WisdomTree Investments, Inc. — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. Financial statement amounts below are in millions of dollars unless otherwise noted. WisdomTree sponsors and manages exchange-traded products (ETPs); advisory fees are primarily tied to average assets under management (AUM).
Business context and operating performance
- WisdomTree reported global AUM of $35.6 billion at quarter-end, including $35.5 billion in U.S.-listed ETFs. It acquired Boost, a U.K. and Jersey ETP sponsor, on April 15 and renamed it WisdomTree Europe.
- U.S.-listed ETF AUM rose 4.8% during Q2 to $35.5 billion, principally from $1.3 billion of market appreciation; net inflows were $334 million. Inflows into European-themed and India ETFs were partly offset by $1.3 billion of outflows from the Japanese-hedged equity ETF.
- Q2 average U.S. ETF AUM was $34.1 billion, up 20.3% year over year. The blended average advisory fee declined to 0.51% from 0.52%, reflecting AUM mix.
Financial results
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Total revenue | $44.1 | $37.3 | $87.0 | $66.7 |
| Total expenses | $24.0 | $25.1 | $50.4 | $46.6 |
| Income before taxes | $20.1 | $12.2 | $36.6 | $20.1 |
| Income tax expense/(benefit) | $9.5 | — | $(4.2) | — |
| Net income | $10.6 | $12.2 | $40.8 | $20.1 |
| Diluted EPS | $0.08 | $0.09 | $0.29 | $0.14 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $32.7 | $29.2 |
- Q2 revenue increased 18.2%, mainly from higher average AUM. Expenses fell 4.4%; lower incentive compensation and reduced fund administration costs more than offset acquisition-related and other growth expenses.
- Management’s non-GAAP gross margin was $36.2 million, or 82.0% of revenue, versus $27.8 million, or 74.5%, in Q2 2013. The measure deducts fund management and administration and third-party sharing costs from revenue.
- Six-month net income included a $13.7 million deferred tax benefit from releasing a valuation allowance in Q1. Q2 then recorded $9.5 million of tax expense after beginning to recognize income taxes. The filing says the company did not expect cash income tax payments in 2014 and for some time thereafter because of tax attributes.
Balance sheet, liquidity and capital
- At June 30, cash and cash equivalents were $128.8 million, investments $12.1 million, current assets $147.3 million, and total assets $180.3 million. Total liabilities were $26.4 million, including $19.7 million of current liabilities. The filing reports no debt balance.
- Cash increased $24.5 million in the first half. Operating activities provided $32.7 million; investing activities used $2.8 million and financing activities used $5.3 million, including $5.4 million for shares withheld/repurchased for employee tax obligations.
- Management said operating cash flows and available resources should fund operations for at least 12 months. It may use cash for operations, strategic growth, acquisitions, employee-related share purchases, or potentially future repurchases or dividends; no new broad return-of-capital program was announced.
- Non-cancelable operating lease payments totaled $42.5 million, including $1.6 million due in the remainder of 2014 and $26.8 million due after five years. A $1.4 million standby letter of credit collateralized the office lease.
Outlook, risks and notable items
- WisdomTree targeted a Q4 2014 launch of WisdomTree-branded ETFs in Europe and described a planned $20 million capital investment in the European business. It also continued managing the Boost product lineup.
- The company owns 75% of WisdomTree Europe; the former Boost shareholders retain 25%, which WisdomTree is required to redeem in 2018. The cash payout is formula-based on European AUM, company enterprise value relative to global AUM, and European profitability, and is payable over two years. The ultimate amount is not specified.
- Management highlighted concentration risk: about 30% of U.S. AUM was in Japanese exposures and another 26% in emerging-markets equity, fixed income and currency exposures. Weak sentiment in these markets or a stronger yen could hurt AUM and fee revenue.
- Revenue is sensitive to market values, investor flows and product mix; management expected challenging and volatile market conditions to persist. Other stated risks include competition, regulation, product development, vendors and international expansion. The company said it did not expect interest-rate or currency movements to have a material effect, but had no currency-hedging derivatives in place.
- Boost acquisition costs were $1.6 million for the first half; Q2 expenses included $1.8 million associated with European listed ETPs. The acquisition created $1.7 million of goodwill and a $1.8 million acquisition payable. No litigation expected to have a material impact was reported; routine regulatory reviews and ordinary-course matters remained.
Important facts for investors to verify
- Whether AUM and net flows continue to support advisory revenue, particularly given Q2 outflows from the Japanese-hedged ETF and the reduced blended fee rate.
- The amount and accounting impact of the mandatory 2018 redemption of the remaining 25% European interest, including future liability remeasurement and service-related compensation.
- European launch timing, the planned $20 million investment, and the acquired business’s growth, costs and profitability.
- The sustainability of reported earnings after separating the one-time Q1 valuation-allowance release from recurring results and assessing future tax expense and cash taxes.
- Execution and cost effects of the new office lease and fund-administration transition, alongside the company’s significant long-term lease commitments.