WisdomTree Inc (WT) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Second Quarter 2011 WisdomTree Investment Inc Earnings Conference Call. My name is Crystal, and I will be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session.

(Operator Instructions)

As a reminder, today's conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Stuart Bell of WisdomTree. Please proceed.

Good morning. Before we begin, I would like to reference our legal disclaimer available in today's presentation. This presentation may contain forward-looking statements within the meaning of the Safe Harbor Provisions of the US Private Securities Litigation Reform Act of 1995.

Forward-looking statements generally can be identified by the use of forward-looking terminology such as believe, expect, anticipate, and similar expressions suggesting future outcomes or events. Such forward-looking statements reflect our current expectations regarding future events and operating performance and speak only as of the day of this presentation.

Such forward-looking statements are based on a number of assumptions which may prove to be incorrect. Forward-looking statements involve significant risks and uncertainties, should not be read as guarantees of future performance or results, and will not necessarily be accurate indications of whether or not or the times that which or by which such performance results will be achieved.

A number of risks and other factors could cause actual results to be different materially from the results discussed in forward-looking statements, including but not limited to, risks set forth in this presentation and in Item 1A risk factors of Amendment number two to WisdonTree's registration statement on Form 10, filed with the FCC on June 28, 2011.

Now, it is my please to turn the call over to WisdomTree CEO, Jonathan Steinberg.

Thank you, Stuart. Good morning, everybody. Welcome to WisdomTree's Second Quarter Conference Call. Let's begin. Fellow shareholders, the second quarter was the strongest quarter in the Company's history. We ended the quarter with record inflows, record assets under management, record revenues, and record of earnings.

We achieved strong market share of industry inflows of 5.8%, which was above our stated target of 3% to 5%, we successfully raised assets in recently launched funds, and lastly, we completed our NASDAQ listing.

All of these accomplishments are a reflection of the growth and strength of the WisdomTree franchise and business model. I want to take moment to note that last month we celebrated our fifth anniversary as an asset manager. I know I am biased, but I think we accomplished a lot in a short amount of time, especially when you factor in the financial crisis of 2008 and early '09. Today we have 47 ETFs, with over $13.3 billion in assets across multiple asset classes.

To borrow from Winston Churchill, this is not the end, it is not even the beginning of the end, but it is perhaps the end of the beginning. We are no longer a start-up. WisdomTree is at an inflection point. The foundation has been laid for WisdomTree to grow into a significant asset manager over the next five years and beyond.

I believe we are incredibly well-positioned for the challenges that lay ahead. The story is simple. ETFs offer a better investing experience, period. With that as our starting point, this becomes a story of market share. The market share of inflows of ETFs versus other structures, primarily mutual funds and hedge funds, and the growing market share of WisdomTree within the ETF industry. It is clear to me that ETFs are the future of asset management.

I do not mean this in some nebulous way. I want to be clear. I believe that at some point, ETFs will take the majority of inflows over mutual funds and hedge funds combined. Like we did as an industry in 2008, but this next time, when we do it, we will do it permanently.

In my opinion, there are two key drivers necessary for this domination to happen. First, investor education about the structural benefits of ETFs, and two, continued product innovation. WisdomTree is committed to both. In fact, one analyst recently referred to us as a potent agent of change in the ETF industry, which is exactly what we, as a firm, strive for and work towards every day. I am proud of the recognition.

Now, let's review our quarterly inflows on the next slide, please. As stated in the press release, we had record inflows of $1.7 billion in the second quarter. It is also the fourth quarter in a row that we took in more than $1 billion.

On the right hand side of the page, we show you inflows by category. Let's start at the bottom. As you can see, fixed income inflows were up 32% to $442 million, representing 26% of total inflows. Currencies were up 41% at $383 million or 22% of the total. We had a strong rebound in both US equities, which took in $374 million and also emerging market equities, which had $344 million.

Alternatives, a space we entered in 2011, with our managed future strategy ETF, took in a $123 million. We saw a reversal in developed equities which had led Q1 inflows. Overall, our business is very positive. It is also clear from this chart that our diversification efforts are paying off.

Now, let's look at our yearly inflows on the next slide. This chart should help put things into perspective. First, in 2008, we had over $900 million of inflows. In light of the financial crisis, a very strong performance. Strong growth in 2009. In 2010, we achieved our strongest year of annual inflows in the Company's history, raising over $3.1 billion, but as you can see, we've almost matched that in first six months of this year. In fact, as of last week, year to date inflows stood at $3.4 billion.

On the right hand side, we show inflows for the last 12 months. It is clear that with $5.4 billion, that our growth is accelerating. 2011 is shaping up to be another record year. Also, with more than $400 million in July, the third quarter is also looking good.

Now, let's take a look at quarter-end assets under management on the next slide. We ended the second quarter with $12.9 billion. That's up 108% year-over-year, and up 14% from the end of the first quarter. As of this morning, our assets were around $13.3 billion. On the right hand side of the page, we show two different pictures of our assets. First by asset class; 73% of our assets were in equities and non-equity assets. Currencies, fixed income, and alternatives were up to 27% of our total assets.

For reference, we launched our first non-equity ETF in May of 2008. The bottom pie chart shows our assets by geography. 57% of our total assets were invested in the emerging markets. 23% in developed non-US, and 20% in the United States.

Now, let's look at asset growth year-to-date on the next slide. This chart shows year-to-date growth of assets for the top 10 ETF sponsors. WisdomTree grew our assets by 31% year-to-date. We are the second fastest among the top ten. This is showing that we have very strong organic growth.

Now, let's review WisdomTree's quarterly market share on the next slide. In the second quarter, we took in 5.8% of the industry total. The last four quarters have been steady and in the range of our 3% to 5% target.

I want to draw your attention to the bottom left hand corner where we show you the yearly market share numbers. 2010 was our best yearly market share number in the Company's history with 2.7%. But as you can see, the first half of 2011 is well ahead of last year's number, with 5.2% of the industry inflows.

On the right hand side, we take a closer look at WisdomTree's second quarter market share of inflows in the different asset classes where we compete. In total, they make up the 5.8%. We had inflows in emerging market equities, even though the overall ETF industry had net outflows.

In alternatives, we took in 54% of the total. In international fixed income, we took in 24%, and in currency, we took 24%. Also, US Equities came in at 7%. Overall, very solid execution. It also shows that WisdomTree is an effective competitor.

Next slide, please. This is a new slide for WisdomTree. It shows that year-to-date there have been 148 new ETF launches. The industry raised $2.6 billion against those new funds. Only two of them were WisdomTree ETFs; however, the two funds we launched are Managed Futures Strategy ETFs and our Asian Local Debt funds have taken in more combined money than the new funds of any of our competitors.

In fact, our Asian Local Debt fund was the most successful new ETF launched this year gathering more than $500 million in assets to-date. This slide highlights how competitive the ETF industry is, how difficult it can be to raise assets regardless who the firm is, and again, how effectively WisdomTree is competing.

Now, it is my pleasure to introduce Amit Muni, WisdomTree's CFO.

Thank you, Jono, and good morning, everyone. I would like to begin by reviewing our overall financial results. Total revenues in the second quarter reached a record $16.7 million and increase of 79% from the second quarter of last year, and up 15% of the first quarter due to higher average asset balances.

Total expenses increased 43% from the second quarter of last year, and 12% from the first quarter. We earned net income of approximately $700,000 in the second quarter, our second profitable quarter. As you can see from these results, we are experiencing overall positive momentum in our business which is translating into continued growth in our top line revenues which we can review on the next slide.

ETF revenues increased 81% compared to the second quarter of last year to $16.5 million and up 16% from the first quarter. Our average ETF assets in the second quarter are $12.1 billion, which is up 78% from the second quarter of last year and up 17% from the first quarter.

You can see from the graph that our diversification efforts are contributing significantly to our top line revenue growth, as our non-equity products, mainly currency, fixed income, and alternative ETFs, continue to experience growth and increasing our revenues by $1.4 million compared to the first quarter.

Along with our newer products, we are also experiencing positive momentum in our equity products which contributed approximately $800,000 in additional revenues in the second quarter. We stated one of our goals was to diversify our revenue stream, and you can see these investments are beginning to pay off.

Our overall revenue capture decreased one basis point to 55 in the second quarter, due to a decrease in the fees for our India ETF. I'll discuss that in more detail on the next slide as we review our expenses.

Our total expenses increased 12% from the first quarter and 43% from the second quarter of last year. Before I go through some of the line items, let me give you some context. This quarter was a bit unusual, in that we have some onetime costs from seasonal expenses and strategically higher discretionary spending.

First the one-timers. We had expenses of $124,000 this quarter related to transferring the listing of our common stock to NASDAQ. We will have some expenses in the third quarter in the $250,000 range, but we will be -- should be complete after that.

Second, we had a onetime charge of $663,000 related to reimbursing our India ETF, for overestimating certain expenses of operating the fund. We completed the fund's annual fiscal year audit, ended March 31, 2011, and with these final audited numbers we reconciled the operating expense of the fund which is lower than projected; therefore, we reimbursed the funded difference.

This is a result of the particular fee structure we have for the India Fund and two of our other funds, where we received a fixed advisory fee and then an expense recapture fee which is variable based on the level of assets in the fund and the cost of running the fund.

As a result of assets in the fund, the variable component decreased and changed the overall fee from 88 basis points to 83 basis points effective in the second quarter and going forward. Again, we characterize this as a onetime item and shouldn't be factored looking forward.

We also have the annual rebalancing of our international ETFs in the second quarter which drove to seasonally higher fund-related costs. And lastly, we made strategic investments in our marketing and advertising spending in the second quarter to continue to support growth in our net inflows and revenues.

With that as background, let me go through some of the line items. Compensation costs decreased 12% compared to the first quarter due to lower stock based compensation and payroll taxes from vesting of restricted stock in the first quarter, partly offset by higher accrued incentive compensation due to higher net inflows.

We ended the second quarter with 61 employees, but as of today, we have 65 as we've added more headcount to our sales force to support our growth. Fund costs were up 38% primarily due to the reasons I highlighted already, as well as higher operating costs of increased average assets under management.

Marketing costs increased 40% due to higher discretionary spending for TV, print, and online advertising. Sales costs increased 23% due to increased levels of sales and product development activities. Professional fees decreased 20% due to lower listing related expenses.

Third-party fees increased 34%. As a reminder, this expense primarily reflects the net profit sharing we have with the Bank of New York Mellon for our currency and fixed income joint venture. For a period of five years, which began in January 2008, we agreed to share the revenues and any third-party costs for our currency and fixed-income products equally.

Because of the strong growth we have experienced in these products, in particular, our fixed-income products, we are earning higher revenues, but also sharing that. So [an] increase in this expense is positive, in that it means revenue from these products is growing. A much smaller component to this expense is marketing fees we paid to third-parties to sell our funds to the independent broker-dealer channel and in Latin America.

You can see from the graph our total expenses are continuing to decline as a percent of our revenues quarter after quarter, as we see the operating leverage in our business model. Our gross margins were 61% in the second quarter, which is down from 64% in the previous quarter primarily due to higher seasonality of our fund related expenses, and higher sharing from our joint venture with The Bank of New York.

Given the strong growth, we are experiencing our joint venture products a gross margin in the 60% to 61% range is more likely in the near term. Understanding this gross margin percentage will allow you to model out fund related costs.

Along with our improving financial results our balance sheet continues to remain strong, as you can see on the next slide. We have total assets of approximately $33 million, which is primarily comprised of $16 million in cash and cash equivalents, $8 million in investments, and $6 million in receivables from the WisdomTree funds for our monthly fees.

Total liabilities increased mostly from normal recurring vender payments. As a reminder, WisdomTree has no debt. We have 114 million common shares outstanding, and 137 million shares in total when you include our options in restricted stock. We also have a net operating loss carry forward of approximately $50 million.

The pie chart on the right reflects our ownership structure at the end of June. Michael Steinhardt is our largest shareholder, followed by RRE Ventures, and Flexpoint Ford. Our employees own 18% of the company which is very important, as we are all (inaudible) with the interests of all of our shareholders.

In closing, we continue to remain focused on carefully managing our cost based balance of making the right opportunistic investments to support our growth. The third quarter is starting off very well and we are already -- our average AUM is up about 10% compared to the second quarter.

Remember that we update our daily and average assets under management of average advisory fee and net inflows on the Investor Relation section of our website, so you can follow our progress.

Based on feedback that we have received from some investors and industry analysts, we will shortly be enhancing our disclosures by publishing our net inflows by fund on a weekly basis, and a summary following the end of the month.

We will also be posting historical AUMs and net inflows by funds since inception, for those who are interested. I look forward to updating you on our next call on our progress. Thank you, and let me turn it back to Jonathan.

Thank you, Amit. WisdomTree is thriving. We are executing well across all corporate functions. We are rapidly growing our market share, we are raising assets in our newest funds, and importantly, we met our goal of a NASDAQ exchange listing.

WETF or WisdomTree, is the first pure play exchange listed ETF firm. I am convinced that in addition to offering our shareholders a better market to trade and invest in WisdomTree, this listing will also raise the Company's profile which in turn should allow us to grow even faster.

Let me summarize our goals for the remainder of 2011. First, we strive for continued fast growth. Second, continue to launch innovative funds that meet the needs of investors. Three, we want to continue to diversify our product offerings. Four, continue to build brand awareness.

We are establishing a reputation for innovation and excellence, but we must continue to educate the marketplace about the benefits of ETFs and, specifically, WisdomTree ETFs.

This ends the planned portion of today's call. I think you for your interest and support of WisdomTree. We will now take your questions.

(Operator Instructions)

Our first question comes from the line of Bill Katz with Citi. Please proceed.

Thank you, this is actually [Ashley Hartigan] on behave of Bill Katz. Hi, good morning.

Good morning.

Just broadly speaking, are you seeing any signs of pricing pressure to the business? With the exception -- I know there was an adjustment to the India ETF, but --

And that was not made for any pricing pressure, just the way the fee is calculated. No, we are not seeing any pricing pressure. We have a very differentiated product set, and so where we've been priced seems to be very well accepted by the marketplace.

Though, as you are aware, there certainly is, in certain segments of the marketplace, fee competition particularly on the cap weighted side of the business. But we have found that we have no pricing pressure, and that we have priced ourselves as a low-fee firm from the very beginning.

Great. Thank you. And also, where do you see the greatest slow-growth in the next 12 months?

You know, that's an extremely difficult question to answer because it's going to be dependent upon the sentiments within the market. And that can change very, very quickly on world events. The only good think I can say is that because the product set now is so diversified, we're in a better position to grow regardless of the different market cycles.

Great. And if you don't mind, one more. Just wondering if the comp level right now is a good run rate to think about.

Ashley, the comp level is -- there is variable components to it based upon our net inflows. We had given some guidance early on in the year that we did expect stock-based compensation to decrease for the year.

So I think if you look at the full year-to-date results that'll give you some -- a good gauge of what we see going forward. The big variable piece of that is the stock-based comp. And the number that we disclosed in the earning release for the second quarter for stock based comp I think is a good number to think about going forward.

Great. Thank you for taking my questions.

Our next question comes from the line Mac Sykes with Gabelli. Please proceed. Mr. Sykes, your line is open.

I'm sorry. Congratulations, on the quarter and your progress this year. You've done a terrific job. Just to go back to this India Fund, in the release you said you did lower the fee. I just wanted to understand this process a little bit more. Is this going to be an annual true-up for -- and an audit true-up for the fund? Or, are we just looking at the base [unit] being where it is going forward?

Sure, Mac, let me try to give you a little bit of background to understand it. First of all, we're very pleased with the success of EPI. It was one of our first funds to reach $1 billion. Today it stands at about $1.3 billion. So, it's been a great addition to our emerging markets family.

EPI has some very unique costs and because of that, we set this fund up a little bit differently than some of other international funds. So we earn a fixed advisory fee of about 68 basis points, and then a variable fee of up to 20 basis points. And that's really variable based upon the asset levels of the fund, and then the cost of operating the fund.

So, the fund had completed its fiscal year. And because of the significant increase in the assets of the fund, it lowers the overall operating expense. And so, we just simply reimburse that to the fund. It was more of a one time item.

Now on a going forward basis, what you've seen is -- if you go look at our website, you see the average fee that we disclose at 55 basis points, and that's already been -- captures the fee change from 88 to 83. And, again, that's only because of the increase in assets that we've seen in the fund.

Okay. So -- does that mean as the fund gets much bigger, that would be impacted? Or, we're just now (inaudible)?

Yes, so -- the fund -- and again, it's based upon the asset levels of the fund, and the cost of operating the fund. There's always some minimum charges that we have of running the fund.

Right now it's about 83 and if the assets of the fund continue to increase significantly, that fee could decline, maybe somewhere form the 80 to the 83 range. But that actually would be a very positive thing because that means it reflects significant asset growth in the fund, and that's a great situation to be in.

But, Mac, we don't see it going below the 80 basis points regardless of how big it gets.

Okay. Terrific. And then we've had some currency movement obviously in the last couple of months here, just talking about the impact on your AUM from a weaker dollar -- just the movement and what it effects in terms of your annual AUM in your income statement.

Well since 80% of our assets are outside of the US, a lower dollar is very constructive for our assets. So, it's a great benefit in that sense. It that sense, we're very well positioned if that market dynamic plays out.

Okay. Great. And my last question is, the demand for the intentional fixed income ETFs been very strong versus the US demand, what's driving that? Is it really just a higher rate potentially?

A couple of things. It's diversifying out of the dollar. It has higher relative yields for similar durations and a sense of strong credit ratings.

Great. Thank you, very much.

You're welcome. Thank you, Mac.

Our next question comes from the line of Jason Weyeneth with Sterne Agee. Please proceed.

Thanks. Can you guys talk a little bit about how long your first mover advantage can last in a successful fund? I guess, for others with exempt of release, is it pretty easy for them to copy idea and come to market quickly with something similar, or is it somewhat longer lasting?

You've got to take it on a fund by fund basis. It's very difficult to knock off a first-to-market advantage, but it's been done in certain instances. We actually did it on Indian equities against a structured note that we came against, but usually it's a very difficult to do.

We've recently seen a number of competitors come into some of our spaces like emerging market dividends and emerging market debt and also equities where the currencies are hedged. And so far, we're maintaining our dominant positions in those places. But you can never be very specific or know for sure in advance how well the position will hold up.

Thanks. And I guess just one more. Can you talk about any progress you've made on the distribution side during the quarter? You mentioned hiring a couple people since the quarter end. Just wondering if you got any more platform placements or gained any access to new distributors that you didn't [sell through] before.

Certainly. Let me introduce Luciano Siracusano, who is the head of Sales and Distribution, as well as our Chief Investment Strategist. Luciano?

Hi, how are you? So in the last few months, we've been adding sales staff to our wirehouse channels. We've been able to hire both internal wholesales as well as external. We've also had a chance to increase the headcount on our RA support with our internal sales team.

So, we're definitely growing in terms of our capacity to help service our clients. We've also seen good progress across all channels; RA institutional as well as wirehouse. And we've been able to get deeper traction within the wires, where everyday we're getting into more ETF models and we hope to be getting on to some more platforms shortly.

Great. Thank you.

(Operator Instructions)

Our next question comes from the line of Lawrence Goldstein with Santa Monica Partners. Please proceed.

Good morning. I wonder if you would comment on two things. In the fullness of time, looking out beyond the horizon, what would you imagine or what you plan, if that's the word, or think about the sources of capital that will flow into ETFs that will enable you to take in billions per year, or more billions than recently?

And I'm also wondering being a specialty house, whether you can envision ETFs that meet -- that are set up on the basis of metrics. For example, yield -- companies that grow at least X, companies that have multiples of cash flow or earnings, companies that are owned or operated, as Murray Stahl won an award for talking about at a recent ETF conference.

First of all, let's talk about the sources of capital, as you put it. I'm assuming you're talking the potential for additional inflows. All investors regardless of size and sophistication and geography want the same thing. They want better returns with less risk.

Now ETFs lower risk because the structural qualities, the transparency, the liquidity, the tax efficiency. So for every channel, we are expecting ETFs to continue to make progress in penetrating those channels. It's in everybody's enlightened self interest to us ETFs more. And the way I view the ETF industry, we're core. We are people's core money in cost of those liquidity and transparency and tax efficiency characteristics.

In terms of some of the specialty type funds that you spoke about, we have a number of them. We have some unique yield-weighted funds. Yield ex-Financials has been a popular category. We've done equities where you've hedged out the currency. So, we've been innovative. We'll continue to look at opportunities.

That really falls just within our brought product develop program where we're just trying to be either first to market, or add choice and differentiation into the market, or do something better than a current execution.

In terms of potential additional sources, which I don't want to go into too much detail on, but one area of potentially future inflows would be international, where we've done a little bit to-date where we've cross-listed certain of our US funds internationally and have some sales agreements for Latin America, but that might be an area of future growth of inflows. Next question.

We have a follow up question from the line of Mac Sykes with Gabelli. Please proceed.

Thank you, I appreciate it. You have a bunch of new products coming to market. And when you think about creating these new products and you're sitting around thinking about it, do you think about existing demand as it stands now? Or, do you think about where you can generate products which would generate fees above your average rate?

So what I'm getting is, how you weigh the opportunities between high and low margin products in this environment?

From my personal standpoint -- and there's a lot of people that are in the room when we're doing product development -- I am not looking at the fee as a driver of the -- putting it in the product queue. We're looking at can it be better? Can it be first? Does it really satisfy investor demand?

Now I will say, after we answer the questions of, is it a good fund to serve investors well, I will also look at is a diversifier of our business. But in terms of domestic or international, if we had a great domestic idea that -- great is great, and that's what we look for.

Okay. Thank you.

We have no further questions. I would like to hand it back to Jonathan Steinberg for closing remarks.

I just want to thank all of you for your involvement, your attention, and support, and we look forward to speaking with you in 90 days. Thank you, so much. Have a good morning, everybody.

Ladies and gentlemen, that concludes today's conference. Thank you, so much for your participation. You may now disconnect, and have a great day.