Virtu Financial, Inc. 2021 Form 10-K Summary
Business context and reporting period
Virtu Financial is a technology-enabled global market maker and execution-services provider operating across equities, ETFs, options, futures, fixed income, foreign exchange, commodities and cryptocurrencies. It operates through Market Making, Execution Services and Corporate segments, serving clients across more than 50 countries and over 235 venues. This filing covers the fiscal year ended December 31, 2021; the filing does not provide a separate standalone fourth-quarter income statement in the supplied text.
Virtu Financial, Inc. is a holding company that owned approximately 62.7% of Virtu Financial LLC at year-end. The Founder Post-IPO Member controlled approximately 85.4% of combined voting power. The company had approximately 973 full-time employees as of February 11, 2022.
Financial performance and key metrics
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Total revenue | $2.811 billion | $3.239 billion | Down 13.2% |
| Trading income, net | $2.105 billion | $2.493 billion | Down 15.6% |
| Commissions, net and technology services | $614.5 million | $600.5 million | Up 2.3% |
| Operating expenses | $1.815 billion | $1.856 billion | Down 2.3% |
| Income before taxes and noncontrolling interest | $996.9 million | $1.383 billion | Down 27.9% |
| Net income | $827.2 million | $1.121 billion | Down 26.2% |
| Net income available to common stockholders | $476.9 million | $649.2 million | Down 26.5% |
| Diluted EPS | $3.91 | $5.16 | Down 24.2% |
| Adjusted Net Trading Income | $1.910 billion | $2.271 billion | Down 15.9% |
| Adjusted EBITDA | $1.301 billion | $1.648 billion | Down 21.0% |
Net income margin based on Adjusted Net Trading Income was 43.3%, compared with 49.3% in 2020. Adjusted EBITDA margin was 68.1%, compared with 72.6%. Normalized Adjusted Net Income was $876.6 million and Normalized Adjusted EPS was $4.57, versus $1.135 billion and $5.76, respectively, in 2020.
- Market Making: revenue was $2.203 billion and pre-tax income was $926.0 million, compared with $2.593 billion and $1.241 billion in 2020. Segment Adjusted Net Trading Income declined 19.9% to $1.428 billion.
- Execution Services: revenue was $600.2 million and pre-tax income was $70.0 million, compared with $650.1 million and $174.6 million in 2020. Commissions and technology-services revenue increased 4.6% to $573.5 million, but other revenue declined substantially because 2020 included the MATCHNow sale gain.
- Management attributed the overall decline primarily to lower market volatility after the unusually elevated volatility and trading activity of 2020. Average daily U.S. equity consolidated volume increased 4.4%, partially offsetting lower volatility.
Cash flow, balance sheet, debt and liquidity
- Net cash provided by operating activities was $1.172 billion, up from $1.061 billion in 2020.
- Cash used in investing activities was $87.3 million, principally reflecting software, property and equipment investment and strategic investments.
- Cash used in financing activities was $957.9 million, including $548.0 million of dividends and distributions and $427.5 million of treasury-stock purchases.
- Cash and cash equivalents were $1.071 billion at December 31, 2021; cash including restricted or segregated balances was $1.121 billion.
- Long-term debt principal was approximately $1.630 billion, consisting principally of a $1.600 billion first-lien term loan due in 2026 and $30.7 million of SBI bonds due in 2023. Net long-term borrowings on the balance sheet were $1.605 billion.
- Short-term borrowings were $61.5 million, including $58.0 million under an uncommitted broker-dealer facility. Prime-broker credit facilities had $177.1 million outstanding against $616.0 million of financing availability. A $600.0 million committed broker-dealer facility had no borrowings outstanding.
- The company stated that cash flows, cash on hand and available borrowing capacity were adequate for expected liquidity needs over the next twelve months, with margin requirements from trading activity identified as the principal near-term need.
- Regulated subsidiaries reported substantial excess regulatory capital. Virtu Americas had $536.6 million of regulatory capital against a $1.2 million requirement.
Material changes versus the prior comparable period
- Revenue, Adjusted Net Trading Income, pre-tax income, net income and EPS declined materially from 2020, primarily because 2020 benefited from exceptional market volatility.
- Execution Services commissions and technology revenue grew, but segment profitability declined because of lower trading-related revenue and the absence of the 2020 MATCHNow sale gain.
- Operating expenses decreased modestly despite lower revenue. Employee compensation declined 4.4%, while interest and dividends expense increased 11.2% and office-lease termination costs increased to $28.1 million from $9.6 million.
- Operating cash flow increased, but financing outflows rose due to greater dividends, distributions and share repurchases. Cumulative repurchases through year-end reached approximately 16.1 million shares and Virtu Financial Units for $439.1 million, leaving approximately $780.9 million of authorization.
- The company exercised a 3.0 million-share warrant issued to the Founder Member at $22.98 per share, generating $68.9 million of proceeds.
- Cash restricted or segregated under regulations declined to $49.5 million from $117.4 million, while trading assets and trading liabilities increased with market activity and positioning.
Guidance, outlook, management commentary, risks and unusual items
The filing does not provide formal quantitative revenue, earnings or margin guidance. Management emphasizes that results depend heavily on trading volumes, realized volatility, bid-ask spreads, market structure, client order flow and access to trading venues. Risk controls may limit upside during extreme volatility, while lower volatility or compressed spreads can reduce profitability.
- Regulatory risk: the company faces continuing scrutiny of payment for order flow, wholesale market making, off-exchange trading, alternative trading systems, market fragmentation and other U.S. market-structure practices. Potential rule changes could restrict order flow, increase technology and compliance costs or reduce profitability.
- Liquidity and leverage: margin requirements can rise sharply during periods of elevated volume or volatility. Debt agreements impose covenants and restrictions on distributions, dividends, acquisitions, asset sales and additional debt.
- Technology and cyber risk: system failures, latency, third-party infrastructure failures, cyberattacks, data loss and operational errors could cause trading losses, business interruption and reputational damage.
- Counterparty and clearing risk: the company relies on trading counterparties, prime brokers, clearing houses and self-clearing infrastructure, creating credit, settlement, funding and liquidity exposure.
- COVID-19 and macroeconomic risk: remote work, future variants, market disruptions, inflation, interest rates, currency movements, geopolitical events and natural disasters could affect operations and liquidity.
- Corporate structure: the company depends on distributions from Virtu Financial to fund dividends, taxes and other obligations. Tax receivable agreements require payments generally equal to 85% of realized cash tax savings; liabilities recorded at year-end were $259.3 million.
- Unusual or nonrecurring items: 2021 included $28.1 million of office-lease termination costs, $6.6 million of debt refinancing and commitment costs, and $0.8 million of transaction advisory expenses. The 2020 comparison included a $56.2 million net gain from the MATCHNow sale.
- Subsequent event: on January 13, 2022, the company issued a $1.8 billion senior secured first-lien term loan due in 2029, primarily to refinance the prior term loan, with remaining proceeds available for share repurchases and general corporate purposes. The board declared a $0.24 per-share dividend payable March 15, 2022.
- The company disclosed ongoing regulatory reviews and investigations and litigation, including securities litigation related to the United States Oil Fund and a putative class action involving Robinhood and market makers. Management stated that the matters were not expected to have a material adverse impact based on currently available information, but outcomes remain uncertain.
Most important facts an investor should verify
- Reconcile the annual results to any separate fourth-quarter results; this Form 10-K summary data is primarily full-year information.
- Review the sustainability of trading revenue and margins if market volatility normalizes or declines further.
- Assess the January 2022 refinancing, increased $1.8 billion debt balance, interest-rate exposure and applicable financial covenants.
- Evaluate liquidity after dividends, distributions, share repurchases, margin requirements and tax receivable agreement payments.
- Monitor proposed U.S. and international market-structure rules, especially those affecting payment for order flow, off-exchange trading and ATSs.
- Review the status and potential financial exposure of regulatory investigations, litigation and acquisition-related indemnification obligations.
- Consider the impact of concentrated voting control, the holding-company structure and the 85% tax receivable agreement payment obligation on minority shareholders.