WisdomTree Inc (WT) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the WisdomTree second-quarter earnings call. At this time, all participants are in listen-only mode. Later, we will go on to the question-and-answer session, and instructions will be given at that time. (Operator Instructions). As a reminder, today's call is being recorded.

I would now like to turn the conference over to WisdomTree.

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 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 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 would 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 the Risk Factors section of 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 CEO Jonathan Steinberg.

Thank you, Stu. Good morning, and welcome to WisdomTree's second-quarter conference call. Fellow shareholders, the second quarter of 2012 was a challenging one from a macro perspective; but, again, WisdomTree executed well across all functions. We ended the quarter with $15 billion in assets; we had $338 million of inflows; we did achieve record revenues of $20.4 million. Of real importance, we also achieved record pro forma net income of $3.1 million, when you back out one-time proxy-related expenses. Our market share of inflows for the quarter was 1.6%.

In light of the fact that domestic fixed income represented 90% of total industry inflows, we did very well where we have competing product. Lastly, our insurance carrier agreed to reimburse a significant majority of our litigation expense. Later on this call, Amit Muni, WisdomTree's CFO, will walk you through that, plus all of our financials.

On the next page, let's look at the factors driving our assets under management. We ended the first quarter with $15.7 billion in assets. We -- as already mentioned, we took in $338 million in new money, but suffered $1 billion of negative market move, and ended the second quarter with $15 billion in assets.

On the right, you can see that world equity markets experienced market declines, especially outside of the United States. In the pie chart below, you can see that 83% of WisdomTree's assets are in equities, and 55% of our assets are in equities outside the US.

Now let's take a closer look at industry inflows on the next page. The industry had $20.7 billion of inflows for the second quarter, which is a decline of 61% from the first quarter, and a decline of 29% from the year-ago quarter. On the right-hand side, you can see that, in addition to the flows being down, what did come in was very narrowly focused. Again, as mentioned in the press release, domestic fixed income represented 90% of total industry inflows.

On the next few pages, let's analyze WisdomTree's inflows. As we reported, our inflows in the second quarter were $338 million, and $2.6 billion for the first half of the year. This page is familiar to our investors and self-explanatory. Later in the presentation, we will discuss how these numbers compare to other leading asset managers. But now, let's take a closer look at inflows by category on the next page.

I want to draw your attention to the second quarter. Here you can see how we got to $338 million of inflows. We experienced modest outflows in currencies and alternatives and US equities. Emerging market equities continued to lead our inflows, with $462 million. On the right-hand side of the page, you can see our first-half inflows. These were dominated by equities; but nicely diversified between US, emerging markets, and international.

Now let's look at our market share of inflows on the next page. In the second quarter, we had 1.6% of the inflows. And for the first half, we achieve 3.6% market share of industry inflows. We continue to target 3% to 5% of the industry inflows.

Now I want to take a look at one of the factors driving our equity inflows -- the performance of our equity funds. The top chart shows the percentage of our equity funds that are beating their respective cap-weighted indexes. As you can see, in the 1-, 3-, and 5-year, as well as since their respective inception dates, at least 70% of our equity ETFs are beating their respective cap-weighted indexes or competitive benchmarks. These are awesome performance numbers. We know this is an important point of distinction for WisdomTree, and is a significant or major factor in our value proposition to our customers.

The bottom pie chart shows the percentage of assets under management invested in our equity funds on June 30, 2012, that were in funds that outperformed their cap-weighted or competitive benchmarks for the above periods. The performance track record of our ETFs is an asset that is growing in value as our track record lengthens, and should help us in attracting more investor interest overall.

Now let's look at how the top 10 sponsors rank in the inflows by category. As you can see, Vanguard led inflows in the quarter, as well as total inflows -- I'm sorry, Vanguard led equity inflows in the quarter as well as total inflows for the quarter. iShares lagged equity inflows at the bottom, with outflows of $6 billion, but managed to come in second overall by leading in fixed income.

WisdomTree's had the fourth-best equity inflows in the second quarter, with $500 million; and the fifth-best overall inflows. For the first half, the story is much the same. WisdomTree had $2.7 billion in equity inflows, ranking fourth; and, again, fifth-best in overall results.

On the next page, let's look at WisdomTree's relative growth rates versus the other leading public asset managers, as well as the leading ETF sponsors. Here we are comparing year-to-date organic growth rates. Organic growth is defined as net inflows over the starting AUM. As you can see, WisdomTree's inflows in the first half of the year were so strong that we led all public asset managers by a wide margin.

And on the right, you can see we also lead the top 10 ETF sponsors in organic growth. This slide tells two important stories -- first, the ETF secular growth story continues, with ETF firms significantly outpacing their traditional mutual fund firms. As you can see, the ETF industry's average organic growth rate was 7% compared to 0.4% -- essentially, 0% growth on average -- for the traditional public asset managers. This quarter, even the best-in-class competitors, like T. Rowe Price and BlackRock, posted mixed results. While there will be short-term aberrations, we believe this trend is well-established and will continue.

The second point is, within the fast-growing ETF industry, WisdomTree is growing faster than the industry, at 22% versus the industry average 7%. So the ETF industry is growing faster than mutual funds, and WisdomTree is growing faster than the ETF industry. I believe this is an important slide for WisdomTree shareholders. It demonstrates that we are benefiting from the secular growth of ETFs. And within our industry, we are well-positioned to continue growing our market share.

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

Thank you, Jonathan, and good morning everyone. I'd like to begin by first reviewing our overall financial results for the second quarter and half-year. Despite the challenging market, our revenues reached a record $20.4 million in the second quarter, primarily due to higher average assets. Remember that we earn our revenues based on average assets under management during the quarter, not end-of-period assets.

For the first half, revenues increased 27% to nearly $40 million. Expenses, excluding the costs related to our patent litigation; ETF shareholder proxy; and initial exchange listing fees, increased 26% from the second quarter of last year, and were essentially flat compared to the first quarter. On a year-to-date basis, pro forma expenses increased 16%.

Pro forma operating income reached $3.1 million, which is a 69% increase from the first quarter, and $5 million for the first half of the year. As we demonstrated last quarter, the operating leverage in our business model is beginning to emerge -- strong revenue growth, controlled expense increases, and margin expansion, which you can see on the next slide.

Our gross margin, which is our total revenues, less fund-related and third-party sharing expenses, increased to 67% in the second quarter. This is primarily due to the changing mix of our assets that are part of our joint venture with the Bank of New York, as well as reaching pricing benefits with our third-party service providers.

Our pre-tax operating margin is also growing as we are gaining scale. Pre-tax operating margin was 15%, which is within the guidance we have given investors at $15 billion of average AUM. The higher margins are being driven by strong revenue growth, which are on the next slide.

Our ETF revenues reached a record $20 million in the second quarter. This was up from $16.5 million in the second quarter of last year, and $19 million from the first quarter, due to higher average assets under management, which you can see on the bottom of the slide. On a year-to-date basis, ETF revenues increased 27% to $39.2 million, due to strong growth in our equity ETFs.

Our average advisory fee was 54 basis points in the second quarter, which was unchanged from the first quarter, but down from 55 basis points in the second quarter of last year, due to change in the mix of our assets. Our current average revenue capture in the third quarter is 53 basis points.

On the next slide, we can review our revenues in more detail. You can see on this slide that our differentiated product offering in emerging market and international equities, as well as international fixed income, were the major drivers of higher revenues in the second quarter. For the first half of the year, US and emerging market equities were the major contributors of revenue growth.

You can see from our results, overall market sentiment in any particular category will continue to have an effect on our revenues and inflows. However, our differentiated approach and continued product innovation should help us compete in different market cycles.

Now I would like to review our expenses on the next group of slides. First, I'd like to go through the major changes in our pro forma expenses from the first quarter. We incurred higher payroll taxes in the first quarter due to our secondary offering and annual bonus payment. We also had a charge related to terminating a marketing agreement. We did not have these two expenses in the second quarter. We also had lower stock-based compensation, due to equity awards to our employees that vested in the first quarter.

In the second quarter, we recognized the benefit of renegotiating certain fees with the Bank of New York. Offsetting these decreases was higher incentive compensation and headcount-related expenses, to reflect our growth in the first half of the year. We also incurred higher professional fees, primarily executive recruiting fees, for our previously announced search for a Chief Operating Officer.

We also typically incur higher fund-related costs in the second quarter due to the annual rebalancing of our international ETFs. We also had higher spending on marketing and sales initiatives. Lastly, we had higher general and administrative costs, primarily office space we assumed during the quarter. Those are the main drivers that get to essentially flat expenses from Q1 to Q2.

The next slide goes through our expense line items. I'll quickly go through the expense changes from the second quarter of last year, which you can see in the chart on the top left corner of this slide. Operating expenses, compared to the second quarter of last year, are up 9%. Compensation costs increased 19%, due to higher stock-based compensation, as well as headcount to support our growth. We have 66 employees today.

Fund costs decreased 3%. Included in the second quarter of last year was a nonrecurring charge related to reimbursing excess fees collected from our India ETF. Marketing costs increased 14% due to higher levels of advertising activities. Sales costs decreased 8% due to lower product development-related expenses. Professional fees increased 45% due to executive recruiting fees. Third-party sharing costs decreased 19% due to lower AUM in our joint venture with the Bank of New York. Other expenses increased 47% due to higher overhead expenses.

The main takeaway when you look at this slide is emerging leverage in our business model. As a percent of revenues, expenses are continuing to decline as we gain operating scale in the business. This trend should continue with rising assets, subject to some seasonal quarterly fluctuations. Along with strong financial results, our balance sheet and cash liquidity continues to improve, as you can see on the next slide.

We had total assets of $59 million at June 30, which is primarily comprised of $39 million of cash and cash equivalents; $10 million in investments; and $8 million in receivables from the WisdomTree funds. We had 123 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 carryforward of approximately $50 million.

Now I like to update you on our litigation and proxy. In the second quarter, we reached an agreement with our insurance carrier, where they will cover a significant majority of our legal defense costs related to our patent litigation with Research Affiliates. Since this lawsuit started, we have incurred approximately $1.5 million in legal costs that are subject to coverage. And we have recorded a $1 million credit this quarter to reflect the insurance coverage, less any deductibles we have to pay.

Beyond that information, we have no material updates to report regarding this litigation. We are in the discovery phase, and still feel very confident in our defenses. Our estimate of $4 million to $7.5 million in total defense costs, before insurance reimbursement, through the first half of 2013, remains unchanged. Also this quarter, we incurred $3.2 million in expenses related to our proxy of the WisdomTree ETF shareholders. On June 29, a significant majority of the ETF shareholders voted in favor of the proposals. We still have some more work to do to get all the ETFs done, and have scheduled an additional Shareholders' Meeting on August 8 for the remaining ETFs. We expect to incur an additional $200,000 to $300,000 in expenses in the third quarter to complete the proxy.

Now I'd like to give you an update on our results so far in the third quarter. As of this morning, our AUM was $15 billion. You can see that inflows have accelerated so far this month as compared to the second quarter, with equities leading the inflows. The ETF industry has taken $5 billion, and you can see US fixed income flows have turned negative. So despite the challenging markets, we have strong financial results, record revenues, and expanding margin. The insurance reimbursement will significantly offset the defense costs we will have going forward, and we are nearly done with the proxy. We are demonstrating the power of our business model through improved margins and bottom-line results.

Thank you, and let me turn it back to Jonathan.

Thank you, Amit. In summary, I just want to remind investors of a few points. Our product strategy is key to our current and future success. We have never launched a me-too product. We have a highly differentiated set of ETFs, and our performance record is an asset that is growing in value.

The ETF phenomenon is disruptive. The ETF industry is experiencing secular growth that will continue uninterrupted as investors get better educated on the benefits of ETFs. And lastly, the third quarter, though it's early, is off to a promising start.

With that, I end the presentation. I want to thank you for your interest and support in WisdomTree. And let's now open this up to questions.

(Operator Instructions). Marc Irizarry, Goldman Sachs.

Great, thanks. Hey, everybody. Just in terms of the gross margin --continues to march higher here, could you give a sense of where the upside could be here if we are in a continued market environment like we're in now? And if things actually improve, if you will, how should we think about where that gross margin could end up?

Sure. There's two components in that. The first is, how much of our AUM is part of the joint venture. And as you can see in this sort of market environment, we're seeing much more stronger flows then on the equities, and that's been benefiting the gross margin expansion; along with just the higher assets that we have, in reaching the pricing benefits that we have with our third-party service providers.

In this market environment, I would expect to be closer to that 67% that you saw in the third quarter. On an incremental basis, on average, our incremental gross margins are about 70%, on average. So we should continue -- with higher assets, we should continue to see growth in that gross margin. As a reminder, the joint venture that we had with the Bank of New York ends in 2013, and we'll be renegotiating that arrangement. And that should, also, hopefully will be a catalyst to expanded markings as well. So I would say, the 67% that we reflected in the third quarter is a good number right now in this sort of market environment.

And then, John, could you talk about the trade-off between market share gains and just being on the leaderboard of market share, if you will, versus the margin in the business, and how product launches play into that? And maybe -- I don't know if you have a long-term margin target, like if you think about the levels of AUM again, where -- how should we just be tracking, thinking about the operating margin versus the market share gains?

Before I do your -- the first part of the question, Amit, why don't you answer the longer-term margin part?

Right, on the pretext margins, the guidance we have given investors is that, how does our margins -- our pre-tax operating margins scale? At about $40 billion in assets under management, based on the sort of current mix we have today, we believe our operating margin will be closer to 40%. So, again, another way of thinking about it is, a T. Rowe Price, a BlackRock -- the leaders in operating margins in the traditional asset management group -- we can reach those same pre-tax operating margins that they do, at a significantly -- at a fraction of the assets that they have. And that's really the power of the ETF model and our business model.

So Marc, let me just talk about your question -- I think it really deals with the number of new fund launches, the marketing spend, the headcount. And we have, over the last couple of years, taken a very conservative approach to all of those elements, in light of what we felt were very constrained, muted investor interest. Not just in WisdomTree, but inflows in the aggregate in traditional mutual funds and ETFs are very muted. And so in that light, we've been very, very conservative. We are always looking at the question about, are we finding the right balance between growth and investment? And we're looking at, as a potential catalyst for changing our stance, the upcoming election. It might be a catalyst for greater inflows for investors; greater participation to equities versus fixed income. And so we have our decision tree and we could step it up if we wanted to. But I think, particularly using hindsight, we've been appropriately conservative. We have given guidance that we're going to launch 3 to 5 funds a year in this environment. We did not launch a new fund in the second quarter. I expect to have launched a new fund in the third quarter, probably again in the fourth. So we'll probably do three funds, plus 1 repurposed fund, this year. So I think that answers your question.

Yes, definitely. And then there's been some discussion about changes in regulations for SEC lending. Can you remind us, is that impactful for you? I guess there's a bigger question, in terms of your European business or building a business outside the US, which I think maybe you put on a laundry list of priorities at some point. Is the issue at SEC lending revenues, is that pertinent to you, or the way you think about the strategy of building internationally?

Not at all. We don't earn any revenues from SEC lending. That benefit goes right to the shareholders of the WisdomTree funds. So we don't get any benefit of that. So that doesn't really affect us. And as far as how we think about internationally -- again, that benefit would fall to any shareholders that we would launch internationally as well, so it wouldn't affect our business.

Okay, great. Thanks.

Mike Grondahl, Piper Jaffray.

Yes, thank you for taking my question. Jonathan, can you update us on the competitive environment, kind of what you're seeing there? And then, have you given any thought to maybe launching more than 3 to 5 funds a year? As you guys have gotten a little bit bigger in terms of number of funds and AUM, is there any strategy to leverage that size a little bit and just create a few more alternatives, if you will, or funds, for existing customers who are in there that are looking for different options?

First, the general environment -- in certain segments it's very, very competitive. I think investors are very aware of the price competition that's taking place on cap-weighted antiquities equities between Vanguard, iShares and State Street. There has been a lot of new funds launched year to date and last year; and a decreasing amount of assets, and on average, going into new funds. The market is having trouble absorbing all of the new funds. Just as a reminder, there are about 1500 ETFs launched in the United States, and 25% or 30% of them have $10 million or less in assets. So, again, in this muted investor participation-type market, we've taken this very conservative approach to new fund launches.

And we are willing, in a different scenario, a different market sentiment, to be more aggressive. But what we don't want to do is get ahead of it; increase significantly our expenses and falter in some way. One of the things that -- we want to continue to try -- market move is market move, and nobody can predict that. But we want to continue to -- whatever ability we can control, show improving margins quarter to quarter.

Okay. And then maybe just as a follow-up, does seeing all the flow into those domestic fixed income funds -- have you thought at all about throwing a fund in that category? Is there anything you can do there, or are you pretty much happy with your mix today?

No. I mean, listen, when you talk about -- we are -- we're not a startup any longer. We're six years old. So we are building out our product set. You can't do everything -- you have to prioritize. No one knew, in hindsight, how strong domestic fixed income would be inflows; and, quite frankly, how long this trend of inflow strength would continue. We are looking at, and have made, a lot of effort in our fixed income offerings over the last couple of years. In the first quarter, we launched our first dollar-denominated emerging-market bond fund, EMCB, with Western. So we're expanding into credit.

So we are looking to do more. We think there's a very big opportunity in fixed income. What's interesting about the inflows and fixed income in mutual funds, it's mostly all active. And in ETF fixed income inflows, it's almost all index based. We're one of the leaders with PIMCO in active fixed income. We think there is a big opportunity for WisdomTree in either rules-based active fixed income or structured active fixed income, like we've done with our sovereign debt funds, as well as just pure active with Western.

So we are looking for more opportunities. I don't want you to think that we're ever satisfied. But I will say, don't expect that WisdomTree will have an offering in every category over time. It's probably -- it's not necessary. An ETF investor looks at the ETF world as a giant menu, and you don't have to get all of your executions from one provider. And what we won't do is launch a me-too product, and then have to compete solely on price.

Got you. Thank you.

Steve Fullerton, Citigroup.

Hi. Thanks for taking my question. Just noting the decrease in the fee rate, in the week ended 7/20, to 53 basis points. Can you guys go into the dynamics there? And if this is something we should look at as we go into 3Q?

The fee decline really is just a factor of changing mix of our assets. That will be the only thing that really drives the changes that you see in our fee structure. If we see more flows going into a higher-priced fund, the overall fee rate will go up. If we see it coming into more on the US side, or a lower-priced fund, it will drive the overall average lower. So it's really just a function of market sentiment and where the flows are going.

And just to add on that, we're not trying to manage it. Investors will put their money where the money goes. But, to our credit -- I hope you feel, at least we're showing you what that number is on our website on a daily basis, so you're not surprised.

Great. And then I noticed some of the headcount additions. Where were those focused? And what is your guys' outlook as far as distribution?

So, where we've been adding headcount is predominantly in our sales function; a little bit in our back office operation, but it has predominantly been in our sales function. And you can see, over time, if you go back and look at our history, we've been incrementally adding to our headcount. You don't see massive changes in our headcount. And on a going-forward basis, I think that trend will continue. And we're not going to get ahead of ourselves. We're going to carefully and incrementally add to our headcount, predominantly to help grow that topline revenue. So it will just be small increases on a going-forward basis.

And just, again, in terms of our outlook, we have a very much a decision tree approach to how we will build out our infrastructure. And I think really, internally, we are looking to see how the election plays out, which I think will give a clear choice to investors on how the economy will grow, and how investors will -- how aggressive investors will be about putting new money to work. We're watching this election very carefully to see if we should step stuff up.

Great. Thanks.

Jason Weyeneth, Sterne, Agee.

Thanks. I just had a question -- when you think about the pool of assets that sits in cap-weighted funds, and the strategies that you offer your funds, what percentage of that pool do you think is longer-term focused investors, versus those that are using ETFs more as trading vehicles? I guess I'm trying to get a sense of how much growth you can drive by market share gains of the current fund lineup, as opposed to being too focused on launching new funds.

Hi, this is Luciano Siracusano. The way we look at it -- by and large, our clients really are more long-term investors. We're not really targeting the trading community. I think when the long-term investors build out their asset allocation, they're looking for ETFs that give them broad asset coverage of an asset class. And that is really where WisdomTree, I think, has the most upside. A good example would be emerging market equity this year. We've done very well in attracting emerging market equity inflows in broad asset classes. And the percentage of our capture of that category, year to date, in terms of net inflows, is much higher than our overall average firm-wide, across the complex.

So I would say, certainly, for US equity; for equity income; for emerging market equity; and emerging market fixed income, those are big asset classes that we have the potential to take in significant percentage inflows in absolute numbers in the years ahead. And that's been guiding our product development thinking. And, frankly, it's been guiding where we've been focusing on the existing funds, in terms of our sales, marketing and research efforts.

And just to add on to that -- so, yes, we are competing with cap-weighted equities within the ETF format. But we're also competing with active equity mutual funds for those new dollars. WisdomTree approach allows us to compete both with a Vanguard on one end, and all of the leading active mutual funds on the other end. Another question?

No, that's all. Thanks.

Mac Sykes, Gabelli & Company.

Good morning, gentlemen. One quick question, and then one follow-up. Are you locked into Western for future co-branded income funds, or could you use other firms?

We are not locked in. We have flexibility in what we're doing.

Okay. And then, are you seeing any changes with the regulatory authorities, in terms of the approval process? Any of the dynamics that may go into your into that, for ETFs -- acceleration, or a certain narrowing of requirements. Any color on what you're seeing there would be great.

I would say that, if anything, it's getting more difficult. The length of time for new sponsors to enter the market has been maybe extended, not decreased. So the regulatory environment has been quite a challenge. But since we already have such broad regulatory approval, it's probably an advantage for us. But I can't guess how long this tone with the SEC will last. But it has been going on for quite some time.

Thank you.

Adam Beatty, Bank of America Merrill Lynch.

First quick question, topside on market share; you make your share flows at 1.6%. Do you have your share of AUM? I think it's probably a little bit less than that.

Our percentage of AUM market share is about 1.3%.

Right, so you're still gaining share, basically?

Absolutely. Even this quarter was a growth -- gaining market share. And certainly, year-to-date is gaining market share.

Got it, thank you. And just one question on flows. I noticed that the US equity category actually turned to outflows in the quarter, which certainly is not unusual within the industry. But, previously, you guys had a pretty remarkable record of having inflows. Just wanted to get any color, or your thoughts on that.

It's minor; really not much color to add, other than it is what it is. It just wasn't a robust quarter for equities in general. I wouldn't read much more into it than that.

Okay. Some of your -- the way that you do some of your rules-based US equity seems like it might have underperformed a more momentum-driven market in 1Q. Do you think that had any effect?

Well, last year, the dividend funds generally outperformed cap-weighted. In the first quarter, there was rotation in the sector, so the more aggressive sectors outperformed in Q1, including technology. So the dividend funds did lag in Q1, but they also took in very strong inflows in Q1. In Q2, they actually outperformed, because the market was in the selloff mode. So sometimes there's a little bit of lag. But I think, generally, what happened was people took profits after a very strong first quarter, and they redeployed it into US fixed income.

Got it. Thank you. That's very helpful color. Just maybe one or two for Amit. In terms of the margin -- and I appreciate the guidance around the $40 billion AUM level -- and you mentioned that being a distinctive aspect of the business model. There are active managers with the $40 billion or less in AUM who have margins up around 40% as well. I was wondering if there's something a little bit incremental to that, in terms of having a better incremental margin at the $40 billion level, or something that makes your business model more distinctive?

If you think about our cost structure, we don't have any of the key man costs or risks of having a star portfolio manager. Our funds are predominantly rules-based. Think about the infrastructure that's needed for an ETF sponsor. We're built off of the built backbone of the exchange industry. We don't have any of the technology infrastructure to worry about -- protecting customer data, customer service infrastructure. So the types of trading that we do are different. So just the key aspects of an ETF sponsor is very different than that of an active manager. And that is what we believe is one of the key differentiators to help us drive that margin growth.

So, would you -- (multiple speakers) Sorry, go ahead.

Just to add, I mean, if you are asking, is a 40% pre-tax margin the ultimate? The number we gave you was for $40 billion. But I guess, internally, we discuss -- what size AUM number do we have to put forward where we start -- if we were to talk about $100 billion, do you think it would be higher than 40%? Yes, we do. But to talk about $100 billion in assets when we only have $15 billion, seems a little bit far ahead of ourselves.

Got it. That's exactly where I was going. Thank you, Jonathan. And then finally, maybe for Amit again, in terms of the insurance payout, it seems like some of that this quarter was a little bit in arrears. Do you expect more of a pay-as-you-go kind of repayment from the insurance company going forward?

Yes, exactly. That's what you saw. So we reached an agreement in the second quarter. So what you saw was sort of the catch-up for everything that, all of the -- we had about $1.5 million, cumulatively, in reimbursable costs that we could apply to that for insurance, less any deductibles. So now, going forward, it will be a sort of pay-as-you-go.

And the deductible -- is that for the life of the litigation? Or is there a periodic deductible?

It's for the life of the litigation.

Got it. Thank you very much for taking all my questions. Appreciate it.

Dan Weiskopf, Forefront.

Thanks, guys. My question is in regard to your -- actually, two questions. My question is in regard to your website. I actually go back to the website at least once a week, sometimes more often. For competitive reasons, I'm not sure you'd want to do this, but there was some talk about breaking down the flows when you report them by category, whether it's EM currency, US equities, international. Are you still thinking about doing that?

Dan, yes we are still thinking about it. But right now, we're in the process of revamping our website. We're transitioning. One of the benefits we get of listing on NASDAQ is that they do offer things to do on an IR website. So it's prioritizing that with all the other enhancements that we're doing with our website. So unfortunately it's taking a little bit longer than I would like. But that's the eventual goal, to get that done.

And, arguably, I'm not sure you'd want to do it, for competitive reasons as well. But everybody knows the flow, so maybe it's not a big deal. The second question that I had -- you're doing a lot, and I think that's great. Is there any further progress in bringing on somebody to support you, Jonathan? Bruce Williams --

I guess you're referring to the COO search.

Yes.

And so the COO search -- thank you for this question -- is well underway. We've met numerous, many, outside candidates; as well as evaluating some internal candidates. And I'm highly confident that by the next phone call this will be resolved, that we'll have made the announcement of the new COO.

Okay, thank you.

Howard Rosencrans, Value Advisory.

Thanks, guys, and congratulations on strong progress in a tough environment. Can you give me some color on what the associated launch costs are, on a per-fund basis? And a little more color on your enhanced marketing effort? And the latch-on to that, associated with the new funds, would be by -- previously, when you've launched funds, you've had some good success out of the gate, in having an institutional presence where there is $40 million, $50 million, $60 million, $70 million that sort of get kicked off out of the gate in the first few days. Are you willing to launch funds if you don't have that in place?

I'll take the first part, Howard. So it costs us about $175,000 to launch a domestic fund; anywhere from $225,000 to $275,000 to launch an international ETF, depending if it's the developed world or emerging markets; and maybe a little bit higher than that, if we are doing something that's alternative.

And those numbers don't include marketing costs. They are really, at the moment, similar to some of the other questions about spend. There's no plan for a more aggressive spend until we evaluate how the election goes. But, in terms of launching, yes, we would launch a fund with less money than that. I think the norm is around $5 million in seed. So as an example, if you go back to January of last year, we launched managed futures with $5 million in seed. So we're willing to -- and, so -- I'll leave it at that. But, obviously, you're trying to round up as much interest, pre-launch, as possible.

Okay. I'm a little confused by your election comments. Is there a preferable outcome you have? Or you just want to wait and -- I'm not sure what visibility or -- the world's going to get better when -- I'm a little confused as to what you're implying about the election, one way or the other.

I believe that you're getting a real choice on the economy between the two candidates. And so, I think that there will be market reaction, depending upon who wins. So I'll just leave it at that.

Okay, fair enough. Thank you very much.

Todd Wasserman, Morgan Stanley.

Hi, good morning everyone, and congratulations on a very good quarter in a tough environment. Just a couple questions -- the first one regarding 401(k)s. What progress are you making within the 401(k) framework to really market your ETFs there and progress more into the wirehouse channel, as I know you're starting to do in the RIA channel? The second question, basically, is a question I asked before. When might you consider a common stock dividend? Thank you.

Hi, this is Luciano. Let me address the first part of it. So on the 401(k) side, we have made progress, in the last six months, getting onto additional recordkeeping platforms. We had -- originally had an agreement with the census; we've since expanded that to several others. And we've been able to, basically, create and end-to-end solution now, including an ETF-enabled custodian that gives RIAs and other consultants in the business a way to get ETFs into their retirement plan businesses; and, in some cases, in a way that doesn't require them to convert their recordkeepers.

So we are making progress there. We're starting to see increased interest, particularly with the disclosure that came out this July in terms of fee disclosure; there's more transparency, now, that's being put into effect. And that's going to have an impact on the industry, particularly by the end of this quarter. So we would hope to see flows accelerate.

On the wirehouse aside, we had the best six-month period we've ever had on the wirehouse side, in terms of net inflows. There were more than $1.2 billion of our total net inflows to date have come in the wirehouse side. And that reflects the investment we've made on that side, not just in people but also in terms of the relationships at the home offices; getting onto platforms; and we're starting to see some terrific traction in that part of the business. I certainly give credit to James DeNitto, who is our national sales manager on the wirehouse side; and to Joe Windish, who handles our home key office relationships there.

In terms of a dividend policy or a cash policy, we only relatively recently turned cash-flow-positive. We have about $35 million net cash today. We know that, at some point, we would have trouble investing cash or cash flow into the business. But, today, we're still not ready to commit to a dividend strategy. But we are looking at it. And, obviously, we'll give guidance as things develop. But I don't want to, again, get ahead of ourselves. So the cash at the moment is a benefit. It gives us cushion. It gives us security and some optionality, both for an international expansion and maybe small acquisitions. So we're building our cash at the moment.

And one last question just regarding product -- would you consider getting into the municipal space? Do you see any value there?

The US fixed income is a tough space to enter, because the fees are so low and because most of the major asset classes have already been covered. We're always going to be taking a look at what we can do on the active side. And, certainly, if there is a way to do active municipal, I think that's something we could explore.

And we are exploring. But, again -- just as Luc said -- it is crowded and difficult, but it does help that we now have an expanded, subadvisory relationship with Western.

Okay. John, thank you very much.

Oh, thank you very much.

(Operator Instructions). I'm showing no further questions at this time. Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day.

Thank you, everybody.