WisdomTree Investments, Inc. — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012. Unless otherwise noted, financial statement amounts are in thousands of dollars. WisdomTree sponsors and manages ETFs, earning advisory fees primarily as a percentage of ETF assets under management (AUM). It reported approximately $15.0 billion of AUM and 48 ETFs at quarter-end.
Financial performance and position
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Total revenue | $20.393 million | $16.716 million | $39.563 million | $31.249 million |
| ETF advisory fees | $20.230 million | $16.514 million | $39.205 million | $30.787 million |
| Total expenses | $20.264 million | $16.027 million | $38.319 million | $30.405 million |
| Net income | $129,000 | $689,000 | $1.244 million | $844,000 |
| Net margin | 0.6% | 4.1% | 3.1% | 2.7% |
| Operating cash flow | Not provided for the quarter | $8.530 million | $3.657 million |
- Quarterly revenue rose 22.0% year over year, while expenses rose 26.4%; net income consequently fell from $689,000 to $129,000. The $3.198 million ETF shareholder proxy expense was a major Q2 cost.
- First-half revenue increased 26.6% and expenses increased 26.0%; net income increased to $1.244 million from $844,000. The reported average advisory fee declined to 0.54% from 0.56%.
- Q2 average AUM was $15.116 billion, up 25.3% year over year. The filing attributes revenue growth mainly to higher average AUM.
- Cash and cash equivalents were $39.300 million at June 30, versus $25.630 million at year-end 2011. Investments were $9.787 million; current assets were $49.009 million and current liabilities $22.135 million. Working capital was approximately $26.874 million. No debt is reported.
- First-half investing cash flow was negative $929,000 and financing cash flow was positive $6.069 million. Cash increased $13.670 million, supported by operating cash generation, a $4.329 million stock offering and $2.773 million of option exercise proceeds.
- Total liabilities were $22.217 million and stockholders’ equity $37.198 million at June 30. The filing reports no off-balance-sheet financing arrangements apart from operating leases.
Material changes and operating trends
- AUM rose 23.2% in the first half, from $12.2 billion to $15.0 billion. Net inflows were $2.637 billion for the half, but slowed from $2.299 billion in Q1 to $338 million in Q2. Q2 market depreciation reduced assets by $1.025 billion.
- WisdomTree’s share of industry ETF inflows was 1.6% in Q2 and 3.6% for the first half, down from 5.8% and 5.6% in the comparable 2011 periods. Management cited the company’s lack of U.S. fixed-income ETFs, which investors favored during the period.
- Costs increased for compensation, marketing, professional services and other expenses. First-half compensation included higher payroll taxes related to option exercises, higher headcount and stock-based compensation. Fund management and administration costs also rose with AUM and the number of ETFs.
- The company completed a February 2012 offering of 1 million newly issued shares, receiving approximately $4.329 million net. Selling stockholders sold an additional 15.5 million shares; those proceeds went to the selling holders.
Outlook, risks and unusual items
- Management said operating cash flows and offering proceeds should be sufficient to fund operations for at least the next 12 months. No specific revenue, earnings or AUM guidance was provided.
- Management described ongoing exposure to volatile global markets, investor sentiment, foreign exchange movements and changes in ETF inflows and AUM; nearly all revenue depends on managed ETF assets. It noted that challenging market conditions could continue.
- Research Affiliates sued the company and other parties alleging infringement of three patents related to fundamentally weighted indexing, seeking unspecified damages and an injunction. WisdomTree disputes the claims and intends to defend the case. Management said loss probability and amount could not be determined and recorded no reserve. The insurer had agreed, subject to a $300,000 deductible and reservation of rights, to fund a significant majority of defense costs; the company estimated legal costs could be $4.0–$7.5 million through the first half of 2013 before insurance reimbursement.
- WisdomTree incurred $3.264 million of proxy solicitation costs in the first half, including $3.198 million in Q2, and expected another $200,000–$300,000 in Q3. A vast majority of the 48 ETFs had approved proposals addressing continued advisory authority in the event of a specified ownership change and potential changes to sub-advisers; solicitation for remaining ETFs was expected to continue into Q3.
- Other notable items include a $385,000 fee for terminating a marketing agreement in Q1 and a $1.012 million insurance receivable for reimbursable litigation costs recorded by June 30. The quarterly litigation expense line was a $191,000 credit; first-half litigation expense was $481,000.
- Operating lease commitments totaled $2.128 million, including $704,000 due in the remainder of 2012. A $700,000 standby letter of credit collateralized office lease space.
Most important facts for investors to verify
- Whether AUM growth and net inflows continue, particularly amid market volatility and WisdomTree’s limited exposure to U.S. fixed-income products.
- Whether expense growth, including proxy, legal, staffing and marketing costs, constrains profitability despite higher advisory revenue.
- The outcome and defense-cost trajectory of the Research Affiliates patent litigation, including the insurer’s coverage position and any potential damages, licensing costs or injunction risk.
- Completion and results of the ETF proxy solicitation, and any effect on advisory agreements or sub-adviser arrangements.
- Cash generation and liquidity relative to operating commitments; management’s stated 12-month funding assessment is not a formal earnings forecast.