WisdomTree Inc (WT) 2012 Q1 法說會逐字稿

Good day, everyone, and welcome to WisdomTree's first-quarter 2012 earnings conference call. At this time all lines are in a listen only mode. (Operator Instructions). As a reminder, this conference is being recorded.

I would now like to turn the call 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 and should not be read as guarantees of future performance or results and will not necessarily be accurate indications of whether or not where the terms 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 including, but not limited to, the risks set forth in this presentation and in the Risk Factors section in the Company's annual report on Form 10-K for the fiscal year ended December 31, 2011.

Now it is my pleasure to turn the call over to WisdomTree's CEO Jonathan Steinberg.

Good morning and welcome to WisdomTree's first-quarter conference call. Fellow shareholders, the first quarter of 2012 was simply our best quarter ever. We ended the quarter with record inflows of $2.3 billion, with records assets of $15.7 billion and record revenues of $19.2 million.

We continue to execute well across all functions as demonstrated by our first-quarter results. In addition, our market share of inflows was 4.4%. $1.1 million of net income was achieved by driving our revenues higher and managing our expenses appropriately. Later on this call Amit Muni, our CFO, will walk you through our financials in greater detail.

In addition, we launched the fourth most successful new ETF in the first quarter, emerging market corporate bonds. Lastly, we completed our secondary offering, which further establishes WisdomTree as the only public pure play in the ETF space. The offering has allowed us to significantly broaden our institutional shareholder base, which was one of our goals for the offering.

On the next page, let's look at our quarterly inflows by category. First, as stated earlier, first-quarter inflows came in at $2.3 billion, that is $600 million or 35% higher than our next best quarter, which was the second quarter of 2011. On the right-hand side you can see the composition of flows.

We experienced very strong inflows into our equity ETFs. We took in $1.4 billion in emerging market equities, almost $600 million in US equities and over $300 million in international equities. The vast majority of our equity flows were in our dividend-based strategies.

Let's look at how our flows affected our assets on the next page. We ended the first quarter with $15.7 billion in assets, which is up 29% sequentially and up 39% year-over-year. On the right-hand side of the page you can see that in addition to inflows we experienced $1.2 billion of positive market move, which contributed to our growth in assets.

Now let's look at our market share of inflows. As we reported, our market share for the quarter was 4.4%. As the chart on the left shows, and as I have cautioned investors in the past, quarterly market share can be volatile as market sentiment can shift suddenly towards different asset classes like they did in the third quarter of last year, as you may remember, away from currencies in that case.

On the right-hand side, we look at our annual market share relative to our first-quarter results and investors can see that we are off to a very strong start to the year. We continue to target 3% to 5% market share of inflows.

On the next couple of charts we put WisdomTree's success into context within the broader ETF industry. One industry comparison we look at is the success of new funds launched by each ETF sponsor. In total the industry launched 74 new ETFs, raising an average of $15 million per fund.

In terms of the pace of ETF launches this is similar to last year's pace. What is different is the distribution between the sponsors. iShares launched 47% of all new funds in the first quarter. This is a very aggressive step-up by the industry leader. They averaged $17 million per fund, which is in-line with the industry average.

PIMCO has launched very successfully an ETF version of their flagship Total Return mutual fund. It is the most successful new ETF launched this year. This is a huge positive for the ETF industry. It brings a lot of attention to ETFs in general. It also shows the potential of active ETFs, and it must add additional pressure on other traditional mutual fund firms to enter the ETF space.

WisdomTree launched one new fund in the first quarter, raising $60 million, or 4 times the industry average. As mentioned earlier, that makes EMCB the fourth most successful new fund launched in the first quarter.

We continued to be very focused and selective in launching new ETFs. It remains a priority to continue to launch truly differentiated first-to-market funds.

Now let's look at some comparisons between ETFs and mutual funds on the next page. Over the last five years ETFs have taken in 50% of the inflows. Remember, ETFs only have 10% of the combined long-term assets, so 50% is extraordinary growth. In the first quarter ETFs took in 33% of the new money. Again, relative to our 10% of long-term assets, it is a tremendous growth rate.

Digging a little deeper, when you look at inflows between equities and fixed income, additional insights can be gleaned. In equities ETFs have had positive inflows in each of the last five quarters. For mutual funds they experienced outflows in four of the last five quarters and outflows over the last 12 months.

In fixed income, mutual funds have enjoyed greater success. I believe that the significant tax advantages equity ETFs maintain over equity mutual funds accounts for this distribution pattern. The $64,000 question is what will happen to equity ETFs and equity mutual funds when sentiment eventually shifts from favoring fixed income to favoring equities? It is my strong expectation that when this happens, the overall market share numbers for ETFs will rise significantly.

Let's look at the combined first-quarter inflows for the top 20 fund families. First, Vanguard had an extraordinary first quarter. Their mutual funds led all inflows. Their ETFs were the second-best asset gatherer.

It is interesting that four of the top 10 families were ETFs. I must say I am proud and excited that WisdomTree broke into the top 20 for the first time, coming in at number 18. This chart dramatically shows how well WisdomTree is maturing and scaling, and gives a sense of what we are capable of.

On the next page let's look a little closer at just the ETF sponsors. WisdomTree had the fifth most success in terms of inflows in the first quarter. On the right-hand side, you can see that this was good enough to give WisdomTree the second-fastest growth rate of the 10 largest ETF sponsors.

Let's check out our ranking on the next page. You can see how WisdomTree's ranking has been going up over the last few years. We ended the year at number seven. And if you look at how we compare at the end of the first quarter relative to Deutsche Bank and ProShares, you can see that it was a very productive quarter for us.

I want to reaffirm WisdomTree's longer-term goal of being a top-five ETF sponsor. I know we have a lot of work ahead of us to achieve that goal, but because of the mainstream nature of our equities, plus our success in identifying first-to-market nonequity strategies, I remain optimistic.

Now it is my pleasure to turn the call over to Amit Muni, who will walk you through our financials.

Thank you, and good morning everyone. I would like to begin by first reviewing our overall financial results. The record net inflows we experienced in the quarter, together with positive market movement, helped us to achieve a record quarter. Total revenues in the first quarter are $19.2 million, which is up 32% from the first quarter of last year and 19% from the fourth quarter.

Our total expenses on a GAAP basis were $18.1 million in the first quarter, which is up 26% from the year-ago quarter and 18% sequentially. On an adjusted basis, excluding the costs related to our patent litigation, ETF shareholder proxy, and initial exchange listing fees, our pro forma operating expenses were $17.4 million, which is up 14% from the first quarter of last year and 24% from the fourth quarter.

Our GAAP net income was $1.1 million, and our pro forma operating net income was up 78% to a record $1.9 million. You can see the attractiveness of the platform in our business model. Compared to the fourth quarter, revenues are up 19%, operating expenses up only 14%, and our operating net income is up 78%.

I will go through the main drivers of our revenues and expenses in a few moments, but I first wanted to review our key margin metrics on the next slide, which also reflects the attractiveness of the business model.

Our gross margin, which is our total revenues, less fund-related and third-party sharing expenses, was 63% in the first quarter. That is up from the fourth quarter due to the change in mix of our assets and lower expenses for our joint venture with the Bank of New York Mellon for our currency and fixed income ETFs. As we continue to gain scale and grow our assets, I would expect to see continued improvement in this gross margin going forward.

Our pretax operating margins are also growing as we are gaining scale. Pretax operating margins were 10%, which is within the guidance we have given investors. Our business model is benefiting from the positive market environment which is reflected in our growing margins.

With rising AUM, I would expect continued improvement in these margins. To remind investors, we have given operating margin targets of 10% in the average $15 billion AUM range, 20% in the $20 billion range, and reaching among the highest levels of the traditional asset managers once we get closer to $40 billion in average assets under management.

Now I would like to review our revenues on the next slide. Our ETF revenues reached a record $19 million in the first quarter. This was up from $14.3 million in the first quarter of last year and $16 million from the fourth quarter, due to higher average assets under management from our strong inflows and positive market movements.

Our average advisory fee was 54 basis points in the first quarter, which is unchanged from the fourth quarter, but down from 56 basis points in the first quarter of last year due to change in mix of our assets.

You can see from the dark blue in the chart that the robust growth we experienced in equities contributed significantly to the growth in revenues, which you can see in more detail on the next slide.

With the exception of our currency ETFs, all categories experienced revenue growth compared to the first and fourth quarters of last year. In particular, as you can see in the blue and green portions of the graph, the record flows we experienced in our dividend-based emerging market equity and US ETFs contributed the majority of our revenue increase.

So our diversification strategy is working in that we have products that should grow in different market cycles. And we are continuing our product development activities to build upon this strategy.

Now I would like to review our expenses on the next group of slides. First, I would like to go through the changes in our expenses at a high level compared to the fourth quarter. After adjusting for litigation costs, our operating expenses grew by $2.2 million from $15.1 million in the fourth quarter to $17.3 million in the first quarter, primarily from five major items.

First, the growth in our assets under management increased the variable costs associated with operating our funds, which increased expenses by $692,000. All this increase is obviously fully offset by the nearly $3 million in additional ETF revenues we earned.

Second, we have seasonal expenses related to payroll taxes from 2011 year-end bonus payments, which are made in February.

Third, we incurred a one-time charge of $384,000 related to terminating our relationship with Advisors Asset Management. You remember in 2010 we entered into an arrangement with AAM, where they would market our ETFs in the independent broker dealer channel. We felt this was a cost effective way for us to market into a fragmented channel that we had not historically focused on.

After reviewing the relationship after a year we felt we could better market into this channel cost effectively now with our expanded sales force. So we have this one-time charge based on the assets AAM had raised.

Fourth, we had an increase in stock-based compensation due to new equity awards granted to employees as part of year-end compensation.

And, lastly, we incurred $316,000 in payroll taxes for options exercised in our secondary offering. I don't believe we will have such a high expense in the near future for option exercises, so this is another one-time item. Those are the main drivers to get us to the $17.3 million in expenses in the first quarter.

On the next slide we go into a little more detail on the expense line changes compared to the fourth quarter. As you can see on the chart on the top-left corner of this slide, compensation costs increased 24% from the fourth quarter due to the payroll tax and stock-based compensation items I spoke about. We have 64 employees today.

Fund costs increased 11% compared to the fourth quarter due to higher average assets under management. Marketing costs increased 7% from the fourth quarter as we increased our level of television and online advertising to support our growth.

Sales costs decreased 13% from the fourth quarter due to lower product development-related expenses. Professional fees were flat compared to the fourth quarter, as higher legal and auditing costs as a result of becoming an exchange listed Company were offset by lower business consulting expenses.

Third-party fees increased 43% primarily due to the one-time termination charge for AAM I discussed, as well as lower expenses for our currency and fixed income joint venture with the Bank of New York.

You will remember that for a period of five years we agreed to share the revenues and any third-party cost for our currency and fixed income products.

You can see from the chart on the right that as a percent of our revenues our expenses are continuing to decline as we gain operating scale in our business. This trend should continue with rising assets, subject to some seasonal quarterly 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 $51 million at March 31, which is primarily comprised of $32 million of cash and cash equivalents, $10 million in investments and $7 million in receivables from the WisdomTree funds. We have no debt.

On the top right-hand side of this slide I want to walk you through the major changes in our cash and liquidity. Our cash increased by $6.5 million this quarter, primarily from the net proceeds of $4.3 million from the secondary offering; $2.6 million from our operating activities due to our strong results; $1.6 million from the exercise of options, partly offset by $1 million used to repurchase shares from our employees for payroll taxes for investing in restricted stock; and $1.1 million used to purchase investments with our free cash.

If you add our investments and receivables from the WisdomTree funds, less our liabilities, results in nearly $32 million in liquidity for us.

We have 121 million common shares outstanding, and 139 million shares in total when you include our options and restricted stock. We also have a net operating loss carry forward of approximately $50 million.

Now I would like to update you on two items. The first relates to or ETF shareholder proxy solicitation. As we have previously disclosed, we have commenced a proxy solicitation of the WisdomTree ETF shareholders. We are doing this because under the Investment Company Act our investment advisory agreements with the WisdomTree ETFs could be automatically terminated if Michael Steinhardt's ownership in our Company falls below 25%. When this occurs, we are required to obtain the approval of the ETF shareholders to continue as an investment advisor and earn our revenues.

Since Michael currently owns 25.5% of our Company, it makes sense for us to start this process now, since he will likely fall below that 25% level if he were to sell or donate any of his WisdomTree shares, or if we were to issue shares in the future.

Since we are already started the proxy solicitation we decided to also seek approval to change subadvisors if needed. If we obtain this approval now we will be in a better position -- we will be better positioned to change subadvisors with minimal cost in the future.

And, lastly, we are asking for approval to make the fee structure of three of our ETFs consistent with our other ETFs. We are increasing our estimated costs from our previous guidance to $2.5 million to $3.5 million, which will be incurred primarily over the second and third quarters. We will do everything we can to manage this cost.

Second, I wanted to give you an update on our patent litigation. As we have previously reported, last December Research Affiliates commenced a lawsuit against us alleging that the fundamentally weighted investment methodology we use for our equity indexes infringes on three of their patents. We continue to believe we have strong defenses in this lawsuit, and we have filed a motion to dismiss the case.

No material events have happened since we last spoke in January, and we are awaiting the court's decision. Discovery has commenced and there is no change in our estimated legal costs. We will keep you up-to-date on these expenses throughout the year.

Now before I turn it over to Jonathan to summarize, I wanted to give you an update on our results so far in the second quarter. As of this morning, we had approximately $15.7 billion in assets under management. That was slightly down from where we ended the year due to negative market movement, despite $175 million in inflows.

Even though AUM is slightly down, our average AUM is up about 8%, so our revenue should be higher if this trend continues. You can see from the chart on the right we are continuing to see very good inflows into our emerging market equity ETFs, despite the industry experiencing nearly $2.5 billion of outflows, primarily in equities.

So just to quickly summarize our financials. We had solid results and are starting to demonstrate the benefits and operating leverage in our business model through improved margins and strong cash flows. We will continue to focus on topline revenue growth and prudent cost management.

Thank you. Let me turn it back to Jonathan.

Thank you, Amit. I will be brief. It was another very strong quarter for the ETF industry. WisdomTree remains well-positioned within the fast-growing ETF marketplace as the only pure play public company. Again, we reported record revenues, record assets and record inflows.

I want to thank you for your interest and support in WisdomTree. And it is now my pleasure to open this call up to questions.

(Operator Instructions). Mike Grondahl, Piper Jaffray.

Thank you, guys, and congratulations on the quarter. Just a question -- Jonathan, you mentioned the acceleration from iShares and kind of PIMCO, and you guys had launched a real successful fund. Do you worry at all that you need a little bit more quantity out there in terms of new funds, or how do you gauge that?

A very good question, thanks, Mike. Well, first I referenced the increase in activity for iShares, not for PIMCO. PIMCO also launched only one fund like WisdomTree. I can only speculate what iShares is doing, which as the firm that has roughly 50% of the assets and $3.7 trillion in assets overall, having a very large tail of small funds is not really a burden for them.

So they have a different business model. I think that they're making it much more difficult for additional firms to come into the industry by sucking up seed, taking up shelf space and being third and fourth to market in many categories.

That really just is not a productive strategy for WisdomTree, and it doesn't seem to us that it is holding back our growth. So it is something that we discuss -- what we have targeted, three to five new funds a year, and I think we are very comfortable with that strategy.

Got you. That is helpful. And then, secondly, what are you hearing from your customers? Are they wanting more funds from you guys or wider kind of selection or are they happy with what you have?

This is Luciano. I think they're happy with what we have. Part of the challenge for us is familiarizing them with funds we already have in the market. And so we are -- if we ever get word that there is a fund that they really want that doesn't exist, we certainly take a look at creating that.

But for the most part, our challenge is showing them how our funds work within the investment themes that they are already seeking. And I think that is where we are getting the traction. I think people are understanding how the WisdomTree funds are different from the other funds in the marketplace. And how the funds we have that are clearly differentiated and really are the only option in the marketplace, I think those funds are also starting to get more attention from our customers.

Okay, great. Thank you guys.

Bill Katz, Citigroup.

This is actually Steve Faucher on the call for Bill. I just want to get an idea, with you guys outlining how well you have done in equity, is that going to guide you guys to do more new product offerings in equity, or is that not the way your guys process would work when thinking about new products?

This is Jon. First, we have a very broad equity lineup as it is, so we are very well-situated in the equity space. But we have filed what is public for one equity fund, China ex-Financials, and also another bond fund, Brazilian Bond.

So we are selectively launching and we are not -- it is not -- these trends of inflows, they can change very quickly. So we're just continuing trying to diversify the business model, fill out any holes that we have, but again be very selective and focused in what we do launch.

Okay, great, and then just one follow-up as well. With AUM climbing, just thinking about margins and thinking about expenses, what should we expect from comp moving forward? And when thinking about margins and your guys goals, what line should we be looking for on the expense line?

Hey, Mike, this is Amit. Obviously, that you will continue to gain leverage, particularly in our fund-related costs as our assets continue to grow.

But I will just reiterate those longer-term margin targets that we have talked about. At the $15 billion of asset average levels, we should be in the 10% range. Once we get closer to the $20 billion in average assets we can get closer to that 20% margin range.

So you will see a little bit of movement here and there in certain line items. Overall, our expenses are going to continue to decline as a percentage of our revenues as we continue to gain scale.

Great, all right, thanks.

Cynthia Mayer, Bank of America Merrill Lynch.

Hi, good morning. Can you talk a little bit about the subadvisory agreement you have with Western? I see you launched the EM corporate bond ETF, but do you envision doing others together this year? What is the timing and what the a financial arrangement?

I will take the financial arrangement part. We have not disclosed what that arrangement is; it is confidential. But, obviously, it has to be within the fee structure of an ETF, so it is not generally that different from our other subadvisory relationships that we have today.

And when we initially struck the agreement with them, it was anticipated that we would continue to build out fixed income on the credit side with them. So that is really our intentions that there happened to be some opportunities that we see on the credit side of fixed income and they would be our expected subadvisor.

So does that mean you will be doing any more this year, do you think?

Yes, we do expect to be doing some more this year, yes.

Okay. And in terms of the performance, it looks like the percentage of funds outperforming the benchmark has fallen from something like 76% to 62% this quarter. What deteriorated, and what impact does that have on flows, is it a similar dynamic to mutual funds or do ETF buyers really pay less attention to relative performance?

Well, what happened in the quarter, risk was on. You had a very strong equity marketing in Q1, led by tech, so dividend paying stocks overall underperformed the market. So that contributed to some of the relative changes in the performance numbers. But don't forget, that was after a very strong year in 2011 where the dividend payers outperformed materially.

So I would say that performance is always important, but there is other reasons why people are buying our funds, particularly on the equity side. And sometimes they are buying them for income. Sometimes they are buying them because they hedge out the currency exposure in a certain region. Sometimes they are buying them because they're the only option in terms of getting a particular asset class exposure.

So these numbers fluctuate, but over time these are still very competitive numbers when you're talking about 71% of the $12.8 billion invested in our 34 equity ETFs. We are in funds that have outperformed their capitalization weighted or competitive benchmarks through that date from their respective inceptions.

So I would stack that performance record up against any active mutual fund manager, and I think it is something we can certainly be proud of.

Okay, great. Maybe one more just in terms of the margins. In terms of the asset-based expenses, including payments to advisers, are there any breakpoints we should know about? I know that BNY Mellon payments go down, but are there any others where assets increased so there would be breakpoints at some point, for instance, to Jeremy Siegel?

No, so our biggest fund -- the Bank of New York is our biggest vendor that we have that operates the funds. And those are the ones that have the breakpoint fees that are based on asset levels. Professor Siegel's arrangement is just a compensation arrangement that we have with him. It is not based on assets or anything.

Oh, it is not based on assets. Okay.

No, not at all. The variable component that you see associated with him is stock equity awards that we had given him in the past. And that is a variable stock-based compensation, so that will move in line with our stock price. That is the only -- that is tied to our stock price, not tied to AUM levels.

Okay. And maybe one last one, which is you mentioned the two ETFs you have filed for, and they're both emerging markets. Do you expect you will do any more US equity ETFs? And how do you differentiate yourself in that market which seems more crowded?

Beyond what we have publicly filed for, product development is one of the few areas where we have to be careful about our transparency. So really we don't want to comment beyond what we have publicly filed.

Got it. Thanks a lot.

Mac Sykes, Gabelli & Co.

Good morning, gentlemen. It is Mac Sykes. First, you have my deepest sympathies for the Lavine family. I know he is a very good guy.

Thank you.

I understand that Legg Mason has filed for its own exemptive relief. Would that impact, or any the approval there affect your work with Western going forward?

I am not sure. We're very -- we seem to have a very strong relationship with Western. I am sure Western was aware of Legg Mason's initiatives. But we seem like we are in in a very good place with our Western relationship.

And then just more broadly on the subject of exemptive relief, have you seen any signals of the regulatory authority to suggest the process is getting any faster or slower or any different? Just any color on that would be great. Thank you.

It remains a very challenging process to launch new funds. And we have not seen any improvement in the speed with which it takes to launch funds.

Thank you very much.

Todd Wasserman, Morgan Stanley.

Hi, good morning. Congratulations on an excellent quarter. I think you guys are really doing a great job.

Two basic questions. First, we are very big fans of the whole dividend family of ETFs, specifically the dividend ex-financials ETF. My first question is what are you considering in the dividend ex-financials space?

My second question is what -- and this is a corporate question -- what level would your assets under management in total have to get to where you might start paying a common stock dividend?

In terms of the dividend ex-financials, we have two -- US dividend ex-financials and international ex-Financials that -- we are very excited about both of those.

We have filed for China ex-financials. We think that is a very attractive way to approach the Chinese equity market. It will be a very differentiated fund. That is one of our next funds, and we have publicly filed for that.

In terms of a dividend, certainly at some point the business will have scale to a degree where it will be hard to reinvest the money in the core business and you'll have opportunities to pay dividends or buy back stock. But at the moment I don't know what that number is. It is a little bit early for us to start contemplating that as we have just recently turned profitable.

Okay, and one last question. I have seen a lot of demand for dividend paying items. There is an asset class -- you know, royalty trust, there has been a lot of issuance here. Would you guys consider putting an ETF in that space that might own something like -- I don't want to get into specific securities, but when you see a lot of issuance of some of the royalty trust that drill for natural resources in the ground?

Sure. This is Luciano again. We have taken a look at the royalty trust, the Master Limited Partnerships, over time, and we -- it is always a complicated asset class to work with because of the tax reporting that is involved.

There have been other products that have come to market. And once you have seen the horse leave the barn and other products scale and taking billions of assets and have a million of trading volume it always makes it difficult to be the number two player in that space.

So at this point we haven't filed for anything. It is not too close the door forever; our product development team takes a look at all good ideas. But at this point we think people are pretty happy with the kind of dividend streams they're collecting from the common stocks through the traditional 1099 structures.

All right, thank you very much, guys.

Mike Grondahl, Piper Jaffray.

Just to follow-up, Jonathan, maybe for you. Any surprises so far in 2012 or opportunities that you hadn't thought about maybe at the beginning of the year?

In terms of from the beginning of the year, not really. We really seem to have a strong sense of how the industry is playing out. Really very few surprises over the last few years actually. So, no, no surprises really.

Okay, thank you.

At this time I am not showing any further questions. I would like to turn the call back over to management for any further remarks.

I have no further remarks. I just want to thank all of you for your time and attention. And we look forward to speaking with you next quarter. Thanks.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone have a great day.