WisdomTree Investments, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015. WisdomTree sponsors and manages exchange-traded products (ETPs); advisory fees, primarily based on average assets under management (AUM), are its main revenue source. Global AUM was $56.1 billion at quarter-end, including $55.8 billion in U.S.-listed ETFs.
Financial results and liquidity
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Revenue | $60.1 million | $42.9 million |
| Total expenses | $39.1 million | $26.4 million |
| Income before taxes | $21.0 million | $16.5 million |
| Income tax expense/(benefit) | $9.0 million expense | $13.7 million benefit |
| Net income | $12.1 million | $30.2 million |
| Diluted EPS | $0.09 | $0.22 |
| Operating cash flow | $16.9 million | $9.4 million |
- Revenue rose 40.1%, primarily reflecting higher average AUM from inflows and a slightly higher U.S. average advisory fee (0.52% versus 0.51%). Pretax income increased 27.6%.
- Management-defined gross margin was $49.7 million, or 82.6% of revenue, versus $33.7 million, or 78.6%, a year earlier. Pretax margin was approximately 34.9%, compared with 38.4%.
- Cash and cash equivalents were $151.7 million at March 31, down $13.6 million from year-end; investments were $21.6 million. Total liabilities were $36.9 million. The balance sheet reports no borrowings or debt.
- Operating cash flow was partly offset by $7.7 million of investing outflows and $22.7 million of financing outflows. Financing included $10.8 million of dividends paid and $14.1 million of share repurchases.
Material changes and operating trends
- U.S.-listed ETFs recorded $13.5 billion of net inflows, led by currency-hedged international equity products HEDJ and DXJ; emerging-markets products had $448 million of outflows. U.S.-listed ETF AUM ended the quarter at $55.8 billion, up from $39.3 billion at year-end.
- International hedged equity represented 53% of average U.S. ETF assets, up from 39% in Q1 2014. Management noted that roughly 60% of U.S. AUM was concentrated in European and Japanese equity exposures hedged against the U.S. dollar.
- Expenses increased 48.0%. Compensation and benefits more than doubled to $19.6 million, primarily due to incentive compensation tied to record inflows, payroll taxes and higher headcount. The quarter also included $1.1 million of compensation for European ETP employees.
- Q1 2015 included $0.5 million of advisory fees from European ETPs acquired in April 2014. European expansion also contributed to operating costs and a $0.3 million acquisition-contingent-payment expense.
Outlook, risks and unusual items
- No specific financial guidance was provided. Management said operating cash flows should be sufficient to fund operations for at least the next 12 months and identified operations, strategic growth, acquisitions and capital returns as expected uses of cash.
- The sharp year-over-year decline in net income largely reflects the comparison with Q1 2014, when a $13.7 million tax benefit resulted from releasing a valuation allowance on deferred tax assets. Q1 2015 instead recorded $9.0 million of income tax expense.
- Revenue depends on ETP AUM and can be affected by market performance, investor flows, competition, regulation and investor sentiment. Management highlighted potential adverse effects from weaker performance or sentiment in European and Japanese markets and currency movements.
- The company had a three-year, $100 million share-repurchase authorization; $85.9 million remained. It declared a quarterly dividend of $0.08 per share.
- Operating lease commitments totaled $40.6 million, including $24.1 million due after five years. A $2.0 million acquisition payable relates to the required redemption of the remaining former Boost shareholders’ interest; the eventual cash payout depends on a formula tied to European AUM, company value and European-business profitability.
- The filing reported no litigation expected to have a material effect and no material changes in internal control. Management cautioned that forward-looking statements are subject to risks and are not guarantees of future performance.
Important facts for investors to verify
- Whether extraordinary inflows into HEDJ and DXJ persist, and how concentrated AUM remains in currency-hedged European and Japanese equity products.
- Whether incentive compensation and other expenses rise in line with AUM and inflows, and how they affect margins.
- The sustainability of cash generation and capital returns after dividends, repurchases and investment purchases.
- The assumptions and potential cash cost of the Boost redemption obligation, and progress in growing European ETP and UCITS AUM.
- The realizability of deferred tax assets and the effect of tax items on comparisons with prior periods.