WisdomTree Investments, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; balance sheet comparisons are against December 31, 2015. WisdomTree sponsors and manages exchange-traded products (ETPs), earning primarily advisory fees tied to average assets under management (AUM).
Business context and results
WisdomTree reported global AUM of $45.1 billion at quarter-end, including $44.3 billion in U.S.-listed ETFs. Its business is highly sensitive to ETP AUM, investor flows and market performance; 53% of U.S. AUM was concentrated in Europe- and Japan-focused hedged equity products.
| Metric | Q1 2016 | Q1 2015 or prior date |
|---|---|---|
| Revenue | $60.9 million | $60.1 million; up 1.2% |
| Income before taxes | $21.7 million | $21.0 million |
| Income tax expense | $9.6 million | $9.0 million |
| Net income | $12.1 million; $0.09 per diluted share | $12.1 million; $0.09 per diluted share |
| Total expenses | $39.2 million | $39.1 million; up 0.2% |
| Gross margin (non-GAAP) | $49.9 million; 82.0% | $49.7 million; 82.6% |
| Cash from operations | $6.8 million | $16.9 million |
Financial position, cash flow and capital allocation
- Cash and cash equivalents were $159.8 million at March 31, down from $210.1 million at year-end; investments were $22.6 million and accounts receivable $20.7 million. Current liabilities were $24.0 million; total liabilities were $33.7 million. No interest-bearing debt is disclosed.
- Operating cash flow fell year over year to $6.8 million. Investing used $11.0 million, including $11.8 million for the GreenHaven acquisition; financing used $46.4 million, including $35.6 million for share repurchases and $10.9 million in dividends.
- The company repurchased 3.4 million shares in the quarter. At quarter-end, $40.3 million remained under the then-current authorization. On April 27, the board increased total authorization to $100.3 million and extended the program through April 27, 2019.
- Management said operating cash flows should be sufficient to fund operations for at least the next 12 months. Contractual obligations included $39.7 million of operating lease payments and a $9.9 million acquisition payable.
Material changes and management commentary
- U.S.-listed ETF AUM declined from $55.8 billion at March 31, 2015 to $44.3 billion at March 31, 2016. In Q1 2016, U.S.-listed products had $5.4 billion of net outflows and $2.2 billion of negative market movement. Management attributed outflows principally to negative sentiment toward Europe and Japan exposures.
- Higher European-listed product revenue offset lower average AUM from U.S.-listed ETFs. The blended U.S. ETF advisory fee remained 0.52%.
- Compensation expense declined 22.3%, primarily from lower accrued incentive compensation, while professional fees, marketing, sales and third-party sharing costs increased. Global headcount rose to 191 from 136 a year earlier.
- On January 1, WisdomTree acquired GreenHaven Commodity Services and GreenHaven Coal Services for approximately $11.8 million cash, recognizing a $10.0 million indefinite-lived advisory-agreement intangible and $1.8 million goodwill.
- WisdomTree commenced Japan operations in February to serve institutional investors. It announced plans for Canadian-listed ETFs in April, subject to regulatory approval. No quantified earnings or AUM guidance is provided.
Risks, contingencies and unusual items
- Management identifies market volatility, investment performance, investor sentiment and fund flows as key revenue risks. Weakness in the euro or yen, or adverse sentiment toward Europe or Japan, may affect results given the portfolio concentration.
- The company reported an overall effective tax rate of 44.3%, citing non-deductible losses in its European ETP business. The filing says those losses may be recognized in the future if the business becomes profitable.
- The $9.9 million acquisition payable is a contingent obligation tied to the European business and is measured using projected AUM, operating results and a 27.5% discount rate. The company recorded $0.7 million of acquisition-contingent-payment expense in Q1.
- Operating lease commitments total $39.7 million, including $21.3 million due after five years. The company reported no material litigation and no off-balance-sheet financing arrangements other than operating leases.
- The filing cautions that forward-looking statements are subject to risks and disclaims an obligation to update them, except as required by law. Management reported disclosure controls effective at a reasonable assurance level.
Important facts for investors to verify
- Whether U.S.-listed AUM outflows and Europe/Japan product concentration persist, and how they affect advisory-fee revenue.
- How cash generation evolves given the lower Q1 operating cash flow and continued dividends, repurchases and investment in growth.
- The terms, valuation assumptions and eventual cash impact of the GreenHaven acquisition and contingent acquisition payable.
- Whether the expanded repurchase authorization is used, and its effect on liquidity and share count.
- Regulatory progress and costs for the planned Canadian-listed ETFs, and the financial contribution from Japan operations.