Virtu Financial, Inc. — Q3 2016 Form 10-Q Summary
Business context and reporting period
Virtu is a technology-enabled global market maker and liquidity provider operating as one reportable segment across more than 12,000 securities and financial instruments, 235 exchanges, markets and liquidity pools, and 36 countries. The filing covers the three and nine months ended September 30, 2016, compared primarily with the corresponding 2015 periods.
Comparability with 2015 is limited because the Company’s IPO and reorganization were completed in April 2015. The 2015 interim results do not reflect the IPO, corporate taxes, noncontrolling interests, or secondary offerings as if they had occurred at the beginning of the period.
Key financial metrics
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Total revenue | $164.8 million | $215.8 million | $531.6 million | $619.3 million |
| Trading income, net | $156.7 million | $206.8 million | $509.5 million | $590.6 million |
| Adjusted Net Trading Income | $94.2 million | $138.6 million | $313.8 million | $392.9 million |
| Operating expenses | $126.9 million | $136.9 million | $390.6 million | $450.7 million |
| Income before taxes and noncontrolling interest | $37.9 million | $78.9 million | $141.0 million | $168.7 million |
| Net income | $33.0 million | $69.5 million | $123.7 million | $154.5 million |
| Net income available to common stockholders | $7.0 million | $12.3 million | $25.8 million | $12.8 million |
| Diluted EPS | $0.18 | $0.35 | $0.66 | $0.37 |
| Net cash provided by operating activities | Not separately reported | Not separately reported | $187.1 million | $242.0 million |
Total revenue declined 23.6% in Q3 and 14.2% for the first nine months. GAAP net income margin was approximately 20.0% in Q3 and 23.3% for 9M 2016, versus approximately 32.2% and 25.0%, respectively, in the comparable periods. Management reported Adjusted EBITDA of $56.9 million for Q3 and $203.8 million for 9M 2016, with margins of 58.6% and 63.5%, respectively, on its defined operating revenue base.
- Cash and cash equivalents were $146.0 million at September 30, 2016, down from $163.2 million at December 31, 2015.
- Total assets were $3.51 billion and total liabilities were $2.97 billion; total equity was $543.1 million.
- Short-term credit-facility borrowings were $253.2 million, broker-dealer facility borrowings were $17.6 million, and long-term borrowings had $530.5 million of principal outstanding.
- Available short-term credit facilities totaled $493 million, with a weighted-average borrowing rate of 2.76%.
- Domestic broker-dealer regulatory capital totaled $69.6 million, against aggregate requirements of $3.9 million.
Material changes versus the prior comparable period
- Trading income and Adjusted Net Trading Income fell principally because of lower market volume and volatility, particularly in equities, currencies and commodities.
- Q3 Adjusted Net Trading Income per trading day decreased 32.0% to approximately $1.5 million. For 9M 2016, it decreased 18.9% to approximately $1.66 million per day.
- Operating expenses declined 7.3% in Q3 and 13.3% for 9M, helped by lower brokerage costs, employee compensation, depreciation, and IPO-related share-based compensation.
- Communication and data-processing expense increased 11.2% in Q3 and 3.9% for 9M, while interest and dividends expense increased 21.9% and 10.2%, respectively.
- IPO-related share-based compensation declined substantially, from $45.3 million in 9M 2015 to $1.4 million in 9M 2016.
- The Company invested $38.8 million for a 29.4% minority interest in SBI Japannext in July 2016, funded partially with ¥3.5 billion of SBI Bonds.
- Net cash from operations declined $54.9 million to $187.1 million for 9M 2016. Investing cash use increased to $53.7 million, primarily because of the SBI Japannext investment.
- The Company completed a September 2016 secondary offering of 1.1 million Class A shares at $15.75 per share and repurchased corresponding Virtu Financial units and Class C shares.
Guidance, outlook, risks and unusual items
The filing does not provide formal quantitative revenue or earnings guidance. Management expects liquidity needs to be driven primarily by increased margin requirements from higher trading activity and expansion into new markets, and believes operating cash flow, available cash, and available borrowing capacity will meet liquidity needs for more than twelve months.
- On October 27, 2016, after quarter-end, the existing term loan was refinanced with a $540.0 million senior secured first-lien term loan maturing October 27, 2022. The $100.0 million revolving facility remained in place; the new term loan was issued at a 0.25% discount.
- The Company declared a $0.24 per share dividend payable December 15, 2016 to holders of record on December 1, 2016.
- Tax receivable agreement obligations totaled approximately $226.0 million at September 30, 2016, with expected payments of approximately $7.4 million to $20.1 million annually over the next 15 years, subject to realization of tax savings. Payments may be accelerated upon certain change-of-control events.
- The Company accrued a €5.0 million, approximately $5.4 million, AMF fine relating to alleged price manipulation and market-rule violations by a European subsidiary. The Company is appealing the fine.
- Management identified risks from lower trading activity, competition, reliance on counterparties and clearing houses, technology and cybersecurity failures, regulatory capital requirements, litigation and regulatory investigations, currency fluctuations, international operations, and loss of access to significant trading venues.
- Brexit-related effects remained uncertain. Management did not expect an immediate effect on EU market access through its Irish regulated subsidiary but acknowledged potential material adverse effects.
- Management stated that no material changes occurred in market-risk disclosures or the previously reported risk factors. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting.
Most important facts for investors to verify
- Reconcile GAAP results with non-GAAP measures, particularly Adjusted Net Trading Income, Adjusted EBITDA and Normalized Adjusted EPS.
- Assess the sustainability of earnings after the unusually strong 2015 comparison, including the effect of market volume, volatility and asset-class mix.
- Review the post-quarter-end refinancing terms, effective interest costs, maturity profile, covenants and collateral requirements.
- Evaluate liquidity after considering cash, margin-related borrowings, securities-financing exposures, regulatory capital constraints and tax receivable agreement payments.
- Monitor the AMF appeal, SEC and NYAG information requests, and other regulatory or litigation matters.
- Confirm the economic impact and valuation sensitivity of the SBI Japannext investment and related yen-denominated bonds.
- Consider the effect of noncontrolling interests and the Company’s approximately 28.9% ownership of Virtu Financial on common-stock earnings and cash distributions.