WisdomTree Investments, Inc. — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015; comparisons are with the corresponding 2014 periods. Unless noted, financial figures are in millions of dollars. The company sponsors and manages exchange-traded products (ETPs), earning primarily advisory fees tied to average assets under management (AUM).
Business context and operating performance
- WisdomTree reported global AUM of $53.7 billion at quarter-end, including $53.0 billion in U.S.-listed ETFs. It described itself as the seventh-largest global ETP sponsor and fifth-largest U.S. ETF sponsor.
- U.S.-listed ETF AUM fell from $61.3 billion at June 30 to $53.0 billion at September 30. The quarter included $661 million of net outflows and $7.6 billion of negative market movement.
- Quarterly U.S. ETF flows included $1.0 billion of outflows from emerging-market equity ETFs, $818 million of inflows to HEDJ, and $269 million of outflows from DXJ.
Financial results
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Total revenue | $80.8 | $47.1 | $222.5 | $134.2 |
| Total expenses | $41.2 | $26.9 | $121.0 | $77.3 |
| Income before taxes | $39.5 | $20.3 | $101.5 | $56.9 |
| Income tax expense | $16.2 | $9.6 | $42.0 | $5.4 |
| Net income | $23.3 | $10.6 | $59.5 | $51.4 |
| Diluted EPS | $0.17 | $0.08 | $0.43 | $0.37 |
- Quarterly revenue rose 71.4%, mainly on higher average AUM and fee capture; average U.S. ETF advisory fee increased to 0.53% from 0.52%. Expenses grew 53.5%, with higher incentive compensation, headcount, and operating costs.
- Management’s non-GAAP gross margin was $69.7 million, or 86.4% of revenue, versus $38.5 million, or 81.6%, in Q3 2014. For the nine months, gross margin was $189.3 million, or 85.1%, versus $108.4 million, or 80.8%.
- Nine-month revenue increased 65.8%, while expenses increased 56.5%. Nine-month net income rose more modestly, partly reflecting income tax expense of $42.0 million versus $5.4 million in 2014. The 2014 period included a $13.7 million tax benefit from releasing a deferred-tax valuation allowance.
Cash, liquidity, and obligations
- At September 30, cash and cash equivalents were $212.0 million, investments were $23.7 million, total current assets were $250.8 million, and current liabilities were $39.5 million. Total liabilities were $47.2 million. The filing reports no borrowings or other debt.
- Nine-month operating cash flow was $110.1 million, compared with $56.7 million in 2014. Investing cash outflow was $11.3 million and financing cash outflow was $52.1 million. Cash increased $46.7 million to $212.0 million.
- Financing uses included $32.9 million of dividends and $23.7 million of share repurchases. The company had $76.3 million remaining under its $100 million repurchase authorization. The quarterly dividend was $0.08 per share.
- Contractual obligations included $41.3 million of operating lease payments and a $2.4 million acquisition payable related to the former Boost shareholders’ remaining interest. Management said operating cash flows should fund operations for at least the next 12 months.
Outlook, risks, and notable items
- No specific financial guidance was provided. Management cited volatile markets and anticipated challenging market conditions. Advisory-fee revenue is exposed to market values, fund flows, and investor sentiment; 63% of U.S. AUM was concentrated in European- and Japanese-equity exposures hedged against the U.S. dollar.
- Management said the overall effective tax rate was 41.1% for Q3 and 41.4% for the first nine months of 2015, reflecting the non-deductibility of losses in the European ETP business; those losses may be recognized after the business becomes profitable.
- On October 29, 2015, the company agreed to acquire GreenHaven Commodity Services and GreenHaven Coal Services for approximately $12 million in cash, subject to shareholder approval and customary closing conditions; closing was expected in Q4 2015.
- The company discussed proposed SEC rules on fund liquidity, risk monitoring, and board oversight, and market disruption during the August 24, 2015 trading session. It stated that it believed ETF structure was not the specific cause of the disruption.
- The filing reported no litigation expected to have a material impact, no material changes to internal control during the quarter, and effective disclosure controls. The company was assessing the impact of recently issued accounting standards on consolidation and revenue recognition.
Important facts for investors to verify
- Whether AUM, flows, and market performance—particularly in emerging markets, Japan, and Europe—continue to support advisory revenue.
- Whether expense growth, especially compensation and benefits, remains proportionate to revenue and AUM growth.
- The sustainability of the reported tax rate and the timing of potential tax recognition for European losses.
- The final terms, funding, approvals, and results of the GreenHaven acquisition, and the future cash cost of the Boost redemption formula.
- The effect of the company’s substantial European- and Japanese-equity exposure, foreign exchange movements, regulatory changes, and market volatility on AUM and fees.