WisdomTree Investments, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. WisdomTree is a global exchange-traded product sponsor and asset manager; substantially all revenue comes from advisory fees based on ETP assets under management (AUM). Amounts below are in U.S. dollars.
Financial performance and position
- AUM: $79.4 billion at quarter-end, up from $77.5 billion at December 31, 2021. Quarterly net inflows were $1.3 billion and market appreciation added $0.6 billion. Average AUM rose 11.8% year over year to $77.8 billion.
- Revenue: $78.4 million, up 10.0% year over year. Advisory fees were $76.5 million, up 9.2%, as higher average AUM more than offset a slightly lower average advisory fee (0.40% versus 0.41%).
- Operating results: Operating expenses increased 15.3% to $60.7 million; operating income fell 4.9% to $17.7 million. Operating margin was approximately 22.6%, compared with 26.1% in Q1 2021.
- Net result: Net loss was $10.3 million, or $0.08 per diluted share, versus net income of $15.1 million, or $0.09 per diluted share, a year earlier. The quarter included a $17.0 million non-cash loss from revaluing the gold-payment obligation and $5.1 million of losses on securities owned. A $16.7 million income tax benefit partly offset the pre-tax loss.
- Adjusted results: Company-reported non-GAAP adjusted net income was $14.1 million and adjusted diluted EPS was $0.09, versus $12.5 million and $0.08, respectively. These measures exclude specified items and are not GAAP results.
- Cash flow and liquidity: Operating cash flow was negative $2.7 million, compared with positive $2.3 million in Q1 2021. Cash and cash equivalents declined $30.3 million to $110.4 million. Management-defined available liquidity was $200.2 million after subtracting current liabilities and required regulatory capital from liquid assets.
- Debt and obligations: Convertible notes had $325.0 million aggregate principal outstanding ($319.3 million carrying value): $175.0 million of 4.25% notes due June 2023 and $150.0 million of 3.25% notes due June 2026. Management said it currently anticipates refinancing the notes when due. The fair-value gold-payment obligation was $245.2 million, up from $228.1 million at year-end; payments are limited to specified gold-product advisory fee income, with no recourse for unpaid amounts beyond that income.
- Capital returns: The quarterly common dividend was $0.03 per share. The company repurchased 588,694 shares for $3.4 million and had $100 million remaining under its repurchase authorization, extended through April 27, 2025.
Changes versus the prior comparable period
- Revenue increased as average AUM rose, while the average advisory fee edged lower.
- Operating expenses grew faster than revenue. Management cited activist-campaign response costs, increased headcount, higher fund administration, marketing, distribution and sales costs. Professional fees rose 121.5% to $4.5 million; compensation expense increased 9.5% to $24.8 million.
- Results shifted from profit to loss, principally reflecting the change from a $2.8 million gain to a $17.0 million loss on revaluation of deferred gold consideration, securities losses, higher interest expense and higher operating costs.
- Total ETP net inflows were $1.3 billion. U.S.-listed ETFs had $2.3 billion of inflows, partly offset by market depreciation; European-listed ETPs had $0.9 billion of outflows, more than offset by market appreciation.
Outlook, commentary and risks
- No specific revenue, earnings or AUM guidance was provided. Management stated that operating cash flow and existing cash balances should fund operations for the foreseeable future, and that it expects to refinance convertible notes at maturity.
- Management described market conditions as challenging and volatile. The filing cites the war in Ukraine, inflation, supply-chain disruption, COVID-19 developments, market declines and changing investor sentiment as relevant uncertainties.
- Revenue depends primarily on ETP AUM and advisory fees, leaving results exposed to market declines and investor withdrawals. Other identified exposures include commodity and cryptocurrency prices, foreign exchange movements and securities investment losses; the company said it does not currently hedge these exposures.
- The company is developing a digital-assets strategy, including the WisdomTree Prime digital wallet and tokenized products. Related products and registrations were subject to regulatory review or approval; execution, regulatory and adoption risks remain.
- Investors in the closed WisdomTree WTI Crude Oil 3x Daily Leveraged ETP sought approximately €15.9 million ($17.7 million) in aggregate damages across claims. One court ruled in the company’s favor in February 2022; other claims remained under assessment. No accrual was recorded.
- The board adopted a stockholder rights plan in March 2022 amid an activist campaign. The plan had a March 2023 expiration date, subject to earlier expiration if stockholders did not ratify it after the 2022 annual meeting.
- The filing reports an immaterial correction to Q1 2021 revenue and expense presentation, with no effect on previously reported net income. It also reclassified certain prior-year securities cash flows between operating and investing activities.
Important facts for investors to verify
- Whether AUM, net flows and the 0.40% average advisory fee support continued revenue growth, particularly given European outflows.
- The assumptions and sensitivity underlying the $245.2 million Level 3 gold-payment obligation; reported fair value is significantly affected by forward gold prices, discount rate and perpetual growth assumptions.
- Liquidity available to meet the $175 million 2023 note maturity, and progress toward the stated refinancing expectation.
- Whether operating cash flow improves and whether securities losses, activist-related expenses and other non-core items persist.
- Developments in the 3OIL litigation, the activist campaign and the stockholder rights plan, including any resulting costs or governance changes.
- Regulatory progress and commercial execution for the digital-assets strategy and proposed products.