Virtu Financial, Inc. — Q1 2022 Form 10-Q Summary
Business context and reporting period
Virtu is a global technology-enabled market maker and execution-services provider operating across more than 25,000 instruments, 235 venues and 36 countries. Its operating segments are Market Making and Execution Services, with Corporate as a non-operating segment. This unaudited Form 10-Q covers the three months ended March 31, 2022, compared with the three months ended March 31, 2021.
Financial performance and key metrics
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Total revenue | $701.3 million | $1,012.6 million | Down 30.7% |
| Trading income, net | $522.3 million | $812.7 million | Down 35.7% |
| Commissions, net and technology services | $154.7 million | $191.6 million | Down 19.3% |
| Adjusted Net Trading Income | $505.1 million | $728.0 million | Down 30.6% |
| Net income | $199.9 million | $409.2 million | Down 51.1% |
| Net income available to common stockholders | $112.3 million | $239.4 million | Down 53.1% |
| Diluted EPS | $0.98 | $1.89 | Down 48.1% |
| Adjusted EBITDA | $343.8 million | $564.7 million | Down 39.1% |
Adjusted Net Trading Income per trading day was $8.1 million versus $11.9 million in the prior-year period. Net income, EBITDA and Adjusted EBITDA margins on Adjusted Net Trading Income were 39.6%, 63.9% and 68.1%, respectively, compared with 56.2%, 75.0% and 77.6%.
Operating expenses declined 12.1% to $459.6 million. Brokerage, exchange, clearance fees and payments for order flow decreased 42.0% to $150.4 million, partly offset by higher interest and dividends expense of $42.5 million and $25.7 million of debt refinancing-related costs. The effective tax rate was 17.3%, compared with 16.4%.
Market Making revenue declined 33.6% to $546.6 million, while segment pre-tax earnings declined to $224.2 million from $453.3 million. Execution Services revenue declined 19.8% to $151.7 million, and segment pre-tax earnings declined to $15.1 million from $40.4 million. Management attributed the declines primarily to lower market volumes compared with the elevated trading activity and volatility in Q1 2021.
Cash flow, liquidity and debt
- Cash and cash equivalents were $564.9 million at March 31, 2022, down from $1.071 billion at December 31, 2021. Cash, cash equivalents and restricted cash totaled $612.7 million.
- Operating cash flow was negative $255.2 million, compared with positive $133.9 million in Q1 2021, primarily reflecting increases in securities borrowed, broker-dealer receivables and trading assets.
- Investing cash flow was negative $35.0 million, including $21.7 million of capitalized software development and $10.0 million of property and equipment purchases.
- Financing cash flow was negative $212.9 million, including $125.8 million of dividends and distributions and $305.6 million of treasury-stock purchases.
- At March 31, 2022, short-term borrowings were $140.8 million; prime-broker credit facilities had approximately $314.3 million outstanding; and long-term borrowings had principal outstanding of approximately $1.829 billion.
- In January 2022, the company refinanced its prior term loan with a $1.8 billion senior secured first-lien term loan maturing in January 2029 and obtained a $250 million revolving facility, with commitments terminating in January 2025. The company stated that it was in compliance with applicable covenants.
- Virtu Americas had $506.0 million of regulatory capital against a $2.5 million requirement at March 31, 2022. Management stated that available cash, operating cash flow and borrowing capacity should meet liquidity needs for the next twelve months.
Material changes and unusual items
- The January refinancing generated $25.7 million of debt issue and refinancing costs, including accelerated amortization of deferred debt issuance costs.
- The company repurchased approximately 9.8 million shares and Virtu Financial Units during Q1 for approximately $313.9 million, including employee tax-withholding repurchases. Cumulative repurchases since program inception were approximately $726.3 million, with approximately $493.7 million of remaining authorization at March 31, 2022.
- The company paid $21.3 million under its tax receivable agreements in March 2022. Future payments are expected to range from approximately $0.4 million to $22.0 million annually over the next 15 years, subject to realized tax savings and other factors.
- Other, net included a $5.2 million unrealized gain on the JNX minority investment. No goodwill impairment was recorded.
- Subsequent to quarter-end, the board approved a proposed increase in the management incentive plan share reserve from 21 million to 26 million shares, subject to shareholder approval. The company also declared a $0.24 per-share dividend payable June 15, 2022, and sold its minority investment in ErisX to Cboe Global Markets.
Outlook, risks and contingencies
The filing does not provide formal quantitative earnings or revenue guidance. Management expects liquidity needs to be driven principally by margin requirements, trading activity, debt service, lease obligations, dividends and share repurchases. Results remain sensitive to trading volumes, realized volatility, bid-ask spreads and market conditions.
Key risks include counterparty and clearing-house failures, market and foreign-exchange risk, dependence on liquidity and trading venues, technology or cyber failures, operational capacity constraints, regulatory capital requirements, increased scrutiny of payment for order flow and electronic market structure, competition, litigation, regulatory investigations, tax changes, geopolitical events and changes in economic conditions.
The company is subject to several legal, regulatory and governmental proceedings, including securities litigation related to the United States Oil Fund, litigation involving Robinhood and market makers, and a Delaware books-and-records action. Management believes the matters are without merit and does not expect a material adverse impact based on currently available information, but acknowledges that outcomes could materially affect a particular period.
Investor verification checklist
- Verify whether trading volumes, volatility and spreads in subsequent quarters support recovery from the Q1 revenue decline.
- Reconcile non-GAAP Adjusted Net Trading Income, EBITDA, Adjusted EBITDA and Normalized Adjusted EPS to GAAP results and assess the recurring nature of excluded items.
- Review the refinancing terms, floating-rate exposure, interest-rate swaps, covenant requirements and 2029 debt maturity.
- Monitor cash balances, margin financing, restricted cash and the effect of continued share repurchases and dividends on liquidity.
- Assess the financial impact and status of regulatory investigations, pending litigation and evolving market-structure regulation.
- Track tax receivable agreement payments, potential acceleration provisions and the realization of related deferred tax assets.