Release Date: July 18, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Virtu Financial Inc (VIRT, Financial) reported $0.83 of adjusted EPS and $6.1 million per day of adjusted net trading income for Q2 2024.
- The company achieved a 56.5% EBITDA margin and $218 million of EBITDA on an adjusted basis.
- Virtu's execution services business performed exceptionally well, with adjusted net trading income up 3% over the first quarter.
- The company has made significant investments in technology and infrastructure, leading to increased client adoption and third-party validation.
- Virtu's market making business delivered strong results despite reduced volatility, with notable performance in single stock and ETFs across multiple regions.
Negative Points
- US notional turnover was down almost 6%, Pan-European notional turnover was down about 2% per day, and Tokyo Stock Exchange notional turnover was down about 10%.
- Softer results were observed in certain commodity segments during the second quarter.
- Crypto market making business faced muted opportunities as spot Bitcoin ETF volumes were down over 30% compared to Q1.
- The company's share repurchase program was within guidelines but did not significantly exceed expectations.
- Section 31 fees increased significantly, impacting profitability and leading to wider bid-offer spreads.
Q & A Highlights
Q: Congrats on a strong quarter. Can you elaborate on what drove the disconnect between quoted spreads contracting and ANTI being up 9% sequentially?
A: We made several model adjustments and enhancements that contributed to our performance. Our internalization improvements and better pricing attracted more flow. Additionally, our Virtu execution services had a strong quarter, thanks to improved execution quality and new products like Switcher, which uses machine learning to optimize client execution strategies. (Douglas Cifu, CEO)
Q: On the organic growth, ANTI was up almost 70% year over year but contracted 33% sequentially. Can you help us parse out the impact of the crypto environment versus ETF block?
A: The contraction was largely due to market forces, such as a 30% drop in spot Bitcoin ETF volumes. Despite this, we continue to expand our crypto venue footprint and see growing demand from counterparties. We are also preparing for the potential approval of spot Ethereum ETFs, which could drive new opportunities. (Douglas Cifu, CEO)
Q: How should we size up the tailwind from Ethereum ETF approvals?
A: It's difficult to predict exact figures, but we expect significant ETF inflows similar to those seen with spot Bitcoin ETFs. The Ethereum market is growing, and while it may be closer to a third the size of Bitcoin, the marginal dollars from this will effectively flow to Virtu's bottom line. (Douglas Cifu, CEO)
Q: How did the fixed income ETF component trend relative to the rest of the ETF block number? And what are you seeing in fixed income on the VES side?
A: Fixed income volumes were down 11% in the first quarter, but we are making significant strides in becoming a multi-asset class technology provider. Our EMS product, Triton, now offers a legitimate multi-asset class solution, and we are seeing increased credibility and opportunities in fixed income. (Douglas Cifu, CEO)
Q: How are you planning on participating in FMX, and what is the outlook for fixed income asset classes?
A: We will be a day-one liquidity provider for FMX and are excited about the opportunities there. Fixed income is a greenfield space for us, and as markets move towards more centralized clearing, we see significant long-term growth opportunities. (Douglas Cifu, CEO)
Q: Can you provide a framework for the recurring revenue in execution services and the sell-side opportunity?
A: While we don't break out recurring revenue separately, it is a significant part of our VES segment. We are making efforts to move clients to more subscription models. On the sell-side, our Virtu technology services offer a "broker in a box" solution, providing full algo suites and EMS systems to broker-dealer firms, which is a key growth initiative for us. (Douglas Cifu, CEO)
Q: How did the mean stock phenomenon and higher sub-dollar trading impact your performance in the quarter?
A: The mean stock phenomenon was short-lived and had no material impact. Similarly, sub-dollar trading did not significantly affect us. In fact, we have submitted a rulemaking proposal to the SEC to tighten listing standards and eliminate some of these sub-dollar names. (Douglas Cifu, CEO)
Q: How did the increase in Section 31 fees impact your business and profitability?
A: The increase in Section 31 fees had an impact from May 23 through June 30. It effectively acts as a transaction tax, which we try to absorb and pass along where appropriate. It affects bid-offer spreads and ultimately impacts investors. (Douglas Cifu, CEO)
Q: The pace of buybacks was lower than implied by the strong EPS. How are you thinking about buybacks for the rest of the year, and where does M&A fit in your capital management strategy?
A: The pace of buybacks will ebb and flow depending on market opportunities and capital deployment. We are on target to fit within our announced ranges. Regarding M&A, we look at value creation and incremental dollar deployment. Currently, buying back our own stock offers the best value, but we remain open to opportunities that create more value. (Joseph Molluso, Co-President, Co-COO)
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
