Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 31, 2015, for Virtu Financial, Inc. (the "Registrant") and its principal operating subsidiary, Virtu Financial LLC. The Registrant was formed in 2013 specifically to facilitate reorganization transactions and an Initial Public Offering (IPO). As of the reporting date, the Registrant held no substantial assets or operating activities; all operational results are derived from Virtu Financial LLC. The filing notes that the Reorganization Transactions and the IPO were completed in April 2015, shortly after the period end.
Key Financial Metrics (Virtu Financial LLC)
Financial data presented below reflects the operating subsidiary, Virtu Financial LLC, as the Registrant itself had negligible activity.
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Total Revenue | $221.5 million | $173.3 million |
| Trading Income, Net | $213.9 million | $165.2 million |
| Net Income | $77.4 million | $48.9 million |
| Adjusted Net Income (Non-GAAP) | $87.9 million | $55.8 million |
| Adjusted EBITDA (Non-GAAP) | $106.4 million | $70.8 million |
| Cash and Cash Equivalents | $66.6 million | $68.2 million |
| Senior Secured Credit Facility (Debt) | $502.7 million | $510.0 million |
| Net Cash Provided by Operating Activities | $82.3 million | $94.2 million |
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 27.8% year-over-year, driven primarily by a 29.5% increase in trading income. This was attributed to higher market volumes and volatility in Global Commodities and Global Currencies, as well as strong performance in EMEA and Americas equities.
- Profitability: Net income increased 58.4% to $77.4 million. Adjusted Net Income rose 57.3% to $87.9 million.
- Expense Increases: Total operating expenses rose 14.5% to $141.4 million. Notable increases included brokerage fees (+12.3%), employee compensation (+24.5% due to higher incentives), and depreciation/amortization (+49.1%, partly due to $1.5 million in accelerated depreciation on obsolete equipment).
- One-Time Items: The company incurred $2.7 million in expenses related to the termination of office leases in Q1 2015, compared to none in the prior year. Conversely, acquisition-related retention bonus expenses ceased in 2015 after the final payment was made in 2014.
Guidance, Outlook, and Subsequent Events
The filing does not provide specific forward-looking financial guidance for future quarters. However, it details significant subsequent events occurring in April 2015:
- IPO Completion: On April 21, 2015, the company completed its IPO, selling 19,012,112 shares of Class A common stock at $19.00 per share, raising approximately $361.2 million in gross proceeds.
- Reorganization: Reorganization transactions were completed on April 15, 2015, making Virtu Financial, Inc. the sole managing member of Virtu Financial LLC.
- Debt Restructuring: Following the IPO, the company amended its senior secured credit facility, reducing the interest rate spread by 0.50%. Additionally, a new $100 million revolving credit facility was established.
- Distributions: The company declared tax and profit distributions to pre-IPO members totaling up to $100.0 million, with $50.0 million paid prior to the IPO.
- Risks: The company faces standard market risks including volatility, counterparty credit risk, and regulatory changes. It is subject to ongoing regulatory inquiries, though management believes these will not have a material adverse effect.
Investor Verification Checklist
- Pro Forma Adjustments: Verify the impact of the $43.1 million non-cash compensation expense recognized upon the IPO and the 0.5% interest rate reduction on the senior debt facility.
- Tax Receivable Agreements: Review the obligation to pay approximately 85% of cash tax savings to pre-IPO members, estimated to aggregate $179.9 million over 15 years.
- Regulatory Capital: Confirm that broker-dealer subsidiaries (Virtu Financial BD LLC and Virtu Financial Capital Markets LLC) remain in compliance with SEC and FINRA net capital requirements (excess capital was $64.1 million and $3.8 million respectively as of March 31, 2015).
- Non-GAAP Reconciliations: Scrutinize the reconciliation of Net Income to Adjusted Net Income and Adjusted EBITDA, specifically the exclusions for stock-based compensation, lease terminations, and equipment write-offs.
- Debt Covenants: Monitor compliance with financial covenants on the $502.7 million senior secured credit facility, including interest coverage and total leverage ratios.