WisdomTree Investments, Inc. — FY2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. The filing also reports fourth-quarter results and selected comparisons with 2010. WisdomTree is an ETF sponsor and asset manager; substantially all revenue comes from advisory fees based on ETF assets under management (AUM).
Business context
At year-end, the company managed 47 ETFs with $12.2 billion of AUM; by March 16, 2012, it reported 48 ETFs and $15.6 billion of AUM. Its products include fundamentally weighted equity ETFs and actively managed currency, fixed-income, and alternative-strategy ETFs. WisdomTree’s stated goal is to become one of the five largest U.S. ETF sponsors.
Financial and operating performance
| Metric | FY2011 | FY2010 |
|---|---|---|
| Revenue | $65.2 million | $41.6 million |
| ETF advisory fees | $64.4 million | $40.6 million |
| Total expenses | $62.1 million | $49.2 million |
| Net income (loss) | $3.1 million | ($7.5 million) |
| Operating cash flow | $13.7 million | $2.1 million |
| Year-end AUM | $12.2 billion | $9.9 billion |
| Net ETF inflows | $3.9 billion | $3.1 billion |
Revenue rose 56.6%, while expenses increased 26.3%; the company returned to annual profitability after losses in 2009 and 2010. Average AUM increased 60.6%, while the average advisory fee eased to 0.55% from 0.56%. AUM growth reflected net inflows, partly offset by $1.6 billion of market depreciation. Management-defined gross margin was approximately 61%.
In Q4 2011, revenue was $16.2 million, expenses were $15.3 million, and net income was $0.9 million, versus revenue of $13.4 million and a net loss of $0.6 million in Q4 2010.
At December 31, 2011, cash and cash equivalents were $25.6 million, investments were $9.1 million, total assets were $42.6 million, total liabilities were $16.7 million, and stockholders’ equity was $25.9 million. The filing does not present a separate borrowings or debt balance; it reports no off-balance-sheet arrangements other than operating leases. Operating lease obligations totaled $2.8 million. Management said available cash flow and the February 2012 offering proceeds were expected to fund operations for at least 12 months.
Material changes and notable items
- Fund management and administration expense rose 39.2% to $19.9 million, including higher asset-related service costs and a one-time $0.7 million reimbursement to the WisdomTree India ETF for excess fees collected.
- Third-party sharing arrangement expense increased to $5.7 million from $2.3 million, primarily reflecting profit sharing on currency and fixed-income ETFs with Mellon Capital and Dreyfus. That agreement expires in March 2013; renewal status was uncertain.
- 2011 operating cash flow improved substantially; cash and cash equivalents increased by $11.4 million. The company repurchased $2.2 million of shares, primarily to cover employee tax withholding on vested restricted stock.
- In February 2012, WisdomTree issued 1.0 million shares at $5.61 per share and received proceeds for general corporate purposes; selling stockholders also sold shares. The filing gives different net-proceeds figures: approximately $5.2 million including option-exercise proceeds in one section and approximately $4.7 million in the financial-statement note.
Outlook, risks, and contingencies
- Management expects continued market volatility and competition. It plans to pursue product launches, distribution growth, and international expansion, and said it did not expect a significant near-term deviation from the 61% gross margin at then-current AUM and mix. It also expected operating expenses to decline as a percentage of revenue as the business matures.
- Revenue is highly sensitive to market levels, investor flows, currency movements, and product mix. The business has notable exposure to foreign and emerging markets: approximately 62% of AUM was in ETFs investing in foreign securities, and six emerging-market-focused ETFs represented about 42% of AUM and 51% of 2011 revenue.
- Research Affiliates sued in December 2011, alleging that WisdomTree’s fundamental-weighting methodology infringes three patents and seeking unspecified damages and an injunction. WisdomTree disputes the claims; the company said loss probability and amount could not be determined and recorded no reserve. It estimated legal costs could reach $4.0–$7.5 million through the first half of 2013.
- New CFTC regulations adopted in February 2012 were expected to add registration, licensing, and compliance requirements for certain ETFs. SEC review of derivatives regulation could also affect some products.
- Management estimated $1.5–$2.0 million of 2012 costs for a shareholder approval process related to continuing advisory agreements if Chairman Michael Steinhardt’s ownership fell below 25%; the company intended to seek approval proactively. Management also planned to seek flexibility to change ETF sub-advisers.
- Other key risks include dependence on BNY Mellon and other service providers, fee competition, concentrated AUM and revenue, limited operating history and profitability record, and the possibility that performance or market declines reduce assets and fees. The filing also discusses Delaware court sanctions against Chairman Michael Steinhardt in litigation unrelated to WisdomTree; the company said his conduct did not involve it.
Important facts for investors to verify
- Reconcile the conflicting reported net proceeds from the February 2012 company share issuance.
- Track AUM flows and market-driven changes, particularly in emerging-market products and the effects of currency moves.
- Monitor the Research Affiliates patent litigation, expected legal spending, and any impact on products or operations.
- Confirm the status and economics of the Mellon Capital/Dreyfus agreement before its March 2013 expiry, and assess reliance on BNY Mellon.
- Review 2012 regulatory compliance costs, shareholder-vote spending, and whether profitability and operating cash generation continue.