Earnings Call Transcript - VIRT Q1 2025

Operator, Operator

Ladies and gentlemen, thank you for standing by, and welcome to Virtu Financial, Inc. 2025 first quarter results. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you would need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. Please be advised that today's conference is being recorded. I would like now to turn the conference over to Andrew Smith, Head of Investor Relations. Please go ahead.

Andrew Smith, Head of Investor Relations

Thank you, Michelle, and good morning, everyone. Thank you for joining us. Our first quarter 2025 results were released this morning and are available on our website. With us today on this morning's call, we have Mr. Douglas Cifu, our Chief Executive Officer, Mr. Joseph Molluso, our Co-President and Co-Chief Operating Officer, and Ms. Cindy Lee, our Chief Financial Officer. We'll begin with prepared remarks and then take your questions. First, a few reminders. Today's call may include forward-looking statements, which represent Virtu Financial, Inc.'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 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 risk factors contained in our annual report on 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 reconciliation of non-GAAP measures to the equivalent GAAP term in the earnings materials. An explanation of why we deem this information meaningful as well as how management uses these metrics. And with that, I'd like to turn the call over to Doug.

Douglas Cifu, CEO

Thank you, Andrew, and good morning, everyone. Thank you for joining us this morning. In my remarks today, I will focus on Virtu Financial, Inc.'s first quarter 2025 financial and business performance and strategic initiatives. Following my remarks, Joe and Cindy will provide additional details on our results. This morning, we reported $1.30 of normalized EPS on total adjusted net trading income per day of $8.3 million. Quarterly EBITDA was $320 million and our EBITDA margin was a healthy 64%. This represents our highest net trading income per day since 2021, and reflects the continued long-term improvement of our core business as well as our benefit. Our expansion into new markets led to market making having its best quarter since the first quarter of 2021. Thanks to our continued enhancements, our retail wholesale business was strong and our global non-customer market making businesses continue to outperform our opportunity metrics. In particular, our non-customer global equities, digital asset, and ETN block market making franchises delivered outstanding performances. This quarter demonstrates the benefits of our global diversified market making operations and highlights its ability to outperform separately from the US retail wholesale business. In addition to our non-customer market making businesses in the US, Europe, and Asia Pacific equities and options, we make markets in energy products like crude oil and natural gas, currencies, digital assets, fixed income instruments, and a range of other commodities including precious and non-precious metals, all of which performed well during the quarter. We continue to extend our listed options business in Asia, India, and Japan, and have expanded our coverage of tokens and venues in digital assets, and we are making strides in expanding our ETN block business in Europe. In addition, we had an outstanding quarter in metals given the recent tariffs that have now been implemented. While our business does benefit from increased retail activity in the United States, we are also broadly diversified and leveraged to increase volumes and volatility across asset classes and geographies. The diverse strength of the firm was further evidenced by Virtu Execution Services' seventh straight quarter of increasing net trading income, a trend which has persisted through a range of both favorable and less favorable operating conditions. The VES suite of scalable, highly performing products has begun to resonate with our growing and impressive global buy-side and sell-side client list. We continue to make significant inroads through product penetration and cross-selling. We believe our VES business has significant room to grow. Our product line is best in class and our position is rising on broker wheels. We have successfully rolled out Virtu Technology Services or VTS, with more in the queue. We've deployed an agency fixed income RFQ platform to a handful of clients, building a dealer network of almost twenty brokers on top of our client connectivity. In 2024, we delivered on our client significantly increase our sales prowess with a number of key hires further accelerating our growth in this space, and the results have been noticeable. In addition, Virtu Capital Markets, which has been a pioneer in implementing at-the-market offerings for corporate issuers to raise capital, is off to a great start in 2025. What we call VES today is the combination of the Knight Execution Service business we acquired when we bought Knight and ITG's Global workflow analytics and connectivity franchise. Since acquiring those businesses, we've completely overhauled their respective technology platforms and upgraded the entire suite of products from our outhouse deposit alert and our now valuable and multi-asset class workload and analytics products. The market penetration and adoption levels that VES is realizing today are the culmination of this hard work and our continued investments. Our VES products allow us to achieve deep integration to client workflows, resulting in growth of recurring and reoccurring revenue streams. In addition to these technological and product enhancements, we have also streamlined our operations. We do not break out bottom line results in our segment reporting. However, suffice to say, our EBITDA margin on these businesses are substantially higher, and depending on the quarters as much as two times or more when we acquired. Given the outlined improvements in this business and the outlook and recent performance, we do not see any reason why in the medium term we cannot achieve a $2 million per day run rate for VES. Now let me comment on recent market activity. As you know, after the tariff and assets on April 2nd, global markets became extremely volatile. I want to make a handful of comments about the state of the market and our experience in the last few weeks. First and very importantly, despite some stresses, the market infrastructure performed exceedingly well. We saw no interruptions in our flows, nor significant liquidity concerns among any of our counterparties, which include the most important clearing houses, prime brokers, retail brokers, banks, and trading venues around the world. This performance is the culmination of years of strengthening the financial market infrastructure and sensible and prudent regulation for which we have always been an advocate. This reflects the lessons learned from prior market events that informed us that competition makes markets better by driving brokers, ATSs, and exchanges to innovate and invest in their systems. Second, our operational performance was outstanding. The past several weeks included the highest volume volatility days in Virtu Financial, Inc.'s history. I am proud to say that we had no counterparty issues from a risk perspective or operational issues that prevented us from servicing clients. While naturally, we had increased margin requirements as we anticipated, our liquidity was more than sufficient to meet all obligations. Looking at retail participation, as measured by retail shares and quoted spread, the first few weeks of the second quarter were well ahead of 2024 and the first quarter of 2025. Indeed, the last time we saw retail participation at these levels was during the pandemic days of 2020. We remain as optimistic as we have been since 2020, very bullish on long-term retail engagement. Of course, broader market volume will come down, but the most recent elevated levels have decreased as anticipated. However, if you look at the long-term trend of retail participation, we believe that the data shows a secular uptrend in retail engagement. In fact, if you look at the share volume and quoted spreads over the last six years, you will notice that even after heightened activity in 2020 and 2021, the market settled well above its pre-pandemic highs. I've also noted several market trends including the strong new account opening figures from retail brokers that are indicative of retail participation continuing at the new baseline levels. I cannot conclude without commenting on our outlook both near term and long term. Virtu Financial, Inc. was built as a highly diversified market making business further diversified by the growth of its execution services businesses. The current environment is favorable for both our customer and non-customer market making businesses, and our execution services business as well. This has been an excellent environment for our growing options business, digital asset business, and ETF block business which, in recent days, has handled a record number of requests for quotes and working orders from clients. In broad strokes, our growth is driven by three key forces: first, sharpening our edge to better capture opportunities within our existing businesses; second, extending our edge into new products and markets, such as electronification of fixed income and the growing adoption of digital assets and ETFs abroad; and third, we benefit from the broader tailwinds as market volumes and volatility drive thanks to our diverse global multi-asset class market making execution services platform; which enables us to participate in both short and long-term trends wherever and whenever they emerge. Importantly, the first two drivers are within our control, powered by our execution, innovation, and strategic investment regardless of how favorable or challenging the external environment may be. I think especially in times like these for our business, it's important to put things into perspective, and note how expansive Virtu Financial, Inc.'s business has become over the years. With more on this point, I'd like to turn the conversation over to Joe Molluso for more commentary.

Joseph Molluso, Co-President and Co-Chief Operating Officer

Thank you. We thought it was an appropriate time to revisit briefly some analysis we had included in our supplemental materials and on our investor website in the past that are meant to provide some long-term perspective on Virtu Financial, Inc. and how we have grown our business in a deliberate way over the years. So first, on slide eight in the supplemental materials, we went back to our IPO ten years ago and arranged this data from 2015 until the first quarter. Despite the inherent volatility in our business, there is a clear upward trend in our results. The next slide on page nine is revisiting how to analyze Virtu Financial, Inc. Such as Virtu. The top of the page shows the sensitivity analysis based on adjusting the trading income and the resulting EPS. We introduced the sensitivity analysis about five years ago, and have been able to realize results that are consistent with this analysis due to the rigor we have around cost and capital management—things we can control as opposed to the operating environment we obviously can't control. Our average daily pro forma net trading income going back to 2019, which was the first full year after the ITG acquisition, has been $6.3 million per day. Through the cycle, through all the ups and downs of different market cycles, our performance translates into $6.3 million per day, which extrapolates from the chart to $3.40 of adjusted EPS. We have real growth in the operating model as demonstrated over the long term, which we are accelerating through our organic initiatives as seen in the middle of the slide. Going back to what Doug said in his prepared remarks, while our business is volatile, we believe the pieces are in place to continue growing as we further enhance our capabilities, and as we extend our abilities to new products and markets. As he mentioned, we believe the VES could be a $2 million per day business through the cycle. Add to that the continuous contribution of our non-retail wholesaling business, and this means you should be able to raise the bar around cyclical troughs over time. The final component of this plan is our continued share buyback program. The top line growth we have realized is significant and enhances our bottom line given our operating leverage. Our share buyback program has and will continue to compound this earnings growth. You have a desire to look out two to three years, and even if you conclude that our business will continue to be volatile and produce a trough year at a given cycle, the cumulative impact of the share buybacks is profound, accounting for meaningful growth on top of any organic growth assumptions you contemplate. With that, I'm going to turn the call over to our CFO, Cindy Lee.

Cindy Lee, CFO

Thank you, Joe. Good morning, everyone. On slide three of our supplemental materials, we provided a summary of our quarterly performance. For the first quarter of 2025, our adjusted net trading income, or NTI, which represents our trading gains net of deferred trading expenses, totaled $497 million or $8.3 million per day. Market making adjusted net trading income was $382 million or $6.4 million per day, while Execution Services adjusted net income was $115 million or $1.9 million per day. Our first quarter 2025 normalized adjusted EPS was $1.30. Adjusted EBITDA was $320 million for the first quarter 2025, and our adjusted EBITDA margin was 64%. On slide twelve, we provided a summary of our operating expense results. For the first quarter of 2025, we reported $193 million of adjusted operating expenses. We continue to maintain an efficient cost structure and disciplined expense management, which has helped us to control our operating expenses during an inflationary environment. Financing interest expense was $30 million for the first quarter of 2025. With the benefit of our recent refinance and interest rate swap contracts that we've entered in the prior year. Our blended interest rate was approximately 7.1% for our long-term debt in aggregate. In Q1, we used a portion of our free cash flow to repurchase 1.3 million shares at an average price of $36.44 per share, totaling $48 million. To date, we have repurchased over 52 million shares at an average price of $25.85 per share, for a total of $1.4 billion. Our quarter-end share count was 160.2 million shares outstanding. Since we initiated our share repurchase program, we have purchased over 18.9% of fully diluted shares of Virtu Financial, Inc., net after new issuances. We remain committed to our 24% reported dividend, and combined with our share repurchase program, demonstrates our continued commitment to return capital to our shareholders. Now, I would like to turn the call back to the operator for Q&A.

Operator, Operator

Thank you. As a reminder to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. We do ask that you please limit your questions to one question and one follow-up. Our first question is going to come from Chris Allen with Citi. Your line is open.

Chris Allen, Analyst

Morning, everyone. Thanks for taking my question. Maybe just to start out, on the market making NTI. You provided helpful comments around the retail sustainability. But maybe when we think about it from a year-over-year perspective looking at the growth there, 40% year-over-year. Can you help us think about the balance between the wholesale business and beyond exchange business? Was there a balance opportunity? Was there a skew? Also, what contribution did the new organic growth initiatives have, just to help people think about the sustainability of the overall complex moving forward?

Douglas Cifu, CEO

Yeah. It's a great question, Chris. We've tried to be more proactive about our views of sustainability and the cyclicality, if you will, of the retail business. As you know, we don't break out customer versus non-customer market making, partially due to competitive reasons, but also because the businesses are not as separate and distinct as you might think. We've done significant work over the last several years, particularly within the last two to three years, to ensure that the different divisions can work well together. The increase from Q4 to Q1 was broadly diverse and evenly allocated between the customer and non-customer business. It wasn't as if we had a burst of activity in January, February, and March, exclusively in our retail customer market making segment. We had some really productive days in our precious and non-precious metals business due to the concerns over tariffs, particularly in copper, silver, platinum, and palladium. Our options business and block ETF business did exceptionally well. Overall, the businesses were balanced, and we emphasize the global diversification and asset scale in this business. Our wholesale business, inherited from Knight, continues to grow and integrate well with all the positive aspects of Virtu Financial, Inc.

Joseph Molluso, Co-President and Co-Chief Operating Officer

I want to emphasize what you said, Chris, in your question. When you referred to the wholesaling retail business and the exchange. We don't consider it as on-exchange versus off-exchange. We view it as the retail wholesaling business and the non-customer business, as Doug mentioned. There is an equity component, but also a US and non-US equity component. Most of the growth initiatives—options, ETF block, crypto, and capital markets—are within the non-equity businesses. Some of the examples Doug mentioned—like metals, foreign exchange, and energy—also highlight that distinction.

Chris Allen, Analyst

I appreciate that. As a follow-up, I noted continued improvement against the opportunity set. Where are we in that continuous improvement? I realize there are many areas for enhancement. Do you still see room for better efficiencies, especially in an environment where things tend to tighten? Is it just the environment or do you genuinely think you can realize increased efficiencies?

Douglas Cifu, CEO

It's a valid question. We measure our performance in favorable and unfavorable market conditions. Indeed, during periods of volatility, like the past few weeks, there is usually more spread crossing, which is beneficial for a market maker such as ours. While we are focused on new areas like options, ETF block, and crypto, we are also committed to enhancing our legacy businesses. We've implemented strategies and predictors within our customer market making segment and enhanced the efficiency of our non-customer global equities market making operations. It cannot be overstated how vital our legacy businesses are. Over the past several years, we have consistently improved these businesses, and while their performance will vary, we are confident in their growth.

Chris Allen, Analyst

Thanks, guys. Appreciate the call, and good luck with the pilot stuff.

Douglas Cifu, CEO

Thank you very much.

Operator, Operator

And the next question comes from Dan Fannon with Jefferies. Your line is open.

Dan Fannon, Analyst

Thanks. Good morning. I wanted to come back to the $2 million per day in the VES business. What gives you the confidence to assert that? You've mentioned a lot about the diversity of products and hiring. Can you specify where the momentum is in your business? Is it more of the same, or are there more things to expect?

Douglas Cifu, CEO

Thank you, Dan. We typically don’t forecast or discuss specific numbers like that, but we have a high degree of confidence based on the hard work from our Virtu Execution Services team over the past five to six years since acquiring ITG and Knight. We laid out our strategic roadmap in 2019 to expand in the execution services segment, and various components contribute to this confidence. Our Virtu Technology Services platform is being rolled out to small to mid-size broker dealers that require technology solutions, and we’ve seen significant adoption. Also, we are experiencing substantial cross-selling opportunities. If someone utilizes our Frontier global algo product, they will often choose to use an analytics product as well, and we try to facilitate trades through our execution management system. We've made numerous enhancements to our workflow solutions and analytics since the acquisition of ITG. Our products are now multi-asset class. Additionally, there's a tremendous amount of collaboration within the firm, which creates synergies that enhance our offerings and results.

Dan Fannon, Analyst

I appreciate your insights. Just as a follow-up, there's been a lot of debate regarding the sustainability of retail. What are you observing from the flow or other parts of the market that would indicate retail might be slowing or has the potential to slow short term?

Douglas Cifu, CEO

It's a great question. We strive to address this not only in our script but also in our supplemental materials. The data speaks for itself. While fluctuations do occur, overall retail activity has not contracted; in fact, we've observed a very healthy, sustainable level of retail engagement. As shown on slide seven, the baseline has elevated, and key retail brokers have reported continuous growth in account openings. Yes, some days may see varying levels of retail activity, but the long-term positive trend remains. Our data supports this narrative; it is frankly incorrect to claim that retail engagement is minimizing.

Dan Fannon, Analyst

Great. Thank you.

Douglas Cifu, CEO

Thank you.

Operator, Operator

And the next question comes from Ken Worthington with JPMorgan. Your line is open.

Ken Worthington, Analyst

Hi. Good morning. Thanks for taking the question. I wanted to start on the core non-customer market making business. Can you provide more details on how that business is building and growing? For instance, are you adding new symbols or exchanges? Is it more hedge count, additional capital, or other factors influencing growth?

Douglas Cifu, CEO

That's a great question. We endeavor to provide as much information as possible regarding our performance. I have acknowledged in my prepared remarks that we measure ourselves rigorously regarding capture rates for various products. Continuous investment in technology is crucial for ensuring execution quality and throughput of market data. In equities alone, there are now fifty securities exchanges in the United States and many alternative trading systems to connect with. Our focus on enhancing internalization within the firm remains essential, and our legacy businesses are vibrant and growing within themselves.

Joseph Molluso, Co-President and Co-Chief Operating Officer

The majority of our organic growth initiatives are categorized under the non-retail umbrella, including areas such as ETF blocks, digital assets, and options. New market opportunities continue to arise, and our commitment to diversification ensures we are well-positioned for growth moving forward.

Ken Worthington, Analyst

Thank you.

Douglas Cifu, CEO

Thank you very much.

Operator, Operator

And the next question comes from Craig Siegenthaler with Bank of America. Your line is open.

Eli, Analyst

Good morning. Thanks for taking the question. Can you update us on the product roadmap for your crypto business? Specifically, what exchanges are you providing liquidity on today, and for what coins? How is that going to build out?

Douglas Cifu, CEO

I'm going to try to be as specific as I can. Much of our growth has been driven by partnerships. We are an investor in EDX, and they have requested us to expand our coverage in terms of coins and trading hours. We are now operating as a twenty-four by seven firm and provide liquidity on over a dozen coins, moving towards close to twenty. However, we will not go far out on the queue with one-off meme coins. For products, we engage with established exchanges such as EDX, Coinbase, Binance, and others. We're also offering institutional streaming directly to buy-side firms, and designing new ETFs and futures products for launches in the marketplace.

Eli, Analyst

Thanks for that update. There has been some discussion about increased competition from Citadel Securities and Jane Street in the Virtu Technology Services space. How does your offering compare to these competing solutions?

Douglas Cifu, CEO

That's a good question. Citadel and Jane Street are both outstanding firms. Our offerings differ significantly. Their solutions typically involve white label RFQ products connecting to bank partners, allowing for liquidity provision that can be repackaged for clients. While that is a solid approach, it often lacks scalability. Our services emphasize agency aggregation tools designed for smaller regional broker dealers and asset managers. This approach empowers those firms and allows for wider market access while being a liquidity provider. It's a different philosophy, aimed toward different segments of the market.

Eli, Analyst

Got it. Thank you.

Operator, Operator

I am showing no further questions at this time. I would now like to turn the call back over to Doug for closing remarks.

Douglas Cifu, CEO

Thank you, everybody, for joining us today. We look forward to addressing the second quarter in July of this year. Thank you, everybody.

Operator, Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.