WisdomTree Investments, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Amounts are in U.S. dollars; financial statement amounts are in millions unless otherwise noted.
Business context and reporting period
WisdomTree is a global exchange-traded product sponsor and asset manager. Revenue is primarily advisory fees based on the average daily net assets of its products. The company reported $70.9 billion of ETP assets under management (AUM) at quarter-end, across 347 ETPs, and is developing blockchain-enabled and digital-asset offerings, including WisdomTree Prime.
Financial performance and position
| Metric | Q3 2022 | Q3 2021 | First nine months 2022 | First nine months 2021 |
|---|---|---|---|---|
| Total revenue | $72.4 | $78.1 | $228.0 | $225.1 |
| Operating income | $14.9 | $24.2 | $48.4 | $66.5 |
| Net income | $81.2 | $5.8 | $79.0 | $38.6 |
| Diluted EPS | $0.50 | $0.04 | $0.49 | $0.24 |
| Operating cash flow | Not separately reported | Not separately reported | $43.1 | $50.1 |
- Q3 advisory fees fell 7.6% to $70.6 million, primarily as the average advisory fee declined to 0.38% from 0.41%; average AUM was essentially unchanged year over year. Total operating expenses rose 6.7% to $57.5 million. Operating margin was approximately 20.5%, versus 31.0% in Q3 2021.
- Reported Q3 net income included a $77.9 million non-cash gain from revaluing the long-term gold-payment obligation. Excluding items identified by management, adjusted net income was $9.3 million and adjusted diluted EPS was $0.06, versus $16.3 million and $0.10 a year earlier.
- For the first nine months, operating expenses increased 13.3% to $179.7 million. Adjusted net income declined to $34.6 million from $45.6 million; adjusted diluted EPS was $0.21 versus $0.28. Reported results also included a $63.2 million gold-obligation revaluation gain and a $19.9 million tax-related indemnification-asset charge, offset by a corresponding tax benefit.
- Q3 global ETP flows were net inflows of $1.7 billion, while market depreciation reduced AUM by $5.2 billion. U.S.-listed ETFs had $3.8 billion of net inflows; European-listed ETPs had $2.1 billion of outflows. End-period AUM was $48.0 billion for U.S.-listed ETFs and $22.8 billion for European-listed ETPs.
- At September 30, cash and cash equivalents were $132.7 million and securities owned at fair value were $125.1 million. Management reported available liquidity of $180.8 million after current liabilities other than the 2023 convertible notes and required regulatory capital. Cash decreased $8.0 million over the first nine months.
- Convertible-note principal totaled $325 million: $175 million of 4.25% notes due June 2023 and $150 million of 3.25% notes due June 2026. The 2023 notes, with a $173.8 million carrying amount, were classified as current. The company said it was actively exploring refinancing or extension alternatives for the 2023 notes.
Material changes, outlook, risks, and unusual items
- 2022 outlook: Compensation expense of $96–$99 million; discretionary spending of $50–$51 million; gross margin percentage of 78%–79%; contractual gold-payment expense of approximately $17 million; third-party distribution expense of approximately $8 million; and normalized effective tax rate of 22%. These are management estimates, not guarantees. The discretionary-spending guidance excludes $4.5 million of activist-campaign expenses already incurred.
- Expenses rose with higher incentive compensation and headcount, fund-management costs, marketing, and digital-initiative professional fees. Headcount increased to 274 from 235 a year earlier. Management cited a reduced office footprint as a source of lower occupancy costs.
- The gold-payment obligation, assumed in the 2018 ETFS acquisition, had a reported fair value of $164.8 million. It represents gold payments tied to advisory-fee income from qualifying gold-backed products, with no recourse for amounts exceeding that income. Its Level 3 valuation is sensitive to forward gold prices, discount rates, and perpetual growth assumptions; revaluation gains or losses can materially affect reported earnings.
- Other losses included $6.3 million of losses on securities and investments in Q3. For the first nine months, the company reported $34.5 million of other losses, including securities losses and the tax-related indemnification-asset charge. The company also reported $15.6 million of losses on securities owned during the nine months.
- Investors in the closed WisdomTree WTI Crude Oil 3x Daily Leveraged ETP are seeking approximately €15.8 million ($15.4 million) in damages in Italian proceedings. The company had not accrued a loss at September 30, 2022; it reported a favorable ruling in one related case in February 2022.
- Management identified volatile markets, inflation, recession concerns, geopolitical events, competition, ETP flows and AUM, regulation, and digital-asset execution as relevant risks. The company does not currently hedge its exposure to gold, other precious metals, cryptocurrencies, or foreign-currency translation.
Most important facts for investors to verify
- Progress and terms of refinancing or extending the $175 million of notes due June 2023, including cash needs if refinancing is unavailable.
- Underlying operating performance versus reported earnings: the effect of the gold revaluation and the trend in adjusted net income, fees, margins, expenses, and AUM flows.
- Assumptions and sensitivity behind the $164.8 million Level 3 gold obligation, and the effect of gold prices and discount-rate changes on future results.
- Developments, potential exposure, and any eventual accrual concerning the Italian 3OIL investor claims.
- Execution, regulatory approvals, spending, and potential returns for WisdomTree’s digital-asset and blockchain initiatives.