WisdomTree Investments, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; financial statements are unaudited and compared with the three months ended March 31, 2017. Balance-sheet figures are compared with December 31, 2017. Amounts below are in U.S. dollars; financial statement amounts are shown in millions unless otherwise noted.
Business context and reporting period
WisdomTree sponsors and manages exchange-traded products (ETPs), earning most revenue from advisory fees tied to average daily assets under management (AUM). It reported U.S. Business and International Business segments. Global AUM was $45.0 billion at March 31, 2018.
After quarter-end, on April 11, 2018, the company completed its acquisition of ETF Securities’ European exchange-traded commodity, currency, and short-and-leveraged business (ETFS). The acquisition and related financing were not reflected in the March 31 balance sheet.
Financial and operating metrics
| Metric | Q1 2018 | Q1 2017 or comparison |
|---|---|---|
| Total revenue | $59.6 | $54.6; up 9.2% |
| Advisory fee revenue | $58.8 | $53.3; up 10.3% |
| Total expenses | $45.7 | $39.8; up 14.8% |
| Income before taxes | $13.9 | $14.8; down 6.1% |
| Income tax expense / effective tax rate | $4.5 / 32.3% | $7.9 / 53.6% |
| Net income | $9.4 | $6.9; up 37.0% |
| Basic and diluted EPS | $0.07 | $0.05 |
| Operating cash flow | $(4.8) | $2.4 |
| Cash and cash equivalents at period-end | $105.7 | $54.2 at December 31, 2017 |
| Total assets / total liabilities | $240.0 / $38.4 | $255.0 / $62.0 at December 31, 2017 |
| Stockholders’ equity | $201.6 | $193.0 at December 31, 2017 |
Expenses were 76.6% of revenue, compared with 72.9% a year earlier. The filing does not provide a separately labeled gross margin. Net income growth reflected the lower effective tax rate following the Tax Cuts and Jobs Act, despite lower pre-tax income. The company declared a $0.03 per-share dividend in Q1, versus $0.08 in Q1 2017.
Operating cash flow was negative, principally reflecting a $22.0 million reduction in compensation and benefits payable. Investing cash flow was $60.5 million, largely from sales and maturities of available-for-sale securities; financing cash flow was $(4.8) million, including $4.1 million of dividends paid and $0.7 million of share repurchases. Cash increased by $51.5 million overall. Management reported available liquidity of $113.8 million, calculated as liquid assets less total liabilities.
At March 31, 2018, the company had no reported borrowings; the post-quarter acquisition financing was arranged in April. Its $19.2 million net note receivable from AdvisorEngine and $25.0 million AdvisorEngine preferred-stock investment are notable exposures. The note had a $22.0 million face value, bore 5% interest, and had $8.0 million of additional funding committed subject to conditions.
Material changes versus the prior comparable period
- Average global AUM rose 12.1% to $47.7 billion, supporting higher advisory fees. The average U.S. ETF advisory fee declined to 0.49% from 0.50%, reflecting product mix.
- U.S.-listed ETF AUM fell from $46.8 billion at year-end 2017 to $42.9 billion at March 31, 2018, due to $2.2 billion of net outflows and $1.8 billion of market depreciation. Outflows were primarily from the two largest ETFs, HEDJ and DXJ.
- International ETPs had $47.9 million of net outflows during Q1, partly offset by inflows to UCITS and Canadian ETFs; international AUM was about $2.1 billion, essentially unchanged from year-end.
- Expenses increased faster than revenue. Q1 2018 included $2.1 million of ETFS acquisition-related costs; third-party sharing expense rose 85.1%, primarily due to a new distribution relationship.
- Cash and cash equivalents increased substantially as the company sold or received maturities of available-for-sale securities. Current liabilities declined, largely alongside lower compensation payable.
Acquisition, outlook, risks, and unusual items
- ETFS transaction and financing: The April 11 acquisition consideration included $253 million cash and 15.25 million common shares plus 14,750 non-voting convertible preferred shares, convertible subject to restrictions into 14.75 million common shares. A $200 million term loan funded part of the cash consideration; a $50 million revolving facility was also made available. The term loan is floating-rate, matures April 11, 2021, and has a bullet repayment. The facility is secured by substantially all assets, subject to customary exceptions, and includes leverage tests and restrictions on dividends, repurchases, debt, and other activities. The revolver was undrawn as reported.
- Preliminary acquisition accounting: The filing estimated total consideration of $695.7 million, including $270.0 million of equity value, $253.0 million cash, and $172.7 million of deferred consideration. The preliminary allocation included $602.4 million of indefinite-lived advisory-contract intangibles and $84.9 million of goodwill; the allocation could change materially.
- Additional acquisition costs and obligations: Management anticipated further acquisition and integration costs, including a $5.5 million transaction fee. A subsidiary also assumed a gold royalty obligation tied to advisory-fee income from specified gold products: fixed annual gold payments are scheduled through 2058 and at a reduced level thereafter, subject to the agreement’s terms.
- Capital returns and preferred-share risk: The credit agreement generally limits dividends above $0.03 per share and share repurchases unless leverage is no more than 1.75:1 and no default exists. If required stockholder approval for conversion of certain preferred shares is not obtained by December 31, 2018, ETF Securities may have a redemption right; the filing estimated approximately $59.7 million using the April 11 share price. Other redemption rights may apply to specified corporate events.
- Risks and market sensitivity: Advisory revenue depends on ETP AUM and is exposed to market performance, investor flows, foreign exchange, and product concentration. The filing highlights commodity and gold-price exposure following the ETFS acquisition, counterparty and custody risks in European products, dependence on service providers, and variable-rate debt and covenant risks. The company did not report a material litigation matter and stated it was not then party to litigation expected to have a material adverse effect.
- Management outlook: No numerical earnings or revenue guidance was provided. Management said existing cash and operating cash flows should be sufficient to fund operations for at least the next 12 months. It also cautioned that volatile market conditions were expected to persist. Management saw potential for broader product and client diversification from ETFS but gave no assurance that historical correlations or AUM stability would continue.
- Other: The company adopted the new revenue standard in Q1 using the modified retrospective method and said adoption did not materially affect historical revenue recognition. Disclosure controls were assessed as effective at a reasonable assurance level; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Post-acquisition AUM, net flows, fee rates, integration progress, and whether anticipated synergies offset acquisition and ongoing costs.
- Term-loan balance, interest expense, leverage-covenant headroom, repayment capacity, and the effect of debt restrictions on dividends and repurchases.
- Stockholder-approval requirements, potential preferred-share dilution or redemption, and the resulting cash and share-count impact.
- Final ETFS purchase-price allocation and the valuation, payment conditions, and long-term economics of the gold royalty obligation.
- Performance and credit recoverability of the AdvisorEngine investment, note receivable, and remaining funding commitment.
- Continued AUM concentration and flows in HEDJ and DXJ, along with commodity-price, gold, counterparty, custody, and vendor-service exposures.