WisdomTree Investments, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; balance-sheet figures are as of March 31, 2013. The company sponsors and manages exchange-traded funds (ETFs), earning advisory fees largely based on ETF assets under management (AUM). It reported 47 ETFs and $25.1 billion in AUM at quarter-end.
Financial performance and liquidity
| Metric | Q1 2013 | Q1 2012 / comparison |
|---|---|---|
| Total revenue | $29.3 million | $19.2 million; up 53.1% |
| ETF advisory fees | $29.2 million | $19.0 million; up 53.6% |
| Total expenses | $21.5 million | $18.1 million; up 19.0% |
| Net income | $7.9 million | $1.1 million |
| Basic and diluted EPS | $0.06 | $0.01 |
| Pre-tax operating margin | 27% | 6%, as reported by management |
| Operating cash flow | $10.2 million | $2.7 million |
Average AUM rose 53.8% to $21.9 billion, while the blended advisory fee remained 0.54%. Cash and cash equivalents were $52.3 million, versus $41.2 million at year-end 2012; investments were $10.7 million. Current assets were $64.9 million and current liabilities $14.9 million. Total liabilities were $14.9 million; the balance sheet reports no debt. Cash increased $11.1 million during the quarter. No income-tax provision was recorded; the filing says a valuation allowance covered the deferred tax asset related to net operating loss carryforwards.
Material changes and business drivers
- ETF net inflows were a record $5.9 billion, compared with $2.3 billion in Q1 2012; market appreciation added $0.9 billion. AUM grew from $15.7 billion a year earlier to $25.1 billion.
- The Japan Hedged Equity ETF drove $3.9 billion of Q1 inflows. WisdomTree’s share of industry ETF net inflows was 10.8%, versus 4.3% a year earlier.
- Expense growth reflected higher AUM and operating costs, including fund management and administration (+51.2%), marketing and advertising (+46.1%), and sales and business development (+109.4%). Management attributed about $0.6 million of higher fund-related costs to ending the BNY Mellon joint venture at year-end 2012, with other costs increasing as AUM grew.
- Third-party sharing expense fell to $0.1 million from $1.7 million, primarily because the collaborative arrangement ended in December 2012. Q1 2012 also included $0.7 million of net patent-litigation expense; none was recorded in Q1 2013.
Outlook, risks and contingencies
- No specific earnings or revenue guidance was provided. Management said operating cash flow should be sufficient to fund operations for at least the next 12 months and expects to use cash for operations, growth initiatives, employee share withholding repurchases, and potential strategic acquisitions.
- Revenue depends heavily on AUM, which is affected by market levels, investor flows, currency movements, and fee rates. The filing highlights concentration in the Japan Hedged Equity Fund: at April 30, 2013, it represented approximately $7.7 billion, or 27.5%, of AUM. Management warned that Japanese market conditions, yen movements, and investor sentiment could affect flows and revenue.
- Competition is increasing, including new and planned factor-based and currency-hedged ETFs. Management cited market volatility and regulatory change among broader risks.
- The office lease expires in January 2014; the company was searching for new space and expected related costs to increase. Future minimum operating lease payments were $1.3 million.
- The company reported no current legal proceedings expected to have a material impact. A patent infringement case filed in 2011 was withdrawn and settled in November 2012; insurance funded most defense costs. Management stated that interest-rate changes were not expected to materially affect results, and disclosure controls were effective at a reasonable-assurance level.
Important facts for investors to verify
- Whether Q1’s record inflows persist, particularly in the Japan Hedged Equity Fund, and how its AUM concentration and yen exposure evolve.
- Whether revenue growth continues to outpace operating expenses after the BNY Mellon arrangement ended and fund-related costs shifted.
- The sustainability of the reported 27% pre-tax operating margin and the extent to which Q1 results reflect unusually strong flows and market conditions.
- How the new office lease affects occupancy costs and whether cash, investments, and operating cash flow remain sufficient for planned uses.