Virtu Financial, Inc. (NASDAQ:VIRT) Q2 2023 Earnings Call Transcript

Virtu Financial, Inc. (NASDAQ:VIRT) Q2 2023 Earnings Call Transcript July 26, 2023

Virtu Financial, Inc. beats earnings expectations. Reported EPS is $0.73, expectations were $0.4.

Operator: Hello and welcome to the Virtu Financial 2023 Quarterly Results Conference Call. My name is Harry and I’ll be your operator today. [Operator Instructions] It’s now my pleasure to hand you over to Andrew Smith, Head of Investor Relations, for Virtu Financial to begin. Andrew, please go ahead when you’re ready.

Andrew Smith: Thank you, Harry and good morning, everyone. Thank you for joining us. Our second 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; Ms. Cindy Lee, our Deputy Chief Financial 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/or, therefore, subject to risks, assumptions, and uncertainties, which may be outside of the company’s control.

Please note that our actual results and financial conditions may differ materially from what is included 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 becomes available. We refer you to disclaimers in our press release and encourage you to review the description of risk factors contained in our annual report, 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 materials with an explanation of why we deem this information to be meaningful as well as how management uses these measures. And with all that, I’d like to turn the call over to Doug.

Douglas Cifu: Thank you, Andrew and good morning everyone. Thank you for joining us this morning. In my remarks today, I will focus on Virtu’s second quarter 2023 financial and business performance and strategic initiatives. Following my remarks, Joe and Cindy will provide additional details on our performance. Looking at our year-to-date and second quarter results, which are summarized on slide two of the supplemental material, we generated $4.5 million of adjusted trading net income per day in the quarter and normalized adjusted EPS of $0.37. Slide three highlights that our Market Making segment earned an average of $3.1 million per day of adjusted net trading income, outperforming the public market metrics for the quarter, and our Execution Services businesses delivered $1.4 million per day.

In the second quarter, our customer Market Making saw decreased opportunity as the overall bid offer spread and retail participation levels declined relative to the prior quarter. Although these factors led to decreased opportunity for our customer Market Making business, we performed in line with our own internal performance projections. As we’ve said previously, Market Making share alone is limited as a gauge of performance, but it’s worth noting that our market share in the wholesale Market Making business remains within historic ranges. Our non-customer Market Making business, which provides liquidity across asset classes globally, performed well in the quarter, although it’s opportunity was also impacted by the muted volumes and volatility environment.

Photo by Kelly Sikkema on Unsplash

Our organic growth initiatives, including our expansion into options Market Making continue too performed well and make meaningful progress. We remain excited and optimistic about our growing abilities to address the global opportunities that await, especially in option ETF block and fixed income. On the Execution Services side, our adjusted net trading income averaged $1.4 million per day in second quarter. Much like the last two quarters, institutional activity remained muted as our clients continue to look for more clarity from the macroeconomic environment. Most pronounced pan-European volumes were 16% lighter in the second quarter with institutionally sized large and scale volumes down over 20%. Despite these challenging markets, VES performed in line with this opportunity quarter-over-quarter as well as year-to-year.

Our multiyear focus on efficiency and new business development has yielded a scale multi-asset class global business that is laser focused on our clients. As I’ve mentioned in the past, we are particularly excited about the expansion to new asset classes. We’re seeing increased uptake of our automation analytics, especially in fixed income markets which continues to drive new opportunities for growth and enhances our current business. While the overall environment in the second quarter was softer, especially characterized by a very slow start in April, we were encouraged by improving performance in the latter part of the quarter. In these very early days of the third quarter, we are seeing some modest enhanced opportunity, in particular, in our customer Market Making business.

While we are generally pleased with how we performed against the addressable opportunities in the second quarter and how we continue to deploy these new businesses, we continue to focus on ways to improve in any environment and seek out new opportunities. It is important to note that we continue to invest in recruiting talent in any market environment. While Virtu’s headcount has remained relatively stable after years of up and downs due to integration, the steady headcount total masked the significant investments that we have made in people and talent in strategic areas of focus. Since January 2021, we have hired almost 300 full-time employees including quants and developers in options, ETF blocks, fixed income, or asset money market business and other growth areas.

We have also invested in hiring the right team of client-facing folks to continue to grow our VES business. Most recently, we hired Keith Casuccio, a respected industry veteran, to lead client engagement and product efforts within VES. As always, we remain relentlessly focused on cost and realized a 44% adjusted EBITDA margin during the period. Coming off a record 2023, our option performance — our options business has performed well against declining opportunities set in the quarter. We continue to expand across venues and geographies. However, in the US, market-wide customer index options volumes were down 11% in Q2, impacting results in the quarter. We continue to build out our block ETF debt by improving our competitive edge and expanding our offering to cover more products and more regions, including fixed income, both in credit and rates.

The operating scale we enjoy from our standardized global technology platform allows multi-tool players to immediately contribute to the growing business in any region or asset class as we reallocate personnel to focus on the biggest opportunities. However, this quarter was slower in ETF block as you may have seen from other announcements from our competitors recently. I will now turn it over to Joe who will provide additional details about the quarter. Joseph?

Joseph Molluso: Okay. Quickly turning to expenses and capital. We focus on cash OpEx. We ended the first half of the year with cash operating expenses that were $322 million, about 3% ahead of where we ended the full year 2022 annualized. We continue to manage expenses aggressively, especially in the soft environment in inflationary times. Our cash comp ratio is at 25% for the first half of the year, which is at the upper end of historical range. So, consistent with Virtu’s history, we will manage the discretionary compensation and headcount to drive profitability for our shareholders while retaining and recruiting world-class talent as Doug mentioned. So, other expenses were up slightly in line with our expectations. Communications and data processing expenses were essentially flat versus the prior year and up 2% year-over-year owing to some investment in building out new businesses in the global inflationary environment and other expenses on an annualized basis are up a bit due to some favorable FX adjustments in the prior year and some increased professional fees.

In terms of guidance for 2023, we would expect our cash operating expenses to come in on an annualized basis equal to the first half of 2023. On capital and debt, you can see our trading capital remained relatively constant throughout the year on slide six of the supplemental material. We’ve maintained our public $0.96 annual dividend, which we have now paid steadily since we’ve been public for eight years. And you can see there that our payout has remained steady despite our variable results over the long-term. This consistency demonstrates our commitment to returning capital to shareholders and our ability to generate robust results over the long term. In addition, we repurchased 2.3 million shares this quarter for approximately $42 million.

Our period-end share count is now 167.9 million shares, and we have repurchased net of compensation-related new issuances, almost 15% of our company in the two-plus years since beginning of our share repurchase program. Since the inception of our share repurchase program, we have repurchased a total of 38.5 million shares for a little over $1 billion. Again, please refer to the outcomes at various performance levels on slide eight, to see that our year-to-date share repurchases of $118 million are ahead of the guidance on an annualized basis. And with that, I will turn it over to Cindy Lee to review the financial details before we turn over the call to questions.

Cindy Lee: Thank you, Joe. Good morning everyone. On slide three of our supplemental materials, we provided a summary of our quarterly performance. For the second quarter of 2023, our adjusted net trading income or NT, which represents our trading gains, net of direct trading expenses, totaled $279 million or $4.5 million per day. Market Making adjusted net trading income was $193 million or $3.1 million per day. Execution Services adjusted net trading income was $85 million or $1.4 million per day. Our second quarter 2023 normalized adjusted EPS was $0.37. Adjusted EBITDA was $122 million for the second quarter of 2023, and the adjusted EBITDA margin was 44%. On slide nine, we provided a summary of our operating expense results.

For the second quarter of 2023, we recorded $173 million adjusted operating expenses. We continue to maintain an efficient cost structure and disciplined expense management, which has helped us to control our operating expenses during the inflationary environment. Financing interest expense was $25 million for the second quarter, with the benefit of the interest rate swap contracts that we entered in the prior years. Our blended interest rate was around 5% for long-term debt in aggregate. Our capitalization remains as is. We remain committed to our $0.24 per quarter dividend. The combination of the dividend payout and the share repurchase program demonstrate our continued commitment to return capital to our shareholders. Now, I would like to turn the call over to the operator for the Q&A.

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Q&A Session

Operator: Thank you. [Operator Instructions] And for our first question, we will go to the line of Daniel Fannon of Jefferies. Daniel your line is now open.

Daniel Fannon: Thanks. Good morning. Doug, I appreciate the commentary on the environment. I was hoping you could expand a bit. It seems like April was kind of below and then you saw improvement throughout and it appears to be continuing a bit in July. Maybe just bifurcate or expand a bit upon kind of what the asset classes or areas, geographies that maybe really have seen both kind of the more improvement and also kind of where the biggest levels of change have been?

Douglas Cifu: Yes. Thank you, Dan. You’re under a lot of pressure because you’ve now replaced with Repetto as the lead-off questionnaire. So, we all miss Rich and thank him for all of his efforts over the years. But anyhow, I am getting back to your question. Yes, April, just anecdotally in talking to competitors, particularly on the institutional side, was one of the slowest months that people have seen in over a decade. I think a lot of that had to do with macro issues, had to do with some of the regional bank catastrophes for lack of a better word that were happening here in the United States. So, it was just very, very slow. And the big banks saw that in April as well. And certainly, we saw it on the market making side. The performance then progressed throughout the quarter and picked up through and including June obviously, and allowed us to report the quarter that we’re reporting.

And as I noted in my comments, we have seen an improvement. It’s only 15, 16 or whatever 17, 18 trading days in July, and that trend has continued. I would say most particularly in US equities, which is our largest asset class, and that obviously drives a lot of our performance certainly on the Market Making side, I did highlight in my remarks that Europe, in particular, was very, very slow in the second quarter. There’s a public company called Flow Traders and they reported and they obviously had a difficult second quarter, so you can kind of see what the metrics are in terms of Europe and whatnot. We’ve seen somewhat of an improvement of that in June and July as well. So, I would say, really, US equities, in particular, was very surprisingly slow in April, and we’ve seen an improvement.

Daniel Fannon: Great, that’s helpful. And you mentioned fixed income, I think in the commentary around some of your data for the quarter. One of your domestic peers had an announcement this quarter about getting more — being more active within corporate fixed income on the market-making side. Can you maybe talk about your presence in that market and how you’re thinking about that opportunity going forward?

Douglas Cifu: Yes. No, look, I mean I think it was great news to be candid. I mean, obviously, they’re a competitor and a great firm, you’re referring to Citadel Securities. I think it validates our thesis that — and it gives that we’ve been active as a market maker and credit. We’re going on like our second kind of full year, if you will, doing all of the Virtu things in terms of onboarding counterparties, developing, trading, expertise in mostly investment-grade debt, becoming a disclosed market maker on MarketAxess and partner with MarketAxess and TradeWeb and Bloomberg and all the other venues that allow us to have distribution. The good news is that we’ve improved our win rates. We’ve improved our credibility, if you will, and we think that we can be a credible source of liquidity as the liquidity provider either directly to buy-side counterparties or through distribution partners like MarketAxess, TradeWeb, et cetera.