WisdomTree Investments, Inc. — FY2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015; filed February 29, 2016. The company is an exchange-traded product sponsor and asset manager, earning primarily advisory fees tied to average assets under management (AUM). It reported one operating segment. The filing describes global AUM of $52.4 billion, including $51.6 billion in U.S.-listed ETFs.
Financial and operating performance
| Metric | FY2015 | FY2014 |
|---|---|---|
| Total revenue | $298.9 million | $183.8 million |
| ETF advisory fees | $297.9 million | $182.8 million |
| Expenses | $161.8 million | $110.2 million |
| Income before taxes | $137.2 million | $73.5 million |
| Net income | $80.1 million | $61.1 million |
| Diluted earnings per share | $0.58 | $0.44 |
| Operating cash flow | $155.1 million | $82.6 million |
- Revenue grew 62.7%, while expenses rose 46.8%; pre-tax income increased 86.5% and net income increased 31.1%.
- Average U.S.-listed AUM rose 58.4% to $55.9 billion; year-end U.S.-listed AUM increased 31.5% to $51.6 billion, reflecting $16.9 billion of net inflows partly offset by $4.5 billion of market depreciation.
- Expenses were 54.1% of revenue, compared with 60.0% in 2014. Compensation and benefits increased 78.6% to $73.2 million, principally from higher incentives, headcount and stock compensation.
- For Q4 2015, revenue was $76.5 million and net income was $20.5 million, versus $49.6 million and $9.6 million, respectively, in Q4 2014. Q4 2015 revenue was below Q2 and Q3 2015.
- Year-end cash and cash equivalents were $210.1 million, investments were $23.7 million and total liabilities were $58.2 million. The balance sheet reported no borrowings; operating lease and acquisition-payment commitments totaled $50.4 million.
- Net cash increased $44.8 million in 2015 after $155.1 million of operating cash flow, $78.5 million of dividends paid and $24.1 million of share repurchases. The company stated that cash and operating cash flow should fund operations for at least the next 12 months.
Material changes and unusual items
- Net inflows rebounded to $16.9 billion in 2015 from $5.1 billion in 2014; WisdomTree captured 7.3% of ETF-industry inflows, versus 2.1% in 2014. The European currency-hedged equity fund HEDJ drove most 2015 inflows.
- AUM was highly concentrated: HEDJ and the Japan-hedged equity fund DXJ represented approximately 62% of U.S.-listed AUM and approximately 60% of 2015 revenue.
- The company launched 17 U.S.-listed ETFs in 2015 and expanded European products and distribution. It completed the GreenHaven commodity-fund acquisition in January 2016 for approximately $11.8 million.
- FY2015 included $2.2 million of acquisition-contingent-payment expense related to the Boost/European business. The company also paid $78.5 million in dividends, including a special dividend, and repurchased $24.1 million of shares.
- Management cited a 42.5% overall effective tax rate in its discussion; the financial statements show tax expense of $57.1 million on pre-tax income of $137.2 million, or approximately 41.7%. Verify the rate reconciliation.
Outlook, risks and contingencies
- For 2016, management expected U.S.-based compensation and benefits to be 24%–28% of U.S.-listed revenue and planned $12–$16 million of strategic growth investment, including sales capacity, new products, marketing, technology and operating support. It also planned to increase headcount.
- Early-2016 market volatility materially reduced AUM: from year-end 2015 through February 17, 2016, U.S.-listed AUM fell approximately 15% to $44.0 billion, including $4.8 billion of negative market movement and $2.8 billion of net outflows, primarily from HEDJ and DXJ.
- Key risks include dependence on market levels, investor flows and advisory-fee rates; concentration in HEDJ and DXJ; foreign-market and currency exposure; investment performance; competitive fee pressure; and reliance on key service providers, including State Street and sub-advisers.
- The SEC had proposed rules addressing fund reporting, liquidity and derivatives. Management said substantially all ETFs met proposed derivatives portfolio limits, but implementation costs and effects remained uncertain.
- Contractual obligations included $40.5 million of operating leases and a $9.9 million estimated acquisition payable related to the European business. The filing reported no litigation expected to have a material impact.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. Management reported effective disclosure controls and internal control as of year-end.
Investor verification priorities
- Track AUM, flows and fee revenue by product, especially HEDJ and DXJ, and assess whether the early-2016 outflows continued.
- Review concentration and foreign-currency exposure, including the sensitivity of advisory revenue to market declines and changes in the U.S. dollar.
- Reconcile the stated FY2015 effective tax rate with reported tax expense and the tax-note rate calculation.
- Assess cash deployment, including post-year-end share repurchases of $35.6 million, the remaining repurchase authorization, dividends and the GreenHaven acquisition.
- Monitor planned growth spending, expense growth, ETF pricing competition, regulatory changes and the European acquisition payable.