WisdomTree Investments, Inc. — Q2 2015 Form 10-Q
Business context and reporting period. The filing covers the quarter and six months ended June 30, 2015. WisdomTree sponsors and manages exchange-traded products (ETPs), earning primarily advisory fees tied to average assets under management (AUM). The company reported global AUM of $61.9 billion, including $61.3 billion in U.S.-listed ETFs. It described itself as the sixth-largest global ETP sponsor and fifth-largest U.S. ETF sponsor by AUM.
Key financial metrics
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $81.6 million | $44.1 million | $141.7 million | $87.0 million |
| Income before taxes | $40.9 million | $20.1 million | $62.0 million | $36.6 million |
| Income tax expense/(benefit) | $16.8 million | $9.5 million | $25.7 million | ($4.2 million) |
| Net income | $24.2 million | $10.6 million | $36.2 million | $40.8 million |
| Diluted EPS | $0.18 | $0.08 | $0.26 | $0.29 |
| Non-GAAP gross margin percentage | 85.6% | 82.0% | 84.4% | 80.3% |
Q2 revenue grew 84.8% year over year, primarily from higher average AUM and fee capture; Q2 expenses rose 69.3%. Q2 net margin was approximately 29.6%, versus 24.0% a year earlier. First-half net income fell despite higher revenue, chiefly because the prior-year period included a $13.7 million tax benefit from releasing a valuation allowance. The first-half 2015 overall effective tax rate was 41.5%.
Cash and cash equivalents were $189.3 million at June 30, 2015, versus $165.3 million at December 31, 2014; investments were $21.2 million, versus $14.0 million. Total assets were $265.2 million and total liabilities $47.8 million. The balance sheet lists no debt. First-half operating cash flow was $65.5 million, compared with $32.7 million in 2014; cash increased $24.0 million. Financing cash outflows included $21.8 million of dividends and $15.3 million of share repurchases. The company declared $0.08 per share per quarter.
Material changes and operating performance
- U.S.-listed ETF AUM increased to $61.3 billion from $35.5 billion at June 30, 2014. First-half net inflows were $20.1 billion; Q2 inflows were $6.6 billion. Q2 U.S. ETF market depreciation was $1.1 billion.
- International hedged equity products accounted for $39.2 billion, or about 64% of U.S.-listed ETF AUM; 62% of U.S. AUM was concentrated in European and Japanese equity exposures hedged against the U.S. dollar.
- Q2 U.S. average AUM rose 79.1% year over year, and the blended average ETF advisory fee increased to 0.53% from 0.51%, reflecting inflows into higher-fee products, particularly HEDJ.
- Compensation and benefits increased 147% in Q2, reflecting incentive compensation, headcount growth and stock-based compensation. Management cited 117 U.S. and 28 European employees at quarter-end.
- European expansion added costs and revenue: Q2 included $0.9 million of advisory revenue and $2.9 million of expenses related to European-listed ETPs. The company reported 57 European-listed ETPs and 10 UCITS ETFs at quarter-end.
Outlook, risks and unusual items
- Management said operating cash flows should fund operations for at least the next 12 months and identified operations, strategic growth, acquisitions and capital returns as expected uses of cash. No numerical earnings or AUM guidance was provided.
- Key exposures include market declines and investor withdrawals, which can reduce AUM and fee revenue. Management highlighted concentration in currency-hedged European and Japanese equity products, competition in that category, and challenging and volatile markets.
- Management discussed potential regulatory scrutiny of ETP listing, trading and fixed-income ETF liquidity; the SEC had requested public comment. It also noted a proposed Department of Labor fiduciary rule and the competitive implications of non-transparent exchange-traded products.
- The company must redeem the remaining 25% interest in its European business on or about March 31, 2018. The cash price will depend on a contractual formula tied to European AUM, company valuation relative to global AUM and European profitability; the reported acquisition payable was $2.3 million.
- Operating lease commitments totaled $42.1 million, including $24.1 million due after five years. Management reported no litigation expected to materially affect the company and no off-balance-sheet financing arrangements other than operating leases.
- U.S. and agency debt instruments totaled $210.5 million when combined with cash equivalents; management said interest-rate and foreign-exchange changes were not expected to have a material impact. The company did not use derivatives to hedge these exposures.
Most important facts for investors to verify
- Whether inflows and AUM remain sustainable, especially given the large share concentrated in currency-hedged international equity products.
- Whether higher compensation, operating and European expansion costs continue to grow more slowly than revenue.
- The effect of taxes on earnings: first-half 2014 net income benefited from a one-time valuation-allowance release, while 2015 European losses were not currently deductible.
- The eventual cash cost of the 2018 purchase of the remaining European business interest, which is formula-dependent and may change with AUM and profitability.
- Capital returns and liquidity: the filing reported $84.7 million remaining under the $100 million repurchase authorization and substantial long-term lease commitments.