WisdomTree Investments, Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; comparisons are primarily with Q1 2011. Balance-sheet comparisons are with December 31, 2011. Amounts below are in millions unless stated otherwise.
Business context
WisdomTree sponsors and manages exchange-traded funds (ETFs), earning advisory fees based largely on average ETF assets under management (AUM). At quarter-end it reported 48 ETFs and approximately $15.7 billion of AUM, up from $12.2 billion at year-end 2011. Q1 net inflows were a record $2.3 billion, concentrated mainly in emerging-market equity and U.S. dividend ETFs; market appreciation added $1.2 billion.
Financial and operating performance
| Metric | Q1 2012 | Q1 2011 / comparison |
|---|---|---|
| ETF advisory fees | $18.975 | $14.273; up 32.9% |
| Total revenue | $19.170 | $14.533; up 31.9% |
| Total expenses | $18.055 | $14.378; up 25.6% |
| Net income | $1.115 | $0.155 |
| Net margin | 5.8% | 1.1% |
| Operating cash flow | $2.680 | $0.523 |
| Cash and cash equivalents | $32.138 at March 31 | $25.630 at December 31, 2011 |
| Investments | $10.086 at March 31 | $9.056 at December 31, 2011 |
| Total liabilities | $17.379 at March 31 | $16.714 at December 31, 2011 |
Average AUM increased 38.6% year over year to $14.265 billion, while the average advisory fee declined to 0.54% from 0.56%, primarily reflecting asset mix. Expenses were 94.2% of revenue, versus 98.9% a year earlier. Fund management and administration costs rose 30.7%, and third-party sharing costs rose 54.7%; Q1 2012 expenses also included $0.738 million for litigation and ETF shareholder proxy matters. No income tax provision was recorded.
Cash increased $6.508 million during the quarter, reflecting operating cash generation, $4.329 million of net proceeds from the company’s stock offering, and $1.613 million from option exercises, partly offset by investing activity and share withholding repurchases. The company reported no debt in the presented balance sheet. Current assets were $40.677 million and current liabilities $17.262 million. Management said operating cash flow and offering proceeds should fund operations for at least the next 12 months.
Material changes, outlook, and risks
- Revenue growth reflected higher average AUM and strong inflows; the lower average fee partly offset that growth. Net income rose to $1.115 million from $0.155 million.
- On February 2, 2012, the company sold 1.0 million shares at $5.61 per share, receiving approximately $4.329 million net for working capital and general corporate purposes. Selling stockholders sold additional shares; proceeds from those sales did not go to the company.
- The company launched an actively managed international fixed-income ETF in March with Western Asset Management Company as sub-adviser.
- Research Affiliates alleges infringement of three patents and seeks unspecified damages and an injunction. WisdomTree disputes the claims and intends to defend itself. The company recorded no litigation reserve, said the outcome and potential loss could not be determined, and estimated legal costs of $4.0–$7.5 million through the first half of 2013. A motion to dismiss was denied without prejudice in April 2012.
- WisdomTree planned an ETF shareholder proxy solicitation concerning continued advisory appointment if its largest stockholder’s ownership fell below 25%, and the ability to change sub-advisers. It expected 2012 proxy-related costs of $2.5–$3.5 million.
- New CFTC regulations may require additional registration, licensing, and compliance costs for certain ETFs. A challenge to the rule had been filed; the company said the effect was uncertain.
- Revenue is sensitive to ETF AUM, market performance, investor flows, global markets, emerging-market sentiment, and foreign-exchange movements. Management noted continuing uncertainty around European sovereign debt and the U.S. recovery, despite strong Q1 markets. It did not provide specific earnings or revenue guidance.
Important facts for investors to verify
- Whether strong net inflows and AUM growth continue, and whether fee mix further affects the average advisory rate.
- Actual cash costs and developments in the Research Affiliates litigation and ETF proxy process.
- The cost and implementation impact of CFTC regulations, and the outcome of the challenge to the rule.
- Cash generation relative to rising operating expenses, lease commitments of $2.484 million, and ongoing share withholding repurchases.
- Potential dilution: Q1 weighted-average diluted shares were 137.4 million versus 119.2 million basic shares; 123.3 million voting shares were outstanding on May 11, 2012.