WisdomTree Inc (WT) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the WisdomTree fourth-quarter and year-end 2011 conference call. At this time all lines are in a listen-only mode. (Operator Instructions). As a reminder, today's conference call is being recorded. I would now like to turn the conference over to WisdomTree. Please go ahead.

Thank you. 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 date 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 are by which] such performance or results will be achieved.

A number of risks and other factors could cause actual results to differ materially from the results discussed in forward-looking statements, included but not limited to, (inaudible) as set forth in this presentation and in the risk factors section of the most recent filings under the Securities Act of 1933 and the Securities Exchange Act of 1934. Now, it is my pleasure to turn the call over to WisdomTree's CEO, Jonathan Steinberg.

Thank you. Before I begin today's call I'd like to reference the registration statement on Form S-1 for a public offering of our common stock, which we filed with the SEC. This registration statement has not yet become effective and we are in what is commonly referred to as a quiet period. Therefore the Company's communications are restricted by securities law.

As a result, today's call will be limited to a discussion of our financial results for the fourth quarter ending and for the year ending December 31, 2011 and we unfortunately will not be able to hold our normal Q&A session. Let's begin.

Fellow shareholders, 2011 was simply our best year ever. With $3.9 billion of inflows for the year we set a new Company record. That represents 3.4% of the ETF industry's total inflows, which is another Company record.

What really set 2011 apart from other years is the completeness of our execution. From new ETFs launched successfully, to the performance of our equity funds, to the listing of our corporate stock on NASDAQ, the full team at WisdomTree executed against our plans and priorities as well as handling all unexpected events that came our way without losing focus on our day-to-day business.

The fourth quarter was solid. Inflows rebounded to $756 million or 1.9% of the industry's total. Revenues for the year were up 57% to over $65 million. The Company also reported its first full year of profitability with net income of $3 million.

Recently WisdomTree announced two new relationships, first with E*TRADE where, on a commission free basis, they will market our ETFs to their customers; and second with Western Asset Management, a division of Legg Mason. Western will act as a new sub-advisor to WisdomTree on ETFs in the international fixed income focusing on the credit space. We are very excited by these new relationships and we will update you on our progress with these initiatives on future calls.

Additionally, we are continuing to build upon our strong relative performance track record in equities. I am very proud of this performance record. 85% of our equity assets, or 76% of our equity ETFs out-performed their cap weighted or competitive benchmarks since their respective inception dates through December 31, 2011. As of January 27 we have $13.4 billion in assets.

Let's move on. On the next page let's look at our quarterly and annual inflows by category. As stated earlier, fourth-quarter inflows came in at $756 million, a strong rebound from the third quarter. As you can see, WisdomTree continued to experience outflows on our currency ETFs, but at a reduced rate compared to the third quarter. Equities, especially our dividend-based strategies, were strong in the fourth quarter with $910 million.

The chart on the right shows our annual inflows. Over the last two years WisdomTree had over $7 billion in inflows with $3.9 billion coming in in 2011. Over the full year we experienced strong growth in both our equity and non-equity ETFs.

On the next page let's look at our market share of inflows. As the inflows from the prior page would suggest, our market share numbers fell off in the third quarter and rebounded somewhat in the fourth. Both the inflows and market share numbers were adversely affected by the risk off strong dollar market sentiment which in turn hurt the performance of our emerging market currency suite and to a lesser extent our emerging market bond ETFs.

Even taking that into account, our full-year market share of 3.4% is the best annual market share in the Company's history and is in line with the long-term Company target of 3% to 5% of industry inflows.

On the next page let's look at our quarterly and annual assets under management. As you can see, we ended the year with $12.2 billion, that is up 9% from the end of the third quarter and up 23% from the end of 2010. On the right-hand side of the page you can see the dramatic growth WisdomTree has experienced over the last few years as well as the success of our diversification efforts. At the end of 2011 non-equity ETFs represented 22% of our total AUM.

Now let's look at new fund launches on the next page. This is one of the highlight areas where WisdomTree executed extremely well. The slide compares the success the 10 largest ETF sponsors had in launching new ETFs in 2011. It was a busy year; the 10 largest firms launched 95 new ETFs, the industry in total launched 231. Let's focus on the 10 leading firms.

Those 95 ETFs raised $4.7 billion; WisdomTree launched three new ETFs raising $723 million in new assets or 10% of all new money raised by funds launched last year. The third column shows how much each sponsor raised on average per new fund and, as you can see, we had a very high success rate with $241 million per new fund. In fact, only Vanguard raised more per fund launch.

If you go down the list it shows that a number of very strong competitors launched a lot of new funds but failed to raise much money. This is just another example of how competitive and challenging the ETF business is today. It also demonstrates how well WisdomTree executed. We have proven to be very selective, thoughtful and effective in launching new ETFs and we'll strive to do so again in 2012.

Now let's look at WisdomTree growth rates as it compares to other public asset managers and the leading ETF firms. On the left we show how WisdomTree grew relative to many of the leading public asset managers and you can see that in each of the last three years we were the fastest growing public asset manager by a considerable margin.

On the right-hand side we compare WisdomTree's growth in assets to that of the other leading ETF sponsors and, again, WisdomTree is at the top of the page with 23% year-over-year growth. In the past we have discussed our desire to become one of the top five firms in the US. On the next page let's check our progress.

Here you can see WisdomTree's ranking over the last three years. In 2009 we were the 11th largest sponsor, in 2010 we were the eighth, and by the end of 2011 we were the seventh. We still have plenty of work ahead of us to crack the top five, but because of the mainstream nature of our equities and the success we've had in diversifying into new asset classes we maintain that longer-term goal of becoming a top five sponsor.

On the next slide let's look at the momentum the ETF industry is enjoying and the size of the opportunity overall. This is my favorite slide. The first chart on the left shows how ETFs have grown their market share of the long-term mutual fund assets to over 10% by the end of 2011.

If you look at the pie chart in the middle, it shows in a dramatic picture how huge the opportunity is. This chart is in trillions. Over the next 20 years ETFs should reasonably become the majority of long-term assets. That means the ETF industry could have $7 trillion or $8 trillion in total assets. I am aware that this is a bold statement that ETFs could have half the long-term assets. The third chart on the right shows why this statement is credible.

Let's look at how we, the ETF industry, compete for new money. Over the last five years ETFs have taken in more than 50% of the inflows. ETFs represent 10% of the assets currently, but have taken in more than 50% of the inflows over five years. On the very far right of this page, in 2011 ETFs took in 78% of the inflows; this is the kind of dominance that will drive the ETF industry and the majority of assets.

ETFs represent one of the great macro trends in investing and, again, WisdomTree as the only public pure play is excited to be helping in telling this story.

Structure matters. As I've said before, ETFs are in newer technology that offers investors a better investing experience. The primary benefits of full transparency, better liquidity and greater task efficiency are significant. Individually any one of these would be significant, but possessing all three is an enormous advantage.

There are enormous benefits to investors who use ETFs and that truth has been powering the industry's growth. That is why I said ETFs are to mutual funds what the Internet is to newspapers.

I will conclude my portion of the presentation with an update on our strong results in January. But first, in light of the fact that we cannot hold a Q&A, I want to take a moment to address two recent developments. First, I want to mention a matter concerning Michael Steinhardt, our nonexecutive chairman.

On January 6 a Delaware court issued an opinion stating that Michael should be sanctioned in connection with his activities as a named plaintiff in an M&A class action pending before that court. This is a civil matter for Michael which does not involve trading in WisdomTree securities, nor does it concern the Company directly.

But as is always the case for WisdomTree, we strive to operate with the highest levels of transparency for our shareholders. So I want to let you know that we are monitoring the situation and we encourage you to read our 8-K, which we filed on January 17.

Secondly, on December 1, 2011 Research Affiliates filed a complaint against WisdomTree alleging that our equity funds infringe on three patents the Firm received in the last two years concerning fundamentals based indexing. We filed our legal response on January 17 and outlined our response in an 8-K filed that same day. Again, I encourage you to read it. But let me give you the essence of our response today.

Flat out, we do not believe we are infringing these patents. We engaged two prominent patent law firms who have independently affirmed this analysis. In addition, we believe these patents should be declared invalid.

Simply put, there is ample evidence that fundamentals based indexing predated these patents, including an earnings weighted index Goldman Sachs created in the early 1990s and a dividend index developed by Dow Jones and licensed to iShares in 2003.

We therefore intend to defend ourselves vigorously against these claims and we are confident in our defenses. Our legal team is focused on this issue. The rest of the management team continues to focus on growing the business.

Now let's look at our growth rate or our growth in the first quarter to date. We ended the year with $12.2 billion in assets. We have seen $553 million in positive market move and $665 million in net inflows. Remember, we did $756 million in all as Q4. So this gives us a current assets of approximately $13.4 billion, which is 10% higher than our end-of-year assets.

On the right-hand side of the page you can see that equities continue to drive our inflows. In light of this historic low interest rate environment we continue to see strong demand for our global suite of dividend-based strategies. Now it is my pleasure to introduce Amit Muni, WisdomTree's CFO.

Thank you, Jon, and good morning, everyone. I would like to begin by first reviewing our overall financial results. We achieved another strong revenue quarter year over year, with revenues increasing 21% to $16.2 million. However, as I mentioned on our last call, the third and fourth quarters were challenging market environments and because of that our revenue has declined 9% compared to the third quarter.

Our total expenses increased 9% compared to the fourth quarter of last year and declined 7% from the third quarter. We had net income of $900,000 in the fourth quarter compared to $1.4 million in the third quarter and a loss of $600,000 in the first quarter of last year.

On an annual basis we generated record results. Revenues increased 57% to a record $65.2 million, yet expenses only increased 26% and we had our first full year of net income of $3.1 million. You can see the operating leverage in our business model and our full-year results -- revenues up 57%, yet expenses only up 26%.

Let's review our ETF revenues on the next slide. As reflected on the chart on the left our ETF revenues reached $16 million in the fourth quarter. This was up from $13 million in the fourth quarter of last year due to higher average assets under management. However, ETF revenues declined compared to the third quarter due to lower average assets.

The significant volatility in the market, which led to $1.9 billion of negative market movement in the third quarter and outflows from our emerging market currency and fixed income ETFs offset the inflows and positive market movement in the fourth quarter and led to lower average assets.

However, despite these challenges we generated record revenues for the full year from a diversified product offering. Both our equity and our non-equity ETFs experienced robust growth reflecting the scale of our offerings. Our average overall revenue capture fee change to 54 basis points due to changes in the product mix and we are averaging 53 basis points today.

Now I'd like to review our expenses on the next slide. As you can see from the top left corner of the slide, our expenses declined 7% from the third quarter and up 9% from the fourth quarter of last year. Compensation costs declined 7% from the third quarter due to lower incentive compensation, and declined 4% from the fourth quarter of last year due to lower stock-based compensation partly offset by higher headcount-related costs. We have 64 employees today.

Fund cost declined 4% compared to the third quarter due to lower custody-related expenses as we renegotiated fees with our service provider, partly offset by higher auditing and legal-related expenses. Fund costs are up compared to the year-ago quarter due to higher average asset balances.

Marketing cost increased 36% from the third quarter as we increased our level of television and online advertising to support our growth. These costs were lower than the year ago quarter due to lower levels of spending because of volatility in the market. Sales costs increased over both periods due to higher levels of new product development as well as higher sales-related activities.

Professional fees were flat compared to the year-ago quarter and down 14% from the third quarter due to lower variable stock-based compensation of a lower stock price. We incurred $150,000 in legal fees related to our patent litigation. I'll speak more about litigation expenses in a few minutes.

Third-party fees declined 32% from the third quarter and increased 50% from the year-ago quarter due to changes in our average assets for our currency and fixed income ETFs, which are subject to our joint venture with the Bank of New York Mellon. You will remember that for a period of five years, which will end in March of 2013, we agreed to share the revenues and any third party costs for our currency and fixed-income products equally.

Our gross margin was 62% in the fourth quarter, up from the previous quarter due to lower joint venture expenses. We expect our gross margins to be approximately 60% to 61% in the near term. You can see from the graph on the right our total expenses are generally declining as a percent for revenues with some increases in marketing and sales due to seasonal spending. We do expect this general trend of declining expenses as a percent of revenue to continue subject to some seasonal fluctuations.

Along with our strong financial results our balance sheet and cash liquidity continues to improve, as you can see on the next slide. We have total assets of approximately $43 million which is primarily comprised of $26 million of cash and cash equivalents, $9 million in investments and $6 million in receivables from the WisdomTree fund for a total of $40 million in assets that we can convert to cash.

If you look at the liquidity chart on the bottom right-hand side of the slide, by subtracting or liabilities of $17 million leaves us with total liquidity of $24 million, which increased nearly 50% during the year. So our cash position continues to improve along with our financial results.

And as a reminder, WisdomTree has no debt. We have 115 million common shares outstanding and 137.6 million shares when you include our options and restricted stocks. We also have a net operating loss carry-forward of approximately $50 million.

Now I'd like to give you some guidance for 2012. We do not give guidance on revenue except to say it is our goal to capture 3% to 5% of the industry inflows on an annual basis. However, I would like to give you some guidance on how we are thinking about our baseline operating expenses in 2012 on the next slide.

We ended 2011 with total expenses of $62 million. We have certain one-time costs related to our NASDAQ listing and reimbursing our India ETF which totaled $1.4 million. As I've mentioned on previous calls, we have been experiencing lower stock-based compensation as majority of our employees become vested in their equity awards and we expect these costs to decline another -- by $1.4 million.

After annualizing our 2011 expenses we are exiting the year with an expense base of approximately $61 million. Because the majority of our employees will be vesting in their equity awards, stock-based compensation expense will increase as we grant new awards in 2012 to retain our employees. We estimate stock-based compensation will increase by $1.6 million.

As a result of becoming an exchange listed company, we will incur additional costs, primarily legal and accounting fees, as well as have general increases in our overhead costs which we estimate will be about $1.2 million. Our intention is to strategically invest in our business when the right opportunities present themselves.

As Jono spoke about the growth prospects of the ETF industry, we are positioned WisdomTree to be a leader in that growth. We intend to increase our investment in marketing, advertising and sales. We intend to incrementally add to our headcount, particularly our sales force and operations, and launch new ETFs to continue to diversify our product offering.

We have also established an international fund company as a steppingstone to a possible international expansion plan. We estimate the total of these investments will be an additional $2.5 million in 2012. We believe these investments will pay off by increased assets and contribute to faster growth.

So our baseline operating expense base is estimated at around $66 million. This baseline expense will change as a result of increases or decreases in our assets under management to keep our gross margins in line.

On top of these baseline expenses we expect to have two additional one-time non-operating items. The first relates to obtaining a shareholder vote from the WisdomTree ETF shareholders to allow our initial investors to decrease their ownership interest in WisdomTree. We are also seeking approval from the shareholders to allow us to change sub-advisors in the future to allow us greater flexibility. We estimate these one-time costs will be $1.5 million to $2 million in 2012.

Lastly, as Jono mentioned, we are currently involved in patent litigation. We estimate the potential legal defense costs could be $4 million to $7.5 million over the next 18 months. We will keep our investors updated on these expenses throughout the year.

So to summarize, despite a challenging second half of 2011 we put up impressive operating results -- record revenues, consecutive quarters of net income and cash flow generation -- all while carefully managing our expenses and investing in our business to increase our market share and industry ranking. So far the first quarter is looking very promising and our average assets are already up from the fourth quarter.

I look forward to updating you on our progress and taking questions on our next call. And remember, in the interim you can follow our progress on the Investor Relations section of our website. Thank you and let me turn it back over to Jono.

Thank you, Amit. In summary, we are the only public pure play in the fastest-growing segment of the asset management industry. We are the fastest-growing publicly traded asset manager for each of the past three years. We were the fastest growing of the top 10 ETF sponsors in 2011. We have a very strong mainstream defensible product set with an enviable performance record.

We've built a great brand; we have a superior business model and a truly talented operating team. Our goal for the coming year is to continue executing at these very high levels and maintain high relative growth rates by achieving our target of 3% to 5% of industry inflows.

This ends the planned portion of today's call. Again, we regret that we cannot take your questions at this time, but I look forward to speaking with you next quarter. I thank you for your interest and support of WisdomTree.

Ladies and gentlemen, this does conclude today's conference. You may all disconnect. And have a wonderful day.