Business Context and Reporting Period
Virtu Financial, Inc. filed an unaudited Form 10-Q for the quarter and nine months ended September 30, 2021. Virtu operates two segments: Market Making and Execution Services, supported by proprietary multi-asset trading, execution, analytics and workflow technology across more than 25,000 financial instruments, 235 venues and 36 countries. Virtu owned approximately 62.6% of Virtu Financial LLC at quarter-end; the remaining ownership is reported as noncontrolling interest.
Financial Performance and Key Metrics
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Total revenue | $544.3 million | $656.1 million | $2.106 billion | $2.563 billion |
| Income before tax and noncontrolling interest | $145.1 million | $252.5 million | $769.9 million | $1.123 billion |
| Net income | $123.1 million | $199.7 million | $641.3 million | $923.2 million |
| Net income available to common stockholders | $70.5 million | $116.7 million | $372.8 million | $536.9 million |
| Diluted EPS | $0.59 | $0.92 | $3.01 | $4.29 |
| Adjusted Net Trading Income | $354.4 million | $362.3 million | $1.424 billion | $1.815 billion |
| Adjusted EBITDA | $210.7 million | $248.7 million | $972.8 million | $1.304 billion |
- GAAP net income margin was approximately 22.6% in Q3 2021 and 30.4% for the nine-month period, compared with 30.4% and 36.0%, respectively, in the comparable 2020 periods.
- Adjusted EBITDA margin was 59.5% in Q3 2021 and 68.3% for the nine months, compared with 68.7% and 71.8%, respectively, in 2020.
- Market Making revenue was $409.3 million in Q3 and $1.636 billion for the nine months. Execution Services revenue was $132.5 million and $459.9 million, respectively.
- Commissions, net and technology services increased 1.5% in Q3 and 4.1% for the nine months, while trading income, net declined 10.7% and 19.9%, respectively.
- Operating cash flow was $374.5 million for the nine months, down from $483.6 million in 2020. Investing cash flow was negative $65.4 million, and financing cash flow was negative $550.3 million.
Balance Sheet, Debt and Liquidity
- Total assets were $10.429 billion and total equity was $1.801 billion at September 30, 2021.
- Cash and cash equivalents were $683.8 million, with an additional $70.5 million restricted or segregated under regulations. Cash, cash equivalents and restricted cash totaled $754.3 million, down from $1.007 billion at December 31, 2020.
- Long-term borrowings had $1.631 billion of principal outstanding, consisting primarily of a $1.600 billion first-lien term loan maturing in March 2026 and $31.5 million of SBI bonds maturing in January 2023. Reported long-term borrowings, net, were $1.604 billion.
- Short-term borrowings, net, were $312.8 million, including $178.0 million under broker-dealer facilities and $136.7 million in short-term bank loans. Prime brokerage borrowings were approximately $202.5 million and were collateralized by trading accounts.
- The company reported compliance with applicable credit agreement covenants and stated that operating cash flow, cash on hand and available borrowing capacity should cover liquidity needs for more than the next twelve months.
- Virtu Americas LLC had regulatory capital of $484.5 million against a $1.7 million requirement, or $482.8 million of excess regulatory capital, at September 30, 2021.
Material Changes Versus the Prior Comparable Period
- Revenue declined 17.0% in Q3 and 17.8% for the nine months, primarily because 2020 benefited from unusually high market volatility and trading activity associated with the early COVID-19 period.
- Average daily realized S&P 500 volatility declined 34.6% in Q3 and 55.4% for the nine months. Average daily Adjusted Net Trading Income declined 2.2% in Q3 and 21.1% for the nine months.
- Q3 employee compensation increased 136.2% to $84.6 million, mainly due to higher accrued incentive compensation. Nine-month compensation declined 16.5% because of lower incentive accruals and one-time COVID-related bonuses in 2020.
- Other, net fell sharply because the third quarter of 2020 included a $56.2 million after-cost gain from the sale of MATCHNow. The filing states that contingent consideration of up to approximately $23.0 million may be earned through December 31, 2022.
- Cash uses included $430.6 million of dividends and distributions and $320.2 million of treasury-stock purchases during the nine months. Approximately $337.5 million had been spent on repurchases through September 30, leaving approximately $132.5 million of authorized capacity at that date.
- Goodwill remained $1.149 billion, with no goodwill impairment recognized. Intangibles declined to $402.9 million from $454.5 million at year-end 2020, primarily due to amortization.
Guidance, Outlook, Commentary and Risks
The filing does not provide formal revenue, earnings or trading-performance guidance. Management expects liquidity needs to be driven principally by margin requirements associated with current and expanded trading activities and believes available liquidity is adequate for more than twelve months.
- Results remain sensitive to trading volumes, realized volatility, bid-ask spreads, market structure, competition, counterparty and clearing-house performance, and access to trading venues.
- Key operational risks include technology or system failures, cybersecurity threats, dependence on third-party infrastructure, remote-work and business-continuity risks, and the need to maintain regulatory capital.
- Virtu is subject to regulatory reviews and investigations, including matters involving the SEC, FINRA, state, federal and foreign regulators. The filing discusses class actions relating to United States Oil Fund trading and Robinhood-related market-making activities; management believes the claims are without merit, but outcomes cannot be assured.
- Tax receivable agreement liabilities were $254.7 million, with expected payments of approximately $0.9 million to $21.7 million per year over the next 15 years. Certain change-of-control events could accelerate payments.
- The company declared a $0.24 per-share dividend payable December 15, 2021. On November 3, 2021, it also expanded share-repurchase authorization to $1.220 billion through November 3, 2023.
- Management reported effective disclosure controls and no material changes to internal control over financial reporting during the quarter. No material changes were reported to the risk factors in the 2020 Form 10-K.
Important Facts for Investors to Verify
- Whether trading volumes and volatility normalize further and how that affects Market Making revenue, Adjusted Net Trading Income and margins.
- The company’s ability to fund dividends, repurchases, tax receivable agreement payments and margin requirements while carrying approximately $1.6 billion of net long-term debt.
- Future employee incentive compensation, which materially affected Q3 expense and profitability.
- Developments in regulatory investigations, litigation, payment-for-order-flow and broader market-structure regulation.
- Realization of the $85.3 million JNX investment and other Level 3 valuations, which depend on significant unobservable assumptions.
- Expiration and refinancing considerations for the $1.600 billion term loan due in 2026, the SBI bonds due in 2023 and the revolving commitments scheduled to terminate in March 2022.