WisdomTree Investments, Inc. — FY2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016; includes fourth-quarter results. The filing was signed March 1, 2017. WisdomTree sponsors and manages exchange-traded products, earning most revenue from advisory fees tied to average assets under management (AUM).
Business context and operating performance
WisdomTree reported global AUM of $41.3 billion at year-end, down 21.3% from $52.4 billion. It operated 94 U.S.-listed ETFs, alongside European ETPs and UCITS ETFs and six Canadian ETFs. Its two largest U.S. funds, HEDJ and DXJ, represented about 43% of U.S.-listed AUM and approximately 50% of 2016 revenue.
Financial metrics
| Metric | FY2016 | FY2015 |
|---|---|---|
| Total revenue | $219.4 million | $298.9 million |
| Advisory fee revenue | $218.5 million | $297.9 million |
| Total expenses | $163.9 million | $161.8 million |
| Income before taxes | $55.6 million | $137.2 million |
| Net income | $26.2 million | $80.1 million |
| Diluted earnings per share | $0.19 | $0.58 |
| Operating cash flow | $54.9 million | $155.1 million |
Revenue fell 26.6%; net income fell 67.3%. Calculated net margin declined to approximately 11.9% from 26.8%. The lower results primarily reflected reduced average AUM and a decline in the blended U.S. ETF advisory fee to 0.51% from 0.53%.
Q4 2016: Revenue was $50.8 million and net income was $2.5 million, versus $76.5 million and $20.5 million, respectively, in Q4 2015. Q4 2016 included a $1.7 million goodwill impairment charge.
AUM flows: U.S.-listed ETF AUM ended at $40.2 billion, down 22.2%. Net outflows of $12.6 billion were partly offset by $0.9 billion of market appreciation and $0.2 billion of acquired assets. HEDJ had $7.8 billion of outflows and DXJ $5.7 billion. U.S. equity ETFs nonetheless recorded $1.9 billion of net inflows for the year.
Liquidity and capital: Cash and cash equivalents were $92.7 million, down from $210.1 million. Company-defined available liquidity—liquid assets less total liabilities—was $143.4 million, compared with $203.1 million. Total assets were $249.8 million, liabilities $48.4 million and stockholders’ equity $201.3 million. The filing text does not provide a clear funded-debt balance; it reports no off-balance-sheet financing other than operating leases. Operating cash flow was $54.9 million; investing cash flow was negative $89.3 million and financing cash flow negative $82.8 million.
Material changes, outlook and risks
- Expenses rose 1.3% despite lower revenue. Marketing and advertising increased 17.0%, and sales and business development increased 36.4%; lower incentive compensation and fund-management costs partly offset these increases.
- International Business pre-tax losses widened to $19.2 million from $9.2 million. Management stated it could not assure that the segment would become profitable.
- Unusual 2016 charges included $6.7 million of acquisition payment expense, largely associated with accelerating the buyout of the remaining European-business minority interest, and a $1.7 million impairment of European goodwill.
- WisdomTree invested $20.0 million for a 36% fully diluted interest in AdvisorEngine. It also acquired GreenHaven’s commodity-fund managing entities for $11.8 million and closed the Coal ETF in September 2016.
- Management expected 2017 U.S. Business compensation and benefits expense to be 28%–31% of segment revenue and strategic growth investment to be approximately $3 million–$4 million. Plans included further product and distribution expansion and targeting retirement products through a collective investment trust. No specific revenue or earnings guidance was provided.
- Key risks include reliance on HEDJ and DXJ, market and currency movements, continued fund outflows, fee and price competition, regulatory change, and dependence on key service providers. Management noted that flows in the two largest funds had begun to stabilize but gave no assurance that this would continue. Brexit and uncertainty around the U.S. DOL Fiduciary Rule were also identified as potential factors.
- The company paid $43.7 million in dividends and repurchased $39.4 million of shares in 2016; the regular quarterly dividend was $0.08 per share. The board had authorized up to $100.3 million of repurchases through April 27, 2019, with $96.5 million remaining at year-end. Management said cash flows and cash balances should fund operations for at least the next 12 months.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. Management reported effective disclosure controls and internal controls as of year-end. The company reported no litigation expected to have a material impact.
Important facts for investors to verify
- Whether HEDJ and DXJ outflows have stabilized, and how their AUM and revenue contribution evolve.
- Whether U.S. and international flows, advisory-fee rates and competitive fee reductions support a recovery in revenue and margins.
- Progress toward reducing International Business losses and the assumptions behind the European goodwill impairment.
- Cash deployment, liquidity after dividends and repurchases, and the company’s funded-debt position; the supplied filing text does not clearly state a debt balance.
- Execution and financial contribution of the AdvisorEngine investment, product launches and planned 2017 growth spending.
- Effects of regulatory developments, including the Fiduciary Rule and Brexit, on distribution, fees and international operations.