Virtu Financial, Inc. Class A

Good morning and welcome to the Virtue Financial 2021 Third Quarter Results Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Andrew Smith, Head of Investor Relations. Please go ahead.

Thank you, Anthony, and good morning, everyone. Thanks for joining us. Our third quarter results were released this morning and are available on our website. This morning's call, we have Mr. Douglas Sifu, our Chief Executive Officer, and Mr. Joseph Maluso, our Co-President and Co-Operating Officer, and Mr. Sean Galvin, our Chief Financial Officer. They will begin with prepared remarks and then take your questions. First, a few reminders. Today's call may include forward-looking statements which represent Bertu's current belief regarding future events and are therefore subject to risks, assumptions, and uncertainties which may be outside the company's control. Please note that our actual results and financial conditions may differ materially from what is indicated in these forward-looking statements. It is important to note that any forward-looking statements made on this call are based upon 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 in Form 10-K and other public filings. During today's call, in addition to GAAP results, we may refer to certain non-GAAP measures, including adjusted net trading income, adjusted net income, adjusted EBITDA, and adjusted EBITDA margin. Non-GAAP measures should be considered as supplemental to and not as superior to financial measures prepared in accordance with GAAP. Direct listeners to consult the investor portion of our website where you'll find supplemental information referred to on this call as well as a reconciliation of non-GAAP measures to the equivalent GAAP terms 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 that, I'd like to turn the call over to Doug.

Good morning and thank you, Andrew. This morning we reported our third quarter results, which reflect an 11% increase in adjusted EPS, in a market environment that was slightly softer than the second quarter. For the quarter ended September 30th, we generated 70 cents of adjusted EPS on $5.5 million per day of adjusted net trading income, bringing our results for the first three quarters of 2021 to $3.38 per share and an average adjusted net trading income of $7.6 million per day. Our performance in a quarter such as this highlights the success of our organic business growth plan, the goal of which is to increase our overall baseline performance in two ways. First, by expanding our addressable market by approaching new opportunities such as options market making, crypto, and virtual capital markets. And second, by increasing the competitiveness and profitability in our existing offerings through the hard work of integrating Virtu's best-in-class technology with the businesses we have acquired, evidenced by Virtu's Algo technology, legacy KCG Quant-style strategies, and our customer-facing ETF Blockdesk. I'll point out some important highlights for this quarter. Our growth initiative generated over $350,000 of ante per day, which represents 6% of our ante in the third quarter. Since 2018, we have grown these initiatives by 61% CAGR, and in many cases, leverage our existing technology infrastructure to build these businesses from scratch. In particular, I would highlight that our options market-making business continues to expand, and while we do not expect this business to simply grow in a straight line, we continue to evolve our capabilities, connectivity, and expand the amount of symbols and venues we trade. In the latest quarter, this business saw strong results despite options volumes being down 15% from recent peak in early 2021. We continue to make select key hires to expand the geographic footprint of this business and accelerate our growth. I also want to provide an update on cryptocurrencies. We have formed a dedicated team of traders and technologists and plan to add additional resources in the near term. With the launch of crypto ETFs globally, we now trade approximately 20 products across the U.S., Canada, and Europe. We are now connected to the principal spot venues to source liquidity and have meaningfully increased the number of venues and markets we can access. Given our historical expertise in market making across a diverse range of products and our scale ETF pricing combined with our global connectivity with institutions and retail clients, We believe Virtu is uniquely positioned to provide liquidity to our customers in crypto products. Our ETF block desk continues to make meaningful progress and we are now a top five liquidity provider as measured by the winning hit rate and total notional volume dealt in U.S. ETFs. I also want to note the progress we have made in our commitment to return capital to our shareholders. Our board of directors has previously authorized $470 million in share repurchases. Through the end of October, we have repurchased 13.4 million shares at an average price of $26.95 for a total of $361 million, consistent with our previously announced targets for share repurchases. In the third quarter alone, we repurchased 5.4 million shares at an average price of $25.71 for a total approximately of $139 million. As we look out on the next 12 to 24 months, we want to reiterate our commitment to returning capital to shareholders and I'm announcing that Virtu's Board of Directors has approved an additional repurchase authorization of $750 million over the next two years. We believe this level is consistent with our expectations for cash flows generated by the business and would target this time horizon to complete the buybacks. As we stated previously, we remain committed to returning capital to investors and have prioritized share repurchases for the foreseeable future. We aim to be in the market consistently, buying back shares as we work to accomplish our capital management goals. Our baseline performance through the cycle is enhanced by incremental intake from our organic business growth plan and the effect of returning capital to our shareholders through share buybacks. We believe that over the long term, This combination will be a powerful driver of growth. The steady growth of these initiatives, as well as the continued less volatile performance of our execution services segment, coupled with the culmination of our multi-year integrations of KCG and ITG, has led us to provide clear detail around where virtual results should be given various levels of A&T in a given time period. We believe our performance this quarter is consistent with that guidance and value creation for shareholders. I'd like to take a few minutes to provide an update on the recent industry discussions around market structure, payment order flow, and wholesale market making. I provided a detailed update in our last public earnings call and there has been no shortage of activity since then. As I have said many times, we welcome the dialogue and we are eager to have fact and data driven discussions with regulators, customers and other constituents as we do on a regular basis. Since I last spoke to you, it is clearer than ever that our markets, especially where retail order flow is concerned, remain fair, transparent and resilient. Study after study and empirical analysis after empirical analysis continues to show that the U.S. equity markets are more accessible than ever, and U.S. retail investor experience has never been better and is decidedly better than any market in the world. As such, we and many other market participants remain concerned that calls for reform are based on false narratives and factually unsupportable conclusions and innuendos. Today, we have a robust regulatory framework that has been developed and maintained by the SEC, FINRA, and others, which was designed to foster competition and has always been transparent, fact- and data-driven, and mostly free of the politics of the day. In an effort to further enhance transparency, we recently petitioned the SEC for specific regulatory reforms, to enhance the measurement and objective disclosure of the enormous benefits that U.S. retail investors receive today. We believe reforms centered on enhancing transparency and enhancing competition will deliver tangible, market-led benefits to retail investors. Despite the noise, innuendo, and political environment, we are confident that the facts, data, and the desire to continue to put retail investors first will win the day. When they look at the data, regulators, politicians, and critics will see that the massive benefits of today's competitive ecosystem, which regulation and transparency have created for retail investors. Now I would like to turn the call over to Joe Malusa. Joe? Thanks, Doug. Sean and I will have some brief comments, and then we will turn to questions. After several quarters of elevated market activity, realized volatility dropped to 11.1%, which is the lowest we have seen in several years, and 10% below the 2019 average. And as you know, 2019 was a historically low point for volatility. Further, U.S. equity volumes were down 8% overall, and retail equity 605 volumes in the United States were down 6.6%. Despite the market conditions that were softer than the second quarter and meaningfully below the market activity of 2020, and first quarter of this year, our market-making business outperformed, realizing $249 million in adjusted net trading income, or $3.9 million per day. We're 5% better than the second quarter. Our execution services business also performed better than the market opportunity this quarter, realizing $106 million in adjusted net trading income, or $1.66 million per day. This is 5% less than 2Q, However, VES is a global business, and market volumes were down a larger percent quarter over quarter in most regions. For example, the U.S. was down 8%, Canada was down 21%, and Europe 6%, with only APAC seeing a slight 3% increase in volumes. VES continues to contribute to our global scale and reduce the quarter-to-quarter variability to our firm-wide results. I will review some thoughts on Virtue's ability to generate growth through both organic initiatives and through the excess cash flow we generate, and how this all translates into revenue and earnings growth rates. Last quarter, we reviewed a slide which showed Virtue's ability to generate earnings at various levels of adjusted net trading income, coupled with our sharing purchase capabilities. Our results here to date and this quarter are consistent with prior indications the earnings and growth potential of our base level of earnings power combined with our growth initiatives and return of cash to shareholders. Since the inception of our share repurchase program less than a year ago, we have repurchased approximately 7% of the company on a gross basis. Compounding this effect over a number of years should meaningfully elevate our base earnings power regardless of the environment. With our current overall debt levels now well within a long-term sustainable nominal amount, our quarterly dividend of 24 cents is more than secure, and we have no immediate plans for any major acquisitions. Our ability to devote most of the substantial cash flow to repurchases will continue. The announced $750 million incremental repurchase authorization will target a two-year period and it's a recognition that over a sufficiently long period of time, Virtu will generate significant cash flows, however episodic. Finally, our growth initiatives, while themselves volatile quarter-to-quarter, are real and accrue to our bottom line, with significant runway to grow. It is worth noting that while many of the initiatives included in our growth slide began only a few years ago, they will not grow in a straight line as volumes and volatilities fluctuate. In the most recent quarter, we witnessed continued strength in some areas such as options, crypto, and virtual capital markets, and experienced a slight slowdown in others, like Block ETF. We remain bullish on these initiatives and the potential for them to contribute meaningfully towards growing our baseline performance in any environment. These organic initiatives, together with a substantial cash flow and appropriate levels of debt going forward, evidence Virtu's ability to thrive in any environment while producing significant returns to shareholders. And now on to Sean to conclude. Thank you, Joe.