WisdomTree Investments, Inc. — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; quarterly comparisons include Q4 2018 versus Q4 2017. WisdomTree sponsors and manages exchange-traded products (ETPs), earning primarily advisory fees based on average assets under management (AUM).
Financial and operating results
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Global AUM at year-end | $54.1 billion | — |
| Average global AUM | $56.4 billion | $45.2 billion |
| Revenue | $274.1 million | $228.3 million |
| Operating income | $61.3 million | $49.1 million |
| Net income | $36.6 million | $27.2 million |
| Diluted earnings per share | $0.23 | $0.20 |
| Operating cash flow | $37.5 million | $48.5 million |
| Cash and cash equivalents at year-end | $77.8 million | $54.2 million |
- Revenue rose 20.1%, primarily due to the April 2018 ETFS acquisition; expenses increased 18.8% to $212.8 million. Operating margin was approximately 22.4%, compared with 21.5% in 2017.
- Advisory fees were $271.1 million. The average global advisory fee declined to 0.48% from 0.50%, reflecting acquisition and product-mix effects.
- U.S.-listed ETF AUM fell to $35.5 billion from $46.8 billion, as $5.2 billion in net outflows and $6.2 billion in market depreciation outweighed inflows elsewhere. International-listed ETP AUM increased to $18.6 billion, mainly from the acquisition, with $0.7 billion of net inflows and $1.8 billion of market depreciation.
- HEDJ and DXJ together experienced $7.7 billion of outflows in 2018 and accounted for about 23% of company revenue. Over three years, their combined outflows were $23.8 billion.
- Net income rose 34.7%, although pretax income declined to $51.0 million from $58.2 million. The effective tax rate fell to 28.2% from 53.3%, contributing materially to the net-income increase.
Q4 2018
- Revenue was $67.9 million versus $61.0 million in Q4 2017; operating income was $11.8 million versus $5.2 million.
- WisdomTree recorded a net loss of $11.6 million, compared with net income of $0.2 million in Q4 2017. The quarter included $17.4 million of impairment charges and a $5.4 million loss from revaluing deferred consideration.
Liquidity, debt and capital
- Reported available liquidity was $119.9 million, including $132.7 million of liquid assets less $62.8 million of current liabilities and the undrawn $50 million revolver.
- The acquisition was financed in part with a $200 million floating-rate term loan, carried at $194.6 million net of issuance costs at year-end. It matures April 11, 2021; the $50 million revolver was undrawn. The company reported compliance with loan covenants through year-end.
- The company also reported $161.5 million of deferred gold-payment consideration, including $149.8 million long-term. The obligation relates to payments of gold tied to physically backed gold products.
- Operating, investing and financing cash flows were $37.5 million, negative $181.8 million and positive $169.2 million, respectively. Investing cash use primarily reflected $239.3 million paid for ETFS, net of cash acquired.
- Year-end total assets were $937.5 million and total liabilities were $446.6 million. The company declared $0.12 per share in dividends for 2018, down from $0.32 in 2017; the quarterly dividend was reduced to $0.03 beginning in Q1 2018.
Material changes, outlook and risks
- ETFS acquisition: Completed April 11, 2018 for cash and equity consideration; it added about $17.6 billion of AUM at closing and substantially expanded international operations. ETFS contributed $55.9 million of revenue from acquisition through year-end. Acquisition-related costs were $11.5 million in 2018.
- Unusual items: The $17.4 million impairment total included $10.0 million for the GCC advisory intangible, $3.8 million for the Thesys investment, $3.3 million for an expired AdvisorEngine option and $0.3 million related to the Japan office. A $12.2 million gain on deferred consideration revaluation partly offset other expenses for the full year; the revaluation is sensitive to gold prices.
- Management estimates for 2019: Compensation and benefits of $53–$63 million for the U.S. segment and $17–$19 million internationally; gross margin of 80%–81% in the U.S. and 70%–72% internationally at current AUM/revenue; third-party distribution fees estimated at approximately 3.5% of advisory fees; and a normalized effective tax rate of approximately 26%–27%. These are estimates, not guarantees. No specific revenue or AUM guidance was provided.
- Management’s strategy emphasizes AUM diversification, technology-enabled advisor services, distribution expansion, international growth, new products and selective acquisitions. It cautions that markets, investor sentiment, currency movements and product flows can materially affect revenues and margins.
- Key risks include continuing outflows from HEDJ and DXJ, intense ETF fee competition, market and foreign-exchange exposure, gold-price sensitivity, acquisition integration, counterparty and vendor dependence, regulatory change, cybersecurity, and the term loan’s leverage covenants and 2021 maturity. Brexit could affect European product distribution; the filing described a potential temporary prospectus gap in a no-deal scenario.
- ETFS tax exposures included $34.9 million of unrecognized tax benefits, interest and penalties, offset by an indemnification receivable from ETFS Capital. The company reported no litigation expected to have a material adverse impact. Management and the auditor reported effective internal controls, but the acquired ETFS controls were excluded from the 2018 ICFR assessment.
Most important facts for investors to verify
- Whether AUM and flows stabilize, particularly for HEDJ and DXJ, and whether other products offset their outflows.
- ETFS’s ongoing contribution to revenue, profitability and cash generation after acquisition and integration costs.
- The company’s leverage-ratio headroom, ability to refinance or repay the term loan at maturity, and restrictions on dividends and repurchases.
- The assumptions and sensitivity behind deferred gold consideration, gold-related fees and the reported revaluation gains or losses.
- AdvisorEngine’s ability to meet its obligations and support the value of WisdomTree’s $53.7 million exposure, comprising equity and an unsecured note receivable.
- Whether projected margins, expenses, distribution costs and normalized tax rate are achieved, and whether tax indemnification and Brexit arrangements remain adequate.