Virtu Financial, Inc. — FY2022 Form 10-K Summary
Business context and reporting period
Virtu Financial filed its Annual Report on Form 10-K for the fiscal year ended December 31, 2022, filed February 17, 2023. The filing is an annual report rather than a standalone fourth-quarter filing; quarterly FY2022 results are not separately presented in the supplied text. Virtu operates technology-enabled market-making and execution-services businesses across multiple asset classes, more than 235 venues and 36 countries. Its operating segments are Market Making and Execution Services, with Corporate as a non-operating segment.
The Company owned approximately 59.7% of Virtu Financial LLC at year-end. The Founder Post-IPO Member controlled approximately 85.2% of the combined voting power of the common stock.
FY2022 financial and operating metrics
| Metric | FY2022 | FY2021 | Change |
|---|---|---|---|
| Total revenue | $2,364.8 million | $2,811.5 million | Down 15.9% |
| Trading income, net | $1,628.9 million | $2,105.2 million | Down 22.6% |
| Interest and dividends income | $159.1 million | $75.4 million | Up 111.1% |
| Commissions, net and technology services | $529.8 million | $614.5 million | Down 13.8% |
| Operating expenses | $1,808.0 million | $1,814.6 million | Down 0.4% |
| Income before taxes and noncontrolling interest | $556.8 million | $996.9 million | Down 44.1% |
| Net income | $468.3 million | $827.2 million | Down 43.4% |
| Net income available to common stockholders | $265.0 million | $476.9 million | Down 44.4% |
| Diluted EPS | $2.44 | $3.91 | Down 37.6% |
| Adjusted Net Trading Income | $1,467.6 million | $1,909.9 million | Down 23.2% |
| Adjusted EBITDA | $859.1 million | $1,301.2 million | Down 34.0% |
Net income margin, calculated using Adjusted Net Trading Income, was 31.9%, compared with 43.3% in FY2021. Adjusted EBITDA margin was 58.5%, compared with 68.1%.
- Market Making: Revenue was $1,812.8 million, down 17.7%; pre-tax income was $480.6 million, down from $926.0 million. Adjusted Net Trading Income was $1,058.5 million, or 72.1% of the consolidated total.
- Execution Services: Revenue was $514.2 million, down 14.3%; pre-tax income was $41.3 million, down from $70.0 million. Adjusted Net Trading Income was $409.2 million, or 27.9% of the consolidated total.
- Corporate: Revenue was $37.7 million, compared with $8.2 million in FY2021, primarily reflecting gains on strategic investments and other items.
- Cash flow: Cash provided by operating activities was $706.8 million, compared with $1,171.6 million in FY2021. Investing activities used $29.5 million and financing activities used $735.7 million. Cash and cash equivalents declined to $981.6 million from $1,071.5 million.
- Capital returns: The Company paid $0.24 per share quarterly dividends and used $480.5 million to purchase treasury stock. Since inception of the repurchase program, approximately 32.3 million shares and Virtu Financial Units were repurchased for approximately $899.6 million, leaving approximately $320.4 million of capacity at year-end.
Material changes versus the prior comparable period
- Trading income declined primarily because of lower spread opportunity and lower quality of customer order flow, particularly in customer market making.
- Execution Services commissions and technology-services revenue declined as institutional commission opportunities and institutional engagement decreased.
- Higher interest rates and higher dividends on trading assets increased interest and dividends income, but also increased interest and dividends expense.
- Operating expenses were broadly stable despite higher employee compensation, communication and data-processing costs, interest expense and financing interest expense. Termination-of-office-lease costs declined to $7.0 million from $28.1 million.
- The January 2022 refinancing replaced the prior debt structure with a $1.8 billion senior secured first-lien term loan and a $250 million revolving facility. Refinancing-related debt costs increased to $29.9 million from $6.6 million.
- In May 2022, Virtu sold a substantial minority interest in RFQ-hub to strategic partners while retaining majority ownership.
Debt, liquidity and financial condition
- Long-term borrowings were $1,796.0 million net at December 31, 2022, consisting primarily of $1.8 billion of first-lien term debt and $26.7 million of SBI bonds. Aggregate principal borrowings were $1,826.7 million.
- The first-lien term loan matures in January 2029, requires annual amortization of 1% of original principal and bore a stated year-end rate of 7.42%. The revolving facility had no outstanding balance and terminates in January 2025.
- Prime-broker credit facilities had $591.0 million of capacity and $212.9 million outstanding. Broker-dealer facilities had $1.06 billion of available capacity and no borrowings outstanding. Short-term bank loans were $3.9 million.
- Management stated that operating cash flow, available cash and available broker-dealer borrowings should be adequate for the next twelve months under the Company’s current operating assumptions.
- Tax receivable agreement obligations were $238.8 million at year-end. Virtu generally must pay eligible holders 85% of realized cash tax savings from specified tax attributes. Expected future payments were estimated at approximately $36,000 to $22.0 million annually over the next 15 years, excluding certain subsequent exchanges.
- Regulated subsidiaries reported substantial excess regulatory capital. Virtu Americas had $554.6 million of regulatory capital against a $1.0 million requirement.
Guidance, outlook, management commentary and risks
The filing does not provide quantitative FY2023 revenue, earnings or margin guidance. Management emphasized that results depend materially on trading volumes, realized volatility, retail participation, order-flow quality, bid/ask spreads, institutional engagement and access to venues and liquidity. These factors can produce significant period-to-period variability.
- Proposed SEC equity-market-structure reforms, including changes relating to Regulation NMS, best execution, tick sizes, access fees, market-data infrastructure, Rule 605 and the definition of exchanges and ATSs, could reduce off-exchange activity, alter retail order flow and increase technology, compliance and operating costs.
- Key operating risks include technology or system failures, cyberattacks, capacity constraints, dependence on third-party infrastructure, self-clearing, counterparty and clearing-house defaults, liquidity and margin requirements, and market or valuation risk.
- The Company remains exposed to substantial competition and concentration in U.S. equities market making, where changes in volumes, spreads or market structure could materially affect results.
- Debt covenants restrict additional debt, distributions, investments, asset sales and other activities. Variable-rate debt creates interest-rate exposure, although the Company has interest-rate swaps covering $1.525 billion of principal.
- Virtu disclosed ongoing litigation and regulatory matters, including an SEC investigation concerning aspects of the Company’s information access barriers and several securities-related lawsuits. Management believes the matters will not have a material adverse effect overall, but stated that outcomes could be material to a particular reporting period and that ultimate exposure cannot presently be determined.
- The U.K. branches of certain Irish subsidiaries operated under the FCA Temporary Permissions Regime, scheduled to end at the end of 2023; applications for full third-country branch authorization were ongoing at filing.
- The independent auditor issued an unqualified opinion and concluded that internal control over financial reporting was effective. Trading income, net was identified as a critical audit matter.
Most important facts for investors to verify
- Reconcile FY2022 reported revenue, net income, EPS and non-GAAP Adjusted Net Trading Income to the audited financial statements and non-GAAP reconciliations.
- Assess whether the decline in customer market-making spreads, order-flow quality and institutional engagement continued after December 31, 2022.
- Review debt maturity, floating-rate exposure, swap coverage, covenant requirements and the availability of broker-dealer and prime-broker financing.
- Evaluate liquidity after dividends, repurchases, margin requirements, tax receivable agreement payments and regulatory capital restrictions.
- Monitor proposed SEC and international market-structure rules, including potential effects on payment for order flow, ATSs, off-exchange trading and retail order flow.
- Review the status and potential financial exposure of the disclosed SEC investigation, litigation and other regulatory matters.
- Consider the implications of the controlled-company structure, 59.7% ownership of Virtu Financial LLC, 85.2% founder voting control and the tax receivable agreements for minority shareholders.