Virtu Financial, Inc. — Q2 2023 Form 10-Q Summary
Business context and reporting period
Virtu is a global financial-services and market-making firm providing liquidity, execution services, analytics, workflow technology and trading infrastructure across more than 25,000 instruments, 235 venues and 36 countries. Its operating segments are Market Making and Execution Services; Corporate is a non-operating segment. This unaudited Form 10-Q covers the three and six months ended June 30, 2023, compared with the corresponding 2022 periods.
Financial results and key metrics
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenue | $506.9 million | $604.7 million | $1,127.2 million | $1,306.0 million |
| Operating expenses | $471.4 million | $431.0 million | $957.0 million | $890.5 million |
| Pre-tax income | $35.5 million | $173.8 million | $170.2 million | $415.5 million |
| Net income | $29.5 million | $148.9 million | $139.6 million | $348.8 million |
| Net income available to common stockholders | $16.7 million | $85.2 million | $74.6 million | $197.4 million |
| Diluted EPS | $0.16 | $0.78 | $0.73 | $1.77 |
| GAAP net income margin | 5.8% | 24.6% | 12.4% | 26.7% |
| Adjusted Net Trading Income | $278.7 million | $357.4 million | $651.8 million | $862.4 million |
| Adjusted EBITDA | $122.0 million | $209.3 million | $329.5 million | $553.1 million |
Q2 Adjusted Net Trading Income margin based on Adjusted EBITDA was 43.8%, compared with 58.6% in Q2 2022. Six-month margin was 50.5%, compared with 64.1% in the prior-year period.
Material changes versus the prior comparable period
- Q2 revenue declined 16.2%; six-month revenue declined 13.7%. Management attributed the decrease primarily to lower market volumes, lower volatility, narrower spread opportunities and less favorable customer order flow.
- Trading income declined 22.7% in Q2 and 21.7% for the six months. Market Making revenue declined 6.3% in Q2 and 7.7% for the six months; Execution Services revenue declined 16.7% and 19.5%, respectively.
- Interest and dividends income increased 218.2% in Q2 and 247.9% for the six months, benefiting from higher interest rates, higher interest on collateral and dividends on market-making positions.
- Commissions, net and technology services declined 19.7% in Q2 and 20.6% for the six months, reflecting lower market volumes, reduced institutional commission availability and declining institutional engagement.
- Operating expenses increased 9.4% in Q2 and 7.5% for the six months. Interest and dividends expense rose 130.9% and 130.2%, respectively, due to higher rates, dividend expense on securities sold short and increased securities-lending activity.
- Share repurchases totaled approximately $135.0 million during the first six months. Since inception, the Company repurchased approximately 38.5 million shares and Virtu Financial Units for approximately $1.017 billion, with approximately $203.3 million of authorized capacity remaining at June 30, 2023.
Cash flow, liquidity and debt
- Cash and cash equivalents were $698.7 million at June 30, 2023, compared with $981.6 million at December 31, 2022. Including restricted or segregated cash, the balance was $745.8 million versus $1.038 billion.
- Six-month operating cash flow was negative $26.4 million, compared with positive $57.6 million in 2022, primarily due to lower earnings and increased trading-related assets. Investing cash flow was negative $55.1 million, including $26.4 million of capitalized software development and $21.9 million of property and equipment purchases.
- Financing cash flow was negative $215.1 million, principally reflecting $145.7 million of dividends and distributions, $135.0 million of treasury-stock purchases, and the $23.2 million tax receivable agreement payment. Total cash decreased $292.4 million during the six months.
- Long-term borrowings were $1.778 billion net carrying value, including $1.782 billion principal under the senior secured first-lien term loan due January 2029 and $24.3 million of SBI bonds due January 2026. Short-term borrowings were $111.7 million net, and prime-broker credit facilities had approximately $140.6 million outstanding.
- The Company had $1.060 billion of broker-dealer financing available, including a $400 million uncommitted facility, a $650 million committed facility and a $10 million overdraft facility. No amounts were outstanding under the $250 million first-lien revolving facility at June 30, 2023.
- Management stated that cash flows, cash on hand and available borrowing capacity should be adequate for the next twelve months. The principal expected liquidity needs are trading-related margin requirements, debt service, lease payments, dividends, share repurchases and tax receivable agreement payments.
- Regulated subsidiaries reported substantial excess regulatory capital, including $454.2 million at Virtu Americas LLC and $2.1 million at RFQ-Hub Americas LLC.
Guidance, outlook, commentary, risks and unusual items
- The filing provides no formal quantitative revenue, earnings or margin guidance. Management expects results to remain sensitive to trading volumes, volatility, spreads, order-flow quality, institutional engagement and interest rates.
- Management highlighted risks from changing U.S. equity-market-structure rules, including proposed changes involving Regulation NMS, best execution, tick sizes, access fees, market-data infrastructure, ATS and exchange registration, and Regulation SCI.
- Other key risks include technology or systems failures, cyber threats, dependence on exchanges, clearing houses and counterparties, liquidity and regulatory-capital requirements, competition, foreign-exchange movements, geopolitical and economic conditions, digital-asset uncertainty and loss of access to a significant venue.
- The SEC has investigated Virtu’s internal information-barrier policies and related disclosures. The Company received a Wells Notice, expects potential SEC litigation and intends to defend itself. A related shareholder class action and Delaware books-and-records demand were filed in 2023.
- Other disclosed litigation includes United States Oil Fund securities litigation, Delaware fiduciary-duty and books-and-records claims, Mallinckrodt-related fraudulent-transfer litigation and Northwest Biotherapeutics market-manipulation litigation. The Company cannot estimate ultimate exposure for certain matters; management believes the matters will not materially affect overall financial condition, although a particular period could be materially affected.
- Other, net was a loss of $6.8 million in Q2 and $2.6 million for the six months, compared with gains in 2022, primarily because the prior-year periods included gains from strategic-investment sales. The JNX Level 3 investment declined to $71.1 million at June 30, 2023.
- The Company’s tax receivable agreement liability was $215.5 million at June 30, 2023. Expected payments range from approximately $36,000 to $22.0 million annually over the next 15 years, subject to realization of tax savings and other conditions.
- The Board declared a $0.24 per-share dividend on July 26, 2023, payable September 15, 2023 to holders of record on September 1, 2023.
- Disclosure controls and procedures were assessed as effective, and the filing reports no material change in internal control over financial reporting.
Important facts investors should verify
- Whether trading volumes, volatility, spreads and order-flow quality improve or deteriorate, given their direct effect on Market Making revenue and Adjusted Net Trading Income.
- The sustainability of earnings after the sharp increase in interest and dividends expense and the substantial sensitivity to interest rates.
- Cash generation relative to dividends, share repurchases, margin requirements, debt amortization and tax receivable agreement obligations.
- Leverage, refinancing and covenant requirements under the $1.782 billion term loan and the availability of broker-dealer and prime-broker financing.
- The effect of proposed market-structure reforms and regulatory scrutiny of payment for order flow, wholesale market making, off-exchange trading and best execution.
- Developments and potential financial impact of the SEC investigation, Wells Notice and related shareholder litigation.
- The valuation and sensitivity of the $71.1 million JNX Level 3 investment and other strategic investments.