WisdomTree Investments, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. WisdomTree sponsors and manages exchange-traded products (ETPs); advisory fees tied to average assets under management (AUM) are its primary revenue source. Unless otherwise stated, financial amounts below are in millions of dollars.
Financial results and liquidity
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Revenue | $54.6 | $60.9 | Down 10.3% |
| Expenses | $39.8 | $39.2 | Up 1.5% |
| Income before taxes | $14.8 | $21.7 | Down 31.6% |
| Net income | $6.9 | $12.1 | Down 43.0% |
| Diluted EPS | $0.05 | $0.09 | Down $0.04 |
| Operating cash flow | $2.4 | $6.8 | Down $4.3 |
Net margin was approximately 12.6%, compared with 19.8% a year earlier. Advisory fees declined 12.1%, reflecting lower average AUM and a lower blended U.S. ETF advisory fee (0.50% versus 0.52%), partly offset by other income, including a one-time $0.8 million reimbursement of prior-year fund costs.
At March 31, global AUM was $43.4 billion. U.S.-listed AUM was $41.9 billion, up from $40.2 billion at December 31, primarily due to $1.8 billion of market appreciation; net outflows were $58 million. International AUM rose to approximately $1.4 billion, supported by $320.1 million of net inflows.
Cash and cash equivalents were $79.6 million, down from $92.7 million at year-end. Management reported available liquidity of $146.1 million, defined as cash, securities owned, held-to-maturity securities and receivables less liabilities. Total liabilities were $33.6 million; the filing reports no debt balance. Operating, investing and financing cash flows were $2.4 million, negative $1.2 million and negative $14.6 million, respectively. Financing uses included $10.9 million of dividends and $3.6 million of share repurchases. The quarterly dividend was $0.08 per share.
Material changes and management commentary
- Revenue and earnings fell year over year as average AUM declined, particularly in the two largest U.S. funds, HEDJ and DXJ. Inflows into U.S. equity products and stronger markets partly offset outflows.
- Expenses increased modestly overall. Compensation and benefits rose 17.4% to $17.9 million, while professional and consulting fees fell 45.0% to $1.6 million. The International Business segment remained loss-making before taxes, with a $3.1 million loss versus $2.5 million.
- The effective tax rate increased to 53.6% from 44.3%. Adoption of stock-compensation accounting guidance generated $1.0 million of tax expense from vesting-related tax shortfalls and reduced EPS by $0.01.
- Management said existing cash and operating cash flows should be sufficient to fund operations for at least 12 months. Capital priorities include operations, strategic growth, acquisitions and shareholder returns; no specific earnings or AUM guidance was provided.
- After quarter-end, WisdomTree invested an additional $5.0 million in AdvisorEngine, bringing its stated ownership interest to approximately 47% (41% fully diluted). It also announced AdvisorEngine’s acquisition of Kredible Technologies.
Risks, commitments and contingencies
- Results depend on market values and investor flows because advisory fees are based on ETP AUM. The company said 42% of U.S. AUM was concentrated in HEDJ and DXJ; adverse European or Japanese equity performance, or strengthening of the euro or yen against the U.S. dollar, could hurt results.
- The company identified market volatility and currency and interest-rate movements as risks. It did not expect translation-rate changes or interest-rate changes to materially affect results, but noted that market declines and withdrawals can reinforce one another.
- Operating lease commitments totaled $36.4 million, including $3.0 million due in the remainder of 2017. The company reported no litigation expected to have a material adverse effect and no off-balance-sheet arrangements other than operating leases.
- Forward-looking statements are subject to risks discussed in the 2016 Form 10-K. Management reported effective disclosure controls and no material change in internal control during the quarter.
Important facts for investors to verify
- Whether AUM flows and market performance—especially in HEDJ and DXJ—support a recovery in advisory-fee revenue.
- Whether the recent growth in international products and U.S. equity ETF inflows can offset pressure on average AUM and advisory fees.
- How recurring earnings compare with reported results after considering the $0.8 million reimbursement and the $1.0 million stock-compensation tax expense.
- Whether cash generation remains adequate alongside dividends, repurchases, lease obligations and strategic investments, including the additional AdvisorEngine investment.
- The effect of the high effective tax rate, foreign-loss valuation allowance and future accounting-standard changes on reported earnings and deferred tax assets.