WisdomTree Investments, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. WisdomTree is a global exchange-traded product (ETP) sponsor and asset manager; substantially all revenue is advisory fees tied to ETP average assets under management (AUM). Unless stated otherwise, amounts below are in U.S. dollars.
Financial performance and key metrics
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $58.1m | $66.3m | $122.0m | $131.8m |
| Operating expenses | $46.3m | $54.4m | $94.6m | $109.2m |
| Operating income | $11.8m | $11.9m | $27.4m | $22.6m |
| Operating margin | 20.3% | 18.0% | 22.5% | 17.1% |
| Net income/(loss) | $(13.3)m | $2.5m | $(21.9)m | $11.3m |
| GAAP diluted EPS | $(0.09) | $0.01 | $(0.15) | $0.07 |
| Adjusted diluted EPS (non-GAAP) | $0.05 | $0.05 | $0.12 | $0.09 |
Q2 advisory fees fell 12.8% year over year; average global AUM was $55.7bn, down 4.9%, and the average advisory fee declined to 0.41% from 0.45%. By quarter-end, AUM had recovered to $57.6bn from $50.3bn at March 31, principally from market appreciation. Q2 net flows were $126m overall: $1.6bn inflows in international ETPs were partly offset by $1.5bn outflows in U.S.-listed ETFs. For the first half, net outflows were $410m.
Q2 operating expenses decreased 14.8%, reflecting lower compensation and discretionary marketing, sales and overhead costs; contractual gold payments increased with gold prices. Operating margin improved despite lower revenue. Net loss primarily reflected a $23.4m non-cash loss from revaluing the gold-payment obligation. The first-half net loss also included a $19.7m impairment related to AdvisorEngine and a $25.6m gold-obligation revaluation loss.
Cash flow and liquidity: First-half operating cash flow was $19.4m, investing cash flow $27.1m and financing cash flow $(70.1)m; cash declined $24.7m to $50.3m. Reported available liquidity was $15.6m after current liabilities and $10.6m of required international regulatory capital, with no remaining revolving-credit capacity. The company reported $848.8m total assets and $428.7m total liabilities at June 30. Cash and cash equivalents were $50.3m, versus $75.0m at year-end.
Debt and capital returns: On June 16, WisdomTree issued $150m of 4.25% senior unsecured convertible notes due 2023 and used proceeds, together with other funds, to repay and terminate its former credit facility. The notes had a $141.5m carrying amount at quarter-end; the effective interest rate was 6.23%. It repurchased 6.7m shares in Q2 for $24.9m and paid a $0.03-per-share quarterly dividend. The notes’ initial conversion price is $5.92 per share, and specified conversion or change-of-control events could require cash payments.
Material changes versus comparable periods
- Revenue declined as lower U.S. average AUM and a lower average advisory fee outweighed growth in international ETPs.
- Operating expenses fell faster than revenue, improving operating margin; COVID-related discretionary spending reductions contributed.
- GAAP results moved from profit to loss, chiefly due to the larger non-cash gold-obligation revaluation loss. The obligation’s fair value rose to $198.8m from $173.0m at December 31, 2019.
- First-half cash flow included debt repayment, share repurchases and dividends. The new convertible notes replaced the former credit facility, removing its financial covenants and restrictions on repurchases and dividends.
- The company sold its Canadian ETF business in February 2020 and exited its AdvisorEngine investment in May 2020; the latter involved a $19.7m first-half impairment charge.
Outlook, risks and unusual items
- Management said operating cash flows and existing cash should fund operations for at least the next 12 months. It gave no specific revenue, earnings or AUM guidance, and said the sustainability of market-recovery trends was highly uncertain.
- Management continued to manage expenses, particularly discretionary spending. The company operated remotely without reported disruption and did not apply for CARES Act financial assistance.
- Market declines, investor outflows and changes in product mix can reduce AUM and advisory revenue. Management expected challenging and volatile market conditions to continue in the foreseeable future.
- Creation activity in certain European oil-related products had been temporarily halted amid extreme oil-market volatility and operational risks. Creations in WisdomTree WTI Crude Oil ETC resumed July 1, with risk mitigations; creations in four other oil products remained halted at the filing date.
- The gold-payment obligation is valued using significant unobservable inputs and is sensitive to forward gold prices. Payments are tied to advisory revenue from physically backed gold products, with no recourse for unpaid amounts beyond that revenue; the agreement includes a potential right to claw back a gold ETP issuer.
- Convertible-note conversions or repurchases following specified events could strain liquidity; the filing says the company may not have sufficient cash or financing to meet those obligations. The notes are subordinated to certain Series A preferred-stock redemption payments.
- The company reported no litigation expected to have a material adverse impact and no events requiring subsequent-event disclosure. Disclosure controls were assessed as effective at a reasonable assurance level.
Important facts for investors to verify
- Whether AUM recovery and international inflows persist, and how flows and product mix affect advisory fees and margins.
- The valuation assumptions and future cash impact of the $198.8m Level 3 gold-payment obligation.
- Cash availability after regulatory capital needs and current liabilities, and the company’s capacity to satisfy convertible-note conversion or repurchase obligations.
- Progress on mitigating oil-product counterparty and concentration risks, including the status of creation halts.
- AdvisorEngine contingent sale consideration, which may reach $10.6m subject to revenue milestones, and Canadian-sale consideration dependent on AUM growth targets.