Virtu Financial, Inc. — Q2 2021 Form 10-Q Summary
Business context and reporting period
Virtu is a technology-enabled financial services firm operating in two segments: Market Making and Execution Services, with a Corporate segment. It provides liquidity, execution, workflow technology, analytics and related services across more than 25,000 financial instruments, 235 venues and 36 countries. This unaudited Form 10-Q covers the three and six months ended June 30, 2021, compared primarily with the corresponding 2020 periods.
Financial performance and key metrics
| Metric | Q2 2021 | Q2 2020 | Change |
|---|---|---|---|
| Total revenue | $549.0 million | $905.9 million | Down 39.4% |
| Adjusted Net Trading Income | $341.8 million | $668.7 million | Down 48.9% |
| Operating expenses | $414.0 million | $501.4 million | Down 17.4% |
| Income before taxes and noncontrolling interest | $135.0 million | $404.5 million | Down 66.6% |
| Net income | $108.9 million | $335.3 million | Down 67.5% |
| Net income available to common stockholders | $62.9 million | $199.1 million | Down 68.4% |
| Diluted EPS | $0.50 | $1.58 | Down 68.4% |
| Adjusted EBITDA | $197.3 million | $485.8 million | Down 59.4% |
| Adjusted EBITDA margin | 57.7% | 72.6% | Down 14.9 points |
For the six months ended June 30, 2021, revenue was $1.562 billion, down 18.1%; net income was $518.1 million, down 28.4%; net income available to common stockholders was $302.3 million, down 28.1%; diluted EPS was $2.41 versus $3.38; Adjusted Net Trading Income was $1.070 billion, down 26.4%; and Adjusted EBITDA was $762.1 million, down 27.8%. Adjusted EBITDA margin was 71.2%, compared with 72.6%.
- Market Making Q2 revenue was $402.5 million, down 47.0%, and segment pretax income was $124.6 million versus $397.6 million.
- Execution Services Q2 revenue was $138.1 million, down 6.7%, and segment pretax income was $4.1 million versus $16.5 million.
- Six-month Execution Services revenue increased 3.0% to $327.4 million, supported by higher U.S. equities volumes and technology services.
- Q2 trading income declined 48.3% to $384.8 million. Management attributed the decrease primarily to lower volatility and trading volumes compared with the unusually elevated 2020 COVID-19 period.
- Q2 employee compensation declined 30.7% to $83.8 million, while brokerage, exchange, clearance fees and payments for order flow declined 16.1% to $170.7 million.
Cash flow, balance sheet, debt and liquidity
- At June 30, 2021, cash and cash equivalents were $848.1 million, compared with $889.6 million at December 31, 2020. Cash, cash equivalents and restricted cash totaled $915.3 million.
- Six-month operating cash flow was $355.4 million, compared with $499.3 million in 2020. Investing cash use was $42.7 million, primarily for capitalized software, property and equipment and joint-venture investments.
- Six-month financing cash use was $400.8 million, including $321.9 million of dividends and distributions and $180.8 million of treasury-stock purchases. Cash and cash equivalents decreased $91.8 million during the period.
- Short-term borrowings were $214.3 million, including $198.0 million under broker-dealer facilities and $18.5 million of international settlement-related bank loans. Prime-broker credit-facility borrowings were approximately $201.8 million.
- Long-term borrowings were $1.603 billion net carrying value, representing approximately $1.631 billion of principal. The First Lien Term Loan Facility matures in March 2026; SBI bonds of $31.5 million mature in January 2023. No revolving-facility borrowings were outstanding.
- Interest-rate swaps effectively fixed rates on $525 million and $1.0 billion of term-loan principal at 4.5% and 4.6%, respectively, after April 2021 amendments.
- Management stated that operating cash flow, cash and available broker-dealer facilities should satisfy liquidity needs for more than the next twelve months. The company was in compliance with applicable credit-agreement covenants at June 30, 2021.
- Virtu Americas had regulatory capital of $524.4 million against a $2.4 million requirement, providing $522.0 million of excess regulatory capital.
Material changes versus the prior comparable period
- Results normalized sharply from the exceptional market volatility and trading activity experienced in Q2 2020. Management reported that average daily S&P 500 realized volatility fell 64.8% and average daily U.S. equity consolidated volume fell 14.5% in Q2 2021.
- Market Making was the principal source of the decline, while Execution Services was comparatively resilient and produced higher revenue for the six-month period.
- Six-month brokerage, exchange, clearance fees and payments for order flow increased 14.0% to $430.0 million, primarily due to higher retail-driven volumes and related payments for order flow.
- Six-month employee compensation declined 35.2% to $188.6 million, partly because 2020 included one-time COVID-19-related bonuses and higher incentive compensation.
- The company expanded its share-repurchase authorization by $300 million to $470 million and extended it through May 4, 2022. Approximately $271.4 million remained available at June 30, 2021.
- Other, net included a $12.2 million unrealized gain on the JNX minority investment in the six months ended June 30, 2021.
Outlook, risks, contingencies and unusual items
The filing does not provide formal revenue, earnings or trading-performance guidance. Management emphasizes that results are highly dependent on market volatility, trading volumes, bid-ask spreads, client activity and access to liquidity.
- Key risks include lower trading activity or volatility, counterparty and clearing-house performance, liquidity and margin requirements, trading-system or third-party infrastructure failures, cybersecurity, competition and loss of access to exchanges or trading venues.
- Regulatory and legislative scrutiny remains significant, particularly regarding payment for order flow, best execution, market structure, high-frequency trading, alternative trading systems, retail trading, anti-money-laundering and sanctions compliance.
- The company is subject to regulatory reviews and investigations by the SEC, FINRA, foreign regulators and self-regulatory organizations. It is also a defendant in litigation relating to United States Oil Fund securities. Management believes current matters will not have a material adverse effect on the business overall, but acknowledges that a material judgment, fine or sanction could affect a particular period.
- Tax receivable agreement obligations were approximately $254.7 million at June 30, 2021. Expected payments range from approximately $0.9 million to $21.7 million annually over the next 15 years, subject to realization of tax savings; payments may accelerate following certain change-of-control transactions.
- Lease consolidation generated $4.9 million of termination-of-office-lease expense in the first six months. Purchased-intangible amortization was $36.2 million for the same period.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter. No material changes to the 2020 Form 10-K risk factors were reported.
Investor verification checklist
- Verify the sustainability of Market Making earnings as volatility and trading volumes normalize from 2020 levels.
- Reconcile GAAP results with Adjusted Net Trading Income, Adjusted EBITDA and Normalized Adjusted EPS, noting that these are non-GAAP measures with defined limitations.
- Monitor cash generation after dividends, noncontrolling-interest distributions, share repurchases, margin requirements and debt service.
- Review the $1.631 billion of long-term debt, March 2026 term-loan maturity, credit covenants and interest-rate-swap terms.
- Assess regulatory developments affecting payment for order flow, market structure, best execution and retail trading.
- Track SEC, FINRA and other regulatory matters, the United States Oil Fund litigation and any related financial impact.
- Consider the $254.7 million tax receivable agreement liability and potential acceleration obligations.
- Review the JNX valuation, which is a Level 3 investment sensitive to revenue growth, discount rates and valuation multiples.