Q3 2023 Virtu Financial Inc Earnings Call
Yeah.
Hello, and welcome to cause that you'd find out through 2023 third quarter results. My name is Carrie and I'll be the companys operators, what today, there will be an opportunity to ask questions. Today and you can do this by pressing star followed by one on your telephone keypad I would now like to hand, the call over to Andrew Smith head of Investor Relations to begin. Please go ahead.
Yeah.
Thank you Terry 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 <unk>, our Chief Executive Officer, Mr. Joseph <unk>, 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.
For your question.
First a few reminders today's call may include forward looking statements, which represent Virtus 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 becomes available.
We refer you to disclaimers in our press release and encourage you to review the description of risk factors contained in our annual report Form 10-K, and other public filings.
During today's call. In addition to GAAP measures, we may refer to certain non-GAAP measures, including adjusted net trading income adjusted net income adjusted EBITDA and adjusted EBITDA margin. These non-GAAP measures should be considered as supplemental to and not as superior to financial measures as reported in accordance with GAAP.
We direct listeners to consult the investor portion of our website, where you'll find additional supplemental information referred to on this call as well as a reconciliation of non-GAAP measures to the equivalent GAAP term in the earnings materials with an explanation of why we deem this information to be meaningful as well as management uses these measures and with that I'll turn the call over to Doug.
Good morning, and thank you Andrew.
Thank you for joining us this morning, and my remarks today I will focus on <unk> 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 two 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 <unk> 45 per share up 22% from the prior quarter.
Slide three 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 and 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 virtues performance. This quarter was not dissimilar to what we've 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've 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.
Mains 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 options market, making continued to perform well and make meaningful progress our $488000 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.
<unk> capital markets business.
We remain very optimistic about the opportunities across all of our growth initiatives.
On the execution services side, our adjusted net trading income average $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 remained slow as institutional investors have.
Less active in the higher rate environment. Despite these.
These challenging markets. Thanks to our continued investments.
<unk> performed in line with its opportunity to a quarter over quarter as well as year to date.
Taking a step back I look at our three 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 reported.
<unk> 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 and volumes.
An increase in global tension 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 were.
We are also seeing an uptick uptake 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 markets and a number of issuers use our service to raise primary capital.
Finally, you all likely notice the litigation brought by the SEC related to virtues 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.
<unk> to say this is a civil litigation and we reject completely the FCC's allegations.
The SEC does not assert that any customer information was ever in appropriately access and the period end focus ended four five years ago.
Predating virtues integration with any of the ITG businesses.
We have engaged with many of our clients about the the news and we have not observed any impact decline 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'll now turn it over to Joe and Sean who will provide some additional details about the quarter Joseph.
Thank you Doug.
Turning to expenses and capital on expenses. We ended the first nine months of the year with cash operating expenses of 481 million four 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.
Nine months of 2023, which is at the upper end of our historical range.
Consistent with virtues history, we will manage discretionary compensation and head count 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 three 9% versus last year, owing to investment and 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 can see that our invested capital has remained within a range of one eight 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'll be able.
To capitalize on more volatile markets as and when they appear.
We maintained our public 96 annual dividend, which we've paid steadily now for eight years.
And you can see that our payout has remained steady despite our variable results over the long term.
In addition, we repurchased two 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 issuance is 17% of our company in the three 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.
You, Joe and good morning, everyone on.
On slide three of our supplemental materials, we 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 <unk> 45.
Adjusted EBITDA was $140 million for the third quarter of 2023, and our adjusted EBITDA margin was 47%.
On slide nine we provide a summary of our operating expense results for the third quarter of 2023, we recorded a $174 million of adjusted operating expenses, we continue to maintain an efficient cost structure and disciplined expense management.
This helped us to control our operating expenses during the inflationary environment.
Financing interest expense was $25 million for the third quarter of 2023.
The benefit of the interest rate swap contracts that we entered into in prior years.
<unk> interest rate was around 5% for our long term debt in aggregate.
We remain committed to our 24 cents 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.
Thank you. Thank you I would like to ask a question. Please press star followed by one on your telephone keypad now we do that all participants limit themselves and any ask one question at a time.
When you're preparing to speak please ensure that your line is unmated lately.
This last question on the line comes from Ken Worthington of Jpmorgan. Please go ahead. Your line is open.
Hi, good morning, Thanks for taking the question.
Wanted to dig into product expansion, particularly.
<unk> 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 in new products.
What new regions did you add this year and maybe how many new products have been added.
For options were to single names stand right now and where would you expect this to be a year from now and then lastly on crypto.
Sure.
Is it possible to size the bitcoin ETF opportunity Les.
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.
Yeah, Great. So let me, 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 two years ago and then Unfortunately, you had a lot of disruption in the market to put it mildly with MTX and some of the other.
<unk>.
Bad actors in the marketplace and some 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 great scale and the amount of volume if you will that it does and the amount of bitcoin units corpus.
So if you assume that sometime between today and January 10th, which I understand is sort of the drop dead date with respect to SEC approval, given what happened in the district Court.
Lost by the SEC.
There's 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 et cetera have proposals on the table Schwab and we are a and <unk>.
With each of those Ken and I think theres going to be a significant amount of trading from the closed end fund that will be that will migrate if you will.
To these other funds it just kind of the natural fluidity people will move to lower fee Etfs removed because it's part of another portfolio than they can offset whatever it is.
There'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.
But with regard to ETF block.
Again this is something we've been talking about for the last couple of years.
We've in terms of regions, we've really focus this year on Europe. In particular, we think there are significant opportunities obviously, there's a number of large competitors their flow traders and others.
We've done all the hard work in terms of pricing.
The products.
Both domestic and into.
International products, which we have been 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 RFU platforms, but more importantly end users in that marketplace know, who we are because of the ITG vertu relationships both.
In the 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're 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 on ETS.
Fixed income products, obviously, there's a lot of incumbents there Jane.
Flow et cetera, citadel that do an excellent job, but we do think there is room for over two 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 I saw some information just the last day or two about the explosion of growth and income index volumes.
And.
That's really been our big focus.
Single name.
Index of options have.
Volumes have significantly dropped off again, we are trading single name options.
We will continue to do so whether in 2024, we start taking directed flow from retail brokers or not is still an open question in my mind, it's probably not.
Not given what's happened with the shift of volumes, it's probably not a significant priority at this point, but something we will get to.
Thank you very much.
[laughter].
The next question on the line comes from Chris.
Please go ahead your line is Nathan.
Good morning, everyone.
Follow ups on Ken questions Brasilia B, a two parter just on on the build out on the right side in particular, the last cold or you know do is very early days, we do lots of types of volume for about 10% of clients of the platform any update on that front and then on the options you talked about a declining.
<unk> opportunities said during the quarter.
And while volumes overall, we're not great Index Williams, where your focus were pretty strong was that just a function of realized volatility declining and how are you thinking about the options environment, specifically right now.
Yeah. That's a great question may take them again in reverse order I think you nailed it index volumes were up but in terms of realized volatility and if you will like rate per contract to.
Be more specific than what we were expecting in terms of opportunity that did declined during the quarter that being said, we outperformed and our market share has grown considerably.
In SPX in the big options family, we are like a meaningful single digit player now and options, which is a statement that I would have been reluctant to make two years ago. So I'm very very pleased with the growth. There we are now Janet generating.
Decent P&L like not material and avert too but.
Individually in Asia.
Both in India, and in Japan, which again things I would not have thought too mentioned two years ago. So I'm very very pleased with the progress we have made there and again I'm not like the greatest macro predictor, Chris we just kind of like build it and we hope that it'll come but I do see a continued interest in like in a single day options in in the index families. So.
That will continue to be our focus.
Again, I think with increased volatility and uncertainty in <unk>.
Macro events around the world between global conflict in central banks, having to deal with interest rates I think we'll continue to see an increase in and options activity you can kind of see the shift that has gone from like the VIX family. If you will to like single day options and other products that enable.
Traders to expose themselves to intra day and over weeks and months Volatilities and things like that.
<unk> had another question was the second part I forgot already.
I got so excited about this great day on the <unk>, yeah. So great.
Yeah, Yeah, yeah races, and interesting market right. Obviously, it's the one market that today doesn't have centralised clearing there isn't a SEC proposal.
That we have been supportive of one of the few things we think the sec's actually right about.
So we would love to see Centralised clearing of Treasury products.
That is a typical vertu style build out we've got.
Obviously connectivity, we've got strategy is going and now it's really a question of distribution. So we have significant we've established this year significant connectivity or substantial connectivity top clients and we've grown reasonable amounts of market share. It again doing it methodically. There's a lot of Counterparties. We can now go to with a credible product and that's kind of the game plan.
Which is.
Build the technology have a great team come up with a product that you feel good about prices that are competitive and then and then figure out what the distribution mechanism is obviously, we go to Ecm's, but also this is the marketplace that we think we're clients will take direct feeds her go through large dealers and that's.
We've made a lot of progress on that in 2023.
Okay.
[laughter]. Thank you.
Thank you to our next question comes from <unk> Jeffrey Please go ahead.
Good morning.
My question is an expensive so we think about the environment, which is.
Still somewhat subdued.
How should we think about the fourth quarter and the two.
<unk> com.
Cop allocation associated with cash in this <unk> environment and then also just looking at next year.
Should we just think about inflation is a reasonable framework for both carbon noncomp expense or any other framework that you could help.
That would be great.
Hey, Dan it's Joe.
Joe <unk>.
Good morning.
Look I think I think that.
I'll take them in reverse order as well I mean, a noncomp expenses.
We've always said that they're going to grow it kind of a low single digit right. Maybe we were a touch higher than that this year.
We do.
Lot of work every day, especially on our connectivity are infrastructure plan our market data.
We monitor everything down to the downtown to everyone's bloomberg's and everything and although the market data subscriptions.
And I think you look at that line item.
Up up a few million dollars in this kind of environment, where there's been price increases.
I.
That's a pretty good outcome.
And I would expect much of the same next year right all things equal.
On the other expenses.
It's just kind of keeping the lights on type of expenses again, we were.
You're fortunate last year 2022, we had some favorable foreign exchange adjustments.
So the year over year increase.
A lot less than it looks on a constant dollar basis.
And again more of the same I would anticipate a couple of percent and again, we monitor those very closely whether it's space or whether it's professional fees.
Professional fees are up slightly this year. In addition to the to the foreign exchange adjustments and then on comp look I think.
We are we have emerged in the past year or two from multi year integrations.
Of large acquisitions are head count has remained relatively steady.
What that masks as we have really restock the talent pool.
Over the past two years, we really I think upgraded.
R R.
Our employee base in terms of talent in terms of capabilities.
And we've always held ourselves out as as not a payout shop.
And that's the way, it's going too and that's the way it's going to remain so I would say.
Our comp ratio coming in in the mid twenties this year from a cash standpoint.
We're very comfortable with that right. We think it's what we need to do to adequately pay people.
I think we didn't we did hire quite a lot of people in the past couple of years.
I think we were.
We did it in a disciplined way so I think we're in a fortunate position to continue recruiting.
And again I have no no issue with our with our comp ratio, where it is if you look back a couple of years. It was in the mid teens right. So I think we're going to be.
If you want to look at that as kind of the pendulum from.
From boom.
Whom times two more.
What was subdued markets.
Then I think that's kind of we're very happy with that.
Great. Thank you. Thank you Dan.
Okay.
The next question comes from Alex <unk> Goldman Sachs. Please go ahead your line is Nathan.
Hey, Hey, guys good morning.
A quick financial question for you. So the leverage ratio is back at around three times and.
Three times that dividend. So obviously has been not the best trading environment for for the business. So that it will bounce around but how are you feeling about this creeping back up here with the with respect your ability to continue share repurchases at this at this kind of pace.
The environment can kind of continues to be what it has been.
Okay, I think we provide a pretty detailed analysis of of.
Our ability to repurchase shares at different levels.
Of trading income.
So I think it's really two separate questions. There is we're going to use our excess cash to repurchase our shares.
Absent any other alternative for that right and people asked us all the time, where we are we looking at other.
Other acquisitions and the answer is we look at everything, but we haven't come across anything that represents close to the value of repurchasing our shares at this level.
So I think to the extent we had the dollar of excess cash that's how it's going to be deployed and that's after as I said after we pay our expenses pay our people.
Invest in our growth initiatives et cetera. So so I think that's kind of one part of the question on the leverage ratio.
Really feel like.
Right we are.
Worried about whether it's three times, three and a quarter or two and a half.
We reset or that we were very fortunate and very happy that we we did this in early 2022, when we had.
We're in a different interest rate environment, obviously, we've got swaps on our on our debt.
We always look at it and try to keep that quantum as cheap as possible, we want to optimize that from a cost standpoint.
But.
The question is in the <unk>.
We ask ourselves is.
The right environment changed the quantum of that there were comfortable with.
The answer is not really I mean will always look too.
Make it as cheap as possible.
But we're pretty comfortable with that total level.
Gotcha that makes sense.
Yep.
Thank you.
The next question comes from Michael Cyprus Morgan Stanley. Please go ahead your line is Nathan.
Good morning, and thanks for taking my question wanted to drill down on index options to somebody earlier commentary just curious how you see the evolution of the index option marketplace here the evolution of the different customer types that are emerging use cases and to what extent do you view. This is sustainable just in terms of this level of activity.
And then I'm also related to that to what extent are you see these.
These index options like SPX being used as a replacement for say E. Many teachers many options on the teachers. Just curious are you seeing that all of us.
Yeah. It's a great question, it's been sort of fascinating to watch and I think you kind of nailed it which is.
And again I don't you know, we get along great with all exchanges and people are creating products I'm not trying to disparage any what the product or or whatnot.
Because we're sort of the Switzerland of liquidity provisioning. So we encourage innovation and whatnot, but I think people have looked at that product and said look it's a really good way to manage volatility.
A good way if you want to be speculative on volatility it.
Provide you the innate leverage if you will of the options market and it's affordable and it's very accessible so just it as a complementary product. If you will to what you see in futures in equities World spy products et cetera, and I think it compliments them very well. So it has really resonated with the marketplace.
I think it adds flexibility too all stripes of traders investors. So clearly institutional investors are now using it as a product there is a huge debate going on between J P. Morgan and Goldman Sachs as to why you know, whether it's retail or not I'm not going to get involved in that let the big guys fight that out.
At the end of the day again, we don't care because.
We service both all sides of.
Of the continuum of the spectrum of traders and use of that product. So we'd like to product a lot. We think it expands the market and provides access.
Talk to investors that want to engage.
And expressed an interest in either volatility or use it to hedge the rest of a portfolio. So I think it's been a really healthy development for the marketplace and obviously the options market is incredibly competitive from a venue perspective at last count I believe we have 17 options exchange's I could be wrong, maybe I missed the 18th.
So there is a need for marketmakers to provide interconnectivity. If you will between those various venues that's not the easiest circus strict in the world to pull off because of the difference in technology, but that's fantastic for virtually that's kind of like Vertu 101, which is understanding products understanding how they interact.
And relate to related products understanding the DNA. If you will we call that market structure 101 of how the all these venues work.
Making that work within our technology plant and then providing a service in the form of an attractive price that we can distribute through these various venues. So we continue to be very excited about how that has evolved in the United States and as I mentioned earlier there are similar similar like global index products in other countries.
That we have found attractive as well that we can.
Approach and provide value to with our scope and scale, namely, India, right, now, namely, India, and Japan, but good observation. Thank you for the question Michael.
Great. Thanks.
Yeah.
Thank you currently have a nice set of questions. This concludes today's conference call. Thank you for joining you may now disconnect your lines.
Thank you everyone.
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