WisdomTree, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. WisdomTree sponsors and manages exchange-traded products (ETPs); substantially all revenue is advisory fees tied to ETP average daily assets under management (AUM). Amounts below are in U.S. dollars; financial statement amounts are in millions unless otherwise noted.
Business context and operating performance
- COVID-19-driven market declines reduced quarter-end global ETP AUM 20.9% from year-end 2019, to $50.3 billion. The decrease primarily reflected $12.0 billion of market depreciation, plus $536 million of net outflows and $778 million of assets sold with the Canadian business.
- Average global AUM was $59.8 billion, up 3.7% from Q1 2019, as the sharpest market depreciation occurred late in the quarter. Quarter-end U.S.-listed ETF AUM was $28.9 billion, down from $40.6 billion at year-end; international ETP AUM was $21.4 billion, down from $23.0 billion.
- On February 19, WisdomTree sold its Canadian ETF business for CDN $3.7 million (about $2.8 million) at closing, with potential additional consideration of CDN $2 million to $8 million tied to future AUM growth.
Financial results and liquidity
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Revenue | $63.9 million | $65.5 million, down 2.5% |
| Operating expenses | $48.2 million | $54.8 million, down 12.0% |
| Operating income | $15.6 million | $10.7 million |
| Operating margin | Approximately 24.5% | Approximately 16.3% |
| Net income (loss) | $(8.6) million; $(0.06) per share | $8.8 million; $0.05 per share |
| Operating cash flow | $(2.6) million | $7.9 million |
| Cash and cash equivalents | $68.4 million at March 31 | $75.0 million at December 31, 2019 |
- Advisory fees fell 2.9% to $63.0 million. Management attributed the decline to lower average U.S. AUM and a three-basis-point decrease in the average global advisory fee, to 0.43%, partly offset by higher average international AUM.
- Operating expenses declined mainly due to lower incentive compensation, the absence of $2.0 million of prior-year severance, and lower third-party distribution and sales costs. Expenses were 75.5% of revenue versus 83.7% a year earlier.
- The net loss included a $19.7 million non-cash impairment of AdvisorEngine financial interests and a $2.2 million loss from revaluing the gold-payment obligation. A $2.9 million gain on the Canadian business sale partly offset these items. Management’s non-GAAP adjusted net income was $11.2 million, or $0.07 diluted adjusted EPS, versus $7.7 million and $0.05 in Q1 2019.
- Cash decreased $6.5 million during the quarter. Investing cash flow was $8.8 million, including sale proceeds and maturities of held-to-maturity securities; financing cash outflow was $11.4 million, including $5.1 million of dividends, $5.0 million of debt repayment and $1.5 million of share repurchases.
- Principal debt outstanding was $174.0 million, due in a single payment on April 11, 2021; the balance-sheet carrying amount was $171.5 million. No revolving borrowings were outstanding. Available liquidity, as defined by the company, was $74.7 million, including $17.1 million of available revolver capacity.
Outlook, risks and unusual items
- Management said April’s market rebound lifted AUM to $54.5 billion as of May 4, 2020. It provided no formal earnings or revenue guidance, and cautioned that market volatility and investor sentiment could continue to affect AUM, fees and liquidity.
- The company was in compliance with its leverage covenant at March 31 and as of the report date. It was actively exploring refinancing or extension alternatives for the April 2021 debt maturity. Covenant limits tighten to 2.00:1.00 beginning with the September 2020 quarter; the company said further operating pressure could require using liquidity to reduce borrowings.
- Management planned expense reductions, including lower AUM-linked costs, incentive compensation and discretionary spending. It said operations continued without disruption while employees worked remotely, but identified potential workforce, service-provider and technology disruptions as pandemic risks.
- After more than $3.0 billion of net inflows into European oil-related products, three leveraged or inverse oil products were terminated after reaching pricing thresholds. Creations in three products, including WisdomTree Crude Oil (CRUD), were temporarily halted to manage counterparty risk; the company anticipated lifting the halt once exposures were mitigated.
- The $175.3 million deferred gold-payment obligation is a Level 3 fair-value estimate and is sensitive to unobservable gold-price, discount-rate and growth assumptions. Payments are tied to fees from physical-gold products, with no recourse for unpaid amounts beyond those advisory fees.
- The company reported no litigation expected to have a material adverse impact and no material subsequent events requiring disclosure. It identified counterparty risks in certain European products and custody risks for precious metals held by HSBC and JPMorgan.
Most important facts for investors to verify
- Whether AUM and net flows recover or deteriorate after quarter-end, and how that translates into advisory revenue and the average fee rate.
- Progress on refinancing or extending the $174 million term loan before April 2021, covenant headroom, and continued access to the revolver.
- Whether planned expense reductions are achieved without impairing distribution, operations or growth, and whether the AdvisorEngine impairment represents the full remaining exposure.
- Developments in oil-product creation restrictions, product terminations and counterparty exposure, including any effects on investors or future flows.
- Changes in the valuation of the gold-payment obligation and any contingent consideration from the Canadian business sale.