Business context and reporting period
WisdomTree Investments, Inc. (NASDAQ: WETF) filed its Form 10-K for the fiscal year ended December 31, 2013. The company sponsors and manages ETFs, earning primarily advisory fees based on average daily assets under management (AUM). At year-end it was the fifth-largest U.S. ETF sponsor, with 61 funds and $34.9 billion of AUM.
Financial and operating metrics
| Metric | FY 2013 | FY 2012 |
|---|---|---|
| Revenue | $149.5 million | $84.8 million |
| ETF advisory fee revenue | $148.6 million | $84.0 million |
| Expenses | $97.9 million | $73.8 million |
| Net income | $51.5 million | $11.0 million |
| Diluted EPS | $0.37 | $0.08 |
| Operating cash flow | $70.1 million | $11.2 million |
| Year-end AUM | $34.9 billion | $18.3 billion |
| Net inflows | $14.3 billion | $4.7 billion |
For Q4 2013, revenue was $43.2 million and net income was $16.5 million. The filing reports annual gross margin of 76% (a non-GAAP measure), versus 66% in 2012; the average advisory fee declined to 0.52% from 0.54% as asset mix shifted.
At December 31, 2013, cash and cash equivalents were $104.3 million, investments $11.7 million, current assets $123.7 million, current liabilities $29.1 million, total liabilities $32.8 million, and stockholders’ equity $109.0 million. The balance sheet presents no borrowings; liabilities principally included vendor, compensation and other obligations. Contractual operating lease payments totaled $43.9 million. The company said available cash and operating cash flow should fund operations for at least 12 months.
Material changes versus the prior period
- Revenue rose 76.3% and net income rose 367.2% year over year, primarily reflecting higher average AUM and record inflows.
- AUM increased 90.8%; approximately $9.8 billion of net inflows went into the Japan hedged equity ETF. That fund accounted for nearly 70% of 2013 net inflows.
- Expenses grew 32.8%, including higher compensation, fund administration, marketing and sales costs. Headcount rose from 70 to 87, and marketing and sales spending increased 65%.
- Fifteen ETFs were launched in 2013. The average advisory fee fell, partly because of the growing share of international hedged equity assets.
- The 2012 Mellon Capital/Dreyfus joint venture ended; related cost-sharing expense fell, while certain operating costs moved into fund management and administration expense.
Outlook, commentary, risks and unusual items
- Management expected 2014 compensation and benefits expense to be 20%–23% of revenue, strategic growth investment of $6–$9 million, and near-term gross margin of 77%–80% after transferring fund administration and custody services to State Street, effective April 1, 2014.
- In January 2014, the company announced a planned 75% investment in U.K.-based Boost and an expected $20 million working-capital investment to build a European platform. Closing was subject to regulatory approval and other conditions, with completion expected in the first half of 2014.
- The filing reports approximately $2.0 million of overall net outflows from January 1 through February 27, 2014, while also describing approximately $1.2 billion of outflows and $1.0 billion of inflows in selected categories; these figures do not clearly reconcile in the filing text.
- Key exposures include market movements, foreign exchange and overseas markets: approximately 76% of AUM was in foreign securities, 91% in equities, and 35% in the Japan hedged equity fund. Ten funds represented approximately 77% of AUM; emerging-market funds generated about 41% of revenue.
- Risks include reliance on AUM and investment performance, concentrated products and markets, stronger competition and fee pressure, regulatory change, and third-party service-provider execution. The change from BNY Mellon to State Street was identified as an operational risk.
- The company reported no litigation expected to have a material effect. A prior patent dispute was settled in 2012, with $0.2 million of net cost that year. It recorded no income tax expense and maintained a full valuation allowance against deferred tax assets.
- No dividends were anticipated in the foreseeable future. Management and the auditor reported effective internal controls; the auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether the exceptional AUM and earnings growth can be sustained, particularly given the concentration of 2013 inflows in the Japan hedged equity ETF.
- Current AUM, net flows, fee mix and performance in Japan, emerging markets and other major funds, including the reported early-2014 flow figures.
- Whether the State Street transition delivered the forecast cost savings and margin improvement without service disruption.
- The closing, funding, performance and eventual purchase-price implications of the planned Boost/European expansion.
- Cash-flow sustainability, the $43.9 million lease commitment, share-based compensation and dilution, and the status and usability of tax-loss carryforwards.