Q2 2023 Virtu Financial Inc Earnings Call
Hello, and welcome to the Virtu Financial 2023 quarterly results Conference call. My name is Harry and I'll be your operator today, if you'd like to enter the queue for questions. You may do so by pressing star one on your telephone keypad.
It is now my pleasure to hand, you over to Andrew Smith head of Investor Relations for <unk> financial to begin Andrew. Please go ahead, when you're ready.
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 on.
Today on this morning's call we have Mr. Douglas Peters, our Chief Executive Officer, Mr. Joseph <unk>, our co President and co Chief operating officer.
Sure.
<unk> 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 purchase currently regarding future events.
Therefore subject to risks assumptions and uncertainties.
The company's control.
Note that our actual results and financial condition may differ materially from what is included in the 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 and information.
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.
Thank you Andrew and good morning, everyone. Thank you for joining US this morning, and my remarks today I will focus on <unk> 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 materials, we generated $4 $5 million of adjusted trading net income per day in the quarter and normalized adjusted EPS of <unk> 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 so decreased opportunity as the overall bid offer spread and retail participation levels decline 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 Mark and making sure 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 perform well and make meaningful progress we remain excited and optimistic about our growing abilities to address the global opportunities that await especially in options ETF block and fixed income on the execution services side, our adjusted net trading income average.
$1 4 million 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 16% lighter than the second quarter with institutionally size large in scale volumes down over 20%.
Despite these challenging market ves performed inline with this opportunity quarter over quarter as well as year to year.
Our multi year focus on efficiency and new business development has yielded a scaled 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 and.
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.
Virtues head count has remained relatively stable after years of up and downs due to integration.
The steady head count total masked the significant investments that we've made in people and talent in strategic areas of focus.
Since January 2021, we've hired almost 300 full time employees, including quantum developers and options ETF block fixed income our at the money market business at other growth areas. We have also invested in hiring the right team of client facing folks to continue.
To grow our BFS business. Most recently, we hired Keith <unk>, 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 options performance our options business has performed well against declining opportunity set in the quarter, we continued to expand across venues and geographies. However in the U S market wide customer index options volumes were down 11% in Q2 impacting results in the quarter we.
Continuing to build out our block ETF desk by improving our competitive edge and expanding our offering to cover more products in more regions, including fixed income both in credit and rate the.
The operating scale, we enjoy from our standardized global technology platform allows multi to 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 <unk>.
<unk> from our competitors recently.
I will now turn it over to Jeff who will provide additional details about the quarter Joseph.
Okay quickly turning to expenses and capital.
We focus on cash Opex, we ended the first half of the year with cash operating expenses were $322 million.
About 3% ahead of where we ended the full year 2022 annualized.
We continue to manage expenses aggressively, especially in a soft environment.
Functionary times, our cash comp ratio is at 25% for the first half of the year, which is at the upper end of our historical range. So consistent with Hercules history, we will manage the discretionary compensation and head count to drive profitability for our shareholders while retail.
Winning in recruiting World class talent as I've 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 and building out new businesses and 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 that you can see our trading capital remained relatively constant throughout the year on slide six of the supplemental material.
We've maintained our public 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 two 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 issue, new issuances, almost 15% of our company and a two plus years since beginning our share repurchase program since the inception of our share repurchase program.
We have repurchased a total of $38 5 million shares for approximately 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 Li to review the financial details before we turn over to call the call to questions.
Yes.
Thank you Jill and good morning, everyone on slide three our supplemental materials, we provided a summary of our quarterly performance.
Second quarter of 2020.
Our adjusted net trading income.
<unk>, which represents our trading gains net of direct trading expenses totaled $279 million.
$4 9 million per day.
<unk> adjusted net trading income was $193 million.
$3 $1 million per day.
Kitchen surfaces, adjusted net trading income with $89 million.
Our $1 1 million.
Our second quarter of 2023 normalized adjusted EPS.
That makes sense.
Adjusted EBITDA was $122 million for the second quarter plenty plenty for me and then adjusted EBITDA margin was 41%.
On slide nine we provided a summary of our operating results for the second quarter of 2023, we reported $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.
The inflationary environment.
Financing interest expense was $25 million for the second quarter with the benefit of the interest swap interest rate swap contract that we entered into five year <unk>.
Net interest rate was around 5%.
I will turn that in aggregate.
Our capitalization remains asset.
We remain committed to our 20 <unk> 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.
Thank you if you would like to ask a question. Please christoph.
On your telephone keypad now.
If you change your mind, Please press star two.
Having to ask a question. Please ensure that your phone is on mute.
And for our first question, we will go to the line of Daniel Santos Jeff.
Geoffrey Dunn your line is now open.
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.
Here's to be continuing a bit in July .
Maybe just bifurcate or or expanded pit upon kind of what the.
Asset classes or areas geographies that may be really you've seen both.
Kind of the more for more improvement and also kind of where the biggest levels will change a bit.
Yes, good morning, and thank you Dan Youre under a lot of pressure because you've not replace Richard <unk> as the lead off question there. So.
We all Miss Rich and thank you for all of his efforts over the years, but 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 with macro.
Issues had to do with some of the regional bank catastrophes for lack of a better word that were happened here in the United States.
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 in.
Allowed us to.
We report the quarter that we're reporting and as I noted in my comments, we have seen an improvement.
Only 15, 16, and whatever 17 18 trading days in July and that trend has continued I would say most particularly in U S 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.
As 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 U S. Equities in particular was very surprisingly slow in April we've seen improvement.
Great Thats helpful.
You mentioned fixed income.
I think the commentary around some of your data for the quarter.
One of your domestic peers.
Announcement, this quarter about getting more being more active within corporate fixed income on the market, making side could you maybe talk about.
Your presence in that market.
How youre thinking about that opportunity going forward.
Yes look I mean, I think it was great news to be candid I mean, obviously, they're a competitor and send a great firm youre, referring to Citadel Securities I think it validates our thesis that and it gives us that.
We have been.
Active as a market maker of credit.
We're going on like our second kind of full year. If you will doing all of the <unk> two things in terms of Onboarding counterparties.
Developing trading.
Experts season, and mostly investment grade debt.
Becoming a disclosed market maker on market access and partner with market access and trade web 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 and we think that we can be a credible.
Source of liquidity as a liquidity provider either directly to the buy side counterparties or through distribution partners like market access trade with.
Et cetera. 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 mechanics, we know those are both great firms that gave it gave us scale and credibility and so it's very early days, we're seeing maybe less than 5% of the volume.
From.
5% to 10% of the clients on these platforms is something that I am personally engaged with because.
I think it's a marketplace, where we can add value again, theres 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 two marketplaces, if you will for credit.
And rates, where we think that we can add value and.
Announcements from Citadel, just frankly validates the decisions that we made a couple of years ago to reallocate some of our resources capital and personnel into this area.
Thank you.
Thank you Dan.
Thank you and in the interest of time, if you could please limit yourself to one question and one related follow up if necessary.
Our next question for you guys to the line of Ken Worthington from Jpmorgan. Your line is now open.
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 600 <unk> six type of business still the goal for you in options and maybe how far along is for to in terms of being able to effectively participate in that single stock options business. The way you do for equities for for client business.
Yeah. Good question. It is definitely the angle I would say.
Not that we've got distracted from and I think the opportunity frankly in.
Index market, making both on the customer and non customer side has.
Frankly, dwarfed can that opportunity I mean, you probably track all the metrics in terms of what the spine SPX volumes were relative to single options and there has been a dramatic shift.
Because of the zero data options or whatnot, I mean thats for.
CBOE and somebody 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 a customer option and what's not a customer of our option at a lot of these venues.
Two the index family. So it is certainly in the roadmap, but it has descended in importance because the addressable market is.
So huge and 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 Indiana and Japanese markets. So.
I don't want to put a date on it because every time I suggest we're going to be will be operational by so in such state we keep pushing it out because there is such an opportunity in the index family that we continue to add.
And frankly.
Memex and different options venues continue to come on there's a lot more opportunity to two.
Improve our indexed market, making capabilities in the United States.
Great. Thank you.
Thanks, Ken.
Our next question today is from the line of Chris Allen.
Chris Your line is now open if you'd like to proceed.
Yes, good morning, everyone I wanted to follow up on Dan's question on <unk>.
On the rates.
Historically, you've talked about market structure impediments to getting bigger in the rates business, what's the outlook there.
Talk around moving to centralized clearing improvement on settlement times.
And then in terms of your penetration level right now less than 5% of volume.
Just because you were kind of just getting up to speed right now just starting to slowly build the business.
What's the longer term opportunity set do you see that.
Yes, I'm going to do something that you will never hear me say on an earnings call and complement the chair of the FCC in terms of.
Centralized clearing of treasury products and.
Real time reporting a relatively real time reporting retrace for treasuries all of those things are positives I think for the marketplace and certainly those are initiatives that the 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, it's the natural efficiency of the marketplace.
10 years ago, even five years ago. These marketplaces that were.
Largely dominated by the big dealers I think the buy side has.
Gotten smarter in terms of seeking alternative liquidity liquidity providers there are dozens of those.
And we now have credibility with the distributors of the products I E. The trade and the Bloomberg's of the World who are great business partners of ours.
I should market access, obviously, but liquidity agents, so we work with them as well so using those.
Gartner is to enable our distribution and to give us credibility.
Louise 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.
It's no different than in equities and what we do in our business and alert et cetera. So it's understanding who the key counterparties are getting credibility with the distribution channels. The trade rescue Bloomberg market access because of the world and then providing.
Good real time pricing I mean, just yesterday, we were engaged on this with some senior folks to try to understand.
Who the main clients are how we can get better what they are looking for in terms of market Mark out then and response times its the blocking and tackling.
Market, making which we're very very good at.
But it's a very competitive marketplace with dozens and dozens of 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, but we're in the top 20.
On trade web right now, which is great, but obviously, we would like to be in the top tenant and ultimately in the top five whether that's realistic or not given the competitive nature of that market, but I think our scale.
Is it.
An advantage and again, the fact that we're multi asset class so to the extent these rates products manifest themselves.
There is a future in 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 two sided quote that's a nice way of saying, we manage our expenses and so we can tighten up our prices.
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 S equities, but it's in a marketplace that we think is eminently addressable.
Our product offering.
Thanks, a lot guys.
Thank you.
Thank you and as a reminder to ask any further questions. Please press star followed by one on your telephone keypad and our next question is from the line of Michael <unk> of Morgan Stanley Michael Your line is open.
Great. Thank you good morning, I wanted to circle back to your commentary on the index options volumes, where you guys have been quite active and it sounds like you're excited about the opportunity set there, but I was hoping you might be able to maybe elaborate on what youre seeing across the marketplace driving the strength in index options and how sustainable.
Or do you think this activity is particularly if we go into different types of market environments over the next year or two and if you could maybe color or provide any sort of color on what sort of customers youre trading what's on the other side, we hear a lot of its retail, but maybe how would you characterize that retail activity and to what extent do you see or think institutions could start to come.
Matt.
Yeah. That's very good question, Michael look I mean, I give credit I guess to the.
The folks of the options exchanges that we're deriving these products, but like.
The daily exploration project.
Our sense is that it traded more because there.
The work better and cheaper hedging instruments than other instruments that have been out there. So this drive.
Volumes and drive interest from both professional traders and institutional traders.
So we don't expect.
I mean, obviously, the there'll be ebbs and flows with macro end market volumes, but we don't expect that this shift will change anytime in the near future and hats off to you.
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 this is where the market is going to be going a cup.
Three years ago, and they were right and so the fact that we are.
And running in very very competitive in those products is has been very very beneficial to our business.
In terms of like what.
So a customer flow. This is whether it's a mom and pop retail I would imagine it is not because obviously this suitability concerns I think it's probably smaller trading firms and.
Folks like that that are.
Going through options, Aggregators, and Thats really where our focus has been in terms of.
Customer engagement is.
It's not necessarily with the big retail retail for us, but more of the options Eric Irrigator firms like.
Like a dash in firms like that that have.
That act as a front end an aggregator for.
Professional or smaller trading firm options slow and I think thats, where.
We will we have focus and will continue to focus our energies.
It's been about 40% of the flow.
<unk> come from customer accounts in these.
And the SPX index complex and Thats meaningful.
Taxi, there was customer and non customer seat kind of allocate.
Your interest based on that so that's significant it's a very.
Attractive addressable market and Thats, why we focused our energies.
Great. Thank you.
Thank you.
Our next question today is from the line of Patrick <unk> with Piper Sandler Your line is now open.
Hey, good morning, Thanks for taking my call.
So.
Doug I had a question on internalization opportunities I was wondering if you could maybe compare and contrast.
The opportunities you saw in the second quarter relative to the first quarter and then just given.
The lower volatility environment were and maybe what that means for those opportunities going forward and maybe what that means for the for.
So the normalized earnings power of the firm overall.
Yes, good question and welcome to the call as Richard'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 I mean, we don't disclose what our internalization rates are by our various groups, but it is and I have mentioned historically on calls and it continues to be a key competitive advantage to this firm.
Our rates were in line with what we thought opportunities where during <unk>.
During the quarter and so we were very very pleased with what we're doing I mean, the examples I've given before about options have hedging in the ETF desk.
Laying off risk on our single stock desk, and et cetera, et cetera down the line.
It continues the pace I think that is part and parcel.
The culture and equally important the technological setup, a virtu in a sense that like.
But widget is a widget is a widget and we don't really have deaths per se. So we're very capable of doing that one.
One thing I will point out is that like on our.
For our at the money offering business Virtu 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 thats a key selling point, we obviously don't have research.
Capital in calendar of what we offer in that business is real alacrity around execution capabilities, both on technological side, but also being able to internalize an awful lot of the flow.
And based on our understanding of what other.
Jeff do or their institutions do we believes our internalization rate for example on our ATM business is at least two X. What our competitors are offering 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.
Alright, Thanks, a lot.
Oh.
Our next question today is from the line of Alex <unk> with Goldman Sachs Blackberry.
Alex Your line is now open.
Hey, good morning, guys. Thanks for the question.
I was hoping you could spend a minute on balance sheet strategy from sort of two angles I guess on the one hand here you on opportunities in fixed income so to what extent do you think that might.
Back to how much capital you need to run the business with and what that means for sort of a capital return framework down the road 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 of what level of debt to EBITDA that you feel comfortable running with and again with higher leverage today does that impact your capital return framework.
Yes.
No.
Yeah, Alex it's Joe I'll take that there is.
No change in that view I mean naturally with.
With with the softer environment and reduced profitability are our returns are going to look.
Lower right on a trailing basis.
But in terms of the amount of capital we need to run the firm.
In terms of prudent buffers and Meanwhile, our regulatory obligations. There is no change in the fixed income business.
It's kind of planned for right within the amount of capital that we use today.
And on surprisingly.
In a in a softer environment.
We deploy less capital than we do in a.
And a.
And in a more expansive environment right and so you know.
From a spike.
Slide six when you look at those trail.
Trailing invested capital numbers in 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.
Planned for in the numbers that we deploy.
That's kind of.
That's 0.1 0.2 in terms of the overall leverage.
Look the.
We were very fortunate I think both from a timing standpoint.
From a kind of a management of the.
Of the leverage in terms of swaps in mute.
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 a slide in here this quarter.
And it allows us to.
Have the flexibility to keep our dividend.
So we are we refinanced in early 'twenty two.
Two 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 it's two and a half times is three times its a volatile business.
We're kind of right.
We focus more on the notional level of debt and we're very very comfortable with where it is today.
Okay. Thank you.
Thank you.
Thank you we have no further questions in the queue. Today. So this will conclude the virtue finance in 2022nd quarter results Conference call.
You all for joining you may now disconnect your lines and please have a lovely rest of your day.
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