Virtu Financial, Inc. — Q1 2021 Form 10-Q Summary
Business context and reporting period
Virtu is a technology-enabled financial services firm providing global market making, execution services, analytics, workflow technology and liquidity across more than 25,000 instruments, 235 venues and 36 countries. The filing covers the unaudited three months ended March 31, 2021, compared with the three months ended March 31, 2020. Operating segments are Market Making and Execution Services; Corporate is non-operating. Virtu Financial, Inc. owned approximately 64.0% of Virtu Financial LLC at March 31, 2021, with the remaining interest reflected as noncontrolling interest.
Financial performance and key metrics
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Total revenue | $1,012.6 million | $1,000.6 million | 1.2% |
| Trading income, net | $812.7 million | $802.5 million | 1.3% |
| Commissions, net and technology services | $191.6 million | $170.7 million | 12.2% |
| Operating expenses | $522.8 million | $534.4 million | (2.2%) |
| Income before taxes and noncontrolling interest | $489.8 million | $466.2 million | 5.1% |
| Net income | $409.2 million | $388.2 million | 5.4% |
| Net income available to common stockholders | $239.4 million | $221.1 million | 8.3% |
| Diluted EPS | $1.89 | $1.80 | 5.0% |
| Adjusted Net Trading Income | $728.0 million | $784.5 million | (7.2%) |
| Adjusted EBITDA | $564.7 million | $569.7 million | (0.9%) |
Calculated GAAP net margin was approximately 40.4% of revenue, compared with 38.8% in the prior-year quarter. Adjusted EBITDA margin was 77.6%, compared with 72.6%; EBITDA margin was 75.0%, compared with 67.9%. The effective tax rate was 16.4%, versus 16.8%.
- Market Making revenue declined 0.8% to $823.7 million. Trading income was broadly stable, while interest and dividends income fell 73.9% to $6.9 million because of lower interest rates. Market Making Adjusted Net Trading Income declined 11.8% to $575.1 million.
- Execution Services revenue increased 11.4% to $189.2 million, and segment pre-tax income increased to $40.4 million from $19.4 million. Execution Services Adjusted Net Trading Income rose 15.7% to $152.9 million.
- Brokerage, exchange, clearance fees and payments for order flow increased 49.2% to $259.3 million, primarily reflecting higher retail trading volumes and related payments for order flow.
- Employee compensation and payroll taxes declined 38.5% to $104.8 million, largely because Q1 2020 included higher incentive compensation and one-time COVID-19-related bonuses.
Cash flow, balance sheet, debt and liquidity
- Cash and cash equivalents were $899.0 million at March 31, 2021; cash plus restricted or segregated cash was $1,021.8 million.
- Operating cash flow was $133.9 million, compared with cash used of $218.7 million in Q1 2020. Investing cash use was $25.6 million, principally for capitalized software and property and equipment.
- Financing cash use was $89.7 million, including $189.4 million of dividends and distributions and $77.1 million of treasury stock purchases. Cash increased by $14.8 million during the quarter.
- Total liabilities were $8.85 billion and total equity was $2.04 billion at quarter-end. Total assets were $10.89 billion.
- Short-term borrowings were $240.4 million, including $178.0 million under broker-dealer facilities and $65.0 million of short-term bank loans. Prime brokerage borrowings were approximately $204.4 million and were presented within broker-dealer receivables and payables.
- Long-term borrowings were $1.64 billion net carrying value, consisting primarily of a $1.635 billion first-lien term loan maturing in March 2026 and $31.6 million of SBI bonds maturing in January 2023. No revolving facility borrowings were outstanding.
- Management stated that operating cash flow, cash on hand and available borrowings should satisfy liquidity needs for more than the next twelve months. Virtu was in compliance with applicable credit agreement covenants at March 31, 2021.
- Virtu Americas LLC had $676.2 million of regulatory capital against a $2.8 million requirement, or $673.4 million of excess capital.
Material changes, outlook and risks
Management attributed the quarter’s results to higher U.S. equity trading volumes but substantially lower volatility. Average daily S&P 500 realized volatility declined 72.4%, while average daily U.S. equity consolidated volumes increased 33.5%. The lower-volatility environment and higher transaction-related costs reduced Adjusted Net Trading Income despite modestly higher total revenue.
The filing provides no quantitative earnings or revenue guidance. Management expects future liquidity needs to be driven primarily by margin requirements associated with trading activity and expansion into new markets. The company continued efforts to consolidate communications, data-processing services and office premises.
- Key risks include trading-volume and volatility changes, counterparty and clearing-house performance, access to liquidity and trading venues, technology or system failures, cybersecurity, operational and remote-work risks, competition, regulatory and market-structure changes, payment-for-order-flow scrutiny, litigation and regulatory investigations, international operations, foreign exchange exposure and substantial indebtedness.
- Virtu remains subject to various regulatory reviews and investigations, including by the SEC, FINRA, state, federal and foreign regulators. Management believes existing matters will not materially affect the business overall, but acknowledges that a material judgment, fine or sanction could affect a particular period.
- The company faces putative class-action litigation relating to the United States Oil Fund ETF. A separate ProShares securities litigation matter was dismissed and the dismissal was affirmed in March 2021.
- The tax receivable agreement obligation was approximately $271.2 million, with expected payments of approximately $0.9 million to $21.7 million annually over the next 15 years. Certain change-of-control events could accelerate payments.
- Goodwill was $1.15 billion and no goodwill impairment was recognized. The JNX investment, a Level 3 asset, was valued at $66.2 million and is sensitive to revenue growth, discount rates and valuation multiples.
Capital allocation and subsequent events
- The company paid a $0.24-per-share dividend for the quarter and repurchased approximately 2.9 million shares or Virtu Financial Units during Q1 for approximately $79.4 million, including employee tax-withholding repurchases. Approximately $72.7 million remained under the then-current authorization at March 31, 2021.
- On May 4, 2021, the board declared another $0.24-per-share dividend, payable June 15, 2021.
- On May 4, 2021, the board increased the share repurchase authorization by $300 million to $470 million and extended it through May 4, 2022. Approximately $319 million remained available as of that date.
Investor verification points
- Reconcile GAAP earnings growth with the 7.2% decline in Adjusted Net Trading Income and assess the sustainability of lower compensation expense and higher payment-for-order-flow costs.
- Monitor the sensitivity of Market Making results to trading volumes, volatility, spreads and retail order flow.
- Review debt maturities, interest-rate swaps, covenant requirements and the March 2022 expiration of the revolving commitments.
- Assess liquidity after dividends, noncontrolling-interest distributions and expanded share repurchases, including cash trapped in regulated subsidiaries.
- Track regulatory investigations, market-structure reforms, payment-for-order-flow scrutiny and the United States Oil Fund litigation.
- Evaluate tax receivable agreement obligations and the potential for accelerated payments following a change of control.