Virtu Financial, Inc. 2023 Q3 SEC Filing Summary
Business context and reporting period
Virtu Financial is a technology-enabled global liquidity provider with two operating segments: Market Making and Execution Services. It operates across more than 25,000 financial instruments, over 235 venues and 36 countries. The unaudited Form 10-Q covers the three and nine months ended September 30, 2023, with comparisons to the corresponding 2022 periods.
Virtu Financial, Inc. owned approximately 58.4% of Virtu Financial LLC at quarter-end and consolidates the remaining interests as noncontrolling interests.
Financial performance and key metrics
| Metric | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 |
|---|---|---|---|---|
| Total revenue | $630.2 million | $561.0 million | $1,757.4 million | $1,867.0 million |
| Income before taxes and noncontrolling interest | $138.1 million | $101.6 million | $308.3 million | $517.1 million |
| Net income | $117.6 million | $79.9 million | $257.2 million | $428.7 million |
| Net income available to common stockholders | $61.9 million | $40.0 million | $136.5 million | $237.4 million |
| Diluted EPS | $0.63 | $0.37 | $1.36 | $2.16 |
| GAAP net income margin | 18.7% | 14.2% | 14.6% | 23.0% |
| Adjusted Net Trading Income | $298.0 million | $331.1 million | $949.8 million | $1,193.6 million |
| Adjusted EBITDA | $139.5 million | $180.6 million | $469.0 million | $733.7 million |
- Q3 revenue increased 12.3%, primarily because of higher interest and dividends income and approximately $74.6 million of gains included in the favorable “Other, net” result, principally related to settlement fund recoveries.
- Q3 trading income declined 20.5% to $316.1 million, reflecting lower market volumes, lower volatility, narrower spread opportunity and lower-quality order flow.
- Q3 interest and dividends income increased 192.7% to $127.7 million as higher interest rates increased returns on cash collateral, bank and prime-broker balances, and trading assets.
- Q3 commissions and technology services declined 8.9% to $110.3 million, driven by lower market volumes, reduced institutional commission budgets and declining institutional engagement.
- Q3 operating expenses increased 7.1% to $492.1 million. Interest and dividends expense more than doubled to $132.8 million, partly offset by lower brokerage, exchange, clearance fees and payments for order flow.
- Adjusted Net Trading Income declined 10.0% in Q3 and 20.4% for the nine-month period. Adjusted EBITDA margin was 46.8% in Q3 and 49.4% for nine months, compared with 54.6% and 61.5%, respectively, in the prior-year periods.
Financial position, debt and liquidity
| Balance-sheet item | September 30, 2023 | December 31, 2022 |
|---|---|---|
| Total assets | $17.62 billion | $10.58 billion |
| Cash and cash equivalents | $688.8 million | $981.6 million |
| Restricted or segregated cash | $37.6 million | $56.7 million |
| Total equity | $1.51 billion | $1.65 billion |
| Long-term borrowings, carrying value | $1.779 billion | $1.796 billion |
| Short-term borrowings, carrying value | $97.2 million | $3.9 million |
- Long-term debt principal was approximately $1.805 billion, consisting primarily of a $1.782 billion first-lien term loan maturing in January 2029 and $23.4 million of SBI bonds maturing in January 2026.
- The company had $100.0 million outstanding under broker-dealer credit facilities and approximately $93.6 million outstanding under prime-broker credit facilities. The $250 million senior secured revolving facility had no borrowings outstanding and terminates in January 2025.
- Management stated that operating cash flow, cash and available broker-dealer borrowings should satisfy liquidity needs for the next 12 months. Key anticipated needs include margin requirements, debt service, leases, dividends and share repurchases.
- U.S. regulated subsidiaries maintained substantial excess regulatory capital. Virtu Americas LLC had $457.3 million of regulatory capital versus a $1.6 million requirement at September 30, 2023.
Cash flow and capital allocation
- Nine-month operating cash flow was $143.7 million, down from $290.5 million in the prior-year period.
- Investing cash use was $70.5 million, including $32.0 million for capitalized software and $24.3 million for property and equipment.
- Financing cash use was $385.3 million, including $251.9 million of dividends and distributions, $184.4 million of treasury-stock purchases and $23.3 million of tax receivable agreement payments.
- Cash and cash equivalents declined by $311.9 million during the nine months; cash, cash equivalents and restricted cash totaled $726.4 million at September 30, 2023.
- From inception through September 30, 2023, the company repurchased approximately 41.2 million Class A shares and Virtu Financial Units for approximately $1.066 billion. Approximately $154.4 million remained available under the repurchase program, which was subsequently extended through December 31, 2024.
Material changes versus the prior comparable periods
- The nine-month revenue decline of 5.9% was driven primarily by a 21.3% decline in trading income and a 17.2% decline in commissions and technology services, partly offset by a 222.6% increase in interest and dividends income.
- Nine-month Market Making revenue was broadly stable at $1.422 billion, but Market Making pre-tax earnings fell to $298.1 million from $448.9 million.
- Nine-month Execution Services revenue declined 15.5% to $340.0 million and pre-tax earnings declined to $16.7 million from $32.0 million.
- Interest and dividends expense increased 123.8% for the nine-month period, reflecting higher rates, increased securities lending activity and higher dividend expense on short positions.
- Share count declined materially because of repurchases; basic weighted-average shares fell to 95.4 million from 105.5 million for the nine-month period, supporting reported EPS despite lower consolidated earnings.
Outlook, commentary, risks and unusual items
- The filing provides no formal revenue, earnings or margin guidance. Management expects liquidity needs to be driven principally by trading-related margin requirements and ongoing capital-return obligations.
- Management highlighted sensitivity to trading volumes, volatility, bid-ask spreads, order-flow quality, institutional engagement, competition and access to liquidity and trading venues.
- The SEC filed an action in September 2023 concerning information-barrier policies and related statements covering approximately January 2018 through April 2019. The company disputes the allegations and intends to defend itself vigorously.
- The company is also involved in shareholder litigation, books-and-records demands and other regulatory and commercial proceedings. Management believes the ultimate outcomes will not materially affect the company overall, but acknowledges that a judgment, fine or sanction could materially affect results in a particular period.
- Potential changes to U.S. equity-market structure, including proposals concerning Regulation NMS, best execution, tick sizes, access fees, market data, ATS and exchange regulation, payment for order flow and off-exchange trading could adversely affect the business.
- Additional risks include technology or cybersecurity failures, counterparty and clearing-house exposure, regulatory-capital requirements, foreign-exchange movements, interest-rate changes, tax obligations, litigation and geopolitical or market disruption.
- The company’s July 1, 2023 quantitative goodwill assessment found that estimated fair values exceeded carrying values; no goodwill impairment was recognized.
- The board declared a $0.24 per-share dividend payable December 15, 2023 to holders of record December 1, 2023.
Important facts for investors to verify
- Whether the Q3 improvement in GAAP earnings is sustainable absent the unusual settlement fund recoveries included in “Other, net.”
- Trends in Adjusted Net Trading Income, trading volumes, realized volatility, spread capture and order-flow quality.
- The effect of elevated interest and dividends expense and future interest rates on net trading economics and debt-service costs.
- Liquidity after margin requirements, dividends, repurchases, tax receivable agreement payments and debt amortization.
- Remaining repurchase authorization, the pace of future buybacks and the effect of reduced share count on per-share results.
- The status and potential financial exposure from the SEC action and related shareholder litigation.
- The impact of proposed and enacted market-structure, best-execution, payment-for-order-flow and ATS regulations.
- Compliance with credit-agreement covenants and regulatory-capital requirements, particularly during periods of market stress.