WisdomTree Inc (WT) 2016 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the WisdomTree first-quarter earnings conference call.

(Operator Instructions)

As a reminder, today's conference is being recorded. I would now like to turn the call over to WisdomTree. You may begin.

Thank you. Good morning. Before we begin, I would like to reference the legal disclaimer available on 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 the times that are by which results will be achieved.

A number of factors could cause 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 year for the ended December 31, 2015.

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

Thank you, Steve and good morning, everyone. This was a challenging quarter due to market volatility and the negative sentiment towards our two largest ETF exposures. Yet, despite the challenges, we generated solid financial results flexing flexibility and efficiency of our business model.

As reflected in our strong financial position, we returned $46 million back to our shareholders through dividends and buybacks; and, in addition, have increased our stock buyback authorization by $60 million to have $100 million available to repurchase shares in the market. And lastly, we are continuing to make the right investments in our business to help further diversify and stabilize our asset base as well as best position us for the future growth as we continue to stay ahead of the competition and remain amongst the leaders in the ETF industry.

Now let's get into the results of quarter beginning with first reviewing the US ETF's industry statistics. US ETF industry flows were muted at $31.9 billion in the quarter. On the right, you can see that fixed income and gold lead the close. Investors tend to favor these two categories during times of volatility.

Also of note, emerging market equities, which had been out of favor historically, experienced inflows this quarter. Both hedged and unhedged international equities experienced industry outflows.

Turning to the next slide, we can review how our results align with these industry trends. As you already know, our US AUM declined 14% to $44.3 billion in the quarter primarily due to $5.4 billion of net outflows and to $2 billion from negative market movement. We also closed on our acquisition of Greenhaven this quarter which increased AUM by $200 million. You can see in the middle chart, the majority of our outflows came from hedge to DXJ. Away from these two funds, we generated inflows and our other hedged and unhedged international-equity ETFs.

There are several themes currently resonating with clients. The first is an interest in small-cap strategies both domestically and abroad. Second, because of the volatility in the markets, clients are focused on dividends and quality dividend-growth strategies as well as volatility-reduction products such as our recently put-right strategy.

Clients are also interested in products that advantage of interest rates potentially staying lower for longer periods such as our Agee fixed-income ETF. And lastly, we are having increasing conversations with clients on emerging markets. We have a strong product set and we are well-positioned to take advantage and build on these themes as well as continuing to educate clients on the benefits of currency hedging.

On the next two slides, we take a deeper dive into our two largest exposures. You can see in the first chart the equity markets in Europe and Japan have been a negative territory with Europe down 7% and Japan down 13% in local currency terms; and both markets are also down in US dollar terms. That negative sentiment has led to outflows in Europe and Japan-focused ETFs for both us and our competitors' products, as you can see on the right.

In fact, there is such a negative sentiment, both hedged and unhedged ETFs have seen outflows. Given that we are the largest in the hedge categories of these two markets, we have experienced larger inflows and outflows when the market sentiments shift. However, we remain the leader in the hedged category.

Turning to the next slide, you can see in the first chart both hedged and DXJ are more than four times larger by AUM than their next-largest competitor. And, as the chart on the right reflects, any change in our market share has been insignificant. Europe and Japan are important categories for investors and we believe we will see the benefits when these markets come back in favor. Despite the outflows, we remain focused on executing on our strategic growth initiatives we discussed earlier this year.

Turning to the next slide, 7. The objectives of these initiatives are to first, increase our target market share of inflows to 5% to 7%. Second, to take steps to diversify our asset base and stabilize our flows and, lastly, to best position us for the long-term growth of the ETF industry.

On the product front, we continue to focus on staying ahead of the competition through innovation and diversifying our product set. So far this year, we have launched 11 ETFs in new categories including liquid alts, a suite of smart beta fixed-income ETFS, and dynamic currency-hedged ETFs.

We're strengthening our position with our core client segments by increasing our marketing and digital initiatives to bring more awareness of our products in the most efficient way possible, as well as leveraging data to better target client segments. We are also expanding our distribution capabilities and footprint. To capitalize on the ETF-industry growth in Canada, due to recent regulatory changes, we will plan to launch Canadian-listed ETFs in the coming months.

In the US, one of our primary focuses is the institutional space; and we recently hired a new head to lead this channel. We also added to our sales team covering new channels like private wealth and the independent broker dealers to capitalize on their continued ETF adoption. So far this year, we have added eight people in sales and sales support functions.

To date, we have spent approximately $2 million of our target $12 million to $16 million on these important strategic-growth investments. All these initiatives, including our expansion into Canada, is included in our $12 million to $16 million targeted spend.

The next slide reflects our industry rankings. Our largest exposures were impacted the hardest by market sentiment which had a negative effect on our overall industry rankings versus the other ETF sponsors and publicly-traded asset managers. While we are not pleased with this ranking, we think it represents more near-term market conditions, not our long-term growth prospects like our mutual fund competitors.

On the next slide, we show our fund performance 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, 67% of our ETFs outperformed their peer group, where 94% of the approximately $43 billion invested in our ETFs were in funds that beat their peers, a statistic we are proud of.

On the next slide, we can review our results in Europe. Our European AUM continues to grow and reached $885 million at the end of the quarter. Our hedged-equity products as well as inverse and leveraged oil products ebbed the flows this quarter. We are continuing to launch products and add to our team as we build out the business in a controlled manner.

Now let's get into the financials beginning on slide 9. We generated solid financial results this quarter, despite the challenging environment. Total revenues were essentially flat from last year at $61 million as higher revenues from our European business offset declines in the US.

Our net income was also flat at $12 million due to expense management and lower incentive compensation accruals given our results. Sequentially, revenues and net income were down due to lower average AUM.

Turning to the next slide, as you can see from both charts, the currency-hedged categories continues to make up more than 50% of our AUM and our revenues. However it has been declining over sequential quarters.

One of the goals of our strategic-growth initiatives is to continue to innovate in differentiated products to help stabilize and diversify our asset base. Our average revenue capture remained at 52 basis points in the quarter.

Next we can review our key margin metrics. Gross margin for our US-listed ETF business was 82.9% in the first quarter. On our last call, we said we expected gross margin to be between 81% and 83% in the near term.

In the chart on the right, you can see the pretax margins on our US business increased from the prior year to 40.7%. So, despite having lower average AUM than the year-ago quarter and the spending increases, margins improved, reflecting the flexibility of our business model.

Next, we will review expenses on slide 14. Third-quarter total expenses were $40.8 million. Compensation costs decreased by a net $625,000 as higher seasonal payroll taxes, headcount-related expenses and stock-based compensation was offset by lower incentive compensation accruals given our operating results.

Funds in third-party sharing costs declined, as well, due to lower average AUM. Professional fees decreased due to lower recruiting fees. Marketing expenses increased $407,000 due to higher advertising expenses to promote our ETFs.

Our Europe buyout costs declined $747,000; as a reminder, last quarter we updated the approach for recognizing the fair value of our buyout obligation. We also incurred $418,000 in fees related to closing on our acquisition in Greenhaven. In total, expenses declined by 4%.

On the right, you can see compensation as a percent of revenue, for our US business was 23% for the quarter, below our annual target of 24% to 28%, reflecting our current level of operating performance. This percentage would have been lower if not for the higher seasonally-adjusted payroll taxes due to bonus payments from last year.

Let's review our balance sheet on the next slide. We ended the quarter with total assets of $238 million and cash and investments of $182 million. On the right, you can see we generated $29.7 million of cash from our operating activities and we used $23 million to pay bonuses for 2015 performance. We bought back $35.6 million of common stock during the quarter and distributed $10.9 million in dividends to return nearly $46 million back to our shareholders.

We also used $11.8 million for our acquisition in Green Haven to end with cash and investments of $182 million. Also today, we announced that we have increased our share buyback authorization by $60 million, bringing the total available today to $100 million.

On the next slide, we can go through our taxes. We are continuing to utilize our remaining net-operating losses. This quarter, we generated additional tax losses due to timing of cash bonus payments for 2015.

At the end of the quarter, we have nearly $29 million of pretax income that can be sheltered from paying cash taxes. It is highly likely we will use up the remaining NOL by the third quarter. However, we continue to generate tax losses through employees exercising options and vesting in their restricted stock. The detailed information for that is on the right-hand side of the slide.

Before turning the call over to Jono, let me give you an update on where we are so far this quarter. As of yesterday, our AUM is essentially flat as outflows are offset by positive market movement; and, on the right, you can see our flows by category. So, in summary, despite the challenging quarter, we generated solid financial results reflecting the flexibility of our business model and we will continue to balance expense management with investments for growth.

Thank you and let me turn the call over to Jono

Thank you. Good morning, everyone. As Amit discussed, our over-weights in Japan and, more broadly, the US dollar led to outflows in our largest ETFs. It was simply a very difficult market environment for Wisdom Tree.

Looking ahead, we were pleased to see the final fiduciary rule from the Department of Labor earlier this month. This rule is widely credited as being constructive for fee-based advisory models, ETFs and passive investing. People can debate the precise amount of affected assets under management and revenue, but no one can debate the ultimate trends.

WisdomTree's ETF-focused business model stands to benefit, perhaps the most, among publicly-traded asset managers. I say that because WisdomTree has the highest percentage of AUM in revenue tied directly to ETFs and transparent product. These are the characteristics that are clearly benefiting from recent flow trend and new regulation.

The fiduciary rule will reverberate well beyond the US retirement market and it reinforces the transformation of the asset-management industry that is already well underway. And it is only the latest in an ongoing trend of transparency around fees and advice. For example, Canada's CRM 2 is amongst the most progressive laws of this nature which is one of the main reasons why we are so excited to enter Canada at such an opportune time.

Recent headwinds for WisdomTree are not pleasant, but they do not change the long-term reality of ETF dominance. As a market leader, WisdomTree is well-positioned to participate in future industry growth. Our solid financial results and strong operating margin combined with our strong balance sheet underscores the inherent strength of our business which allows us to stay the course on important strategic investments which are geared towards diversifying our business and growing our long-term market share.

We feel confident that we have the right balance between margin, investment and capital management. Thank you for that. Now let's open up the call to questions.

(Operator Instructions)

Craig Siegenthaler, Credit Suisse.

Thanks. Good morning. I just wanted to circle back on the buyback authorization. It was nice to see that, but I'm looking where the dividend is today versus your earnings run rate and I'm wondering how will that impact the buyback?

Well, when we think about how we return capital back to our shareholders, we do it through dividends and we do it through buyback and we will do it now based on what's going on at the time. Where we see the industry, where we see our growth prospects, where we see we need to put in capital to the business. Whichever way we will do it, whether it is through specials, whether it's dividends, through buyback, it will just depend at the time.

Craig, this is Jono. Last year, we delivered something like over $100 million in capital and more of that was in dividends than buybacks. And, as the stock weakened this first quarter you saw us shift a little bit more on buybacks versus dividends. And so I think, to Amit's point, we have to be flexible to where we are at any given moment.

Got it. And then just as my follow-up, I want to understand how you structure your European business; and I'm wondering if a Brexit would impact how you structure the use of business

I'm sorry, Craig--?

For the exit potential from the EU.

Our lawyers and our regulatory folks are monitoring that to see -- we do have Dublin-based usage and our regulatory folks are monitoring what would happen in case there would be an exit. It's something that-- it is ongoing. We will make adjustments as the rest of the industry since Luxembourg and Dublin are the two major European domicile areas for use of funds for Europe.

Thank you.

Michael Cyprus, Morgan Stanley.

Good morning. Just wanted to ask about some of the low-volatility products; it's been a very strong category this year. Don't quite necessarily see it per se coming through in your flows. If you could just talk about your positioning in that category, how you're thinking about it. Your positioning, thoughts around product development with respect to low-volatility products.

Hi. This is Luciano. We, as you know, created 10 years ago, dividend-weighted funds around the world. So, in some instances, they do exhibit some of the characteristics of low volatility. They are certainly lower beta relative to the market. We had a very strong first quarter in terms of performance of those funds; in part because of how well they did when the market was declining.

So certainly we have some existing product, I think, that can fit into that mold. Obviously, we are always looking for new ideas. The research we do is ongoing. The test, at this point, would be to create better low ball than what is already in the market.

I would note, that the market has noted, that some of these lowball strategies are starting to get a little bit stretched in valuations. And so, some of the excitement about them they have been backwards-looking, but now we look at current fee ratios, some of the expected alpha going forward might be called into question.

So we will expect to innovate. We launched the put-writing strategy recently, which we think could be used in the portfolio to help lower volatility. We also launched a long and short portfolio that can also be applied that way. There are a lot of tools we think investors can use to lower overall volatility and we'll continue to innovate in the space.

Great and could you also talk a little about the fixed income products that you launched? I know you mentioned Agee and that you launched some other ones just the other week. Who the target customer, their rationale for using the product maybe you could also talk to an update on distribution around those products.

So Agee we launched almost a year ago and we have been able to attract upwards close to $100 million in it. That starting to get traction in the wire houses; we're starting to get more approvals there. That's just basically gives investors a way to enhance the yield on the existing Ag; and we think it has a lot of application and environment where the fed may be dovish longer than people expected.

With respect to the recent product launch, that was a smart beta fixed-income launch and that was really WisdomTree's floorway into fundamental fixed-income ETFs. We think it's a very interesting strategy in the US credit space to screen for quality and tilt towards income. That's really designed for advisors and clients who are getting concerned of where we are in the credit cycle, where we are in the market cycle and they want to have a higher qualitative screen applied to their credit exposure. So we will be educating clients about that and that will be a big push for us this year.

Great. Thank you.

Jason Weyeneth, Piper Jaffray.

Thanks, first one for Amit. When we're thinking about the comp ratio and the guidance range that you have given, what type of revenue growth or net flows or metrics should we be thinking about that would land you in that range rather than maybe a little bit below like we saw this quarter?

So we have a pay-for-performance model, so when the performance is not there, the AUM is not there and the revenue is not there, compensation will be reflected. And you can see that in the first quarter. If you go back historically you can see, when we've had outflows or inflows how that comp ratio will change.

We are driving towards an annual target based on where our operating results are today. We would expect to see something towards the lower end of that range; and if that trend continues for the rest of the year, there may be a little bit of offsets based upon headcount growth that we think that we are going to do during the year that we think are very important for our long-term growth positioning, but, as of right now, we're still thinking about the low end of the range.

And then just following up on the themes that you highlighted on slide 4. If you had to rank those or highlight one or two where you think your product suite is currently best positioned, which would those be?

Hi, this is Luciano again. Obviously when we are thinking about themes in the small cap space, those are truly one of the first to launch international small caps around the world, we saw inflows there into European small caps in the first quarter. And that's in unhedged exposures, so that's a good complement to the hedged exposures we have. Obviously there's a great deal of interest in dividends now in this low-yield environment.

We're also coming up on a 10-year anniversary on our main dividend fund. We have, when you look through the assets under management and you look at where our assets are, in terms of a billion-dollar plus funds, several of them are dividend-weighted funds that were launched about 10 years ago; and they are coming upon a 10-year anniversary. Once that screen hits people will be able to compare that to strategies that have been around a decade.

I think, at that point, you start to get a potential catalyst for these longer-term funds. Obviously, quality dividend growth is a big thing for WisdomTree. We've seen some inflows there internationally, as well as domestically; and have spoken about what we think we can add in terms of volatility reduction.

I think the key thing to keep in mind is that we believe we have competitive products in every single category that is out there. It's really a function of the marketing environment and where we focus and then where we can execute as the winds start to blow back in our favor.

Thank you.

Bill Katz, Citigroup.

Thank you very much for taking my questions. Nice to see the repurchase authorization. So, curious, can you frame that out relative to how you think the share count proceeds as you go through this year. I would have expected a little more of a deeper decline just given the big buyback in the quarter. Is this a good run rate or would you expect to have a net reduction of shares. How are you thinking about that?

Sure. You know we took out as our share count reduced by about a little over 2 million shares this quarter. To the extent we do increase buybacks through the remainder of the year, you should see that share count continue to decline. We don't disclose the amount of share repurchases that we are going to do during the year. But, philosophically, we are trying to keep share count somewhat flat.

Remember our buyback covers two things. One is to eliminate share count creep when we issue stock to employees, so that part will remain flat. And we'll be opportunistic when we think the time is right.

Okay. And just going back to Jono's discussion about striking that balance between volume versus margins. How do you think about the long-term margin of the Company these days given your aspirational goal of 7% or so market-share of incremental growth? Is there any willingness to give up profitability for growth or can you still sustain that historical margin target of that 50% plus?

Hi Bill, it's Jono. When we look at margins, investments and return of capital, you have got to look at all three of them. When we start from the margin perspective, last year we top-ticked at about $60 billion in AUM and we achieved a 50% margin. So, from a margin standpoint, I feel like we really have accomplished tremendous things.

Now, our assets are down, so we're averaging about $44 billion right now and we showed something more like a 36% consolidated-margin this quarter, a very strong number relative to the other public peers at such a small AUM. Now you know that while we are showing you the 36% margin, we are making pretty significant investments. We are in Europe. We are launching in Canada. We have Japan. We are hiring people in the US and launching a lot of funds.

So we're making investments. We are doing that because the opportunity we see, it's so huge, so tremendous that we want to make sure that we maintain our leadership position. And then, from the standpoint of capital return, last year we returned more than $100 million; this year $46 million. So a pretty significant capital return. All in general, we are trying to be a tremendously efficient organization. The investments are geared towards really scaling in the future and it's our full expectation that we can achieve the highest margins of any of the publicly-traded asset managers as we scale. But I feel no pressure to do that at $44 billion.

Okay and just one last one, thanks for taking three this morning. I'm intrigued with your entry into Canada. Just looking around at the actual market size there, it seems to be somewhat, there's somewhat entrenched players there. Can you talk a little about strategically how you plan to attack that market? I appreciate the regulatory backdrop opportunity, but specifically how you had to build a little market share there.

Sure, Bill. I think, when we think about foreign markets, there's four things that we look at. Generally it's what's been the rate of ETF adoption in those markets.

Second, are there regulatory changes that are happening there that we think will be conducive for ETF-industry growth. Third, we look at how do our products and strategies-- will they be accepted in that marketplace? And lastly, from a business standpoint, if we think we can make money there.

I think, Canada, when we look there, it fits that sort of guideline. The regulatory changes with CRM2, that's happening there to bring more transparency on fees, we think will be good for ETF-industry growth there. And then, so when we look at our product set, with our smart beta products, our innovation, our differentiated product set, we think that we can be very successful over there.

Now look, it's a competitive market just like here in the US. You have the big players here that are there, as well as some big local players. It's not going to be explosive growth on day one, but we think this is all incremental growth for us to help increase our targeted market share.

Remember about 14% of our assets today come from non-US investors. This is not just about locally-listed products in Canada, but it's also the ability for Canadian institutions to buy US-listed ETFs.

Bill, just let me add a couple of things. We probably have close to $700 million in assets from the Canadian market now, so investors there already bought our products; so that's proof of concept. Also the cost of their proximity to the US, they see our commercials. We have brand awareness in Canada.

And again, because of the proximity, a lot of the launch will be coming out of the US, the infrastructures in the US. Canada was always one of the most logical first markets. Europe was our first market and Europe is the second-largest so incredibly strategically important to the firm, but it's a much heavier lift. We had to do more because we have no supporting infrastructure nearby to support it.

So Canada really makes total perfect sense. It was either going to be first or second in our launch scheme. And now, within CRM2, it's just a perfect time.

Okay. Thank you very much.

Chris Shutler, William Blair.

Good morning. Maybe just a follow up on compensation expense. If flows and AUM were flat for the rest of the year, would you be at the low end of the US comp ratio?

Yes, under that scenario, if we think we're going to be flattish then yes. I would think low end of the range is where we think about it.

Okay. And then in Europe, AUM there continues to increase nicely. Why did the fund management and admin down from the prior two quarters and what should we look at as the trend there?

We incurred some one-time costs when we launched some of our use of funds out in Europe. We launched a series of different share classes through our use of funds. So that's what drove off some of these one-time costs out there that you saw over the last couple of quarters which didn't recur this quarter.

Chris, thanks for the shout out on the success that the European team has shown. They really have grown quicker than many of their larger peers on really less resources. That's been a very successful year-to-date start them.

And then, lastly, could you give us the AUM by channel, if you have it? And I'm curious, in the institutional space and the recent hire there. The asset owners there, I think, have historically been pretty tied to benchmarks which has led the asset managers to be pretty tied to benchmarks, name brand indices as well. I'm just curious, in your conversations with institutional investors, do you see much evidence of their getting comfortable with self-indexed providers? Thanks.

Hi. It's me again. WisdomTree for now, a decade, has been taking on the traditional indexes; and when we started, there wasn't even a conversation of smart beta or factors of fundamental weighting. There's no question that the institutional investors have a historical legacy to the traditional benchmarks, but there's also no question that they are getting much more comfortable with a lot of the new innovation that has taken place in investing, including WisdomTree's offerings.

Can you give us the percentages by channel if you have them?

Chris, it's Amit. It really hasn't changed as much from what we have seen historically. Roughly one-third of our assets with the RIAA; one-third with NSS; about 14% non-US; about 14% with institutional; and the balance to retail.

All right. Great. Thank you.

Alex Blostein, Goldman Sachs.

Hi guys. I was hoping you could spend a couple of minutes on pricing. It looks like some of the newer strategies that you launched have a little of a lower management fee than where we have seen in the installed book of business. And also, competitive landscape on the smart-beta front is intensifying with a lot of more traditional players coming, obviously, a bit behind the curve, but more competitors. Had do you expect pricing to evolve in some of your products?

So you are right we have launched recent funds at lower price points if they were within a suite of product that we had launched years ago, but we knew that. That's one of the reasons why we moved so quickly in general. There's no question that future product launches will probably be at lower prices than things that were done yesterday or 10 years ago. We knew that and it's a part of the strategy; and it's one of the reasons why we really try to push very aggressively.

From that standpoint, since January 1, 2015, we have launched 29 new funds. We've really put down some very important markers. Liquid alts, which I think will play a very large role in WisdomTree's success over the next 10 years.

The fixed-income suite that we were asked about earlier on the call, that's been something that we have in working towards for 3 or 4 years. When we started with emerging markets where we could really be first in some of the executions. What you've seen that how we have attacked the US fixed-income market first with zero- and negative-duration funds and Luciano spoke about the enhanced Ag

And what we did today, or actually on Wednesday with the smart-beta fixed income, it really is a very exciting development in the fixed-income arena. There hasn't been that you have traditional-beta indexes. You have a few successful active managers. There have been very little innovation on the indexing side and we are now a leader in that.

It's very, very early days, but it's something that the team here in New York, the WisdomTree fixed-income team, has been working on for 3 or 4 years. We're really trying to put those markers down as quickly as we can knowing that it makes all the sense in the world that we're going to see more competition over time.

Another strategic distribution question for you guys. The importance of set automatic advice, the robo advisors has obviously picked up over the last 12 months. And with the DOL rule, it feels like that part of the distribution mosaic will become more critical. Can you talk to us a little bit about how do you try to distribute through those channels and whether or not you are thinking anything on the more proprietary innovative front, starting your own to help facilitate some of the shelf space for your ETFs line-up?

We are watching very closely the evolution of robo. We have been looking at it for quite some time. They have tended to be the most vanilla executions in their fund selections, to date, but they will need to differentiate just as the industry in general has to differentiate. And we think that there are lots of opportunities in the future for us.

I'm not sure how big robo will be. There's certainly been some incredible short-term projections for asset growth. I think that's a bit optimistic. But there's no question that technology can be very constructive in delivering advice.

We also have models right now on our website that Luciano and his team have been creating for a couple of years. So we are providing a lot of advice to our clients. But stepping back, robo just tends to be constructive to ETFs. So, from that standpoint, we are very happy with the development.

Thank you for taking my questions.

Adam Beatty, Bank of America.

Couple of follow-ups. First on comp and incentives, I appreciate all the detail there. Just wanted to disaggregate. You mentioned AUM revenue and flows in terms of driving incentive comp. In a scenario where, let's say you've got some market benefit in key products and they bounce back pretty well, but flows were still somewhat challenged, what should we expect in terms of the movement of incentive comp?

Sure. Look there's four things that we look at when we think about incentive comp. First and foremost, is net inflow levels. That's a very important factor that we look at. Second, is our market share of inflows; third is our pretax margins that we have targeted versus the beginning of the year. And lastly, how our stock has performed against the publicly traded asset manager. So, of that, I would say the biggest driver of all of those will be net inflows. So that's what you should look at.

Great. Thanks, Amit. On then on distribution, you mentioned incremental opportunity from DOL and I'm thinking in terms of allocation models with brokers and large retirement plans, what have you. Right now, which of your products are gaining the most traction there? What areas seem to be of interest, if you will, into intermediated retail channel?

Hi, this is Luciano. We continue to see interest in this team of solving for income. We think one of those areas we're uniquely positioned is giving people a way to get broad-equity exposure around the world, but in a way that squeezed out as much dividend income as possible from the market, while still continuing to correlate with the market, and, in some instances, generate returns that can exceed the market.

So, we are certainly going to continue maintain and try to improve the dividend-weighted portfolio we have on our website. And, to the extent there is interest in those models, across brokers and distribution potential partnerships and partners, we're interested in speaking to people about different ways to make them more available to our clients and our advisors.

Interesting. Thanks Luciano. That's all I had today.

Ann Dai, KBW.

Hi. Good morning. Thanks for taking my questions. Just a quick question on the European business. You have previously given guidance of $8 million to $11 million of free cash losses in Europe. Is that still about in-line?

Hi, Ann, yes. That's the target and the way the businesses is running; we are in line with that.

Okay great. And, you've talked a lot about getting the market quickly in different geographies and spending to run ahead. And so, when you think about the European business there and thinking about the new product launches, the continued investment spend and then the growth of the business, internally, how do you think about a break-even point in that business? Either, do you target certain asset levels internally? And, when you think about it, is it a couple year kind of thing? Is it longer than that. What are your goals?

Sure. So a lot of the profitability or breakeven will be dependent upon where we see the flows coming in and which product set. Our inverse and leverage boost funds are higher-priced and higher margin versus the use of funds which are more traditional and priced competitively in the marketplace. So that will have a factor on breakeven.

And just put that in context. When we did the investment in boost, we put a $20 million investment; we think that's how much cash it needs to roughly get to breakeven by somewhere at the end of 2017. And we are still roughly going on that track. It's a very controlled build out that we are doing; and everything is going as we had planned.

And just a quick one. On the $2 million that you spent towards the (inaudible). Has most of those fallen to marketing. Is that why (inaudible)?

I am sorry, Ann, you were breaking up there. Can you repeat the question?

On that $2 million that you spent on the strategic initiative, where does that fall in? Is that mostly in the marketing line item?

It's really been across the board. We have hired about 10 people so far this year predominantly in sales and sales support. We have launched 11 funds. You can see from our income statement, we have picked up the marketing and sales-related spending. So, really it has been across all those three categories.

Thanks.

Pete Hoffman, Northcoast Research.

Good morning, gentlemen. I was hoping you could provide a little more color on the investments in Canada and Japan. I appreciate the comments on Canada. I think they can leverage the US infrastructure.

As you guys thought out those practices over the next several years, do you think we'll take trajectory close to how you are doing it Europe? Or, how do you see those expenditures coming through for the next several years? Corollary to that, how do you think of perhaps the revenue growth in terms of where it can, 2 or 3 years from now

On the expense side, what we did in Europe, was we built a standalone operations there. What we are doing in Canada is not that. Because of its proximity, the English language spoken there, we will be able to leverage a lot of what we're doing here in the US up into Canada. So it won't have the same expense base that you see there.

In Japan what we have is basically, we built out a sales office and our sales staff there are selling our US-listed ETFs and use it funds to Japanese institutions there. So again, it's not as big of a buildout as we did in Europe. So expense-wise they are going to be a lot less; but I would say, from a revenue growth potential, it is going to be dependent on the market size and how our products and the ETF growth are growing in those markets.

So right now you guys break out Europe as a separate income statement. Is Japan and Canada going to continue to be broken out and included in the US numbers? Or are you guys going to do international income statement at some point in the future?

Yes, I think we're going to probably, once the Canada numbers get to be larger, they are very small right now, but once they start to be larger, I think we will probably just have a US segment, which is part of Japan is in our US segment; and then we will have probably a non-US to look at as well.

Great. Thank you.

Bill Katz, Citigroup.

Hi, a couple of follow-ups and thanks again. You mentioned you'd get to $2 million into your $10 million to $12 million range for this year. Obviously, you have a lot of things going on now. What kind of flexibility do you have if the revenue backdrop with the AUM were to get a bit weaker from here?

Sure, so these are all discretionary spending that we have. Can we rent them back if we had to, yes? Let me just reiterate what Jono said at the beginning from your other question to help put our spending in some context.

The mutual-fund industry has been in decline. When you look at our competitors in the mutual-fund space, they're doing restructurings, they are doing cost reductions because their industry is in decline. Our industry, the ETF industry is actually growing.

When we think about the investments that we're making, they're very important for us. They are targeting three things. Continue to grow our market share 5% to 7%; continue to diversify and stabilize our asset base; and position ourselves for the long-term growth of the industry.

We think it's very important for us to continue to make those investments. Again, as Jono said, put our margins in perspective and we are in the top three, so far, of the companies that have reported so far. We feel very confident in our ability to continue to make these investments. But we will always manage that with the cost discipline.

Okay and just one last follow-up for me. Just looking through my numbers versus your dividend, I know you touched on it a little bit earlier. But, when you initially set your dividend, I think your earnings would have been at a higher level. How do you think about, strategically, the right targeted payout rate of earnings, just so we can try to think about the dividend a little bit more closely?

The way we think about we don't necessarily think as far as payout rate, but when we first put out the dividend, we look more at the dollar value of what we're going to put into a dividend. We felt very comfortable then. We feel very, very comfortable now with the level of our dividends; and that's why we feel so confident we are able to even increase the stock buyback authorization. We have no issues in the level of our dividend payments.

Okay. Thanks again.

Michael Cyprus, Morgan Stanley.

Thanks for taking the follow-up. You mentioned that you're seeing interest in the theme of solving for income. Just curious what's the opportunity stat for creating a multi-asset solution that uses both equity and fixed income within the same ETF? And could you also speak to the challenges of creating such a product, what that might be?

Hi. This is Luciano again. I would just say that the category that you mentioned, the so-called balance funds that use both equity and fixed income, obviously, there is a very large amount of assets in the mutual fund industry and those types of funds. So that's a natural target to look at. We don't comment on any specific funds that we may launch in the future or strategies.

But I would just say that WisdomTree has shown an ability to execute in terms of building products that are both innovative and, in some instances, very complex. So I would just say, I think we have a track record of being able to innovate and if we think clients are interested in categories that really haven't been in equitized yet in the ETF structure, we will continue to take a look at that.

And if I could add another follow-up. You mentioned digital investments, I assume that's probably referring to something on the robo front. Just in terms of the conversations you're having with thinking about robo partnership or distribution. What products do you think would make the most sense as you think about broadening distribution and partnering with robos? Would it be more liquid alts as they try and differentiate on their end? What are some of your thoughts there?

Well again, this is Luciano speaking. Jono was right; a lot of the first iteration were plain vanilla beta exposures. One of the big themes over the last few years has been the importance of managing volatility internationally by hedging out currency risk. I would say that the currency-hedged category is still a big opportunity out there; and obviously WisdomTree is a leader in that space.

I think as the robo advisors and some of these platforms expand beyond just unhedged international equity, WisdomTree products are a natural consideration given the scale and the size of the volumes and the assets and the track record. I would hope that these people are starting to look at hedging out international currency as that's obviously been something that is resonating with clients.

Great. Thank you.

I'm not showing any further questions at this time. I'd like to turn the call back over to Jonathan Steinberg

So I just want to thank all of you for your time and attention. We will speak to you in another 90 days. Thanks everybody, have a good day.

Ladies and gentlemen, this concludes today's presentation. You may now disconnect. Have a wonderful day.