WisdomTree, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Unless stated otherwise, financial amounts below are USD millions. WisdomTree sponsors and manages exchange-traded products (ETPs); substantially all revenue comes from advisory fees based on ETP average daily assets under management (AUM).
Business context and operating performance
- Global ETP AUM was $60.7 billion at September 30, up from $57.6 billion at June 30. Q3 growth primarily reflected $3.6 billion of market appreciation, partly offset by $468 million of net outflows.
- Average global AUM rose 1.5% year over year to $61.2 billion in Q3. The average advisory fee declined to 0.42% from 0.44%, which management attributed to AUM mix.
- Q3 U.S.-listed ETPs had $575 million of net inflows; international-listed ETPs had $1.0 billion of net outflows. International AUM nevertheless increased during the quarter on market appreciation.
Key financial metrics
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $64.6 | $67.7 | $186.6 | $199.5 |
| Operating income | $14.7 | $16.1 | $42.2 | $38.7 |
| Operating margin | 22.8% | 23.8% | 22.6% | 19.4% |
| Net income/(loss) | $(0.3) | $4.2 | $(22.2) | $15.5 |
| Diluted EPS | $(0.01) | $0.02 | $(0.16) | $0.09 |
| Operating cash flow | Not separately reported | Not separately reported | $15.6 | $43.1 |
Q3 operating expenses declined 3.3% to $49.9 million, chiefly from reduced sales and business-development spending. For the first nine months, expenses declined 10.1% to $144.5 million, including lower compensation and discretionary costs.
Balance sheet, debt and liquidity
- At September 30, cash and cash equivalents were $63.6 million; total current assets were $128.0 million and current liabilities were $67.0 million. Available liquidity, after current liabilities and required regulatory capital, was $45.1 million, down from $72.5 million at year-end 2019.
- The company had $175.0 million principal amount of 4.25% convertible senior notes due June 2023; their carrying amount was $165.8 million. The notes are senior unsecured and have a $5.92 initial conversion price, subject to terms and adjustments. The former credit facility was repaid and terminated in June 2020.
- A separate, fair-value obligation for contractual gold payments was $207.7 million, including $17.2 million current and $190.5 million long-term. Payments are made in gold and are limited to advisory-fee income from specified physically backed gold products; the filing says unpaid amounts beyond that income are non-recourse to the company.
- For the first nine months, investing activities provided $28.5 million and financing activities used $55.1 million. Financing included $179.0 million of credit-facility repayments, $31.0 million of share repurchases, $15.2 million of dividends, and $175.3 million of convertible-note proceeds.
Material changes and unusual items
- Q3 revenue fell 4.5% year over year despite higher average AUM, reflecting the lower average advisory fee. Nine-month revenue declined 6.4%; average AUM was essentially unchanged, while the average fee fell to 0.42% from 0.45%.
- Reported net loss included a $3.1 million Q3 impairment of the Thesys investment and an $8.9 million non-cash loss from revaluing the gold-payment obligation. For the first nine months, impairments totaled $22.8 million, including $19.7 million related to AdvisorEngine and $3.1 million for Thesys; the gold-obligation revaluation loss was $34.4 million.
- Nine-month results also included a $2.4 million non-cash loss on extinguishment of the former credit facility. The company sold its Canadian ETF business in February and exited its AdvisorEngine investment in May; it received $2.8 million and $9.6 million, respectively, with additional contingent consideration possible in each transaction.
- Management’s non-GAAP adjusted net income was $11.0 million for Q3 and $30.8 million for the first nine months, versus $10.6 million and $26.2 million, respectively, in 2019. These measures exclude specified items and are not substitutes for GAAP results.
Outlook, commentary and risks
- Management said operating cash flows and existing cash balances should be sufficient to fund operations for at least 12 months. No specific revenue or earnings guidance was provided.
- WisdomTree plans a “remote first” approach, significantly reducing its New York and London office footprint. It anticipates a $9–$12 million impairment charge and $3–$4 million in annual cost savings; timing and amounts depend on securing a New York subtenant and other real-estate factors. Management estimated a sublease might occur by late 2021 or early 2022.
- Management reported continued uncertainty from COVID-19 and volatile markets. Revenue depends on ETP AUM, so market declines or investor outflows can reduce advisory fees. Other identified exposures include competition, product development, regulation, foreign exchange and gold-price movements.
- Gold-price increases can raise the measured value of the long-term gold-payment obligation and create earnings volatility. The company does not currently hedge its gold exposure.
- The company declared a $0.03 per-share quarterly dividend. Its share-repurchase authorization had $52.4 million remaining at September 30; future purchases depend on results, cash availability and strategic priorities.
- The company reported no litigation expected to have a material adverse effect, no subsequent events requiring disclosure, and effective disclosure controls as of September 30.
Important facts for investors to verify
- Whether AUM trends and the reduced advisory-fee rate continue, particularly given Q3 international outflows and the year-to-date decline in advisory fees.
- The assumptions behind the $207.7 million gold-payment valuation, including forward gold prices and the sensitivity of future reported earnings to gold-price changes.
- The terms, potential dilution and cash-settlement implications of the $175 million convertible notes, including the $5.92 conversion price and 2023 maturity.
- Whether management achieves the projected office-related savings and impairment estimates, and whether a subtenant is secured on the anticipated timetable.
- The company’s ability to sustain liquidity, dividends and repurchases while servicing debt and meeting regulatory-capital requirements.
- The recoverability of remaining investments and contingent proceeds from the AdvisorEngine and Canadian-business transactions, along with the tax and preferred-stock redemption exposures described in the filing.