WisdomTree Investments, Inc. — 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. The filing also reports fourth-quarter results; it is an annual report, not a standalone quarterly filing.
Business context
WisdomTree sponsors and manages exchange-traded funds, earning most revenue from advisory fees tied to average ETF assets under management (AUM). At year-end it ranked seventh among U.S. ETF sponsors, with 46 ETFs and $18.3 billion of AUM. Its offerings include fundamentally weighted equity ETFs and actively managed currency, fixed-income, and alternative-strategy ETFs.
Financial and operating metrics
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Total revenue | $84.8 million | $65.2 million |
| ETF advisory fees | $84.0 million | $64.4 million |
| Net income | $11.0 million | $3.1 million |
| Basic / diluted EPS | $0.09 / $0.08 | $0.03 / $0.02 |
| Operating cash flow | $11.2 million | $13.7 million |
| Year-end AUM | $18.3 billion | $12.2 billion |
| Net ETF inflows | $4.7 billion | $3.9 billion |
| Cash and cash equivalents | $41.2 million | $25.6 million |
| Total liabilities | $12.4 million | $16.7 million |
- Revenue rose 30.1%; net income rose 256.7%. Net margin was approximately 13.0%, versus 4.7% in 2011.
- AUM grew 50.1%, reflecting $4.7 billion of net inflows and $1.4 billion of market appreciation. Average AUM increased 32.5% to $15.6 billion.
- The average advisory fee edged down to 0.54% from 0.55%, primarily due to asset mix. Advisory fees represented nearly all revenue.
- Total expenses increased 18.9% to $73.8 million. Fund management and administration cost $23.0 million; compensation and benefits cost $23.2 million.
- Management reported a 66% gross margin for 2012, defining it as revenue less fund management and administration expenses and third-party sharing costs. It expected near-term gross margins of 70%–75% after the BNY Mellon joint venture ended and the new fee arrangement took effect in 2013.
- Year-end liquid resources included $41.2 million in cash, $11.0 million in investments, and $9.3 million in receivables; current liabilities were $12.4 million. The filing reports no off-balance-sheet financing arrangements and does not identify outstanding borrowings.
- Operating cash flow was positive but lower than 2011, despite higher earnings; the filing cites, among other working-capital movements, a $3.7 million increase in accounts receivable.
Fourth-quarter results and changes
Q4 2012 revenue was $23.6 million, compared with $16.2 million in Q4 2011; net income was $5.3 million, compared with $0.9 million. Q4 2012 diluted EPS was $0.08, versus $0.01 in Q4 2011. Quarterly results included normal business variability and should not be treated as a forecast.
- FY 2012 market share of ETF-industry inflows was 2.6%, down from 3.3% in 2011, although WisdomTree’s own net inflows increased.
- Emerging-market equity ETFs were a major growth and concentration driver: eight funds accounted for approximately 51% of year-end AUM and 57% of 2012 revenue. Approximately 75% of AUM was in ETFs investing in foreign securities.
- The Mellon Capital/Dreyfus joint venture ended December 31, 2012. The parties adopted a new fee arrangement effective January 1, 2013; management expected improved gross margins at current asset levels.
Outlook, risks, and unusual items
- Management planned $5.0–$8.0 million of 2013 strategic growth investment, including spending on marketing, sales, headcount, technology, and product development. It also changed employee equity awards to an annual long-term incentive approach, expected to increase future stock-based compensation expense.
- Key risks include market declines and investor redemptions reducing fee-bearing AUM; foreign-market and currency exposure; concentration in emerging markets and a small number of funds; intense ETF fee competition; and dependence on BNY Mellon and other service providers.
- Regulatory changes remain a risk. The SEC lifted its moratorium on certain exemptive-relief applications for ETFs using derivatives in December 2012, potentially enabling additional competitors.
- The company incurred $3.3 million of ETF shareholder proxy-solicitation expense in 2012 to obtain approvals related to advisory continuity and future sub-advisor changes. This was a significant nonrecurring cost.
- Research Affiliates’ patent litigation was settled in November 2012: the parties exchanged releases and covenants not to sue, and Research Affiliates paid WisdomTree $0.7 million. WisdomTree reported $0.2 million of net litigation expense for 2012 after insurance reimbursements and the settlement payment; settlement terms were partly confidential.
- February 2012’s offering included 1.0 million newly issued company shares and generated approximately $4.3 million net proceeds for WisdomTree. The November offering consisted of selling-stockholder shares and yielded no proceeds to the company.
- The company reported $136.5 million of net operating loss carryforwards at year-end, but a full valuation allowance offset deferred tax assets. Ownership changes triggered Section 382 limits on portions of the carryforwards; the filing reported no income-tax provision for 2012.
- Management and Ernst & Young reported effective internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and controls. No material litigation was reported as pending at filing.
Important facts for investors to verify
- Whether AUM growth and inflows continued after year-end, especially in emerging-market and other concentrated funds.
- Whether the new BNY Mellon fee arrangement delivered the projected gross-margin improvement and whether vendor concentration changed.
- How 2013 growth spending and the revised equity-award program affected margins, cash generation, and share dilution.
- The practical availability and utilization limits of tax-loss carryforwards following the ownership changes.
- Any subsequent regulatory, competitive, or patent developments that could affect fees, product launches, or AUM.