WisdomTree, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. WisdomTree is a global ETP sponsor and asset manager operating as one segment, with developing digital funds and blockchain-enabled products. Amounts below are U.S. dollars; financial statement figures are in millions unless noted.
Business context and results
- Assets under management ended the quarter at $93.7 billion, up from $90.7 billion at March 31. Q2 net inflows were $2.3 billion and market appreciation added $0.6 billion. U.S.-listed ETF assets rose to $65.9 billion; European ETP assets fell to $27.8 billion, reflecting outflows and market depreciation.
- Q2 revenue was $85.7 million, up 11.0% year over year. Advisory fees were $82.0 million, up 8.5%, as higher average AUM more than offset a lower average advisory fee (0.36% versus 0.39%). Other income rose to $3.7 million, mainly from flows into certain European products.
- Q2 operating expenses increased 9.9% to $67.5 million; operating income was $18.2 million versus $15.8 million. Operating margin was approximately 21.2%, compared with 20.5% a year earlier. Reported net income was $54.3 million versus $8.0 million; diluted EPS was $0.32 versus $0.05.
- For the first half, revenue was $167.8 million, up 7.8%; operating income was $34.8 million versus $33.5 million. Net income was $70.5 million versus a $2.3 million loss, and diluted EPS was $0.42 versus a $0.02 loss. Six-month gross margin, as defined by management, was 79.2%.
- Management’s non-GAAP adjusted net income was $14.9 million for Q2 versus $11.3 million, with adjusted diluted EPS of $0.09 versus $0.07. First-half adjusted net income was $26.1 million versus $25.3 million, and adjusted diluted EPS was $0.16 in both periods.
Cash flow, debt and liquidity
- For the six months, operating cash flow was $20.0 million versus $8.5 million. Investing activities provided $51.9 million, largely reflecting proceeds from sales of financial instruments; financing activities used $121.1 million. Cash declined $48.4 million to $83.7 million.
- Available liquidity, a company-defined measure that excludes seed capital and regulatory capital, was $77.6 million at June 30, down from $113.0 million at year-end 2022. Regulatory capital requirements were $24.9 million.
- Convertible notes had $280 million aggregate principal outstanding ($150 million due 2026 at 3.25% and $130 million due 2028 at 5.75%); carrying value was $274.1 million. Interest expense was $8.0 million for the first half. The company issued $130 million of 2028 notes, repurchased $115 million of 2020 notes, and settled the remaining 2020 notes at maturity with approximately $59.9 million cash and 1.0 million shares.
Material changes, outlook and risks
- Gold-payment obligation ended: On May 10, WisdomTree terminated the long-term contractual gold-payment obligation for consideration of approximately $136.9 million: $50.0 million cash and $86.9 million in Series C preferred stock convertible into 13.1 million common shares. The termination produced a $41.4 million Q2 gain and a $62.0 million first-half gain; these non-operating gains substantially boosted reported GAAP income. Gold-payment expense was $6.1 million for the first half and is expected to be zero going forward.
- Operating expenses rose, including professional fees tied to an activist campaign, the gold-obligation settlement and the WisdomTree Transfers acquisition. Q2 professional fees increased 93.5% year over year. The company adopted a stockholder rights plan, ratified by shareholders, with rights scheduled to expire March 16, 2024 unless earlier redeemed or exchanged.
- 2023 guidance: compensation expense of $104–$110 million (raised from $100–$106 million); discretionary spending of $56–$59 million, excluding potential non-recurring activist-response costs; gross margin of 79%; third-party distribution fees of $8–$9 million; interest expense of approximately $15 million; interest income of approximately $3 million; and normalized effective tax rate of 24%. Management expects approximately 177 million diluted shares per quarter.
- Management said cash flows and cash balances should fund operations for the foreseeable future. Key risks include market declines or ETP outflows reducing fee revenue, competition, regulatory and digital-asset execution risks, and commodity, cryptocurrency, currency and investment valuation volatility. Management noted volatile market conditions may persist.
- Claims relating to the 2020 closure of the 3OIL leveraged ETP seek approximately €15.2 million in damages; an additional demand of up to approximately €8.4 million was received in July 2023. The company is assessing claims and expects any losses, if any, to be covered by insurance less a $0.5 million deductible; no accrual was recorded. Courts had ruled for the company in certain cases.
Most important facts for investors to verify
- How much of reported earnings growth reflects recurring asset-management operations versus the one-time gold-obligation termination gain and other adjustments.
- Whether AUM growth and net flows continue, particularly given Q2 European ETP outflows and a lower average advisory fee.
- Cash availability after debt service, dividends, repurchases and digital-business investment; confirm the scope and assumptions behind management’s $77.6 million available-liquidity measure.
- Potential dilution from the Series C preferred stock, convertible notes and expected diluted-share count, as well as future note repayment or conversion requirements.
- Progress and costs of WisdomTree Prime and digital products, the activist campaign and rights plan developments, and the outcome or insurance coverage of the 3OIL claims.