Virtu Financial, Inc. — Q2 2022 Form 10-Q Summary
Business context and reporting period
Virtu is a global technology-enabled financial services firm operating in Market Making, Execution Services and Corporate activities. It provides liquidity, execution, workflow technology and analytics across more than 25,000 financial instruments, over 235 venues and 36 countries. The unaudited filing covers the three and six months ended June 30, 2022, compared with the corresponding 2021 periods.
Key financial metrics
| Metric | Three months ended June 30, 2022 | Six months ended June 30, 2022 |
|---|---|---|
| Total revenue | $604.7 million | $1,306.0 million |
| Income before taxes and noncontrolling interest | $173.8 million | $415.5 million |
| Net income | $148.9 million | $348.8 million |
| Net income available to common stockholders | $85.2 million | $197.4 million |
| Diluted EPS | $0.78 | $1.77 |
| Adjusted Net Trading Income | $357.4 million | $862.4 million |
| Adjusted EBITDA | $209.3 million | $553.1 million |
| Adjusted EBITDA margin | 58.6% | 64.1% |
| Net income margin on Adjusted Net Trading Income | 41.7% | 40.4% |
Q2 revenue increased 10.2% year over year, while six-month revenue declined 16.4%. Q2 results benefited from higher trading volumes and volatility, higher interest and dividend income, and gains on strategic investment sales. Six-month results reflected weaker trading income, particularly in the first quarter.
Cash flow from operating activities was $57.6 million for the six months, compared with $355.4 million in the prior-year period. Investing activities provided $4.0 million, while financing activities used $307.8 million, primarily for dividends and distributions of $228.8 million and treasury-stock purchases of $353.1 million. Cash, cash equivalents and restricted cash totaled $849.8 million at June 30, 2022, including $810.6 million of unrestricted cash and cash equivalents.
Total assets were $11.4 billion and total equity was $1.7 billion at June 30, 2022. Long-term borrowings were $1.8 billion net of discounts and issuance costs, consisting principally of a $1.8 billion term loan maturing in January 2029 and $25.8 million of SBI bonds maturing in January 2023. Short-term borrowings were $157.1 million, and prime-broker credit facilities had $218.4 million outstanding. No amounts were outstanding under the $250 million revolving facility.
Material changes versus the prior comparable period
- Q2 Adjusted Net Trading Income increased 4.5% to $357.4 million; Market Making increased 9.3%, while Execution Services declined 5.6%.
- Six-month Adjusted Net Trading Income decreased 19.4% to $862.4 million, with Market Making down 21.3% and Execution Services down 13.6%.
- Q2 trading income increased 2.9% to $395.9 million. Six-month trading income declined 23.3% to $918.2 million.
- Interest and dividends income increased 222.6% in Q2 and 213.2% for the six months, reflecting higher dividends, collateral balances and interest rates.
- Commissions, net and technology services declined 4.7% in Q2 and 13.1% for the six months.
- Other, net increased materially, primarily from gains on sales of strategic investments.
- Six-month operating expenses decreased 4.9%, but interest and dividends expense rose 86.2% and debt-refinancing-related costs rose to $27.1 million from $3.7 million.
- In January 2022, Virtu refinanced its prior term loan with a new $1.8 billion senior secured first-lien term loan and used proceeds partly for share repurchases and general corporate purposes.
Guidance, outlook, commentary and risks
The filing does not provide specific quantitative earnings or revenue guidance. Management expects liquidity needs to be driven primarily by margin requirements associated with trading activity and believes operating cash flow, cash on hand and available borrowing capacity will be adequate for the next twelve months. Management also expects future funding needs for debt service, leases, dividends and share repurchases.
Management attributes market-making performance to trading volumes, realized volatility and bid-ask spreads. It cites Q2 increases in U.S. equity volumes and volatility, but notes that the six-month comparison was adversely affected by lower first-quarter market activity. Interest-rate increases supported interest income but also increased financing and securities-lending-related expenses.
Key risks include market-volume and volatility changes, counterparty and clearing-house exposure, liquidity and margin requirements, trading-system or cybersecurity failures, dependence on third-party infrastructure and trading venues, competition, regulatory and congressional scrutiny of market structure and payment for order flow, regulatory-capital requirements, foreign-exchange movements, litigation, tax changes, geopolitical events and the ability to retain key personnel.
The Company is subject to various legal and regulatory reviews, investigations and litigation, including matters involving U.S. Oil Fund securities litigation, Robinhood-related claims and a Delaware books-and-records action. Management believes current matters will not have a material adverse effect on the business overall, but acknowledges that a judgment, fine or sanction could materially affect a particular reporting period.
Virtu Americas LLC had regulatory capital of $523.4 million against a $2.4 million requirement at June 30, 2022. The Company states that it was in compliance with applicable Credit Agreement covenants. The tax receivable agreement liability was $237.9 million, with expected future payments of approximately $0.4 million to $22.0 million annually over the next 15 years.
Most important facts for investors to verify
- Whether the Q2 improvement in market-making results is sustained if volatility and trading volumes normalize.
- The sensitivity of earnings, cash flow and debt service to higher interest rates, securities-lending costs and margin requirements.
- The company’s ability to fund dividends, share repurchases, tax receivable agreement payments and debt obligations from operating cash flow.
- The effect of the January 2022 refinancing, including floating-rate exposure, interest-rate swaps, maturities and covenant requirements.
- The amount and sustainability of gains from strategic investment sales included in Other, net.
- Developments in regulatory investigations, market-structure rules, payment-for-order-flow scrutiny and pending litigation.
- Changes in regulatory capital at Virtu Americas and other regulated subsidiaries.
- Potential dilution and governance implications from the multi-class share structure, noncontrolling interests and outstanding equity awards.