Interactive Brokers Group Inc at UBS Financial Services Conference Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Brennan Hawken - UBS - Analyst : I'd love to dive right into growth actually. Last year, really tremendous growth at Interactive, 33% account growth, I want to say, 30% year over year. 33% on client equity, actually, pardon me. So you look ahead this year, already started, what do you see as the key drivers of account growth and are there any particular segments or innovations -- product innovations that you think could have a meaningful impact?

Question: Brennan Hawken - UBS - Analyst : What is the pipeline on the introducing brokers -- how many -- how does it compare today versus where it was, let's say, a year or two ago?

Question: Brennan Hawken - UBS - Analyst : Right, okay. Margin loan growth has been really impressive too. January, I want to say it was like nearly 50% year over year. So have you -- this is sort of inherent in the question. Clearly, there's more risk appetite, so that's a reflection or an outcome of that. But is there any particular client behavior around the usage of margin that you've noticed that would suggest as a focus on a particular asset class or any increase in risk taking?

Question: Brennan Hawken - UBS - Analyst : Sure. When you think about that metric, because we track that too, and we've noticed it's sort of been coming down, right? It's sort of a range. But is there any change in the customer makeup or your client base that might suggest lower levels of margin vis-a-vis the client equity?

Question: Brennan Hawken - UBS - Analyst : Okay, got it. Thinking about rate sensitivity since we're on the balance sheet, right, are you able to increase the stability or durability of the NII in any way? Like maybe some kind of a hedging strategy or adjustment in the balance sheet that you might consider?

Question: Brennan Hawken - UBS - Analyst : Right, okay. Revenue from securities lending has been sort of in focus. You guys, I guess, put a new graphic in your investor presentation that helps with this, but I think it'd be -- might be helpful to walk through, for the audience and folks listening to the webcast. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. FEBRUARY 10, 2025 / 7:40PM, IBKR.OQ - Interactive Brokers Group Inc at UBS Financial Services Conference So number one, there's a slide to point to which I thought was really instructive. And then could you maybe talk about what's going on there and why the securities lending revenue when you consider it in total is actually way more stable than it looks on the reported basis?

Question: Brennan Hawken - UBS - Analyst : Right, when you consider the whole -- all the different component parts?

Question: Brennan Hawken - UBS - Analyst : Right. The hard-to-borrows or specials as they're called, have been pretty low. How much of that do you think -- and that's not just an Interactive thing, that's industry wide because we have a lot of companies that are involved in that business. How much do you think it's because we've had such a quiet banking like there's very little M&A, so there's not a lot of merger arb, the IPOs are limited. A lot of that can lead to more hard-to-borrow, right? Have you looked at how much you think maybe the slower banking is holding it back?

Question: Brennan Hawken - UBS - Analyst : Well, from my perspective, either the M&A revenue is going to grow about 20% this year or some of these investment banks are way overvalued, so we'll see. Operating margins were pretty impressive, 73%. Commentary on the call though suggested that that was as much as we should expect from a margin expansion perspective. Maybe could you add some color on why that would be the case and what factors could drive a little more operating leverage? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. FEBRUARY 10, 2025 / 7:40PM, IBKR.OQ - Interactive Brokers Group Inc at UBS Financial Services Conference

Question: Brennan Hawken - UBS - Analyst : So that's the volume driven incremental margin, and then I would assume that NII is probably a bit higher margin. Is that fair or is it similar?

Question: Brennan Hawken - UBS - Analyst : Right, yeah. So you guys have had a lot of traction with the hedge fund business as you've continued to tweak your approach ¡ come-to-market approach. How have your high-touch prime brokerage services been received? It certainly seems like it's going well, but does this offer -- is this offering the key to driving a lot of that traction and how is it working from a retention perspective?

Question: Brennan Hawken - UBS - Analyst : And have you noticed any shift in your client, like demographics, size of hedge fund that you've been attracting or servicing? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. FEBRUARY 10, 2025 / 7:40PM, IBKR.OQ - Interactive Brokers Group Inc at UBS Financial Services Conference

Question: Brennan Hawken - UBS - Analyst : Got it. You touched on the introducing broker before and a little on the pipeline and the fact that it seemed like generally towards maybe smaller introducing broker clients. So when we think about -- you have a few different ways that those clients can connect. When you think about it, is there a difference in like profitability or how Interactive engages or monetizes those clients depending on how they connect whether it's omnibus or you know thousands of accounts?

Question: Brennan Hawken - UBS - Analyst : Right, okay. You guys more recently in recent years have built up some decent momentum with RIAs. Do you have visibility into the platforms that those advisers are joining from? And given that it's sort of more of an asset heavier rather than revenue heavier mix for you all, can you maybe walk through how you view this opportunity and the level of resources that you're dedicating to it?

Question: Brennan Hawken - UBS - Analyst : Yeah, well, I was also going to ask a follow up -- like sort of the resources that is required in order to service. But specifically, we saw in the past year or two, there was a merger of a big provider for that market. Did you see maybe an increase in the amount of activity in the movement that happened on the back of that? It got a lot of attention in investors' circles. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. FEBRUARY 10, 2025 / 7:40PM, IBKR.OQ - Interactive Brokers Group Inc at UBS Financial Services Conference

Question: Brennan Hawken - UBS - Analyst : Yeah, we hear that from some other folks who compete in that space that it matters. We'd love to ¡ I have a few on capital. Always something to discuss with you all. So you've got a pretty substantial equity base, about $17 billion. To say it exceeds your required capital is to put it lightly, how are you thinking about capital allocation today?

Question: Brennan Hawken - UBS - Analyst : Okay. So the buffers that you think are appropriate just in case you see spikes in activity or whatever.

Question: Brennan Hawken - UBS - Analyst : And one of the uses of capital you guys have spoken to recently has been M&A. But it's been challenging to find something that makes sense. So are you still actively looking and what kind of deals would you be interested in beyond the obvious? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. FEBRUARY 10, 2025 / 7:40PM, IBKR.OQ - Interactive Brokers Group Inc at UBS Financial Services Conference

Question: Brennan Hawken - UBS - Analyst : Yeah, okay. The dividend, so the payout, there's at least one now. For a while, there was none. So but the payout ratio when you look at it as a percentage of earnings is low, it's 13%. If -- are there any other priorities, maybe like reinvestment or buybacks to consider with the excess that you have?

Question: Brennan Hawken - UBS - Analyst : For sure.

Question: Brennan Hawken - UBS - Analyst : Okay. We can take a moment and see if there's any questions in the audience. Haven't been having a high batting average on the audience questions today. They'd rather leave it to me. Well, I want it back. Unidentified Participant You were talking about your hedge fund business and trying to attract clients -- new clients. The biggest challenge is basically access to long-term capital, especially for new managers. Is that something that you've thought about? I mean, you have, as you mentioned, quite a bit of capital. A sprinkling of some of that capital would go a long way to helping sort of, what is kind of a nascent sort of market, since you bifurcated into gigantic hedge funds and a lot of the small hedge fund managers have kind of had a hard time sort of getting access to capital?

Question: Brennan Hawken - UBS - Analyst : Any more? I suppose I should quit while I'm ahead. That's already -- I'm above my average here. Last year, you had spoken a little bit about some new capabilities that you were excited about rolling out. Without asking to tip your hand competitively, but is there anything that you're able to speak to that you guys are working on? You guys are regularly rolling out new tools, new capabilities, new functionality. What's on the docket here for 2025?

Question: Brennan Hawken - UBS - Analyst : One of the things that we hear regularly in dialogue with investors is how engaged most retail investors are right now. When you look at your book of business and the folks that would represent individuals, where is the activity level today versus historical reference? Like are we already past meme level or like where is it?

Question: Brennan Hawken - UBS - Analyst : Without a doubt. So last one for me, and I feel like I got to -- I did it last year, I got to ask about it again. Thomas went on record in the last earnings call about the fact that he's not interested in selling. But previously he had noted that he disliked the price, he was not happy with it. The stock was a beast in the past year, it's been an outstanding stock. Do you have any idea about what his temperature is or thoughts around whittling down his stake at a reasonable pace or at least making progress?

Question: Brennan Hawken - UBS - Analyst : Sure, right, that's fair. And why not finish on that high price target, right? Thanks a lot for your time, Paul.