WisdomTree Investments, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Dollar amounts are in millions unless otherwise noted. WisdomTree sponsors and manages exchange-traded products (ETPs), earning substantially all revenue from advisory fees tied to average ETP assets under management (AUM). The ETFS acquisition closed in April 2018, so comparisons with 2018 are not fully like-for-like.
Financial performance and position
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $66.3 | $74.8 | $131.8 | $133.7 |
| Operating income | $11.9 | $14.5 | $22.6 | $27.8 |
| Net income | $2.5 | $16.7 | $11.3 | $26.1 |
| Diluted EPS | $0.01 | $0.10 | $0.07 | $0.17 |
| Operating expenses as % of revenue | 82.0% | 80.6% | 82.9% | 79.2% |
- Revenue and AUM: Q2 revenue fell 11.3% year over year, primarily from lower U.S. average AUM and a lower U.S. advisory fee rate, partly offset by international growth and a full quarter of ETFS revenue. Average global AUM was $58.6 billion, down 4.4% from Q2 2018; period-end global AUM was $60.4 billion. The average global advisory fee was 0.45%, versus 0.48% a year earlier.
- Profitability: Q2 operating expenses declined 9.7%, mainly because acquisition-related costs fell to $0.03 million from $7.9 million. However, operating income declined 18.0% and net income declined 85.2%. Net income was also affected by a $4.0 million loss on revaluation of deferred gold consideration, compared with a $9.9 million gain in Q2 2018. Q2 effective tax rate was 59.1%.
- Six-month comparison: Revenue declined 1.4%; operating income declined 18.6%; and net income declined 56.8%. The periods differ due to the ETFS acquisition timing. Expenses increased 3.1%, including higher compensation, fund administration and contractual gold payments, partly offset by sharply lower acquisition costs.
- AUM trends: Q2 global net inflows were $337 million. U.S.-listed ETFs had $166 million of net outflows, while international ETPs received $503 million. Management cited continuing outflows from HEDJ and DXJ, partly offset by inflows to fixed income, U.S. equity, emerging-market and commodity products.
- Cash flow: First-half operating cash flow was $15.4 million, compared with $9.0 million in 2018. Investing activities used $1.5 million and financing activities used $12.3 million, including $10.2 million of dividends and $2.1 million of share repurchases. Cash increased $1.8 million to $79.6 million.
- Debt and liquidity: The $200 million term loan had a $195.8 million carrying value, matures April 2021, and requires a single principal repayment at maturity. Its effective interest rate was 5.46%. No revolver borrowings were outstanding; reported available revolver capacity was $25.1 million. Available liquidity was $83.0 million, down from $108.9 million at year-end 2018. The company reported compliance with credit covenants and said cash and operating cash flow should fund operations for at least 12 months.
- Other obligations and balance sheet: Deferred consideration for contractual gold payments was valued at $161.3 million, including $12.9 million current and $148.4 million long term. The obligation’s valuation is sensitive to gold-price assumptions and is classified as Level 3. Total assets were $954.8 million and total liabilities were $458.4 million at June 30, 2019. Operating lease liabilities totaled $23.8 million following adoption of the new lease standard.
Material changes, outlook and risks
- The U.S. segment’s Q2 revenue declined 18.7% year over year; international segment revenue rose 6.8%. International results include ETFS, acquired in April 2018. International segment pretax results were a $1.2 million loss in Q2 2019, versus $11.4 million income in Q2 2018, reflecting the gold revaluation swing and higher interest expense.
- Management said ETFS integration was essentially complete but expected additional acquisition-related expenses in Q3 2019 as it rationalized the European product offering. No quantified earnings or revenue guidance was provided.
- Management identified market volatility, AUM declines and investor outflows as risks to advisory-fee revenue. It also cited exposure to gold prices, foreign-currency translation and variable-rate borrowing; the company did not currently hedge its gold-price exposure.
- A $0.6 million impairment was recorded for termination of the Japan office lease. Japan subsidiary wind-down losses were $0.5 million for the first half. The company reported no litigation expected to have a material adverse effect and no subsequent events requiring disclosure.
- A $4.3 million reduction in the tax indemnification asset following expiration of a statute of limitations was recorded in other losses, with an equal and offsetting income tax benefit. The company said it expected changes in unrecognized tax benefits over the next 12 months, but not a material financial-statement impact.
- The company extended its share repurchase program through April 2022. Repurchases and dividends above $0.03 per share are subject to credit-agreement leverage and default restrictions. The quarterly dividend remained $0.03 per share.
Important facts for investors to verify
- Whether U.S. AUM and fee-rate pressures persist, and whether international inflows can offset them.
- The cash-flow and earnings effects of the planned Q3 European product rationalization and any associated costs.
- Gold-price assumptions underlying the $161.3 million deferred consideration valuation and the resulting potential earnings volatility.
- Debt maturity and covenant headroom, including the conditions governing revolver availability, dividends and share repurchases.
- Credit quality and recoverability of the $31.5 million AdvisorEngine notes and the $25.0 million AdvisorEngine preferred-stock investment; the filing reports maximum exposure to loss of $56.5 million and no allowance for credit losses.
- Progress on the Japan wind-down, tax examinations and the indemnified ETFS tax exposures.