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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