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8-K - 8-K - Virtu Financial, Inc.a18-39682_18k.htm

Exhibit 99.1

 

 

Virtu Announces Third Quarter 2018 Results

 

NEW YORK, NY,  November 7, 2018  — Virtu Financial, Inc. (NASDAQ: VIRT), a leading technology-enabled market maker and liquidity provider to the global financial markets, today reported results for the third quarter ended September 30, 2018.

 

Third Quarter Selected Highlights

 

·                  Net income of $15.6 million, Normalized Adjusted Net Income* of $42.0 million

·                  Basic and diluted earnings per share of $0.08; Normalized Adjusted EPS* of $0.22

·                  Total revenues of $295.1 million; Trading income, net of $235.7 million; Adjusted Net Trading Income* of $177.9 million

·                  Adjusted EBITDA* of $88.3 million; Adjusted EBITDA Margin* of 49.6%

·                  Repurchased $61.9 million of Virtu shares to-date; authorized to repurchase up to $100 million per previously approved share buyback program

·                  Made $115 million of incremental payments on the term loan in the third quarter; $750 million total payments since the closing of the KCG acquisition in July 2017

·                  Quarterly cash dividend of $0.24 per share payable on December 14, 2018

 


* Non-GAAP financial measures. Please see “Non-GAAP Financial Measures and Other Items” for more information.

 

The Virtu Financial, Inc. (the “Company”) Board of Directors declared a quarterly cash dividend of $0.24 per share. This dividend is payable on December 14, 2018 to shareholders of record as of November 30, 2018.

 

“Our third quarter results reflected a market characterized by lower volume and muted volatility; however, we performed in-line with opportunities in Q3 and we have seen a substantial uptick in volumes and volatility in the first month of Q4.  In particular, since building and rolling-out a single technology platform around our Virtu Execution Services business in late summer, we have seen a sharp increase in this business whose results are less volatile than our market making business,” said Douglas Cifu, Chief Executive Officer of Virtu Financial.

 

Acquisition of Investment Technology Group, Inc.

 

On November 6, 2018, the Company and Investment Technology Group, Inc. (“ITG”) entered into a definitive agreement (the “ITG Merger Agreement”) whereby the Company will acquire ITG in a cash transaction valued at $30.30 per ITG share, or a total of approximately $1.0 billion (the “ITG Acquisition”). The ITG Acquisition is expected to close during the first half of 2019 after receipt of all required regulatory approvals and ITG shareholder approval. The Company intends to finance the ITG Acquisition solely with debt financing (collectively with the ITG Acquisition and related transactions, the “ITG Transactions”) and has entered into a debt commitment letter with Jefferies Finance LLC and Royal Bank of Canada for gross new borrowings of $1.5 billion, the proceeds of which will be used to pay the merger consideration and related fees and to refinance the Company’s existing first lien term loan.

 

Form of Presentation

 

The Company completed its acquisition of KCG Holdings, Inc. on July 20, 2017 and the reported financial results of the Company for the periods following the acquisition reflect KCG’s and the Company’s balances, and reflect the impact of purchase accounting adjustments.

 

1


 

Third Quarter Financial Results

 

Total revenues increased 8.8% to $295.1 million for this quarter, compared to $271.3 million for the same period in 2017. Trading income, net, increased 15.6% to $235.7 million for this quarter, compared to $203.9 million for the same period in 2017. Net income increased to $15.6 million for this quarter, compared to a net loss of $40.0 million for the same period in 2017.

 

Basic and diluted earnings per share for this quarter were both $0.08, respectively, compared to loss per share of $0.17 each for the same period in 2017.

 

Adjusted Net Trading Income increased 11.3% to $177.9 million for this quarter, compared to $159.8 million for the same period in 2017. Adjusted EBITDA increased 49.9% to $88.3 million for this quarter, compared to $58.9 million for the same period in 2017. Normalized Adjusted Net Income increased 200.2% to $42.0 million for this quarter, compared to $14.0 million for the same period in 2017.

 

Assuming all non-controlling interests had been exchanged for common stock, and the Company’s Normalized Adjusted Net Income before income taxes was subject to corporation taxation, Normalized Adjusted EPS was $0.22 for this quarter and $0.08 for the same period in 2017.

 

Operating Segment Information

 

Prior to the acquisition of KCG, the Company was managed and operated as one business, and, accordingly, operated under one reportable segment.  As a result of the acquisition of KCG, beginning in the third quarter of 2017 the Company has three operating segments: (i) Market Making; (ii) Execution Services; and (iii) Corporate.

 

Market Making principally consists of market making in the cash, futures and options markets across global equities, options, fixed income, currencies and commodities. As a market maker, the Company commits capital on a principal basis by offering to buy securities from, or sell securities to, broker dealers, banks and institutions.

 

Execution Services comprises agency-based trading and trading venues, offering execution services in global equities, options, futures and fixed income on behalf of institutions, banks and broker dealers.

 

Corporate contains the Company’s investments, principally in strategic trading-related opportunities, and maintains corporate overhead expenses.

 

2


 

The following tables show the trading income, net, total revenues and Adjusted Net Trading Income by operating segment for the three and nine months ended September 30, 2018 and 2017.

 

Total revenues by operating segment

(in thousands, unaudited)

 

 

 

Three Months Ended September 30, 2018

 

 

 

Market

 

Execution

 

 

 

 

 

 

 

Making

 

Services

 

Corporate

 

Total

 

 

 

 

 

 

 

 

 

 

 

Trading income, net

 

$

235,564

 

$

135

 

$

 

$

235,699

 

Commissions, net and technology services

 

6,587

 

33,665

 

 

40,252

 

Interest and dividends income

 

21,320

 

110

 

21

 

21,451

 

Other, net

 

899

 

296

 

(3,474

)

(2,279

)

Total Revenues

 

$

264,370

 

$

34,206

 

$

(3,453

)

$

295,123

 

 

 

 

Three Months Ended September 30, 2017

 

 

 

Market

 

Execution

 

 

 

 

 

 

 

Making

 

Services

 

Corporate

 

Total

 

 

 

 

 

 

 

 

 

 

 

Trading income, net

 

$

206,542

 

$

(3,342

)

$

707

 

$

203,907

 

Commissions, net and technology services

 

1,563

 

41,788

 

 

43,351

 

Interest and dividends income

 

20,056

 

104

 

270

 

20,430

 

Other, net

 

421

 

527

 

2,650

 

3,598

 

Total Revenues

 

$

228,582

 

$

39,077

 

$

3,627

 

$

271,286

 

 

 

 

Nine Months Ended September 30, 2018

 

 

 

Market

 

Execution

 

 

 

 

 

 

 

Making

 

Services

 

Corporate

 

Total

 

 

 

 

 

 

 

 

 

 

 

Trading income, net

 

$

899,902

 

$

552

 

$

 

$

900,454

 

Commissions, net and technology services

 

21,886

 

118,775

 

 

140,661

 

Interest and dividends income

 

60,681

 

600

 

56

 

61,337

 

Other, net

 

2,132

 

338,832

 

(5,113

)

335,851

 

Total Revenues

 

$

984,601

 

$

458,759

 

$

(5,057

)

$

1,438,303

 

 

 

 

Nine Months Ended September 30, 2017

 

 

 

Market

 

Execution

 

 

 

 

 

 

 

Making

 

Services

 

Corporate

 

Total

 

 

 

 

 

 

 

 

 

 

 

Trading income, net

 

$

482,279

 

$

(3,342

)

$

707

 

$

479,644

 

Commissions, net and technology services

 

1,563

 

47,674

 

 

49,237

 

Interest and dividends income

 

30,559

 

104

 

270

 

30,933

 

Other, net

 

421

 

527

 

2,699

 

3,647

 

Total Revenues

 

$

514,822

 

$

44,963

 

$

3,676

 

$

563,461

 

 

3


 

Reconciliation of trading income, net to Adjusted Net Trading Income by operating segment

(in thousands, unaudited)

 

 

 

Three Months Ended September 30, 2018

 

 

 

Market

 

Execution

 

 

 

 

 

 

 

Making

 

Services

 

Corporate

 

Total

 

 

 

 

 

 

 

 

 

 

 

Trading income, net

 

$

235,564

 

$

135

 

$

 

$

235,699

 

Commissions, net and technology services

 

6,587

 

33,665

 

 

40,252

 

Interest and dividends income

 

21,320

 

110

 

21

 

21,451

 

Brokerage, exchange and clearance fees, net

 

(54,305

)

(14,333

)

 

(68,638

)

Payments for order flow

 

(18,261

)

(22

)

 

(18,283

)

Interest and dividends expense

 

(32,048

)

(518

)

 

(32,566

)

Adjusted Net Trading Income

 

$

158,857

 

$

19,037

 

$

21

 

$

177,915

 

 

 

 

Three Months Ended September 30, 2017

 

 

 

Market

 

Execution

 

 

 

 

 

 

 

Making

 

Services

 

Corporate

 

Total

 

 

 

 

 

 

 

 

 

 

 

Trading income, net

 

$

206,543

 

$

(3,341

)

$

705

 

$

203,907

 

Commissions, net and technology services

 

1,563

 

41,788

 

 

43,351

 

Interest and dividends income

 

20,056

 

103

 

271

 

20,430

 

Brokerage, exchange and clearance fees, net

 

(52,321

)

(12,263

)

 

(64,584

)

Payments for order flow

 

(12,452

)

381

 

 

(12,071

)

Interest and dividends expense

 

(31,360

)

1,561

 

(1,443

)

(31,242

)

Adjusted Net Trading Income

 

$

132,029

 

$

28,229

 

$

(467

)

$

159,791

 

 

 

 

Nine Months Ended September 30, 2018

 

 

 

Market

 

Execution

 

 

 

 

 

 

 

Making

 

Services

 

Corporate

 

Total

 

 

 

 

 

 

 

 

 

 

 

Trading income, net

 

$

899,902

 

$

552

 

$

 

$

900,454

 

Commissions, net and technology services

 

21,886

 

118,775

 

 

140,661

 

Interest and dividends income

 

60,681

 

600

 

56

 

61,337

 

Brokerage, exchange and clearance fees, net

 

(183,171

)

(46,608

)

 

(229,779

)

Payments for order flow

 

(50,284

)

(97

)

 

(50,381

)

Interest and dividends expense

 

(100,002

)

(1,197

)

 

(101,199

)

Adjusted Net Trading Income

 

$

649,012

 

$

72,025

 

$

56

 

$

721,093

 

 

 

 

Nine Months Ended September 30, 2017

 

 

 

Market

 

Execution

 

 

 

 

 

 

 

Making

 

Services

 

Corporate

 

Total

 

 

 

 

 

 

 

 

 

 

 

Trading income, net

 

$

482,281

 

$

(3,342

)

$

705

 

$

479,644

 

Commissions, net and technology services

 

1,563

 

47,674

 

 

49,237

 

Interest and dividends income

 

30,558

 

104

 

271

 

30,933

 

Brokerage, exchange and clearance fees, net

 

(157,991

)

(12,262

)

 

(170,253

)

Payments for order flow

 

(12,452

)

381

 

 

(12,071

)

Interest and dividends expense

 

(58,575

)

1,562

 

(1,443

)

(58,456

)

Adjusted Net Trading Income

 

$

285,384

 

$

34,117

 

$

(467

)

$

319,034

 

 

4


 

Reconciliation of trading income, net to Adjusted Net Trading Income by category — Market Making segment

(in thousands, unaudited)

 

 

 

Three Months Ended September 30, 2018

 

 

 

Americas

 

ROW

 

Global FICC,

 

 

 

Total

 

 

 

Equities

 

Equities

 

Options and Other

 

Unallocated

 

Market Making

 

 

 

 

 

 

 

 

 

 

 

 

 

Trading income, net

 

$

146,428

 

$

34,372

 

$

58,134

 

$

(3,370

)

$

235,564

 

Commissions, net and technology services

 

6,469

 

 

118

 

 

6,587

 

Brokerage, exchange and clearance fees, net

 

(23,227

)

(15,916

)

(14,905

)

(257

)

(54,305

)

Payments for order flow

 

(18,261

)

 

 

 

(18,261

)

Interest and dividends, net

 

(5,932

)

(1,898

)

(2,517

)

(381

)

(10,728

)

Adjusted Net Trading Income

 

$

105,477

 

$

16,558

 

$

40,830

 

$

(4,008

)

$

158,857

 

 

 

 

Three Months Ended September 30, 2017

 

 

 

Americas

 

ROW

 

Global FICC,

 

 

 

Total

 

 

 

Equities

 

Equities

 

Options and Other

 

Unallocated

 

Market Making

 

 

 

 

 

 

 

 

 

 

 

 

 

Trading income, net

 

$

122,161

 

$

35,271

 

$

48,055

 

$

1,056

 

$

206,543

 

Commissions, net and technology services

 

63

 

342

 

(84

)

1,242

 

1,563

 

Brokerage, exchange and clearance fees, net

 

(22,528

)

(15,487

)

(13,552

)

(754

)

(52,321

)

Payments for order flow

 

(12,014

)

 

 

(438

)

(12,452

)

Interest and dividends, net

 

(5,095

)

(3,131

)

(2,213

)

(865

)

(11,304

)

Adjusted Net Trading Income

 

$

82,587

 

$

16,995

 

$

32,206

 

$

241

 

$

132,029

 

 

 

 

Nine Months Ended September 30, 2018

 

 

 

Americas

 

ROW

 

Global FICC,

 

 

 

Total

 

 

 

Equities

 

Equities

 

Options and Other

 

Unallocated

 

Market Making

 

 

 

 

 

 

 

 

 

 

 

 

 

Trading income, net

 

$

586,224

 

$

117,862

 

$

195,959

 

$

(143

)

$

899,902

 

Commissions, net and technology services

 

21,700

 

 

186

 

 

21,886

 

Brokerage, exchange and clearance fees, net

 

(92,986

)

(43,878

)

(43,755

)

(2,552

)

(183,171

)

Payments for order flow

 

(50,284

)

 

 

 

(50,284

)

Interest and dividends, net

 

(21,117

)

(7,030

)

(9,014

)

(2,160

)

(39,321

)

Adjusted Net Trading Income

 

$

443,537

 

$

66,954

 

$

143,376

 

$

(4,855

)

$

649,012

 

 

 

 

Nine Months Ended September 30, 2017

 

 

 

Americas

 

ROW

 

Global FICC,

 

 

 

Total

 

 

 

Equities

 

Equities

 

Options and Other

 

Unallocated

 

Market Making

 

 

 

 

 

 

 

 

 

 

 

 

 

Trading income, net

 

$

217,403

 

$

118,251

 

$

147,541

 

$

(914

)

$

482,281

 

Commissions, net and technology services

 

63

 

342

 

(84

)

1,242

 

1,563

 

Brokerage, exchange and clearance fees, net

 

(61,569

)

(50,882

)

(43,934

)

(1,606

)

(157,991

)

Payments for order flow

 

(12,014

)

 

 

(438

)

(12,452

)

Interest and dividends, net

 

(9,295

)

(10,268

)

(6,376

)

(2,078

)

(28,017

)

Adjusted Net Trading Income

 

$

134,588

 

$

57,443

 

$

97,147

 

$

(3,794

)

$

285,384

 

 

5


 

The following tables show our Adjusted Net Trading Income and average daily Adjusted Net Trading Income by category for the three and nine months ended September 30, 2018 and 2017:

 

(In thousands except percentages, unaudited)

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

Adjusted Net Trading Income by Category:

 

2018

 

2017

 

% Change

 

2018

 

2017

 

% Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Market Making:

 

 

 

 

 

 

 

 

 

 

 

 

 

Americas Equities

 

$

105,477

 

$

82,587

 

27.7

%

$

443,537

 

$

134,588

 

229.6

%

ROW Equities

 

16,558

 

16,995

 

-2.6

%

66,954

 

57,443

 

16.6

%

Global FICC, Options and Other

 

40,830

 

32,206

 

26.8

%

143,376

 

97,147

 

47.6

%

Unallocated(1)

 

(4,008

)

241

 

NM

 

(4,855

)

(3,794

)

NM

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Market Making

 

$

158,857

 

$

132,029

 

20.3

%

$

649,012

 

$

285,384

 

127.4

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Execution Services

 

19,037

 

28,229

 

-32.6

%

72,025

 

34,117

 

111.1

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate

 

21

 

(467

)

NM

 

56

 

(467

)

NM

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted Net Trading Income

 

$

177,915

 

$

159,791

 

11.3

%

$

721,093

 

$

319,034

 

126.0

%

 

Average Daily

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

Adjusted Net Trading Income by Category:

 

2018

 

2017

 

% Change

 

2018

 

2017

 

% Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Market Making:

 

 

 

 

 

 

 

 

 

 

 

 

 

Americas Equities

 

$

1,674

 

$

1,311

 

27.7

%

$

2,359

 

$

716

 

229.6

%

ROW Equities

 

263

 

270

 

-2.6

%

356

 

306

 

16.6

%

Global FICC, Options and Other

 

648

 

511

 

26.8

%

763

 

517

 

47.6

%

Unallocated(1)

 

(64

)

4

 

NM

 

(26

)

(21

)

NM

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Market Making

 

$

2,521

 

$

2,096

 

20.3

%

$

3,452

 

$

1,518

 

127.5

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Execution Services

 

303

 

448

 

-32.5

%

383

 

181

 

111.1

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate

 

0

 

(8

)

NM

 

0

 

(2

)

NM

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted Net Trading Income

 

$

2,824

 

$

2,536

 

11.3

%

$

3,836

 

$

1,697

 

126.0

%

 


(1)    Under our methodology for recording ‘‘trading income, net’’ in our condensed consolidated statements of comprehensive income, we recognize revenues based on the exit price of assets in accordance with applicable U.S. GAAP rules, and when we calculate Adjusted Net Trading Income for corresponding reporting periods, we start with trading income, net. By contrast, when we calculate Adjusted Net Trading Income by category, we recognize revenues on a daily basis, and as a result prices used in recognizing revenues may differ. Because we provide liquidity on a global basis, across asset classes and time zones, the timing of any particular Adjusted Net Trading Income calculation can defer or accelerate the amount in a particular asset class from one day to another, and, at the end of a reporting period, from one reporting period to another. The purpose of the Unallocated category is to ensure that Adjusted Net Trading Income by category sums to total Adjusted Net Trading Income, which can be reconciled to Trading Income, Net, calculated in accordance with GAAP. We do not allocate any resulting differences based on the timing of revenue recognition.

 

6


 

Financial Condition

 

As of September 30, 2018, Virtu had $415.9 million in cash and cash equivalents, and total long-term debt outstanding in an aggregate principal amount of $930.8 million.

 

Share Repurchase Program

 

The Virtu Financial, Inc. Board of Directors approved the share repurchase program for $100 million Class A common stock and common units of Virtu Financial LLC in February 2018.  Since the inception of the program, the Company has repurchased approximately 2.37 million shares and units for approximately $61.9 million.  The Company now has approximately $38.1 million remaining capacity for future purchases of common stock and common units under the plan.

 

Non-GAAP Financial Measures and Other Items

 

To supplement our unaudited condensed consolidated financial statements presented in accordance with generally accepted accounting principles (“GAAP”), we use the following non-GAAP measures of financial performance:

 

·                  “Adjusted Net Trading Income”, which is the amount of revenue we generate from our market making activities, or trading income, net, plus commissions, net and technology services, plus interest and dividends income and expense, net, less direct costs associated with those revenues, including brokerage, exchange and clearance fees, net and payments for order flow. Management believes that this measurement is useful for comparing general operating performance from period to period. Although we use Adjusted Net Trading Income as a financial measure to assess the performance of our business, the use of Adjusted Net Trading Income is limited because it does not include certain material costs that are necessary to operate our business. Our presentation of Adjusted Net Trading Income should not be construed as an indication that our future results will be unaffected by revenues or expenses that are not directly associated with our market making activities.

 

·                  “EBITDA”, which measures our operating performance by adjusting Net Income to exclude financing interest expense on our long-term borrowings, debt issue cost related to debt refinancing, depreciation and amortization, amortization of purchased intangibles and acquired capitalized software, and income tax expense, and “Adjusted EBITDA”, which measures our operating performance by further adjusting EBITDA to exclude severance, reserve for legal matter, transaction advisory fees and expenses, termination of office leases, acquisition related retention bonus, trading related settlement income, gain on sale of business, connectivity early termination, other, net, write-down of assets, share based compensation, charges related to share based compensation at IPO, 2015 Management Incentive Plan, and charges related to share based compensation at IPO, and “Adjusted EBITDA Margin”, which compares Adjusted EBITDA to Adjusted Net Trading Income.

 

·                  “Normalized Adjusted Net Income”, “Normalized Adjusted Net Income before income taxes”, “Normalized provision for income taxes”, and “Normalized Adjusted EPS”, which we calculate by adjusting Net Income to exclude certain items and other non-cash items, assuming that all vested and unvested Virtu Financial LLC units have been exchanged for Class A Common Stock, and applying a corporate tax rate, which was between 35.5% and 37% for periods prior to January 1, 2018 and decreasing to approximately 23% beginning January 1, 2018 as a result of the Tax Act.

 

·                  “Adjusted Operating Expenses”, which we calculate by adjusting total operating expenses to exclude severance, share based compensation, reserve for legal matters, connectivity early termination and write-down of assets.

 

Total Adjusted Net Trading Income, EBITDA, Adjusted EBITDA, Adjusted EBITDA Margin, Normalized Adjusted Net Income, Normalized Adjusted Net Income before income taxes, Normalized provision for income taxes, Normalized Adjusted EPS and Adjusted Operating Expenses are non-GAAP financial measures used by management in evaluating operating performance and in making strategic decisions. Additional information provided regarding the breakdown of Total Adjusted Net Trading Income by category is also a non-GAAP financial measure but is not used by the Company in evaluating operating performance and in making strategic decisions. In addition, these non-GAAP financial measures or similar non-GAAP measures are used by research analysts,

 

7


 

investment bankers and lenders to assess our operating performance. Management believes that the presentation of Adjusted Net Trading Income, EBITDA, Adjusted EBITDA, Adjusted EBITDA Margin, Normalized Adjusted Net Income, Normalized Adjusted Net Income before income taxes, Normalized provision for income taxes, Normalized Adjusted EPS and Adjusted Operating Expenses provide useful information to investors regarding our results of operations because they assist both investors and management in analyzing and benchmarking the performance and value of our business. Adjusted Net Trading Income, EBITDA, Adjusted EBITDA, Adjusted EBITDA Margin, Normalized Adjusted Net Income, Normalized Adjusted Net Income before income taxes, Normalized provision for income taxes, Normalized Adjusted EPS and Adjusted Operating Expenses provide indicators of general economic performance that are not affected by fluctuations in certain costs or other items. Accordingly, management believes that these measurements are useful for comparing general operating performance from period to period. Furthermore, our credit agreement contains covenants and other tests based on metrics similar to Adjusted EBITDA. Other companies may define Adjusted Net Trading Income, Adjusted EBITDA, Adjusted EBITDA Margin, Normalized Adjusted Net Income, Normalized Adjusted Net Income before income taxes, Normalized provision for income taxes, Normalized Adjusted EPS and Adjusted Operating Expenses differently, and as a result our measures of Adjusted Net Trading Income, Adjusted EBITDA, Adjusted EBITDA Margin, Normalized Adjusted Net Income, Normalized Adjusted Net Income before income taxes, Normalized provision for income taxes, Normalized Adjusted EPS and Adjusted Operating Expenses may not be directly comparable to those of other companies. Although we use these non-GAAP financial measures as financial measures to assess the performance of our business, such use is limited because they do not include certain material costs necessary to operate our business.

 

Adjusted Net Trading Income, EBITDA, Adjusted EBITDA and Normalized Adjusted Net Income should be considered in addition to, and not as a substitute for, Net Income in accordance with U.S. GAAP as a measure of performance. Our presentation of Adjusted Net Trading Income, EBITDA, Adjusted EBITDA, Adjusted EBITDA Margin, Normalized Adjusted Net Income, Normalized Adjusted Net Income before income taxes, Normalized provision for income taxes, Normalized Adjusted EPS and Adjusted Operating Expenses should not be construed as an indication that our future results will be unaffected by unusual or nonrecurring items. Adjusted Net Trading Income, Normalized Adjusted Net Income, Normalized Adjusted Net Income before income taxes, Normalized provision for income taxes, Normalized Adjusted EPS and our EBITDA-based measures have limitations as analytical tools, and you should not consider them in isolation or as substitutes for analysis of our results as reported under U.S. GAAP. Some of these limitations are:

 

·                  they do not reflect every cash expenditure, future requirements for capital expenditures or contractual commitments;

 

·                  our EBITDA-based measures do not reflect the significant interest expense or the cash requirements necessary to service interest or principal payment on our debt;

 

·                  although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced or require improvements in the future, and our EBITDA-based measures do not reflect any cash requirement for such replacements or improvements;

 

·                  they are not adjusted for all non-cash income or expense items that are reflected in our statements of cash flows;

 

·                  they do not reflect the impact of earnings or charges resulting from matters we consider not to be indicative of our ongoing operations; and

 

·                  they do not reflect limitations on our costs related to transferring earnings from our subsidiaries to us.

 

Because of these limitations, Adjusted Net Trading Income, EBITDA, Adjusted EBITDA and Normalized Adjusted Net Income are not intended as alternatives to Net Income as indicators of our operating performance and should not be considered as measures of discretionary cash available to us to invest in the growth of our business or as measures of cash that will be available to us to meet our obligations. We compensate for these limitations by using Adjusted Net Trading Income, EBITDA, Adjusted EBITDA and Normalized Adjusted Net Income along with other comparative tools, together with U.S. GAAP measurements, to assist in the evaluation of operating performance. These U.S. GAAP measurements include Net Income, cash flows from operations and cash flow data. See below a reconciliation of each non-GAAP measure to the most directly comparable GAAP measure.

 

8


 

Virtu Financial, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

(in thousands, except share and per share data)

 

2018

 

2017

 

2018

 

2017

 

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

Trading income, net

 

$

235,699

 

$

203,907

 

$

900,454

 

$

479,644

 

Commissions, net and technology services

 

40,252

 

43,351

 

140,661

 

49,237

 

Interest and dividends income

 

21,451

 

20,430

 

61,337

 

30,933

 

Other, net

 

(2,279

)

3,598

 

335,851

 

3,647

 

Total revenues

 

295,123

 

271,286

 

1,438,303

 

563,461

 

 

 

 

 

 

 

 

 

 

 

Operating Expenses:

 

 

 

 

 

 

 

 

 

Brokerage, exchange and clearance fees, net

 

68,638

 

64,584

 

229,779

 

170,253

 

Communication and data processing

 

39,516

 

45,998

 

137,793

 

83,190

 

Employee compensation and payroll taxes

 

44,827

 

72,341

 

150,723

 

111,053

 

Payments for order flow

 

18,283

 

12,071

 

50,381

 

12,071

 

Interest and dividends expense

 

32,566

 

31,242

 

101,199

 

58,456

 

Operations and administrative

 

17,254

 

24,183

 

53,671

 

35,931

 

Depreciation and amortization

 

16,012

 

15,602

 

47,558

 

29,157

 

Amortization of purchased intangibles and acquired capitalized software

 

6,367

 

6,440

 

20,042

 

6,546

 

Termination of office leases

 

1,440

 

 

23,300

 

 

Debt issue cost related to debt refinancing

 

3,347

 

4,869

 

11,727

 

9,351

 

Transaction advisory fees and expenses

 

(261

)

15,677

 

8,985

 

24,188

 

Charges related to share based compensation at IPO

 

 

181

 

24

 

545

 

Financing interest expense on long-term borrowings

 

17,709

 

24,593

 

55,536

 

40,141

 

Total operating expenses

 

265,698

 

317,781

 

890,718

 

580,882

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes and noncontrolling interest

 

29,425

 

(46,495

)

547,585

 

(17,421

)

Provision for income taxes

 

13,815

 

(6,505

)

75,330

 

(2,918

)

 

 

 

 

 

 

 

 

 

 

Net income

 

$

15,610

 

$

(39,990

)

$

472,255

 

$

(14,503

)

 

 

 

 

 

 

 

 

 

 

Noncontrolling interest

 

(6,998

)

26,472

 

(263,682

)

6,466

 

 

 

 

 

 

 

 

 

 

 

Net income available for common stockholders

 

$

8,612

 

$

(13,518

)

$

208,573

 

$

(8,037

)

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.08

 

$

(0.17

)

$

2.07

 

$

(0.17

)

Diluted

 

$

0.08

 

$

(0.17

)

$

2.04

 

$

(0.17

)

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

 

 

 

 

 

 

 

Basic

 

106,692,034

 

79,199,142

 

99,038,084

 

53,520,346

 

Diluted

 

107,128,206

 

79,199,142

 

100,468,860

 

53,520,346

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

Net income

 

$

15,610

 

$

(39,990

)

$

472,255

 

$

(14,503

)

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

Foreign exchange translation adjustment, net of taxes

 

(666

)

2,558

 

(3,713

)

8,300

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

$

14,944

 

$

(37,432

)

$

468,542

 

$

(6,203

)

Less: Comprehensive income attributable to noncontrolling interest

 

(6,708

)

25,122

 

(262,239

)

1,014

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income available for common stockholders

 

$

8,236

 

$

(12,310

)

$

206,303

 

$

(5,189

)

 

9


 

 

Virtu Financial, Inc. and Subsidiaries

Reconciliation to Non-GAAP Operating Data (Unaudited)

 

The following tables reconcile Condensed Consolidated Statements of Comprehensive Income to arrive at Adjusted Net Trading Income, EBITDA, Adjusted EBITDA, and selected Operating Margins.

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

(in thousands, except percentages)

 

2018

 

2017

 

2018

 

2017

 

 

 

 

 

 

 

 

 

 

 

Reconciliation of Trading income, net to Adjusted Net Trading Income

 

 

 

 

 

 

 

 

 

Trading income, net

 

$

235,699

 

$

203,907

 

$

900,454

 

$

479,644

 

Commissions, net and technology services

 

40,252

 

43,351

 

140,661

 

49,237

 

Interest and dividends income

 

21,451

 

20,430

 

61,337

 

30,933

 

Brokerage, exchange and clearance fees, net

 

(68,638

)

(64,584

)

(229,779

)

(170,253

)

Payments for order flow

 

(18,283

)

(12,071

)

(50,381

)

(12,071

)

Interest and dividends expense

 

(32,566

)

(31,242

)

(101,199

)

(58,456

)

 

 

 

 

 

 

 

 

 

 

Adjusted Net Trading Income

 

$

177,915

 

$

159,791

 

$

721,093

 

$

319,034

 

 

 

 

 

 

 

 

 

 

 

Reconciliation of Net Income to EBITDA and Adjusted EBITDA

 

 

 

 

 

 

 

 

 

Net income

 

$

15,610

 

$

(39,990

)

$

472,255

 

$

(14,503

)

Financing interest expense on long-term borrowings

 

17,709

 

24,593

 

55,536

 

40,141

 

Debt issue cost related to debt refinancing

 

3,347

 

4,869

 

11,727

 

9,351

 

Depreciation and amortization

 

16,012

 

15,602

 

47,558

 

29,157

 

Amortization of purchased intangibles and acquired capitalized software

 

6,367

 

6,440

 

20,042

 

6,546

 

Provision for income taxes

 

13,815

 

(6,505

)

75,330

 

(2,918

)

 

 

 

 

 

 

 

 

 

 

EBITDA

 

$

72,860

 

$

5,009

 

$

682,448

 

$

67,774

 

 

 

 

 

 

 

 

 

 

 

Severance

 

1,291

 

9,295

 

7,625

 

10,172

 

Reserve for legal matter

 

1,620

 

 

 

2,020

 

(2,176

)

Transaction advisory fees and expenses

 

(261

)

15,677

 

8,985

 

24,188

 

Termination of office leases

 

1,440

 

1,811

 

23,300

 

1,811

 

Acquisition related retention bonus

 

 

23,050

 

 

23,050

 

Connectivity early termination

 

 

 

7,062

 

 

Loss (gain) on sale of businesses

 

2,339

 

 

(335,210

)

 

Other, net

 

(60

)

(300

)

(641

)

(289

)

Write-down of assets

 

542

 

544

 

3,239

 

544

 

Share based compensation

 

7,091

 

2,270

 

20,213

 

17,102

 

Charges related to share based compensation at IPO, 2015 Management Incentive Plan

 

1,425

 

1,336

 

4,356

 

4,134

 

Charges related to share based compensation awards at IPO

 

 

181

 

24

 

545

 

 

 

 

 

 

 

 

 

 

 

Adjusted EBITDA

 

$

88,287

 

$

58,873

 

$

423,421

 

$

146,855

 

 

 

 

 

 

 

 

 

 

 

Selected Operating Margins

 

 

 

 

 

 

 

 

 

Net Income Margin(1)

 

8.8

%

-25.0

%

65.5

%

-4.5

%

EBITDA Margin(2)

 

41.0

%

3.1

%

94.6

%

21.2

%

Adjusted EBITDA Margin(3)

 

49.6

%

36.8

%

58.7

%

46.0

%

 

 

 

 

 

 

 

 

 

 

 


(1) Calculated by dividing net income by Adjusted Net Trading Income.

(2) Calculated by dividing EBITDA by Adjusted Net Trading Income.

(3) Calculated by dividing Adjusted EBITDA by Adjusted Net Trading Income.

 

10


 

Virtu Financial, Inc. and Subsidiaries

Reconciliation to Non-GAAP Operating Data (Unaudited)

(Continued)

 

The following tables reconcile Condensed Consolidated Statements of Comprehensive Income to arrive at Normalized Adjusted Net Income before income taxes, Normalized provision for income taxes, Normalized Adjusted Net Income and Normalized Adjusted EPS.

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

(in thousands, except per share data)

 

2018

 

2017

 

2018

 

2017

 

 

 

 

 

 

 

 

 

 

 

Reconciliation of Net Income to Normalized Adjusted Net Income

 

 

 

 

 

 

 

 

 

Net income

 

$

15,610

 

$

(39,990

)

$

472,255

 

$

(14,503

)

Provision for income taxes

 

13,815

 

(6,505

)

75,330

 

(2,918

)

Income before income taxes

 

$

29,425

 

$

(46,495

)

$

547,585

 

$

(17,421

)

Amortization of purchased intangibles and acquired capitalized software

 

6,367

 

6,440

 

20,042

 

6,546

 

Financing interest expense related to KCG transaction

 

 

3,010

 

 

4,626

 

Debt issue cost related to debt refinancing

 

3,347

 

4,869

 

11,727

 

9,351

 

Severance

 

1,291

 

9,295

 

7,625

 

10,172

 

Reserve for legal matter

 

1,620

 

 

2,020

 

(2,176

)

Transaction advisory fees and expenses

 

(261

)

15,677

 

8,985

 

24,188

 

Termination of office leases

 

1,440

 

1,811

 

23,300

 

1,811

 

Connectivity early termination

 

 

 

7,062

 

 

Write-down of assets

 

542

 

1,075

 

3,239

 

2,177

 

Acquisition related retention bonus

 

 

23,050

 

 

23,050

 

Loss (gain) on sale of businesses

 

2,339

 

 

(335,210

)

 

 

Other, net

 

(60

)

(300

)

(641

)

(289

)

Share based compensation

 

7,091

 

2,270

 

20,213

 

17,102

 

Charges related to share based compensation at IPO, 2015 Management Incentive Plan

 

1,425

 

1,336

 

4,356

 

4,134

 

Charges related to share based compensation awards at IPO

 

 

181

 

24

 

545

 

Normalized Adjusted Net Income before income taxes

 

$

54,566

 

$

22,219

 

$

320,327

 

$

83,816

 

Normalized provision for income taxes(1)

 

12,550

 

8,221

 

73,675

 

31,012

 

Normalized Adjusted Net Income

 

$

42,016

 

$

13,998

 

$

246,652

 

$

52,804

 

 

 

 

 

 

 

 

 

 

 

Weighted Average Adjusted shares outstanding(2)

 

191,989,323

 

178,490,856

 

190,886,342

 

152,812,060

 

 

 

 

 

 

 

 

 

 

 

Normalized Adjusted EPS

 

$

0.22

 

$

0.08

 

$

1.29

 

$

0.35

 

 


(1) Reflects U.S. federal, state, and local income tax rate applicable to corporations of approximately 23% for 2018 and 35.5% for 2017

(2) Assumes that (1) holders of all vested and unvested Virtu Financial LLC Units (together with corresponding shares of Class C common stock), have exercised their right to exchange such Virtu Financial LLC Units for shares of Class A common stock on a one-for-one basis,  (2) holders of all Virtu Financial LLC Units (together with corresponding shares of Class D common stock), have exercised their right to exchange such Virtu Financial LLC Units for shares of Class B common stock on a one-for-one basis, and subsequently exercised their right to convert the shares of Class B common stock into shares of Class A common stock on a one-for-one basis.

 

11


 

Virtu Financial, Inc. and Subsidiaries

Condensed Consolidated Statements of Financial Condition (Unaudited)

 

 

 

September 30

 

December 31,

 

 

 

2018

 

2017

 

 

 

(in thousands, except share data)

 

Assets

 

 

 

 

 

Cash and cash equivalents

 

$

415,933

 

$

532,887

 

Securities borrowed

 

1,305,789

 

1,471,172

 

Securities purchased under agreements to resell

 

10,014

 

 

Receivables from broker-dealers and clearing organizations

 

1,115,764

 

972,018

 

Trading assets, at fair value

 

2,926,753

 

2,712,622

 

Property, equipment and capitalized software, net

 

117,501

 

137,018

 

Goodwill

 

836,583

 

844,883

 

Intangibles (net of accumulated amortization)

 

90,069

 

111,224

 

Deferred taxes

 

178,087

 

125,760

 

Assets of business held for sale

 

 

55,070

 

Other assets

 

242,037

 

357,352

 

Total assets

 

$

7,238,530

 

$

7,320,006

 

 

 

 

 

 

 

Liabilities and equity

 

 

 

 

 

Liabilities

 

 

 

 

 

Short-term borrowings, net

 

$

14,567

 

$

27,883

 

Securities loaned

 

800,145

 

754,687

 

Securities sold under agreements to repurchase

 

301,238

 

390,642

 

Payables to broker-dealers and clearing organizations

 

952,343

 

716,205

 

Trading liabilities, at fair value

 

2,398,094

 

2,384,598

 

Tax receivable agreement obligations

 

199,264

 

147,040

 

Accounts payable and accrued expenses and other liabilities

 

284,241

 

358,825

 

Long-term borrowings, net

 

904,027

 

1,388,548

 

Total liabilities

 

$

5,853,919

 

$

6,168,428

 

 

 

 

 

 

 

Total equity

 

1,384,611

 

1,151,578

 

 

 

 

 

 

 

Total liabilities and equity

 

$

7,238,530

 

$

7,320,006

 

 

 

 

As of September 30, 2018

 

Ownership of Virtu Financial LLC Interests:

 

Interests

 

%

 

 

 

 

 

 

 

Virtu Financial, Inc. - Class A Common Stock and Restricted Stock Units

 

108,235,977

 

56.6

%

Non-controlling Interests (Virtu Financial LLC)

 

83,092,871

 

43.4

%

Total Virtu Financial LLC Interests

 

191,328,848

 

100.0

%

 

12


 

About Virtu Financial, Inc.

 

Virtu is a leading financial firm that leverages cutting edge technology to deliver liquidity to the global markets and innovative, transparent trading solutions to our clients. As a market maker, Virtu provides deep liquidity that helps to create more efficient markets around the world. Our market structure expertise, broad diversification, and execution technology enables us to provide competitive bids and offers in over 25,000 securities, at over 235 venues, in 36 countries worldwide.

 

Cautionary Note Regarding Forward-Looking Statements

 

The foregoing information and certain oral statements made from time to time by representatives of the Company contain certain forward-looking statements that reflect the company’s current views with respect to certain current and future events and financial performance, including with respect to integration of KCG and synergy realization and with respect to the acquisition of ITG and related integration and synergy realization. These forward-looking statements are and will be, as the case may be, subject to many risks, uncertainties and factors relating to the Company’s operations and business environment which may cause the company’s actual results to be materially different from any future results, expressed or implied, in these forward-looking statements. Any forward-looking statements in this release are based upon information available to the company on the date of this release. The Company does not undertake to publicly update or revise its forward-looking statements even if experience or future changes make it clear that any statements expressed or implied therein will not be realized. Additional information on risk factors that could potentially affect the Company’s financial results may be found in the Company’s filings with the Securities and Exchange Commission.

 

CONTACT

 

Media and Investor Relations

Andrew Smith

Virtu Financial, Inc.

(212) 418-0195

investor_relations@virtu.com

media@virtu.com

 

13