WisdomTree Announces Third Quarter 2019 Results

$4.2 million net income, or $10.6 million net income, as adjusted

$0.02 diluted EPS for the quarter, $0.06 as adjusted

Declares $0.03 quarterly dividend

NEW YORK, Oct. 25, 2019 (GLOBE NEWSWIRE) -- WisdomTree Investments, Inc. (NASDAQ: WETF), an exchange-traded fund (“ETF”) and exchange-traded product (“ETP”) sponsor and asset manager today reported net income of $4.2 million or $0.02 diluted EPS in the third quarter.  Adjusted net income (a non-GAAP measure¹) was $10.6 million¹ or $0.06 diluted EPS¹.  This compares to net income of $22.0 million or $0.13 diluted EPS (as adjusted, $14.8 million¹ or $0.09 diluted EPS¹) in the third quarter of last year and net income of $2.5 million or $0.01 diluted EPS (as adjusted, $7.8 million¹ or $0.05 diluted EPS¹) in the second quarter of 2019.  

WisdomTree CEO Jonathan Steinberg said, “Our continued focus on technology has led to greater efficiency of our resources and an enhanced digital experience for our customers. Additionally, disciplined expense management led to significant improvement in operating margins and has enabled us to continue investing in market leading products and services.”

Steinberg continued, “With an increasing number of advisors looking to outsource asset allocation and portfolio construction, the development and distribution of our fully open architecture model portfolios remain a strategic priority for WisdomTree. We’ve made a key new hire for CIO of Model Portfolios who leads our Asset Allocation team and Investment Committee. We are also enhancing our relationship with Professor Jeremy Siegel in this space and intend to collaborate on model portfolios in the upcoming months. Model portfolios are an important aspect of our Advisor Solutions program along with portfolio construction tools, other technology tools, and access to practice management experts.”

Recent Business Developments

Company News

• In September 2019, we announced the appointment of Jarrett Lilien as WisdomTree’s President and Chief Operating Officer; and we announced the addition of Scott Welch as WisdomTree’s Chief Investment Officer – Model Portfolios.      
• In October 2019, we announced the launch of our new website that has been re-engineered with enhanced functionality and more industry-leading tools; and we announced that Michael Steinhardt has retired from WisdomTree’s Board of Directors and Frank Salerno will replace him as Chairman of the Board.

Product News

• In September 2019, we announced the global  launch of the WisdomTree Cloud Computing Fund (WCLD) in partnership with Nasdaq and Bessemer Venture Partners (BVP) and listed on the Nasdaq (US), the London Stock Exchange (LSE), the Borsa Italiana and the Deutsche Börse Xetra; we announced that two European WisdomTree UCITS ETFs – the WisdomTree Europe Equity Income UCITS ETF - Acc (EEIA) and the WisdomTree Europe SmallCap Dividend UCITS ETF - Acc (DFEA) – have been cross-listed in Mexico on the Mexican Stock Exchange, Bolsa de Mexicana de Valores (BMV); and we announced our plan to close and liquidate the WisdomTree Global ex-Mexico Equity Fund (XMX) to be completed in late October.
• In October 2019, we announced our 5 year anniversary since launching our first UCITS ETFs – WisdomTree US Equity Income UCITS ETF (DHS), WisdomTree US Small Cap Dividend UCITS ETF (DESE), WisdomTree Europe Equity Income UCITS ETF (EEIE) and WisdomTree Europe Small Cap Dividend UCITS ETF (DFEE) – on the London Stock Exchange (LSE); and we announced the completion of the final stage of integration of ETF Securities’ European commodity, currency and short-and-leveraged ETP business. This includes the unification of 224 products under one WisdomTree brand and closure of 192 duplicative or extraneous products across our full product set.

Assets Under Management and Net Flows

Assets under management (“AUM”) were $60.0 billion at September 30, 2019, up 1.5% from September 30, 2018 due to market appreciation and net inflows.  AUM was down 0.6% from June 30, 2019 due to net outflows and fund closures associated with the rationalization of our product offering in Europe, partly offset by market appreciation.

Net outflows were ($0.7) billion for the third quarter of 2019, primarily due to outflows from one of our fixed income products and two largest currency hedged products (HEDJ/DXJ), partly offset by inflows into our commodity, U.S. equity and emerging markets products.  Outflows from HEDJ/DXJ were $0.7 billion in the third quarter.  On a year to date basis, net inflows were $0.2 billion, or $2.7 billion excluding outflows from HEDJ/DXJ.

Operating Revenues

Advisory Fees

Advisory fees of $67.0 million decreased 6.5% from the third quarter of 2018 due to lower average AUM of our U.S. Business segment, partly offset by higher average AUM of our International Business segment.  Advisory fees increased 2.1% from the second quarter of 2019 primarily due to higher average AUM of our International Business segment, partly offset by lower average AUM of our U.S. Business segment. 

In addition, our average global advisory fee was 0.44%, 0.45% and 0.48% during the third quarter of 2019, second quarter of 2019 and third quarter of 2018, respectively.  The change as compared to the second quarter of 2019 was due to a change in product mix of our International Business segment.  The change as compared to the third quarter of 2018 was primarily due to a change in product mix globally.

Other Income 

Other income of $0.7 million decreased 20.1% from the third quarter of 2018 primarily due to lower creation/redemption fees of our International Business segment.  Other income was essentially unchanged from the second quarter of 2019. 

Margins

Gross margin for our U.S. Business segment was 80.8%¹ in the third quarter of 2019 as compared to 82.3%¹ in the third quarter of 2018 and 80.3%¹ in the second quarter of 2019.  The decline as compared to the third quarter of 2018 was primarily due to lower revenue capture and lower average AUM.  The increase as compared to the second quarter of 2019 was primarily due to cost savings achieved through recent vendor negotiations.  Gross margin for our International Business segment was 72.6%¹ in the third quarter of 2019 as compared to 71.3%¹ in the third quarter of 2018 and 69.5%¹ in the second quarter of 2019.  These increases were primarily due to higher revenues as well as lower fees from vendor negotiations.

Operating income margin on a consolidated basis was 23.8% in the third quarter of 2019 (as adjusted 24.1%¹) as compared to 29.9% in the third quarter of 2018 (as adjusted 30.5%¹) and 18.0% in the second quarter of 2019 (as adjusted 20.2%¹).

Operating Expenses

Total operating expenses were $51.6 million for the third quarter of 2019, up 1.4% from the third quarter of 2018 and down 5.1% from the second quarter of 2019.  

• Compensation and benefits expense increased 7.6% from the third quarter of 2018 to $18.9 million due to higher incentive compensation.  These expenses decreased 11.4% from the second quarter of 2019 due to lower headcount related expenses.  In addition, the second quarter of 2019 included severance expense of $1.5 million.  Headcount of our U.S. Business segment was 142, 143 and 151 and our International Business segment was 70, 71 and 76 at September 30, 2019, June 30, 2019 and September 30, 2018, respectively.
  
  
• Fund management and administration expense decreased 1.2% and 3.0% from the third quarter of 2018 and second quarter of 2019, respectively, to $15.1 million.  The decrease as compared to the third quarter of 2018 was primarily due to lower variable fees associated with lower average AUM of our U.S. Business segment, partly offset by higher average AUM of our International Business segment.  The decrease as compared to the second quarter of 2019 was primarily due to cost savings achieved through recent vendor negotiations.  We had 80 U.S. listed ETFs and 286 International listed ETPs at the end of the third quarter.
  
  
• Marketing and advertising expense decreased 6.7% from the third quarter of 2018 to $3.0 million due to lower spending in our International Business segment.  These expenses were essentially unchanged from the second quarter of 2019.
  
  
• Sales and business development expense increased 14.5% and 4.4% from the third quarter of 2018 and second quarter of 2019, respectively, to $4.4 million primarily due to higher spending on sales related activities in our U.S. Business segment.   
  
  
• Contractual gold payments expense increased 21.6% and 12.6% from the third quarter of 2018 and second quarter of 2019, respectively, to $3.5 million.  This expense was associated with the payment of 2,375 ounces of gold and was calculated using an average daily spot price of $1,474, $1,213 and $1,310 per ounce during the third quarter of 2019, third quarter of 2018 and second quarter of 2019, respectively.
  
  
• Professional and consulting fees decreased 34.9% and 2.9% from the third quarter of 2018 and second quarter of 2019, respectively, to $1.3 million due to lower spending on corporate consulting-related expenses.
  
  
• Occupancy, communications and equipment expense decreased 10.0% from the third quarter of 2018 to $1.5 million due to the closure of our office in Japan.  These expenses were essentially unchanged from the second quarter of 2019.
  
  
• Depreciation expense decreased 15.4% from the third quarter of 2018 to $0.3 million primarily due to the closure of our office in Japan.  This expense was essentially unchanged from the second quarter of 2019.
  
  
• Third-party distribution fees were essentially unchanged from the third quarter of 2018.  These expenses decreased 21.7% from the second quarter of 2019 to $1.5 million primarily due to lower fees paid for platform relationships.
  
  
• Acquisition-related costs decreased 58.3% from the third quarter of 2018 to $0.2 million as the integration of ETFS is essentially complete.  These expenses increased from the second quarter of 2019 due to the rationalization of our product offering in Europe following our acquisition of ETFS. 
  
  
• Other expenses decreased 14.1% and 13.1% from the third quarter of 2018 and second quarter of 2019, respectively, to $2.0 million due to lower levels of administrative spending.

Other Income/(Expenses)

• Interest expense increased 3.1% from the third quarter of 2018 and decreased 2.7% from the second quarter of 2019 to $2.8 million due to changes in interest rates.
  
  
• We recognized a (loss)/gain on revaluation of deferred consideration of ($6.3) million, $7.7 million and ($4.0) million during the third quarter of 2019, third quarter of 2018 and second quarter of 2019, respectively.  The loss arose in the current quarter due to an increase in the price of gold and the steepening of the forward-looking gold curve when compared to the forward-looking gold curve on June 30, 2019, the date on which the deferred consideration was last measured.  The magnitude of any gain or loss recognized is highly correlated to the magnitude of the change in the forward-looking price of gold.
  
  
• Interest income increased 11.1% from the third quarter of 2018 to $0.8 million primarily due to higher paid-in-kind interest on notes receivable from AdvisorEngine Inc.  Interest income was essentially unchanged from the second quarter of 2019.
  
  
• Other gains, net were $0.8 million, $0.1 million and $0.3 million during the third quarter of 2019, third quarter of 2018 and second quarter of 2019, respectively.  Included in the third quarter of 2019 is a gain of $0.4 million arising from the recognition of the foreign currency translation adjustment upon the liquidation of our Japan business.  In addition, gains and losses generally arise from the sale of gold earned from management fees paid by our physically-backed gold ETPs, foreign exchange fluctuations, securities owned and other miscellaneous items.

Income Taxes

Our effective income tax rate for the quarter ended September 30, 2019 of 51.9% resulted in income tax expense of $4.5 million. Our tax rate differs from the federal statutory tax rate of 21% primarily due to a valuation allowance on foreign net operating losses, a non-deductible loss on revaluation of deferred consideration, non-deductible executive compensation and state and local taxes, partly offset by a lower tax rate on foreign earnings.

Our adjusted effective income tax rate was 29.7%¹.

Nine Month Results

Our operating results for the current year are not directly comparable to the nine months ended September 30, 2018 due to our acquisition of ETFS, which was completed on April 11, 2018.

Total operating revenues decreased 3.3% to $199.5 million for the nine months ended September 30, 2019 due to a 4bps decline in our average global ETP advisory fee and lower average AUM of our U.S. Business segment, partly offset by higher revenues earned from the ETFS acquired business, which were recognized for the entire nine months of 2019.  Total operating expenses increased 2.5% to $160.8 million due to higher expenses of the ETFS acquired business, which were recognized for the entire nine months of 2019.  These items were partly offset by lower acquisition-related costs and lower non-compensation expenses of the U.S. Business segment.

Other income/(expenses) for the nine months ended September 30, 2019 includes ($8.6) million of interest expense, a loss on revaluation of deferred consideration of ($5.9) million, interest income of $2.4 million, impairment of ($0.6) million and other net losses of ($3.5) million.  Included within other net losses is a charge of $4.3 million arising from the release of a tax-related indemnification asset which arose from tax exposures assumed from the ETFS acquisition.  This item was recognized upon the expiration of the statute of limitations which occurred in the first quarter of 2019 and an equal and offsetting benefit was recognized in income tax expense.  See the quarterly discussion above for additional information regarding the other gains and losses.

Balance Sheet

As of September 30, 2019, we had total assets of $923.8 million which consisted primarily of intangible assets and goodwill of $689.1 million, and cash and securities owned of $109.7 million.  There were approximately 154.8 million shares of our common stock outstanding as of September 30, 2019.

In addition, in connection with our capital management strategy we used $15.0 million of available capital during the quarter to begin to pay down our long-term debt. 

Quarterly Dividend

Our Board of Directors declared a quarterly cash dividend of $0.03 per share of our common stock. The dividend will be paid on November 20, 2019 to stockholders of record as of the close of business on November 6, 2019.

Conference Call

WisdomTree will discuss its results and operational highlights during a conference call on Friday, October 25, 2019 at 9:00 a.m. ET. The call-in number will be (877) 303-7209. Anyone outside the U.S. or Canada should call (970) 315-0420. The slides used during the presentation will be available at http://ir.wisdomtree.com. For those unable to join the conference call at the scheduled time, an audio replay will be available on http://ir.wisdomtree.com.

Cautionary Statement Regarding Forward-Looking Statements

This press release contains forward-looking statements that are based on our management’s beliefs and assumptions and on information currently available to our management. Although we believe that the expectations reflected in these forward-looking statements are reasonable, these statements relate to future events or our future financial performance, and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue” or the negative of these terms or other comparable terminology. These statements are only predictions. You should not place undue reliance on forward-looking statements because they involve known and unknown risks, uncertainties and other factors, which are, in some cases, beyond our control and which could materially affect results. Factors that may cause actual results to differ materially from current expectations include, among other things, the risks described below. If one or more of these or other risks or uncertainties occur, or if our underlying assumptions prove to be incorrect, actual events or results may vary significantly from those implied or projected by the forward-looking statements. No forward-looking statement is a guarantee of future performance. You should read this press release completely and with the understanding that our actual future results may be materially different from any future results expressed or implied by these forward-looking statements.

In particular, forward-looking statements in this press release may include statements about:

• anticipated trends, conditions and investor sentiment in the global markets and ETPs;
  
  
• anticipated levels of inflows into and outflows out of our ETPs;
  
  
• our ability to deliver favorable rates of return to investors;
  
  
• competition in our business;
  
  
• our ability to develop new products and services;
  
  
• our ability to maintain current vendors or find new vendors to provide services to us at favorable costs;
  
  
• our ability to successfully operate and expand our business in non-U.S. markets; and
  
  
• the effect of laws and regulations that apply to our business.

Our business is subject to many risks and uncertainties, including without limitation:

• Declining prices of securities, precious metals and other commodities can adversely affect our business by reducing the market value of the assets we manage or causing WisdomTree ETP investors to sell their fund shares and trigger redemptions.
  
  
• Fluctuations in the amount and mix of our AUM, whether caused by disruptions in the financial markets or otherwise, may negatively impact revenues and operating margins, and may impede our ability to refinance our debt upon maturity, increase the cost of borrowing or result in our debt being called prior to maturity.
  
  
• Withdrawals or broad changes in investments in our ETPs by investors with significant positions may negatively impact revenues and operating margins.
  
  
• Competitive pressures could reduce revenues and profit margins.
  
  
• We derive a substantial portion of our revenues from a limited number of products, and as a result, our operating results are particularly exposed to investor sentiment toward investing in the products’ strategies and our ability to maintain the AUM of these products, as well as the performance of these products and market-specific and political and economic risk.
  
  
• A significant portion of our AUM is held in ETFs that invest in foreign securities and we therefore have substantial exposure to foreign market conditions and are subject to currency exchange rate risks.
  
  
• Net outflows in our two largest currency hedged ETFs – the WisdomTree Europe Hedged Equity Fund and the WisdomTree Japan Hedged Equity Fund – have had, and in the future could continue to have, a negative impact on our revenues.
  
  
• Over the last few years, we have expanded our business globally. This expansion subjects us to increased operational, regulatory, financial and other risks.
  
  
• Many of our ETPs and ETFs have a limited track record, and poor investment performance could cause our revenues to decline.
  
  
• We depend on third parties to provide many critical services to operate our business and our ETPs and ETFs. The failure of key vendors to adequately provide such services could materially affect our operating business and harm WisdomTree ETP investors.

Other factors, such as general economic conditions, including currency exchange rate fluctuations, also may have an effect on the results of our operations. For a more complete description of the risks noted above and other risks that could cause our actual results to differ from our current expectations, please see the section entitled “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018.

The forward-looking statements in this press release represent our views as of the date of this press release. We anticipate that subsequent events and developments may cause our views to change. However, while we may elect to update these forward-looking statements at some point in the future, we have no current intention of doing so except to the extent required by applicable law. Therefore, these forward-looking statements do not represent our views as of any date other than the date of this press release.

About WisdomTree

WisdomTree Investments, Inc., through its subsidiaries in the U.S., Europe and Canada (collectively, “WisdomTree”), is an ETF and ETP sponsor and asset manager headquartered in New York. WisdomTree offers products covering equity, commodity, fixed income, leveraged and inverse, currency and alternative strategies. WisdomTree currently has approximately $61.4 billion in assets under management globally.

WisdomTree^® is the marketing name for WisdomTree Investments, Inc. and its subsidiaries worldwide.

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1}   See “Non-GAAP Financial Measurements.”

WISDOMTREE INVESTMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(Unaudited)

WISDOMTREE INVESTMENTS, INC. AND SUBSIDIARIES
SEGMENT INFORMATION
(in thousands)
(Unaudited)

The following tables set forth the pre-tax operating results for our U.S. Business and International Business segments.    

U.S. Business Segment

International Business Segment

WISDOMTREE INVESTMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)

WISDOMTREE INVESTMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)  

Non-GAAP Financial Measurements

In an effort to provide additional information regarding our results as determined by GAAP, we also disclose certain non-GAAP information which we believe provides useful and meaningful information. Our management reviews these non-GAAP financial measurements when evaluating our financial performance and results of operations; therefore, we believe it is useful to provide information with respect to these non-GAAP measurements so as to share this perspective of management. Non-GAAP measurements do not have any standardized meaning, do not replace nor are superior to GAAP financial measurements and are unlikely to be comparable to similar measures presented by other companies. These non-GAAP financial measurements should be considered in the context with our GAAP results. The non-GAAP financial measurements contained in this release include:

• Adjusted net income and adjusted diluted earnings per share.  We disclose adjusted net income and adjusted diluted earnings per share as non-GAAP financial measurements in order to report our results exclusive of items that are non-recurring or not core to our operating business.  We believe presenting these non-GAAP financial measures provides investors with a consistent way to analyze our performance.  These non-GAAP financial measures exclude the following:
  
  
  • Unrealized gains or losses on the revaluation of deferred consideration:  Deferred consideration is an obligation we assumed in connection with the ETFS acquisition that is carried at fair value.  This item represents the present value of an obligation to pay fixed ounces of gold into perpetuity and is measured using forward-looking gold prices.  Changes in the forward-looking price of gold may have a material impact on the carrying value of the deferred consideration and our reported net income.  We exclude this item when arriving at adjusted net income and adjusted diluted earnings per share as it is not core to our operating business.  The item is not adjusted for income taxes as the obligation was assumed by a wholly-owned subsidiary of ours that is based in Jersey, a jurisdiction where we are subject to a zero percent tax rate.
    
    
  • Tax shortfalls and windfalls upon vesting and exercise of stock-based compensation awards: GAAP requires the recognition of tax windfalls and shortfalls within income tax expense.  These items arise upon the vesting and exercise of stock-based compensation awards and the magnitude is directly correlated to the number of awards vesting/exercised as well as the difference between the price of our stock on the date the award was granted and the date the award vested or was exercised.  We exclude these items when determining adjusted net income and adjusted diluted earnings per share as they introduce volatility in earnings and are not core to our operating business.
    
    
  • Other items:  Severance expense of $1.5 million (or $1.2 million after-tax) for the second quarter of 2019 and acquisition-related costs of $0.2 million, $0.03 million and $0.5 million (or $0.2 million, $0.03 million and $0.4 million after-tax) for the third quarter of 2019, second quarter of 2019, and third quarter of 2018, respectively, are excluded when determining adjusted net income and adjusted earnings per share.
    
    
• Adjusted effective income tax rate.  We disclose our adjusted effective income tax rate as a non-GAAP financial measurement in order to report our effective income tax rate exclusive of items that are non-recurring or not core to our operating business.  We believe reporting our adjusted effective income tax rate provides investors with a consistent way to analyze our income taxes.  Our adjusted effective income tax rate is calculated by dividing adjusted income tax expense by adjusted income before income taxes.  See “adjusted net income and adjusted diluted earnings per share” above for information regarding the items that are excluded.  
  
  
• Gross margin and gross margin percentage.  We disclose our gross margin and gross margin percentage as non-GAAP financial measurements for our U.S. Business segment and International Business segment because we believe they provide investors with a consistent way to analyze the amount we retain after paying third-party service providers to operate our ETPs.  These ratios also assist us in analyzing the profitability of our products.  We define gross margin as total operating revenues less fund management and administration expenses.  Gross margin percentage is calculated as gross margin divided by total operating revenues.   
  
  
• Adjusted operating income margin.  We disclose adjusted operating income margin as a non-GAAP financial measurement on a consolidated basis, as well as for our U.S. Business segment and International Business segment in order to report our operating income margin exclusive of items that are non-recurring or not core to our operating business.   

WISDOMTREE INVESTMENTS, INC. AND SUBSIDIARIES
GAAP to NON-GAAP RECONCILIATION
(in thousands)
(Unaudited)

Consolidated

Released October 25, 2019