Virtu Financial, Inc. — Q1 2016 Form 10-Q Summary
Business context and reporting period
Virtu is a technology-enabled market maker and liquidity provider operating across equities, commodities, currencies, options, fixed income and other securities on more than 230 exchanges, markets and liquidity pools in 35 countries. The company reports one operating segment.
The filing covers the three months ended March 31, 2016. The prior-year comparison is not fully comparable: Q1 2015 reflects Virtu Financial LLC and its subsidiaries before the April 2015 reorganization and IPO, while Q1 2016 reflects the public company and consolidated Virtu Financial. The 2015 period therefore does not reflect corporate taxes, noncontrolling interests or the IPO transactions as if they had occurred at the beginning of the period.
Financial performance and condition
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Total revenue | $192.6 million | $221.5 million | Down 13.0% |
| Trading income, net | $186.3 million | $213.9 million | Down 12.9% |
| Adjusted Net Trading Income | $117.3 million | $148.4 million | Down 21.0% |
| Total operating expenses | $133.9 million | $141.4 million | Down 5.3% |
| Income before taxes and noncontrolling interest | $58.7 million | $80.2 million | Down 26.8% |
| Net income | $51.4 million | $77.4 million | Down 33.7% |
| Net income available to common stockholders | $10.3 million | Not clearly provided in the filing text | Not clearly determinable |
| Basic / diluted EPS | $0.27 / $0.26 | Not clearly provided in the filing text | Not clearly determinable |
| Net cash provided by operating activities | $51.5 million | $82.3 million | Down $30.8 million |
| Net cash used in investing activities | $3.3 million | $6.3 million | Lower use of cash |
| Net cash used in financing activities | $65.4 million | $80.6 million | Lower use of cash |
Adjusted EBITDA was $81.1 million versus $106.4 million, and Adjusted Net Income was $58.9 million versus $87.9 million. The company-reported net income margin was 43.0% in 2016 versus 51.3% in 2015, based on the company’s defined Adjusted Net Trading Income plus technology services revenue denominator. Adjusted EBITDA margin was 67.9% versus 70.5%.
At March 31, 2016, cash and cash equivalents were $148.5 million, down from $163.2 million at December 31, 2015. Total assets were $3.94 billion and total equity was $564.6 million, including $428.7 million of noncontrolling interest. The company’s approximately 28.1% ownership of Virtu Financial means consolidated earnings are substantially allocated to noncontrolling interests.
Debt and financing included $498.5 million of senior secured credit facility principal, $32.0 million of broker-dealer borrowings and approximately $223.7 million outstanding under short-term credit facilities. The $100 million revolving credit facility was undrawn. The senior secured facility carried a 5.25% interest rate at March 31, 2016, and management stated that all related covenants were satisfied.
Material changes versus the prior comparable period
- Trading income and Adjusted Net Trading Income declined primarily because Q1 2015 benefited from unusually favorable volume and volatility conditions following the Swiss National Bank de-pegging announcement. The largest Adjusted Net Trading Income declines were in global currencies, global commodities and EMEA equities.
- Americas equities increased by $8.1 million and APAC equities increased by $1.3 million, partially offsetting declines in other categories.
- Operating expenses decreased $7.5 million, led by lower employee compensation, operations and administrative costs, depreciation and amortization, and brokerage-related costs.
- Interest and dividends expense increased $3.9 million, primarily due to higher interest expense on cash collateral received in securities lending transactions.
- Income tax expense increased to $7.3 million from $2.7 million. The 2015 period largely preceded the company’s post-IPO corporate tax structure.
- Operating cash flow declined due mainly to lower net income and higher taxes paid. Financing cash use included a $41.2 million distribution to noncontrolling interests, $9.4 million of dividends, and debt repayments.
Guidance, outlook, commentary, risks and unusual items
No formal revenue, earnings or other quantitative guidance is provided in the filing. Management expects operating cash flow, available cash and borrowing capacity to satisfy liquidity needs for more than the next twelve months. Primary expected liquidity needs include higher margin requirements from increased trading activity and expansion into new markets.
The company’s results are highly dependent on trading volumes, volatility, bid-ask spreads, access to liquidity and continued access to exchanges and trading venues. Other material risks include counterparty and clearing-house performance, technology or system failures, cybersecurity, regulatory capital requirements, competition, international operations, foreign exchange movements, litigation and regulatory enforcement.
- The company accrued a €5.0 million fine, approximately $5.4 million, imposed by France’s Autorité des marchés financiers for alleged price manipulation and violations of market rules. Virtu is appealing and states that the relevant trading complied with French law.
- Virtu faces ongoing regulatory inquiries and requests for information from the SEC and the New York Attorney General, but management believes other known matters are not probable to have a material adverse effect on financial position, subject to possible material effects in a particular period.
- Tax receivable agreement obligations were approximately $218.4 million at March 31, 2016. Payments are generally equal to 85% of realized tax savings and are expected to range from approximately $8.1 million to $16.8 million annually over the next 15 years. The first payment was extended to September 15, 2016.
- Virtu Financial distributed $40.0 million to its members between April 1 and May 13, 2016. The board declared a $0.24 per-share dividend payable June 15, 2016.
- Management concluded that disclosure controls were effective as of March 31, 2016 and reported no material changes to internal control over financial reporting.
Most important facts for investors to verify
- Assess the comparability of Q1 2016 results with Q1 2015 given the IPO, reorganization, corporate tax structure and noncontrolling interests.
- Track trading volumes, volatility, spreads and Adjusted Net Trading Income by asset class, particularly global currencies, commodities and EMEA equities.
- Review liquidity against approximately $498.5 million of senior secured debt, $223.7 million of short-term credit facilities and collateral-driven financing needs.
- Verify the timing and amount of tax receivable agreement payments and the ability to receive sufficient distributions from subsidiaries.
- Monitor the AMF appeal, SEC and NYAG inquiries, other regulatory matters and potential effects on capital, reputation, earnings and cash flow.
- Evaluate the effect of noncontrolling interests on earnings available to Virtu Financial common stockholders and the sustainability of the declared dividend.