WisdomTree Inc (WT) 2014 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the WisdomTree second quarter earnings conference call. (Operator Instructions) As a reminder, this conference call may be recorded. I would now like to introduce your host for today's conference, WisdomTree. Please go ahead.

Thank you. 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 US Private Securities Litigation Reform Act of 1995. Forward-looking statements generally can be identified by the use of forward-looking terminology, such as, believe, expect, anticipate, and similar expressions suggesting future outcomes or events.

Such forward-looking statements reflect our current expectations regarding future events and operating performance, and speak only as of the date of this presentation. Such forward-looking statements are based on a number of assumptions, which may prove to be incorrect.

Forward-looking statements involve significant risks and uncertainties, should not be read as guarantees of future performance or results, and will not necessarily be accurate indications of whether or not, or the times that are by which, such performance or results will be achieved. A number of risks and other risk factors could cause actual results to differ materially from the results discussed in forward-looking statements, included, 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, 2013.

Now, it is my pleasure to turn the call over to WisdomTree CFO, Amit Muni.

Thank you, Stu, and good morning, everyone. On today's call, I will review our operating and financial results for the second quarter, update you on WisdomTree Europe, discuss guidance for the second half of the year and, lastly, update you on our results so far in the third quarter. Jon will then make some closing comments before opening it up to Q&A.

So, let's begin on slide three by reviewing the US ETF industry statistics for the second quarter. As you can see on the chart on the left, industry flows rebounded to nearly $57 billion from the low level seen in the first quarter. The middle column chart reflects the flows by category and, as you can see, all asset classes experienced inflows, except Japanese-focused equities. In the far right column, you can see that Japan equity market was up 4.9%, and the yen weakened slightly against the dollar.

As the next slide reflects, our operating results mirrored these industry trends. We had net inflows of $300 million in the second quarter. The net number was low, as we experienced outflows of $1.3 billion in DXJ, and another $300 million in our emerging market (technical difficulty) fixed income and currency ETFs. However, on the positive side, we had $1.9 billion of inflows, primarily into our European-themed and India ETFs. A core part of our strategy is to continue to build out our product line so we have the right ETFs that meet investor demands in different market cycles. Our results in the last two quarters reflect the benefits of that strategy, when you look at our gross inflows, not just our net inflows.

Turning to the next slide, you can see the strength we demonstrated in the European category. We were the third-best asset gatherer in this category, and our market share increased, compared to the first quarter, to 19% of the flows.

Our Europe Hedged Equity Fund, HEDJ, gathered $716 million of inflows in the second quarter, nearly double what it gathered in the first quarter. HEDJ is just another example of our product innovation, as investors turn to WisdomTree when looking for hedged equity strategies. In the middle chart, you can see the flow rankings for the US ETF industry; and on the right, our market share of the total US industry flows, with and without the exchange.

As the next slide reflects, our first half net outflows caused us to have negative organic growth, when you compare us against the publicly-traded asset managers and the US ETF industry participants. While the ranking improved from the first quarter, we are still very disappointed with this statistic. We are still feeling the effects of the negative sentiments towards our largest exposures. However, we continue to have a long-term view of our business and the long-term opportunities for these asset classes.

On slide seven, we show you how our ETFs have performed, relative to their peer groups, as categorized by Morningstar. These comparisons take into account fees and transaction costs and reflect how our equity, fixed income, and alternative ETFs have performed against actively managed, and indexed mutual funds, and other ETFs. In evaluating the performance of these funds, you can see in the far right column, that since their respective inceptions, 56% of our ETFs outperformed their peer group. Put another way, 82% of the approximately $33 billion invested in our ETFs were in these peer-beating funds.

Now, let's turn to the financials, beginning on slide nine. Despite the challenging market, we continued to generate solid financial results. We recorded record revenues of $44.1 million in the second quarter, an increase of 18% from the second quarter of last year.

Pre-tax income was up 65% to $20.1 million. For the first half of the year, revenues increased 31%, and pre-tax income was up an impressive 82% to $36.6 million.

We have broken out the results of WisdomTree Europe's on the next few slides, so it's easier to compare our results to prior periods. US listed refers to the old WisdomTree, which are the results of our US listed ETF business, which makes up the vast majority of our financial and operating results.

Turning to slide 10, you can see how our average mix has changed. The hedged equity category mix and revenues declined, as a result of outflows in DXJ, yet a slight increase in our emerging market mix offset the revenue decline. This is primarily due to the strong inflows we experienced in our India ETF EPI.

We also continued to experience steady revenue growth in the International and US categories quarter-after-quarter. Our average revenue capture remained at 51 basis points; however, because of the strong demand we saw in our India fund, which carries a 83 basis points fee, our average rate increased to 52 basis points in the third quarter, as you can check on our website every day.

On the next slide, we can review our key margin metrics. Gross margin for our US listed ETF business increased to 82.4% in the second quarter. This was due to cost savings from transferring our fund accounting, administration, and custody services from Bank of New York to State Street, which took effect on April 1. In the chart on the right, you can see our pre-tax operating margin increased to 49.4% for our US listed ETF business, and 45.6% on a combined basis with our European operations. To the right, you can see the first half of the year, our margins increased to 44% for the US listed business, and 42% on a combined basis.

Our pre-tax margins were particularly high this quarter, as we significantly reduced compensation costs, as a result of reflecting net outflows for the first half of the year, so I caution you not to extrapolate the second quarter margin.

Next, we will review expenses on slide 12. First quarter total expenses were $26.4 million. We incurred expenses of $818,000 in deal-related expenses in the first quarter for our acquisition of Boost. Compensation costs decreased by $2.3 million due to lower accrued incentive compensation, as a result of reflecting net outflows for the first half of the year, partly offset by higher headcount-related expenses.

We realized $1.8 million in savings from the transition to State Street. Marketing- and sales-related spending increased by $449,000, and other fund-related costs increased by $301,000, due to listing of new ETFs. Included in the quarter was $1.1 million in expenses for our European operations. Lastly, the Europe business incurred a final $692,000 in deal-related closing costs. We ended the second quarter with expenses of $24 million.

As slide 13 reflects, we continue to carefully manage our cost base yet make the right investments in the business, as our expenses continue to decline as a percent of revenues. You can see our compensation costs declined significantly, as a percentage of revenue, and are 18.8% for the first half of the year, below our [previously target range], because of the net outflows we had in the first half. We still expect our compensation costs to be between 20% and 23% of revenues for the full year, assuming flows normalize, but closer to the lower end of that range.

On the next slide, we can review our balance sheet. We have total assets of $179.8 million at the end of the quarter, which is primarily comprised of $128.8 million of cash, and $12.2 million in investments. You can see from the two charts on the right, our continued revenue growth and the leverage of our business model translates into powerful cash generation, ending the quarter with $128 million in working capital and $141 million in cash [and in] investments. Building our cash and having the dry powder will allow us to be aggressive and opportunistic as we see an open-ended run rate for growth ahead of us. Once we generate excess cash beyond our investments' needs, we would look to return capital to our shareholders in some fashion.

Now, I would like to update you on our European business. We closed on our acquisition of Boost in April and renamed the company WisdomTree Europe. Our team in London is continuing to grow the Boost brand of equity and commodity ETPs. As you can see on the chart, AUM increased 31% to $113 million. We launched four additional Boost ETPs in Germany and cross-listed four commodity ETPs on the Italian exchange.

In May, we had the London Team in New York to begin integration and planning for listing WisdomTree branded ETFs in Europe. We are targeting launch in a handful of ETFs in the fourth quarter of this year.

On the next slide, we can go through the financials for Europe. In the supplemental table in our press release, we broke out the results for the European business, and you can see those results on the left-hand side of this slide. The average revenue capture on the Boost branded products is 82 basis points. The business had expenses of $1.6 million, as I mentioned earlier, $692,000 of that was related to closing costs that won't be repeated. The business had a pre-tax loss of $1.6 million for the quarter.

We cannot recognize any income tax benefit from the losses Europe generates, except for certain Europe expenses incurred in the US. We are projecting the business will generate a pre-tax total loss of $4.6 million (sic - see slide 16, "$4.0 million to $6.0 million") this year, and $6 million to $9 million in 2015. We legally own 75% of WisdomTree Europe, and under our agreement with the Boost shareholders, we will buy out their 25% ownership at the end of four years.

The price of those shares is a predefined formula based on the European AUM, and tied to our enterprise value over global AUM at the time of measurement, and affected by the profitability of the European business. The payout will be in cash over two years. We will recognize the change in the fair value of this buyout liability through our income statement over four years. We did not recognize any expense this quarter, as the current estimated fair value is not greater than the minimum buyout. Because we are required to buy out their interest, from a US GAAP perspective, we own 100% of WisdomTree Europe today and will not reflect minority interest.

Now, I would like to update you on two items. The first is taxes. Beginning this quarter, we began to record GAAP tax expense at a rate of 45.4% on our US business, as a result of recording our deferred tax asset last quarter. Even though we are recording tax expense, we will not be paying cash taxes because of our NOL. Unfortunately, as I mentioned, we cannot offset any taxes by the losses generated by our European business, so our effective tax rate will be higher on a consolidated basis until the European business is profitable, at which point we can then recognize and use their NOLs.

Our US NOL balance, on a pre-tax basis, is $120 million or about $55 million after tax. Said another way, we will not pay cash taxes on our next $120 million of pre-tax income on our US business. That is why, when discussing our results, we will focus on pre-tax income, not net income.

Next, on our strategic growth initiatives, we gave guidance that we expect to spend $6 million to $9 million on strategic growth initiatives this year. These investments would cover additional headcount, primarily in the revenue-producing parts of the business. Second, continue to aggressively launch funds. We are targeting launching 10 to 15 new ETFs this year, and have launched eight already. Lastly, continue to invest in marketing and sales-related initiatives that support our growth and build our brand.

To date, we have spent approximately $2 million, or $4 million on an annualized basis, which is less than the $6 million to $9 million we had planned. We expect to increase our spending in the second half of the year and are projecting we will be to the mid- to low-end of the $6 million to $9 million range for the year.

Lastly, I'd like to update you on our flow so far this month. The industry flows are starting off light, with $9.5 billion so far this month. All categories, except Japanese-focused ETFs, saw inflows.

We are following a similar trend as the industry and our second quarter results. We are seeing strength in Europe and India, as well as our US equity ETFs; however, the outflows in DXJ is leading us to net outflows of about $300 million so far this quarter.

So, in summary, despite the challenging environment, we demonstrated solid financial results and improved margins, reflecting the strength of our business model. Now, let me turn it over to Jono.

Thank you, Amit. Good morning, everyone. Today, I will be brief. Despite challenges, the second quarter, in many ways, was our best quarter ever. The challenge was due to $1.3 billion of outflows from DXJ. Still, we were able to raise an additional $1.6 billion, making us positive for the quarter; admirable, but not enough to be great.

What made the quarter outstanding was; record average assets, record revenues, record pre-tax profits, record cash flows, record margins, and record number of billion dollar funds. We cannot control which markets go in and out of favor, but there are aspects of the business that we do control and we are executing against those things incredibly well.

We are clearly demonstrating the efficiency, power and potential of the WisdomTree franchise. As many of you know, we are passionate about the ETF industry and see nearly open-ended opportunity.

On a personal level, speaking before you today as CEO of the eighth-largest ETF sponsor in the world; the fifth-largest in the US, after having just generated $25 million in cash flow, and ending the quarter with more than $140 million in cash and investments, I sometimes can't believe how well-positioned WisdomTree is within asset management worldwide.

We have demonstrated how well we can manage the business through periods of volatility. We have also showed you that we are capable of explosive growth, and we have achieved one of the highest operating margins of any publicly-traded asset manager, in spite of our relative size. The future for WisdomTree has never been brighter.

Thank you for your attention. Now, let's take questions.

(Operator Instructions) Our first question comes from the line of Jason Weyeneth from Sterne, Agee. Your line is open.

Thank you. First question, I guess, is just on the growth spending. Is there anything, in particular, that was driving the slowdown, just from the standpoint of the first half? And, also, towards the lower end, is it driven by the environment or is it just a timing issue and maybe some of that gets pushed out into 2015?

Hi, Jason. I would say it was mostly timing. We did spend a little bit more on the marketing side than we had originally planned, but the headcount came in a little bit lighter, so I think it was really more timing, which is why we're giving the guidance that we do expect the second half to sort of pick up some of the amounts that we weren't able to really deploy in the first half of this year.

Thanks. And, then, just on the headcount, as we think about it longer term, it's obviously scaled up quite a bit over the past, you know, four to six quarters; I think you were around $70 million at the beginning of 2013, a little over $100 million today; realize some of that is Boost. Just how do you think about headcount growth and where it starts to level off, and when that pace of growth starts to slow, and maybe the platform scales a little bit more versus a more level headcount?

Sure. So, about 11 people came in from the Europe acquisition, and so as we talked about last year, continuing to grow our headcount was one of the initiatives that we wanted to do, and we want to do this year. It's been mostly on the revenue-producing parts of the business, as well as the overall operations of the business. And so, we want to continue to do that this year.

We're still very much focused on growth, and continuing to grow the topline revenue. But the beauty of the business model is that our headcount -- we can double our AUM, but the headcount is not going to double as a result of that. So really what we're doing is, is we're focusing on what we want to do to help really grow the business.

We'll continue to focus on growing mostly on the revenue-producing parts of the business, on the headcount, but it's really incremental at the end of the day that we're talking about; right? We're not talking about WisdomTree growing from 100 people to 200 people in a matter of a year. It's really been more of a controlled build out where we see that we can penetrate more and really help the results from the headcount increase.

Great. Thank you.

Thank you. Our next question will be coming from the line of Surinder Thind from Jefferies. Your line is open.

Good morning, guys. Just a quick question on guidance. So, is there any change to your actual full-year guidance on expenses? Because I think it lost -- it was between the [$110 million] to [$113 million] range because, currently, you guys are running well below that, and I understand that there will be a pickup in the second half. But I think -- just wanted to get your thoughts on that.

Yes, we are -- do -- expecting the core to still be between that range. We're probably, because of the slowness in spending in the first half of the year, and the results that we saw from inflow levels, we'll probably be closer towards the middle end of that but the overall core expense are still within the guidance of the range that we gave.

Okay. And in terms of your cash continues to build nicely, I think you mentioned that -- you know, you guys will think about it in terms of the capital return policy more around when you guys start generating excess cash, but in the meantime, any thoughts around maybe offsetting any dilution or anything like that?

So today we do do a little bit of buyback; when our employees vest in their stock awards, we buy back the payroll tax portion of it. So, I would just say, just generally speaking, when you think about capital management and WisdomTree, I think it's two things that we have to recognize. First is, we do recognize the fact that we are generating a lot of cash, and that's really as a result of the fact that we have a very capital-light business, and the operating leverage in our business model. And second is that we do see a tremendous amount of growth opportunities ahead of us. And we are a growth company and we want to make the right investments to help really grow the business.

But, as we've also said this, we're not going to let our cash just continue to build. And at some point, once we have the cash beyond our investment needs, we'll look to return that, either through dividends, or buybacks, or some sort of combination. So, it's something that we're thinking about.

Thank you. And, then, maybe one other quick question. Obviously, Europe has generally been a pretty good area of strength for you guys in terms of flows, but more recently there's been a bit of a divergence between the DFE and the HEDJ. Any insight into that at all?

Yes. Surinder, this is Luciano. So we have seen continued strong inflows into hedged which, of course, hedges out the currency. So, those are really two different choices people are making. If they are trying to limit volatility, they're typically tilting towards hedge, which was a larger cap portfolio. If you're trying to take advantage of the European recovery, then typically you've been tilting towards small caps. Small caps had a very big run over the last 12 months, so it doesn't surprise us that some people are taking some chips off the table. But again, we continue to see strong inflows into the hedged European product.

Okay. Thanks a lot, guys. It was very helpful and great quarter.

Thank you. Our next question will be coming from the line of Tom Whitehead from Morgan Stanley. Your line is open.

Hey, guys, good morning, and thanks for taking my questions. Just the first one I had was on comps. So, could you maybe provide some color on how the incentive comp flexes? I know it flexes with flows, but maybe if you could give us some insight into sort of the range that we can expect in a good quarter and a bad quarter? And then, if it's possible also, sort of like a fixed and variable component of that line?

Sure. So, let me just speak just generally, right? I mean, our compensation program is tied to our performance, right, and we had -- as a result of having net outflows for the first half of year, we didn't have the performance, and our compensation is going to be adjusted to reflect that. We do expect -- we gave guidance earlier this year that we expect our compensation to be between 20% and 23% of revenues, and that's assuming we have some normalized flow levels, and we came in less than that in the first half of this year, from a percentage basis. So, it's 18.8% for the first half of year, as a result of that.

So, it shows you the operating leverage that we have in the business model, that when people ask, what are some of the levers that we have -- if our AUM declines or flow levels go down, compensation is one of the levers that we have. We are expecting flows to normalize and we do expect to be closer to the -- probably the lower end of the 20% to 23% range. And so if you sort of like at the year-to-date numbers, it gives you some idea of how the numbers can flex, based upon flow levels.

Tom, this is Jon. If you're asking for the metrics, we do flows, market share, margins, and stock price total return. And those are the metrics that we're looking at when we think about compensation.

Great. That's helpful. And then just another one; I know you spoke about capital return a little bit earlier, but could you maybe update us on how the discussions with the Board, or discussions you've had internally regarding a dividend, in particular, have gone? Has that even come up? What seems to be the preference for capital return? And, then, just digging into the comment about generating excess cash beyond your investment needs, maybe how close you guys might be to crossing that hurdle? Thanks.

Sure. So, I really can't speak to conversations that we're having with the Board, but just -- I sort of laid out what we are -- the overall thoughts that we have that affect our thinking on a return of capital. And so, it's something that we're thinking about currently. That's really all we can say about it right now.

Okay. Thanks for taking my questions.

Thank you. Our next question will come from the line of Douglas Sipkin from Susquehanna. Your line is open.

Thank you and good morning, guys. Just wanted to -- I had a couple questions. Wanted to talk a little bit more about the margin. I guess I appreciate, you know, the flexibility in the compensation, so that was nice to see. Are you guys still sort of standing to your rough margin targets, 40% on about $35 billion in AUM or --? It just feels like even with the comp benefit you got this quarter, it feels like still that's probably still too low of a target. Is that a fair assessment?

So we have two margin targets that we gave, more of a short term of about a $35 billion of average assets. We're expecting a 40% pre-tax margin. If you look at our first half results, which I'll say is a little bit more representative, a little bit normalized, you can see the average is about $34 billion in assets, and we had about a 42% -- on the US business, about a 44% operating margin. So, you see a lot of the savings from State Street flowing as a result of that. So we are sort of meeting that shorter term target.

And then longer term, we laid out at about $55 billion to $60 billion of average assets; we're expecting a 50% operating margin. And so that's assuming some levels of flows. And so those two margin targets are still intact. It gives us enough room to make investments in the business to really help focus on our growth.

Great. Okay. That's helpful. Second question, so I know it's early, but it does feel like the market maybe is starting to think a little bit more about interest rates. I know the Fed funds futures have been moving a little bit. So I'm just curious, I know you guys had a big launch with the fixed income products and there hasn't been much action there, yet. I was just curious if -- what the dialogues are like with some of those products? Are people getting to learn about them? Or close to pulling the trigger? How would you frame that right now?

Hi, this is Luciano. I would say that we have seen some interest in the US dollar [well] product, that's up to over $50 million of assets; we launched that in the last year. So that is a -- if you looked at the market yesterday, that was actually one of the few asset classes that was up. I think we'll see continued interest in that, particularly if the dollar strengthens; [they are linked to] foreign currencies.

With respect to the interest rate strategies, those are really anti-fixed income strategies. Those are -- when people view them, they view them really as alternatives to help manage interest rate risk. So, in an environment where rates rise, they should have some reception, both for people who want to manage rate risk and also people who want to capitalize and try to offset declining bond positions with a strategy that can go up in value.

So I would say is that we are having conversations where we can with those funds. They are approved on some of the platforms within the wirehouses, but we're particularly targeting the RA channel, and some of the independent broker dealers and regional broker dealers who can use them. I would say that there is interest. They're monitoring them. They're looking at them. And they're figuring out, when is the right environment to start using them?

And I would just say that we started the years with ten-year treasuries at 3%. They backed up a little, but they're still in the 2.5% range. So, I think you need to see a little bit more market movement, but certainly some of the data that came out yesterday could suggest that rates may rise sooner than previously expected.

So I guess if -- I'm just understanding the product a little bit better. It feels like the long end is what really needs to, probably, incite some interest in those products, you know, the ten-year, you know, obviously, has gone in the opposite direction, so far this year, to sort of, probably, really get people to take action. Is that a fair assessment?

Yes. And I would say the other piece of it is just that we need to develop a little bit longer history, in terms of monthly distributions. We have a high yield product that takes interest rates down to zero. And if we can demonstrate that product can pay out 2.5%, 3%, maybe 3.5% a year, some people will just buy it for the income, with zero duration. So as these products get longer histories, that's another important point before people start to use them.

Great. And then just a last question on Boost. I guess, obviously, some nice trends in terms of the AUM growth; obviously, it's a low base, but you're still seeing nice trends there. What, if at all, did the investment or, effectively, acquisition from WisdomTree do to Boost? Did it help them with their specific products or --? I mean, i.e., validating what they're doing? Was there any sort of benefit from you guys putting an investment in them; or is it really still kind of distinct?

No, I would say, when we made the investment in Boost, it gave them some credibility in the marketplace. They are very excited about the acquisition, so I think that helped really spur some of the growth, as well as just -- they're continuing to educate the marketplace to differentiate themselves in the European space and that's also helping grow their AUM.

When we made the investment, their funds had only been in the market for a year, so they're just getting going on their own Boost product set.

Got you. Great. And then just last one, and I could probably do the math, but I figured I would ask you to make my life easier -- I mean, do you guys know roughly the AUM level out of Europe that gets you sort of to break even? I know we're a ways from that, given your guidance, but I just figured I would take a shot.

No, we haven't given that, because really the one piece that's missing is, when we start to launch the WisdomTree branded ETFs in Europe. Once we have -- it's going to start off with the handful of funds initially and then we'll continue to launch as we see success there. And so that's really going to help define the cost base that really builds there. So, it's really too early to tell you what a breakeven is. I think just more generally speaking, we're investing $20 million into the business, we think conservatively; it will get to breakeven in about four years, using that $20 million.

Great. That's helpful. Thanks a lot.

Thank you. Our next question will be coming from the line of Bill Katz from Citi. Your line is open.

Okay. Thanks. Good morning, everybody. When you step back, and you've done very well with DXJ and that sort of -- the new outflows of late, but yet HEDJ is doing quite well, as a partial offset. How do you think about allocating marketing dollars? I guess the root question is, given the dynamics that's going on right now, how do you sort of get back into a more decisive net inflow number? Do you need to boost the aggregate marketing spend? Or maybe just refine into more a different set of products at this point in time?

Hi. This is Jono. Really, we do have highly concentrated positions in Japan and in emerging markets, and so we've seen, with their negative sentiment outflows, you have seen, as you indicated, strength in our European exposures; you've seen a real strong rebound within emerging markets in our Indian ETF. Our marketing spend is really appropriate. It really is what we had said many times in the past on these calls, and in one-on-one meetings, that the product sets need to align with market sentiment. I don't think you're going to have to see any sort of dramatic change in marketing to turn the flows around.

Okay. Second question, big picture question for you, couple of your peers, both iShares and PowerShares, through BlackRock and Invesco, respectively, have spoken about the structural opportunity in Europe, just given some of the regulatory changes, specifically RDR. I'm just wondering -- I know you had Boost, obviously early days, but what strategy will you have to differentiate yourself versus those two companies? I feel like they have a little bit more of a stronghold in those markets. Is it just the market itself is going to be up very wide and give you chance for WisdomTree? Or how do you specifically plan to maybe take some share in that market?

So the regulatory changes was one of the impetus for us to make the investment at the time that we did. We see that sort of advice being a critical component for ETF success within a market. The way we will differentiate ourselves with it, we always differentiate ourselves with original product. One, the Boost product set is differentiated, and what we bring over will be differentiated.

So, I think our business model will be very similar to what we're doing here in the United States. It wasn't easy to do eight years ago, starting in the US. We have no illusions it will be easy in Europe. But, long-term goal, I would like to be a top ten player within Europe. And to give perspective, that's about a $7 billion AUM today.

Okay. That's helpful, and then just one maybe for Amit. When you think about the gross margin that came in a little [better than] I think most of us were looking for. From here, how do you think that plays out? Is it still sort of 83%, 84%, or are there other opportunities to take that to a higher level?

I think the asset is going to have to scale a lot more before we see sort of an uptick or a significant change in mix. So I would say I'm still very comfortable with the 80% to 83% range that we've given. You saw we were at 82.4%. You know, we are going to continue to launch funds in the second half of the year, and so that will have an effect on that gross margin. So, we're pretty comfortable still staying within that guidance.

Okay, all right. Thank you very much for taking my questions.

Thank you. Our next question comes from the line of Chris Shutler from William Blair. Your line is open.

Good morning. The first question on competition. So, with BlackRock rolling out a hedged version of their Japan ETF earlier this year, and it uses the underlying cap weighted un-hedged ETF, which is, obviously very liquid which is a pretty unique structure. How do you view that as maybe changing the competitive dynamic going forward? And does it influence how you guys are going to think about product launches?

Hi, Chris. This is Luciano. It really hasn't impacted us too much. We are already facing competition in the currency hedge space against that same underlying index. So, the fact that there's more [blue chip] products out there doesn't really change the calculus for us. We are, obviously, the leader in the space in Japan in terms of assets, volumes, execution, spreads. And there's also an active option market around that particular ETF for WisdomTree.

So once you establish that type of lead, it's very hard for someone who is coming in third or fourth to uproot you. We also have a slightly different methodology that can create advantages particularly in down markets in terms of limiting some of the downside in volatility. So, I think we're very well positioned in Japan, and we would expect DXJ to maintain its leadership position, as it has, after these competitive products have been launched in the marketplace.

Just to add to it, we also launched a series of Japan sector currency hedge products, which is another way for us to participate in that theme, which will give investors many more choices, if that's how they want to -- if they want to play Japan in the currency-hedged environment.

Yes, makes sense. And then you guys mentioned expanding the product set a couple of times now to make sure that you're well-positioned for all kind of cycles and sentiments. Just hoping you can give us a couple of examples, particularly with your, as you said, concentrated exposures in Japan and EM? Thanks.

Really we're -- we don't really go into specifics. All you could assume is you'll continue to see product in all of the buckets that we have product today. We have most of the industry covered at this point so you'll just continue to see product being rolled out over time.

But just within the existing product set, Jono, within like the Japanese with DXJ or with DEM, do you have products that you feel are complementary, that an investor could move from one product to another product?

Absolutely. First of all, we think we have products in the market today that affords investors that opportunity; and we'll always -- one of the metrics that we look at when launching new products is diversification. It's not the only metric, by any means, but it is one of them.

Okay. Thank you.

Thank you. Our next question comes from the line of Dain Haukos from Piper Jaffray. Your line is open.

Hey, guys. It's Dain on for Mike. Just a quick question here. Can you size up, at all, the opportunity of potential for the Boost into -- like, if you used the 11 sales people, or the 11 people that you've hired at Boost in Europe, the opportunity for Europe into US sales?

Well, this is Luciano speaking. The Boost team is going to focus on selling both the ETPs and the UCITS in Europe. To the extent there are institutional investors around the world who are interested in the UCIT, that could also be a potential way to leverage that team. We're going to continue to sell the US registered funds in the United States with the US sales team. But we think as we get a global footprint and WisdomTree is expanding around the world, we could see a residual benefit, where institutions start to get more interest in the US registered funds as well simply because WisdomTree's brand is growing and being amplified around the world.

Okay. And is there any opportunity -- like size of that opportunity? Or is it still kind of -- there's not really numbers around that?

We don't have specific numbers but you do hear anecdotally from our competitors that foreign buyers into US ETFs is a major contributor to their US asset base. So, we do think it was one of the decisions that encouraged us to expand our footprint globally.

Okay. And then, just one other question on the new products that I know you're talking about rolling out there for the second half. How should we think about that? Is it all going to come in a lump? Will it come spread out throughout the quarter? What are you guys -- what goes into your decision-making process as you look at rolling out some of those new products?

It's easy to launch product one at a time, unless it really is tied together in some sort of theme, like what we did with the hedged -- the interest rate funds. So it's going to be hard for us to give you that guidance in advance. We now have 69 funds. We're at the most funds that we've ever had. We are very comfortable in launching funds and finding opportunities. We continue to see opportunities, but it's hard for us to give you the blueprint that you can count on in terms of timing, sequence, and specifics.

Okay. Great. Thanks and congrats on the quarter.

Thank you. Our next question comes from the line of Mac Sykes from Gabelli. Your line is open.

Good morning, gentlemen. I have a question, I think it's a tough question to answer, but I'm still going to try and give it a shot. I guess it goes to when you have your conversations with investors and they're looking at the hedge currency products, whether it is the Europe, the DXJ, and you also have pure currency products. How many of them -- specific to the country currency products -- how many of those investors are really driven to the product by outlooks for specific currencies versus the underlying index or country returns?

And if there is some way to segment those people or investors, is there a different aspect to their timing? Do the currency folks tend to be a little bit more higher velocity than the pure investors in terms of those products? I guess just trying to see if there's any sensitivity, whether it is DXJ hedged, [J-product], in terms of just expectations around currency, exogenous of sort of the country returns?

Well, I would say it's very specific to the particular fund. You know, in the case of hedged, I think people understand when they buy the foreign equity, if their default is to buy it completely un-hedged, they're in effect, making two bets; they're making one bet on the equities, they're making one bet on the currency. I think we've educated the advisors that if they're not comfortable making 100% bet on the currency, by being un-hedged, it just makes sense to hedge some of that exposure.

So I think some of the advisors are doing it to limit the volatility in the portfolio; some of them are doing it because they're getting direction from their home office or their research. That's basically saying, if you have a choice, we think you should be hedging the currencies right now. In the case of Japan, obviously, last year the government was pretty direct in terms of its intention and the market read that and the yen weakened considerably, and the equity market rallied.

There has been a consolidation in the first six months of the year, but the policy hasn't changed. And there's plenty of earnings growth happening in Japanese companies and the valuations are very attractive. So I would say there people are making a separate calculation based on Japanese equity earnings' growth, valuations, and where they think the currency goes from here.

So, I would say it's case-by-case by country. Certainly, there are plenty of advisors who allocate internationally, based on country. They do country rotation, in an attempt to beat MSCI, or [World], or EAFE. Given the ability to make the country call, and make the currency call, if they want to, it's just another tool that they can use. And we have started to see some interest in some of our other country funds, beyond just Japan and Europe. And we would expect that to go forward, as more and more people get educated about currencies' impact on total return.

Thank you, gentlemen.

Thank you. Our next question comes from the line of Marc Irizarry from Goldman Sachs. Your line is open.

Great, thanks. Maybe Jono, and also for Luc, just in terms of your distribution channels that you're in, you obviously -- being global might be an aspiration, or is an aspiration over time, you've got the UK piece now, but how do you think about some of the opportunities to broaden out distribution? Where are you from that perspective? Maybe address the 401(k) and DC channel as well? Thanks.

Well, Marc, on the 401(k), as you know, right now ETFs within 401(k) is a relatively small number; there is $1.7 trillion in ETF assets. Estimates of ETFs in 401(k) is in the $10 billion to $15 billion range. So, right now, it's less than 1% of the entire industry. We're about -- 1% of our assets are in 401(k) retirement platforms. So, the strategy there is to work with the RIA money managers, who are using WisdomTree in their models and then help them get connected to platforms that they can get distribution on the retirement side.

And there's probably a good half a dozen now that we're working with that are starting to get penetration there. As other major record keepers start to open up their platforms and allow ETFs in, that's going to be a driver of ETF growth going forward in the 401(k) channel. And we've seen recent news, in the last few months, about some major brokers and custodians getting involved in that space.

So that will ultimately put pressure on the other broker dealers and the other record keepers to make a ETF-enabled offering, both to drive down fee and to get best-of-breed product on the platform menu. So we see the growth of 401(k) as still a big opportunity, but it's a very slow-moving freight train, at this point.

And, Marc, we do have a dedicated team to that channel, which we will grow appropriately when the time is right. Another channel where we're seeing some very early interest would be in the insurance channel. We've got, again, an institutional team that is attacking the insurance channel. And I would say that it feels, from some of the different channels, that this is really the very earliest days of the ETF industry for those channels.

A lot of growth is still ahead. And we have all the resources that we need to appropriately invest against any opportunities as they appear, when they appear.

Okay. And then, Amit, on just going back to the gross margins for a second -- I get the guidance -- but can you give us some sense -- I guess, obviously, there's been some market movement in there, but as the maturation curve of new products come in, do think you would stay at the bottom end of that range as new products come onboard?

Yes. So, we're talking about gross margins and so the big driver of that this quarter was this transition to State Street, right? So, it costs us about $175,000 to launch a new ETF. We're still going to continue to launch ETFs in the second half of the year. So, when you carry over the effect of the funds that we launched so far this year into the second half, new funds, I think staying within the numbers that you see now, 80% to 83%, probably closer to the higher end of that range is the right area that you should be right now, when thinking about the next couple of quarters.

Okay. Great. Thanks.

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

Good morning. Thanks for taking my questions. First, just a follow-up on Europe and your strategy there. I guess, from the standpoint of products, are the product strategies that you're rolling out the same as the ones here in the US? Are they differentiated? And how do you sort of make decisions on sequencing that and what to go first?

And also on country markets, how you select, kind of, Germany and Italy, where you decide to roll things out? And is there leverage once you've launched a product in one country to bring it to other countries? Thanks.

Hi, Adam, this is Luciano. We're not going to disclose what products we're launching today, or considering launching, obviously, for competitive reasons. But as we get closer to the launch, we'll share that with you. I would say, generally, what we're going to try to do is take advantage of WisdomTree strengths. Obviously, we have certain strategies in America that have longer track records that people can at least look at the underlying indexes to get a sense of how they have done historically.

We're also going to listen to our team on the ground in Europe, which is much closer to the local markets, particularly, the local exchanges and where they -- what might make the best sense, in terms of where to list first. So, I would just say, as we get closer to the launch, we'll have more details for you, but that's something that we're anticipating to do in the fourth quarter this year.

And as you do launch funds, it will always be the opportunity to cross list within Europe. So, we have already gone from London to Italy, and others within the Boost product sets today.

Thanks. I appreciate that. Also, you mentioned the AUM levels of the various product and reaching a billion or $100 million. Obviously, there is economic leverage there. In terms of marketing, is it more of an awareness thing, or are there certain levels I guess implying maybe liquidity where clients open up who might not have been willing to take the product to a smaller AUM level?

There are certain gatekeepers that have either size limits, asset limits, liquidity limits, length of time limits. So all of those are factors within -- for certain segments of the market. We look -- there are then economics related to certain size levels. So, sort of, we've used a rough $50 million in AUM is sort of a breakeven. So, when you talk about like -- we have 31 funds with $100 million in assets, most funds are getting launched with $5 million in seed, so if you get to $100 million, it represents customer acceptance to some level. From $100 million, you really do have quite a lot of optionality.

And then what we've seen is -- so, what's interesting from our product strategy today, we have 69 funds, 45% of them have $100 million or more in assets. From those 31 funds with $100 million in assets, we've seen 35% of them grow to $1 billion or more. I feel that from a product standpoint, we've been immensely successful. I feel very comfortable with what we've done in the past and that we will continue to do going forward.

It sounds like using the word momentum would not be necessarily inappropriate?

Would not be inappropriate.

Right, yes. Great. Thanks very much. And just one quick follow-up for Amit on the compensation. Just around the measurement period there, you had kind of choppy flows in first quarter and then actually improving in second and the comp seemed to respond to the first half numbers. Do you do that half/half? If flows were to change about in third quarter, should we expect a difference or how is that measured?

Sure. So, you said it right. It's sort of like half/half. We see what we're doing. We pay our salespeople twice a year, so we have a little bit more sense of true up, so to speak, when we get to the first-half number. As the year progresses, we have more and more confidence of what our operating results are going to be and the four factors that we look at for our compensation to come up with the right number. So we'll have not as much in the first quarter and then you have hopefully a little bit of true up again in the fourth quarter.

Great. Thank you for taking all my questions.

Thank you, Adam.

Thank you. Our final question comes from the line of John Dunn from Sidoti. Your line is open.

Hi. Good morning. I wanted to ask -- maybe you could give us an update on what you're seeing and your views on the nontransparent ETF front?

There certainly is a lot of media attention to it. There certainly seems to be a lot of attention from the traditional active mutual fund industry that may see this as one way to enter the ETF marketplace in a way that would be less disruptive to their historical business. I have never met an adviser, though, who has ever asked for product in a nontransparent format. So, it all comes not from the customer base that is in the market today, we only see it from the media, from the analysts, and from the executives of the traditional firms.

Got it. Thank you very much.

That's the last question. We want to thank you again for your interest and attention in WisdomTree and we will speak to you next quarter. Thank you, everybody.

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