WisdomTree Investments, Inc. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Amounts are in U.S. dollars; financial statement amounts are in millions unless noted. WisdomTree sponsors and manages exchange-traded products (ETPs), earning primarily advisory fees based on assets under management (AUM).
Business context and operating performance
Global AUM was $38.8 billion at quarter-end, including $37.7 billion in U.S.-listed ETFs. U.S.-listed ETF net outflows were $2.4 billion in Q3, driven chiefly by investor sentiment toward the company’s large Europe- and Japan-focused funds. U.S. equity ETFs attracted $759 million. Market appreciation of $2.0 billion partly offset outflows; U.S.-listed AUM declined from $38.0 billion at June 30 to $37.7 billion at September 30.
Key financial metrics
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Total revenue | $51.8 | $80.8 | $168.6 | $222.5 |
| Income before taxes | $14.2 | $39.5 | $47.1 | $101.5 |
| Net income | $8.0 | $23.3 | $23.7 | $59.5 |
| Diluted EPS | $0.06 | $0.17 | $0.17 | $0.43 |
| Operating cash flow | Not stated separately for the quarter | Not stated separately for the quarter | $43.9 | $110.1 |
- Q3 revenue fell 35.9% year over year, mainly because average U.S.-listed AUM was 35.0% lower and the average advisory fee declined to 0.51% from 0.53%.
- Q3 expenses decreased 8.9% to $37.6 million, primarily reflecting lower compensation. For the first nine months, expenses increased 0.5% to $121.6 million; this included a $6.0 million expense related to accelerating the European minority-interest buyout.
- Management’s non-GAAP gross margin was $40.8 million, or 78.8% of revenue, in Q3, versus $69.7 million, or 86.4%, a year earlier. Nine-month gross margin was $135.4 million, or 80.3%, versus $189.3 million, or 85.1%.
- Effective tax rates were 44.1% for Q3 and 49.7% for the first nine months, versus 41.1% and 41.4%, respectively, in 2015. The year-to-date rate included the tax effect of a nondeductible European buyout expense, foreign-loss valuation allowances, and state and local taxes.
- Cash and cash equivalents were $178.1 million at September 30, down from $210.1 million at December 31, 2015. Available liquidity, defined by the company as liquid assets less total liabilities, was $169.0 million. Total liabilities were $42.6 million; the filing reports no borrowings or other debt.
- For the first nine months, financing cash outflows were $71.8 million, including $32.7 million of dividends and $39.1 million of share repurchases. Cash declined by $31.9 million overall. The quarterly dividend remained $0.08 per share.
Material changes, outlook, and risks
- In January 2016, WisdomTree acquired GreenHaven for approximately $11.8 million, recording $10.0 million of indefinite-lived advisory-agreement intangible assets and $1.8 million of goodwill. In May, it accelerated and completed the buyout of the remaining Boost minority interest; related expense was $6.0 million.
- On September 29, the company closed the WisdomTree Coal Fund and planned to dissolve its subsidiary that sponsored it. The company also expanded into Canada; six Canadian-listed ETFs had $68.4 million of AUM at quarter-end.
- Management said operating cash flows should fund operations for at least the next 12 months. No numerical earnings or revenue guidance was provided. The company maintained a $0.08 quarterly dividend and a repurchase authorization with $96.8 million remaining at quarter-end.
- Key disclosed exposures include fund outflows and market declines that reduce fee-generating AUM, concentration in Europe- and Japan-focused U.S. funds, competition and fee pressure, and regulatory changes. Management noted that the Department of Labor fiduciary rule could encourage fee-based advice and benefit ETFs generally, while acknowledging industry fee pressure.
- Contractual operating-lease payments totaled $38.2 million, including $1.1 million due in under one year; an additional $3.7 million acquisition payable was due within one year. The company reported no material litigation and no off-balance-sheet financing arrangements other than operating leases.
- Disclosure controls were assessed as effective at a reasonable assurance level, with no material change in internal control reported for the quarter.
Important facts for investors to verify
- Whether flows and AUM in the largest Europe- and Japan-focused ETFs stabilize, and how that affects advisory-fee revenue.
- Whether the lower gross margin percentage and elevated year-to-date tax rate persist after the acquisition-related items.
- Cash generation relative to dividends, repurchases, lease commitments, and remaining acquisition payments; confirm the timing and use of the remaining repurchase authorization.
- Performance and impairment assessments of GreenHaven goodwill and its indefinite-lived advisory-agreement intangible asset.
- Future fee levels and distribution economics amid competition, platform changes, and fiduciary-rule-related industry shifts.