Virtu Financial, Inc. — Q3 2022 Form 10-Q Summary
Business context and reporting period
Virtu is a global financial-services firm providing market making, execution services, liquidity, analytics and workflow technology across more than 25,000 financial instruments, 235 venues and 36 countries. The company reports two operating segments: Market Making and Execution Services, plus Corporate. This unaudited Form 10-Q covers the three and nine months ended September 30, 2022, compared with the corresponding 2021 periods.
Key financial metrics
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Total revenue | $561.0 million | $544.3 million | $1,867.0 million | $2,105.9 million |
| Adjusted Net Trading Income | $331.1 million | $354.4 million | $1,193.6 million | $1,424.3 million |
| Operating expenses | $459.4 million | $399.2 million | $1,349.9 million | $1,336.0 million |
| Income before taxes and NCI | $101.6 million | $145.1 million | $517.1 million | $769.9 million |
| Net income | $79.9 million | $123.1 million | $428.7 million | $641.3 million |
| Net income available to common stockholders | $40.0 million | $70.5 million | $237.4 million | $372.8 million |
| Diluted EPS | $0.37 | $0.59 | $2.16 | $3.01 |
| Adjusted EBITDA | $180.6 million | $210.7 million | $733.7 million | $972.8 million |
| Adjusted EBITDA margin | 54.6% | 59.5% | 61.5% | 68.3% |
GAAP net income margin based on Adjusted Net Trading Income was 24.1% in Q3 and 35.9% for the nine-month period, compared with 34.7% and 45.0%, respectively, in the prior-year periods. The company’s effective tax rate was 21.4% in Q3 and 17.1% for the nine months, versus 15.1% and 16.7% in 2021.
Cash flow, liquidity and debt
- Cash and cash equivalents were $836.3 million at September 30, 2022; cash including restricted or segregated balances was $890.4 million.
- Operating cash flow was $290.5 million for the nine months, down from $374.5 million in 2021. Investing activities used $11.0 million and financing activities used $466.5 million.
- Cash declined by $230.5 million during the nine months, primarily reflecting dividends and distributions of $316.1 million and treasury-stock purchases of $434.5 million, partly offset by debt refinancing proceeds.
- Short-term borrowings were $167.5 million carrying value, including $168.0 million of broker-dealer facility borrowings. Prime-broker credit facilities had approximately $157.6 million outstanding.
- Long-term borrowings were $1.792 billion carrying value, consisting principally of a $1.8 billion senior secured first-lien term loan maturing in January 2029 and $24.2 million of SBI bonds maturing in January 2023. The revolving facility had no outstanding balance and commitments totaled $250 million.
- Management stated that operating cash flow, available cash and broker-dealer borrowing capacity should be adequate for liquidity needs over the next twelve months. Primary needs include margin requirements, debt service, leases, dividends, tax-receivable payments and share repurchases.
- Virtu Americas had regulatory capital of $482.1 million versus a $3.6 million requirement, or $478.6 million of excess regulatory capital, at September 30, 2022.
Material changes versus the prior comparable period
- Q3 revenue increased 3.1%, but nine-month revenue declined 11.3%, reflecting lower trading income during the first half of 2022.
- Q3 trading income was broadly stable at $397.4 million, while nine-month trading income fell 17.4% to $1.316 billion.
- Interest and dividends income increased substantially to $43.6 million in Q3 and $95.4 million for the nine months, benefiting from higher interest rates, cash collateral balances and dividends on trading assets.
- Commissions, net and technology services decreased 11.0% in Q3 and 12.5% for the nine months, primarily affecting Execution Services.
- Adjusted Net Trading Income decreased 6.6% in Q3 and 16.2% for the nine months. Market Making declined 4.2% in Q3 and 17.2% for the nine months; Execution Services declined 12.2% and 13.2%, respectively.
- Operating expenses increased 15.1% in Q3 and 1.0% for the nine months. Key Q3 increases included employee compensation of 22.1% and interest and dividends expense of 133.2%.
- Employee compensation increased 11.8% for the nine months, while interest and dividends expense increased 102.7%, primarily due to higher rates, securities-lending activity and dividends on short positions.
- Debt refinancing in January 2022 replaced the prior term loan with a $1.8 billion facility, increased the maturity to 2029 and generated $28.5 million of debt-issue-cost expense during the nine months.
- The company repurchased approximately 3.44 million shares or Virtu Financial Units during Q3 for approximately $80.6 million. Cumulative repurchases through September 30, 2022 were approximately 30.3 million units for $854.4 million, leaving approximately $365.6 million of authorization.
Guidance, outlook, commentary and risks
The filing does not provide formal quantitative earnings or revenue guidance. Management emphasized that results depend substantially on trading volumes, realized volatility, bid-ask spreads, interest rates, market structure and client activity. Management expects liquidity needs to rise with margin requirements as trading activity and market expansion increase.
- Principal operating risks include market-volume and volatility changes, counterparty and clearing-house performance, liquidity and margin requirements, trading-system failures, cyber threats, operational disruptions and dependence on exchanges and third-party infrastructure.
- Regulatory scrutiny remains significant, particularly regarding payment for order flow, wholesale market making, off-exchange trading, market fragmentation, short selling, market data and retail-market structure. Regulatory or legislative changes could adversely affect the business.
- The company is subject to regulatory reviews and investigations, including by the SEC, FINRA and other regulators, as well as litigation. Management believes currently disclosed matters will not have a material adverse effect overall, but acknowledges that a material judgment, fine or sanction could affect a particular period or financial condition.
- Outstanding legal matters include the United States Oil Fund securities litigation and a Delaware books-and-records action concerning the company’s Up-C structure and distributions. The Robinhood-related action against Virtu was reported as no longer pending against the company after consolidation.
- The company’s $237.9 million tax-receivable-agreement liability is expected to require payments ranging from approximately $0.4 million to $22.0 million annually over the next 15 years, subject to realization of tax savings. Payments could accelerate following certain change-of-control transactions.
- The company reported no material changes to the risk factors in its 2021 Form 10-K, no defaults upon senior securities and effective disclosure controls as of September 30, 2022.
Most important facts for investors to verify
- Whether trading volumes, volatility, interest rates and spreads support a recovery in Adjusted Net Trading Income after the nine-month decline.
- The effect of higher funding costs and interest/dividend expense on margins, earnings and cash generation.
- Debt-service requirements, floating-rate exposure, hedge effectiveness and compliance with Credit Agreement covenants.
- The sustainability of dividends and share repurchases relative to operating cash flow, regulatory capital and liquidity needs.
- Potential financial or business effects from regulatory investigations, market-structure reforms, litigation and the tax-receivable agreements.
- The valuation sensitivity of the $71.6 million Level 3 Japannext investment and other strategic investments.