WisdomTree Investments, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparative period is Q1 2018. Amounts are in U.S. dollars unless noted. The company sponsors and manages exchange-traded products (ETPs), earning primarily advisory fees based on average daily assets under management (AUM). Q1 2019 includes the European ETFS business acquired in April 2018; Q1 2018 does not.
Financial and operating results
| Metric | Q1 2019 | Q1 2018 | Change / context |
|---|---|---|---|
| Revenue | $65.5 million | $58.9 million | Up 11.2%; primarily ETFS, partly offset by lower average U.S. AUM |
| Operating expenses | $54.8 million | $45.7 million | Up 20.0%, mainly ETFS-related |
| Operating income | $10.7 million | $13.2 million | Down 19.2% |
| Operating margin | 16.3% | 22.4% | Calculated as operating income divided by revenue |
| Net income | $8.8 million | $9.4 million | Down 6.4% |
| Basic and diluted EPS | $0.05 | $0.07 | Lower despite higher revenue |
| Operating cash flow | $7.9 million | $(4.8) million | Improved year over year |
- Advisory fees were $64.8 million, up 10.9%. Average global AUM rose 20.9% to $57.7 billion, largely reflecting ETFS and inflows in certain products; the average global advisory fee declined four basis points to 0.46%, partly from product mix.
- At March 31, global AUM was $58.9 billion. U.S.-listed ETF AUM was $39.4 billion, with $147 million of quarterly net inflows and $3.8 billion of market appreciation. International-listed ETP AUM was $19.6 billion, with $414 million of net inflows and $545 million of market appreciation.
- Cash and cash equivalents were $78.9 million. The company reported $133.7 million of liquid assets, $62.8 million of current liabilities, and $120.9 million of available liquidity including the undrawn revolver.
- Long-term debt had a $195.2 million carrying amount against $200 million principal. No revolver borrowings were outstanding; $50 million was available. The term loan matures April 11, 2021, with the principal due at maturity. The company reported compliance with its leverage covenant.
- Quarterly dividends paid were $5.1 million; declared dividends were $0.03 per common share. The company repurchased 311,213 shares for $2.0 million during the quarter.
Material changes and unusual items
- ETFS contributed substantially to International Business growth: segment revenue increased to $22.9 million from $3.2 million, while U.S. Business revenue declined to $42.6 million from $55.7 million. U.S. results were affected by outflows from HEDJ and DXJ, market movements, and lower average advisory fees.
- Costs rose faster than revenue. Fund management and administration expense increased 39.0%, compensation and benefits 13.1%, and third-party distribution fees 39.1%. Compensation included $2.0 million of severance; distribution fees included one-time platform-related fees. Acquisition-related costs fell to $0.3 million as ETFS integration was described as essentially complete.
- Q1 included $3.1 million of contractual gold-payment expense and a $4.4 million gain from revaluing the related deferred gold-payment obligation. The obligation’s fair value was $157.1 million; it requires gold payments through 2058 and thereafter into perpetuity, subject to specified limitations tied to advisory-fee income from physical-gold products.
- Other losses, net, were $4.6 million, including a $4.3 million charge from reducing a tax-related indemnification asset after a statute-of-limitations lapse. An equal and offsetting tax benefit contributed to a $1.0 million income tax benefit and a negative 13.5% effective tax rate.
- The company recorded a $0.6 million impairment related to terminating its Japan office lease. Japan operations are being wound down; the filing reports a $0.4 million operating loss there for Q1 2019.
- Adoption of lease accounting on January 1, 2019 added a $19.4 million right-of-use asset and $24.8 million lease liability at adoption. March 31 operating lease liabilities totaled $24.4 million.
Outlook, risks and contingencies
- No specific revenue or earnings guidance is provided. Management said current operating cash flows and cash balances should fund operations for at least the next 12 months.
- Management noted market volatility may continue. Results depend on ETP market values and investor flows; the filing highlights continuing exposure to outflows and concentration in HEDJ and DXJ, as well as currency and commodity-price movements.
- Gold-related exposures include advisory fees received in gold and the deferred gold-payment obligation; the company said it does not currently hedge gold-price fluctuations. ETFS-related expenses are also exposed to foreign-currency translation, particularly sterling.
- The credit agreement imposes a declining maximum leverage ratio, reaching 2.00:1.00 from September 2020 onward. Dividends above $0.03 per share and share repurchases are restricted unless the leverage ratio is no more than 1.75:1.00 and no default is continuing.
- The company said it was not party to litigation expected to have a material adverse impact. It was reviewing its 2016 U.S. federal tax return and a Jersey subsidiary’s 2016 return; the company stated it was indemnified for potential exposure related to the Jersey audit.
- Disclosure controls were deemed effective at a reasonable assurance level. The company had not completed integration of ETFS into internal controls and deferred its assessment of ETFS-related internal control over financial reporting.
- After quarter-end, the board extended the share repurchase program through April 27, 2022. On April 11, 2019, the company also advanced $1.54 million to AdvisorEngine under a convertible note financing.
Important facts for investors to verify
- How much future AUM and fee growth is driven by durable net inflows versus market appreciation and the ETFS acquisition, particularly given U.S. outflows from HEDJ and DXJ.
- Whether expense growth, lower advisory-fee rates, and the resulting operating-margin decline persist as ETFS is integrated.
- The company’s leverage-covenant headroom and ability to refinance or repay the $200 million term loan at its 2021 maturity.
- The assumptions and cash-flow limitations underlying the $157.1 million deferred gold obligation, including gold-price sensitivity and the perpetual payment feature.
- Potential developments in tax audits and indemnification, and the completion and results of ETFS internal-control integration.
- AdvisorEngine credit and investment exposure: the company’s disclosed maximum exposure to loss was $54.3 million at March 31, 2019, before the subsequent $1.54 million convertible-note advance.