Virtu Financial, Inc. Class A

Good morning and welcome to the Vertu Financial 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 touch-tone phone. 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, Kate, and good morning, everyone. Thanks for joining us. Our fourth quarter results were released this morning and are available on our website. On this morning's call, we will have Mr. Douglas Sifu, our Chief Executive Officer, Mr. Joseph Meluso, our Co-President and Co-Chief 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 Virtue'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 condition may differ materially from what is indicated in these forward-looking statements. It's 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 and Form 10-K and other public filings. During today's call, in addition to GAAP measures, 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. These non-GAAP measures should be considered as supplemental to and not as superior to financial measures reported in accordance with GAAP. We 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 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 that, I'd like to turn the call over to Doug.

Thank you very much, Andrew, and good morning, everybody. This morning we reported our fourth quarter results, which reflect a 37% quarter-over-quarter increase in adjusted net trading income to $486 million, adjusted EPS of $1.19, and adjusted EBITDA of $328 million. These results cap another strong year for Virtu. We achieved $1.9 billion in adjusted net trading income, posted $4.57 in adjusted EPS, and $1.3 billion of adjusted EBITDA in 2021. Virtu enters 2022 better positioned than ever to capitalize on the secular and macro tailwinds occurring around the globe as new generations of investors enter the market, new asset classes grow and mature, and as central banks reprice assets and review monetary policy as the world emerges from the pandemic. Taking a look at our results, while the overall market environment was better in the fourth quarter than the third quarter, I'm incredibly proud of how our results significantly outperformed the benchmarks thanks to enhancements within our core market-making businesses, growing adoption of our execution services products, and the continued success of our growth initiatives. Our market-making business produced $5.8 million per day in the quarter, almost 50% more than we achieved in the third quarter, despite volumes and volatility being 10% and 26% higher in the quarter, respectively, and market-wide, 605 volumes being up 4% in the third quarter. Our strong performance was driven by several factors, including most significantly our the continued progress we have made on our efforts to improve internalization, which optimizes how we manage risk across the firm. The benefits of these ongoing enhancements have become evident over the last couple quarters, and we expect that these efforts around firm-wide internalization will continue to bear fruit for the foreseeable future. Our execution services segment also performed well in the fourth quarter, where performance was driven by brokerage with strong U.S. and European contributions despite a number of trends in 2021 that typically favor larger sell-side firms, most notably the spike in new equity-linked issuances, including IPOs. In these results, we see evidence that our multi-year technology integration following the acquisition of ITG is bearing fruit. In total, VES contributed 25% of our total ante in 2021. We also made significant progress in our organic growth initiative last quarter, generating ante of $26 million, a 13% increase over the third quarter. Our option business produced a solid quarter on the back of expanded symbol and venue coverage as we increased our footprint. Growing our options capabilities remains a top priority, and we are investing significant resources to become a wholesaler in options to our retail partners. The contribution from our Virtu Capital Markets business also set a new record in 2021, as issuers took advantage of healthy markets and Virtu's trading capabilities. We recently expanded the Virtu Capital Markets team to help us cover more issuers across the United States and Canada and support the growth of this business. I continue to be most excited about our efforts with regard to becoming a leading global market maker in crypto products. Our crypto market making continues to accelerate as we allocate more traders and technologists to expand our activities across major venues globally. We now trade approximately 30 products across the US, Canada, Europe, and Asia, including the ETF. We continue to support the launch of a US-based spot Bitcoin ETF for crypto. We believe that our crypto market banking will be a significant growth area for the firm for the foreseeable future. We also believe that there is no principled reason that a spot Bitcoin ETF has not been approved and this lack of approval is harming investors and in particular retail investors. These organic growth initiatives increase our overall baseline performance by expanding our global addressable market in multiple dimensions across market making and execution services and complement our persistent enhancements to our core businesses. We are excited for 2022, and we remain focused on investing and executing on the many growth opportunities in front of us. I also want to note our continued commitment to return capital to our shareholders. We purchased 3.7 million shares in the fourth quarter. Jill will go through details, but I want to highlight that since we started our share repurchase program in late 2020, We have repurchased $483 million of Virtu stock through the end of January, reducing our net share count by 6.4%. We believe this method of returning cash to shareholders is an efficient use of our excess cash beyond what is necessary to support our aggressive growth initiatives. As a supplement to our annual dividend, the buyback allows us the flexibility to return more capital in quarters with outsized results and continually reset the bar for earnings. turning to some issues in and around our industry. We remain in continuous dialogue with clients, lawmakers, regulators, and key industry stakeholders regarding market structure policies that provide investors with more investment choices and that make our markets more accessible and more transparent for retail investors. In fact, I believe that the recent focus on the U.S. retail investor has been illuminating for many who may not have realized how well the retail investor is served Our hope is that people now better understand and recognize the billions of dollars of price and size improvement, which indisputably accrue to retail investors thanks to competition within the current system. Before I turn it over to Joe, I would like to highlight a number of the secular tailwinds, as well as macro tailwinds, that Virtu is well-positioned to capture, focusing first on the secular tailwinds driving growth. As many of you are aware, today's markets are evolving at a faster pace than ever thanks to unrelenting innovation, the application of technology, and end users' demand to have everything readily available in the palm of their hands for little or no cost. These factors increasingly contribute to the growth of secular tailwinds, including the birth of new asset classes, new business models such as zero commission trading, and the continued electronification of markets all of which expands the long-term opportunity for virtue the success of zero commission trading has fueled a new and more diverse generation of informed retail investors empowered by the ease and efficiency of accessing the markets they are significantly growing and broadening the investor base in u.s equities and options this new level of sustained retail engagement has invigorated the competition among retail brokers, creating a virtuous feedback loop of innovation and impressive offerings. Public metrics, such as FINRA's customer account balance data, shows that retail investors increased their cash balance by 7% in the fourth quarter and increased their investing on borrowed margin by 4%. Compared to Q4 2020, cash balances are up 15% and investing on borrowed margin is up 28%. demonstrating that retail investors are doing more than just opening trading accounts. They are funding and using them. We see this as a strong positive indicator about the new level of long-term retail engagement in our capital markets. Other examples of secular tailwinds include the growth and maturation of new asset classes, such as crypto products, and the continued electronification of existing asset classes, like fixed incomes. As I mentioned a moment ago, Virtu also benefits from macroeconomic tailwinds, such as changes in global monetary policy, as well as social and geopolitical uncertainty. As the world hopefully begins to emerge from this terrible pandemic and finds its new normal, central banks are looking to taper quantitative easing and raise rates to address inflation concerns, causing the market to reprice valuations and risks. Virtu's investment in creating a global scale technology platform uniquely positions us to capture significant upsides from volatility wherever and whenever it arises. While it is still early, January's volumes and volatilities might be a glimpse of what is to come. That said, Virtu's commitment to disciplined expense management and scaled operations means that our success is not tied to a single trend or type of macro environment. We are well positioned for success across a variety of macroeconomic environments. Our efforts to expand our footprint by entering new markets and products combined with our continued enhancements to our core businesses compounds the sustained growth potential for Virtu from secular and macro tailwinds. Now I'll ask Joe to fill in some more details. Joe?