WisdomTree Investments, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Amounts are in U.S. dollars; financial-statement amounts are in millions unless noted. WisdomTree sponsors and manages exchange-traded products (ETPs), earning substantially all revenue from advisory fees based on ETP assets under management (AUM).
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $77.3 | $75.8 | $155.6 | $147.0 |
| Operating income | $15.8 | $23.7 | $33.5 | $42.3 |
| Net income (loss) | $8.0 | $17.6 | $(2.3) | $32.8 |
| Diluted EPS | $0.05 | $0.11 | $(0.02) | $0.20 |
| Operating cash flow | Not separately presented for the quarter | $8.5 | $22.4 |
- Q2 operating margin was approximately 20.5%, versus 31.3% a year earlier; net margin was approximately 10.4%, versus 23.3%. For the first half, operating margin was approximately 21.5%, versus 28.8%.
- Average global AUM was $77.7 billion in Q2, up 5.6% year over year, while quarter-end AUM was $74.3 billion. Q2 net inflows of $3.9 billion were more than offset by $8.9 billion of market depreciation. U.S.-listed ETFs had $4.3 billion of net inflows; European ETPs had $0.4 billion of net outflows.
- At June 30, cash and cash equivalents were $109.7 million, securities owned were $128.9 million, and total assets were $1.01 billion. Available liquidity, as defined by the company and after current liabilities and regulatory capital requirements, was $179.2 million, down from $204.1 million at year-end 2021.
- Convertible notes had $325 million aggregate principal outstanding: $175 million due June 2023 and $150 million due June 2026. The 2023 notes’ $173.3 million carrying amount is classified as current. Total liabilities were $616.6 million.
- Quarterly common dividend was $0.03 per share; first-half dividends paid were $9.7 million. First-half cash decreased $31.0 million to $109.7 million.
Changes and drivers versus comparable periods
- Q2 revenue rose 2.0%, as higher average AUM was partly offset by a lower average advisory fee (0.39%, versus 0.40%). First-half revenue rose 5.8%; the average advisory fee fell to 0.39% from 0.42%.
- Operating expenses increased 18.0% in Q2 and 16.6% for the first half. Drivers included higher compensation and headcount, fund administration costs, sales and marketing, and professional fees. Professional fees included activist-campaign costs; the company reported $4.5 million of such costs in the first half.
- Q2 net income fell to $8.0 million, reflecting increased operating costs, interest expense and $4.5 million of net other losses, including losses on securities owned. First-half results included a $14.7 million loss on revaluation of the gold-payment obligation and $29.2 million of other net losses, partly offset by a $14.0 million income-tax benefit.
- The first-half tax benefit included a $19.9 million reduction in unrecognized tax benefits, with an equal offsetting charge from release of the related indemnification asset in other losses. This unusual item did not represent a comparable recurring operating gain.
- Management’s non-GAAP adjusted net income was $11.3 million for Q2 and $25.3 million for the first half, compared with $16.8 million and $29.3 million, respectively, a year earlier. Adjusted diluted EPS was $0.07 and $0.16, versus $0.10 and $0.18. These are non-GAAP measures and exclude specified items.
Outlook, risks and other notable items
- Updated 2022 guidance: compensation expense of $96–$99 million; discretionary spending of $51–$53 million; gross margin percentage of approximately 79%; contractual gold payments of approximately $17 million; third-party distribution expense of approximately $8.5 million; and normalized effective tax rate of 21%–22%. Guidance excludes $4.5 million of first-half activist-related expenses; management did not anticipate significant additional activist-campaign costs for the rest of the year.
- Management said cash and operating cash flows should fund operations for the foreseeable future, but is actively exploring refinancing or extension alternatives for the $175 million notes due June 2023. Failure to refinance, extend or repay could result in default and materially harm the business.
- The ETFS acquisition-related gold obligation was valued at $242.8 million at June 30. Its fair value depends on gold-price assumptions and other significant unobservable inputs; first-half revaluation produced a $14.7 million loss. Management states that payment recourse is limited to advisory fees from specified gold-backed products.
- Investors in the closed WisdomTree WTI Crude Oil 3x Daily Leveraged ETP seek approximately €15.8 million ($16.6 million) in damages. One court ruled in the company’s favor in February 2022; other claims remained under assessment. No accrual was recorded.
- Management identified volatile markets, declining ETP values and possible investor outflows as risks to AUM and fee revenue. The company also cited exposure to securities, gold, cryptocurrency and foreign-exchange price movements, and stated it does not currently hedge certain commodity and currency exposures.
- The company is developing digital-asset and blockchain-related products and services, including WisdomTree Prime, while related products and activities remain subject to regulatory and execution risks. The stockholder rights plan expired June 2, 2022, in connection with a cooperation agreement. Disclosure controls were concluded effective; no material change in internal control was reported for the quarter.
Important facts for investors to verify
- Refinancing plans, terms and timing for the $175 million notes due June 2023, and the effect of their current-liability classification on liquidity.
- Underlying operating trends in AUM, net flows, market-driven AUM changes and average advisory fees, especially in Europe.
- Progress against 2022 expense and margin guidance, including recurring versus activist-related professional costs.
- Exposure and valuation sensitivity of the $242.8 million gold-payment obligation and the company’s securities portfolio.
- Developments and potential financial exposure in the outstanding 3OIL investor litigation.
- Whether non-GAAP adjustments provide a useful view alongside GAAP results, particularly given the first-half tax and valuation items.