Virtu Financial, Inc. 2015 Form 10-K Summary
Business context and reporting period
Virtu Financial is a technology-enabled market maker and global liquidity provider operating in more than 12,000 securities and financial instruments across more than 230 exchanges, markets and liquidity pools in 35 countries. Its market-neutral strategies seek to capture small bid/ask spreads across high transaction volumes while limiting directional exposure.
This Form 10-K covers the year ended December 31, 2015 and was filed March 25, 2016. The company completed its initial public offering and related reorganization in April 2015; therefore, historical results before April 16, 2015 primarily reflect Virtu Financial LLC, while later results reflect Virtu Financial, Inc. and its consolidated subsidiaries. The filing also provides unaudited fourth-quarter results.
Financial performance, cash flow, margins, debt and liquidity
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Total revenue | $796.2 million | $723.1 million | Up 10.1% |
| Trading income, net | $757.5 million | $685.2 million | Up 10.6% |
| Adjusted Net Trading Income | $500.7 million | $435.0 million | Up 15.1% |
| Operating expenses | $580.3 million | $529.5 million | Up 9.6% |
| Income before taxes | $215.9 million | $193.6 million | Up 11.6% |
| Net income | $197.5 million | $190.1 million | Up 3.9% |
| Adjusted Net Income | $272.8 million | $226.5 million | Up 20.4% |
| Adjusted EBITDA | $352.4 million | $291.4 million | Up 20.9% |
| Net income available to common stockholders | $20.9 million | Not comparable in the filing | Post-IPO attribution |
| Basic diluted EPS | $0.60 / $0.59 | Not comparable in the filing | Post-IPO measure |
Adjusted Net Trading Income per trading day increased to $1.99 million from $1.73 million. Revenue mix was diversified: Americas equities represented 27%, global commodities 23%, global currencies 22%, EMEA equities 12%, APAC equities 9%, and options, fixed income and other securities 6% of 2015 Adjusted Net Trading Income.
Reported net income margin was 38.6%, compared with 42.7% in 2014. Adjusted Net Income margin increased to 53.3% from 50.9%, and Adjusted EBITDA margin increased to 68.9% from 65.5%. The reported margin decline was principally affected by IPO-related share-based compensation, higher taxes and the AMF legal reserve.
Net cash provided by operating activities was $260.3 million, compared with $272.7 million in 2014. Investing activities used $24.3 million, primarily for capitalized software and equipment. Financing activities used $144.4 million, including distributions, dividends, debt repayments and equity-related transactions. Cash and cash equivalents increased to $163.2 million from $75.9 million.
At December 31, 2015, the company reported $499.8 million of principal debt under its senior secured credit facility, with a carrying value of $493.6 million. The facility matures in November 2019, and the company was in compliance with its covenants. Additional liquidity included $219.1 million of short-term credit facility borrowings, $45.0 million of broker-dealer borrowings, a $100.0 million corporate revolving facility with no reported borrowings, and uncommitted or prime-broker margin financing. Management stated that available cash, operating cash flow and borrowing capacity should cover liquidity needs for more than 12 months.
Domestic broker-dealer regulatory capital was $72.7 million in aggregate against $3.9 million of requirements. The company paid $63.2 million of interest and $12.9 million of taxes in cash during 2015.
Material changes versus the prior comparable period
- Adjusted Net Trading Income grew 15.1%, led by increases in Americas equities, APAC equities, global commodities and EMEA equities. Options, fixed income and other securities declined by $10.3 million.
- Global commodities increased to 23% of Adjusted Net Trading Income from 21%; APAC equities increased to 9% from 7%; global currencies declined to 22% from 25%; and options, fixed income and other securities declined to 6% from 10%.
- Operating expenses rose 9.6%, including $44.2 million of non-cash IPO-related share-based compensation and a $5.4 million reserve for the AMF fine. These items were absent in 2014.
- Income tax expense increased to $18.4 million from $3.5 million, primarily because the post-reorganization public company became subject to U.S. corporate taxation on its taxable share of income.
- The IPO generated gross proceeds of approximately $361.2 million in April 2015. Approximately $58.8 million of net proceeds was contributed to Virtu Financial for working capital and general corporate purposes; other proceeds funded underwriting costs and purchases of Virtu interests and shares.
- A November 2015 secondary offering involved 6.5 million Class A shares at $22.15 per share. Silver Lake no longer held an equity interest after the offering, and the company held approximately 27.5% of Virtu Financial at year-end.
- The company began paying public-company dividends, including $0.24 per share in each of the third and fourth quarters. Its stated policy was to return 70% to 100% of net income annually, subject to board discretion, debt covenants and regulatory restrictions.
- The balance sheet changed materially following the IPO and reorganization, including recognition of $218.4 million of tax receivable agreement obligations, $193.7 million of deferred tax assets, and $427.2 million of noncontrolling interest.
Guidance, outlook, management commentary, risks and unusual items
The filing does not provide formal quantitative revenue or earnings guidance. Management emphasized that results depend heavily on trading volumes, volatility, bid/ask spreads, market structure and the company’s relative performance against market benchmarks. Management expects liquidity needs to be driven primarily by increased margin requirements from higher activity and expansion into new markets.
The company intends to continue quarterly dividends, but payments may be reduced or discontinued because of operating performance, capital requirements, debt covenants, regulatory capital rules or restrictions on distributions from subsidiaries.
Key unusual items included $44.2 million of IPO-related non-cash share-based compensation, a $5.4 million AMF legal reserve related to alleged price manipulation by a European subsidiary before the company acquired it, and approximately $2.7 million of accelerated lease expense. The company is appealing the AMF fine. It also disclosed ongoing or potential SEC, NYAG, CFTC and other regulatory inquiries and enforcement matters; management stated that, except for the accrued AMF matter, known matters were not presently expected to have a material adverse effect, although individual reporting periods could be affected.
Tax receivable agreements require payments generally equal to 85% of realized cash tax savings. Expected payments related to the IPO, reorganization and secondary offering were estimated at approximately $218.4 million, generally ranging from $8.1 million to $16.8 million annually over the next 15 years, before additional exchanges. Certain change-of-control events could accelerate these obligations and materially affect liquidity.
Principal risks include dependence on trading activity and volatility; compressed spreads and competition; counterparty, clearing and liquidity risk; failures or capacity constraints in proprietary and third-party technology; cybersecurity; self-clearing and operational risk; regulatory capital requirements; changing U.S. and international market-structure rules; litigation and enforcement actions; foreign exchange risk; loss of access to a significant exchange; key-person risk; and the possibility that debt covenants restrict distributions, acquisitions or dividends.
Most important facts for an investor to verify
- Reconcile consolidated net income of $197.5 million with only $20.9 million attributable to common stockholders after noncontrolling interests and post-IPO ownership changes.
- Review Adjusted Net Trading Income, Adjusted EBITDA and Adjusted Net Income reconciliations, especially the treatment of non-cash IPO compensation, legal reserves and other excluded items.
- Assess sustainability of the 2015 trading performance across asset classes, including the impact of volume, volatility and spread compression.
- Analyze the $499.8 million senior secured debt balance, variable interest rate exposure, 2019 maturity and covenant restrictions.
- Evaluate cash available at the public-company level versus cash held at regulated subsidiaries and the ability to fund dividends, taxes and tax receivable agreement payments.
- Review the estimated $218.4 million tax receivable agreement liability, potential acceleration upon a change of control and the assumptions supporting the deferred tax asset.
- Monitor the AMF appeal, SEC, NYAG and CFTC inquiries, and any additional regulatory actions, fines or capital requirements.
- Consider the founder’s approximately 93.1% voting control, controlled-company governance exemptions and the resulting protections available to Class A shareholders.
- Verify fourth-quarter volatility: fourth-quarter revenue was $176.9 million, operating income was $47.3 million, net income was $42.9 million and net income attributable to Virtu Financial, Inc. was $8.1 million.