WisdomTree Inc (WT) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the WisdomTree first quarter earnings conference call. My name is Ed and I will be your operator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference.

(Operator Instructions)

As a reminder, this call is being recorded for replay purposes. At this time, I would like to turn the call over to Mr. Jonathan Steinberg, Chief Executive Officer of WisdomTree. Please proceed.

Thank you. Good morning, and welcome to WidsomTree's first quarter conference call, let's begin. Fellow shareholders, the first quarter was another strong quarter for the company. It was marked by great execution across every aspect of the business. We ended the quarter with record assets under management of $11.3 billion, up 68% from the year-ago quarter. We also reported record revenues of $14.5 million, up 67%, and most importantly, we achieved our first quarter of profitability of roughly $200,000.

Though the number is small, it is a meaningful achievement nonetheless. With respect to inflows, we took in almost $1.3 billion or a solid 4.7% market share of the industry's total. In terms of new products, we continue to diversify our products suite with the launch of two new ETFs. In January, we launched the industry's first Managed Futures ETF, and in March, we launched our second foreign bond fund, Asia Local Debt. These are active, complex and very difficult both operationally as well as from a regulatory standpoint to launch.

In my very first comments, I mentioned our execution. This is one of the areas where our execution was excellent. We are now actively competing in global equities, currencies, fixed income, and alternatives. As today's presentation continues, I am hopeful you will be able to appreciate that our efforts to diversify our products suite and revenue base over the last two years is really starting to pay off.

2011 will prove to be a very active year from a new product standpoint. The areas of future focus will continue to be in foreign bonds, alternatives, some equities as well as commodities. There are still big, meaningful opportunities to launch funds that stratify unmet investor demand. Lastly, we met our stated goal to file our Form 10 with the Securities and Exchange Commission. Later on this call, CFO, Amit Muni, will update you on the status of our exchange listing as well as take you through our financial results.

Let's turn to Page four. In the first column, our industry inflows since we launched our first ETFs in the second quarter of 2006; in the second column, the blue-shaded one, WisdomTree's inflows since inception; and in the third column is WisdomTree's market share of inflows.

Let's turn our attention to the first quarter of 2011. As noted in the press release, WisdomTree had $1.26 billion of net inflows or 4.7% of the industry's total. This is the third consecutive quarter that we had over $1 billion of inflows. It is also the third consecutive quarter that our market share has been between 3% and 5%, which is our stated goal. And go down one line to the second quarter to-date inflows, and you can see that the second quarter is off to a good start with $384 million of inflows. Then at the very end of this row is our current assets under management. It shows $11.935 billion. But for those investors who check out our assets under management every morning on our website, you know that today we just surpassed $12 billion in assets for the first time. This is an all-time high for the Company.

Let's go to the next page. This column ranks ETF sponsors by assets under management. WisdomTree is currently the eighth largest sponsor. As you know, we ended the first quarter with $11.3 billion, up 14% from the end of the prior quarter. The only point I want to make here is we grew faster than the overall ETF industry, which is necessary if we are going to move up on the lead tables, which is another one of our longer-term goals. The second column shows Q1 inflows, but this format highlights how the ETF sponsors compare to one another, it's self-explanatory.

Let's go to Page six. The first column provides a different view of quarterly inflows broken out by category. Our first few quarter inflows were led by international developed equities, which took in $474 million. Almost all of the inflows in this category were in our two Japan funds. In my opinion, the success that we had with our Japanese equity funds is the singular highlight of the quarter from an execution standpoint. It is very difficult to overcome someone else's first-to-market advantage, which anyone follows the ETF industry is familiar with. Because of that, I want to highlight the WisdomTree Case Study for Japan. Obviously Japan garnered a great deal of interest and sympathy, but also investor intention in the days and weeks following the tragic earthquake and nuclear disaster.

That said, I believe our ability to capture assets and grow market share against the incumbent in leader for Japanese equities and iShares fund was a result of strategic changes we made to our existing offering prior to those events. A year ago, our research department felt that the investment case for Japan equities hedging out the Yen was a notable investment opportunity. So, we changed the investment objective of our ETF, with broad-based Japanese equities to effectively hedge out the exposure to the Yen. Before doing this, we had very little success in attracting assets into the fund. Our research team encapsulated their opinions in research reports that we shared with advisors.

The sales team made this fund a point of focus in advisor meetings whenever was appropriate and marketing and PR went about drawing attention to the fund. The net result of all of this activity was that when Japan was front in center in the minds of investors, WisdomTree was also top of mind. We took in almost $500 million or 14% of the inflows into Japanese ETFs in the quarter. We currently have $750 million in our two Japan equity ETFs, and the best part of the case study if you will is that the investment thesis is still intact and because our offerings within the Japanese equity scene are so differentiated, we should be able to drive future asset growth into these funds. The bottom line is WisdomTree significantly increased our mind share as well as our market share within this category, truly great execution across multiple functions.

The next category on this page is foreign bonds. We had inflows of $335 million or 27% of this quarter's total. This is similar to the inflows and percentage contribution that we experienced in the fourth quarter. Remember, this category is only seven months old for WisdomTree. Today, foreign bond funds have a combined assets under management of $1.2 billion. If I can, I want to draw your attention to the bottom lines on this column. You can see that we break out Japan inflows and new fund inflows. Here, we are classifying new funds as funds that are less than a year old, and they accounted for $507 million of the inflows or roughly 40% of this quarter's total. This is another illustration of the success of our diversification efforts.

Let's go to Page seven. Here, we highlight inflows for the quarter for the industry by category, noting WisdomTree's market share in the categories in which we currently compete. You can read the market share numbers for yourself, but there are two points that I want to highlight. The first is how broad the WisdomTree ETF platform has become. As I already said, our efforts to diversify is starting to pay off in meaningful ways. Foreign bonds, currencies and alternatives contributed over 53% of the total inflows this quarter.

It is also notable how strong our market share is in these newer categories. These remain asset classes to which ETF investors and their advisors haven't had much exposure to before. So, the potential to expand investor interest in these categories is a real and significant opportunity for WisdomTree. The second point of note is that emerging market equities which has been a key driver to our growth in the fourth quarter as well as throughout the full 2010 showed a noticeable drop-off this quarter. However, we still have positive inflows at a time that the broad category experienced outflows.

Let's go to the next page please. This page carries forward the numbers we have just covered through April 26th. This gives you an early glimpse of how the second quarter and year-to-date numbers are shaping up. Now, let me turn the call over to Amit Muni, WisdomTree's CFO.

Thank you, John, and good morning, everyone. I would like to begin by reviewing our overall financial results. Total revenues in the first quarter reached a record $14.5 million, an increase of 67% from the first quarter of last year and up 8% from the fourth quarter due to higher average asset balances. Our total expenses increased 17% from the first quarter of last year and up only 3% from the fourth quarter. We reported our first GAAP net income this quarter of approximately $200,000. This was in line with our previous guidance that we needed to average $10 billion to $10.2 billion of average ETF assets to reach GAAP net income. We averaged $10.3 billion of ETF assets during the first quarter.

Our pro forma operating income, which excludes stock-based compensation and depreciation and amortization expenses increased 36% from the fourth quarter to $2.4 million. You can see the operating leverage in our business model when you review these key financial metrics year-over-year. Revenue was up 67%, yet expenses only increased 17% with significant improvement in our pro forma operating income.

Our incremental pro forma operating margins also improved with 55% of the incremental growth in revenues flowing through our bottom line. I will just review the key drivers of the business on our next slide. ETF assets under management increased 68% year-over-year to approximately $11.3 billion at the end of March, and today, we have approximately $12 billion of ETF assets under management. We had our third back-to-back $1 billion quarter, taking in another $1.3 billion in net inflows in the first quarter.

We had a shift in the mix of our average assets, which decreased the average fee we earned from 57 basis points to 56 basis points in the first quarter. I will just review how these drivers affected our revenues on the next slide. Total revenues increased to $14.5 million, with ETF revenues increasing 69% from the first quarter of last year and up 9% from the fourth quarter. Our average ETF assets increased 63% from the first quarter of last year to $10.3 billion, an increase of 13% from the fourth quarter.

You can see from the graph that our revenues have been growing nicely over the last five quarters, with increasing revenue trends in all our product categories. You can also see the benefits of our diversification efforts. Revenues from our newly-launched international fixed income ETFs have grown from $156,000 in the third quarter to $583,000 in the fourth quarter to almost $900,000 in the first quarter of this year.

The fact based on net inflows into these funds so far this quarter, these ETFs should make up almost 10% of our revenues in the second quarter. Our non-ETF revenues declined as two separate account mandates closed with us in the first quarter. Now, let's review our expenses on the next slide. Our total expenses increased 17% from the first quarter of last year to $14.3 million and up 3% from the fourth quarter. Included in the first quarter was approximately $384,000 of expenses related to the preparation of our Form 10.

Compensation and benefits expense increased 6% compared to the fourth quarter due to higher payroll taxes from investing our restricted stocks brands, higher salary expenses and higher stock-based compensation from 2010 year-end equity grants. Partly offsetting these increases was lower accrued incentive compensation as the fourth quarter included a year-end true-up.

Our headcount increased by one to 61 at the end of the quarter. Fund management and administration expenses increased 4% compared to the fourth quarter and increased 23% compared to the first quarter of last year, primarily due to increased fund administration and portfolio management expenses from higher average asset balances. Marketing and advertising expenses declined 30% from the fourth quarter and declined 16% from the first quarter of last year due to lower levels of discretionary TV and online spending, but we do expect that year-over-year increase in our full-year marketing expense, which will start to show in the second quarter.

Sales and business development expenses increased 62% from the first quarter of last year due to higher levels of sales-related activity and consulting for new products. Professional fees increased 33% from the first quarter due to legal and accounting fees associated with preparation of our Form 10 along with higher variable stock-based compensation due to the increase in our stock price. Third-party sharing arrangements increased 39% compared to the fourth quarter and [370%] compared to the first quarter of last year. This expense lines primarily represent the Bank of New York Mellon share of profits less direct expenses related to our currency and fixed income ETFs. So, an increase in this expense means that these products are growing and generating more profits for us.

Our gross margins remain constant at 64% in the first quarter as compared to the fourth quarter and improved from 58% in the first quarter of last year. Our gross margins or our revenues less funds-related costs and third-party sharing arrangements, understanding this gross margin percentage will model out our fund costs. Stock-based compensation expense decreased to $2.1 million as fixed stock-based compensation expense decreased as equity awards rented in prior years become fully vested, which is partly offset by slightly higher variable expense due to the increase in our stock price.

You can see from the table on the right of this slide that our expenses are declining as a percent of our revenues quarter after quarter, with the exception of third-party arrangements, which is more of a reflection of higher revenues from our joint venture. This decline in trends should generally continue as our revenues increased and we benefit from the operating leverage of our business model. You can review our balance sheet on the next slide.

We have total assets of approximately $29 million, just primarily comprised of $13 million of cash and cash equivalents, $9 million in investments and $5 million in receivables from the WisdomTree funds for our monthly advisory fee. Total liability has declined to $10.5 million, mostly from normal recurring vendor payments. WisdomTree has no debt. At the end of the quarter, we had 114 million common shares outstanding and 132 million shares on a fully diluted basis.

Now, I would like to update you on our listing status. As you know, we filed our Form 10 on March 31st. We are waiting comments from the SEC, which we anticipate receiving very shortly. We follow an amendment to our registration statement adjusting the SEC's comments within a few weeks after receiving them depending upon the nature of the comments. We may or may not receive additional comments from the SEC based on our amendment.

As I mentioned previously, we meet the listing requirements for the NASDAQ and NYSE AMEX, and we have met with representatives of both exchanges and are currently evaluating them. We will make the decision on the exchange by the time we file our amendment. We are currently on plan and I am optimistic we will be listed by the end of the second quarter or early third quarter.

Now that we have achieved GAAP net income, it's appropriate to start thinking about our operating margin target once we become a mature company. The operating margins are traditional asset managers that currently average 33% to 34% or between a range of 20% and 40%. Because of the scalability of the ETF structure and our operating business model, our goal is to operate our business at the highest level of this range. Our business is performing very well and we are off to a great start with average AUM of 11.7 billion so far in the second quarter.

If you remember, we update our daily and average assets under management, average advisory fees and less inflows on the investor relations section of our Website, so you can follow our progress. I look forward to updating you on our next call with another record asset level and revenue quarter. Thank you. Let me turn it back to Jonathan.

Thank you, Amit. Now that WisdomTree has achieved another one of our primary corporate goals and profitability, I just want to summarize our goals for the remainder of 2011. First, strive for faster growth, faster growth of net income, faster growth of market share and faster growth of inflows in absolute terms.

WisdomTree is definitely getting stronger but as good as it is today, it is not as good as it can be, and remain a very motivated and hungry company and management team. Second, we want to continue to launch innovative funds that meet the needs of investors. This is a core strength in the firm and we each remain aggressive in seeking out opportunities for future growth. And finally, when we speak next quarter, I expect to be speaking to you as a CEO exchange listed company.

This ends the planned portion of today's call. I want to thank you for your interest and support of WisdomTree. But before we take your calls or your questions, I just wanted to introduce Bruce Lavine who is our President and COO and Luciano Siracusano who is our Director of Sales who are here with us to take calls with Amit and myself. So, with that, let's open it up to some of the questions. Thank you.

(Operator Instructions)

And our first question comes from the line of Mac Sykes of Gabelli & Company. Please proceed.

Good morning guys, congratulations on a solid quarter. I just had a couple of quick questions. Did I see that from cash statements that there was some shares that have been purchased, was that offset from the dilution at the end of December or something else?

Good morning, Mac. Yes, what we did in the first quarter, we initiated a small buyback. What this is the vesting of restricted stock that our employees have mostly at the beginning of the year. There's generally some selling in our stock related to taxes on that vesting. So, our business is doing very well. We believe it's prudent to use our cash strategically and when we can. So, it was a good opportunity to buy back just that portion of the vesting that was occurring. Most of that buying is done that we have a little bit of trail in the second quarter, but something that we are contained to look at.

Okay. There was a decrease in the expenses related to TV advertising. Just curious as to why that would have been this quarter? Was there some seasonality, it's when you want to advertise or just looking at the prudence of cash.

Thank you, Mac. This is John. Yes, it's basically seasonality. I wouldn't read anything more into it, but if you have seen our marketing, I thought we were able to be very efficient this quarter in our presence, that was very strong.

I think we have all been reading the last couple of weeks, there has been some articles especially in the journals talking about regulatory issues related to derivatives. Do you see any of the current speculation around changes in derivatives impacting your ETF business, whether through issuing your new products potentially or maybe having to change existing structures?

Bruce?

Mac, Bruce Lavine here. We are clearly watching the piece on the CFTC carefully as the fund we launched January has some commodities in the first one of its kind. But that's really the only fund that we have to date that has that exposure. So, on the overwhelming majority of our products not feeling any regulatory pressure, and I still believe that in most cases on the regulatory side, the ETFs are on the right side of the issue, the full transparency, the fund structure with an oversight of the Board of Directors et cetera. So, we tend to come out pretty well on these things, but we are watching it closely.

And just to follow up on that, if you could provide an update on WDTI meeting your expectations from this early launch, what's the competitive landscape and what other ETF providers are getting ready to answer that space?

Hi, this is Luciano. So, on our Website, we update the assets, and if you check today, I believe WDTI is about 95 million. So, we launched that in January, so that's been a very good initial launch for the fund. It hasn't been cleared for use in all the major wire houses yet, but there is still some due diligence going on. So, there is potential drivers going forward as more people can use the fund.

I think it's getting a lot of attention, because it's the only ETF out there in that category. There are of course other mutual funds that have been around for a while, but definitely feel good about the strategy and we have got some very good feedback from clients who are interested in using it.

Great. Thanks. Okay, back in the queue.

Thank you. Next question.

And our next question comes from the line of Jason Weyeneth from Sterne Agee. Please proceed.

Thank you guys. Just two questions, first is any update on the distribution front, I guess both in the standpoint of the hiring of wholesalers, I believe you talked about that last quarter as well as any progress you can speak to just with broadening or deepening of any distribution relationships that are key?

We have been adding internally to our sales team and we are building out that bandwidth to provide more support for our external wholesalers. We also have plans to hire more external wholesalers going forward in the second half of the year. So, I think we will have more bandwidth going forward, particularly on the wire house side where you really do need more boots on the ground to compete some of the larger firms. I think our distribution agreements are going well. We are working closely with advisor asset management and they are helping us in the independent broker dealer channel. So, we definitely feel that we are leveraging different segments of the market very well and we will continue to build it out as we reinvest in the business.

I guess similarly when you think about the organic growth potential flows into new product, it's clearly been a big driver recently. You have talked about the opportunity to launch new products in 2011. How do I think about growth overall near term and longer term when you think about the balance between growth coming from new products and growth coming from expansion and deeper penetration of distribution?

So, Jason, thank you for the question. This is Jonathan Steinberg. So, obviously new products are very important to us, but it is very difficult to time a new product to market sentiment at that moment because of the regulatory process of launching new funds. We never know where market center will be. So, I think that the shift or the change between new funds or existing or older funds in terms of their contribution to inflows in any quarter can vary greatly from quarter-to-quarter. And I think the only thing that's important is new funds allow us to have a bigger wider net so that we can participate in different market cycles, but expect still be time from launching new fund and it may not be in sync with market sentiment at that moment, so just be flexible.

Thank you.

And our next question comes from the line of [Steven Schoenfeld]. Please proceed.

Hi guys. Congratulations on a great quarter and continued momentum this quarter. Just wanted to get an update on the fixed income fund, I know you filed for that somewhere in the pipeline as well as whether you have any plans for other emerging market currency funds given this, and you haven't mentioned sort of your positioning on that, obviously with continued discussion of Chinese Yuan revaluation. You guys have a unique product there. So, any further granularity on the traction you have in that space?

Thanks, Steven. It's Bruce here. Both China and Brazil are interesting points and we are watching them very closely. China, because there are increasingly different ways to get exposure to Yuan -begin to be treated in more places around the world, onshore and offshore markets, the dynamics are changing. So, we are kind of looking at that with the goal being to get the best people we can with the highest yields available to a foreign investor into the fund. So, that's something we are trying to make sure that we stay current and that fund always pays the most relevant it can.

Brazil is another situation and the government has been very aggressive in taxing foreign capital flowing into Brazil, and I believe there was pretty big movements last night which I don't have my head fully around yet, have been reflecting things. So, we did file for the product and we are still sort of waiting a little bit to see how some of this shakes out before making a decision about whether not to launch it, but that's certainly in our plans.

You asked about other emerging markets, certainly we are looking at those all the time. Some of our efforts off late are perhaps more in the longer duration side of the fixed income market as opposed to the shorter duration currency side of it. But we are very active in total in the space and expect to continue to be.

Great. Thanks a lot.

And there are no further audio questions at this time.

Okay. We are going to take one question from the web. It's an observation and a question. The observation is that the listener noticed that on one of the slide the expansion of the percentage of new revenues flowing to the bottom line, and the question, can you talk about the leverage of your business model and what it would like at AUM of $25 billion?

Sure. Thank you. So, as you noticed, we had very attractive incremental margins quarter-over-quarter, about 55% flow down to the bottom line. I think that's the nature of not just WisdomTree itself but asset managers in general, they want you start a built to scale. You have more and more revenues that can flow down to the bottom line, but we believe there is more inherent natures of the ETF structure that will make that much more attractive as we continue to grow. We said that we want to target our operating margins once we become mature at the highest end of the asset manager range close to the 40% level. That said, as we continue to mature, but right now, our goal is to continue to invest back into business strategically.

As we stated in our Form 10, our goal is to become one of the Top 5 ETF sponsors, and to do that, we need to continue to invest back into business to grow our AUM, to grow our market share and we will strategically do that. So, while we are doing that, we will obviously always manage our cost base prudently, but it's hard to say what we would like exactly at that asset level, but it can come at various points. We can take in a couple of funds and more of that revenue will flow to the bottom line. It depends all just nature of how it scales, but we are very optimistic that we should be able to reach the higher end of that operating margin range. Are there any more questions?

The next question comes from the line of [John Hou] from Shareholder WisdomTree. Please proceed.

Yes, hi. Congratulations once again. I am a shareholder and I just had a question about the stock price, should we become a listed company and will the stock price change and will there be any adjustments to the number of shares to the investors?

So, with our listing, we are not raising capital, and we are not planning on any reverse stock split. So, it will just be a seamless transition on to a new exchange. The only point that I would make about that is, it should, we expect open the market where the potential for our different investors to participate in WisdomTree success. Many investors are not able to or are uncomfortable investing in a pin sheet listed company. But I don't know what net effect that will have. We just think that this is the right thing to do for investors long term.

Very good.

Thank you.

And our next question comes from the line of Mac Sykes from Gabelli & Company. Please proceed.

Jonathan, just a follow-up question, from an industry perspective, BlackRock had talked about seasonality I think in the first quarter, typically being a little bit weaker for them. I know you had a little bit different product offerings, but I am just, if you can give us any sort of hints on any seasonality that occurs during the year that you can see outside of the secondary [growth rate]?

We find that the ETF market is very, very fluid with market sentiment, and so, there is some seasonality where people we expect sort of the fourth quarter to be strong. But when you really look at it closely, it's volatile and the seasonality is very hard to predict. But I would say something else about the overall growth of the industry. The recent inflows on a quarterly and yearly basis though not bad have not been spectacular. We as an industry should be able to garner greater inflows as a percentage of the total inflows that are going into ETFs, mutual funds and hedge funds. So, I would just say we should just as an industry do better, and I will leave it at that.

Thanks guys.

(Operator Instructions)

And there are no further questions at this time.

All right everybody. I very much want to thank you for your interest and support of WisdomTree, and we will speak to you in 90 days. Thank you.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.