WisdomTree Investments, Inc. — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011. Financial statement amounts below are in millions of dollars unless stated otherwise. WisdomTree sponsors and manages ETFs; advisory fees, based mainly on average ETF assets under management (AUM), are its principal revenue source. At quarter-end it had 47 ETFs and $11.2 billion of AUM.
Financial performance and position
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $17.7 | $10.1 | $49.0 | $28.2 |
| Expenses | $16.4 | $11.6 | $46.8 | $35.2 |
| Net income/(loss) | $1.4 | ($1.5) | $2.2 | ($7.0) |
| Basic and diluted EPS | $0.01 | ($0.01) | $0.02 | ($0.06) |
- Q3 revenue grew 75.1%; nine-month revenue rose 73.7%. ETF advisory fees rose 78.0% and 76.1%, respectively, primarily reflecting higher average AUM. Average advisory fee was 0.55% in both nine-month periods; Q3 fee was 0.55%, versus 0.56% a year earlier.
- Expenses grew more slowly than revenue: 40.6% in Q3 and 33.0% for the nine months. Total expenses were 92.3% of Q3 revenue and 95.5% of nine-month revenue, compared with 115.0% and 124.7% in the prior-year periods. Management defines gross margin as revenue less fund management and administration costs and third-party sharing costs; it reported approximately 61% and expected no significant near-term deviation at then-current AUM and mix.
- At September 30, cash and cash equivalents were $21.1, investments $9.2, total assets $37.9, total liabilities $14.8, and stockholders’ equity $23.1. Current assets were $28.0 versus current liabilities of $14.7. The filing reports no borrowings or debt balance.
- Nine-month operating cash flow was $9.4, compared with cash used of $0.7 in 2010. Investing cash flow was a use of $0.8 and financing cash flow a use of $1.8, including $2.1 of share repurchases. Cash increased $6.8 to $21.1. The operating cash flow included a $3.2 increase in fund management and administration payable.
- Investments are held-to-maturity federal agency debt securities, recorded at amortized cost; $8.1 of the $9.2 total was due after ten years. A $0.7 investment collateralized the office lease letter of credit.
Changes versus the prior comparable period
- WisdomTree returned to quarterly and nine-month profitability from losses in 2010. Revenue growth substantially exceeded expense growth.
- Nine-month net ETF inflows were $3.1 billion, versus $1.9 billion in 2010, but market depreciation of $1.8 billion more than offset inflows in the period’s AUM reconciliation. Quarter-end AUM rose 35.4% year over year, but fell from $12.9 billion at June 30, 2011; Q3 net inflows were only $179 million versus $1.2 billion a year earlier, and market depreciation was $1.9 billion.
- AUM reached $13.5 billion on July 26, then declined to $11.2 billion at quarter-end, primarily because of market declines. Management said late-quarter outflows from certain emerging-market currency and international fixed-income ETFs would likely weigh on Q4 average assets and revenue.
- Key expense increases included fund management and administration (+45.9% for nine months) and third-party sharing arrangements (+198.6%). The latter primarily reflected higher profits in collaborative currency and fixed-income ETFs shared equally with Mellon Capital and Dreyfus. Compensation rose 4.6%; headcount increased from 56 to 64.
Outlook, risks and unusual items
- Management expected increased investment in marketing, advertising, sales, staffing and strategic growth, including additional ETF launches and plans to establish an international fund company. It expected marketing spending for full-year 2011 to exceed 2010 levels. It also expected expenses to decline as a percentage of revenue as the business matured, except for seasonal marketing fluctuations.
- Management estimated $1.5–$2.0 million of 2012 costs to seek ETF shareholder approval for continued advisory services if major shareholder Michael Steinhardt’s ownership fell below 25%, which could trigger a change-of-control termination of advisory agreements. It also intended to seek approval for the option to change sub-advisors.
- On October 17, 2011, the company filed an S-1 for a proposed underwritten offering by the company and certain stockholders. It intended to issue up to one million new shares; the selling-stockholder share count had not been determined. Management said operating cash flow and anticipated offering proceeds should fund operations for at least 12 months.
- Principal exposures include market declines, investor outflows, foreign exchange and international-market volatility, and concentration: approximately 65% of AUM was in ETFs investing in foreign securities; six emerging-market-focused ETFs represented about 42% of AUM and 51% of nine-month revenue; ten ETFs represented about 66% of AUM. The company also highlighted competition and fee pressure, reliance on BNY Mellon and other vendors, regulation, and risks from limited operating history and growth execution.
- Unusual items included a one-time $0.7 million reimbursement to the WisdomTree India ETF for excess operating-expense recapture fees, and $0.7 million of nine-month legal and accounting costs related to its Form 10 registration and NASDAQ listing. The company had $97.0 million of NOL carryforwards at September 30, fully offset by a valuation allowance; it used $1.0 million of NOLs during the nine months.
- Management reported no litigation expected to have a material effect and no material changes in internal control during the quarter. Disclosure controls were assessed as effective at a reasonable assurance level. Forward-looking statements are subject to risks and are not guarantees of future results.
Important facts for investors to verify
- Subsequent AUM, flows and average fee rates, particularly the persistence and revenue effect of late-Q3 outflows and market volatility.
- Offering terms and share dilution, including the allocation between new company shares and selling-stockholder shares.
- Profitability sustainability as expenses rise, and the impact of fund-level sharing costs and growth spending on margins and cash generation.
- Concentration in foreign and emerging-market products, dependence on key service providers, and the shareholder approvals that may be required if control changes.
- Execution and cost of planned international expansion, new products and ETF shareholder approval initiatives.