WisdomTree Inc (WT) 2016 Q3 法說會逐字稿

Good day ladies and gentlemen and welcome to the WisdomTree Q3 earnings conference call.

(Operator Instructions)

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

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

This presentation may contain forward-looking statements within the meaning of the 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 at the times that or by which results will be 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 the Risk Factors section of the Company's annual report on form 10K for the year ended December 31, 2015 and quarterly reports on form 10Q for the quarter ended June 30, 2016.

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

Thank you, Jason, and good morning everyone. This was a challenging quarter due to the continued negative sentiment towards our two largest ETF exposures. However, despite the challenges we are pleased with the continuing flow momentum and performance of our US equity product suite and remain focused on continuing to position our business for the long term because of the continued growth of the ETF structure and the significant regulatory changes due to go into effect that we believe will further accelerate growth in our industry.

Now let's get into the result for the quarter beginning by first reviewing the US ETF industry statistics. US ETF industry flows rebounded to $90 billion this quarter. On the right you can see all categories had inflows with the exception of the international developed world equity categories. The negative trend to the international category was a significant driver of our results this quarter, which we can begin to review beginning with the next slide.

Our AUM declined slightly to $37.7 billion as $2.4 billion of outflows were partly offset by positive market movement. Hedge and DXJ drilled the majority of our outflows, however, the outflow levels have started to decline.

On the right side you can see industrywide both hedged and unhedged Japan and Europe strategies experienced outflows. Ex hedge and DXJ our flows were positive this quarter and on a year-to-date basis. We're continuing to see positive momentum in our US equity ETFs which took in 50% greater flows this quarter and reached $759 million.

We take a deeper dive into our US equity flows on the next slide. As you can see from the chart on the left on slide five, our leading US equity ETFs, most with ten-year track records are generating solid annualized organic growth.

The US equities base is extremely crowded and competitive, yet our US equity complex has grown at a rate of 31% which is significantly higher than the industry organic growth rate of 19%. We believe this trend comes from a combination of positive momentum for US equities as well as many of these funds receiving a stellar ten-year track record. As reflected on the right, our US equity product suite has outperformed actively and passively managed mutual funds and ETFs across all time periods.

We believe in an environment where investors are continuing to shift from active to passive, our proven Smart Beta approach brings together the best of both worlds and separates us from others just competing on price in a commoditized space. This will be a competitive differentiator for us in a post DOL world.

Turning to slide 6, as is already known, our largest exposures continued to be negatively impact by market sentiment which has affected our industry rankings. While we are disappointed with these rankings, it represents more short-term market conditions, not the long-term growth prospects of our business.

On the next slide we can review our results in Europe and Canada. Our European AUM surpassed $1 billion and with the accelerated buy-out for the majority shareholders last quarter, our new leadership is preparing a strategic plan to accelerate growth of our European platform. We are also excited to have launched our Canadian listed products in July which have $68 million in AUM today.

Now lets get into the financials beginning on slide 9. The AUM decline from negative sentiment towards hedge and DXJ led to a decrease in our revenues. Total revenues were $52 million in the quarter and net income was $8 million or $0.06 a share.

Turning to slide 10, as you can see from both charts, strong flows in our US equity products contributed to a shift in AUM concentration and revenues. Our average revenue capture ticked down to 51 basis points in the quarter due to the change in mix of our AUM.

On the next slide we can review our key margin metrics. Gross margin for our US listed ETF business was 80.5% in the quarter, down to the lower average AUM. At AUM level today, gross margins were expected to be around 80%. In the chart on the right consolidated pretax margin was 27.5% and our US margins were 32.3%.

Turning to the next slide we can review our expenses. First-quarter expenses, excluding the buy out charge last quarter was $38.8 million. Sales and marketing costs decreased due to lower levels of spending. Professional fees decreased due to lower recruiting expenses.

Fund related expenses declined due to lower average AUM in our US products. Compensation costs increased as we adjusted year-to-date incentive compensation to our targeted full year guidance of 24% to 28% as you can see in the chart on the right. In total, expenses declined to $37.6 million.

Let's review the balance sheet on the next slide. We ended the quarter with total assets of $249 million and cash and investments of $194 million. On the right you can see this quarter we generated $15 million of cash from our operations and returned $14 million back to shareholders through dividends and buybacks to end the quarter with $178 million of cash.

Before I turn the call over to Jono let me give you an update on where we are so far this quarter. As of yesterday, our AUM was up slightly to $37.8 billion and on the right you can see positive US equity flows are continuing and outflows and hedge and DXJ are slowing.

So in summary, despite the continued challenges around our two largest products, we see encouraging signs in other parts of our product suite and are focused on growing in those areas. As we always do, we will continue to balance common sense management with investments for growth.

Now let me turn the call over to Jono.

Thank you, Amit. Good morning, everyone. The third quarter was incrementally better than the second quarter, but we are still obviously not pleased with the results. For perspective, I would categorize our performance as having very little market momentum but significant strength overall as a firm. WisdomTree remain one of the best positioned firms for where the asset management industry is headed.

The Department of Labor's fiduciary role is accelerating change across the entire industry, impacting product manufacturers and distributors. We have a business model designed to both coexist with low fee data and compete with it as our long-term track record underscores.

We are strategically investing to ensure WisdomTree remains one of the best positioned firms for a post DOL environment. Our investments are intended to maximize our long-term growth potential. Few companies are as well positioned to succeed in this hyper fast-changing global industry as WisdomTree.

Thank you, let's open up the call for questions.

(Operator Instructions)

Craig Siegenthaler, Credit Suisse.

Just as a follow-up on the DOL rule commentary, I just wanted to see which products you think are best positioned to take share? And when could we start to see the positive impact on flows?

I'm not sure specifically DOL changes any one specific fund's strategies. I think that the DOL is very, very positive for ETFs in general and that our differentiated proprietary approach I think lines up extraordinarily well with the new regulations.

We are starting to see positive flows but they've been overwhelmed by the outflows of our largest exposures, as you are aware. Recently, and when we update on Saturday you will see there has been some more positive movement just on DXJ as the dollar/yen has been moving, but in general we have to see market sentiment at least to continue to moderate on those large exposures.

Also I was wondering if you could provide a quick update on the S&P 500 China ETF. I think as you last left it, you had a European share class but not a US share class yet, so maybe just an update there?

Sure. Let me introduce for this call our Global Head of Distribution, Kurt MacAlpine. Kurt would you take that first?

Sure. In regards to the S&P China 500, as you heard on the last call, we do have a global exclusive product partnership with ICBC, Credit Suisse and WisdomTree. We've chosen to launch that strategy first and use the format in Europe with the expectation that we would be bringing the product queue to other markets around the world. Nothing as of yet, but it is still our intention to take that strategy and the global exclusive partnership that we have in place and bring it to new markets, including the US.

Chris Shutler, William Blair.

I wanted to follow-up on that same topic on the DOL. Just better understand what specific initiatives are underway at WisdomTree or what investments you are making to take advantage of the rule?

I read a lot of the transcripts of the other public asset managers and unlike them, we are not changing our business model. We don't feel the need to reduce our fees. We built this business for -- so that the commoditization of non-exclusive indexes.

We don't have conflicts within our business model as others have to deal with and we have been making steady investments from the very, very beginning of the launch of the firm, and so WisdomTree really doesn't change anything, but let Kurt add a couple other points if he has.

Sure. As we think about how many wealth managers are responding and many of them are still working through their strategies for DOL, we are really seeing a few themes or trends emerge. So one is around providing more guardrails around the investment decision-making process for advisors. Second is we're trying to deliver a more consistent client experience, and third is they are hoping to package this execution more through fee-based accounts than transaction-based accounts as a way of normalizing that experience.

So the impact on asset managers, which we're hearing focus on a high-quality, focus on differentiation and looking for high-value, lower-cost products. As Jono had just mentioned, we feel our business model was essentially designed for DOL. The combination of an ETF focus, differentiated and proprietary products and our consultative selling process, that touches both platform, gatekeepers and advisors should position us very well when the dust settles and the firms have executed their strategy.

And just one other quick one for Amit. Amit, you have a very strong balance sheet, no debt. I know this hasn't been an issue historically, but what kind of debt levels would you be comfortable with as a business given the market sensitive nature of the revenue?

A lot of that would depend on who is providing the debt, right? There's obviously certain levels, how many times EBITDA the Firm would be willing to give out. So I think a lot of it would just depend on sort of why we would take on debt, and that would really define the level of comfort of how much leverage we can put on the balance sheet.

Michael Cyprys, Morgan Stanley.

Just curious if you guys could talk a little bit about how you are thinking about packaging your ETF products into on our portfolios and [NSMA] accounts?

In terms of packaging our products in model portfolios, so if you think about asset allocation and the role that WisdomTree has been providing in delivering asset allocation through our clients for the last number of years, there's really been two components to it.

One is we have a suite of model portfolios that Luciano, our Chief Investment Strategist, oversee that asset allocation team and those standardized models that we have available for FP access today. We also internally have a customized asset allocation capability where we work individually with our clients to come up with asset allocation recommendations and then WisdomTree product recommendations within those asset allocation strategies.

What you are starting to see us do more of over the last few months is taking this foundation and framework that we've built and applying it to asset allocation models that will be available for execution across a number of the different strategists and model managers that exist in the marketplace today. So we're in the midst of taking this process that we've been refining and using for the last number of years and applying it to the market in a way that people can execute our strategies in a more simpler and easy to access way.

This is Luciano. I would just add that we are actually running against the models so we can create a real-time performance track record and we intend to have that monitored and updated by an outside third party so that performance record can get out there to the market, and we think that will facilitate the process for us going forward.

If I could just ask a follow-up on a separate topic, just around distribution as you are building out Europe and Japan, Canada. Just curious how you are approaching distribution differently in perhaps each of these different markets relative to the US, how the markets are different and what your approach is in distribution, how that differs?

Sure. As you look across the markets, there are a lot of similarities, so despite a different operating environment across each of markets. There's a lot of similarities in terms of our business model which is focused on the financial intermediaries, the more influential gatekeepers and ultimately the advisors that are placing assets. So at that level things are largely the same.

The investment intellectual property that we're bringing to our clients is consistent across markets and the role that we have to play in educating our clients both those platform gatekeepers and the advisors is quite consistent. So there's definitely subtleties as we think about how you sell in Japan versus how you sell in Canada or Europe, but for the most part the approach is largely consistent.

Next question.

Bill Katz, Citi.

Thanks very much. I joined the call just as the comments started so I apologize if you covered this. Could you talk, Amit, little bit about the guideposts that you'd have that would range the comp for the fourth quarter between the high and the low-end, what kind of dynamics are you looking at for that?

Sure. The biggest outflow dynamic will obviously be the level of flows, that has been the biggest driver of volatility in our compensation as you have seen quarter over quarter. If you go back a couple years ago we had a big spike in the fourth quarter in our comp because we did see a higher level of flow coming in, so that will be the biggest driver of it. Remember we are targeting that full-year amount of $24 million to $28 million and as based on performance so far, I would say towards the low-end of the range of that.

And then Jon, perhaps one for you. All we keep hearing from many of the traditional managers is sort of the downward pressure on pricing. You have on one side of the table a reduction on pricing on core ETFs by BlackRock and Schwab and others. And then just the inevitable decline in more the traditional mandates through hedge funds. And then you look at the swap [data] it's been relatively resilient on pricing so far, although competition is picking up. Can you talk a little bit about how you sort of see the volume versus maybe fee-rate dynamic playing out over the next couple years for Smart Beta?

Again it's very -- the trends that you are seeing are not new. There was always incredible price competition on nonexclusive indexes, so we are certainly not focusing on what the hedge fund industry is doing to make themselves more competitive, but what when you look at what the iShares recently did on some of their core, that really doesn't change the dynamic of what commoditized data was doing when we launched the firm in 2006. In terms of Smart Beta, again it helps that we are doing it off of a proprietary index that we got in early, so we haven't seen very significant at all pricing pressure.

I'm not trying to say that we are immune to pricing pressure. We've never been immune to pricing pressure. We just created for this environment, so it just -- continue as we go.

Okay. One housekeeping item and maybe it's me and my numbers, but it looks like there's been a restatement on the second-quarter fully diluted share count. Is that right or do I have a bad number in my model?

Yes, because we had some noise in our share count last quarter because the reclassification of [how] because our unvested securities, they do carry dividend and voting rights so they are considered participating securities on how we calculate EPS other than [the supplied method]. That had an immaterial reclass on our share counts from last quarter, but there's no change in EPS.

Ann Dai, KBW.

I did want to start again with DOL and understood that your kind of seeing it from a long-term perspective, but I'm just wondering in the short-term if you do feel like maybe there's some assets that are going to be in motion as people move towards fee-based accounts, and if so are you doing any kind of enhanced outreach to distributors to try to take up a larger share of flows around the implementation date?

This is Jono. Really, DOL is extraordinary positive for the ETF industry, Ann, so we are very excited about how behavior will be changed as the rule gets implemented.

There's also a lot of questions from the distributors on how they should navigate this, and we've spent a tremendous amount of time and energy with our partners in helping them to navigate and so I think we are being viewed as a very constructive partner in these very challenging times for the distributor part of the asset management industry. Kurt, is there anything? Or Luci you want to add to it?

I would just if you look at where the assets are and actively managed mutual funds, they're predominantly overwhelmingly in US equity and US fixed income, so I would expect that to be the place where the money would be in motion.

And if I could get one follow-up? When you talk about your European distribution, talk about broadening the platform to some other geographies and I'm just kind of curious what's ahead, and then when you think about what you have upcoming, is there anything that you can comment on from a expense perspective for the coming year, so just what type of incremental expenses are driven by that buildout?

Right now globally, obviously we have a very large presence in the United States. We have our first efforts internationally were actually in Latin American with the Compass Group. We are very, very strong with them and has been a long, deep relationship now coming on almost 8 years.

Europe is a very big effort for the firm. We just launched in Canada. We have people, a team in Japan. I don't expect adding any new markets beyond the bet that we've made -- investments that we have made to date, but we are position for actually the very largest ETF markets right now and around the world and those that are also facing the greatest regulatory changes, which should spur faster growth of ETF adoption.

As far as expense guidance, how we're thinking as we typically do on our next call, we'll give guidance on 2017 and how we're thinking about expense growth from there.

Mike Grondahl, Northland Securities.

This is [Mike Dee] on for Mike Grondahl, and maybe if you could just talk from a high level, not guidance or anything, but how you're looking at managing costs versus growth across your current geographies in the upcoming year if we assume AUM is flat?

Sure. As we always do, we balance the need for expense management with growth. There is a lot of tailwinds in our industry as we've spoken about over the years, particularly with the DOL rule coming in place. We're making the right investments to continue to position ourselves for that growth.

As far as future guidance, as I said, our next call we will be giving more guidance I'm sort of how we're thinking about expense growth and key initiative will be working on next year to help you sort of model out into the future.

Got you, and then maybe just a quick follow-up towards that, not an exact number but do you see a trend for the next year of new funds launched, maybe similar to what we have done over the last few years?

Again, that will also give -- we give that usually our next earnings call.

On our next call we will give our guidance on the new product launches that we're targeting.

Mac Sykes, Gabelli Financial.

I have a two-part question and I'll just ask the whole thing. I think we've talked about this before, but thematic ETFs, and we had a traditional competitor launch at thematics week this summer. I was just wanting your thoughts on how much opportunity is there for this approach, how much of your thoughts have been given about innovation here for your platform?

And then in light of sort of that launch of ETFs, we've heard some commentary just before this -- or ETF products, maybe you can talk about the competitive aspects in terms of your marketing to advisors who may be seeing more approaches come at them?

Whether it's Smart Beta, rules-based active, thematic ETFs, it all rolls into this sort of this giant bucket of index innovation. We think it is very, very constructive, even the fee cut that Schwab and Barclays or iShares are doing, constructive, making it almost impossible for any advisor to look anywhere else to put their money to work.

In terms of WisdomTree from a competitive standpoint, really the energy has always been to compete with iShares and Vanguard and State Street, the largest firms that have been in the business the longest. We certainly have seen over the last 10 years numerous new competitors come in, but they come in -- most of them have come in just the last couple of years.

They done a lot of work to build their name recognition within these channels, get the sales organization geared towards communicating this new structure to their clients and potential clients. Luckily we established our funds. We're a known entity. Were building these very strong track records, and quite frankly the industry is evolving exactly the way the executive management team thought 10 or 12 years ago.

So just in terms of ensuring that we are well-positioned in front of advisors. Since the inception, WisdomTree has been playing a very active role in educating advisors on our products and methodologies and how to best execute them. So as you look, and there's a lot of new entrants in the market as you mentioned, a lot of new products but we feel very strongly that we have both the infrastructure and the quality of the team that is well positioned to compete, as new entrants come and go from the marketplace.

One last point. We also have probably the strongest regulatory freedom for both active and self indexing, which over a longer period of time will help us deliver the best after-tax returns, and so net-net we're very well-positioned.

And congrats to Jason. I look forward to speaking with him.

Very kind of you to say that. And he's blushing.

Keith Housum, Northcoast Research.

I'm hoping you guys can provide a little bit of color. I think in the past one of the challenges has been the 401(k) administrators have not been able to have a platform that can accommodate ETFs. What are you guys seeing in the marketplace in terms of progress in that market, and where would you the opportunity perhaps starts best?

As you know and or those on the call know, we have been making the 401(k) effort for seven or eight years now, maybe longer. We and the industry have had very little penetration as a structure into the 401(k) market.

We believe we have very, very strong IT for the retirement market. We've recently hired a retirement expert. We've really built up our institutional channel, but we -- we're going to have to continue to figure out a way to penetrate that market. As an asset manager you don't want to admit such a large pool of money, but so far the ETF industry is not been successful.

And I guess what's been administrators' push back in terms of why they haven't been able to update their platforms to accommodate it?

It's not the administrator in my opinion. It's more of the advisor that administrates the plan, the advisor to the plan.

They are already in tax protected accounts, taking away one of the major benefits of the ETF structure and then the ability to trade intra-day is not necessarily something that they are comfortable with for a 401(k) plan, but almost every administrator has the ability to create a 401(k) plan, they just don't promote it.

Alex Blostein, Goldman Sachs.

It's Grayson Barnard filling in here for Alex. Jono, wanted to get your take on the M&A environment. Recently we've seen obviously Janus and Henderson announce a deal and we see a number of traditional players entering the Smart Beta space via M&A, so I wanted to get your view on how that landscape will evolve going forward and how you think traditional firms will evolve under the DOL standard?

I think that there's a tremendous amount for capacity through all the different structures, just a tremendous amount. I think that you will see aggressive M&A.

I think the rationale for a Janus and Henderson to scale up giving them more time to work through their transitions makes a lot of sense from their perspective. In terms of the ETF industry, there's been tremendous amount of M&A. Historically Invesco, BlackRock, all have been buyers. You've seen lots of the traditional firms, most of them buying small entrants into the business, and it gives them a little bit of ETF DNA within their organizations and I would imagine that it continues.

Michael Cyprys, Morgan Stanley.

Just curious how you guys feel about using data and analytics to improve your sales efforts and more efficiently target financial advisors in the intermediate? Maybe kind of talk to what you're doing today and also what the opportunity set is there longer-term?

Sure. We've had a big, as Amit has talked you through on previous calls around our strategic priorities and strategic spending, using data as a tool to be more predictive with the advisors that we are talking to and the conversations that we are having with those specific advisors has been an important initiative for us. We feel like we've made very good progress down that path.

We, as you can imagine, aggregating data sources from multiple different places is a task in and of itself. We've essentially completed that and we are in early stages of running predictive models against it and predictive algorithms that will give us a better sense for who specifically we should target, what we should target them with and what's the message we should deliver to them when we target them.

Were making very good progress. This as a you probably know is a continuously evolving and improving capability and we feel that we made the investments required to be the best in class in it.

Any sense early stages on what that could translate into in terms of better sales?

No. Were still in the process of refining the algorithms and the models and will continue to test this in the market in which we're already doing and get a better sense on it as we continue to spend more time using it as a key sales filler.

So if there are no more calls, we thank you for your interest and support and we will speak to you next quarter. Have a good day, everyone.

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.