WisdomTree Investments, Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. The filing also presents unaudited fourth-quarter results. WisdomTree is a publicly traded asset manager focused on exchange-traded products (ETPs); its revenue is primarily advisory fees tied to ETP assets under management (AUM).
Financial highlights
| Metric | 2020 | 2019 |
|---|---|---|
| Year-end global AUM | $67.4 billion | $63.6 billion |
| Average global AUM | $61.2 billion | $59.7 billion |
| Revenue | $253.7 million | $268.4 million |
| Operating expenses | $198.6 million | $214.9 million |
| Operating income | $55.1 million | $53.5 million |
| Net income (loss) | $(35.7) million | $(10.4) million |
| Operating cash flow | $29.4 million | $46.8 million |
| Cash and cash equivalents at year-end | $73.4 million | $75.0 million |
- Revenue fell 5.5% despite a 2.4% rise in average AUM, primarily because the average advisory fee rate declined to 0.41% from 0.45%, reflecting AUM mix shifts.
- Operating expenses declined 7.6%, reflecting lower incentive compensation and discretionary sales, marketing and other spending, as well as the prior-year severance charge and the Canadian business sale. Higher gold payments partly offset these reductions.
- Reported net loss was driven substantially by a $56.8 million non-cash loss from revaluing deferred gold consideration and $22.8 million of impairment charges. Adjusted net income, a non-GAAP measure, was $40.2 million, versus $36.3 million in 2019; adjusted diluted EPS was $0.24 versus $0.21.
- Operating margin, calculated as operating income divided by revenue, was approximately 21.7%, compared with 19.9% in 2019.
- Year-end AUM increased 5.9%, primarily on market appreciation. Full-year global net flows were approximately negative $6 million: U.S.-listed ETFs had $1.25 billion of outflows, largely offset by $1.25 billion of international inflows. U.S. AUM ended at $38.5 billion; international AUM at $28.9 billion.
- Available liquidity was $53.5 million, defined by the company as liquid assets less current liabilities and certain subsidiaries’ regulatory capital requirements. The former revolving credit facility was terminated in June 2020.
- WisdomTree issued $175 million principal amount of 4.25% convertible senior notes due 2023 and repaid its former debt. The notes’ carrying value at year-end was $166.6 million. The company also reported a $230.1 million deferred-consideration liability for contractual gold payments.
Fourth quarter 2020
- Revenue was $67.1 million, compared with $68.9 million in Q4 2019; operating income was $12.9 million, compared with $14.8 million.
- Net loss was $13.5 million, or $0.10 per diluted share, versus a $25.9 million loss, or $0.17 per diluted share, in Q4 2019. Q4 2020 included a $22.4 million loss on revaluation of deferred gold consideration.
- Quarter-end global AUM was $67.4 billion. Net inflows were $881 million and market appreciation was $5.9 billion during the quarter.
Material changes, outlook and risks
- COVID-19: Management reported that AUM recovered from its initial pandemic decline. The company reduced discretionary spending and operated remotely without material disruption reported in the filing. Future market, pandemic and service-provider effects remain uncertain.
- Capital returns: The company repurchased 8.2 million shares for $31.2 million in 2020 and paid $20.1 million in dividends. The quarterly dividend was $0.03 per share; $52.2 million remained under the repurchase authorization at year-end. Management said future buybacks depend on results, cash and strategic priorities.
- Management estimates for 2021: Compensation and benefits expense of $75–$85 million; gross margin of 77%–78% at then-current AUM/revenue levels; third-party distribution fees of approximately $6 million; and a normalized effective tax rate of approximately 19%–20%. These are estimates, not guarantees.
- Office plans: The company adopted a “remote first” approach and planned to reduce New York and London office space. It anticipated a $9–$12 million impairment charge when the New York space is subleased and $3–$4 million of annual cost savings; timing and amounts depend on leasing conditions.
- Growth plans: Management targeted 20 global product launches in 2021, including core, tactical, thematic and ESG strategies, and cited digital assets as a strategic area. These are plans rather than assured outcomes.
- Key exposures: Revenues depend on AUM, product mix and fee rates; competition and fee pressure may weigh on growth and margins. About 53% of year-end AUM was concentrated in ten ETPs, including approximately 26% of total AUM in gold-backed products. Other material risks include market and commodity prices, foreign exchange, regulation, reliance on third-party service providers and custodians, and cybersecurity.
- Contingency: Investors sought approximately €9.0 million ($11.1 million) in claims related to the March 2020 closure of the leveraged oil ETP 3OIL after its swap provider terminated the underlying contract. The company had not accrued a loss at December 31, 2020.
- Unusual valuation: Deferred gold consideration is a Level 3 fair-value estimate based on forward gold prices, discount rate and perpetual growth assumptions. The 2020 revaluation loss was $56.8 million; the company noted that changes in those assumptions can materially affect reported results.
Important facts for investors to verify
- Whether AUM flows, especially U.S. outflows and international inflows, and the declining average fee rate improve or deteriorate after year-end.
- The assumptions, sensitivity and future cash obligations associated with the $230.1 million deferred gold liability and annual gold payments.
- The terms, potential dilution and cash-settlement requirements of the 2023 convertible notes, alongside the Series A preferred shares’ $72.7 million redemption value and conversion rights.
- Whether the 3OIL litigation results in a probable or estimable loss, and any developments in counterparty or custody risks.
- The timing and realized cost savings from office reductions, and whether 2021 expense, gross-margin and tax estimates are achieved.
- Performance and AUM concentration in major products, including gold-backed ETPs, and the effects of competition, fee reductions and market movements.