WisdomTree Inc (WT) 2012 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the WisdomTree fourth-quarter earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. (Operator Instructions)

As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, WisdomTree. You may begin.

Good morning. Before we begin, I would like to reference our legal disclaimer available on today's presentation.

This presentation may contain forward-looking statements within the meaning of the Safe Harbor provisions of the US 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 time 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 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, everybody, and welcome to WisdomTree's fourth-quarter and year-end conference call for 2012. Fellow shareholders, 2012 was another record year. Our assets under management rose 50% to end the year at $18.3 billion. We had inflows in the fourth quarter of $1.1 billion and a record $4.7 billion of inflows for the year.

We also had record revenues, $23.6 million in the fourth quarter, up 46% year over year, and $84.8 million for the full year, up 30%. Pro forma net income more than tripled to $5.1 million in the fourth quarter and to $14.8 million for the full year. We also expanded our gross and pretax profit margins, key metrics which display our corporate discipline. Amit Muni, WisdomTree's CFO, later on this call will walk you through our financial statements and update our expense guidance.

We also ended our joint venture with Mellon Capital on very favorable terms. We launched two new ETFs, Emerging Market Corporate Bonds and China ex-Financials. In addition to all of the above, we also completed two stock offerings in 2012, completed our search for a new COO, and we successfully ended the patent litigation. As in prior years, it was the completeness of our execution across all business functions that defined the year. It is simply a testament to the talent and dedication of the 70-person team that WisdomTree has been fortunate enough to assemble.

2013 is off to a fast start, with almost $2 billion of inflows to date. We are having trouble updating our website this morning, but our assets under management would be approximately $21 billion, an all-time record, which is up another 15% in just one month. Yesterday, we launched our second active bond fund with Western as subadvisor, Global Corporate Bonds, or GLCB. WisdomTree is currently the second-largest player in active bonds behind PIMCO, and I expect that over the next few years, this will be an area of continued activity for our Firm.

Let's continue. It was also a record year for the ETF industry. ETFs had inflows of $55 billion in the fourth quarter. In the middle column, you can see that Equity ETFs took in $133 billion, while Equity Mutual Funds lost another $153 billion. Fixed Income ETFs took in $52 billion, or 15% of Fixed Income inflows. On the right-hand side, you can see the industry took in $185 billion. Again, this is an all-time record for the ETF industry, and represents 49% of total inflows between ETFs and mutual funds.

It's important to remember, ETFs represent only 11% of the long-term assets, so as an industry, ETFs are making tremendous progress, and we have a big runway of growth ahead of us. I'm sure everyone on this call is already aware of my strong belief that ETFs will eventually be the dominant structure in asset management.

Now let's look at WisdomTree's inflows on the next page. As stated earlier, fourth-quarter inflows came in just over $1 billion. In the middle column, you can see how our annual inflows have increased over the last four years to over $4.7 billion in 2012. Later on this call, we will put that number into better context, and compare it to other leading asset managers.

On the right, you can see how our assets under management have grown over the last few years. For perspective, just think, on March 9, 2009, during the height of the financial crisis, WisdomTree's assets bottomed at just $2.4 billion. Less than four years later, we have approximately $21 billion. We've made stunning progress as a Firm in a short amount of time. We simply have incredible momentum.

Now let's look at our inflows by asset class. As you can see, in the fourth quarter, International Equities led our inflows with $620 million. For those of you watching us closely, you know that our Japanese Hedged Equity, DXJ, is responsible for the lion's share of that number.

We continue to see strength in our Emerging Market Equity suite as well. We did experience some domestic dividend outflows, as there was tax uncertainty with respect to the fiscal cliff at the end of the year. On the right, you can see the inflows for the full year. It was just a very strong year of growth, diversified across all of our equities. While we have asserted in the past that we strive for concentration, meaning we want bigger allocations and bigger funds, we do note that the continued fast growth of DXJ has now provided us with greater balance across our Emerging, Developed, and US asset classes.

Now, on the next page, let's look at our market share of inflows. For the fourth quarter, we took in 1.9% of the industry inflows. For the full year, we took in 2.6%. WisdomTree's market share of the industry's assets is currently 1.5%, so 2.6% of inflows means we are growing our business and taking market share.

That said, market share was one of the few metrics where we missed our target in 2012. As in prior years, we've been targeting 3% to 5% of industry inflows. We continue to target 3% to 5% of industry inflows. We hope to do better in 2013, and as already noted, we are off to a very strong start this new year.

Now let's take a different look at our equity flows. This chart shows the 10 ETF sponsors who garnered the largest equity inflows. As you would expect, the big three dominate equities, but WisdomTree, with $4.7 billion, had the fourth-best inflows of all ETF sponsors, and that translated into 4% of the equity inflows. Even as we continue to diversify our product offerings, equities remain an important cornerstone of our business, with 85% of our total assets. We have a global suite of equity ETFs. We have a focus and a strength on dividend-based portfolios. We have a strength in emerging markets, and we are a proven innovator, as demonstrated by DXJ, which combines equities with a currency-forward overlay. Overall, we remain very well positioned in equities.

On the next page, let's look at the performance of our funds. This chart references our equity performance. We underperformed in our one-year numbers. To give you a little color on the one-year performance numbers, 2012 was generally a year of higher volatility, which in an environment in which higher beta, higher volatility stocks performed well. The majority of our equity funds are dividend weighted, which typically exhibit characteristics of lower volatility, so in the short term, these strategies generally underperformed. But our three, five and since-inception numbers remain very compelling.

Now let's look at our organic growth as compared to the other leading public companies and asset managers. Many of you on today's call are already familiar with this slide. WisdomTree remains the fastest-growing publicly traded asset manager, with 39% organic growth. I think this is an immensely important metric for the shareholders of WisdomTree. And as the only pure-play publicly traded ETF sponsor, we remain uniquely well positioned for equity investors who want exposure to the ETF industry.

On the right, we compare WisdomTree's organic growth in assets to that of the other leading ETF sponsors. Again, WisdomTree, with 39% growth, came in second to PIMCO. WisdomTree is very focused on organic growth, and we think it is important that we continue to grow our market share within the ETF industry.

Let's check our progress on the next page. Here you can see WisdomTree's rankings over the last four years. In 2009, we were the ninth-largest sponsor, with $6 billion in assets. In that year, we were less than half the size of Deutsche Bank, and just one-quarter of the size of ProShares. By the end of 2012, we were 50% larger than Deutsche Bank, and we were 87% of ProShares. In the very last box, we show you a more recent snapshot as of January 30. Because of our very strong start to 2013, we are continuing to make significant progress towards our stated longer-term goal of being in the top five of all US ETF sponsors.

We still have plenty of hard work ahead of us, but again, because of the mainstream nature of our equities, and the success that we've had in diversifying into new asset classes, and our general prowess in product development, we remain committed to that longer-term goal of being in the top five.

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

Thank you, Jono, and good morning, everyone. I'd like to begin by first reviewing our overall financial results. This was another record quarter and year for WisdomTree. Revenues continued to grow, reaching $23.6 million in the fourth quarter, up 46% from the fourth quarter of last year. Our pro forma operating expenses increased only 22% to $18.5 million, and pro forma operating income more than tripled from the fourth quarter of last year to $5.1 million. For the full year, revenues increased 30% to $84.8 million, yet pro forma operating expenses increased only 14% to $70 million, and pro forma operating income also more than tripled to $14.8 million.

The operating leverage in our business model has also translated to attractive margin metrics, which you can see on the next slide. Our gross margin increased to 68% in the fourth quarter, compared to 62% in the fourth quarter of last year. And for the full year, it was 66%. Gross margins were flat compared to the third quarter due to timing of tax-related payments for one of our funds. Our pretax operating margin also grew significantly to 22% in the fourth quarter from 6% in the fourth quarter of last year and 18% for the full year. Pretax margins were also flat compared to the third quarter. Our expenses are typically less in the third quarter, so the third quarter is seasonally high. The higher margins are being driven by strong revenue growth, which we can review on the next slide.

Our ETF revenues reached a record $23 million in the fourth quarter due to higher average assets under management, which you can see on the bottom of this slide. For the full year, ETF revenues increased to $84 million. You can see that this was a very strong equities year for us, particularly in emerging markets and in the US. Our average advisory fee remains unchanged compared to the third quarter at 54 basis points, and down from 55 basis points on a full-year basis due to the change in mix of our assets. As you will see when we update our website, our average revenue capture is still 55 basis points today.

Now I'd like to review our expenses on the next group of slides. First, I'd like to go through the major changes in our 2012 expenses. We ended 2011 with $61.2 million in operating expenses. Higher incentive compensation due to our strong performance, as well as additional headcount to support our growth, increased compensation-related expenses by $2.8 million. Higher assets under management increased variable fund costs by $1.9 million and non-variable fund costs by $1.2 million.

Increased marketing and sales initiatives to support our ETFs increased expenses by $900,000. General and administrative overhead expenses increased also by $900,000. Being an exchange-listed Company for a full year, and performing all the regulatory requirements, increased expenses by $600,000. Lastly, other related costs increased $500,000, ending the year with $70 million in expenses.

The next slide will go through our expenses for the quarter. I will quickly go through the expense changes compared to the third quarter, which you can see in the chart on the top-left corner. Compensation costs increased 8% due to higher accrued incentive compensation due to our strong results. We have 70 employees today. Fund costs increased 12% due to higher assets-under-management-related expenses. Marketing cost increased 89%. We typically reduce these expenses in the third quarter, and increase them to more normalized levels in the fourth.

Sales cost increased 27%, primarily due to higher levels of sales-related activities. Professional fees decreased 40% due to the end of our variable stock-based compensation costs. Third-party sharing cost increased 9% due to higher profit levels in our joint venture with the Bank of New York. Other expenses decreased 7% from lower overhead and admin-related costs.

Included in our results this quarter is the full settlement amount of $700,000 we received from ending our litigation with Research Affiliates. We've also incurred net legal expenses after insurance reimbursement of $176,000 this quarter. We also incurred expenses of $353,000 related to our secondary offering in November. On the right-hand side of the slide, you can see that expenses continue to decline as a percentage of our revenues, and we expect this trend to continue with higher assets.

Our balance sheet and cash liquidity continues to grow, along with our strong bottom-line results. We have total assets of $63 million at December 31, which is primarily comprised of $41 million of cash and cash equivalents, $11 million in investments, and $9 million in revenues from the WisdomTree funds. We had 125 million common shares outstanding and 139 million shares in total when you include our options and restricted stock.

Now I'd like to give you some guidance for 2013. While 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, due to our transparency you can follow our revenues from the IR section of our website on a daily basis. But I would like to give you some guidance on how we're thinking about our baseline operating expenses in 2013 on the next slide.

We ended 2012 with total expenses, excluding non-operating items, of $70 million. We will no longer have variable stock-based compensation, which results in savings of approximately $2.2 million. At the end of 2012, we ended our joint venture with the Bank of New York. This results in net savings of approximately $2 million based on the asset levels in our currency and fixed-income products at the end of the year.

This year, we changed our equity granting practice to one that is more normally followed in the financial service industry. In the past, we had granted meaningful equity awards when a new employee joins the Company and generally no further awards until that equity vests. This practice is typical for start-up companies. Now, employees will receive equity grants each year as part of their compensation, as opposed to once every three or four years. This change will result in higher stock-based compensation cost in 2013 and future years. As you will remember, we have been experiencing lower stock-based comp as our employees vest in their previously granted equity awards.

As a result of this change, and other compensation decisions we have already made, we expect baseline compensation costs to increase by $1.2 million. We anticipate our general overhead and administrative costs will increase by $1.4 million. Annualizing our fund-related expenses based on year-end asset levels, and taking into account other one-time items in 2012, results in an increase of $2 million.

We have always carefully balanced managing our expenses with investing in our business when the right opportunities were presented. Given the growth trajectory of the ETF industry and our own business, we believe the time is right to increase these investments.

In 2012, we gave guidance that we would invest $2.5 million back into our business. For the coming year, we intend to invest $5 million to $8 million on strategic initiatives to continue to support and accelerate our growth. These growth initiatives include expanding our marketing efforts to further support our existing and new products, and enhancing the WisdomTree brand.

Second, it includes continued product-development initiatives and new ETF launches to further our diversification efforts. Third, it includes adding to our staffing levels, particularly in sales and other functions that support our sales efforts, to continue to grow our top-line revenues. Lastly, it includes additional resources and tools for our sales force to support their efforts.

Remember that these strategic investments are discretionary, and we can accelerate or decrease them based on market conditions, as we have proven through our fiscal discipline in the past. However, we believe these investments will pay off with increased assets, and contribute to faster growth rates in the long run. This will result in 2013 baseline operating expenses of $75 million to $78 million. This baseline expense will increase from higher fund cost due to increases in our asset levels, which is more than completely offset by higher revenues. Remember, as we stated on our last call, we expect our gross margins to be between 70% and 75% based on today's asset mix, and correspondingly, higher AUM and inflows will result in higher compensation-related costs.

As we have demonstrated, there is attractive financial scale in our business model and our investments and strategic growth initiatives will not change that. In fact, we believe it will enhance it. We are revising our longer-term guidance, and believe that at $35 billion in assets, not $40 billion, we should have a 40% pretax operating margin, and we are managing and targeting our business to have amongst the highest pre-tax operating margins of all publicly traded asset managers.

Before I turn it back to Jono, I'd like to just give you an update on our results so far in January. As Jono stated in his opening remarks, 2013 is off to a terrific start. As of this morning, our AUM is at approximately $21 billion, and we generated nearly $2 billion in net inflows for the month, of which $1.1 billion came in our Japan Equity Fund, DXJ. Our average AUM is up 15% from the fourth quarter, which will further drive our revenues higher in the first quarter. You can see on the bottom right-hand side, the ETF industry has had strong inflows in equity so far.

So, to summarize, we've had another great year with record revenues and expanding margins. Now is the time to make the right investments to support our growth, and our goal to become one of the top five leading ETF sponsors. Thank you, and let me turn it back to Jono.

Thank you very much, Amit. As I noted earlier, 2012 can be characterized as a busy year of impressive execution at the corporate level. We completed several important tasks which placed the Company on even stronger footing today. And, as proven by our growth and strong results, we never took our eye off the business. Our house is in order, and 2013 looks to be a promising year.

I'd like to end by discussing a new slide which shows the top asset-gathering complexes across all ETFs and mutual fund firms over the last two years. WisdomTree ranked 26th in asset gathering in 2011, and 22nd in 2012. As I look at this list of venerable names, I ask -- what would it take for WisdomTree to become a top-20 or even a top-10 asset gatherer? The answer is, one, continued growth of ETFs at the expense of mutual funds -- that's a given. Stronger and more favorable sentiment towards equities -- I'm hopeful. Three, continued demand for dividend-based strategies -- I think the resolution to taxes on dividends at the end of the year makes this highly likely. Fourth, continued strength in emerging markets -- a given. And five, further innovation and adoption of active bonds -- I'm very optimistic.

As I see it, WisdomTree is extremely well positioned for the future. We are very well positioned relative to the other firms on this list. Our goals for the coming year are to continue executing at these very high levels, and to maintain high relative growth. We have a strong mainstream, defensible product set with an enviable long-term performance record. We have a great brand, a superior business model, and a truly talented operating team. It should all translate into an exciting 2013.

This ends the planned portion of today's call. I thank you for your interest and support, and now let's open it up to questions.

(Operator Instructions) Our first question comes from Marc Irizarry of Goldman Sachs. Your line is now open.

Great, thanks. Marc Irizarry with Goldman Sachs. Jono, in terms of this -- there is a lot of debate around the equity flows and what we are seeing, seasonality versus secular and structural. Can you just speak to what you guys see and where you guys are coming out on that and what impact, if any, that's having on the business?

It's very new. You're talking literally about just one month. There tends to be 401(k) strength in the early part of the quarter, so I would say it seems seasonal. Certainly ETFs have nothing to prove. We are the dominant play for equity, so really, the burden is on the mutual fund industry. I'm not sure I see any trends. It's certainly too early to make any conclusions.

Okay. And then just on some of the guidance and strategic growth initiatives, can you talk about the philosophy for launching funds, number of fund launches, and then if you can comment on your latest fund launch with Western, I'm curious what the fee arrangements are and how that works?

I will talk philosophically. So when we discuss fund launches, we're always trying to do something that's a first to market or something innovative, a differentiated approach so that we're adding choice to the market. We've have never launched a me-too product, so we'll continue to do that. The guidance that we've given is three to five new funds a year. For the last two years, we were on the low end of that. This year, you should expect to be at the high end of that range, so five or six funds would be -- not to be surprising. Amit, you want to --?

As far as the fee structure on the new fund, we don't disclose the fee that we pay to our subadvisors, but ETFs are generally lower-fee products, and they have to work within that fee structure.

And as you can tell, we've obviously been very disciplined in all of our business arrangements and will continue to be.

Got you. Then when you think about the number of ETFs versus the depth of the market that you are launching in, how do you -- how can you help us understand when you launch something like the new Global Bond ETF, what you think the uptake would be? And then how does the -- when you think about the five, are you launching more niches, or are these all deep markets that you're thinking about entering?

It is very hard to open up a new asset class, so Global Corporate Bonds isn't really a new asset class, but it's the first actively managed execution, so that happens to be a deep market. What I would just say is, new funds are positive. Obviously, you try to be an asset gatherer in the year that you launch them, but it's really more than just the year that you launch them. Last year we launched Emerging Market Corporate Bond, and it took in maybe $105 million in the first year. But it's not about the first year. What is it going to do in the second, third, fourth, and fifth years? So we really don't launch anything that we don't think has the ability to be a billion dollar fund.

Okay. Then, Amit, just on the gross margin guidance, I guess 70% to 75% is the range. How should we think about the way that ramps up closer to 75% versus 70%? And I appreciate any color on the overall operating leverage that you expect to see in 2013 if the current state of growth for the business continues.

Sure. So as far as gross margins, we gave that range of 70% to 75%. That's really all going to depend on mix of assets, where we see the flows coming in. On an average basis, the incremental gross margins are about 80%. Some of our funds, even larger funds, will have incremental margins close, into the higher end of the 80% range. So it really all will depend upon where we see those flows coming in.

As far as the longer-term margins, though, we've improved the guidance that we have given before. Now we believe that $35 billion will get to that 40% operating margin. And, Marc, I think you have to remember, we are in -- we are a young Company. We're in a fast-growing industry, and we're in growth mode, and we're focusing on growing that top-line revenue, continuing that long-term goal of becoming a top-five ETF player. We'll always carefully manage those investments with our bottom line results.

But you can see today, the operating leverage in the business, and these are only the early days. I think directionally, we're going to continue to head towards that 35% -- that 40% margin. And remember that as we stated before, it is the goal of this management team that we will operate and target this business to be at the highest end of all the operating margin range of all traditional asset managers.

Okay, great. Thanks.

Thank you. Our next question comes from Bill Katz of Citi. Your line is now open.

This is actually Steve Fullerton filling in for Bill Katz. Quick question. With the fee rate ticking up recently in the recent releases, I know some may be due to DXJ, where directionally should we look at the fee rate looking out '13, '14, '15?

On our website, we give you the average BPs that we collect, but we make no guidance on that. The money will flow where the money will flow. And so our domestic equities are lower-fee, our emerging markets are higher-fee, and it -- just the mix will determine it.

Okay. And can you just update as to the amount of the NOL? And just to confirm, that is after tax, correct?

Yes, we're updating that number now given it's the end of the year. Last year, it was at $48 million, and that's the after-tax amount. In our 10-K, we'll update you with what the current number is, but right now it is at $48 million.

Okay, and one more quick one. Just looking at the trends in the alternative bucket, what do you -- is there any outlook on what you guys are looking to do with those funds?

We have a few alternatives. It's an area that -- because of all of the regulatory exemptive relief that we have, it's something that we are focused on. We want to grow the existing funds, and you will see some selective launches in that space over time, but we're bullish on alternatives in the ETF format.

Okay, great. Thanks a lot, guys.

Thank you. Our next question comes from Mike Grondahl of Piper Jaffray. Your line is now open.

Thanks for taking my questions, guys. The first one, can you talk a little bit about your marketing strategy for GLCB just so we understand when you roll out a fund how you -- the different avenues that you market it?

Thank you, Mike. The -- it's not consistent across every fund. Certain themes are easier from a marketing standpoint, but we're -- we have all of our sales material, obviously, is organized. We have a very engaged database and client base that we're always communicating to, and we are supporting it with some selective advertising both online and sometimes in print and sometimes on TV. But you have to take it fund by fund. So I wouldn't make a generalization. We get behind certain funds when we see an easier, cleaner marketing strategy against that fund.

Okay. And then maybe just one more as a follow-up. The Japan Fund, DXJ, has had an amazing couple months. As a fund like that really picks up that kind of steam, do you shift gears and say, hey, now it's time to market this one, it's hot? Or how do you react to a situation like that?

So I think our execution on DXJ was very strong. We launched the Fund originally in the initial 20 funds in June of 2006. We shifted the Fund to hedge out or mitigate the currency exposure, and then we actually adjusted the underlying basket of equities to tilt towards exporters, so it became a truly differentiated Fund. In December, we saw that there was political movement that would be extraordinarily constructive, and we started, from a research side, very aggressively updating our clients as well as the media to the shift within Japan and how well it positioned DXJ for those changes.

And then as you saw that it had a very strong end of year. Now, towards marketing, we get sort of quiet as you get into the holidays regardless, and we always come back in January. So in January, if you probably noticed that, we also started to promote the fund on television and continue our online and print push and so that we tried to just max it out so that the world was aware of this unique exposure in the world of ETFs, and it now takes on a life of its own.

Got you. Hey, that's helpful. Thanks, guys.

Thank you. Our next question comes from Adam Beatty of Bank of America Merrill Lynch. Your line is now open.

Thank you and good morning. Just a follow-up question on the strategic initiatives. Appreciate your comments on the new product launches which I think are still crucial for the Firm. In terms of the other items there, marketing and sales support, maybe if you could just give some detail around, if there are channels that you are focusing on or other objectives that you have for that spend?

So again, a couple of components. We're not going to get into specifics of dollar value versus each one. I would say it's just continuing to do what we do today, which is continuing to push the brand, continuing to support our existing products and new products, continuing to add resources, technology resources and like, to our sales staff, continuing to add bodies to help grow that top-line revenue. There are maybe some small initiatives in there to look at broadening some of the distribution channels that we may have, but a lot of it is just really continuing to do what we do today but just accelerating the rate of how we support that effort.

Luciano, would you like to add any color?

Yes. I would just say that we're going to continue to add salespeople both on the outside as well as on the inside across the RA, wirehouse, institutional channels. We've already had hires this year on our Capital Markets team and on our Outside Wirehouse team. So we're definitely leaning into this year, and we want to make sure we have a full capability to take advantage of what we see out there in the marketplace.

Okay, thanks. Appreciate the color. Then maybe a follow up on the NOL. My recollection is that at a certain point, you're going to have to recognize that asset, and that's going to lead to some GAAP accounting event. Maybe give us an update on that. And my understanding is that it's based on a level of earnings beyond trace amounts. Is that a quarter-by-quarter evaluation that your accountants do or more an annual thing?

Sure. So it is -- so we have an NOL today under US GAAP. We will take that NOL in when we believe it is more likely than not that we will be profitable for the foreseeable future and be able to use those NOLs. Our auditors tell us that they generally like to see at least one to two years of solid operating earnings before you get over that more-likely-than-not threshold from a GAAP perspective. So right now, what we're doing is we're taking it in every quarter, but at some point, we will have whatever the balance is remaining when we get over that threshold, we will take it all into our income statement from a GAAP perspective. But remember, from a cash perspective, we still won't have the cash flow going out to have to pay those taxes. It'll just be a book entry.

Right. Understood. And so I guess 2012 would probably count as a year of solid operating income under that, right?

Yes. Again, we've been told it takes like one to two years, so I don't see that happening in the short term to have to take it in.

Right. Got it. Okay, thanks very much. And then, turning more towards product development philosophy, you have obviously the DXJ that has done very well, and you just launched a global fund. In terms of the trade-off between a fund that is global, go anywhere versus maybe a regional fund that can obviously benefit from a hot market at a given time, what is your philosophy around that?

You got to take each idea as its own case looking at the existing offerings in the marketplace. A regional idea can be extraordinarily large as an opportunity. A global, obviously, can be large. But you just can't look at it in a vacuum. So everything, again, it just must add choice to the market, be differentiated. We try to line up new funds with market sentiment, but that happens to be very challenging because of the laborious process it takes to actually launch funds. So market -- timing it to the moment is not the easiest thing, and we're not really -- we're trying, but I wouldn't put much hope there. So again, we just look for each opportunity. We take it one by one.

Got it. Thanks very much, guys. Much appreciated. That's all I had today.

(Operator Instructions) Our next question come from Mac Sykes of Gabelli & Company. Your line is now open.

Good morning, gentlemen. Congratulations on the results and certainly the efforts this year. I jumped on the call a little bit late, but -- and maybe you did explain this, Jono, but I wanted to get -- I was interested to get more of your thoughts. And we've seen a sharp acceleration, certainly, in the industry in the fall and then this year, but maybe you could give us some more specifics on what you are seeing in the industry now versus maybe a year ago and any nuances that you expect to continue this year.

I think the industry on merit continues to take market share against other structures. And what we do find is that particularly -- that we always meet skeptics who think it's as good as it's going to be. But I think historically, certainly in my, let's say, seven or eight years of the industry, the ETF industry itself has always been underestimated. So on merit, full transparency, greater liquidity, greater tax efficiency, no minimums, no gating, no lockups, only one share class, no incentive fees is a best of class, and on merit, we are educating all of the intermediaries and the retail investors at every level, including the media, and we are picking up steam, and I don't think this train is ever going to slow down. I think it is only accelerating. And I don't see how it is going to stop.

So we are seeing the trends. The thing that we suffer, like all asset managers, we just suffer from market sentiment. But there was a lot that was taken, a lot was done with respect to the fiscal cliff at the end of the year that was just constructive for investing in general, and there was a tremendous amount of money on the sidelines. So net-net, I am very optimistic.

Terrific. I think WAMCO received its own exemptive relief last year. Will that impact your relationship with them going forward or in terms of marketing or maybe competition for products?

I'm sorry, could you just repeat the question?

I think Western received -- Western Asset received its own exemptive relief. I was just curious if that might impact your relationship with them in terms of marketing or competition with products going forward?

So to clarify, Legg Mason, the parent company, received exemptive relief. As I understand it, the subsidiaries do have a lot of independence, but our relationship with Western is not exclusive. I expect that Western will launch funds under the Legg Mason brand, but I think that they will continue to launch funds with us as well. It is still early, so we'll see how it all plays out, but it feels like we have a strong and growing relationship with Western.

My last question. On the DXJ flows, congratulations, but can you talk a little about the diversification of those flows? Is it being driven by a specific channel or region, or just any color on how that's coming together.

This is Luciano. It's been very broad based. We're seeing tremendous interest across all the channels. There's literally been thousands of trades in DXJ in January. And one of the things that's going on is that a lot of asset managers have been under-wage paying equities for some time, so as interest comes back into Japan, folks are looking for the Japanese exposure, but they are also looking to hedge the impact of the yen. And if this is a long-term trend or even a secular trend that could last a few years, this is actually a tactical beta way to get exposure to that investment theme.

And right now, for all intents and purposes, it's the only ETF in town that gives people this exposure. So this is a fund, now, that is trading 1 million, 2 million shares a day, and it's taking on a life of its own. So I would say the interest is very broad-based, and Japan is a very large, important market in terms of global equity markets.

Just a little more color. When we launched our funds, and DXJ was one of our original funds in June of 2006, the leading fund in Japan at that time had $9 billion in assets. So today, that fund, seven years later, is maybe a little less than $6 billion, and now we are $2.5 billion. So it shows you that ETFs as an industry have grown immensely in those seven years, but Japan has actually shrunk. There is a tremendous amount of upside, I think, to the category, as Luciano indicated.

Great. Thank you very much.

Thank you. Our next question comes from Matt Kelley of Morgan Stanley. Your line is now open.

Good morning, guys. Thanks for taking my question. So I just wanted to ask a little bit more detailed question on the penetration or the uptake you're seeing by channel currently. Are there any -- where are you seeing the incremental buyer more? Is it in the retail brokerage? Is it with RIAs? Are institutions getting more involved? Where are you seeing the incremental buyer for your product?

This is Luciano again. It's really across the board. Last year was a very strong year for the wirehouse channel for WisdomTree. We got to a point where the Wirehouse team in aggregate was contributing pretty much as comparable to what the RIA team contributed, and so I would say on a relative basis last year you saw gains on the wirehouse channel. But in aggregate, we are seeing increased interest across all three channels.

We're seeing more firms with at least $1 million in WisdomTree funds, more branches with at least $1 million. The number of clients we have is increasing. The number of large clients we are having is increasing. So I would say it's just a gradual gaining of traction across the board, and as these funds take on longer histories and become larger, they open themselves up to larger interests, and including derivatives that are trading around the funds. So volume begets volume, and a lot of these funds are at all-time highs in shares outstanding, and a lot of the activity in the channels are as highest as they have ever been.

Maybe this is one more for Amit, but in terms of the margin guidance, again, I know everybody has asked the same thing here, but just taken a different way. You did between 21.5 and 22 for the quarter at a little over $17 billion AUM. Your guidance at $35 billion, you're 40%. Then taking what Jono was saying about the product launches being on the upper end this year, is it fair to assume as you hit the end of those product launches that you may get more acceleration at that point toward your margin target than you would through the first half of this year?

Again, I wouldn't focus so much on the shorter term. We've given that longer-term guidance, which we've taken down now to $35 billion in assets to get to that 40% operating margin. I think I sort of I said we're in growth mode, we want to invest in the business. You may get a little bit of noise quarter over quarter, but directionally, we are headed that way. A lot of it is going to depend upon market sentiment, how fast these funds take in money versus others. But directionally, we are headed towards that margin.

And remember, I talked to you about the gross margin, 70% to 75%. The incremental margins on that are on average 80%. Some of our larger funds are closer to the higher 80%s. So if we start to see more -- higher flows into those larger funds, that is going to improve those margins. Again, we look at it on a -- don't look at it on a fund-by-fund basis but more just the entire family.

And also, I gave you guidance for 2013, but it's not going to slow down, I don't think, in 2014. I think that over the next 24 months, WisdomTree will be more aggressive in new products than we were over the prior 24 months just as a -- because what we have also done, we've closed funds, we've repurposed funds, so the existing product suite, it is immensely efficient right now. And then we took care of all these corporate issues in 2012. So you'll just see a more aggressive tone in general in 2013, I think, and '14.

Okay. That's helpful. And then one final one for me, just on -- thoughts on product launches outside of Europe, how attractive is that? How easy is it to penetrate, and how could you potentially do that? Thanks, guys.

I'm not sure I understood the question. Please, before you get off, you said outside of Europe?

Sorry. If I did, I apologize. I meant outside of the US, thoughts towards Europe, potentially Asia longer term, where do you think it's the most attractive to enter the market outside the US?

Sure. So ETFs are not just a US phenomenon. It's a global phenomenon. And what we have done is a couple of things. One is we actually have listed about 10 or 12 of our ETFs in Mexico, and we have a relationship with the Compass Group that are selling those funds in Latin America to the institutional channel there. We've also set up a UCITS structure in Dublin, and what that will allow us to do is launch ETFs in Europe and Asia if the right opportunities presented themselves. It's a low cost to keep that going, but it gives us the option to do something. Right now it is on hold, and we're just seeing if the right opportunity comes up for us to really turn that on. I would say probably, if we were going to -- I don't want to say Europe, but we're probably leaning more towards Asia, I would imagine, if we were going to do something overseas.

We still evaluate it quarter by quarter, and because we're making so much progress quarter by quarter, maybe our tolerance for investment might change over time, but at the moment, we are still very, very much focused on the US market share.

Great. Thanks, guys.

Thank you. Our next question comes from Todd Wachsman of Morgan Stanley. Your line is now open.

Hi. Good morning, gentlemen, and congratulations on just an outstanding quarter and year. A couple of questions. First, I'd like you to talk a little bit about your progress in the 401(k) space and really trying to get the ETFs within that space.

Secondly, with regard to the Japan area, might it make sense to do something with the yen in DFJ? Just a thought. And lastly, the advertisements for DXJ, which we always see on CNBC, I don't know if you guys know this, but it's gone completely viral on YouTube. It's so far seen like 137,000 views for that, which I thought was impressive. But anyway -- that was basically my question with regard to 401(k) and 401(k) market share growth and the maybe potentially hedging the yen in the Japan SmallCap.

Hi. Well, thank you for the questions, Todd. This is Luciano. With respect to 401(k), 401(k) represents about 1% of our ETF assets, so we are seeing some good progress there. We made good progress in 2012 in terms of expanding the number of 401(k) record keepers and 401(k) ETF-enabled custodians that can work together in an end-to-end solution that then allows other folks who are interested in getting into the 401(k) market using ETFs within that system to expand their businesses.

And so we are talking to other money management firms out there that use ETFs as part of their models, helping to educate them about how to get greater traction utilizing this broader 401(k) system. So I would expect continued progress in that channel, but again, it's a very small percentage of our overall assets today.

With respect to hedging out other currencies in other parts of the world, that is something we're always evaluating. We're always interested in feedback from clients, particularly in areas of the world that could benefit from a weakening currency that was being hedged by our ability to use forwards inside of (inaudible) products, so we will certainly consider that around the world where it makes sense.

With respect to social media, that's been a big initiative of the marketing department over the last year, and we're starting to see some really interesting, as you mentioned, viral repercussions to it. We are blogging on a regular basis, and we're also getting our content out into broader social media forums, including, from your own attestation, YouTube. We are certainly encouraged that the DXJ TV ads are seeing that afterlife within the free media.

Thank you. I think that's really just incredible, and keep up the good work. I look forward to see what you guys come up with next.

Thank you very much. We appreciate your support.

And our next question comes from Dan Weiskopf of Forefront. Your line is now open.

Actually, thanks very much, guys. My questions have been asked.

All right, Dan.

Thank you.

Are there any more questions? Well with that, I think we just want to thank you again for all of your support and interest in WisdomTree, and we look forward to speaking to you in a few months. 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.