WisdomTree, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparisons are with Q1 2022 unless stated otherwise. WisdomTree is an ETP sponsor and asset manager, and is developing blockchain-enabled funds and its WisdomTree Prime digital wallet. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance and position
| Metric | Q1 2023 / March 31, 2023 | Comparison |
|---|---|---|
| Total revenue | $82.0 | Up 4.7% from $78.4 |
| Advisory fees | $77.6 | Up 1.5%; average advisory fee declined to 0.36% from 0.40% |
| Operating income | $16.6; 20.2% operating margin | Down from $17.7; 22.6% margin |
| Net income / diluted EPS | $16.2 / $0.10 | Compared with net loss of $10.3 / loss per share of $0.08 |
| Adjusted net income / diluted EPS (non-GAAP) | $11.2 / $0.07 | Compared with $14.1 / $0.09 |
| Operating cash flow | $(5.4) | Compared with $(2.7) |
| Cash and cash equivalents | $119.1 | Down from $132.1 at December 31, 2022 |
| Available liquidity | $113.0 | Company-defined measure, after current liabilities, seed capital and regulatory capital requirements |
| Convertible notes | $340.0 principal outstanding | $60.0 due June 15, 2023; $150.0 due 2026; $130.0 due 2028 |
| AUM | $90.7 billion at quarter-end | Up from $79.4 billion a year earlier; Q1 net inflows were $6.3 billion |
Operating expenses rose 7.9% to $65.5 million, faster than revenue, mainly reflecting compensation and benefits and fund management and administration costs. The defined gross margin was 79.1% in Q1. The company declared a $0.03 quarterly dividend per common share.
Material changes and unusual items
- GAAP net income included a $20.6 million gain from revaluing the deferred gold-payment obligation, compared with a $17.0 million loss in Q1 2022. The gain was primarily associated with a higher discount rate and is non-cash and valuation-sensitive.
- Q1 included a $9.7 million loss on extinguishing notes and a $4.9 million non-cash impairment of Securrency Series A shares. The company issued $130 million of 5.75% notes due 2028 and repurchased $115 million principal of 2020 notes.
- Other income increased to $4.4 million from $1.9 million, largely due to flows into certain European products. Average AUM increased 12.5% year over year, while the lower average advisory fee partly offset that benefit.
- Deferred consideration for contractual gold payments was valued at $179.8 million at quarter-end. Payments are in gold, extend through 2058 and then continue at a reduced annual amount in perpetuity; recourse for unpaid amounts is limited to specified gold-product advisory-fee income.
- Investments totaled $26.9 million, including Securrency and Fnality holdings; the company reported maximum exposure to loss on its non-consolidated VIE interests equal to their $26.9 million carrying amount.
Outlook, risks and contingencies
- 2023 guidance: compensation expense of $100–$106 million, with management expecting to trend toward the high end; discretionary spending of $56–$59 million; gross margin of approximately 78%; contractual gold payments of approximately $18 million; third-party distribution fees of $8–$9 million; interest expense of approximately $15 million; and a normalized effective tax rate of 23%.
- Management said operating cash flows and existing cash should fund operations for the foreseeable future. It expects to settle the $60 million notes due in June 2023 and may settle and/or refinance remaining debt when due. The filing estimates interest cost of $4.1 million for Q2 and approximately $3.5 million per quarter afterward following settlement of the 2020 notes.
- Management cited volatile markets, market-driven AUM and investor flows, competition, regulation, and execution of digital-asset and international strategies as risks. Revenue depends substantially on ETP AUM; market declines or outflows could reduce advisory fees.
- Investors have sought approximately €15.8 million ($17.2 million) in damages concerning the 2020 closure of the WisdomTree WTI Crude Oil 3x Daily Leveraged ETP. The company had not accrued a loss; one related Italian court had previously ruled in its favor.
- The board adopted a stockholder rights plan in March 2023 amid an activist campaign. The plan generally has ownership thresholds of 10%, or 20% for qualifying passive holders, and was scheduled to expire March 16, 2024 unless earlier terminated or not ratified as specified. The company also reported $1.0 million of Q1 activist-response expenses, excluded from its adjusted measures.
- Management concluded disclosure controls were effective as of March 31, 2023 and reported no material change in internal control over financial reporting during the quarter.
Key facts for investors to verify
- Whether the $60 million June 2023 maturity was settled or refinanced, and the resulting debt balance, cash position and interest burden.
- How much reported earnings depend on revaluation of the gold-payment obligation and other non-core items; compare GAAP results with the company’s non-GAAP adjustments.
- Subsequent AUM, net flows and advisory-fee trends, particularly whether inflows persist and the average fee stabilizes.
- Developments affecting the Securrency investment and the Italian investor claims, including any change in valuation, exposure or expected loss.
- The status, stockholder ratification and practical effects of the rights plan, as well as costs or other effects related to the activist campaign.