Virtu Financial, Inc. (NASDAQ:VIRT) Q3 2023 Earnings Call Transcript

Virtu Financial, Inc. (NASDAQ:VIRT) Q3 2023 Earnings Call Transcript November 2, 2023

Virtu Financial, Inc. misses on earnings expectations. Reported EPS is $0.45 EPS, expectations were $0.46.

Operator: Hello and welcome to the Virtu Financial 2023 Third Quarter Results. My name is Kerry, and I’ll be the conference operator for today. [Operator Instructions] I would now like to hand the call over to Andrew Smith from Investor Relations to begin. Please go ahead.

Andrew Smith: Thank you, Kerry and good morning everyone. Thank you for joining us. Our third 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 maybe 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 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 will 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 and with an explanation of why we deem this information to be meaningful as well as how as management uses these measures. And with that, I will turn the call over to Doug.

Douglas Cifu: Good morning and thank you, Andrew. Thank you for joining us this morning. In my remarks today, I will focus on Virtu’s third quarter 2023 financial and business performance and strategic initiatives. Following my remarks, Joe and Sean will provide additional details on our performance. Looking at our year-to-date and third quarter results, which are summarized on Slide 2 of the supplemental material, we generated $4.7 million of adjusted net trading income per day, up 5% per day from the prior quarter and normalized adjusted EPS of $0.45 per share, up 22% from the prior quarter. Slide 3 highlights that our Market Making segment earned an average of $3.3 million per day of adjusted net trading income in the quarter, rising 6% compared to the prior quarter, on our Execution Services business delivered $1.4 million per day, an increase of 4% per day over the prior quarter.

The overall market environment that underlies Virtu’s performance this quarter was not dissimilar to what we have seen at times in the past and most recently in the second quarter. Periods like these are characterized primarily by reduced opportunity. And while we typically see reversion, we remain focused on our growth initiatives as well as enhancing our spread capture rates in any environment, thanks to our global scale and diversity. As we have said previously, market 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 solidly within historic ranges even up slightly recently. Our non-customer Market Making business, which provides liquidity across asset classes globally, performed well in the quarter relative to the opportunity set.

Our organic growth initiatives, including our expansion into Options Market Making continued to perform well and make meaningful progress. Our $488,000 per day from organic growth was 10% of adjusted net trading income in the quarter. Our ETF Block business, including our fixed income business, had an excellent quarter as did our ATM Virtu Capital Markets business. We remain very optimistic about the opportunities across all our growth initiatives. On the Execution Services side, our adjusted net trading income averaged $1.4 million per day in the third quarter, about 4% per day above the prior quarter, impressive results given the general decline in market opportunity. For much of 2023, institutional activity remains slow as institutional investors have become less active in the higher rate environment.

Despite these challenging markets, thanks to our continued investments VES performed in line with its opportunity quarter-over-quarter as well as year-to-date. Taking a step back, I look at our third quarter and year-to-date results and see the success of our long-term disciplined overall strategy. We continued to hire and make investments in our business, remaining disciplined around cost, which enabled us to realize a 47% EBITDA margin and report respectable $0.45 per share in a challenging environment. Our focus on enhancing our core businesses and the continued success of our growth initiatives positions us well for any macro environment, including significant spikes in volatility in volumes and increasing global tensions and economic uncertainty.

Touching briefly on our growth initiatives and Options coming off a record 2022, our Options business has performed well against a declining opportunity set in the quarter. We continue to expand across venues and geographies, including single names in addition to the index complex. Our ETF Block business was up meaningfully in the third quarter. We continue to expand our offering to cover more products in more regions, including fixed income both in credit and rates. We are also seeing an uptick in our crypto Market Making business in the last 30 days as the SEC moves closer to what we think will be the inevitable approval of spot crypto ETFs in the United States. In addition, our Virtu Capital Markets business had an excellent quarter as financing activity began to return to the market and a number of issuers use our service to raise primary capital.

Finally, you will all likely notice the litigation brought by the SEC related to Virtu’s historical internal information barriers. I do not have much to add that is not in the detailed materials and supplemental information that we have already published. Suffice to say, this is a civil litigation and we reject completely the SEC’s allegations. The SEC does not assert that any customer information was ever inappropriately accessed and the period in focus ended 4.5 years ago, predating Virtu’s integration with any of the ITG businesses. We have engaged with many of our clients about the news and we have not observed any impact to client engagement. As a general rule, we try to avoid litigation. And given the facts in this case and the relevant legal precedent, a proportionate commercial settlement could certainly have been achieved under different circumstances.

However, it seems to be the sad and unfortunate trend whether it involves equally serious matters such as crypto ETFs, market structure reform, private equity fee disclosures or the funding of the consolidated audit trail or other issues that the commission seems increasingly litigious and their approach and actions are inviting further litigation. So, Virtu is not alone in this unfortunate trend. I will now turn it over to Joe and Sean who will provide some additional details about the quarter. Joseph?

Joseph Molluso: Thank you, Doug. Turning to expenses and capital. On expenses, we ended the first 9 months of the year, with cash operating expenses of $481 million, 4.6% ahead of last year. We think this is a solid performance in this inflationary environment. Our cash compensation ratio is 26% for the first 9 months of 2023, which is at the upper end of our historical range. Consistent with Virtu’s history, we will manage discretionary compensation and headcount to drive profitability for our shareholders, while retaining and recruiting world class talent. Other non-compensation expenses were up slightly in line with our expectations. Communications and data processing expenses were up 3.9% versus last year owing to investment in building out new businesses and price increases for infrastructure and market data.

Other expenses on an annualized basis are up a bit, primarily due to favorable foreign exchange adjustments in the prior year. Turning to capital management, on Slide 11, you could see that our invested capital has remained within a range of $1.8 billion to $2 billion for this year. We remain very well capitalized from a trading capital and long-term debt standpoint. We also remain well positioned from a liquidity standpoint and we will be able to capitalize on more volatile markets as and when they appear. We maintained our public $0.96 annual dividend, which we have paid steadily now for 8 years and you could see that our payout has remained steady despite our variable results over the long-term. In addition, we repurchased 2.7 million shares for approximately $49 million in the third quarter.

Our period end share count is now 165.2 million shares and including repurchases through October, we have repurchased net of new issuances, 17% of our company in the 3 years since beginning our share repurchase program. This brings our total repurchases to 42.2 million shares for over $1 billion. And with that, I’ll turn it over to Sean to review the financial details before we open the call to your questions.

Sean Galvin: Thank you, Joe, and good morning, everyone. On Slide 3 of our supplemental materials, we’ve provided a summary of our quarterly performance. For the third quarter of 2023, our adjusted net trading income which represents our trading gains, net of direct trading expenses, totaled $298 million or $4.7 million per day. Market Making adjusted net trading income was $208 million or $3.3 million per day, and Execution Services adjusted net trading income was $90 million or $1.4 million per day. Our third quarter 2023 normalized adjusted EPS was $0.45. Adjusted EBITDA was $140 million for the third quarter of 2023 and our adjusted EBITDA margin was 47%. On Slide 9, we provide a summary of our operating expense results.

For the third quarter of 2023, we recorded $174 million of 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 third quarter of 2023. With the benefit of the interest rate swap contracts that we entered into in the prior year, our blended interest rate was around 5% for our long-term debt in aggregate. We remain committed to our $0.24 per quarter dividend and combined with our share repurchase program, this demonstrates 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.

Operator: Thank you. [Operator Instructions] The first question on the line comes from Ken Worthington of JPMorgan. Please go ahead. Your line is open.

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Q&A Session

Ken Worthington: Hi, good morning. Thanks for taking the question. I wanted to dig into product expansion, particularly ETF Block options Market Making in crypto. So I guess, three parts to hopefully one question. So for ETF Block, you mentioned you added a new region and new products. What new regions did you add this year? And maybe how many new products have been added. For Options, where do single names stand right now? And where would you expect this to be a year from now? And then lastly, on crypto, is it possible to size the Bitcoin ETF opportunity. My understanding is, as you add new overlapping opportunities in an asset class, the potential to profit increases exponentially, not linearly. So could you walk us through that as well? Thank you.

Douglas Cifu: Yes. Great. So let me try to handle those in reverse order since I’ll remember them better. But let me talk first about crypto, which we had started talking about maybe 2 years ago. And then unfortunately, you had a lot of disruption in the market to put it mildly with FTX and some of the other bad actors in the marketplace. And so volumes dramatically declined, as you are aware. There is still significant interest in the asset class. You can look at like the closed-end fund rate scale and the amount of volume, if you will, that it does in the amount of bitcoin in its corpus and so if you assume that sometime between today and January 10, which I understand is sort of the drop dead date with respect to SEC approval, given what happened in the District Court, the lost by the SEC, there is going to be, I would think, a significant influx of interest in the ETFs that are kind of queued up.

I think there is 10 to 12 of them. Some of the big names, BlackRock, etcetera, have proposals on the table Schwab. And we are an AP with each of those, 10. And I think there is going to be a significant amount of trading from the closed-end fund that will migrate, if you will, to these other funds. It’s just kind of the natural fluidity people will move to lower fee TFs were moved because it’s part of another portfolio or they get an offset whatever it is, I think they’ll be kind of almost letting the air out of the balloon kind of effect of all of that. But once people can look at a price on a screen and say, okay, I know that, that is one, the price of a Bitcoin or Ethereum or whatever the product is within an ETF, and it’s traded in a product that’s listed on a national security exchange that Century cleared.

And I know there is not going to be a shenanigans because we have a proper regulatory environment, people are going to get a closing price, etcetera, we think then you can see a significant increase in real retail and even institutional volumes, and that’s what we’re setting up for. In addition, as you know, we’ve partnered with Citadel, Schwab and Fidelity and some others to create a platform called EDX, which would be a front through back custody and clearing solution and execution. So there will be spot venues that will emerge in addition to that, ErisX, which is now owned by CBOE, has a great platform. So there will be real volumes and we will see a marketplace that we all kind of know and understand unlike as Guntzer [ph] said, a little bit of the Wild West that we have dealt with historically.

So that’s why I’m very happy we made the investments that we did a couple of years ago, and I think we’re very well positioned to be a significant market maker in this asset class. With regard to ETF Block, again, this is something we’ve been talking about for the last couple of years. In terms of regions, we’ve really focused this year on Europe, in particular. We think there is significant opportunities. Obviously, there is a number of large competitors there, Flow Traders and others. We’ve done all of the hard work in terms of pricing the products, both domestic and international products, which we’ve gotten better at and fixed income products in that region. We have distribution in that region because of the ITG acquisition, right?

So we have connectivity to both the RFQ platforms, but more importantly, end users in that marketplace know who we are because of the ITG Virtu relationships both in the UK and on the continent. So we have distribution there as well. So we’re very excited about that. As we’ve also talked about the synergy between what we are doing in credit and rates like being a market maker for the first time in those products enables us to be, we think, a significant contributor to being a market maker in ETF fixed income products. Obviously, there is a lot of incumbents there, Jane, Flow, etcetera, Citadel that do an excellent job, but we do think there is room for Virtu. And then finally, with respect to options, I think we’ve been somewhat validated, if you will, with regard to our approach to attack the big index family.