and helping us win new business by demonstrating our strength to prospective clients and partners while also considering overall capital allocation. Turning to our operating data on pages six and seven, our trading volumes for all customers Outpaced industry growth over the prior year quarter in all three major product classes. Options and futures contract volumes rose 25% and 16% respectively, and stock share volume rose 47%. On page seven, you can see that total customer darts were 3.5 million trades per day, up 50% from the prior year, and strong in all product classes. Commission per cleared commissionable order of $2.76 is down from last year due to both smaller average order sizes and earning higher rebates, which reduce the cost of a trade and are generally passed through to the customer. Page 8 shows our net interest margin numbers. Total GAAP net interest income was $770 million for the quarter, up 3% on the year-ago quarter, and our net interest margin table net interest income was $794 million up 4%. We include for NIM purposes certain income that is more appropriately considered interest, but that for GAAP purposes is classified as other fees and services or as other income. Our net interest income reflects both the strong increases in balances and the decline in benchmark rates, resulting in a rise in margin loan interest income and lower interest expense on customer cash balances. partially offset by lower interest income on segregated cash. Regarding rates, central banks in most major markets lowered their benchmarks. Several held theirs constant and a few raised. Reflecting a decline in benchmark rates versus last year, including 100 basis points of cuts in the average U.S. Fed funds rate, which represents a 19% decline in that rate, our segregated cash interest income was down 13%, while margin loan interest rose by 14% on a 38% increase in average balances. At a high level, in the first quarter of 2024, we estimated that a 1% decrease in all benchmark rates would decrease our annual net interest income by $304 million. In the past year, the U.S. Fed funds benchmark did, in fact, fall 1%, and other countries' rates moved more or less than that. But driven by higher balances, this quarter's net interest income represented an annualized increase of $128 million. The average duration of our investment portfolio remained at less than 30 days. The US dollar yield curve remains inverted through the medium term so that we continue to maximize what we earn by focusing on short-term yields rather than accept the lower yields and significantly higher duration risk of longer maturities. particularly in an unpredictable economic environment. This strategy also allows us to maintain a relatively tight maturity match between our assets and liabilities. Securities lending net interest remain muted for a couple of reasons. There are fewer names that are hard to borrow industry-wide, as some of the typical drivers of securities lending, including IPOs and merger and acquisition activities, have remained subdued. Despite this, we've been consistently successful in raising the total notional dollar value of securities we lend. As benchmark interest rates rose from near zero 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 $186 million this quarter versus $167 million in the prior year quarter. Interest on customer credit balances, the interest we pay to our customers on the cash in their accounts, declined on lower benchmark rates despite 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 US dollar balances, is a significant attraction to new customers. Fully rate-sensitive customer balances ended the current quarter at $20.3 billion versus $18.5 billion in the year-ago quarter and $19.1 billion at year-end. Now, for 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 $65 million reduction in annual net interest income. Our starting point for this estimate is March 31st, with the Fed Fund's 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 of the relevant non-USD benchmark rates would reduce annual net interest income by about $29 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 $364 million. In conclusion, We started the year with another financially strong quarter, reflecting our continued ability to grow our customer base and deliver on our core value proposition to customers while scaling the business. We raised our dividend in recognition of our financial strength. Our business strategy continues to be effective, automating as much of the brokerage business as possible and expanding what we offer while minimizing what we charge. And with that, we will turn it over to the moderator and take questions.