Virtu Financial, Inc. — 2020 Q2 Form 10-Q Summary
Business context and reporting period
Virtu is a global technology-enabled financial services firm operating through Market Making, Execution Services and Corporate segments. It provides liquidity, execution, workflow technology, analytics and related services across more than 25,000 financial instruments and over 235 venues in 36 countries. This unaudited filing covers the three and six months ended June 30, 2020, compared primarily with the corresponding 2019 periods.
Results benefited materially from COVID-19-related market volatility and trading volumes. The filing also reflects the full first-quarter contribution of Investment Technology Group, acquired on March 1, 2019, versus only a partial first-quarter contribution in the 2019 comparison period.
Key financial metrics
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total revenue | $905.9 million | $375.1 million | $1,906.5 million | $735.5 million |
| Trading income, net | $744.0 million | $205.9 million | $1,546.5 million | $463.5 million |
| Commissions, net and technology services | $147.7 million | $145.1 million | $318.5 million | $220.3 million |
| Operating expenses | $501.4 million | $441.7 million | $1,035.8 million | $818.3 million |
| Income before taxes and noncontrolling interest | $404.5 million | $(66.6) million | $870.8 million | $(82.8) million |
| Net income | $335.3 million | $(55.5) million | $723.5 million | $(69.1) million |
| Net income available to common stockholders | $199.1 million | $(29.9) million | $420.2 million | $(36.6) million |
| Diluted EPS | $1.58 | $(0.27) | $3.38 | $(0.34) |
- Adjusted Net Trading Income, a non-GAAP measure, was $668.7 million in Q2, up 179.9%, and $1.453 billion for the six months, up 210.7%.
- Q2 Adjusted EBITDA was $485.8 million, with a 72.6% margin on Adjusted Net Trading Income, versus $89.2 million and 37.3% in Q2 2019. Six-month Adjusted EBITDA was $1.055 billion, with a 72.6% margin versus 45.6%.
- Q2 net income margin on Adjusted Net Trading Income was 50.1%, versus negative 23.2% in the prior-year quarter. Six-month net income margin was 49.8%, versus negative 14.8%.
- Market Making revenue increased 224.4% to $759.1 million in Q2; Execution Services revenue increased 4.7% to $148.1 million. Market Making generated $397.6 million of Q2 pretax income, while Execution Services generated $16.5 million.
Cash flow, liquidity and capital structure
- Net cash provided by operating activities was $499.3 million for the first six months of 2020, compared with $377.3 million of cash used in the prior-year period.
- Investing cash outflow was $36.7 million, compared with $864.4 million in 2019, which included $835.6 million of cash consideration for the ITG acquisition.
- Financing cash outflow was $483.9 million, including a $188.6 million long-term debt repayment, $164.4 million of distributions to noncontrolling interests and $59.8 million of dividends.
- Cash, cash equivalents and restricted or segregated cash totaled $748.0 million at June 30, 2020, including $670.8 million of unrestricted cash and cash equivalents, versus $773.3 million at December 31, 2019.
- Total assets were $10.289 billion and total equity was $1.701 billion at June 30, 2020. Virtu Financial, Inc. owned approximately 64.1% of Virtu Financial; the remainder was reflected as noncontrolling interest.
- Long-term borrowings were $1.733 billion carrying value, consisting principally of a $1.737 billion First Lien Term Loan Facility and $32.4 million of SBI bonds. Aggregate long-term principal was approximately $1.769 billion, with the term loan maturing in March 2026 and SBI bonds maturing in January 2023.
- Short-term borrowings were $26.3 million. Prime brokerage borrowings were approximately $112.4 million, presented within receivables from broker-dealers and clearing organizations. No borrowings were outstanding under the broker-dealer facilities or the $50 million first-lien revolving facility at quarter-end.
- Available broker-dealer facilities totaled $1.3 billion, including the $400 million uncommitted facility, $600 million committed facility and $300 million Founder Member Loan Facility. No Founder Member Loan balance was outstanding at June 30, 2020.
- Domestic broker-dealer subsidiaries had aggregate regulatory capital requirements of $6.4 million and substantial excess regulatory capital at quarter-end. Management stated that the Company was in compliance with applicable credit agreement covenants.
Material changes versus the prior comparable period
- COVID-19-driven volatility and volume sharply increased Market Making results. Q2 trading income rose 261.3%, while average daily S&P 500 realized volatility increased 178.7% and U.S. equity consolidated volume increased 78.1% versus Q2 2019.
- Payments for order flow increased 327.6% in Q2 to $101.1 million and 246.1% for the six months to $163.3 million, reflecting higher retail-related volumes.
- Employee compensation increased 44.5% in Q2 and 52.1% for the six months, primarily because of higher incentive compensation and COVID-19-related one-time cash bonuses.
- Operating expenses benefited from the absence of the $65.2 million office-lease termination charge recorded in Q2 2019. Travel and entertainment expenses also declined as employees worked remotely.
- Financing interest expense declined 37.3% in Q2 and 17.5% for the six months, primarily following the $188.5 million term-loan prepayment. The March 2020 credit agreement amendment reduced the interest-rate spread by 0.50%.
- Accumulated other comprehensive loss was $(39.6) million at quarter-end, primarily reflecting unrealized losses on qualifying interest-rate swaps.
Guidance, outlook, commentary, risks and unusual items
- No formal revenue or earnings guidance is provided in the filing. Management said operating cash flows, cash on hand and available broker-dealer borrowings should be adequate to meet liquidity needs for more than the next twelve months.
- Management expects future liquidity needs to be driven principally by margin requirements associated with trading activity and market expansion. It selectively reduced certain trading activity, client limits and clearing exposures to manage peak funding requirements.
- Management stated that the full impact of COVID-19 was not yet determinable. A prolonged decline in market activity, operational disruption, remote-work risks, counterparty stress or higher margin requirements could materially reduce results and liquidity.
- Key risks include electronic trading and technology failures, cybersecurity, dependence on exchanges, clearinghouses and prime brokers, regulatory capital requirements, competition, market structure changes, litigation and regulatory scrutiny of high-frequency trading, best execution, alternative trading systems and payment for order flow.
- The Company carried a $256.0 million tax receivable agreement obligation at June 30, 2020. Expected future payments generally range from approximately $3.3 million to $20.7 million annually over the next 15 years, subject to realization of tax benefits.
- The Company remained subject to regulatory investigations and legal proceedings. The ProShares securities litigation dismissal was appealed. A $3.0 million AMF fine was fully reserved and expected to be paid during 2020.
- Subsequent to quarter-end, Virtu completed the MatchNOW disposition on August 4, 2020, recognizing an approximately $56.6 million gain, with potential additional consideration of up to approximately $23.0 million based on future performance. The board declared a $0.24 per-share dividend payable September 15, 2020.
- The filing states that disclosure controls and procedures were effective as of June 30, 2020 and that no material change occurred in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether the exceptional COVID-19-related volatility and trading volumes persist, normalize or reverse, given the large contribution of Market Making to 2020 earnings.
- The sustainability of Adjusted Net Trading Income and Adjusted EBITDA margins after excluding unusually favorable market conditions and considering higher variable compensation and order-flow costs.
- Liquidity and margin requirements under more volatile or less liquid market conditions, including access to prime-broker and broker-dealer facilities.
- Debt repayment capacity, interest-rate exposure, credit agreement covenants and the March 2026 term-loan maturity.
- The effect of the MatchNOW disposal, integration of ITG, ongoing technology and remote-work costs, and any future restructuring or lease charges.
- Potential cash obligations under tax receivable agreements, regulatory matters, litigation and other contingencies.
- The definitions and limitations of Adjusted Net Trading Income, Adjusted EBITDA, Normalized Adjusted Net Income and related non-GAAP margins before comparing Virtu with peers.