Business Context and Reporting Period
Virtu Financial, Inc. filed an unaudited Form 10-Q for the three months ended March 31, 2023, with comparative results for the three months ended March 31, 2022. Virtu operates through Market Making, Execution Services, and Corporate segments, providing liquidity, trading, execution, analytics, and workflow technology across global markets. Virtu owned approximately 59.5% of Virtu Financial LLC at March 31, 2023.
Financial Results and Key Metrics
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Total revenue | $620.4 million | $701.3 million | (11.5%) |
| Adjusted Net Trading Income | $373.1 million | $505.1 million | (26.1%) |
| Operating expenses | $485.6 million | $459.6 million | 5.7% |
| Income before taxes and noncontrolling interest | $134.8 million | $241.7 million | (44.2%) |
| Net income | $110.1 million | $199.9 million | (44.9%) |
| Net income available to common stockholders | $57.9 million | $112.3 million | (48.4%) |
| Diluted EPS | $0.56 | $0.98 | Decrease |
| Adjusted EBITDA | $207.5 million | $343.8 million | (39.7%) |
GAAP net income margin was 17.7% of revenue versus 28.5% in the prior-year quarter. On the company’s non-GAAP basis, Adjusted EBITDA margin was 55.6% of Adjusted Net Trading Income versus 68.1%.
- Trading income declined 21.0% to $412.5 million, reflecting lower market volumes, lower volatility, reduced spread opportunity, and lower-quality customer order flow.
- Interest and dividends income increased 291.4% to $82.2 million, benefiting from higher interest rates, higher interest on collateral and bank balances, and dividends on market-making positions.
- Commissions, net and technology services declined 21.5% to $121.4 million, primarily due to lower market volumes, reduced institutional commissions, and lower institutional engagement.
- Interest and dividends expense increased 129.4% to $97.6 million, driven by higher dividend expense on short positions, higher interest on securities-lending collateral, and higher financing costs.
- Market Making revenue declined 8.7% to $498.9 million and segment pre-tax income declined to $124.1 million from $224.2 million. Execution Services revenue declined 21.9% to $118.5 million and segment pre-tax income declined to $9.0 million from $15.1 million.
Cash Flow, Liquidity, Debt, and Capital
- Cash and cash equivalents were $769.0 million at March 31, 2023, compared with $981.6 million at December 31, 2022. Cash, cash equivalents, and restricted or segregated cash totaled $809.2 million.
- Net cash used in operating activities was $148.4 million, compared with $255.2 million used in Q1 2022. Trading-related asset and liability movements materially affected operating cash flow.
- Net cash used in investing activities was $35.8 million, primarily for capitalized software, property and equipment, and strategic investments.
- Net cash used in financing activities was $46.5 million, including $52.0 million of dividends and distributions and $93.2 million of treasury-stock purchases.
- Long-term borrowings had principal outstanding of approximately $1.808 billion, including a $1.782 billion first-lien term loan maturing in January 2029 and $26.3 million of SBI bonds maturing in January 2026. The company repaid $18.0 million of term-loan principal in January 2023.
- Short-term broker-dealer borrowings were $125.0 million, net $121.2 million after debt issuance costs. Prime-broker credit facilities had approximately $285.1 million outstanding and were collateralized by trading accounts.
- The company had $1.060 billion of broker-dealer financing capacity, including $650.0 million committed capacity, and no borrowings under its $250.0 million first-lien revolving facility. Management stated that operating cash flow, cash on hand, and available borrowing capacity should meet liquidity needs for the next twelve months.
- Virtu Americas LLC had regulatory capital of $567.4 million versus a $1.7 million requirement, or $565.7 million of excess regulatory capital.
- The share-repurchase program had approximately $244.8 million of remaining capacity at March 31, 2023. The company had repurchased approximately 36.3 million shares and Virtu Financial Units for approximately $975.2 million since inception.
Material Changes, Outlook, Risks, and Unusual Items
- Management attributed the year-over-year decline primarily to lower global market volumes and volatility and weaker customer market-making opportunities. No specific earnings or revenue guidance was provided in the filing.
- Operating expenses increased despite lower revenue, mainly because interest and dividends expense rose by $55.1 million. The prior-year period included $25.7 million of debt-refinancing and prepayment-related costs, compared with $2.2 million in Q1 2023.
- The company declared a $0.24 per-share dividend on April 20, 2023, payable June 15, 2023, to holders of record as of June 1, 2023.
- Virtu is responding to an SEC investigation concerning information-access barriers and related policies and statements from approximately January 2018 through April 2019. Management indicated that, absent settlement, the company may receive a Wells Notice. The ultimate exposure cannot currently be determined.
- Other legal matters include securities litigation relating to the United States Oil Fund, a Delaware books-and-records action, and claims involving Mallinckrodt and Northwest Biotherapeutics. Management believes these matters are without merit or not expected to have a material adverse effect overall, but a material judgment, fine, or sanction could affect a particular period.
- Key ongoing risks include trading-volume and volatility changes, counterparty and clearing-house exposure, technology and cybersecurity failures, liquidity and regulatory-capital requirements, competition, foreign-exchange movements, changing U.S. equity-market-structure rules, payment-for-order-flow scrutiny, and regulatory treatment of digital assets.
- The tax receivable agreement liability was approximately $238.8 million. Expected payments were estimated to range from approximately $36,000 to $22.0 million annually over the next 15 years, subject to realized tax savings and other conditions.
Investor Verification Checklist
- Verify the sustainability of market-making revenue and Adjusted Net Trading Income under different volume, volatility, spread, and order-flow conditions.
- Reconcile non-GAAP Adjusted Net Trading Income, Adjusted EBITDA, and Normalized Adjusted EPS to GAAP results and assess the recurring nature of excluded items.
- Monitor liquidity usage, prime-broker financing, collateral requirements, interest-rate exposure, term-loan amortization, and the January 2025 revolving-commitment termination.
- Track the SEC information-barriers investigation, potential Wells Notice, other proceedings, and any related accruals or settlements.
- Assess the effect of proposed or adopted market-structure rules on payment for order flow, off-exchange trading, execution services, and market-making economics.
- Review future share repurchases and dividends against operating cash flow, debt obligations, tax receivable agreement payments, and regulatory-capital constraints.