WisdomTree Investments, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014. The filing identifies the registrant as WisdomTree Investments, Inc. The company sponsors and manages ETFs, earning primarily advisory fees calculated on average daily assets under management (AUM).
Business context and operating performance
- WisdomTree reported $33.9 billion of AUM at quarter-end and 62 ETFs. AUM fell 2.9% from $34.9 billion at December 31, 2013, reflecting $498 million of net outflows and $502 million of market depreciation.
- Emerging-markets ETFs had $632 million of outflows; European-themed ETFs had $1.4 billion of net inflows. The company described the industry environment as challenging and competitive.
Financial results
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Total revenue | $42.9 million | $29.3 million |
| Total expenses | $26.4 million | $21.5 million |
| Income before taxes | $16.5 million | $7.9 million |
| Income tax benefit | $13.7 million | None reported |
| Net income | $30.2 million | $7.9 million |
| Diluted earnings per share | $0.22 | $0.06 |
| Operating cash flow | $9.4 million | $10.2 million |
- Revenue increased 46.3%, principally because average AUM rose 54.4% to $33.9 billion. The blended advisory fee declined to 0.51% from 0.54%, reflecting asset mix.
- Expenses rose 23.1%. Compensation increased 25.0%, while professional and consulting fees rose 192.8%, including Boost acquisition-related costs and higher legal and technology consulting expenses.
- Management’s non-GAAP gross margin was $33.7 million, or 78.6% of revenue, compared with $21.0 million, or 71.6%, a year earlier.
- Net income included a non-recurring $13.7 million tax benefit from releasing the valuation allowance on deferred tax assets. Excluding that benefit, reported pre-tax income was $16.5 million.
Financial position and liquidity
- Cash and cash equivalents were $104.8 million at March 31, 2014, versus $104.3 million at year-end. Total assets were $159.7 million; total liabilities were $23.8 million. The filing does not present a debt balance.
- Quarter-end cash increased by $0.5 million. Operating cash flow of $9.4 million was offset in part by $3.6 million of investing outflows and $5.4 million of financing outflows, principally share withholding repurchases related to employee restricted stock.
- The company reported $11.8 million of held-to-maturity investments, primarily U.S. government and agency securities. Their disclosed fair value was $10.8 million, including $1.1 million of gross unrealized losses; management said it intended and was able to hold them to maturity.
- Operating lease commitments totaled $43.2 million, including $26.8 million due after five years, associated with a new 16-year office lease. Management expected operating cash flows to fund operations for at least the next 12 months.
Outlook, material events, and risks
- On April 17, 2014, after quarter-end, WisdomTree completed its acquisition of U.K.-based Boost ETP, invested $20 million in working capital, and took a 75% interest in WisdomTree Europe. Existing Boost shareholders retained 25%; the company expects to acquire that interest after four years under a formula tied to European AUM, company valuation relative to global AUM, and European profitability. The filing says related charges are expected to begin in Q2 2014 and recur quarterly for four years.
- Management expected an income tax rate of about 45% beginning in Q2, but did not expect cash income tax payments in 2014 and for some time thereafter because of tax-loss carryforwards, including deductions related to stock compensation.
- Key risks include market declines or volatility reducing ETF AUM and fee revenue, investor outflows, competition, product-development and international-expansion execution, vendor costs, and regulatory changes. The company noted that market conditions could remain challenging and volatile.
- The company reported no material litigation, no material changes in internal control over financial reporting, and no off-balance-sheet arrangements other than operating leases. Disclosure controls were assessed as effective at a reasonable-assurance level.
Important facts for investors to verify
- How AUM flows and market performance develop, especially in emerging markets, and whether European inflows persist.
- How sustainable revenue and gross-margin growth are given the lower blended advisory fee and higher operating costs.
- The amount and timing of deferred-tax-asset realization, the expected tax rate, and the basis for the Q1 valuation-allowance release.
- The full economics and future charges of the Boost transaction, including the formula and cash timing for the remaining 25% buyout.
- Liquidity available after the $20 million European investment, ongoing share withholding repurchases, and substantial long-term lease commitments.