Virtu Financial, Inc. — Q2 2015 Form 10-Q Summary
Business context and reporting period
Unaudited quarterly report for the three and six months ended June 30, 2015. Virtu is a technology-enabled, market-neutral market maker and liquidity provider operating across more than 11,000 securities and 225 markets in 35 countries. The company reports one operating segment.
The April 2015 reorganization and IPO materially affect comparability. Virtu Financial, LLC is consolidated from April 16, 2015; historical periods primarily represent the predecessor operating group and exclude the post-IPO corporate tax structure, reorganization transactions and noncontrolling interests. Accordingly, 2015 public-company EPS reflects only April 16 through June 30, 2015.
Financial performance and key metrics
| Metric | Q2 2015 | Q2 2014 | Change |
|---|---|---|---|
| Total revenue | $182.0 million | $163.0 million | +11.7% |
| Trading income, net | $169.8 million | $153.4 million | +10.7% |
| Adjusted Net Trading Income | $105.9 million | $94.5 million | +12.1% |
| Net income | $7.6 million | $30.8 million | -75.5% |
| Net income available to common stockholders | $0.5 million | Not applicable | Not comparable |
| Adjusted Net Income | $55.9 million | $43.8 million | +27.7% |
| Adjusted EBITDA | $73.3 million | $57.7 million | +27.1% |
| Adjusted EBITDA margin | 67.5% | 59.5% | +8.0 percentage points |
Q2 net income was reduced by $44.2 million of one-time, non-cash IPO-related share-based compensation. Reported net income margin was 7.0%, compared with 31.8% in the prior-year quarter; management’s adjusted net income margin was 51.4%, compared with 45.2%.
| Metric | Six months ended June 30, 2015 | Six months ended June 30, 2014 | Change |
|---|---|---|---|
| Total revenue | $403.5 million | $336.3 million | +20.0% |
| Adjusted Net Trading Income | $254.3 million | $200.3 million | +27.0% |
| Net income | $85.0 million | $79.7 million | +6.6% |
| Net cash provided by operating activities | $182.9 million | $105.6 million | +73.2% |
| Capital expenditures and capitalized software | $17.8 million | $14.7 million | Cash used |
Balance sheet, debt and liquidity
- Cash and cash equivalents were $127.0 million at June 30, 2015, up from $75.9 million at December 31, 2014.
- Total assets were $4.54 billion and total liabilities were $4.03 billion. Total equity was $504.7 million, including $388.5 million of noncontrolling interest.
- Senior secured credit facility principal was approximately $502.4 million, with a stated interest rate of 5.25% at June 30, 2015. The filing also reports approximately $206.4 million of short-term credit-facility borrowings in the broker-dealer and clearing-organization balances.
- A $100 million revolving credit facility became available following the IPO. No principal was outstanding under the separate uncommitted or committed broker-dealer facilities at June 30, 2015; aggregate short-term facility availability was reported at $476.0 million, with $228.9 million of principal outstanding across short-term facilities in the borrowing note.
- Management stated that operating cash flow, available cash and available borrowings should meet liquidity needs for more than the next twelve months. Primary expected needs include increased margin requirements, tax receivable agreement payments, distributions and capital expenditures.
- U.S. broker-dealer subsidiaries exceeded minimum regulatory capital requirements by approximately $38.4 million and $3.8 million, respectively. The filing states that all senior secured credit facility covenants were satisfied at June 30, 2015.
Material changes versus the prior comparable period
- Revenue growth was driven by higher market volumes and volatility, particularly in global commodities, global currencies, EMEA equities and APAC equities. Q2 Adjusted Net Trading Income per trading day increased to $1.68 million from $1.50 million.
- Operating expenses increased 29.1% in Q2, exceeding revenue growth, primarily because of the $44.2 million IPO-related share-based compensation charge. Excluding unusual items, adjusted profitability improved.
- Interest and dividends expense increased 37.7% in Q2 to $16.8 million, primarily due to higher interest expense on cash collateral received in securities-lending transactions.
- Six-month operating cash flow increased by $77.3 million, although working-capital movements in securities borrowed, trading assets, receivables and trading liabilities were significant.
- The IPO generated approximately $361.2 million of gross proceeds. Approximately $277.2 million funded purchases of Class A shares and Virtu Financial units, while $58.8 million of net proceeds was contributed to Virtu Financial for working capital and general corporate purposes.
Outlook, risks, contingencies and unusual items
- No formal financial guidance is provided. Management expects liquidity to remain adequate for more than twelve months based on current operations, cash flow and borrowing capacity.
- Results depend heavily on trading volumes, volatility, bid/ask spreads, market structure, competition, technology performance and the ability to manage market, credit, counterparty and liquidity risks. Derivative notional amounts are not measures of amounts at risk.
- The company is subject to regulatory inquiries and proceedings, including an AMF enforcement action concerning historical French equity trading by an MTH subsidiary and information requests from the SEC and New York Attorney General. Management believes currently known matters will not have a material adverse effect, but the ultimate effect is unknown.
- Tax receivable agreement obligations were recorded at approximately $184.7 million, generally requiring payments equal to 85% of applicable realized cash tax savings. Expected payments range from approximately $7.9 million to $13.6 million annually over 15 years; acceleration may occur in certain change-of-control or other circumstances.
- Virtu Financial made a $5.0 million distribution to certain pre-IPO members on June 12, 2015 and intended further distributions of up to $45.0 million. A $0.24 per share dividend on Class A and Class B common stock was declared for payment September 15, 2015.
- The company recognized $2.7 million of office-lease termination expense and $1.5 million of accelerated depreciation during the six-month period. It also early adopted the new debt-issuance-cost presentation guidance.
Most important facts for investors to verify
- Reconcile reported GAAP net income and public-company EPS with the IPO-period consolidation, noncontrolling interest and one-time $44.2 million compensation charge.
- Verify the debt maturity disclosure: the borrowing note lists minimum payments beginning in 2015 and a large balance in 2018 and thereafter, while MD&A states that the senior secured facility matures in November 2019. The filing text does not provide a fully clear reconciliation.
- Assess recurring earnings using Adjusted Net Trading Income and adjusted profitability, while considering that these are non-GAAP measures and exclude material costs.
- Review liquidity available after margin requirements, planned distributions, tax receivable agreement payments and the company’s substantial securities-borrowing and trading liabilities.
- Monitor the AMF, SEC and NYAG matters, regulatory-capital requirements, credit-facility covenants and potential changes in tax receivable agreement obligations.