WisdomTree Investments, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Unless otherwise noted, financial amounts are in U.S. dollars; figures below are rounded to millions. WisdomTree sponsors and manages exchange-traded products (ETPs), earning primarily advisory fees based on average assets under management (AUM).
Business context and operating performance
- Global ETP AUM was $72.8 billion at quarter-end, up from $60.7 billion a year earlier but down from $73.9 billion at June 30, 2021. Q3 net inflows were $548 million, offset by $1.7 billion of market depreciation.
- Average global AUM rose 21.8% year over year to $74.6 billion. The average advisory fee remained 0.41%. The company ended the quarter with 322 ETPs and 235 employees.
- U.S.-listed ETF AUM ended at $44.7 billion, with $612 million of Q3 net inflows; European-listed ETP AUM was $28.0 billion, with $64 million of Q3 net outflows.
Financial results
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Total revenue | $78.1m | $63.7m | $225.1m | $184.3m |
| Operating income | $24.2m | $14.7m | $66.5m | $42.2m |
| Net income/(loss) | $5.8m | ($0.3m) | $38.6m | ($22.2m) |
| GAAP diluted EPS | $0.04 | ($0.01) | $0.24 | ($0.16) |
- Q3 revenue increased 22.5%, principally on higher average AUM; advisory-fee revenue rose 21.2% to $76.4 million. Operating expenses increased 10.0% to $53.9 million. Operating margin was approximately 31.0%, versus 23.1% a year earlier.
- Q3 results included $15.9 million of impairments associated with the New York office exit, partly offset by a $1.7 million gain on revaluation of the gold-payment obligation. Q3 2020 included an $8.9 million revaluation loss. Adjusted diluted EPS, a non-GAAP measure, was $0.10 versus $0.07.
- For the nine months, operating margin was approximately 29.5%, versus 22.9%. Results included a $5.1 million gain on gold-obligation revaluation in 2021 versus a $34.4 million loss in 2020, and lower impairment charges ($16.2 million versus $22.8 million). Adjusted diluted EPS was $0.28 versus $0.18.
- Quarterly operating expenses were 69.0% of revenue versus 76.9% a year earlier. Compensation and benefits rose 15.3% in Q3; management cited higher incentive compensation and headcount. Professional fees increased, in part due to digital-asset initiatives.
Cash flow, liquidity and capital structure
- Nine-month operating cash flow was $50.1 million, compared with $32.1 million in 2020. Investing cash flow was a $92.5 million outflow, including $97.6 million of securities purchases and $5.8 million of investments. Financing cash flow was a $97.4 million inflow, principally reflecting $150 million of 2021 convertible-note proceeds, partly offset by $34.5 million of share repurchases and $14.7 million of dividends.
- Cash and cash equivalents were $127.9 million at September 30, 2021, up from $73.4 million at year-end 2020. The company reported $191.6 million of available liquidity after current liabilities and required international regulatory capital, compared with $53.5 million at year-end.
- Convertible-note principal totaled $325 million: $175 million of 4.25% notes due 2023 and $150 million of 3.25% notes due 2026. Their balance-sheet carrying amount was $318.0 million. Management said it anticipates refinancing the obligations when due.
- The gold-payment obligation had a fair value of $225.0 million, including $16.0 million current and $209.0 million long-term. Payments are tied to gold prices and are generally payable from advisory fees on physically backed gold products, without recourse for amounts exceeding those fees. Series A preferred shares had a $132.6 million carrying amount and an $88.5 million stated redemption value.
- Total assets were $1.018 billion and total liabilities were $624.9 million. Common dividends remained $0.03 per share per quarter. No shares were repurchased in Q3; $17.7 million remained under the repurchase authorization at quarter-end.
Material changes, outlook and risks
- WisdomTree terminated its 245 Park Avenue office lease in September, paying a $12.7 million termination fee. The reported $15.9 million impairment included lease and fixed-asset write-offs and related costs. Management estimated 2022 savings of approximately $3.5 million from reduced New York and London office footprints, including anticipated rent for smaller replacement offices.
- The company described digital-asset product development and distribution initiatives, including U.S. trust and fund registration filings, European cryptocurrency ETP launches, and investments in Securrency and Onramp Invest. No quantified earnings or AUM guidance was provided.
- Management stated that operating cash flows and existing cash balances should fund operations for the foreseeable future. It also cautioned that market declines, volatility, investor outflows, competition, regulation, and the COVID-19 pandemic could affect AUM and fee revenue.
- A proposed U.S. tax-law change discussed in the filing could remove ETFs’ in-kind redemption tax treatment; the proposal was not enacted as of the report. WisdomTree also identified execution and vendor risks for planned European cryptocurrency basket ETPs, where it expects to place rebalancing trades directly.
- Italian investors sought approximately €9.0 million (about $10.5 million) in claims relating to the March 2020 closure of the leveraged oil ETP 3OIL. The company had not accrued a loss. Although the Part II legal-proceedings item says “None,” the financial-statement note describes these pending claims.
- The filing reports effective disclosure controls. Comparative 2020 revenue and expense presentation was revised for an immaterial error, with no impact on net income; prior-year cash flows were also reclassified between operating and investing activities.
Important facts for investors to verify
- Whether AUM growth, net inflows and the 0.41% average advisory fee persist, particularly in light of Q3 market depreciation and European outflows.
- The terms, conversion and refinancing implications of the $325 million convertible notes, including the 2023 maturity, and the company’s ability to manage ongoing gold-payment obligations.
- Actual recurring savings from the office exits versus the one-time impairment and termination costs.
- The outcome and potential exposure of the Italian 3OIL litigation, and the status of the tax-related indemnification and unrecognized tax benefits.
- Progress, regulatory outcomes and operational controls for digital-asset products, and any effects of proposed ETF tax legislation.
- How reported GAAP earnings compare with adjusted results; adjusted net income and adjusted EPS are non-GAAP measures and exclude specified items.