Virtu Financial, Inc. 2017 Form 10-K Summary
Business context and reporting period
Virtu Financial is a technology-driven global market maker and execution-services provider operating across more than 25,000 securities and financial instruments, over 235 venues, and 36 countries. The filing covers the year ended December 31, 2017; the fourth-quarter results are provided in unaudited supplemental information. The July 20, 2017 acquisition of KCG materially expanded the company’s scale and added the Execution Services segment. Results include KCG from the acquisition date through year-end, so comparisons with 2016 are not fully like-for-like.
Key financial metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Total revenue | $1,028.0 million | $702.3 million | +46.4% |
| Adjusted Net Trading Income | $556.3 million | $424.5 million | +31.0% |
| Operating expenses | $914.8 million | $522.7 million | +75.0% |
| Income before taxes | $113.2 million | $179.6 million | −37.0% |
| Net income | $18.9 million | $158.3 million | −88.1% |
| Net income attributable to common stockholders | $2.9 million | $33.0 million | −91.1% |
| Basic and diluted EPS | $0.03 | $0.83 | Declined |
| Net cash provided by operating activities | $290.6 million | $239.6 million | +21.3% |
| Adjusted EBITDA | $251.4 million | $268.3 million | −6.3% |
| Adjusted EBITDA margin | 45.2% | 63.2% | Down 18.0 points |
| Cash and cash equivalents at year-end | $532.9 million | $181.4 million | +193.8% |
Trading income, net increased 15.1% to $766.0 million. Commissions, net and technology services increased to $116.5 million from $10.4 million, primarily due to KCG’s institutional execution business. Americas Equities represented 49.6% of Adjusted Net Trading Income, compared with 29.2% in 2016; Global FICC, Options and Other declined to 23.0% from 46.0%.
The company recorded $1,388.5 million of long-term borrowings, representing $1,431.1 million of principal, plus $205.7 million of short-term credit-facility borrowings and $32.0 million under broker-dealer facilities. Total liabilities were $6.17 billion and total equity was $1.15 billion at December 31, 2017.
Material changes versus the prior comparable period
- KCG was acquired for approximately $1.40 billion, creating a larger Market Making business and a significant Execution Services platform.
- The company issued $1.15 billion of first-lien term loans and $500 million of 6.75% senior secured second-lien notes to finance the acquisition and refinance existing debt. It made $250 million of term-loan prepayments during 2017.
- Operating expenses rose substantially due to KCG-related brokerage, connectivity, compensation, amortization, interest, transaction advisory fees, and $27.7 million of payments for order flow.
- Net income was materially reduced by a provisional $90.6 million deferred-tax expense from the 2017 Tax Cuts and Jobs Act. The company also recorded an $86.6 million gain from reducing its tax receivable agreement obligation.
- Adjusted Net Trading Income improved, but Adjusted EBITDA declined because expense growth exceeded revenue growth. Execution Services generated $99.1 million of revenue but a $12.5 million pretax loss.
- Cash flow from investing activities was negative $838.0 million, primarily reflecting $799.6 million of cash consideration for KCG. Financing activities provided $889.8 million.
Guidance, outlook, commentary, risks and unusual items
The filing does not provide formal numerical earnings or revenue guidance. Management states that liquidity should be adequate for more than the next twelve months based on operating cash flow, cash on hand, and available borrowings. Future liquidity needs are expected to include increased margin requirements from trading activity and expansion into new markets.
Management emphasizes that revenue and profitability depend heavily on trading volumes, market volatility, bid-ask spreads, client activity, competition, and access to exchanges and liquidity providers. The company also faces technology, cybersecurity, operational, counterparty, self-clearing, regulatory-capital, litigation, foreign-exchange, and international-operating risks.
- The Term Loan Facility matures in December 2021 and the second-lien notes mature in June 2022. The company was in compliance with applicable debt covenants at year-end.
- Debt agreements impose leverage and interest-coverage tests and restrict dividends, additional debt, investments, asset sales, and other corporate actions.
- Tax receivable agreement obligations were $147.0 million at year-end; the agreements generally require payments equal to 85% of realized cash tax savings and may require accelerated payments upon certain change-in-control events.
- MiFID II became effective January 3, 2018 and was expected to increase technology, operational, reporting, and compliance costs.
- BondPoint was classified as held for sale at year-end and sold to ICE on January 2, 2018 for $400 million. The proceeds were used in part to repay debt.
- The company had ongoing regulatory reviews and investigations, including matters involving market structure and electronic trading. An AMF fine relating to historical conduct was reduced to approximately €3.3 million and fully reserved at year-end.
- The 2017 Form 10-K revised previously reported 2017 net income available to common stockholders from $17.3 million and EPS of $0.26 to $2.9 million and $0.03, respectively, because of the updated tax provision.
Most important facts for an investor to verify
- Separate recurring operating performance from KCG acquisition effects, purchase-accounting amortization, transaction costs, retention bonuses, and tax-related items.
- Reconcile GAAP net income and common-stockholder earnings with Adjusted Net Trading Income, Adjusted EBITDA, and normalized measures.
- Review debt maturity, interest-rate exposure, covenant headroom, post-year-end debt repayments, and the effect of leverage on dividends and strategic flexibility.
- Assess whether KCG integration produces the expected synergies and whether Execution Services can reach profitability.
- Verify the amount, timing, and potential acceleration of tax receivable agreement payments.
- Monitor trading volumes, volatility, U.S. equity concentration, bid-ask spread compression, payment-for-order-flow economics, and access to key venues.
- Review regulatory investigations, the AMF matter, assumed KCG liabilities, cybersecurity controls, and the exclusion of KCG from management’s 2017 internal-control assessment.