Virtu Financial, Inc. 2020 Q3 Form 10-Q Summary
Business context and reporting period
Virtu is a global financial services and technology firm operating through Market Making, Execution Services and Corporate segments. It provides liquidity, execution, workflow technology, analytics and trading solutions across more than 25,000 financial instruments, 235 venues and 36 countries. This unaudited filing covers the three and nine months ended September 30, 2020, compared with the corresponding 2019 periods.
Financial performance and key metrics
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Total revenue | $656.1 million | $382.3 million | $2.563 billion | $1.118 billion |
| Income before taxes and noncontrolling interest | $252.5 million | $(5.8) million | $1.123 billion | $(88.6) million |
| Net income | $199.7 million | $(5.2) million | $923.2 million | $(74.3) million |
| Net income available to common stockholders | $116.7 million | $(4.3) million | $536.9 million | $(40.9) million |
| Diluted EPS | $0.92 | $(0.04) | $4.29 | $(0.38) |
| Net income margin | 30.4% | (1.4)% | 36.0% | (6.6)% |
| Adjusted Net Trading Income | $362.3 million | $249.8 million | $1.815 billion | $717.5 million |
| Adjusted EBITDA | $248.7 million | $103.9 million | $1.304 billion | $317.3 million |
| Adjusted EBITDA margin | 68.7% | 41.6% | 71.8% | 44.2% |
Q3 revenue increased 71.6% year over year, while nine-month revenue increased 129.2%. Trading income, net rose 100.5% in Q3 and 190.8% for the nine-month period. Management attributed the increase primarily to elevated market volatility and trading volumes associated with COVID-19 and related market conditions. Nine-month average daily S&P 500 realized volatility increased 165.2%, and average daily U.S. equity consolidated volume increased 55.5%.
Market Making generated Q3 revenue of $474.6 million and pretax income of $161.7 million, compared with $249.8 million and $30.4 million, respectively, in Q3 2019. Execution Services generated Q3 revenue of $182.7 million and pretax income of $102.0 million, compared with $133.8 million and a $29.2 million loss, respectively, in the prior-year quarter.
Operating expenses increased 4.0% in Q3 to $403.6 million and 19.3% for nine months to $1.439 billion. Brokerage, exchange, clearance fees and payments for order flow increased with trading activity, while Q3 employee compensation declined because of lower accrued incentive compensation. Nine-month employee compensation increased due to higher incentive compensation and COVID-19-related bonuses.
Cash flow, debt and liquidity
- Cash and cash equivalents were $567.7 million at September 30, 2020, compared with $732.2 million at December 31, 2019. Cash, cash equivalents and restricted or segregated cash totaled $666.0 million.
- Operating cash flow was $483.6 million for the first nine months of 2020, versus $(346.2) million in the prior-year period.
- Investing cash flow was $3.4 million, including $60.6 million of proceeds from the sale of MATCHNow, compared with $(882.8) million in 2019, which included the ITG acquisition.
- Financing cash flow was $(598.2) million, primarily reflecting $288.5 million of long-term debt repayment, $247.8 million of distributions to noncontrolling interests and $90.2 million of dividends.
- Long-term borrowings totaled $1.637 billion net carrying value, with approximately $1.670 billion of principal outstanding. The principal debt consists primarily of a first-lien term loan due March 2026 and $33.2 million of SBI bonds due January 2023.
- Short-term borrowings totaled $124.0 million, including $78.0 million under broker-dealer facilities and $47.0 million of short-term bank loans. Prime brokerage borrowings were approximately $163.6 million.
- The company had $1.0 billion of broker-dealer credit facilities available, with $78.0 million outstanding, and no borrowings under its $50.0 million first-lien revolving facility. Management stated that available cash, operating cash flow and borrowing capacity should meet liquidity needs for more than the next 12 months.
- Virtu Americas LLC had regulatory capital of $641.3 million against a $2.5 million requirement, leaving $638.8 million of excess regulatory capital.
Material changes and unusual items
- Virtu completed the sale of MATCHNow on August 4, 2020 for $60.6 million in cash and recognized a $56.2 million net gain after transaction costs. Additional contingent consideration of up to approximately $23.0 million may be earned through December 31, 2022.
- The company repaid an additional $100.0 million of first-lien term debt in August 2020; total nine-month long-term debt repayments were $288.5 million.
- The March 2020 Founder Member Loan Facility expired September 20, 2020 without any borrowings. A warrant for up to 3.0 million Class A shares remains exercisable at $22.98 per share through January 15, 2022.
- Virtu continued integrating ITG, acquired in March 2019. The comparison period includes ITG for only part of the first quarter, whereas 2020 includes a full nine months.
- No goodwill impairment was identified in the July 1, 2020 assessment. Intangibles declined to $473.3 million from $529.6 million at year-end 2019, primarily through amortization.
- Noncontrolling interests received $386.3 million of the nine-month net income, reflecting that the parent owned approximately 64.2% of Virtu Financial LLC at September 30, 2020.
Outlook, risks and contingencies
The filing provides no formal earnings or revenue guidance. Management stated that COVID-19-related volatility and volume benefited results but also increased margin requirements, short-term funding needs and operational risk. The company selectively limited certain client trading and market-making activities and increased liquidity resources during periods of elevated activity.
- Results remain highly sensitive to trading volumes, realized volatility, bid-ask spreads, market structure and competition; reduced activity could materially reduce revenue and profitability.
- COVID-19 creates risks related to remote work, business continuity, cybersecurity, system capacity, operational errors, counterparties, clearing houses and access to liquidity.
- The company is subject to extensive regulatory oversight, including scrutiny of payment for order flow, best execution, high-frequency trading, alternative trading systems, market data, cybersecurity and anti-money-laundering controls.
- Virtu is subject to litigation and regulatory investigations. Management believes currently disclosed matters will not materially affect the company overall, but a material judgment, fine or sanction could affect a particular period.
- The company has approximately $256.0 million of tax receivable agreement obligations and expects future payments of approximately $3.3 million to $20.7 million annually over the next 15 years, subject to realization of tax benefits. A change of control could accelerate payments.
- Foreign exchange, counterparty credit, interest-rate, market and technology risks remain material. A hypothetical 10% adverse U.S. dollar movement against foreign-denominated earnings would have reduced nine-month revenue by an estimated $51.7 million.
On November 6, 2020, the board declared a $0.24 per-share dividend payable December 15, 2020. It also authorized a share repurchase program of up to $100.0 million through December 31, 2021; no assurance was given that repurchases will occur.
Important facts for investors to verify
- Whether elevated volatility and trading volumes persist, and the resulting impact on Market Making revenue and margins.
- The sustainability of Q3 and nine-month adjusted earnings after excluding the $56.2 million MATCHNow gain and other unusual items.
- Debt repayment capacity, interest expense, credit agreement covenants and the March 2022 revolving commitment termination.
- Liquidity requirements and regulatory capital during renewed market volatility or higher clearing and margin demands.
- Future tax receivable agreement payments, potential acceleration provisions and the portion of consolidated earnings attributable to noncontrolling interests.
- Regulatory, litigation, cybersecurity and operational developments, including the impact of remote work and market-structure scrutiny.