Virtu Financial Q2 2023 Earnings Call Transcript

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Provided by Quartr
July 26, 2023

There are 11 speakers on the call.

Operator

Hello, all, and welcome to the Virtu Financial 2023 Quarterly Results Conference Call. My name is Harry, and I'll be your operator today. 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.

Speaker 1

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 With us today on this morning's call, we have Mr. Douglas Cifu, our Chief Executive Officer Mr. Joseph Maluso, Our Co President and Co Chief Operating Officer Ms.

Speaker 1

Cindy Lee, our Deputy Chief Financial Officer and Mr. Sean Galvin, our Chief Financial Officer. We'll 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 beliefs regarding future events We are therefore subject to risks, assumptions and uncertainties, which may be outside the company's control.

Speaker 1

Please note that our actual results and financial conditions may differ materially from what 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 ks and other public filings. During today's call, in addition to GAAP measures, You 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 And with all that, I'd like to turn the call over to Doug.

Speaker 2

Thank you, Andrew, and good morning, everyone. Thank you for joining us this morning. In my remarks today, I will focus on Virtu's 2nd 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 2 of the supplemental material, We generated $4,500,000 of adjusted trading net income per day in the quarter and normalized adjusted EPS of $0.37 Slide 3 highlights that our Market Making segment earned an average of $3,100,000 per day of adjusted net trading income, Outperforming the public market metrics for the quarter and our Execution Services businesses delivered $1,400,000 per day.

Speaker 2

In the Q2, 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 its opportunity was also impacted by the muted volumes and volatility environment. Our organic growth initiatives including our expansion into options market making continue to Especially in options, ETF lock and fixed income.

Speaker 2

On the Execution Services side, our adjusted net trading Average $1,400,000 per day in the 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 15% lighter in the 2nd quarter with institutionally sized large and scale volumes down over 20%. Despite these challenging markets, VES performed in line with its 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.

Speaker 2

As I 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 2nd 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 3rd 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 Q2 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.

Speaker 2

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 integrations, the steady headcount total Matt, 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 Block, fixed income, our at the 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 Casutio, a respected industry veteran to lead client engagement and product efforts within VES.

Speaker 2

As always, we remain relentlessly focused on costs and realized a 44% adjusted EBITDA margin during the period. Coming off a record 2023, our options business has performed well against declining opportunities set in the quarter. We continue to expand across venues and geographies. However, in the U. S, market wide customer index option volumes were down 11% in Q2, Impacting results in the quarter.

Speaker 2

We've continued to build out our block ETFs by improving our competitive edge And expanding our offering to cover more products in 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 the growing business in any region or asset class as we reallocate personnel to focus on the biggest opportunities. However, this quarter was slower And 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?

Speaker 3

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 $322,000,000 about 3% ahead of where we ended the full year 2022 annualized. We continue to manage expenses aggressively, especially in the soft environment and inflationary times.

Speaker 3

Our cash comp ratio It's at 25% for the first half of the year, which is at the upper end of a historical range. So Assisting 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 twenty twenty three.

Speaker 3

On capital and debt, you can see our trading capital remained relatively constant throughout the year on Slide 6 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 8 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 2,300,000 shares this quarter for approximately $42,000,000 Our period end share count is now 167,900,000 shares and we have repurchased net of compensation related new issuances almost 15% of our company in the 2 plus years since beginning our share repurchase program.

Speaker 3

Since the inception of our share repurchase program, We have repurchased a total of 38,500,000 shares for approximately a little over $1,000,000,000 Again, please refer to the outcomes at various performance levels on Slide 8 to see that our year to date share repurchases of $118,000,000 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.

Speaker 4

Thank you, Joe. Good morning, everyone. On Slide 3 of our supplemental materials, we're provided a summary of our quarterly performance. For the Q2 of 2023, our adjusted net trading income, or ANT, which represents our trading gains net of direct trading expenses, Totals $279,000,000 or $4,500,000 per day. Market Making adjusted net trading income was $193,000,000 For $3,100,000 per day.

Speaker 4

Execution Services adjusted net trading income was $85,000,000 Or $1,400,000 per day. Our Q2 2023 normalized adjusted EPS was 0 point 37 dollars Adjusted EBITDA was $122,000,000 for the Q2 of 2023 and the adjusted EBITDA margin was 44%. On Slide 9, we provided a summary of our operating expense results. For the Q2 of 2023, we reported $173,000,000 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.

Speaker 4

Financing interest expense was $25,000,000 for the 2nd quarter with the benefit Of the interest rate swap contracts that we entered in the prior year, our blended interest rate was around 5% for long term debt in aggregate. Our capitalization remains active. 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 and A.

Operator

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

Speaker 5

Thanks. Good morning. Doug, appreciate the commentary on the environment. I was hoping you could And a bit, it seems like April was kind of the low and then you saw improvement throughout and it appears to be continuing a bit in July. You 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?

Speaker 2

Yes. Good morning and thank you, Dan. You're under a lot of pressure because you've now replaced Richard Peto with the lead off questioner. So We all miss Rich and thank him for all of his efforts over the years. But anyhow, getting back to your question, yes, April, just anecdotally and talking to competitors, particularly on 2, well said, was one of the slowest months that people have seen in over a decade.

Speaker 2

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 U.

Speaker 2

S. Equities, which is our largest asset class and that's 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 Q2, we there's a public company called Flowtraders and they reported and they obviously had a difficult 2nd 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 July as well. So I would say really U.

Speaker 2

S. Equities in particular was very surprisingly slow in April and we've seen improvement.

Speaker 5

Great. That's helpful. And you mentioned fixed income, I think in 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.

Speaker 2

Yes. No, look, I mean, I think it was great news to be candid. I mean, obviously, they're a competitor and 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 the virtue things in terms of onboarding counterparties, developing trading expertise And 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 We've improved our win rates, we've improved our credibility, if you will.

Speaker 2

And we think that we can be a credible Source of liquidity as a liquidity provider either directly to buy side counterparties or through distribution partners like MarketAxess, Tradeweb, Etcetera. In addition, we have expanded our capability in rates both on the run and off the run. We have over 50 firms that we are enabled for trading rates, again using primarily Bloomberg and Tradeweb. We're agnostic as to the Distribution Mechanic. Those are both great firms that give us scale and credibility.

Speaker 2

And so it's very early days of seeing maybe less than like 5% of the volume from Yes, 5% to 10% of the clients on these platforms, it's something that I'm personally engaged with because I think it's a marketplace where we can add value. Again, There's a lot of room and I think a lot of opportunity and we've always done well competing in our part of the market and using our style. So These are 2 marketplaces, if you will, both credit and rates where we think that we can add value and That announcement from Citadel just frankly validates the decisions that we made a couple of years ago to We allocate some of our resources, capital and personnel into this area. Thank you. Thank you, Dan.

Operator

Thank you. And And for our next question, we will go to the line of Ken Worthington from JPMorgan. Ken, your line is now open.

Speaker 6

Hi, good morning. Thanks for taking the question. Would love an update in terms of where you are in the single stock option market making rollout roadmap. Is the 6056 type of business still the end goal for you in options? And maybe how far along is Virtu in terms of being able to effectively participate in that single stock options business The way you do for equities for client business?

Speaker 2

Yes, good question. It is definitely the end goal. I would say But not that we've got distracted from it. I think the opportunity frankly in index market making both on the customer and non customer side has Frankly, dwarfed, Ken, that opportunity, I mean, you probably track all the metrics in terms of what the SPY and SPX volumes were relative to Single options and there has been a dramatic shift. I don't know if it was because of 0 date options or whatnot.

Speaker 2

I mean that's You can ask CBOE and some of the other smart people as to why that's happened. But they I mean, I guess our decision To compete first in the index family has been validated because we've seen an enormous shift of interest On the institutional and frankly on the retail side because you can see what's a customer option and what's not a customer option in a lot of these venues To the Index family. So it is certainly in the road map, but it has descended in importance because the addressable market It's so huge in the index family here in the United States. I would also point out that we do have an up and running Index business in Asia, primarily in the Indian and Japanese markets. So I don't want to put a date on it because every time I Suggest we're going to be that we'll be operational by so and so state.

Speaker 2

We keep pushing it out because there's such an opportunity in the index family That we continue to and frankly with MeMex and different options venues continue to come on, there's a lot more opportunity to Improve our index market making capabilities in the United States.

Speaker 6

Okay, great. Thank you. Thanks Ken.

Operator

Our next question today is from the line of Chris Allen of Citi. Chris, your line is now open if you'd like to proceed.

Speaker 7

Yes. Good morning, everyone. I wanted to follow-up on Dan's questions on rates. Historically, you've talked about market structure impediments to getting bigger in the rates business. What's the outlook there?

Speaker 7

There's a lot of talk Moving to centralized clearing, improvement on settlement times. And then in terms of your penetration level right now, let's say 5% of volume, Is this just because you're kind of just getting up to speed right now, just starting to slowly build the business? What's the longer term opportunities that do you see there?

Speaker 2

Yes. I'm going to do something that you will never hear me say on an earnings call and compliment the Chair of the SEC in terms of Centralized clearing of treasury products and real time reporting or relatively real time reporting or trace for treasuries, all of those things Our positives I think for the marketplace and certainly those are initiatives that this SEC has undertaken and we have been publicly And privately very supportive of those because I think it enhances competition. So I think what has changed in the marketplace is A little bit of that, I mean, the natural efficiency of the marketplace, I mean, 10 years ago, even 5 years ago, these were marketplaces that were Largely dominated by the big dealers. I think the buy side has gotten smarter in terms of seeking alternative Liquidity providers, there are dozens of those. And we now have credibility with the distributors of the products, I.

Speaker 2

E, the TradeRevs and the Bloombergs of the world You are great business partners of ours. MarketAxess obviously bought LiquidityEdge and so we work with them as well. So using those Partners to enable our distribution and to give us credibility. I mean, it's always a fight, Chris, to get into the wheel, if you will, on the buy side. So they don't they can't enable 30 liquidity providers.

Speaker 2

It's no different than in equities and what we do in our business in Alert, So it's understanding who the key counterparties are, getting credibility with distribution channels, the trade routes, the Bloomberg, the MarketAxes of the world And then providing good real time pricing, I mean, just yesterday, we were engaged on this with some senior folks at TradeRev to understand Yes, who the main clients are, how we can get better, what they're looking for in terms of market markouts and response times. It's the blocking and tackling of market making, which we're very, very good at, but it's a very competitive marketplace with dozens and dozens Competitors and hundreds and hundreds of counterparties. So sifting through all that to build out the right offering And provide value to the market is what we're doing. So we're in the top 20 on Tradeweb right now, which is great. But obviously, we would like to be in the top 10 and ultimately in the top 5, whether that's realistic or not given the competitive nature of that market.

Speaker 2

But I think our scale It gives us an advantage and again the fact that we're multi asset class. So to the extent these rates products manifest themselves Either as a future or an ETF, obviously those are marketplaces that we have access to as well and we always pride ourselves in being the most efficient Provider of the 2 sided quote. That's a nice way of saying we manage our expenses and so we can tighten up our prices in order to be competitive. So again, This is just kind of Virtu 101 how to build a business. This is clearly different than some of the other Then U.

Speaker 2

S. Equities, but it's in a marketplace that we think is eminently addressable by our product offering.

Speaker 7

Thanks a lot guys.

Speaker 2

Thank you.

Operator

Thank you. And our next question is from the line of Michael Cyprys of Morgan Stanley. Michael, your line is open.

Speaker 8

Great. Thank you. Good morning. I want to circle back to your commentary on the index options volumes where You guys have been quite active. It sounds like you're excited about the opportunity set there.

Speaker 8

But I was hoping you might be able to maybe elaborate on What you're seeing across the marketplace that's driving the strength in index options? And how sustainable do you think this activity is, particularly if we go into different types of Market environment over the next year or 2. And if you could maybe color provide any sort of color on what sort Customers you're trading with on the other side, we hear a lot of it's retail, but maybe how would you characterize that retail activity? And to what extent do you see or think institutions could

Speaker 2

Yes. Very good question, Michael. I mean, I give credit, I guess, to the folks at the options Changes that were deriving these products. But like the daily exploration product, I think our Sense is that it trades more because they're, I'll use the word, better and cheaper hedging instruments than other instruments that have been out there. So this drives Volumes and drive interest from both professional traders and institutional traders.

Speaker 2

So we don't expect That these I mean, obviously, there will be ebbs and flows with macro and market volumes, but we don't expect that this shift We'll change anytime in the near future and hats off to folks at Cboe and other institutions that have done a great job Creating a hedgeable instrument that is that provides efficiency and scale. I mean, that's how markets work and that's what we're all about. And so We're excited about that. So we feel validated and I give a lot of credit to the folks that run our options business because they beat me over the head and said, no, This is where the market is going to be going a couple of years ago and they were right. And so the fact that we are up and running and very, very competitive in those products It has been very, very beneficial to our business.

Speaker 2

In terms of like what customer Flo, this is whether it's mom and pop retail. I would imagine it's not because obviously the suitability concerns, I think it's probably smaller trading firms And folks like that, that are going through options aggregators and that's really where our focus has been in terms of Customer engagement, it's not necessarily with the big retail firms, but more of the options aggregator firms Like a dash and firms like that that have that act as a front end and an aggregator for professional or smaller trading firm Options flow and I think that's where we will we have focused and we'll continue to focus our energies. It's been about 40% of the flow Come from customer accounts in the SPX index complex and that's meaningful. Tag, either as customer or non customer, so you I allocate your interest based on that. So that's significant.

Speaker 2

It's a very attractive addressable market and that's where we focus

Speaker 8

Great. Thank you.

Speaker 2

Thank you.

Operator

Our next question today is from the line of Patrick Mollie of Piper Sandler. Patrick, your line is now open.

Speaker 2

Yes, good morning. Thanks for taking my call.

Speaker 9

So just Doug, I had a question on internalization opportunities. I was wondering if you could maybe compare and contrast The opportunities you saw in the Q2 relative to the Q1 and then just given the lower volatility environment we're in, maybe what that means for Those opportunities going forward and maybe what that means for the normalized earnings power of the firm overall? Thanks.

Speaker 2

Yes. Good question and welcome to the call. As Rich's successor, you got some very, very large shoes to fill. So Good luck to you, and we look forward to working with you. So to answer your question, look, we don't disclose what our internalization rates are By our various groups, but it is and I have mentioned it historically on calls and it continues to be a key competitive advantage to this firm.

Speaker 2

Our rates were in line with what we thought opportunities were during the quarter. So we're very, very pleased with what we're doing. I mean the examples I've given before about options hedging and the ETF desk, Laying off risk on our single stock desk and etcetera, etcetera down the line continues apace. I think that is part and parcel Of the culture and equally important, the technological setup of Virtu in the sense that like A widget is a widget is a widget and we don't really have depth per se. So we're very capable of doing that.

Speaker 2

One thing I will point out is that like on our For our at the money offering business for 2 Capital Markets, we have a it's at least double what we think other Competitors can do in terms of crossing with internal Virtu Flow. So that's a key selling point. We obviously don't have research Capital and calendar, what we offer in that business is real alacrity around execution capabilities, Both on a technological side, but also being able to internalize an awful lot of the flow. And based on our understanding of what other, debts do or other institutions do, we believe that our internalization rate, for example, on our ATM business It's at least 2x what our competitors are offering and that has resonated with clients and hopefully will resonate With more issuers in the future, we continue to be very excited about that business in particular, Patrick. All right.

Speaker 2

Thanks a lot.

Operator

Our next question today is from the line of Alex Blostein of Goldman Sachs. Alex, your line is now open.

Speaker 10

Hey, good morning guys. Thanks for the question. I was hoping you could spend a minute on Balance sheet strategy from sort of 2 angles. I guess on the one hand, hear you on opportunities in fixed income. So to what extent do you think that might Impact, how much capital you need to run the business with and what that means for sort of capital return framework down the road?

Speaker 10

And then secondly, if we look at the balance sheet leverage, That's obviously been picking up with EBITDA coming down. So just maybe a reminder, what level of debt to EBITDA do you feel comfortable running with? And again, with higher leverage today, does that impact your capital return framework at all?

Speaker 3

No. Hey, Alex, it's Joe. I'll take that. There's No change in that view. I mean naturally with a softer environment And reduced profitability, our returns are going to look lower, right, on a trailing basis.

Speaker 3

But in terms of the amount of capital we need to run the firm, in terms of prudent buffers and meaningful regulatory obligations, There's no change. And the fixed income business is kind of planned for within the amount of capital That we use today. And unsurprisingly, in a softer environment, we deploy Less capital than we do in a more expansive environment, right? And so from a Slide 6, when you look at those trailing invested capital numbers and our EBITDA and our return, I would say, one, it includes Planning for fixed income, which is a little more capital intensive, we use obviously we use prime brokers. We don't self clear there, But we are appropriately kind of planned for in the numbers that we deploy.

Speaker 3

That's kind of That's point 1. Point 2, in terms of the overall leverage, look, we were very fortunate, I think, both from a timing standpoint And from a Kinneva management of the leverage in terms of swaps and muting the impact of the higher rates. So we're very happy with the overall level of debt. It allows us to buy back shares at the various points. I've updated the slide in here this quarter.

Speaker 3

And it allows us to have the flexibility to keep our dividend. So we are Yes. We refinanced in early 2022. We got rid of most of the more punitive kind of Required cash flow sweeps and amortizations, so from we don't really look at it as whether Yes, it's 2.5 times, it's 3 times, it's a volatile business. We're kind of right focused more on the notional level of debt and we're Very, very comfortable where it

Speaker 2

is today. Okeydokes. Thank you.

Speaker 6

Thanks. Thank you.

Operator

Thank you. And we have no further questions in the queue today. This will conclude the Virtu Financial 2023 Second Quarter Results Conference Call. Thank you all for joining. You may now disconnect your lines, and please have a lovely rest of your day.

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Key Takeaways

  • Virtu reported Q2 2023 adjusted net trading income of $279 million (or $4.5 million per day), with Market Making at $193 million ($3.1 million/day), Execution Services at $85 million ($1.4 million/day), driving a 44% adjusted EBITDA margin and normalized EPS of $0.37.
  • Market volumes and volatility were muted—April proved the slowest month in over a decade amid macro uncertainties—yet performance remained in line with internal projections, with late-quarter and early-July improvements, especially in U.S. equities.
  • Virtu continues to invest in organic growth, having hired nearly 300 quants and developers since January 2021 to expand options market making, ETF block trading, fixed-income analytics and other strategic areas.
  • The firm is scaling its fixed-income franchise—covering both credit and rates—through partnerships with MarketAxess, Tradeweb and Bloomberg, positioning Virtu as a growing liquidity provider validated by peers’ recent market entries.
  • Maintaining disciplined cost management, Virtu kept first-half cash operating expenses roughly flat year-over-year, preserved a $0.24 quarterly dividend and repurchased $42 million of shares in Q2, representing 2.3 million shares bought back.
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Earnings Conference Call
Virtu Financial Q2 2023
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