WisdomTree Investments, Inc. — FY 2017 Form 10-K
Business context and reporting period. The filing covers the fiscal year ended December 31, 2017; quarterly figures below include Q4. WisdomTree sponsors and manages exchange-traded products, earning primarily advisory fees based on average assets under management (AUM). Global AUM was $48.9 billion at year-end, and the company operated U.S. and International business segments.
Financial performance and liquidity
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Revenue | $237.4 million | $219.4 million |
| Expenses | $179.2 million | $163.9 million |
| Income before taxes | $58.2 million | $55.6 million |
| Net income | $27.2 million | $26.2 million |
| Diluted earnings per share | $0.20 | $0.19 |
| Operating cash flow | $48.5 million | $54.9 million |
- Revenue grew 8.2% year over year; expenses rose 9.3%. Net income increased 4.0%. Net margin was approximately 11.5%, versus 11.9% in 2016; expenses were 75.5% of revenue, compared with 74.7%.
- Revenue included a $6.9 million Thesys settlement gain, representing the fair value of preferred stock received, and $2.7 million of other income, which included a one-time $0.8 million reimbursement. Advisory fees were $227.8 million, up 4.3%.
- Global AUM increased 18.6% to $48.9 billion. U.S.-listed AUM ended at $46.8 billion, up from $40.2 billion, with $6.4 billion of market appreciation and $234 million of net inflows. International AUM rose to approximately $2.1 billion; international ETFs had $834.9 million of net inflows, including acquired Questrade AUM.
- Year-end cash and cash equivalents were $54.2 million, versus $92.7 million a year earlier. Management reported $101.1 million of available liquidity, defined as liquid assets less total liabilities. Total liabilities were $62.0 million and stockholders’ equity was $193.0 million. The balance sheet reported no funded debt; acquisition financing had not yet been raised.
- Cash used in investing activities was $37.0 million and cash used in financing activities was $51.1 million. Financing outflows included $43.8 million of dividends and $7.9 million of share repurchases.
Q4 2017
Revenue was $61.4 million, including $60.8 million of advisory fees; expenses were $55.7 million, pretax income was $5.6 million and net income was $0.2 million. In Q4 2016, revenue was $50.8 million and net income was $2.5 million. Q4 2017 expenses included $6.3 million of professional and consulting fees, while compensation and benefits were $25.7 million.
Material changes versus prior periods
- FY 2017 revenue and earnings partly recovered from 2016, when revenue fell 26.6% and net income fell 67.3% from 2015, largely reflecting outflows from the two largest U.S. ETFs, HEDJ and DXJ.
- 2017 U.S. AUM growth was driven mainly by market appreciation; net inflows were modest overall. Outflows from HEDJ and DXJ continued to weigh on flows, while other U.S. ETFs recorded $2.9 billion of net inflows excluding those two funds.
- Compensation and benefits increased 28.8% to $81.5 million, primarily due to higher incentive compensation. Professional and consulting fees rose 50.7%, including $4.8 million of transaction costs related to the proposed ETFS acquisition and the AdvisorEngine option.
- The average U.S. ETF advisory fee declined to 0.50% from 0.51%, reflecting product mix. The International Business segment remained loss-making, with a $12.3 million pretax loss, improved from $19.2 million in 2016.
Outlook, transactions and risks
- ETFS acquisition: At the filing date, the proposed purchase of ETF Securities’ European commodity, currency and short-and-leveraged business remained subject to regulatory approvals and other closing conditions. ETFS had $17.8 billion of AUM at December 31, 2017. Consideration includes $253 million cash, 15.25 million common shares and preferred stock convertible into up to 14.75 million common shares. WisdomTree had secured commitments for $250 million of three-year senior secured facilities; the credit agreement and borrowing were contingent on closing. The agreement could terminate if conditions were not met by May 13, 2018, unless extended.
- Management expected 2018 strategic growth initiative spending of $3–$5 million and U.S. Business compensation and benefits of 27%–29% of segment revenue. It estimated normalized 2018 effective tax rates of approximately 33% excluding ETFS and 30% assuming the acquisition closes. These are estimates, not guaranteed results.
- The quarterly dividend was reduced from $0.08 to $0.03 per share beginning in Q1 2018. Under the planned credit agreement, dividends above $0.03 and most share repurchases would be subject to leverage and default tests.
- Key risks include concentration in HEDJ and DXJ—about 36% of U.S. AUM and 40% of 2017 revenue—market and currency movements, persistent fund outflows, competitive fee pressure, execution and integration risks for ETFS, and regulatory, vendor, cybersecurity and international operating risks. Approximately 67% of AUM was invested in non-U.S. securities.
- WisdomTree reported no litigation expected to have a material impact and no unresolved SEC staff comments. The auditor issued unqualified opinions on the financial statements and internal controls; management also reported effective controls.
Important facts for investors to verify
- Whether the ETFS acquisition closed, its final purchase-price adjustments and financing terms, and the resulting dilution, leverage and integration costs.
- Subsequent HEDJ and DXJ flows and the extent to which AUM growth reflects sustained inflows rather than market appreciation.
- Whether compensation, acquisition-related costs and other expenses remain elevated, and how the company performs against its 2018 spending and tax-rate estimates.
- Available liquidity, post-acquisition debt and covenant headroom, and the effect of financing restrictions on dividends and repurchases.
- The performance and impairment risk of the company’s $47.0 million of AdvisorEngine interests, note and option exposure; the filing disclosed an $8.0 million remaining funding commitment.