WisdomTree Inc (WT) 2015 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the WisdomTree Q2 earnings call. (Operator Instructions) As a reminder, today's conference call is being recorded. I would now like to turn the conference over to Mr. Stuart Bell, WisdomTree Investor Relations. Please go ahead, sir.

Thank you. Good morning. Before we begin, I would like to reference our legal disclaimer, available in today's presentation. This presentation may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which are generally identified by terms such as believe, expect, anticipate, and similar expressions suggesting future outcomes or events. Forward-looking statements reflect our current expectations regarding future events and operating performance and speak only as of the date when made. Forward-looking statements are subject to numerous assumptions, risks, and uncertainties which may prove to be incorrect. Such statements should not be read as guarantees of future results and will not necessarily be accurate indications of whether or not or the times by which results are achieved. A number of 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 of the Company's annual report on Form 10-K for the year ended December 31, 2014.

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

Thank you, Stu. Good morning, everyone. We again demonstrated another stellar quarter characterized by record AUMs, further strengthening of our product positioning and currency hedging and, lastly, demonstrating the operating strength of our business model as we surpassed our goals of a 50% pretax margin on our US business. On top of all this we continue to execute on our strategic growth plans including expanding our distribution capabilities and launching innovative products in the US and Europe that best position us for growth ahead.

Now let's get into the results for the quarter, beginning by first reviewing the US ETF industry stats. Turning to slide 3. Industry flows were $42.3 billion for the second quarter, slightly down from the first. On the right you can see international unhedged and hedged equities dominated the flows. Also of note, this is the lowest level of flows we have seen into fixed income over the last several quarters.

On the next slide we can review our operating results. Our AUM increased 73% from last year to a record $61.3 billion, led by the strong inflows of $6.6 billion driven by the continued success of HEDJ and DXJ. Our market share of inflows was 15.6% for the quarter. The continued success of HEDJ and DXJ further demonstrates our belief that currency hedging is becoming a long-term strategic holding.

Turning to the next slide, you can see on the chart on the left international equity AUM growth of $359 billion. But what's more important is the dark blue. Hedged equity AUM market share continue to grow, reaching now 17% in the quarter.

Why do we believe currency hedging is a strategic allocation and not a short-term tactical trade? Look at the chart on the right. Despite the dollar's weakness over the last three months, currency-hedged AUM continued to climb during that same period. We believe the currency hedging category for the industry over time could be 50% of the international equity AUM. Therefore, we continue to focus on this opportunity to position ourselves to be the leader in this category.

We also continued to demonstrate our strength in Europe and Japan. Turning to slide 6, on the left WisdomTree had nearly 60% market share of hedged and unhedged flows into Europe for the first half of the year and nearly 50% in Japan. This is important because Europe and Japan are large asset allocation categories for investors. Having the leading products in these categories allows us to be in the best position to capitalize on this allocation opportunity. Our dominant position in these two markets were led by HEDJ and DXJ, but let's look at the highlights away from these two products.

Turning to slide 7, we took in $1 billion of flows away from HEDJ and DXJ or $1.7 billion for the first half of the year. In the hedged equity category we saw strength in our broad international and Germany hedged equity ETFs. In our unhedged international products, small caps led the flows. In emerging markets we saw continued flows into our India fund. On the fixed income side, we similarly saw flows into our emerging markets fixed income fund as well as some modest flows into some of our rising rate fixed income ETFs.

On the next slide, the next two slides will reflect how we ranked against the other asset managers. Turning to slide 8 on the left, WisdomTree was ranked third in inflows compared to the other US ETF sponsors for the first half of the year. This translated us into having the best organic growth rate of the top 10 ETF sponsors, as you can see on the right.

However, we are also proud of the much broader ranking on the next slide. WisdomTree was also the third best asset gatherer compared to all ETFs and mutual fund managers in the US, according to Morningstar. This also translated into WisdomTree continuing to have the best organic growth rate versus the other publicly traded asset managers. In fact, if you exclude HEDJ and DXJ, we had the highest growth rate. We believe this again demonstrates the strength of our product innovation and the growing acceptance of the superior structure that ETFs have over mutual funds.

On the next slide we show how our ETFs have performed according to their Morningstar peer groups. These comparisons take into account fees and transaction costs and reflect how our equity, fixed income, and alternative ETFs performed against active and passive mutual funds and other ETFs. Since inception, 58% of our ETFs outperformed their peer group, where 90% of the approximately $60 billion invested in our ETFs were in funds that beat their peers.

I would like to update you on our European business on slide 11. Our European AUM continues to grow across both our WisdomTree UCITS and Boost product set and reached $612 million at the end of June. During the quarter we launched HEDJ and DXJ in the UCITS form, so now these two ETFs are available worldwide. We see continued growth in our Boost product line, particularly in commodities, and we launched additional Boost products in London, Germany, and Italy. And lastly, we are continuing to build out our sales teams to prepare for future growth ahead.

On slide 13 we can start to go through our financials. On the back of the strong inflows in the first and second quarters revenues reached record levels and climbed 85% from last year to $81.6 million. Net income of more than doubled from last year to $24.2 million. EPS was $0.18 for the quarter, which included the loss of approximately $0.01 for our European business.

Turning to slide 14, on the left you can see the currency hedging category continues to grow as we lean into this opportunity which has helped contribute to a 242% increase in revenues from this category, as you can see on the right. We also experienced a 25% increase in our US equity ETF revenues over the second quarter of last year. Our average revenue capture increased to 53 basis points and remains at 53 today.

On the next slide we can review our key margin metrics. Gross margin for our US-listed EPS business increased to 86.4% due to the significant increase in our AUM. We are raising our guidance and anticipate gross margins to be in the 85% to 87% range in the near-term, assuming these AUM levels and mix hold. In the chart on the right, you can see our US business had a 53.2% pretax margin on $61 billion of average AUM and our overall margin was 50.2%.

We have achieved the margin target we laid out several quarters ago, reflecting the operating scale of our business model. I know from speaking to many of you after our last call that you would like to know our next margin target. While we are not giving any new margin guidance, let me give you a framework of how to think about margins. WisdomTree is a growth Company. This is not about reporting an uptick in margins quarter after quarter, but rather we are focused on growing our revenues, increasing our market share, and becoming one of the top-five ETF players globally. So our goal is to make the right investments in the business to capitalize on the tremendous runway the ETF industry has ahead of itself.

Can margins grow from here? Absolutely. As we continue to scale, margins will improve. But we have to measure that against the opportunities ahead of us.

But some things will not change. First, we will continue to have expense discipline, as we have demonstrated to you over the years. And second, our goal to have the highest margins of any of the publicly traded asset managers has not and will not change.

Next we will review expenses on slide 16. First-quarter total expenses were $39.1 million. Compensation expense declined by $1 million due to lower seasonal payroll tax expense. Higher AUMs increased fund expenses by $943,000. Marketing and sales-related spending increased $487,000 as part of our strategic growth spending we spoke about earlier in the year. Professional fees increased $243,000 due to recruiting expenses for the positions we filled in the US and Japan. Other expenses increased $366,000 due to higher general and administration spending. Operating expenses for our European business increased $492,000 due to the launch of new funds and higher marketing and sales-related spending to support our European products. We ended the quarter with $40.6 million in expenses, or up 3.8% in the first quarter.

On the right and see the compensation as a percent of revenue for our US business was 21.6% for the quarter. Based on our year-to-date results we are still tracking are you as compensation to be between 21% and 25% of revenues for the full year. However, timing and level of flows in the second half may impact that target. We will keep you updated as we have more visibility.

On the next slide we can review our balance sheet. Total assets grew to $265 million due to our strong cash flows. As you can see on the right, we generated $65.5 million of cash from our operating activity due to our record inflow levels. We spent $15.3 million to buy back approximately 835,000 shares of stock that we issued to employees as part of compensation. We returned to $21.8 million to our shareholders through quarterly dividends and ended the quarter with $211 million of cash.

On the next slide we can start to go through our taxes. As a reminder, while we record GAAP tax expense, we don't actually pay cash taxes due to our tax losses. At the end of the quarter we have about $100 million of pre-tax earnings that can be sheltered from paying taxes. At today's growth rate it is likely we will run through our current remaining tax shield by the end of the year or first quarter of 2016. This is a good problem because it means we are growing. But remember, we also continue to generate tax losses due to employees exercising options and investing in restricted stocks. The detailed information on that is on the right-hand side of slide 18.

Now let me give you an update on where we are so far this quarter. Momentum continues to carry. Our US AUM reached $62.8 billion and we have taken in about $1.2 billion in inflows, led by HEDJ.

Now, before turning the call over to John I would like to update you on some exciting things that are happening on the distribution side. Turning to slide 20, as we have stated at the beginning of the year, expanding our distribution capability is one of the key priorities for us for 2015. We have taken important steps to add depth and diversity across our global distribution platform. First, we promoted Alisa Maute to head of sales in the US. Alisa has been with us for seven years and has successfully worked across multiple distribution channels at WisdomTree. In Europe, Nizam Hamid joined us to lead our sales efforts in Europe. Nizam has played the distribution roles in the ETF businesses of Deutsche Bank, BlackRock, and Lyxor.

In Asia, we recently announced the opening of an office in Japan, and Jesper Koll will be leading our development efforts there. Jesper comes to us from JPMorgan and is widely recognized as a leading authority in the Japanese investment community, and he will further strengthen our thought leadership on the Japanese market. Complementing Jesper in the sales capacity is Junichi Kamitsubo, who was formerly the head of iShares Japan.

Since we are going through a regulatory approval process right now, I can't speak much about our plans and Japan. We expect to have our approval in the fourth quarter and we can speak more about it then.

Finally, we announced the creation of a new role to oversee our ongoing and future distribution efforts globally, and we are pleased to welcome Kurt MacAlpine as Head of Global Distribution. Kurt joins us from McKinsey, where he was a partner and leader of their North American asset management practice. Collectively, these hires represent a meaningful expansion of our distribution capability and allows us to better respond to the demands we see from investors for ETFs and our investment strategies globally.

Now let me turn the call over to Jono.

Thank you, Amit. Good morning, everyone. The numbers can almost speak for themselves. Record revenues, up 85%; record net income, up 128%; record inflows. In fact, we took in more than $20 billion of inflows through the first half of the year, making WisdomTree the third-best asset gathering complex in America. I have to repeat that. WisdomTree was the third-best asset gathering complex for the first six months of the year, a stunning accomplishment. It's probably the greatest accomplishment for this Company in our young history.

Also, we achieved industry-leading pretax margins of 50% while making significant investments into Europe, Japan and, of course, into the United States. The combination of these two statistics proved WisdomTree is capable of greatness. We have the ability to create some of the most desirable investment solutions in the market. We have a powerful business model which is scaling and supporting substantial growth with efficiency and ease. Our execution is world-class. We have become a highly effective competitor in the fast-changing world of asset management. And make no mistake, asset management is being transformed right before our very eyes.

The key to WisdomTree's success from the very beginning has been the quality of our people and our focused ETF product strategy. The combination of our innovative products, our talented and experienced operating team, and our focused ETF platform is extremely effective, repeatable, and scalable. That is why we are continuing to invest in our people, our products, and our platform to support future growth. I am excited by the world-class talent and capability we are adding to the Company to enhance our distribution in the US and across international markets. I believe we have an immense opportunity to grow from here. I have never been more optimistic about ETFs and WisdomTree's future.

With that, let's open up the call to questions.

(Operator Instructions) Craig Siegenthaler of Credit Suisse.

Have you started accelerating the research and sales effort behind the rising interest rate products, just given that the Fed could be raising rates pretty soon?

Really, we have put out a lot of content through our research. But we haven't been doing more than that at the moment. But we are poised to promote those when the market is ripe. And obviously, there is a sense that rates will be rising, which should prove to be constructive for those funds and probably supportive also for the currency hedged equity product.

Got it. And then can you walk us through the competitive advantages that you have in competing for new white spaces, really given your captive self-indexing effort and your purely ETF-focused salesforce?

Could you just repeat the question? I'm sorry.

Yes. So as you compete for new white spaces like new areas that haven't taken off yet, like if you go back in time and look at HEDJ or DXJ, what are some of the competitive advantages you have, maybe like an ETF-focused salesforce, the ability to have a captive self-indexing effort inside your [house]?

Well, so I think the greatest advantage that we have is our broad regulatory relief, our -- really, we have the most experienced team in the ETF industry. And then you did touch upon the point self indexing. Self-indexing allows us to get to markets fast. It allows us to come out with truly differentiated proprietary product. It allows us to promote the funds in a unique way, which is really how we were able to capture the leadership in currency hedging. And at the end of the day, when future competition does arise, when others catch up, they are never exact competitive products. So self-indexing is probably the point that you should focus on as our greatest advantage.

Thanks, guys. Thanks, Jono.

Bill Katz of Citi.

So I want to get back to margins. Clearly, you met your goal and you made your gross margin. And just listening to your summary comments about the investments you made around the world, and I know you said margins go up absolutely. But how are you thinking about that? And I guess the broad question is, there's a number of competitors -- this may repeat on the last question -- who are starting to step up their folks on smart [beta]. You've heard Franklin talk about it. Legg Mason talked about it a few minutes ago. iShares is talking about it. So these are some big heavyweights. And certainly appreciate the self-indexing.

So is there any thought of potentially sacrificing some of that margin, maybe in the form of pricing, to really drive growth? Or is it just revenues come in and you just can't spend it fast enough, and the margins go up? Just sort of thinking how are you thinking strategically about that. Sorry, long question. I apologize.

The way we deal with future competition really starts with the original business model, which is proprietary product, first to market. So we were the first to really give you a global suite of smart beta products using our dividend and earnings weighted methodology, which -- they are approaching, many of them, their 10-year anniversary, which is in itself a strategic advantage.

We try to price our funds at the right price with a long-term view towards pricing. And then in general we are always -- we have launched some products at lower price points as just the normal course of business. And then, lastly, we have always been aware that this is a price competitive industry. It has been price competitive from day one. So there's really nothing new, but we -- I feel we have a very good feel for pricing. And it's something we always keep an eye on.

And then just maybe one comment, and I appreciate you taking both my questions this morning. Can you frame out what would put you toward the low end of the comp rate, US comp ratio, versus the high end, [you sort of said] conditional AUM and flows? So maybe abandoned it in your mind, given we are half way through the year?

Sure, Bill. So it's really going to depend, I think, on the velocity and the timing of the flows that we see in the second half of the year. That's going to help us gauge whether we are going to be at the low end of the 21 or the high end of the 25. Remember what we experienced in the fourth quarter of last year, where we had a majority of our flows come in Q4 and then we had an uptick in the expense. Remember what happened in Q1, when we had the big inflows coming in, in Q1, yet the revenues didn't show up until Q2. And that had an effect on the cost as a percentage of revenue. So that, the timing and the velocity is really going to define where it's going to be in that range.

Okay, thanks very much for taking my questions.

Jason Weyeneth of Piper Jaffray.

Can you talk a little bit about the feedback you've gotten from advisers regarding your research in the merits of the currency hedged vehicles as a longer-term strategy rather than just the short-term strategy?

The feedback has been great. I think you can see it in the flows. I think you can see it in our share of the category. And you can just see it in the change of behavior. The chart that is in the deck that shows you the growth of currency hedged is very important because, as we've said, as more and more people start to incorporate it into allocation, that's a huge opportunity for WisdomTree.

The default, a year ago, was basically to be 100% unhedged. And that debate has changed and that thinking has changed. And a lot of it has been driven by the research WisdomTree has put out there and, of course, the success of DXJ and HEDJ. It is made a real difference in people's portfolios.

Thanks. And then I guess one for Amit. Where do we sit versus the prior expectations around growth spending for this year, just trying to get a sense of the announcements that we've heard recently. And a lot of the recent hiring is as you had planned when you were doing your budgeting earlier in the year.

Sure, Jason. So remember at the beginning of the year we said we were going to spend anywhere from $12 million to $16 million on growth investments. The bulk of that was really expansion of our salesforce. So far this year we spent about $4.5 million of that $12 million to $16 million. Now that we have our two heads of US and global sales in place, I'm expecting a pickup in the spending. But I would say probably, since we didn't have as much spending in the first half of the year, we will probably be on the low end of the range of that $12 million to $16 million.

Thanks.

Chris Shutler of William Blair.

For DXJ and HEDJ, can you talk about the breakout of Q2 flows by distribution channel? I'm particularly interested in how the retail versus institutional split would look.

We have shown those charts in prior quarters. We don't always show the charts about the estimated flows into the channels. But there has been no change. They look very similar to our AUM breakdown with a little bit of extra strength internationally and institutionally.

Okay, great. And then on the competition front, not surprising that we've seen a ton of new interest in currency hedged ETFs in the market. Clearly, HEDJ and DXJ have tremendous branding and liquidity. But some of the products have materially lower expense ratios and maybe not the exact same strategy but similar strategies. So maybe walk through, Jono, why is first-mover advantage is so important in the ETF space. And I'm particularly interested in any comments you have on the importance in the wirehouse and RIA channels.

So first mover, we take mind share and liquidity ticker awareness. We have a longer track record. We have a proprietary product that is very differentiated from, really, the other competitors who are all competing with virtually identical exposures. The business model is what we have anticipated from the very beginning. It goes back 10 to 12 years. If you are happy with the fund, any sort of ETF, it's not easy to get an advisor to switch for an insignificant differential in price.

So we are very confident that we have a very strong foundation or positions in currency hedging. And to go back to what Luciano was talking about, all of this new competition only reaffirms our optimism that we are on the right track, that this is a mainstream long-term allocation for advisors. This is a different and alternative way to buy your international equities. And we think it has a lot of appeal to a lot of investors. And you are seeing it through changed behavior. All of these people coming into the market is really validation and I think will lead to much higher penetration rate for currency hedging versus unhedged international equities.

All right, thank you.

Adam Beatty of Bank of America.

Wanted to ask about product trend. One of your products that is gaining popularity in the asset space and in ETFs is allocation or go-anywhere type fund. Some of those are using or considering using ETFs. Is that part of your target market? Do you feel that you have suitable products for that space? Or what is your thought on that?

Well, we launched a product in the second quarter that does that on the bond side. It's an unconstrained bond fund run for us by Western Asset Management. So we have innovated there. We have taken advantage of active exemption. We are, of course, looking at products and categories around the world. We have a very robust product development effort. And to the extent we see an opportunity to do something in the ETF structure that really hasn't been done yet, we are always looking for where we can take money from the mutual fund world.

Yes. And just to be clear, this is the one area of our business that we don't give full transparency, for competitive reasons. Thanks, Adam.

Got it, thank you. And just to follow up on the exempt of relief and the competitive landscape, if you will, there, I know there are a couple of other firms that have that. What is your sense -- I know it's hard to handicap regulatory and what have you. But what's your sense on the ability of other firms to deploy that?

So I would say in the past getting the regulatory approval was a barrier to entry. Today it's not; you just have to go through the process and get your regulatory approval. If you are just going to license a third-party index, it could take you about 12 months to get your license. It's not that hard. If you are going to do something a little bit more exotic, you want to be active management, if you want to use derivatives, it's going to take you longer. So that's one of the benefits that we have is we have a broad exemptive release.

When I say what the challenge is now, is really the barrier to success is having a product strategy. That's what I think is what really makes it difficult. It's not the getting the regulatory approval process, it's what are you going to do once you finally get that regulatory approval process.

And let me just add that being a pure play with no legacy issues encumbering us is an advantage. And that is true about ETFs, meaning we are unencumbered by other structures, and it's also true about self-indexing. Some of the largest ETF sponsors have a legacy issue of third-party indexing. And it's not that they can't also self-index, but it just changes their feel for it. I think that we have done both. We have self-indexed and we have very selectively licensed third-party indexes and made those in very sort of proprietary ways, as we did reflect the Barclays Ag zero negative duration. So I think we have a real good feel for it and it's just a real strategic advantage to be the pure play.

Got it. Those nuances are important. Thanks very much, I appreciate it.

Alex Blostein of Goldman Sachs.

Question for you on just the distribution landscape and particularly your efforts outside the US. It's obviously very nice to see that you guys are making a big push and it's an important market. But just kind of curious to hear what are the biggest hurdles for, really, any ETF provider coming in and trying to distribute a new product, whether it's from the channel penetration perspective or anything else. Thanks.

Look, we're talking about internationally. The dynamics are the same as in the United States. You have incumbent structures. You have, in many cases, a less knowledgeable ultimate investor, and so it takes a lot of education. You have very strong incumbent players. iShares is a world leader in virtually every market around the world. So you are really dealing with the same issues internationally, whether it's Europe or in other international markets. And we still deal with these issues in the United States but it's becoming less so day to day.

Okay, thanks.

Douglas Sipkin of Susquehanna.

Congratulations on getting to the margin target, first off. Just a couple quick questions on, first, the balance sheet. I know you guys are a growth Company and you are proving that out with the success of the European business. But cash levels really continue to build. And I'm just wondering at what point do you maybe reevaluate the capital management policy. I know you have a nice dividend there. But what level of cash can you maybe do at all, where you are still investing for growth but maybe even giving a little bit more capital management back to investors.

So when you look at our capital management plans that we have in place, we are generating, as you said, a nice amount of cash. We have the ability to make the right investments in the business because we are focused on the growth. We have the ability to keep dry powder in case we see opportunities ahead of us. And we have a capital management plan that can return cash to our shareholders through dividends and buybacks. And we think currently, right now, that mix is the right mix that we have today.

At some point do you guys reevaluate that? I'm just looking at the cash, just under, I think, $200 million now, and just continues to build. And with the margins now at the current pace probably plus in and about 50% it just feels like maybe you are close to being in a position to do even more. I know I don't want to put pressure on you guys. But it just feels like there's a lot of power, I guess, in the cash flow. So okay, that's fair.

Secondly -- yes?

This is something we evaluate every quarter. We just approved the $0.08 again. It's something we evaluate every quarter. We will continue to evaluate it every quarter. And as you did say, we started with, I think, a surprisingly hefty $0.08 a share. I think that surprised a lot of people. We said we would grow into it. But don't worry; we do look at this every quarter.

And remember what we said before, Doug. Philosophically, we are not a Company that's just going to let our cash build. If we don't have a need for it, we don't see the opportunity, we will return it back to our shareholders.

Great. No, that's helpful. Look, it's a high-class problem. And then just secondly, on the tax rate, I noticed it ticked down a little bit. What drove the tax rate? Because I was thinking 42% to 43%. Is it something coming out of Europe that drove that down a little bit?

No. We had a little bit of an uptick last quarter, when we had to pay some state taxes, when we reallocated our income two different states, when we lowered our tax rate last year. As a result of that, we had some extra tax payments in certain states that caused a little uptick in the tax rate in Q1. So now that has been normalized now and that's why you see that little bit of a downtick in Q2.

So what is the number, roughly?

Remember, the US business is 38%. And then the overall rate that you see from the US business is about 41.5% year to date. That's a good number to think about overall, going forward.

Okay, great. So when we think about modeling going forward, it's about 41.5%, you suggest?

Yes, 41.5% right now is a good number you can model.

Okay, perfect. Thanks a lot, guys.

Thank you. And I'm showing no further questions at this time. I would like to turn the conference back over to Mr. Steinberg for closing remarks.

I just want to thank all of you for your continued interest and support in WisdomTree. We look forward to speaking to you next quarter. Thank you. Have a good day.

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