WisdomTree Investments, Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Amounts are in U.S. dollars; financial statement amounts below are in millions unless noted. WisdomTree sponsors and manages exchange-traded products (ETPs), earning fees primarily based on assets under management (AUM).
Business context and operating performance
- Global AUM was $44.7 billion at quarter-end, up 14.7% from $39.0 billion a year earlier. U.S.-listed AUM rose to $43.2 billion from $38.0 billion year over year; Q2 growth reflected $605 million of net inflows and $638 million of market appreciation.
- International ETPs recorded $162.1 million of Q2 net inflows. International AUM rose from $1.4 billion at March 31 to $1.5 billion at June 30, despite market depreciation.
- U.S.-listed advisory fees were nearly flat year over year in Q2, while the average fee rate declined from 0.52% to 0.50%, mainly due to product mix. In the first half, advisory fees fell 6.2% to $109.4 million, reflecting lower average U.S. AUM and fee rates.
Key financial metrics
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Advisory fees | $56.1 | $55.9 | $109.4 | $116.5 |
| Total revenue | $63.4 | $56.0 | $118.0 | $116.9 |
| Expenses | $41.2 | $44.8 | $81.0 | $84.0 |
| Income before taxes | $22.2 | $11.2 | $37.0 | $32.8 |
| Net income | $12.1 | $3.7 | $19.0 | $15.7 |
| Diluted EPS | $0.09 | $0.03 | $0.14 | $0.11 |
- Q2 total revenue rose 13.3%, but included a $6.9 million Tradeworx settlement gain. Excluding that item, revenue was approximately $56.5 million.
- Q2 expenses fell 8.1%, chiefly because the prior-year quarter included a $6.0 million acquisition payment. Compensation and benefits increased 28.4% to $18.4 million, mainly due to higher incentive compensation and related costs.
- Net margin, calculated as net income divided by revenue, was approximately 19.1% in Q2 2017 versus 6.5% in Q2 2016; first-half margins were approximately 16.1% versus 13.5%. These comparisons reflect the unusual settlement gain and prior-year acquisition payment.
- Cash from operations was $17.3 million in the first half, compared with $29.0 million in the prior-year period. Investing activities provided $3.5 million; financing activities used $25.5 million, including $21.9 million in dividends and $3.7 million in share repurchases. Cash declined $4.1 million to $88.6 million.
- Available liquidity, as defined by the company (liquid assets less total liabilities), was $137.5 million at June 30, versus $143.4 million at year-end 2016. Total liabilities were $41.4 million. The supplied filing text reports no borrowings or debt balance.
- Quarterly dividend was $0.08 per share. The repurchase authorization had $92.8 million remaining at quarter-end.
Changes, unusual items, outlook and risks
- First-half net income increased 20.7% even as advisory fees declined, supported by the $6.9 million Tradeworx gain, higher other income, and lower expenses. Other income included a one-time $0.8 million reimbursement of prior-year fund-related costs.
- The Tradeworx dispute was settled in June: the company received preferred stock representing 19.99% ownership on a fully diluted basis and a warrant; it recognized a $6.9 million gain. The litigation was dismissed and the parties released related claims.
- WisdomTree invested an additional $5.0 million in AdvisorEngine, bringing its cost-basis investment to $25.0 million; its stated ownership was approximately 47%, or 41% fully diluted. No impairment was reported.
- Management said operating cash flows and cash balances should fund operations for at least the next 12 months. The filing provides no specific earnings or revenue guidance.
- Key exposures include market levels, investor flows, fee pressure and foreign exchange. HEDJ and DXJ together represented 41% of U.S. AUM; weakness in European or Japanese equities or strengthening of the euro or yen against the U.S. dollar could adversely affect results. Management noted challenging and volatile markets could persist.
- Operating lease commitments totaled $37.5 million. Management reported no litigation expected to have a material adverse impact; the Tradeworx dispute had been resolved. Disclosure controls were deemed effective, and no material internal-control changes were reported.
Important facts for investors to verify
- How much of reported profit growth is attributable to the non-recurring Tradeworx settlement gain and other one-time income items.
- Whether AUM inflows can be sustained, particularly given outflows from HEDJ and DXJ and the company’s 41% concentration in those products.
- Whether lower advisory-fee rates and the first-half decline in advisory revenue persist as product mix and average AUM change.
- The valuation and future performance of the Tradeworx and AdvisorEngine investments, including the warrant terms and impairment assumptions.
- Cash-flow sustainability alongside dividends, repurchases, strategic investments and $37.5 million of operating lease commitments.
- The impact of elevated compensation costs, taxes, market volatility and foreign-currency movements on future margins and earnings.