WisdomTree, Inc. — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2023; comparisons are with the quarter and nine months ended September 30, 2022 unless otherwise noted. Amounts are in U.S. dollars; financial statement amounts are generally in millions.
Business context and operating performance
WisdomTree sponsors and manages exchange-traded products (ETPs), and is developing digital funds, tokenized assets and the WisdomTree Prime digital wallet. It reported approximately $93.7 billion of ETP assets under management (AUM) at quarter-end. Revenue is primarily advisory fees tied to average ETP assets.
- Global ETP AUM ended the quarter at $93.7 billion, up from $70.9 billion a year earlier. Third-quarter net inflows were $2.0 billion, partly offset by $1.9 billion of market depreciation. U.S.-listed ETF AUM rose to $68.0 billion; European-listed ETP AUM declined to $25.7 billion, reflecting outflows and market depreciation.
- Third-quarter average AUM increased 28.2% year over year to $95.7 billion. The average advisory fee declined to 0.36% from 0.38%.
Key financial metrics
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Total revenue | $90.4 | $72.4 | $258.2 | $228.0 |
| Operating income | $26.7 | $14.9 | $61.5 | $48.4 |
| Net income | $13.0 | $81.2 | $83.5 | $79.0 |
| Diluted EPS | $0.07 | $0.50 | $0.49 | $0.49 |
| Operating margin | 29.5% | 20.5% | 23.8% | 21.2% |
- Third-quarter revenue increased 24.9%, mainly on higher average AUM; advisory fees rose 22.6% and other income more than doubled to $3.8 million. Nine-month revenue increased 13.2%.
- Third-quarter operating expenses rose 10.7% to $63.7 million, with higher compensation, fund administration, professional fees and distribution costs partly offset by no further gold-payment expense after the obligation was terminated.
- Third-quarter net income fell sharply from 2022 because the prior-year quarter included a $77.9 million gain from revaluation of the gold-payment obligation. 2023 also included $2.7 million of impairment charges. Management’s non-GAAP adjusted net income was $18.0 million for Q3 2023 versus $9.3 million in Q3 2022; adjusted diluted EPS was $0.10 versus $0.06. For nine months, adjusted net income was $44.2 million versus $34.6 million.
- Cash from operations for the first nine months was $48.4 million, compared with $43.1 million. Investing activities provided $35.9 million, mainly reflecting sales of financial instruments; financing activities used $126.4 million. Cash decreased $42.6 million to $89.5 million.
- At September 30, cash was $89.5 million, financial instruments owned were $79.0 million, total assets were $951.8 million and total liabilities were $349.9 million. Available liquidity, as defined by the company after current liabilities, digital-fund seed capital and regulatory capital requirements, was $89.2 million, down from $113.0 million at year-end 2022.
- Convertible notes had $280 million principal outstanding: $150 million due 2026 at 3.25% and $130 million due 2028 at 5.75%. Carrying value was $274.5 million. The company also had $132.6 million of Series A preferred stock in temporary equity; its disclosed redemption value was $105.1 million.
Material changes, outlook and commentary
- In May 2023, the company ended its contractual gold-payment obligation for $136.9 million of consideration: $50.0 million cash and Series C preferred stock valued at $86.9 million, convertible into 13.087 million common shares. The obligation’s termination eliminated future contractual gold payments. The Series C shares are non-voting and subject to conversion and sale restrictions.
- The company issued $130 million of 5.75% convertible notes due 2028, repurchased $115 million principal of 2020 notes and settled the remaining 2020 notes at maturity with approximately $59.9 million cash and 1.037 million common shares. The repurchase resulted in a $9.7 million extinguishment loss.
- For full-year 2023, management maintained compensation expense guidance of $104–$110 million and discretionary spending of $56–$59 million, both expected near the high end. Gross margin guidance is 79%–80%; third-party distribution fees are estimated at $9–$10 million; interest expense at $15 million; interest income at approximately $3.5–$4.0 million; and normalized effective tax rate at 24%.
- Management said operating cash flow and cash balances should fund operations for the foreseeable future. It also cited challenging and volatile markets. AUM and revenue remain exposed to market performance, investor flows, advisory-fee trends, competition, regulatory developments, foreign exchange and commodity or cryptocurrency prices. The company does not currently hedge certain currency, commodity or cryptocurrency exposures.
- Claims related to the closure of the 3OIL leveraged ETP seek approximately €15.2 million in damages; additional investors separately demanded up to approximately €8.4 million. The company is assessing the claims, expects any losses, if incurred, to be covered by insurance less a $0.5 million deductible, and recorded no accrual. It had prevailed in two court rulings described in the filing.
- The filing discusses an activist campaign and related expenses, and a stockholder rights plan that expires March 16, 2024 unless earlier redeemed or exchanged. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether AUM growth and net inflows continue, particularly given European outflows, market sensitivity and the lower average advisory fee.
- How much reported earnings depend on non-recurring valuation, impairment, tax and financing items; compare GAAP results with the company’s non-GAAP reconciliations.
- Cash needs and dilution exposure from the $280 million convertible notes, Series A preferred stock and Series C preferred shares convertible into 13.087 million common shares.
- Progress against 2023 expense guidance and whether higher compensation, professional and distribution costs affect margins.
- Developments in the 3OIL claims, insurance coverage, activist-related matters and the stockholder rights plan.
- Valuation and recoverability of investments, especially Securrency: the filing reports a $7.6 million nine-month impairment and a subsequent announcement of its acquisition by an unrelated party.