WisdomTree Investments, Inc. — Q3 2019 Form 10-Q
Business context and reporting period
Quarter ended September 30, 2019; filed November 1, 2019. WisdomTree sponsors and manages exchange-traded products (ETPs), earning substantially all revenue from advisory fees tied to average daily assets under management (AUM). Global ETP AUM was $60.0 billion at quarter-end. The April 2018 ETFS acquisition makes year-to-date comparisons less comparable because 2019 includes ETFS for the full nine months, versus only part of 2018.
Financial performance and position
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $67.7m | $72.6m | $199.5m | $206.2m |
| Operating income | $16.1m | $21.7m | $38.7m | $49.5m |
| Net income | $4.2m | $22.0m | $15.5m | $48.2m |
| Diluted EPS | $0.02 | $0.13 | $0.09 | $0.31 |
| Operating margin | 23.8% | 29.9% | 19.4% | 24.0% |
For the quarter, advisory fees fell 6.5%, primarily reflecting lower average U.S. AUM and a lower average global advisory fee (0.44% versus 0.48%); stronger international AUM partly offset the decline. Operating expenses rose 1.4% to $51.6m, with higher compensation, sales spending and contractual gold payments partly offset by lower professional fees and acquisition costs. Year-to-date expenses rose 2.5% to $160.8m.
Q3 net income was sharply lower mainly because a $7.7m prior-year gain on revaluation of deferred gold consideration became a $6.3m loss. For the nine months, that comparison shifted from a $17.6m gain in 2018 to a $5.9m loss in 2019. The nine-month effective tax rate was 31.2%; Q3’s was 51.9%.
Cash and cash equivalents were $88.6m at September 30, versus $77.8m at December 31, 2018. Nine-month operating cash flow was $43.1m; investing cash flow was $0.5m and financing cash outflow was $32.4m. Cash increased $10.8m, including $15.3m of dividends, $15.0m of debt repayment and $2.2m of share repurchases. Reported available liquidity was $66.4m, down from $108.9m at year-end, including $15.8m of available revolver capacity.
Long-term debt had a $185.0m principal balance after a $15.0m repayment; its carrying amount was $181.4m. The $50m revolving facility had no borrowings. The facility matures April 11, 2021, and the company reported compliance with its financial covenants. Total assets were $953.7m and total liabilities $456.6m. The fair value of deferred gold consideration was $167.6m, including $13.4m current and $154.2m long-term.
Changes, outlook, risks and unusual items
- U.S.-listed ETF AUM decreased from $39.2bn at June 30 to $37.6bn at September 30, primarily due to outflows and market depreciation. International ETP AUM rose from $21.2bn to $22.4bn on inflows and market appreciation. Year-to-date net inflows were $0.2bn, or $2.7bn excluding outflows from HEDJ and DXJ.
- Management said operating cash flows and cash balances should fund operations for at least the next 12 months. No specific earnings or revenue guidance was provided.
- Management viewed the SEC’s newly approved ETF Rule positively, citing potential product-development, operational-efficiency and transparency benefits; implementation was expected to begin in December 2019, with one year for issuers to implement changes. Commission-free trading announcements were also viewed as positive, with expected savings from ending certain platform arrangements.
- Gold-price and forward-curve movements affect the valuation of the gold-payment obligation and can cause substantial non-cash earnings volatility. The company pays specified gold ounces through 2058 and a reduced amount thereafter; ETFS Capital’s recourse is limited to qualifying advisory-fee income, subject to the disclosed terms.
- Other notable items: $0.6m impairment related to ending the Japan office lease; Japan operations were liquidated in Q3. A $4.3m reduction in uncertain tax benefits was offset by a corresponding reduction in the ETFS Capital indemnification asset. Management reported no litigation expected to materially affect the company and no subsequent events requiring disclosure.
- Key risks include market-driven AUM and fee pressure, investor outflows, competition, foreign-exchange and commodity exposure, variable-rate debt and leverage-covenant limits. The company said it does not currently hedge currency or gold-price exposure.
Important facts for investors to verify
- Whether U.S. AUM trends, including outflows from HEDJ and DXJ, stabilize and whether international inflows persist.
- How advisory-fee rates, product mix and market movements affect revenue and operating margins.
- Debt repayment progress, available revolver capacity, leverage-covenant headroom and the April 2021 maturity.
- Sensitivity of the $167.6m gold-payment liability and reported earnings to gold prices and valuation assumptions.
- Credit exposure to AdvisorEngine: $57.4m maximum exposure, comprising preferred stock and unsecured notes; the company is not its VIE primary beneficiary.
- Potential effects of the ETF Rule, commission-free platform changes, and upcoming adoption of the CECL credit-loss standard.