WisdomTree Investments, Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Unless otherwise stated, financial amounts below are in U.S. dollars; statements report amounts in thousands. WisdomTree sponsors and manages exchange-traded products (ETPs), earning most revenue from advisory fees based on average daily assets under management (AUM).
Business context and material changes
- On April 11, 2018, WisdomTree completed its acquisition of ETFS, adding European commodity, currency, and leveraged/inverse products. ETFS contributed $37.1 million of revenue from acquisition through September 30.
- Global AUM was $59.1 billion at quarter-end; average global AUM in Q3 was $59.5 billion, up 31.5% year over year, principally reflecting acquired ETFS assets. Reported comparisons therefore include ETFS only from the acquisition date.
- The company restructured its Japan distribution strategy and plans to close WisdomTree Japan Inc. Q3 operating losses there were $1.3 million.
Financial performance
| Metric | Q3 2018 | Q3 2017 | First nine months 2018 | First nine months 2017 |
|---|---|---|---|---|
| Total revenue | $72.6 million | $57.7 million | $206.2 million | $167.3 million |
| Operating income | $21.7 million | $15.2 million | $49.5 million | $43.9 million |
| Net income | $22.0 million | $8.0 million | $48.2 million | $27.0 million |
| Diluted EPS | $0.13 | $0.06 | $0.31 | $0.20 |
| Operating margin | 29.9% | 26.4% | 24.0% | 26.2% |
- Q3 revenue rose 25.7% year over year; advisory fees increased 25.1%. Total operating expenses rose 19.7% to $50.9 million, including higher fund administration costs, contractual gold payments, and acquisition-related costs.
- Q3 net income included a $7.7 million gain from revaluing the gold-payment obligation, partly offset by $2.7 million of interest expense. The gain is tied to gold-price movements and is not equivalent to recurring operating earnings.
- For the first nine months, reported net income included a $17.6 million revaluation gain and $10.4 million of acquisition-related costs. The prior-year period included a $6.9 million settlement gain.
- Average advisory fee rates were 0.48% in Q3 for both U.S. and international products; the global rate had declined from 0.50% a year earlier, reflecting acquisition and product mix.
Cash flow, debt, and liquidity
- Cash and cash equivalents were $77.1 million at September 30, versus $54.2 million at December 31, 2017. Current assets were $112.9 million and current liabilities $61.4 million.
- For the first nine months, operating cash flow was $30.2 million (prior year $31.1 million); investing cash flow was $(181.8) million, principally reflecting $239.3 million paid for ETFS, net of cash acquired; financing cash flow was $175.7 million, including $200 million of term-loan proceeds. Cash increased $22.9 million.
- The company reported available liquidity of $115.9 million, including $50 million of undrawn revolving capacity. Management stated existing cash and operating cash flows should fund operations for at least the next 12 months.
- The $200 million term loan carries variable-rate interest, had a 4.99% effective rate at September 30, and matures April 11, 2021, with principal due in a single payment. The $50 million revolver was undrawn. The company said it complied with credit covenants through September 30; leverage limits tighten over time.
- Quarterly dividends were $0.03 per common share. Debt covenants restrict dividends above that level and most share repurchases unless the specified leverage and default conditions are met.
Outlook, risks, and unusual items
- No specific revenue, earnings, or AUM guidance is provided. Management cited challenging and volatile markets as likely to persist.
- Revenue depends on ETP AUM, which is exposed to market levels, investor flows, currencies, and product performance. The two largest U.S. ETFs, HEDJ and DXJ, represented approximately 19% of AUM; both experienced outflows. International ETP AUM fell during Q3 amid market depreciation and net outflows.
- Gold creates linked exposures: advisory fees on certain products are paid partly in gold, and the assumed ETFS obligation requires recurring gold payments into perpetuity. The obligation had a $156.1 million fair value at quarter-end; its valuation depends on gold-price forecasts and other significant unobservable assumptions. The company does not currently hedge gold exposure.
- The acquisition added $194.0 million of net carrying-value term debt and $144.3 million of long-term deferred gold consideration, as well as $132.6 million of Series A preferred stock. The preferred stock is convertible into up to 14.75 million common shares, subject to restrictions.
- ETFS-related uncertain tax positions, interest, and penalties totaled $35.7 million and were matched by an indemnification receivable from ETFS Capital; the company reported the indemnity and escrow/collateral arrangements. The filing says no litigation was expected to have a material adverse effect.
- Management reported disclosure controls were effective at a reasonable-assurance level. Integration of ETFS internal controls was still underway; the company anticipated deferring its assessment of ETFS-related internal control over financial reporting. ETFS represented about 18% of nine-month revenue.
Most important facts for investors to verify
- How much of revenue and earnings growth reflects acquired ETFS operations versus organic AUM, and whether U.S. product outflows persist.
- Adjusted or recurring earnings excluding the gold revaluation gain and acquisition-related costs; understand the assumptions driving the Level 3 gold obligation valuation.
- Term-loan leverage, covenant headroom, variable-rate interest exposure, and the 2021 bullet repayment requirement.
- ETFS integration, the deferred internal-control assessment, and the status or resolution of indemnified tax exposures.
- Potential dilution from the preferred shares and the conditions governing dividends and share repurchases.