WisdomTree Investments, Inc. — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012. Amounts below are in U.S. dollars; financial statement amounts are in millions unless otherwise noted.
Business context
WisdomTree sponsors and manages ETFs, earning most revenue from advisory fees tied to average ETF assets under management (AUM). At September 30, 2012, it reported $16.8 billion of ETF AUM and 49 ETFs. Its average advisory fee was 0.54%.
Financial performance and position
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Total revenue | $21.7 | $17.7 | $61.2 | $49.0 |
| ETF advisory fees | $21.4 | $17.6 | $60.6 | $48.3 |
| Total expenses | $17.1 | $16.4 | $55.4 | $46.8 |
| Net income | $4.5 | $1.4 | $5.8 | $2.2 |
| Diluted EPS | $0.03 | $0.01 | $0.04 | $0.02 |
- Revenue grew 22.1% in Q3 and 25.0% for the nine-month period, principally reflecting higher average AUM. Average AUM increased 23.6% and 28.6%, respectively; the average fee declined from 0.55% to 0.54% due to asset mix.
- Net income margin was approximately 20.9% in Q3 2012 versus 7.7% in Q3 2011, and 9.4% for the first nine months versus 4.5% in 2011. No income tax provision was recorded in these periods.
- Operating cash flow was $7.5 million for the first nine months, compared with $9.4 million a year earlier. Investing cash flow was negative $0.6 million and financing cash flow was positive $7.1 million. Cash increased $14.0 million to $39.6 million.
- At September 30, cash was $39.6 million, investments $9.4 million, current assets $50.8 million, current liabilities $16.1 million, and total liabilities $16.2 million. The filing reports no borrowings or debt balance. Total stockholders’ equity was $44.6 million. Cash, investments, and receivables less total liabilities were $42.2 million under management’s liquidity calculation.
- Stock-based compensation was $5.9 million for the first nine months. Shares outstanding increased from 115.4 million at December 31, 2011 to 123.6 million at September 30, 2012; the February offering generated $4.3 million in net proceeds to the company.
Material changes and management outlook
- For the first nine months, AUM rose 37.8% to $16.8 billion, supported by $3.7 billion of net inflows and $0.9 billion of net market appreciation. Q3 net inflows were $1.0 billion. Market share of industry inflows was 2.8% year to date, down from 4.3% in the comparable 2011 period.
- Expenses increased 18.5% year over year for the nine-month period, including $3.3 million of ETF shareholder proxy costs and $0.7 million of litigation expense. In Q3, expenses rose 4.6%; higher compensation and fund administration costs were partly offset by lower third-party sharing costs.
- Management expected gross margin of 70%–75% in the near term at current asset levels and mix, and expected improved margins on certain currency and fixed-income ETFs following a new BNY Mellon fee arrangement effective January 1, 2013. Management also expected a new equity compensation program to increase stock-based compensation in 2013 and future periods, while variable stock compensation for senior-advisor awards was not expected after December 2012.
- The company stated that operating cash flow and February 2012 offering proceeds should fund operations for at least the next 12 months. No specific revenue or earnings guidance was provided.
Risks, contingencies, and unusual items
- Revenue depends heavily on AUM and is exposed to market performance, investor flows, asset mix, foreign exchange movements, and sentiment toward international and emerging-market investments. Management noted that investors favored U.S. fixed-income products, a category WisdomTree did not offer at the time.
- Research Affiliates’ patent lawsuit was settled after quarter-end. The parties agreed to mutual releases and covenants not to sue on specified patent matters; Research Affiliates agreed to pay WisdomTree $0.7 million. The filing said the settlement would not affect current ETF methodologies or fees. By September 30, the company had incurred $2.9 million in defense and related costs, with $2.3 million expected to be reimbursed by insurance, leaving approximately $0.7 million net cost.
- The BNY Mellon collaborative arrangement for certain currency and fixed-income ETFs was to end early on December 31, 2012; a replacement fee arrangement was scheduled to begin January 1, 2013. The filing also cites competition, regulatory matters, litigation risk, and market volatility as risks. Routine regulatory reviews and ordinary-course legal proceedings were noted.
- Operating lease commitments totaled $1.8 million, including $0.4 million due within one year. A $0.7 million standby letter of credit collateralized office space.
Important facts for investors to verify
- Whether AUM inflows and the average advisory fee sustain revenue growth, particularly given lower market share of industry inflows.
- Whether the BNY Mellon fee transition delivers the anticipated margin improvement and whether management’s 70%–75% gross-margin outlook is achieved.
- The final insurance reimbursement, settlement payment, and any remaining financial or operational effects of the patent dispute.
- The expected scale of higher stock-based compensation in 2013 and its impact on earnings per share and share dilution.
- Whether cash generation remains adequate as receivables, compensation, and other operating costs change; the filing reported operating cash flow below the prior-year period despite higher net income.