WisdomTree Investments, Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. Financial statement amounts are in thousands of dollars unless otherwise noted. WisdomTree sponsors and manages exchange-traded products (ETPs), earning advisory fees principally based on average assets under management (AUM).
Business context and operating performance
- WisdomTree reported global AUM of $39.0 billion at quarter-end, including $38.0 billion in U.S.-listed ETFs. It described itself as the ninth-largest ETP sponsor globally and sixth-largest U.S. ETF sponsor.
- U.S.-listed ETF assets fell to $38.0 billion from $44.3 billion at March 31, 2016. Q2 net outflows were $4.9 billion and market depreciation was $1.3 billion. International hedged equity ETFs accounted for $4.9 billion of Q2 outflows; U.S. equity ETFs had $500 million of inflows.
- Revenue depends heavily on average AUM. At quarter-end, 46% of U.S. AUM was concentrated in European- and Japanese-equity exposures, which management said could be adversely affected by weaker relevant markets or currency movements.
Financial results
- Q2 revenue: $56.0 million, down 31.4% year over year; advisory fees were $55.9 million. Management attributed the decline mainly to lower average AUM from outflows in its largest ETFs and negative market movement.
- Q2 earnings: Operating expenses were $44.8 million, up 10.3%; pretax income was $11.2 million versus $40.9 million; net income was $3.7 million versus $24.2 million. Diluted EPS was $0.03 versus $0.18.
- Q2 margin: Non-GAAP gross margin was $44.7 million, or 79.8%, versus $69.9 million, or 85.6%, a year earlier. The company defines this measure as revenue less fund management and administration expenses and third-party sharing arrangements.
- First half revenue and earnings: Revenue was $116.9 million, down 17.5%; net income was $15.7 million versus $36.2 million; diluted EPS was $0.11 versus $0.26. Non-GAAP gross margin was 80.9%, compared with 84.4%.
- Cash flow: First-half operating cash flow was $29.0 million, down from $65.5 million. Investing used $7.4 million, including $11.8 million for the GreenHaven acquisition; financing used $57.4 million, including $35.7 million for share repurchases and $21.8 million in dividends. Cash decreased $35.2 million to $174.9 million.
- Liquidity and debt: Current assets were $200.6 million and current liabilities $35.0 million; total liabilities were $40.0 million. Cash and investments totaled $193.6 million. No borrowings or debt balance is reported in the supplied filing text. Management said operating cash flows should fund operations for at least the next 12 months.
- Capital return: The quarterly dividend was $0.08 per share. The repurchase authorization was increased and extended; $100.2 million remained available at June 30, 2016.
Material changes, outlook and risks
- A $6.0 million Q2 expense related to accelerating the buyout of Boost’s remaining minority stake materially affected earnings. The effective tax rate rose to 67.3% for Q2 and 52.1% for the first half, largely because the buyout charge was not tax deductible.
- WisdomTree completed its acquisition of GreenHaven commodity businesses on January 1 for approximately $11.8 million in cash, recording approximately $10.0 million of indefinite-lived intangible assets and $1.8 million of goodwill.
- Management expected market volatility to continue and identified the uncertain consequences of the U.K.’s vote to leave the EU as a risk to European operations, investor confidence, AUM and fee revenue. The filing provides no quantitative earnings or revenue guidance.
- Other significant risks include market declines, investor outflows, competition, product development, regulation, vendor costs and foreign exchange exposure. Management noted that a weaker U.S. dollar against the euro or yen, or negative sentiment toward those equity markets, could hurt results.
- The company reported no material litigation, no material change in internal control over financial reporting, and no off-balance-sheet arrangements other than operating leases. Future minimum operating lease payments totaled $39.0 million.
Important facts for investors to verify
- Whether outflows and market declines in the concentrated European- and Japanese-equity exposures persist, and how they affect AUM and advisory fees.
- The sustainability of earnings and margins after excluding the unusual Boost buyout charge, while considering the higher effective tax rate.
- Cash generation relative to dividends, repurchases, acquisitions and the remaining repurchase authorization.
- The assumptions and accounting treatment for the GreenHaven intangible asset and goodwill, and for the Boost acquisition payment.
- Potential operational, regulatory and market effects of Brexit, and the company’s exposure to currency and market movements.