Virtu Financial, Inc. — Q1 2020 Form 10-Q Summary
Business context and reporting period
Unaudited results for the three months ended March 31, 2020, compared with the three months ended March 31, 2019. Virtu provides global market making, execution services, workflow technology, analytics and liquidity solutions across more than 25,000 financial instruments, 235 venues and 36 countries. The company reports Market Making, Execution Services and Corporate segments. Virtu owned approximately 63.2% of Virtu Financial LLC at March 31, 2020.
Key financial metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Total revenue | $1,004.1 million | $363.0 million | +176.6% |
| Trading income, net | $802.5 million | $257.5 million | +211.6% |
| Commissions, net and technology services | $170.7 million | $75.1 million | +127.2% |
| Total operating expenses | $537.9 million | $379.2 million | +41.8% |
| Income before taxes and noncontrolling interest | $466.2 million | $(16.2) million | Improved |
| Net income | $388.2 million | $(13.6) million | Improved |
| Net income available to common stockholders | $221.1 million | $(6.7) million | Improved |
| Diluted EPS | $1.80 | $(0.07) | Improved |
| Adjusted Net Trading Income | $784.5 million | $228.8 million | +242.8% |
| Adjusted EBITDA | $569.7 million | $124.2 million | +358.7% |
| Adjusted EBITDA margin | 72.6% | 54.3% | +18.3 points |
GAAP net income margin was approximately 38.7% of revenue, compared with a negative margin in the prior-year quarter. Management reported EBITDA of $532.4 million and a 67.9% EBITDA margin, versus $43.2 million and 18.9% in Q1 2019. Adjusted measures exclude items including amortization, financing costs, share-based compensation, severance, legal reserves, COVID-19 costs and other specified items.
Segments and operating drivers
- Market Making: Revenue increased 197.8% to $831.6 million, and pretax income increased to $451.5 million from $47.5 million. Market Making Adjusted Net Trading Income increased 266.9% to $652.3 million.
- Execution Services: Revenue increased 104.1% to $170.4 million, and pretax income was $19.4 million versus a $44.4 million loss. Adjusted Net Trading Income increased 159.0% to $132.2 million.
- Management attributed the significant improvement primarily to elevated market volatility and trading volumes associated largely with the COVID-19 pandemic. Average daily S&P 500 realized volatility increased 314.8%, and average daily U.S. equity consolidated volume increased 50.5%.
- Employee compensation increased 58.0% to $170.4 million, including higher incentive compensation and one-time COVID-19-related bonuses. Brokerage, exchange and clearance fees increased 74.1%, and payments for order flow increased 164.3%.
Cash flow, liquidity and debt
- Net cash used in operating activities was $218.7 million, compared with $210.0 million used in Q1 2019. Working-capital movements, particularly receivables from broker-dealers and clearing organizations, absorbed cash despite strong earnings.
- Net cash used in investing activities was $20.0 million, compared with $848.0 million in Q1 2019, which included $835.6 million for the ITG acquisition.
- Net cash provided by financing activities was $281.0 million, principally from a $358.9 million increase in short-term borrowings. Cash, cash equivalents and restricted or segregated cash totaled $805.2 million at March 31, 2020, including $710.5 million of unrestricted cash and cash equivalents.
- Short-term borrowings were $431.5 million, including $239.0 million of broker-dealer facilities, $180.5 million of short-term bank loans and $15.0 million drawn under the first-lien revolving facility.
- Long-term borrowings were $1.916 billion net carrying value, consisting primarily of $1.925 billion of first-lien term loans maturing in March 2026 and $32.5 million of SBI bonds maturing in January 2023. Aggregate long-term principal was approximately $1.958 billion.
- Prime brokerage credit facilities had approximately $283.0 million outstanding at March 31, 2020. Management stated that the company was in compliance with applicable credit agreement covenants and believed available cash, operating cash flows and borrowing capacity would meet liquidity needs for more than twelve months.
- U.S. broker-dealer subsidiaries had aggregate regulatory capital of $679.2 million against $8.4 million of requirements, based on the disclosed subsidiary amounts.
Material changes, unusual items and outlook
- The quarter benefited materially from unusual volatility and volume conditions; management cautioned that these conditions may not persist and that COVID-19 could ultimately reduce trading activity and financial results.
- Virtu implemented a business continuity plan under which a significant majority of employees worked remotely. Management identified elevated operational, technology, cybersecurity, counterparty, market and liquidity risks.
- On March 20, 2020, a subsidiary entered into an unsecured Founder Member Loan Facility of up to $300 million at 8.0%, available through September 20, 2020. In consideration, Virtu issued a warrant for up to 3.0 million Class A shares, potentially increasing to 10.0 million shares if specified borrowing conditions are met. The warrant exercise price is based on the ten trading days following May 7, 2020.
- A $20 million demand loan entered into in March 2020 was repaid in full on April 17, 2020.
- An amendment to the credit agreement effective March 2, 2020 reduced the applicable interest-rate spread by 0.50 percentage points. Interest-rate swaps effectively fixed rates on $1.0 billion and $525 million of term-loan principal at 4.4% and 4.3%, respectively, for the stated hedge periods.
- The company recorded $4.4 million for a legal reserve and $3.4 million of COVID-19 one-time costs and donations. The filing states that a previously disclosed KCG-related litigation settlement received final court approval in March 2020, without admission of liability.
- The company declared a $0.24 per-share dividend on May 7, 2020, payable June 15, 2020. The board also approved, subject to shareholder approval, an increase in the 2015 Management Incentive Plan share reserve from 16 million to 21 million shares.
- No formal financial guidance is provided in the filing. Management’s outlook emphasizes continued uncertainty from COVID-19, volatility, trading volumes, liquidity requirements, remote operations, regulatory scrutiny, technology reliability and counterparty performance.
Important facts for investors to verify
- Whether the exceptional Q1 volatility and trading volumes continued or normalized after March 31, 2020, and the resulting effect on revenue, margins and capital requirements.
- Actual utilization and repayment status of the Founder Member Loan Facility, including whether the warrant share count could increase to 10 million.
- Liquidity availability, margin requirements, prime-broker financing and clearing-counterparty exposure during stressed market conditions.
- Debt amortization, interest expense, covenant headroom and the March 2026 maturity of the first-lien term loans.
- Regulatory, litigation and market-structure developments, including the reserved AMF fine, ongoing regulatory reviews and payment-for-order-flow scrutiny.
- Execution Services integration and recurring revenue performance following the ITG acquisition, including technology and analytics customer retention.
- Tax receivable agreement obligations of approximately $256.0 million at March 31, 2020 and expected annual payments of approximately $3.3 million to $20.7 million over the next 15 years.