WisdomTree Investments, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. Unless otherwise indicated, amounts are in U.S. dollars; financial statement amounts below are in millions.
Business context and reporting period
WisdomTree sponsors and manages exchange-traded products (ETPs), earning primarily advisory fees based on average daily assets under management (AUM). It reported global ETP AUM of $69.5 billion at quarter-end, across 313 products. The company operates as one reportable segment.
Management cited favorable global equity markets amid vaccine rollout and economic stimulus. For Q1, global ETP AUM rose from $67.4 billion to $69.5 billion, reflecting $1.3 billion of net inflows and $0.9 billion of market appreciation. U.S.-listed ETF AUM grew to $42.2 billion; international ETP AUM declined to $27.4 billion, largely due to market depreciation in gold products.
Financial results and liquidity
| Metric | Q1 2021 | Q1 2020 / comparison |
|---|---|---|
| Revenue | $72.8 | $63.9; up 14.0% |
| Advisory fees | $71.6 | $63.0; up 13.8% |
| Operating expenses | $54.2 | $48.2; up 12.4% |
| Operating income | $18.6 | $15.6 |
| Operating margin | 25.5% | 24.5% |
| Net income/(loss) | $15.1 | $(8.6) |
| GAAP diluted EPS | $0.09 | $(0.06) |
| Adjusted net income (non-GAAP) | $12.5 | $11.2 |
| Adjusted diluted EPS (non-GAAP) | $0.08 | $0.07 |
| Operating cash flow | $1.9 | $(2.6) |
Average global AUM increased 15.6% year over year to $69.6 billion, while the average advisory fee rate was unchanged at 0.42%. Operating expenses were 74.5% of revenue, versus 75.5% a year earlier. Compensation and benefits rose 30.8%, primarily from higher incentive compensation; professional fees rose 58.1%, partly reflecting digital-assets initiatives.
Cash and cash equivalents were $62.3 million at March 31, down $11.1 million from year-end. Management reported available liquidity of $59.0 million after current liabilities and required regulatory capital. Q1 investing cash outflow was $5.6 million, including $5.5 million invested; financing cash outflow was $7.2 million, including $4.9 million of dividends and $2.6 million of share repurchases.
Convertible notes had $175.0 million principal outstanding, bear 4.25% interest, and mature June 15, 2023; carrying value was $171.2 million. The company also reported $227.1 million of deferred gold-payment consideration, substantially long-term. These payments are funded from specified gold-product advisory fees, and the seller has no recourse for unpaid amounts beyond those fees. Operating lease liabilities totaled $20.0 million.
Material changes versus the prior comparable period
- Revenue growth reflected higher average AUM and net inflows; operating income increased despite higher expenses.
- Net income improved from a loss to profit. The comparison was affected by a $19.7 million AdvisorEngine impairment in Q1 2020, a $2.9 million gain on the Canadian ETF business sale in Q1 2020, and a more favorable gold-obligation revaluation in Q1 2021 (a $2.8 million gain versus a $2.2 million loss).
- Q1 2021 included a $0.3 million impairment related to exiting the London office and a $0.2 million unrealized gain on the Securrency investment.
- The company early adopted ASU 2020-06 on January 1, 2021, changing convertible-note accounting and reducing quarterly note interest expense by approximately $0.4 million, according to management.
Outlook, commentary, risks and contingencies
No specific revenue or earnings guidance was provided. Management said operating cash flows and existing cash balances should fund operations for the foreseeable future and stated it currently anticipates refinancing the 2023 notes when due. It intends to continue its $0.03 quarterly dividend and has share-repurchase authorization through April 27, 2022; $49.6 million remained available at quarter-end.
Management highlighted market and investor-sentiment sensitivity: advisory revenue depends on ETP AUM, which can fall with market declines or investor withdrawals. Other disclosed exposures include gold prices, foreign exchange, regulatory changes, competition, product development and the COVID-19 pandemic. The gold obligation is a Level 3 fair-value estimate sensitive to forward gold prices, discount rates and perpetual growth assumptions; the filing gives significant modeled sensitivity to changes in those inputs.
Investors in the WisdomTree WTI Crude Oil 3x Daily Leveraged ETP brought Italian court claims seeking approximately €9.0 million in aggregate following the product’s 2020 closure. The company was assessing the claims and had made no accrual. The filing also reported $22.2 million of indemnified uncertain tax positions and related interest and penalties; management said $7.1 million could decrease within 12 months as statutes of limitations lapse, with an offsetting indemnification asset. Management reported disclosure controls were effective and no material change in internal control over financial reporting.
Most important facts for investors to verify
- Whether AUM growth and net inflows continue, particularly in international products, and how market movements affect fee revenue.
- The timing and terms of refinancing or repayment of the $175.0 million notes due in 2023, including potential conversion or change-of-control provisions.
- The assumptions and valuation sensitivity behind the $227.1 million gold-payment obligation, and the resulting cash payments over time.
- The outcome and potential financial impact of the Italian litigation related to the closed leveraged oil ETP.
- How much of reported earnings reflects recurring operations versus gold revaluation, tax-related indemnification adjustments and other unusual items; also compare GAAP results with management’s non-GAAP adjustments.
- The company’s available liquidity after required regulatory capital, dividends, buybacks and planned investments, including digital-assets initiatives.