Virtu Financial, Inc. (VIRT) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. I am Robert Greifeld, Chairman of our Board of Directors, and I will be presiding at this meeting. On behalf of the Board and the offices of Virtu Financial, I am pleased to welcome all of you to the 2021 Virtual Annual Meeting of Stockholders. It is 9:00 a.m. And in accordance with the amended and restated bylaws of the company, I call this annual meeting of stockholders to order. We hope all of you and your loved ones are safe and healthy, and we appreciate you attending our meeting. All of our stockholders were mailed the notice of Internet availability. Copies of our proxy statement and annual report were mailed to the stockholders who have so requested. Additionally, our proxy statement and annual report are available on the Annual Meeting website, if anyone would like a copy. Before proceeding to the business of the meeting, I would like to introduce you to the directors of the company in addition to myself, who have dialed in today: Douglas A. Cifu, our Chief Executive Officer; Michael T. Viola; Liam Cruger; Joseph Grano; and David Urban are from our Board. Also, Joseph Molluso, our Co-President and Chief Operating Officer; Sean Galvin, our Chief Financial Officer; Andrew Smith, our Senior Vice President, Business Development and Investor Relations; Justin Waldie, Secretary, Senior Vice President and General Counsel of the company, who will also act as secretary of the meeting; [ John Halawa ], an independent inspector of elections, has been appointed as inspector of elections in accordance with the company's amended and restated bylaws. Also present today are Paul Lameo and Christopher Savino of PricewaterhouseCoopers LLP, which firm served as the company's independent registered public accounting firm for the financial year ended December 31. If questions arrive -- arise during the annual meeting for discussion period these professionals will appropriately address, they will be glad to respond. Each of you should have entered the meeting with your control number or dialed in as a guest. We have posted the agenda and rules of conduct here in the virtual annual meeting site. It is our intention to conduct this meeting in accordance with this agenda and the rules. [Operator Instructions] After the formal portion of the annual meeting, you will note that under Item 14 in the agenda, an opportunity is provided for additional questions and discussions. Thank you for your cooperation with these rules. Justin will now report on the mailing of the notice of this meeting and the presence of a quorum.

Thank you, Mr. Chairman. This meeting is held pursuant to a printed notice mailed on April 23, 2021, to each stockholder of record as of April 7, 2021, who is entitled to vote. A list of stockholders entitled to vote at this meeting has been available for the past 10 days by contacting the Investor Relations department of the company and is also available on the virtual meeting site for examination by any stockholder desiring to do so. All documents concerning the call and notice of this meeting will be filed with the records of the company. There are 120,661,513 shares of Class A common stock, 10,135,182 shares of Class C common stock and 60,091,740 shares of Class D common stock issued and outstanding and entitled to vote at this meeting. Holders of Class A common stock and of Class C common stock are entitled to 1 vote per share and holders of Class D common stock are entitled to 10 votes per share. We were informed by the inspector of election that there are, represented in person or by proxy, at least 176,228,752 shares of common stock or approximately 98% of all the voting power entitled to vote at this meeting. And I certify that as required by the company's amended and restated bylaws, the holders of a sufficient number of common stock are present in person or proxy and that a quorum is, therefore, present.

Thank you. Because holders of a majority of the shares entitled to vote at this meeting are present in proxy, in person or by proxy, I hereby declare that a quorum is present at this meeting in accordance with the company's amended and restated bylaws and declare this meeting to be duly convened for the purposes of transacting such business as may properly come before it. On behalf of the Board of Directors of the company, I would like to express my appreciation to all stockholders who are attending this meeting and those who were unable to attend but returned their proxies. I would like to point out that most of you who returned proxies authorized the persons named in the proxy to vote on all proposals coming before the meeting. If you would like to vote at this meeting, please follow the instructions on the website. If you already have voted by proxy, it will not be necessary to do so, unless you wish to revoke or change your vote. The next order of business is a description of the matters to be voted upon at today's meeting. At this meeting, the stockholders will be asked to elect 4 directors to our Board of Directors, each to serve as a Class III director for a term of 3 years expiring at the annual meeting of stockholders to be held in 2024 and until such director successor has been elected and qualified; approve, on an advisory basis, the compensation of the company's named executive officers as disclosed in the proxy statement for this annual meeting of stockholders; and also ratify the appointment of PricewaterhouseCoopers LLP as our independent registered public accounting firm for the current fiscal year ending December 31, 2021. We will first entertain nominations for the 4 directors to be elected by the stockholders of the company as Class III directors. The company has a staggered Board comprised of 3 classes of directors. The terms of the Class III directors expire by the terms at this annual meeting, and each Class III director elected today will hold office for a term of 3 years expiring at the annual meeting of stockholders to be held in 2024 and until such director successor has been duly elected and qualified. To nominate the persons listed in the proxy statement, I recognize Mr. Smith.

Mr. Chairman, I hereby nominate the following persons for election as Class III directors of the company to be elected by the holders of common stock: Virginia Gambale, John D. Nixon, David J. Urban and Michael T. Viola. These nominees are named and described on Pages 9 and 10 of the company's proxy statement filed on Schedule 14a with the United States Securities and Exchange Commission on April 23, 2021.

All right. You've heard the motion. Is there a second?

Second.

Since no other nominations have been made in accordance with the amended and restated bylaws of the company, I hereby declare the nominations closed. The election of directors is now in order. If any stockholders are voting online, I suggest they do so now. [Voting]

The polls are now closed. After voting has been completed on all matters on the agenda, all ballots will be counted. The next matter being submitted to the stockholders for action is the proposal to approve on an advisory basis the 2020 compensation of the company's named executive officers. The company's executive compensation is described on Pages 20 to 39 of the company's proxy statement. I recognize Mr. Smith to provide the recommendation of the Board of Directors regarding this matter.

The Board of Directors has unanimously voted and recommend the approval of the compensation of the company's named executive officers. I move for the approval of the compensation paid to the company's named executive officers as disclosed in the proxy statement pursuant to the compensation disclosure rules of the Securities and Exchange Commission, including the compensation discussion and analysis, the compensation tables and the related narrative discussion.

You've heard the motion. Is there a second?

Second.

I second.

Thank you. Are there any questions or comments? If any stockholders are voting online, I suggest they do so now. [Voting]

The polls are now closed. As the voting has been completed on all matters on the agenda, all ballots will be collected and counted. The next matter being submitted to the stockholders for action is to ratify our Audit Committee's appointment of PricewaterhouseCoopers LLP as our independent registered public accounting firm for the company's current fiscal year ending December 31, 2021. The fiscal year that ends on December 31, 2001 (sic) [ 2021 ], will be the fourth year that PricewaterhouseCoopers LLP has served as our independent registered public accounting firm. Mr. Smith?

Mr. Chairman, I move for the ratification of the appointment of PricewaterhouseCoopers to audit the financial statements of the company for the current fiscal year ending 12/31/2021.

All right. You've heard the motion. Is there a second?

Second.

Are there any questions or comments? After voting has been completed on all matters, all votes will be counted. If any stockholders are voting online, I suggest they do so now. [Voting]

The polls are now closed. I ask that the inspector of election tally the votes of stockholders present at the meeting today with the votes of stockholders by proxy and then report the number of votes received for and against the business matters presented this morning. Inspector of election?

The holders of...

Go ahead.

The holders of a majority of the shares of common stock present in person or by proxy at this meeting have voted in favor of the election of Virginia Gambale, John D. Nixon, David J. Urban and Michael T. Viola as Class III directors. The holders of a majority of shares have voted to approve on an advisory basis the compensation of the named executive officers and have voted to ratify the selection of PricewaterhouseCoopers LLP as the company's independent auditors for the fiscal year ending December 31, 2021.

I hereby declare based on these preliminary results that all the nominees for director have been duly elected, the executive compensation of our named executive officers has been approved on an advisory basis the appointment of PricewaterhouseCoopers LLP as the company's independent registered accounting firm to audit the financial statements and of its subsidiaries for fiscal year 2021 have been duly ratified. There being no other business, our meeting is concluded. I would again like to express my sincere appreciation to the stockholders who attended the meeting as well as those who submitted their proxies but were not able to be present today. The official business is concluded. We will now have a brief presentation by the company's management, after which we'll have a brief question-and-answer period. I'd like to introduce our very esteemed Chief Executive Officer, Douglas A. Cifu, who will make a few remarks about the company.

Thank you so much, Mr. Chairman. 2020 was a year like no other as our markets, our communities, our country and our world were disrupted and impacted by the global pandemic. Our thoughts and prayers remain with all those impacted, and we express our gratitude to the great health care professionals, first responders and scientists doing so much to keep people safe and healthy. At Virtu, we spent much of 2020 and, in fact, 2021, thus far, operating in a work-from-home model under our business continuity plan to protect the health and safety of our employees. Despite these operational complexities, our company performed exceptionally well, rising to the challenge presented by market dislocation and volatility to provide liquidity to the global market and trading at technology solutions to our global client base. In 2020, we generated record total revenues of $3.2 billion, adjusted net trading income of $2.3 billion, adjusted EBITDA of $1.6 billion, basic and diluted earnings per share of $5.19 and $5.16 and normalized earnings per share of $5.76. Our performance reflected a robust volume and volatility environment, qualitative improvement to both our Market Making and Execution Service businesses, strong demand from our clients for trading technology and solutions and the success of our organic growth initiatives. The first quarter of 2021 presented a similarly robust market environment driven by continued secular trends in the marketplace. Our business performed exceptionally well with our Execution Services business posting a record performance. During the first quarter, we generated revenues of $1 billion; adjusted net trading income of $728 million; adjusted EBITDA of $564.7 million; normalized adjusted net income of $401.6 million; basic and diluted earnings per share of $1.91 and $1.89, respectively; and normalized adjusted earnings per share of $2.04. In recognition of these results and the company's continued commitment to return excess cash to shareholders, the company's Board of Directors authorized a $300 million expansion to the company's existing stock repurchase plan, bringing the total authorization to $470 million, of which $151.1 million has been executed. While there are still many uncertainties as our communities, workplaces and economy reopen, we continue to focus on our core mission of delivering value to the market and to the clients we serve, guided by our core principles of transparency and efficiency. We sincerely appreciate the support of our shareholders and take seriously our role as stewards of capital. We continue to focus on the long-term growth of our business and remain excited at the prospects for Virtu in the future.

Thank you, Doug. We have now come to the part of the agenda providing for general questions and discussion. Anyone wishing to address the meeting should enter their questions online. [Operator Instructions] Questions and comments will now be read by Mr. Smith.

Thank you, Mr. Chairman. We have a number of questions from one of our shareholders. I will read them off and let management respond. The first question relates to the debt that Virtu incurred for the acquisition of KCG and ITG. And the question is, with interest rates appearing to be on the rise from high inflation and massive government spending, how are these headwinds affecting our strategy of any future potential acquisitions without affecting our investment-grade credit rating? The second question is regarding cybersecurity and it relates to the recent cyber attacks. How well does Virtu assess our cybersecurity system? And has Virtu been the subject of any attempted attacks? And what is budgeted for up -- the upcoming fiscal year? The third question is regarding Reddit and meme stock trading. How has recent Reddit activity in GameStop, BlackBerry, AMC impacted Virtu's operations? Is there any balance sheet impact for Virtu? The fourth question relates to cryptocurrencies. And it's a general question regarding -- asking what is Virtu's involvement in cryptocurrencies? And the final question is, what is the -- is there an update on Virtu's support for the new stock exchange in the U.S., the Members Exchange?

Wow. Terrific. Howard, I hope you're well. It's nice to get your questions, and we sincerely look forward to reading you in person next year in our boardroom here in New York. We'll make sure we have a nice spread for you in Virtu city. So it's always great to get questions from an interested and smart shareholder that does his homework. I'll try to answer those in the order which they were dealt. And so the first question relates to the debt we incurred when we bought Knight and ITG and how that increasing interest rates may impact our ability to do debt -- to do acquisitions going forward. I mean as a threshold manner, we have hedged the interest rate exposure for a good portion of that debt of kind of fixed rate through 2026 -- '25?

Yes.

2026. And so we're very comfortable with that indebtedness amount, and we make periodic amortization payment that's required under the terms of the debt. What we've talked about is, for the time being, using our excess capital and cash to buy back shares, right? So we're not really focused on any near- or medium-term acquisitions. I would say that we've got 1:1 leverage right now debt-to-EBITDA, right? So we're very comfortable with that level, and we have a good amount of borrowing capacity were there an opportunity presented and the fixed income market continue to be frothy. So there's a lot of opportunity for us to access the different markets where we are inclined. So from a strategic and operational perspective, I'm very happy and comfortable where we are at. So I don't see that being a headwind going forward. Your second question relates to cybersecurity. And obviously, there's been a lot of -- between the pipeline and this [ meme ] producer, there's been a lot of focus on it. And we do -- we have a chief -- I just call it Chief Security Officer, if you will, for cyber, that spend a good deal of his time focused on this. We have used outside consultants to assess our vulnerability. I mean the good thing, put it in quotes, is, for the most part, we run kind of private networks where we access marketplaces. So our trading system is we don't use the Internet or public networks to do it. We obviously work closely with the exchanges and with the clearinghouse to ensure state-of-the-art surveillance because there's always a concern around penetration at a securities exchange or at a clearinghouse and whatnot. But from our own perspective, our biggest issue is we do have customers and we do have a website, right? There is obviously some interaction. But we've done our best to sort of wall off that environment from our trading environment. And we do put considerable resources into that. And I'm not going to comment whether we've been subject to attacks and things like that just because I don't think it's in the best interest of the company to do that. But I will say we are very, very diligent and very cognizant that we could be a target. Your next question was regarding the so-called meme stocks in the Reddit trading and has it impacted our operations or our balance sheet. From a balance sheet perspective, the answer would be no, we're not in a Robinhood-like situation because unlike Robinhood, the customers we have on a market-making side, we can control our risk. So at the end of the day and even intraday, we manage what our gross notional exposures are one way or the other. So therefore, we're able to manage our margin. Robinhood ran into difficulties, I guess, it was in late January because they had a lot of clients, obviously, that were going in one direction. And they found themselves very long or short of these stocks in large amounts. And the clearinghouse because of the volatility of the stocks margin, those stocks had, frankly, 100% of the notional amount, and they can't -- they couldn't control the act of shutting down access to the market what their directional positions were. As a market maker, fortunately, we're not in that bucket. We're able to control our position in our -- on the institutional side, these are names that are typically not traded in large amounts by our institutional clients. So even there, where we have less control of the margin, we do use third-party clearers. So that's not been an issue. Operationally, definitely, in January, there were some challenges just based on the sheer magnitude of orders we received. So it was a good live fire exercise in terms of the resiliency of our systems, and we made some adjustments, and we've had no issues with regard to, knock on fake wood, with regard to this latest uptick in interest and in orders. Your fourth question, and you only get 5, Howard, I apologize. So this is it. It was with regard to cryptocurrencies and what our role there is. We have announced publicly that we are an active market maker. We're the lead market maker for 3 Canadian ETFs which have been approved by the Ontario Securities Commission for trading. And so we are a market maker in Canadian crypto ETFs and in the underlying Bitcoin on a couple of the "cash venues" where you can trade this Bitcoin notably like Coinbase, et cetera, and as well in the futures market. Obviously, if the SEC saw it fit to approve cryptocurrency ETFs in the United States, we think that they would be very well accepted. But thus far, the SEC has not done that. There's obviously a new sheriff in town, new Chairman who is quite knowledgeable on crypto and has not definitively given guidance one way or the other. But as soon as that -- as soon as the SEC -- I think it's inevitable that they will approve them, we will be a major market maker in crypto ETFs because that's kind of right in our sweet spot. And then your last question is, what is the status of the Members Exchange, which we helped start a couple of years ago with our friends at Citadel and 14 other partners. I think the good news is, if you go and Google around, you'll see that they have increased their market share to like 2.5% of the U.S. securities market, which is still way below where we would want them to be, but they've overtaken in large measure IEX, which is the only other non-big 3 national securities exchange. I think they're number 6 overall now in the United States in terms of exchanges and quickly approaching number 5. We've been very supportive. I -- you'll see continued growth in that as we cannot exchange as the large broker-dealers, which are now connected, begin to understand and absorb the data and their best execution committees enable them to route more flow there. I've been very happy with the technology and whatnot. So we're very optimistic that MEMX long term will continue to add value to the markets and more importantly, continue to be a positive experience for Virtu. So Howard, I thank you again. You are indeed the Cal Ripken of shareholders for not having missed a meeting, and we look forward to you continuing your streak. Remember what happened to Wally Pipp. So you better not miss next year. Who remembers Wally Pipp? You probably don't. You do?

Yes. Lou Gehrig.

Lou Gehrig.

Lou Gehrig.

The second most prominent graduate from Columbia.

Lou Gehrig?

Yes.

Who's the first?

I don't know. I don't know. But I think -- oh, I do [indiscernible]. Andrew, do we have any other questions?

Thank you, Mr. Cifu. And with that, we have no further shareholder questions at this time.

Great. So we can call the meeting adjourned then, Mr. Smith. Mr. Waldie?

Yes, sir.

Wonderful. Thank you, everybody, for your time. Appreciate it.

All right. Thank you, everybody.

Thank you. The Virtu Financial, Inc. 2021 Annual Meeting of Stockholders has now come to an end. Thank you for attending. You may now [Audio Gap]