Virtu Financial, Inc. (NASDAQ:VIRT) Q1 2024 Earnings Call Transcript

Virtu Financial, Inc. (NASDAQ:VIRT) Q1 2024 Earnings Call Transcript April 24, 2024

Virtu Financial, Inc. beats earnings expectations. Reported EPS is $0.76, expectations were $0.59. VIRT isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Ladies and gentlemen thank you for standing by. Welcome to Virtu Earnings Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. I would like now to turn the conference over to Andrew Smith, Head of Investor Relations. Please go ahead.

Andrew Smith: Thank you, Michel and good morning everyone. Thank you for joining us. Our first quarter results were released this morning and are available on our website. With us today on this morning’s call we have Mr. Douglas Cifu, our Chief Executive Officer; Mr. Joseph Molluso, our Co-President and Co-Chief Operating Officer; and Mr. Sean Galvin, our Chief Financial Officer. We will begin with prepared remarks and then take your questions. First a few reminders. Today’s call may include forward-looking statements which represent Virtu’s current belief regarding future events and are therefore subject to risks, assumptions, and uncertainties, which may be outside the company’s control. Please note that our actual results and financial conditions may differ materially from what is indicated in these forward-looking statements.

It is important to note that any forward-looking statements made on this call are based on information presently available to the company and we do not undertake to update or revise any forward-looking statements as new information be comfortable. We refer you to disclaimers in our press release and encourage you to review the description of risk factors contained in our annual reports Form 10-K and other public filings. During today’s call, in addition to GAAP measures, we may refer to certain non-GAAP measures, including adjusted net trading income, adjusted net income, adjusted EBITDA, and adjusted EBITDA margin. These non-GAAP measures should be considered as supplemental to and not as superior to financial measures as reported in accordance with GAAP.

We direct listeners to consult the Investor portion of our website where you’ll find additional supplemental information referred to on this call as well as a reconciliation of non-GAAP measures to the equivalent GAAP term in the earnings material with an explanation of why we deem this information to be meaningful as well as how management uses these measures. And with that, I’d like to turn the call over to Doug.

Douglas Cifu: Good morning and thank you Andrew. This morning we reported our first quarter results. For the quarter ended March 31st, Virtu earned $0.76 of adjusted EPS on $6 million per day of adjusted net trading income. We generated a 55% EBITDA margin and $203 million of EBITDA, both on an adjusted basis. We outperformed headline volume and volatility statistics in the quarter as a result of our organic growth initiatives as well as the solid performance in both our customer and non-customer market making businesses. In particular, we had record performance in both our crypto and ETF Block market making operations, which I will discuss further in a moment. Overall, the environment was mixed compared to the prior quarter.

Realized volatility was down about 10%, but volumes were elevated across global equities and commodities, while options volumes were flat and retail volumes were up modestly. Our core business generally performed well against this backdrop. Our customer market making operations saw a modest uptick in retail volume and an increase in the attractiveness of the flow we received, offset by reduced volatility. Our market share of Rule 605 volumes remained within historical ranges and we saw increases in executed shares and quoted spread values compared to the fourth quarter of 2023. Growth initiatives generated $1 million per day in adjusted net trading income, contributing 17% of our ANTI. I will highlight our performance in digital assets as well as ETF Block, which were the standout performer this quarter.

In crypto, as I just mentioned, we had a record quarter. The principal catalyst was the launch of 11 Spot Bitcoin ETFs in the United States, which were approved by the SEC on January 10th. If you recall, for several years, we have discussed how our disciplined approach to counterparty risk management and commitment to capital efficiency has intentionally limited our presence in crypto. In fact it was only a year ago when we announced that we had resumed limited market-making in crypto which we had pause around the collapse of FTX. Since then and until January, our crypto initiatives were focused on market making and top cryptocurrencies on a limited basis. The introduction of spot crypto ETF has transformed Virtu’s role in the crypto ecosystem.

The introduction of the ETF has played to Virtu’s strength and enabled us to leverage our scale capabilities to service clients and the markets. In advance of the ETF launch, Virtu was approved as an ETF authorized participant and we were there on day one of trading making market and facilitating flows. After normalizing for the appreciation of Bitcoin this year, the flows into these securities have been meaningful over $14 billion of net new inflows into spot Bitcoin ETFs and the gross flows have been over $56 billion. Our ability to create tight prices in like instruments in this case the ETFs our — spot Bitcoin. Bitcoin is very similar to how we make markets in a plethora of equity and multi-asset class ETF products across the globe. We are very encouraged by the persistent opportunities in these products which has continued into the second quarter.

Further, we remain confident that the inherent underlying volatility of crypto as an asset class will drive sustained elevated opportunities in crypto ETFs and contributes to heightened levels of broader investor engagement and awareness across equities and options. The market is anticipating the launch of new crypto products across ETFs options and futures both in the US and abroad which will further expand the addressable market for Virtu. We look forward to more products coming online and for the market’s continued evolution bringing greater transparency in the efficiency that comes with centralized clearing and settlement. Turning now to ETF block. Our global ETF block initiatives also contributed meaningfully to our results and had one of its best quarters since 2020.

While global ETF volumes were up across the board our robust performance was further enabled by our efforts to broaden our distribution and our increased competitive capabilities in both equity ETFs and fixed income ETFs combined with the depth and breadth of our global client franchises. Finally, our options market making expansion continues at pace. Despite total OCC volumes up only 2% compared to the prior quarter and muted volatility our performance was solid improving quarter-over-quarter. Over the last year our market share in index options has more than doubled and our share of ETF options remain strong despite fluctuations in market volumes. We expect our options business to continue to grow as we incrementally expand our symbol universe and look forward to another record year building on what we have achieved since beginning this business from scratch in 2019.

To summarize our market-making performance, we believe that our established businesses executed well against our internal benchmarks yet we remain focused on our efforts to improve our yield on every opportunity and to address more of the significant opportunities available in both new and existing markets including the ones I just mentioned. We are very excited about the continued real progress in these areas which we had no presence in only a few years ago. Execution Services was up 3% over the fourth quarter delivering $93 million of anti or $1.53 million per day. While institutional activity remains muted there were pockets of increased activity as clients adjusted their portfolios in light of evolving global monetary policy expectations.

Our ongoing efforts globally and across the BES products have continued to bear fruit. We saw outsized trading volumes in Japan and in Asia overall this quarter as we invested resources in those regions and we reached a high watermark in EMEA equity market share an uptick in adoption of our EMS Triton has led to further cross-selling opportunity in our brokerage and analytics businesses as well. We are nearing the end of a multi-year technological transformation to create a platform focused on providing clients seamless automation of their multi-asset workflows through the life cycle of a trade in all regions globally making us a one-stop shop for all clients market activity. We believe these investments focused on technology and infrastructure are producing a uniquely valuable platform, which reduces many of the frictions traders encountered on a daily basis.

Our client in search of efficiencies have asked for multi-asset class full life cycle capabilities. And because of our extensive technology replatform, we will be able to deliver new products quickly. In addition, we continue to enhance our existing flagship equity products. Our new algo of algos provides smart automation where based on current market conditions for a given stock we help the client choose the best algorithm to execute its objective. Our new alert block crossing client interface streamlines client’s ability to cross blocks of stock saving time and money. Our data analytics platform API provides clients more choices with pre-trade decision-making and post-trade review of those decisions. In addition to adding multi-asset class capabilities to existing products, we’re expanding our potential client base by offering our products to new client segments through redistribution partnerships or what we call Virtu Technology Services, offering our technology via new additional strategic channels, allows us to accelerate the distribution of our global multi-asset class offerings in a scalable manner to help us realize these important opportunities in BES, we have made a number of senior hires who are attracted to Virtu by our broad suite of cutting-edge projects.

We are excited about the future of this business as ever. As always, our offerings are based on client demand and built around long-term partnerships. Overall, our businesses continue to grow and demonstrated an impressive yield this quarter in a market environment that was mixed in terms of the opportunity, of course the opportunity set afforded by the market. Finally, you will note in our press release that effective August 1, Cindy Lee, a long time Virtuian will become the Chief Financial Officer of Virtu, succeeding my friend Sean Galvin in that position. Cindy joined Virtu in 2011 and she will be an extraordinary CFO given her knowledge of Virtu and has been instrumental in our success over the years. I am very happy and pleased to report that Sean is remaining with Virtu in a senior capacity.

Sean’s contributions to Virtu and Knight KCG over his 22 years here have been very meaningful and we expect to continue to benefit from Sean’s professionalism and experience. Thank you, Sean and Cindy. Now, I’ll turn the call over to Joe Molluso.

Joseph Molluso: Good morning. I’ll speak a bit about our growth levers from our new initiatives, as well as our buyback program. At March 31, total trading capital on slide 9 in the supplement was $1.7 billion. Our scaled business is not limited by our capital base as evidenced by the impressive results generated in the first quarter without the need for material incremental trading capital. Our capital base remains more than adequate to support our ongoing and growing businesses. In Q1, we used a portion of our free cash flow to repurchase 2 million shares at an average price of $18.31 per share. To date, we have repurchased 45.9 million shares at an average price of $25.10 per share. Quarter end share count was 163 million shares outstanding, bringing our buybacks on target to fit the range as we have set forth publicly.

Since we initiated our share repurchase program, we have repurchased over 17% of the fully diluted shares of Virtu, net after new issuances. Consistent with our continued commitment to returning capital to shareholders, our Board of Directors has authorized an additional $500 million in share repurchases. We often asked about future nonorganic growth opportunities including acquisitions. The answer to this is that we evaluate any opportunity presented versus the relative attractiveness of buying back our shares and investing in our businesses, including our growth initiatives. So, it is a high bar in our opinion. You can see the demonstrated earnings leverage in our business from both capital management and our growth initiatives. While we understand our business is volatile, we believe slides 6 and 7 illustrate our long-term earnings power, as a result of both organic growth initiatives and the cumulative impact of share repurchases.

On the expense side, adjusted cash operating expenses were $164 million in the first quarter. Our quarterly cash OpEx for the last five quarters has remained essentially flat, despite the external environment of the past few years, which has placed significant pressure on costs. Our cash compensation ratio was 23% and our total compensation ratio was 27% for the quarter, compared to 26% and 32% respectively for the full year 2023. We expect cash operating expenses to remain within the recent historical range and will provide more clarity on compensation ratios as the year unfolds, although we also expect the ratio to remain within historical norms. If you look at the 5-year period from 2019, ending in 2023 our total cash operating expenses grew only 3.4% on a compound annual basis, which we consider a strong performance.

Going forward, we will assume this type of low single-digit overall increases in non-compensation expenses. Now, I’ll turn it over to our CFO Sean.

Sean Galvin: Thank you, Joe. Good morning, everyone. On Slide 3 of our supplemental materials, we provided a summary of our quarterly performance. For the first quarter of 2024, our adjusted net trading income or anti, which represents our trading gains net of direct trading expenses totaled $367 million or $6 million per day. Market Making adjusted net trading income was $274 million or $4.5 million per day. Execution Services adjusted net trading income was $93 million or $1.5 million per day. Our first quarter 2024 normalized adjusted EPS was $0.76. Adjusted EBITDA was $203 million for the first quarter of 2024 and our adjusted EBITDA margin was 55%. On Slide 11, we provide a summary of our operating expense results. For the first quarter of 2024, we recorded $180 million of adjusted operating expenses.

We continue to maintain an efficient cost structure and disciplined expense management just helped us to control our operating expenses during the inflationary environment. Financing interest expense was $23 million for the first quarter of 2024. With the benefit of the interest rate swap contracts that we introduced it in prior years, our blended interest rate was around 7.6% for our long-term debt in aggregate. We remain committed to our $0.24 per share quarterly dividend and combined with our share repurchase program, this demonstrates our commitment to return capital to our shareholders. Now, I would like to return the call over to our operator for the Q&A.

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Q&A Session

Operator: Thank you. [Operator Instructions] The first question comes from Patrick Moley with Piper Sandler. Your line is open.

Patrick Moley: Yes. Good morning. Thanks for taking question. So I was hoping we could just dig a little deeper into the impact crypto Market Making had in the quarter. Doug, is there any chance you could quantify like what the overall contribution was to anti judging by the organic growth initiatives? And it seems like maybe it was a couple of hundred thousand dollars a day. So any color you can give us there would be great. And then second, could you speak to just kind of the distribution of revenues you’re seeing in that business? Is it fairly steady day-to-day? Or are there any outlier days where you’re seeing the bulk of the revenues? Thanks.

Douglas Cifu: Yeah. Thank you. Good question. Yeah, I think you are in the ZIP code, it has been a couple of hundred thousand dollar a day contribution. In fact, I can say that like the block ETF contribution in the quarter was greater than the crypto contribution in the quarter which is kind of interesting right kind of framing it. So it wasn’t like we had like a day or two of extraordinary results. I mean, certainly on January 11 or 12, when the ETFs were launched, there was a huge reshuffling between the closed-end fund into the ETFs. And so you had an uptick in performance those couple of days, but that was maybe like 10% of the overall crypto P&L for the quarter if that. So it wasn’t like we made millions and millions of dollars on a day or two.

So it has been a nice steady contributor. The way I would look at it is if you look at the VPMM business our non-customer market making business. It’s now like a new asset class within VPMM. It really has established itself as a consistent asset class in the same way that we look at like FX and we look at commodities. We now in all of our internal reports and we’ve had this for a while, but that was meaningful. We have a separate line for digital assets or crypto. And we think that like the success that the marketplace has seen with massive inflows and massive ETFs created will just encourage any additional instruments to be free. You’ve already seen that the United Kingdom and Hong Kong have announced that they have approved versions of Spot Bitcoin point ETFs. You’re going to see leveraged products.

When the CFTC and the SEC can get their act together you’re going to see options on those ETF products and when the SEC, hopefully can get it’s act together in the next month on the same products, you’ll see a suite of those launch. It’s not at all dissimilar from what you see in the world of FX where you have major payers and then you see options on FX ETFs you see smaller payers and whatnot. So we’re very excited that this is a new asset class within our non-customer market making business. The other thing I’d point out is that it’s a perfect Virtu-style business because it incorporates Bitcoin and these other digital assets in the form of Spot and ETFs and futures it’s cross-border. So it’s kind of Virtu 101 in terms of market making and our operational discipline and then we’re very good at partnering with the issuers and becoming an authorized participant.

All the things that we have talked about for the last 16 years around the Virtu non-customer market making business. This asset class fits quite well into. I’m happy that we got engaged in this asset class three or four years ago. Obviously, it took longer than we had thought in terms of regulation and approval of this Spot Bitcoin ETF that’s water under the bridge. But we’re very excited that this asset class will continue to grow and we will continue to be in the middle of helping grow it. And I think the important thing is that it’s not a niche product. $14 billion of inflows didn’t just come from retail investors that are interested in trading in and out of Bitcoin. There has to have been real I don’t want to say institutional but high net worth RIA other money.

And I think a number of RIAs are now looking at the asset class and saying okay should there be a slimmer allocated to that? And I think the answer in some — for some advisers is certainly yes. And so that’s — you’ve seen the result of that in terms of the inflows into the product. And again, this is kind of Virtu 101. We want to be in the middle of that ecosystem providing really, really tight prices and efficiency to make — to the market, excuse me, because efficiency then just begets more liquidity, which begets more interest and begets more growth of the asset class and we want to be part of that.

Patrick Moley : Okay. Great. And then just as a follow-up as we think about that few hundred thousand of ANTI a day can you help us understand like what amount of that is coming from trading in the ETFs versus the money that you’re making trading the Spot Bitcoin and kind of like selling that back to the ETF issuers?

Douglas Cifu: Yes. I mean it’s all — we look at it as all one big integrated pot. I mean, obviously the strategies that we run market making in the ETFs work in concert with what we do in the futures in the Spot market. And it’s like what we do in gold. We look at GLD we look at Spot gold. We look at gold futures on — and all of those strategies are sort of integrated Patrick. So I’m not trying to be a punk and not answer your question, but it certainly — it’s a universe if you will of products that all integrate and work together. And frankly, we don’t break it down in that regard. And so as I said in the answer to your first part of your question as that universe continues to grow and expand we’re very confident that we’ll be at the middle of it.

And the market maker will continue to provide competitive prices whether it’s in an ETF a Spot or a future. And frankly whether it’s cross-border I mean you can throw currency on top of that right? There’s going to be products that will be you’ll have a yen-denominated Bitcoin ETF at some point that people will be interested into and that’s right in our wheelhouse.