WisdomTree Investments, Inc. — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. This is an annual report; fourth-quarter figures below are unaudited. WisdomTree is a global exchange-traded product sponsor and asset manager. Its revenue is primarily advisory fees calculated on average daily assets under management (AUM). Results are not fully comparable with 2018 because the ETFS business was acquired in April 2018.
Key financial and operating metrics
| Metric | FY 2019 | FY 2018 |
|---|---|---|
| Global AUM at year-end | $63.6 billion | $54.1 billion |
| Average global AUM | $59.7 billion | $56.4 billion |
| Total revenue | $268.4 million | $274.1 million |
| Operating income | $53.5 million | $61.3 million |
| Operating margin | 19.9% | 22.4% |
| Net income (loss) | $(10.4) million | $36.6 million |
| Diluted EPS | $(0.08) | $0.23 |
| Operating cash flow | $46.8 million | $37.5 million |
| Cash and cash equivalents at year-end | $75.0 million | $77.8 million |
| Debt at year-end | $176.0 million carrying value; $179.0 million principal outstanding | $194.6 million carrying value |
- Revenue fell 2.1%, although average global AUM rose 5.9%. Advisory fee revenue declined 2.0% to $265.7 million; the average global advisory fee fell from 0.48% to 0.45%, reflecting product mix and lower average AUM in U.S.-listed products.
- Operating expenses increased 1.0% to $214.9 million. Operating margin narrowed to 19.9% from 22.4%.
- Net loss included $30.7 million of impairment charges and an $11.3 million loss from revaluing deferred gold consideration. Adjusted net income, a company-defined non-GAAP measure, was $36.3 million versus $50.0 million in 2018.
- Cash and cash equivalents decreased $2.8 million during the year. Available liquidity, as defined by the company, was $72.5 million, down from $108.9 million; this includes $27.9 million of available Revolver capacity. The Revolver had no borrowings outstanding.
Material changes and business developments
- Year-end AUM rose 17.6%, mainly from $9.2 billion of market appreciation and $572 million of net inflows. The company reported $3.3 billion of inflows in 2019 excluding HEDJ and DXJ outflows; those two funds had $13.0 billion of cumulative outflows over three years.
- U.S.-listed ETF AUM increased to $40.6 billion from $35.5 billion, despite net outflows of $654 million. International-listed ETP AUM rose to $23.0 billion from $18.6 billion, including $1.2 billion of net inflows.
- The ETFS integration was substantially completed in 2019, including consolidating product branding and closing products. The company launched a Bitcoin ETP and made an $8.1 million strategic investment in Securrency.
- WisdomTree agreed to sell its Canadian subsidiary; the sale closed February 19, 2020, for CDN $5.0 million at closing, with additional consideration contingent on AUM growth targets.
Fourth-quarter snapshot
Q4 2019 revenue was $68.9 million, up from $67.9 million in Q4 2018. Operating income was $14.8 million versus $11.8 million. Net loss widened to $25.9 million from $11.6 million, primarily reflecting a $30.1 million AdvisorEngine impairment in Q4 2019; Q4 2018 included $17.4 million of impairment charges.
Outlook, risks and unusual items
- Management estimated 2020 compensation and benefits expense of $75 million to $85 million, gross margin of 77% to 78% at current AUM and revenue levels, and third-party distribution fees of approximately $7 million. It anticipated a normalized effective tax rate of approximately 27%. These are estimates, not formal earnings guidance.
- Management said operating cash flow and existing cash should be sufficient to fund operations for at least 12 months. The $179 million Term Loan matures April 11, 2021; its floating-rate borrowing cost and covenant requirements are material considerations. The company reported compliance with its covenants at year-end.
- The company’s deferred consideration obligation for gold payments was valued at $173.0 million at year-end. It requires gold payments under specified terms and its reported fair value is sensitive to gold-price assumptions and discount rates.
- AdvisorEngine financial interests were impaired by $30.1 million, leaving a $28.2 million carrying value. WisdomTree said it was pursuing an exit and could incur further impairment if unsuccessful.
- Key business risks include continued fee and market-share pressure, dependence on AUM and investment performance, concentration in gold and a small number of products, and continued outflows from HEDJ and DXJ. The company also cited counterparty, vendor, cybersecurity, regulatory and Brexit-related risks.
- The annual dividend was $0.12 per share ($0.03 quarterly). Dividends and repurchases are subject to board discretion and credit-agreement restrictions. No litigation was disclosed as expected to have a material impact. The auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Most important facts for investors to verify
- Whether organic inflows outside HEDJ and DXJ persist, and whether outflows from those funds stabilize.
- How AUM mix and advisory fee rates affect revenue and operating margins amid industry fee competition.
- The company’s ability to meet or refinance the Term Loan at its April 2021 maturity while maintaining covenant compliance and liquidity.
- Assumptions underlying the $173.0 million deferred gold liability, and the ultimate recovery or sale value of AdvisorEngine interests.
- Whether the Canadian sale’s contingent consideration is earned and whether expected cost savings and growth initiatives translate into improved results.