Virtu Financial, Inc. annual report, FY2020

Virtu Financial, Inc. — FY2020 Form 10-K Summary

Reporting period: Fiscal year ended December 31, 2020. The filing is an annual Form 10-K, not a standalone 2020 fourth-quarter report. Virtu operates through Market Making, Execution Services and Corporate segments, providing liquidity, agency execution, workflow technology and analytics across multiple asset classes and more than 50 countries.

Key Financial Metrics

Metric	2020	2019	Change
Total revenue	$3,239.3 million	$1,517.5 million	+113.5%
Trading income, net	$2,493.2 million	$912.3 million	+173.3%
Commissions, net and technology services	$600.5 million	$498.5 million	+20.5%
Income before taxes and noncontrolling interest	$1,382.8 million	$(116.0) million	Improved materially
Net income	$1,120.9 million	$(103.7) million	Improved materially
Net income available to common stockholders	$649.2 million	$(58.6) million	Improved materially
Diluted EPS	$5.16	$(0.53)	Improved materially
Adjusted Net Trading Income	$2,271.4 million	$974.7 million	+133.0%
Adjusted EBITDA	$1,648.0 million	$431.9 million	+281.6%
Adjusted EBITDA margin	72.6%	44.3%	+28.3 percentage points
Net income margin on Adjusted Net Trading Income	49.3%	(10.6)%	Improved materially

Cash Flow, Liquidity and Capitalization

Cash and cash equivalents were $889.6 million at December 31, 2020, compared with $732.2 million at December 31, 2019. Cash, cash equivalents and restricted or segregated cash totaled $1,007.0 million.
Operating cash flow was $1,060.9 million, compared with $168.8 million in 2019. Investing cash flow was $(2.6) million and financing cash flow was $(839.9) million.
Long-term borrowings had $1,670.4 million of principal outstanding, consisting primarily of the First Lien Term Loan Facility and SBI bonds. Net long-term borrowings were $1,639.3 million.
Short-term borrowings were $64.7 million, including $36.4 million under broker-dealer facilities and $28.7 million of bank overdrafts. Prime brokerage facilities had $134.7 million outstanding against $616.0 million of available financing.
The Company had $1.0 billion of broker-dealer credit facilities, including $600.0 million of committed capacity, with no borrowings under the committed facility at year-end.
Virtu prepaid $288.5 million of long-term debt during 2020. The term loans mature in March 2026, while the SBI bonds mature in January 2023.
Management stated that operating cash flow, cash on hand and available broker-dealer borrowings were expected to meet liquidity needs for more than the next twelve months. Liquidity needs remain sensitive to margin requirements, trading volumes and market volatility.
Quarterly dividends were $0.24 per share during 2020. The November 2020 repurchase program had $66.1 million of remaining capacity at year-end; the authorization was later increased to $170.0 million in February 2021.

Material Changes Versus 2019

COVID-19-related market volatility and trading volumes materially increased Market Making results. Average daily S&P 500 realized volatility rose 145.4%, and average daily U.S. equity consolidated volume increased 55.4%.
Market Making revenue increased 152.2% to $2,593.3 million, while segment income before taxes increased to $1,241.3 million from $109.2 million.
Execution Services revenue increased 32.2% to $650.1 million, and segment income before taxes was $174.6 million versus a $126.9 million loss in 2019. The comparison benefited from a full year of ITG results in 2020 versus approximately ten months in 2019.
Brokerage, exchange, clearance fees and payments for order flow increased 96.1% to $758.8 million, primarily reflecting higher trading volumes and increased retail-related order flow payments.
Interest and dividends income declined 42.9% to $62.1 million because of lower interest rates and lower collateral balances.
Other, net increased to $83.5 million, including a $58.7 million gain on the sale of MATCHNow and a $17.4 million gain on the JNX investment.
Termination of office lease expense declined to $9.6 million from $66.5 million as integration and office consolidation progressed.
Financing interest expense declined 28.0% to $87.7 million, reflecting lower debt balances and interest rates. The March 2020 credit amendment reduced the applicable interest-rate spread by 0.50 percentage points.
The Company consolidated additional historical broker-dealer operations into Virtu Americas during 2020, and related registrations were subsequently withdrawn.

Guidance, Outlook, Commentary and Risks

The filing does not provide formal quantitative earnings or revenue guidance. Management expects future liquidity needs to be driven principally by margin requirements associated with trading activity and expansion into new markets. The Company selectively reduced certain client trading and market-making activities during periods of extraordinary volume and volatility to manage operational and liquidity risk.

Management stated that the full economic and financial-market impact of COVID-19 remained uncertain. Elevated volatility benefited 2020 results but also increased margin funding, operational, counterparty and liquidity requirements.
Results are highly dependent on trading volumes, realized volatility, bid-ask spreads, market structure and access to exchanges and other venues. Lower volatility or compressed spreads could materially reduce revenue and profitability.
Principal risks include technology failures, cyberattacks, operational errors, dependence on third-party infrastructure, self-clearing and counterparty risk, regulatory capital requirements, competition and loss of significant clients or trading venues.
Regulatory scrutiny remains elevated regarding U.S. equity market structure, payment for order flow, high-frequency trading, alternative trading systems, best execution, data access, rebates and retail trading relationships. Regulatory changes or transaction taxes could increase costs or reduce trading activity.
The Company remains highly leveraged and subject to secured debt covenants. A failure to comply with covenants could result in acceleration of debt and cross-defaults.
Virtu is a holding company that owned approximately 64.1% of Virtu Financial at year-end and depends on subsidiary distributions to fund dividends, taxes, debt service and corporate obligations. Tax receivable agreement obligations totaled $271.2 million and generally require payment of 85% of realized cash tax savings to eligible holders.
Legal and regulatory proceedings are ongoing. Management believes the ultimate outcomes are not expected to have a material adverse effect on the Company, although an individual period could be materially affected. The Company had fully reserved a reduced €3.0 million AMF monetary penalty.

Investor Verification Items

Verify the sustainability of 2020 earnings and margins after the unusually high COVID-19 volatility and trading-volume environment.
Reconcile GAAP net income available to common stockholders with Adjusted EBITDA, Adjusted Net Trading Income and Normalized Adjusted EPS, including all excluded items.
Review debt maturities, covenant headroom, variable-rate exposure, interest-rate swaps and the March 2026 term-loan maturity.
Assess liquidity requirements under stressed margin, clearing and counterparty conditions, rather than relying only on year-end cash balances.
Evaluate the recurring contribution from Execution Services, including ITG-related revenues, workflow technology and analytics.
Review the $271.2 million tax receivable agreement liability and potential acceleration payments upon a change of control.
Monitor regulatory investigations, litigation, payment-for-order-flow developments and proposed transaction taxes.
Consider the effects of founder control, including approximately 81.9% of combined voting power, controlled-company governance exemptions and potential conflicts with public shareholders.
Confirm the status and financial impact of the MATCHNow contingent consideration, office lease obligations and remaining share-repurchase authorization.