WisdomTree Investments, Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Amounts below are in U.S. dollars; financial statement amounts are in millions unless otherwise indicated. WisdomTree is a global exchange-traded product sponsor and asset manager. It earns substantially all revenue from advisory fees based on average ETP assets under management (AUM).
Business context and operating performance
- Global ETP AUM was $73.9 billion at quarter-end, up from $57.7 billion a year earlier. Average AUM in Q2 increased 32.1% year over year to $73.7 billion, reflecting market appreciation and net inflows.
- Q2 global ETP net inflows were $931 million. U.S.-listed ETFs had $1.13 billion of inflows; European-listed ETPs had $199 million of outflows. Quarter-end U.S. ETF AUM was $45.1 billion and European ETP AUM was $28.8 billion.
- Management cited rising global equity markets and vaccine-driven economic recovery during the quarter. It reported the S&P 500 rose 8.6% and gold prices rose 4.3% in Q2.
Key financial metrics
| Metric | Three months ended June 30, 2021 | Three months ended June 30, 2020 | Six months ended June 30, 2021 | Six months ended June 30, 2020 |
|---|---|---|---|---|
| Total revenue | $77.6 | $58.1 | $150.4 | $122.0 |
| Operating income | $23.7 | $11.8 | $42.3 | $27.4 |
| Net income (loss) | $17.6 | $(13.3) | $32.8 | $(21.9) |
| Diluted EPS | $0.11 | $(0.09) | $0.20 | $(0.15) |
- Q2 advisory fees were $76.0 million, up 32.8%; the average advisory fee rate was 0.41%, unchanged year over year. Total operating expenses rose 16.4% to $53.9 million. Operating margin was approximately 30.5%, versus 20.3% a year earlier.
- For the first half, operating expenses rose 14.4% to $108.1 million; operating margin was approximately 28.1%, versus 22.5%. The effective tax rate was 19.5% in Q2 and 6.5% for the half-year.
- Adjusted net income, a company-defined non-GAAP measure, was $16.8 million for Q2 and $29.3 million for the first half; adjusted diluted EPS was $0.10 and $0.18, respectively. These measures exclude specified items and should be considered alongside GAAP results.
Cash flow, balance sheet and capital
- Cash and cash equivalents were $167.6 million at June 30, up $94.2 million from year-end. Available liquidity, as defined by the company after current liabilities and international regulatory capital requirements, was $184.4 million, versus $53.5 million at year-end.
- Operating cash flow was negative $2.2 million for the first half, compared with positive $19.4 million in the prior-year period. Investing cash flow was negative $5.8 million; financing cash flow was positive $102.1 million, principally reflecting the new notes issuance.
- The company had $325 million aggregate principal of convertible notes outstanding: $175 million of 4.25% notes due 2023 and $150 million of 3.25% notes due 2026. Their combined carrying amount was $317.3 million; reported fair value was $356.6 million. Notes are senior unsecured obligations and require cash settlement of principal upon conversion.
- The company also reported $226.7 million of deferred consideration tied to recurring gold payments and $132.6 million carrying value for Series A preferred shares. The preferred shares’ stated redemption value was $97.5 million; the company said adjustment was not probable at quarter-end.
- WisdomTree repurchased 4.63 million common shares for $31.9 million in Q2 and paid $0.03 per share in dividends. $17.7 million remained under its repurchase authorization.
Material changes, outlook and risks
- Net income improved substantially versus Q2 2020, but the comparison was materially affected by a $23.4 million prior-year loss on revaluation of the gold-payment obligation versus a $0.5 million gain in Q2 2021. The obligation’s fair value is sensitive to forward gold prices, discount rate and perpetual growth assumptions; it is a Level 3 measurement.
- Operating expense increases included compensation and headcount, fund administration, marketing, professional fees and third-party distribution. Management attributed higher professional fees partly to its digital-assets initiative and higher marketing partly to spending curtailed during the early pandemic period in 2020.
- On June 14, 2021, the company issued $150 million of 3.25% convertible notes due 2026. It early adopted ASU 2020-06, which changed convertible-debt accounting and reduced recognized note interest expense by approximately $0.4 million per quarter.
- Management said existing cash and operating cash flows should fund operations for the foreseeable future and expects to refinance notes at maturity. No numerical earnings or AUM guidance was provided.
- Digital-asset efforts included filings for U.S. bitcoin, ethereum and short-term Treasury products, European cryptocurrency ETP activity, and investments in Securrency and Onramp. Management noted approval of the WisdomTree Bitcoin Trust listing had been delayed.
- Key exposures include market-driven AUM and fee volatility, investor outflows, commodity and cryptocurrency price changes, foreign exchange, regulation and competition. The company does not currently hedge its gold, precious-metals or cryptocurrency exposures.
- Investors in the closed WisdomTree WTI Crude Oil 3x Daily Leveraged ETP brought claims in Italian courts seeking approximately €9.0 million ($10.7 million) in aggregate. The company was assessing the claims and had not accrued a loss at June 30, 2021.
- The company warned that it may not have sufficient cash or financing to meet cash settlement or repurchase obligations if note conversions or specified change-of-control events occur. Convertible-note holders’ rights and any preferred-share redemption claims could affect liquidity and payment priority.
Important facts for investors to verify
- Whether AUM growth and net inflows persist, particularly given the quarter’s material contribution from market appreciation and the divergent U.S. and European flows.
- Drivers of negative first-half operating cash flow despite reported net income, and the cash conversion expected from advisory-fee revenue.
- Debt maturities, conversion and repurchase triggers, potential dilution, refinancing assumptions, and liquidity available after regulatory capital and other obligations.
- Sensitivity of the $226.7 million gold-payment liability to valuation assumptions and future gold prices, and the contractual limits on recourse for unpaid amounts.
- Progress and costs of digital-asset products, regulatory approvals, and the status and potential exposure of the Italian litigation.