WisdomTree Investments, Inc. — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. Amounts are in U.S. dollars; financial statement amounts below are in millions unless otherwise noted.
Business context
WisdomTree sponsors and manages exchange-traded products (ETPs), earning fees primarily based on average assets under management (AUM). It reported global AUM of $35.9 billion at quarter-end and described itself as the eighth-largest global ETP sponsor. Its U.S.-listed ETFs represented $35.8 billion of AUM. The April 2014 acquisition of Boost, now WisdomTree Europe, expanded the business into Europe.
Financial performance and liquidity
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Total revenue | $47.1 | $39.6 | $134.2 | $106.3 |
| Expenses | $26.9 | $24.7 | $77.3 | $71.2 |
| Income before taxes | $20.3 | $15.0 | $56.9 | $35.1 |
| Income tax expense | $9.6 | — | $5.4 | — |
| Net income | $10.6 | $15.0 | $51.4 | $35.1 |
| Diluted earnings per share | $0.08 | $0.11 | $0.37 | $0.25 |
- Q3 revenue increased 18.9%, principally on higher average AUM; Q3 average AUM rose 16.7% year over year to $35.6 billion. Nine-month revenue rose 26.2%, with average AUM up 28.2% to $34.5 billion.
- Q3 pretax income increased, but net income declined because the company recorded $9.6 million of tax expense; it had recorded no tax expense in Q3 2013. Nine-month net income increased despite $5.4 million of tax expense in 2014.
- Management’s non-GAAP gross margin was $38.5 million, or 81.6% of revenue, versus $30.5 million, or 76.9%, in Q3 2013. For the first nine months, gross margin was $108.4 million, or 80.8%, versus $79.3 million, or 74.6%.
- Operating cash flow was $56.7 million for the first nine months, compared with $47.7 million in 2013. Cash and cash equivalents increased by $47.0 million to $151.3 million; investments were $12.2 million. No debt balance is reported in the supplied filing text.
- At September 30, total assets were $202.2 million, total liabilities $27.9 million, and stockholders’ equity $174.3 million. Current assets were $169.8 million and current liabilities $20.9 million.
Material changes versus comparable periods
- Expenses rose 8.9% in Q3 and 8.5% for the nine-month period, slower than revenue growth. Marketing and advertising increased 64.5% in Q3 and 40.2% year to date; professional and consulting fees increased 155.2% in Q3 and 176.9% year to date.
- Higher marketing, consulting and acquisition-related costs were partly offset by lower fund administration expenses, including savings following a service-provider transition, and lower third-party sharing expenses.
- U.S.-listed ETF net inflows were $748 million in Q3, compared with $1.16 billion a year earlier. The company reported $0.7 billion of net inflows, including approximately $1.1 billion into its U.S.-listed European hedged fund, partly offset by approximately $800 million of outflows, including from DXJ and an unhedged European ETF.
- The company acquired 75% of WisdomTree Europe in April; former Boost shareholders retain 25%, subject to a required cash redemption after four years under a formula tied to European AUM, company valuation and European profitability. The filing recorded $1.7 million of goodwill and $1.6 million of acquisition transaction costs.
Outlook, risks and unusual items
- Management said operating cash flows should be sufficient to fund operations for at least the next 12 months. No specific revenue or earnings guidance was provided.
- Management highlighted market volatility and investor flows as key business risks because advisory fees depend on ETP AUM. It noted concentration in Japanese exposures (31% of U.S. AUM) and emerging-markets exposures (25%); adverse sentiment or currency movements could pressure AUM and revenue.
- Management said the U.S. baseline operating tax rate was revised from 45% to approximately 38% following a state tax study. It also cited a first-quarter release of a valuation allowance that generated a $13.7 million tax benefit, and third-quarter tax charges associated with the revised deferred-tax-asset valuation and Boost acquisition-related nondeductible expenses. The statements report Q3 tax expense of $9.6 million and nine-month tax expense of $5.4 million.
- The company stated that it did not expect to pay cash income taxes in 2014 and for some time thereafter because of tax-loss carryforwards, including deductions related to equity compensation.
- Operating lease commitments totaled $41.8 million, including $26.8 million due after five years. The required future redemption of the remaining European interest is additional cash exposure; its ultimate amount is not specified.
- After quarter-end, the board declared a quarterly dividend of $0.08 per share and authorized up to $100 million of share repurchases over three years. The program may be suspended or terminated. Management warned dividends are discretionary and may be reduced or discontinued.
- The filing reported no litigation expected to have a material impact and no material changes in internal control over financial reporting. Market, regulatory, competitive, currency, product-development and vendor risks remain relevant.
Key facts for investors to verify
- Whether AUM growth and net inflows persist, particularly for European hedged products, and how market movements affect fee revenue.
- The drivers and recurrence of tax expense, the realization of deferred tax assets, and the timing and availability of tax-loss carryforwards.
- The formula and eventual cash cost of redeeming the remaining 25% of WisdomTree Europe, including any post-acquisition compensation obligations.
- Execution of the dividend and repurchase authorization alongside lease obligations and other capital needs.
- The effect of concentrated Japanese and emerging-markets exposure, competition, and regulatory developments on flows and business performance.