WisdomTree Inc (WT) 2018 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the WisdomTree Q1 earnings conference call. (Operator Instructions) As a reminder, this conference call is being recorded for replay purposes.

It is now my pleasure to hand the conference over to Mr. Jason Weyeneth, Director of Investor Relations. Sir, you may begin.

Good morning. Before we begin, I'd 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. 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 section of WisdomTree's annual report on Form 10-K for the year ended December 31, 2017. WisdomTree assumes no duty and does not undertake to update any forward-looking statement.

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

Thank you, Jason, and good morning, everyone. Most of our operating data is already announced, so I'll quickly go through the important items for the quarter, discuss recent flow diversification trends and provide a brief update on ETF Securities. I'll then turn the call over to Jono for some closing remarks before opening it up for Q&A.

So beginning on Slide 3. Our U.S. AUM was $42.9 billion at the end of the first quarter due to a combination of net outflows and market depreciation. The U.S. dollar's continued decline versus the euro and the yen drove significant outflows from HEDJ and DXJ that more than offset inflows into other categories as the middle chart shows. The chart on the right reflects our flows ex-HEDJ and DXJ, which totaled $1.3 billion for the quarter, the strongest quarterly result in 5 years.

In fact, not only were these flows at record levels, they were -- they also demonstrated solid diversification across categories and funds, as we highlight on the next slide. Excluding DXJ and HEDJ, the $1.3 billion of inflows we generated in the U.S.-listed ETFs represented 18% annualized organic growth and significantly outpaced the broader U.S. ETF market which struggled in February and March, as volatility returned to the markets. Our suite of emerging market product generated broad-based inflows with 9 of 10 funds producing inflows that totaled $418 million. That -- this was also the strongest quarter for flows in this category over the last 5 years.

During the quarter, we saw a continued strong demand for our non-U. S. small-cap strategies, which had aggregate inflows of $610 million, driven by our unhedged Japan small-cap fund DFJ. Our suite of domestic fixed income ETFs also had their strongest quarter ever, with $225 million of inflows, driven by AGGY, which continues to build an impressive performance track records versus the passive benchmarks and active managers.

This quarter also showed diversified record flows, with 11 of our ETFs across the broad range of strategies producing greater than $50 million of inflows and 7 funds generating record quarterly inflows. We believe the momentum and diversification we're now experiencing is a direct result of our strategic initiatives around adviser solutions, investments in technology and entering new distribution channels and partnerships. These initiatives are focused around deepening client relationships and driving broader and stronger flows into our funds, as you can see on the next slide.

As the first chart reflects, the net flow breadth has accelerated in the past several months. We are seeing a significant increase in the number of funds with creations on a daily basis.

Over the past 2 years on average, we saw a 2 to 3 funds create on a daily basis. That increased nearly 5 funds in the fourth quarter with the launch of our Advisor Solutions program and TD Ameritrade's new commission-free ETF platform.

During the first quarter, it expanded further to almost 6 funds a day, as initiatives continued to take hold. In addition, a record 51 U.S.-listed ETFs generated net inflows for the quarter, reflecting a combination of core funds as well as more tactical exposures. These flows have translated into a greater percentage of our AUM in our core funds, which you can see in the chart on the bottom of this slide.

These funds generated $805 million in first quarter flows and now make up 56% of our U.S.-listed AUM versus 35%, 2 years ago. We're very pleased to start seeing the return from these important investments we've made to diversify and stabilize our asset base.

Now turning to our financial results on Slide 6. Although revenues declined due to lower average assets under management, net income grew to $9.4 million, reflecting more normalized incentive compensation levels and the benefits from recently enacted corporate tax reform.

During the quarter, we incurred $2 million cost associated with our acquisition of ETF Securities. Adjusting for the deal-related cost, net income would have been $11.3 million or $0.08 per share. Also this quarter, we had a onetime item in other income of approximately $600,000. And tax expense was lower, as we recognized a tax-based compensation benefit of approximately $300,000 in the quarter.

Turning to our expenses on Slide 7. Total expenses excluding acquisition-related costs declined 14% sequentially to $43.6 million. The decline was primarily driven by lower incentive compensation.

The U.S. segment comp ratio of 29% was at the high-end of our guidance range, reflecting the combination of seasonally higher payroll taxes and lower revenues due to negative market movement.

Turning to margins on Slide 8. Gross margins for the quarter were 83.8%, down slightly from the fourth quarter due to lower average AUM. Based on current AUM levels, we expect our current gross margin to range between 83.5% to 84%.

As shown in the chart on the right, our pretax margins rebounded sequentially, reflecting the lower incentive compensation accruals.

Now to give you an update on ETF Securities transaction. The transaction closed on April 11, adding $17.6 billion to our AUM. The integration process is well on its way, and we're excited about where we sit today. There are a few updates to the numbers we have previously disclosed. Based on the asset levels at close, the EBITDA contribution from the ETF Securities business has changed to $29.9 million due to the transaction closing in April instead of March, which we had originally anticipated. Second, GAAP interest expense on the debt we are taking to fund the transaction is higher due to the amortization of the debt financing cost over the 3-year debt term. In addition, the LIBOR rate is higher from when we first announced the deal. Net income will be approximately $16 million in 2018, based on the asset levels at closing. There is no change to our synergy target of approximately $5 million. We anticipated $22 million in onetime deal-related expenses and integration costs. That number will now be approximately $16 million, since we are recognizing the debt-related expenses over the loan term.

The final acquisition cost was $523 million, made up of 30 million shares of WisdomTree stock and $253 million of cash. We plan to file pro forma financial statements in the next week or 2. These should provide much more detailed information to assist you with your modeling.

Now an update on the results so far this quarter. As of yesterday, our global AUM totaled approximately $63 billion, reflecting the acquisition in addition to modest net inflows and positive market movement. You can see in the pie chart, post the ETF Securities transaction, we have a much more diversified asset base. And the chart on the right reflects our global inflows by region.

Now I'd like to turn the call over to Jono for some closing remarks.

Thank you, Amit. Good morning, everyone. I share the frustration of our investors and employees that despite persistent and expanding growth across our products and distribution channels that these results did not offset the $3.5 billion of outflows in our 2 largest currency products, which continue to suffer from a declining U.S. dollar.

It is not enough to show an encouraging trend line. We must return to our historical growth trajectory with positive net inflows. That said, it would be a mistake to let market conditions completely mask certain crucial developments which have proved to be sustainable and scalable and which, I believe, reflect the emerging transformation or continued evolution of our business.

As Amit highlighted on several slides, we continue to see material improvement in the breadth and depth of our flows. The number of funds created on a daily basis expanded further to a record of almost 6 funds a day. The 51 funds with net inflows for the quarter was also a record, reflecting the impact of recent initiatives.

Importantly, the 51 funds with net creations had a weighted average revenue capture of 46 basis points, highlighting that expense ratios alone aren't driving allocation decisions and reaffirms WisdomTree's product strategy and execution.

Our core strategic funds, which represent more than 56% of our U.S.-listed AUM continue to generate double-digit organic growth. It's all a result of the team we've assembled, it's the innovative product offerings and the performance track records we built, it's the expanded distribution reach, including our positioning in TD Ameritrade's commission-free trading platform and model marketplace, which continues to be a material driver of asset growth, and most recently, it's the multifaceted Advisor Solutions program, which we launched this past fall.

I am very proud that earlier this month, our Advisor Solutions platform was named Fund Innovation of the Year at the Mutual Fund Industry Awards, further credentializing what financial intermediaries are quickly recognizing as a truly differentiated and innovative solutions program that can help FAs grow their businesses, better serve their clients and help them tackle the biggest challenges they face today, which are many.

I expect many more successes to come in the future from these initiatives and hard work. Since our -- since announcing the ETF Securities transaction in November, we have talked a lot about the strategic and financial merits of the deal. The ability to accelerate growth in the second largest ETF market. The diversification benefits from the commodity focus and the strong day one accretion. Having spent time in London last week, following the closing of the acquisition, I'm even more confident that this was the right transaction for WisdomTree. We welcomed 42 new colleagues to the firm, and the combined team is in place. I'm proud of the work done by the employees from both firms to make the initial stages of integration a success, and I'm excited to see what this already cohesive team can accomplishable over the coming quarters and years.

Without a doubt, our positioning and growth outlook has never been stronger in Europe. Beyond the U.S. and Europe, we continue to position the firm to participate in long-term global growth of ETFs. In February, we announced a distribution agreement with Hong Kong-based Premia Partners to distribute WisdomTree products to institutional investors in Asia ex-Japan. Like the Compass Group relationship for Latin America, we believe this one will prove to be an attractive and cost-effective way to drive growth from investors in this region. And in Canada, we continue to leverage aspects of our U.S. infrastructure to generate strong growth in the region. Year-to-date, our Canadian franchise has generated nearly 100% annualized organic growth off of a small base, it's still very encouraging. The combination of strengthening underlying fundamentals in the U.S. franchise and the improved scale and positioning of our international operations makes WisdomTree a truly unique and irreplaceable asset, while outflows from the DXJ and HEDJ have been a significant headwind recently, WisdomTree is working with more advisers today than at any time in the firm's history, and those advisers on average own more WisdomTree products than ever. We've never been in a better position to serve our clients and capitalize on the global growth of the ETF industry.

I thank you for your interest in WisdomTree and would be happy to take your questions now.

(Operator Instructions) And our first question will come from the line of Craig Siegenthaler with Crédit Suisse.

Jono, Amit, I wanted to start on the technology business. Can we get an update on the timing and size of flows that we should expect from the AdvisorEngine cross-sell?

Kurt, why don't you take that one?

It's Kurt MacAlpine here, Global Head of Distributions. So the AdvisorEngine platform and the feedback around that platform continues to be excellent. Over the course of the past quarter, we have a record number of advisers using the platform and a record amount of AUM on the platform. As you think about the sale for AdvisorEngine, there's the technology sale and then there's the Model Portfolios sale that follows. We do have some critical wins that we will be announcing in the coming weeks, and then those assets should be onboarded later, starting later this year and primarily through 2019.

Kurt, and then just real quick on the ETF Securities business. I think they had $0.5 billion of outflows in 1Q, and I also think the commodity segment for the industry was inflowing. So I was just wondering, is that merger-related? Or is there anything to call out there?

It's Kurt again. So if you look at the ETF Securities business for the first quarter, they had $641 million in redemptions. $516 million of that came from the gold funds. So if you look at the yield listed gold funds as a category, as a whole, the only generated ex-ETF Securities $100 million in net flows. Most of the $516 million of redemptions came from 1 client that moved to a proprietary in-house solution. So it's actually putting a -- magnifying the flows relative to the underlying impact across clients. So looking forward, we remain very optimistic about the position -- ETF Securities' position in gold and across commodities, and the with the integration behind us, I think we are well positioned to continue to capture a significant market share in those categories.

And our next question will come from the line of Bill Katz with Citi Group.

I just wanted to come back to the cross-sell opportunity, because it does seem like there's a bunch of good things going on. Could you tell me -- walk us through where you sort of stand in terms of the penetration on the Ameritrade platform? And maybe what you're seeing elsewhere, that's number one. And then number two, you mentioned that you're doing more work with more advisers than ever before. Are there any metrics you can share with us to give us a sense of that ramp that you're seeing? And maybe toss in how you're doing with the core portfolio, away from the International Hedge book?

Sure. So Bill, it's Kurt here again. So on TD Ameritrade, we don't disclose flows at the individual platform level. But I can tell you that the TD relationship was a material contributor to the strength of the firms of flows ex-DXJ and HEDJ. So in addition to having the commission-free ETFs available for execution on the platform now, we do have a suite of Model Portfolios that are also live on the platform. And we've seen strong flows to date, as it relates those particular Model Portfolios as well. We do remain very excited about the TD relationship and believe it's going to continue to be a significant contributor to net flows for the RA and the retail channels for us. In terms of your second question around -- Jono mentioned the points around -- we are doing business with more advisers than we ever have in the past and they are -- so the breadth of the advisers and the depth of the relationship that we have is certainly getting better. We do think that's in part tied to the data intelligence efforts that we have underway, better screening and identifying who we should be targeting, hitting them with the right messages. And then also having the solutions program where we now have the ability to go much deeper with them, whether it's on the portfolio construction side or adviser services and support side. So those -- we're very early days both in the TD relationship and the Solutions program, but I think the trends and the impact we're seeing is very constructive and probably ahead of schedule, relative to what we'd expected, given they just both launched late last year.

Let me just add also, Bill, that in the first quarter, AdvisorEngine acquired the leading CRM firm for financial intermediaries called Junxure. Junxure has 1,500 firms, that's about 12,000 FAs, advising on about $600 billion of AUM. And so that's also a tremendous cross-selling opportunity, both for AdvisorEngine, upselling them from that software to the bigger platform, but also upselling them to models for WisdomTree, just to throw that out as well.

Okay, and just one follow-up, this one is for Amit. Amit, was that tax really a second quarter guide? Or is that a more structural guide in terms of a natural limit to business or to the extent that AUM would sort of rebuild in the U.S, you'd have expected that margin might expand?

No, it's much more short term, given the AUM levels that we see today. As we do see the AUM level scale because of the pricing that we have with our third-party service providers, we would expect to see an uptick in those gross margins. So that was much more short-term-oriented guidance.

Okay, can I just steal one more question? Jono, one of thing that's been coming up, was reading a fair amount on, the competitive pressure building in Europe around pricing. A bunch of third-party players have been cutting pricing very quickly. And you mentioned that you're seeing a lot of good growth at higher fee levels, so maybe the answer is no. What's your sense on pressure to the business in Europe, pro forma with the ETF platform? Do you see any risk to the business? And if so, how should we think about that?

So there is no question, Bill, that the dynamic that you're seeing here, you're sitting there as well. So that's 1 element. With the -- of the $17.6 billion of AUM, about $11 billion is in gold. In gold, there is significant competition. The rest of it -- the rest of their AUM is really broad-based commodities, things like, it could be like nickel and other metals and other commodities, there they almost have no competition. We have in many of the funds 80% to 95% market share around certain exposures. So there we're facing much less pricing competition than you're seeing in nonexclusive indexes or even proprietary smart beta. So I, sort of, feel very optimistic from an overall picture that ETF Securities is very well positioned from a pricing standpoint on a going-forward basis and with sort of an uptick in sort of inflation expectations with the sort of global growth being strong. Maybe we'll get lucky from a timing standpoint, that the exposures will be more in favor on a going-forward basis just than they've historically been, that commodities will be in a stronger demand. And we're actually seeing that, both with our GCC funds here in United States and in WisdomTree Europe's broad-based commodity fund, which I think had something like $70 million of flow in the quarter as well. So net-net, we're feeling strong about our place with pricing and the commodity exposures in general.

Our next question will come from the line of Surinder Thind with Jefferies.

I wanted to start with just kind of the DXJ and HEDJ. Can you provide us an update about where incremental margins might be at this point? Obviously, if we were to rewind a couple of years, AUM levels were in the $18 billion, $20 billion range. We're about 1/3 of that at this point. And just how those margins scale with where AUM is if, let's say, AUM was a bit lower than current levels?

Sure, Surinder. There are still very, very attractive margins for us, incremental margins close to the in the low-90s for those funds, because they have scaled to those level so there are still very profitable funds for us, even at the asset levels that they are today.

Understood. And where do the margins generally inflect? Is it around $2 billion, $3 million of AUM, or how should we think about where they really...

Yes, we don't give as much of that granularity, but you do know that the breakeven is about $50 million. You can see at the current asset levels that we have today, incremental margins on the overall platform are like 86%, 87%. But it doesn't take long for it to start to really get to attractive margins. So hopefully that helps fill in a little bit.

Fair enough. And then just wanted to touch base on Europe. One of the impacts that was put forward as a result of the MiFID regulations was that it might drive greater use of ETF-centered index funds. Have you guys noticed any kind of a change in the conversations over there? Or any color that you can kind of provide on the environment other than just kind of the secular trends that have been existing already?

Surinder, let me just, I guess, overall -- then maybe Kurt has a comment too. I think -- still the early days for MiFID. What we're hearing right now is now generally, it's been very well received. The assets are putting more transparency around the liquidity of products on the exchanges have been beneficial, but I think it's still the early days for that.

Yes, and I mean, from our core business perspective, with the ETF Securities acquisition, we have seen a material increase in the breadth of the conversations we're having, and the platforms we're having those conversations on, I think, kind of, my commentary is more related to the acquisition and how it's benefiting us more broadly from there.

Understood. And then maybe one more quick question. Are there any considerations around the way you guys do the reporting currently? On how we should think about it? Obviously, there is the GAAP numbers, there is non-GAAP, but just it seems like the maybe if there is a -- maybe a more consistent approach to presenting the materials. It just seems like there's different viewpoints on the financials at this point.

Yes. So in a few weeks, Surinder, we're going to be publishing pro forma financial statements and in that, I'm going to be providing a little bit more guidance of how we're thinking about reporting our financial results going forward now that we have a much broader platform with debt on the balance sheet and the likes. So stay tuned. Just give me a few weeks, and I think once you see that, we can get on the phone and we can walk through it.

And our next question will come from the line of Brian Bedell with Deutsche Bank.

Maybe Amit, just some more guidance. The just -- if you can talk a little bit about the dynamic of the growth in third-party sharing agreements expense. Is that still -- do you think to be in a sub-3% range? Or would you expect that to grow with your -- with the Ameritrade -- with the success of the Ameritrade platform? And also comp revenue guidance inclusive of the ETF Securities business.

Sure. So on the third-party sharing, we came in a little bit on the higher side of the guidance that we gave. I think it's a combination of, first, the success that we're seeing on these platforms, which is a good thing, but also the fact that we did have lower revenues from the HEDJ and DXJ outflows, which are generally not on these platforms, so we have a little bit of a mismatch there. But I do expect that at these asset level today, we should still be within that 2.6% to 3% range but closer to the levels that you see today. On the comp-to-revenue ratio, we came in on the higher end of the range there. Some of it is seasonal. We do have higher payroll taxes in the first quarter. Also we did, as we pointed out in the presentations, we did very strong flows ex-HEDJ and DXJ, which has been a concerted effort that we've had at the firm. We do think about compensation on a full year basis, and so when you think about all those factors, we came in within the guidance that we gave and that guidance still holds going forward.

What was ETF Securities for the year?

So with the ETF Securities -- that's the U.S. business, with the ETF Securities transaction, once we publish pro forma financial statements in a few weeks, we're going to be giving updated guidance on the overall -- our international segment. So I think just stay tuned for that and then once you see that, we can hop on the phone and, kind of, walk through that.

Got it. Got it. Okay. And then just as a follow-up, either for Jono or Kurt, back on AdvisorEngine. Obviously, a hot topic, with a lot of your competitors also trying to develop this, but inclusive of Junxure now, where you've got a pretty sizable FA force that's on the platform, how are you seeing the competitive positioning versus, just to throw out a couple of different platforms, say, Jemstep at Invesco and Aladdin for Wealth of BlackRock. Are you -- do you tend to see as Model Portfolio and AdvisorEngine in the same shop? So in other words, the advisers have a choice of a couple? Or are they really on a stand-alone basis, in other words, not competing against those and you're really looking to compete by signing up new firms on a collective basis?

I'll start with the AdvisorEngine part, and you'll jump on -- Kurt, on the model side. But from AdvisorEngine, they had a very strong initial vision. They were -- before they got to us, undercapitalized, so they weren't really in a position to win mandate, but since we made the investment about, I don't know, maybe 14, 16 months ago, we have been winning business. The vision was really broader than the other sort of Robo-advisers that people had invested in. And we think ours was the better execution, that it's -- that the needs of the financial intermediary are broader than just Robo, and so from prospecting, which we strengthened through the initial acquisition of Kredible all the way through to Robo to integrating CRM into the platform. Though it is open architecture and modular, so if you want to use Salesforce or something else, AdvisorEngine is perfectly situated to accommodate any of those to sort of open architecture questions. But the fully integrated approach is really resonating with the decision makers at these firms. As others I think have said -- and one thing that is different than the others, their initial vision was always B2B2C, instead of B2C, and it is a challenge to upgrade your technology platform to be as robust to handle the enterprise requirements to be able to deal with B2B. So we think that we have a lot of strengths in our program, similar to what you've heard from others. It's a long sales process, but we're starting to really -- we've been together now for a number -- a length of time, and so we'll start to have continued -- we'll show continued wins in that space and then as Kurt said earlier, but the AUM from that platform will early start to show up in '19. Kurt, on models?

Sure. So if you think about the sales cycle for something like AdvisorEngine, some firms that are making a decision to digitize their platform are putting the technology decision together with the Asset Allocation or Model Portfolios decision. Others are doing it separately. So I think for us, there's the benefit of the investment that we have in AdvisorEngine and the partnership we have with them, we always have a seat at the table. So even if the investment decision is following the technology decision, there is a follow-up for WisdomTree. In some instances, like some you'll hear more about in the coming weeks and months, those decisions were made together, where the technology decision and the investment decision was made at once and we're well positioned to benefit from that. But even in instances where we don't, let's just say, a firm decides to keep their own Model Portfolios but digitize their business and onboard to the AdvisorEngine platform. Through that process and experience, given how we've integrated the sales process between the 2 firms, we believe that technology onboarding in a much better place than where we started. And there's lots of follow-ups for WisdomTree and our specific funds to be present at someone's customized model as well. So I would say it's really upfront. There's the chance for us to win the model portfolio. If not, if the decisions are separated, we can win it on the back-end. In worst-case scenario, which isn't a bad scenario, is we have a much deeper relationship with particular firm to sell individual strategies into their models.

And models are being sold separate of AdvisorEngine. So it's its own effort, stand-alone, which is generating success on its own. And there is also a tool that we've created that sits on the website, that allow -- so it's not quite selling models, but it does allow the Advisor to create their own models and figuring -- and it helps them figure out how to best integrate WisdomTree into their own model design. So the model effort on its own is a very robust push here at the firm.

So the point that Jono had just mentioned, so you really mentioned 2 firms, Jemstep on the front-end, which kind of directly competes with AdvisorEngine in some instances and then Aladdin for Wealth which our competitor that would be -- what we call a Digital Portfolio Developer, as Jono has mentioned. So this is a fully digitized solution on our website that allows people to conduct a very detailed portfolio analytics in a very user-friendly format. We launched that in October, and to date we've already run over 8500 individual portfolio construction analysis through this tool in addition to all of the human-based portfolio construction services that we're doing as well. So that tool is a better proxy for Aladdin for Wealth and I think the start that we've got off to, and that is then -- has been truly remarkable. A lot of advisers are using it many, many times. Some of them are even using it as their core portfolio construction tool and each month, we continue to see more advisers using it and those advisers using it more frequently. So I'd say we're excited about the prospects for that as well.

I know it's very early days. But is your sort of market share within that open architecture platform something that you will track and be able to see over time.

Yes, over time. So still -- like I said, still the early days but over time, as it grows, yes, we will be disclosing certain key metrics but it's still too early today.

But to -- but because we're only a $64 billion asset manager even with open architecture, these models are driving significantly higher usage numbers to the WisdomTree portion than we've historically had.

And our next question will come from the line of Michael Cyprys with Morgan Stanley.

Just curious, with the transaction closed now, how you're thinking about use of cash, balance sheet strategy and allocation, and when do you think, if at all, share buybacks will be back in discussions?

Sure, Mike. So we did put a lot of thought about how we allocate our capital, when we announced the dividend change in light of the ETF Securities transaction. We just put debt on our balance sheet and at these AUM levels, we feel very comfortable with the way we're allocating our capital now. We feel we have the right amount of cash for investing in growth, making sure we have dry powder in case there's opportunities out there. We want to have -- we have to be able to service the debt, and we have a return-on-capital program already in place. So I think from here, as the AUM level scales, we'll see how best to allocate that excess cash, between those buckets. But right now, it's too early to say how that would change, but we feel comfortable in the mix that we have today.

Okay, then just as a follow question, I noticed, you -- I think, had closed a number of ETFs over the past couple of quarters. Just curious if you can update us on how you're thinking about product shelf in terms of other potential closures that we could see? But then also, if you could touch upon some of the new product initiatives on the horizon?

So this is Jono. Historically we've, from time to time, closed some funds. What we did recently was nothing out of the ordinary. We're very optimistic about our new product launches, and that is actually a global statement. So you'll see, I think, a very aggressive relative to maybe last year product launches in Europe relative to what we were doing last year in Europe. Canada continues to launch new funds, and you will see more product coming out of the United States, and you'll see where it makes sense for product development to be coordinated globally. The most effective thing is to own proprietary IP and have it launched around the world, so we get real scale and leverage on our research and marketing efforts. But you're going to see us continue to fill out sort of fixed income, liquid alts and others active we've recently been doing. You'll see more of all of that on a going forward basis. And the successes that we've seen from a flow perspective when I -- you know that 51 funds, it was really every vintage fund launched is participating in the flow and so again, we have a great sense of optimism on a going-forward basis around new products.

And our next question will come from the line of Chris Shutler with William Blair.

On the third-party sharing expense increase, Kurt, I think most of that was TD, and I think you said that your revenue share tiers down as assets grow, is that correct?

We don't give disclosure, Chris, on sort of how that fee breakdown is, but yes, obviously, the success we're seeing on the TD platform is helping to drive that as well as Compass, we have a relationship we have there in Latin America.

And again, as I mentioned in my comments that we have a new Compass-like relationship for Asia ex-Japan. So that'll show up in the same line item.

Okay. And then just one other one. We saw that you recently filed 3 international multifactor funds, which that would add to the U.S. multifactor funds you introduced last June. Definitely seemed like interesting products, given the fact they're actively managed to have currency hedging. Just talk about the distribution strategy for those. How you see advisers using some of the multifactor products, that'd be helpful.

This is Jeremy Schwartz, the Director of Research here and overseeing the development of these strategies here. It is one of the things we're very, very excited about in terms of -- we've been investing in both active capabilities as well as these multifactor processes generally as well as the dynamics hedging process and the branding shows you how much conviction we have in the process generally. I mean, we were the first firm to think about taking currency risk off the table, with HEDJ and DXJ, but we're also the first firm to pioneer this more active approach to currency management, with our dynamic family and funds like DBWM, which is one of the leaders today in dynamic hedging. And so you could see with this new multifactor having a value-added equity process, but then being unique to add this active currency all the way, we're also very excited about these and we think this is really the future for international investing with that combined package together, so we're very excited about that.

And our next question will come from the line of Bren Hawken (sic) [Brennan Mc Hawken] with UBS.

Had a follow-up question on the third-party distribution expense guide. Was just curious about what assumptions are embedded in staying under that 3% of revs. Is that including the additional revenues that are going to come on from the ETF Securities transaction? Or does that guide exclude the incoming rev?

Yes, that's only for our U.S. business. When we issue pro forma financial statements in the coming weeks, we'll have some more disclosure around there to help build your modeling and guiding that number. But that 2.6% to 3% is only for the U.S. segment.

Okay, so it wouldn't include the Compass and the Asian deal that you guys just referred to?

It does. Those relationships primarily benefit our U.S. business segment. There's a little bit of it that benefits our international segment, but the primary benefit is the U.S.

But let me just -- as we continue to launch XSOE funds and our XSOE funds continue to scale, the third-party selling into Latin America and Asia XSOE will be a very attractive platform, and that is one of the major reasons why you need a strong and robust European platform. So that you can absolutely access the global investor, who, over time, will prefer, in my opinion, the XSOE structure to the 40 Act. So in that, you'll see those that we participate in the XSOE structure.

Okay, so over time as it evolves, it may become a bigger item in the international segment too? That a fair way to reference?

Yes. And again, we're really trying to make the synergies of the organization work. So passing leads back from the U.S. to Europe, from Europe to the U.S. and to other parts of the world, we're really trying to run a coordinated global firm here, and so you'll see more of that and obviously if Kurt, you want to add anything, please. Don't let me steal your thunder. No, I guess he doesn't.

Cool. And then last one for me, you guys adjusted some of the acquisition-related guidance. It looks like the change in financing was specified as a GAAP impact. Do you guys attend to exclude financing cost from the adjusted results? Or am I reading too much into that?

No, so you'll see when we issue the pro forma financial statements, we're going to be starting to have operating income and nonoperating items. So obviously, interest expense, by definition, will be a nonoperating item, but I think once you see the pro forma then we'll walk through how we're thinking about the guidance and reporting our results. It'll be a little bit clearer then.

You know how to build up some suspense here into that release, nice one.

This is not exciting stuff, I am sorry.

And our next question will come from the line of Alex Blostein with Goldman Sachs.

Wanted to go back to the revenues. You said there the opportunity was ETF Securities. Now that you guys kind of have the business under 1 roof, can you, I guess, spend a couple of minutes on which channels and which products you expect to, kind of, lead in terms of cross-selling with the existing business and what's your kind of drive the synergies of the next kind of 12 to 24 months? And I guess as a follow-up to that, it's also the revenue -- the expense guide synergy hasn't changed, but wondering what kind of incremental investments you guys might need to still make in that business as you build out scale?

Let me start off with the last question, and then I'll give it to Kurt to talk about distribution. The guidance that we gave for the ETF Securities business incorporates any incremental spend that we think we would need to do, as we integrate that business, so that you shouldn't see anything beyond the guidance that we've already given on that.

In regard to distribution, I believe that the acquisition will really help accelerate the growth of the XSOE platform that we built in Europe. So first off, we brought over a great team from ETF Securities that not only has experience selling commodity funds, but they also have experience selling XSOE funds as well, so there's no real learning curve in terms of getting familiar and comfortable with the structure. Second, the scale that we now have in Europe is a nearly $20 billion firm that's really allowing us to make a lot of the investments in distribution that we wanted to make that will position us to take share from competitors similar to the investments that we were making here in the U.S. And third, the ETF Securities acquisition has provided WisdomTree with access to a lot of these intermediary platforms that we didn't have access to prior to the acquisitions. So for whatever reason, the platforms in Europe tend to be more restrictive than the platforms in the U.S. and by -- through the acquisition of ETF Securities, the WisdomTree XSOE funds have been absorbed into those overall relationships, providing access for investors and advisers to use us that didn't have access to us before. And those statements are true literally across all of the markets that we're distributing in Europe. So it's not a particular phenomenon from the U.K. versus Germany, it's really true across-the-board.

This is Jeremy Schwartz, just to add briefly on how we're trying to support that from a research perspective, one of my key deputies, Chris Gannatti has been with us for 8 years here in the U.S. We recently transferred him over to lead the European research team. And so we also believe we're going to get content synergies with Chris helping lead research efforts over there. And at this stage in the cycle, we've been talking a lot about how -- Jono alluded to this, that some of the -- when the market filled off earlier this year and with series of rising inflations leading to higher interest rate, we do believe commodities generally are having increasing diversification over all today, and we're going to be able to leverage some of the insights from the ETF Securities platform coming on, the commodities work that they're doing feeding into the both product development and just general solutions for our clients, and so we're excited about all those synergies from the research and product development standpoint as well.

And our next question will come from the line of Keith Housum with Northcoast Research.

Amit, just a little bit of housekeeping here. With the interest rate rising environment here, are you guys going to be hedging the interest rate risk on the debt?

Yes, something that we're looking at right now to see the cost of it. So if we do, we'll obviously disclose that, but it's something that we're looking at.

Okay. And can you just remind us the type of debt that you guys are taking on and what's your plan in terms of priority of paying down that debt compared to your other opportunities to use the capital?

I'd say, it's still the early days. We just put the debt on. I think we have to wait to see how the asset level scales from here to see how we're going to pay that down, but we think right now that the mix that we have of allocated capital is the right level. So some of this is -- it's too early to tell. Let's see how the business progresses from here.

Okay. And I guess the final question for you. As looking at your employee count over the past, both sequentially in the past year. It looks like your employee count has been done, especially in international. Do we assume that was to kind of get ready for the ETF Securities acquisition and -- get rid of people, you might have order up early on?

Yes, so the headcount decline that you saw in the international segment was in preparation of the ETF Securities transaction.

And in general just employees overall, you are seeing efficiencies created through our investment in technology, which is also keeping headcount sort of flat or down.

Our next question will come from the line of Mac Sykes with Gabelli.

I had a two-part question. One for, I mean, basically around the same kind of topics, but 1 for the firm and, kind of, 1 in general. So the question is, can you talk about client feedback during those volatile days in the quarter, in February? And then given some of the news around volatility products, do you think there was any impact to sales more broadly for the ETF business? Or a decline investor confidence, just given some of the more dramatic aspects of those products?

This is Jeremy speaking again, on -- from the research perspective. No, I'd say if anything, we've seen during this past crisis periods that ETF remain most robust structure out there. And yes, some of the volatility products blew up, and we have -- and that was some of the sense as to what created the volatility fears, but in a way ETF shines through. They're full transparent, you understand what you hold and compared to some of the more active structures where they're more opaque you don't really know what's going on there and even involves wholly products generally there too. There were some really big blow-ups with active strategies that people didn't understand what was going on in those funds versus the ETFs, you know exactly what the strategy is and why it performs the way it does, and so we think if anything, it just keeps showing the merits of the benefits of ETF structure, even in these more complex volatility products. You had big active blow-ups, just as you had on some of the ETN.

So I think generally on what we've seen from these here.

I think on the -- from a distribution front, if you look at kind of the impact of WisdomTree given the market volatility and kind of the redemption the industry saw in February and March, we actually generated 11% positive organic growth in those months, while the industry itself was experiencing redemption. So I think it's just the testament to some of the initiatives we're doing, the role that we're playing in educating advisers, some of the points Jeremy mentioned on the structure and also how our strategies fit.

And just one last point, I would say that much of -- -- there is an immediacy to the ETF portion of an investor's book of business and so as the markets were unsettled, you might see people taking some trading out of certain things faster than ETF just because they're very market sensitive and that's portion of their book of business. But again, I wouldn't, in any way, read any lack of confidence in the overall industry flows. This doesn't change anything in the expectations of incredibly strong robust industry flows globally really going forward uninterrupted.

And our next question will come from the line of Craig Siegenthaler with Crédit Suisse.

Just 2 follow-ups here. First one, with the delta between GAAP and non-GAAP, is this going to be about $2.1 million higher than the $1.9 million in 1Q '18? I'm just to estimate the pickup in amortizations.

Yes, the difference between 8.8 and the 6 will be that non-GAAP amount. The additional debt financing cost that we had spread over the 3-year debt term.

Okay. And then on taxes, when will your tax rate drop down to the 24% range? Just because now you're going to be profitable in Europe for the first time when the deal closes?

So we have to look at each one of our businesses in Europe separately. We just can't offset one against the other, unfortunately. So on a consolidated basis, after the ETF Securities transaction, we think our overall effective rate will be about 30%, so down from the 33% that you see in the first quarter, but we have to wait till each one of those business segments within Europe turn profitable and then be able to shelter some of the income because of the losses that we built up.

And this may be a simple question, but if the U.S. tax rate is 24%, and tax rates outside the U.S. are somewhere between 15% in 20%, why is your overall tax rate is 30%?

Well, we have state taxes, don't forget, so that increases our rate here in the U.S. There is nondeductible -- certain of our expenses are nondeductible, like related to executive comps, so that also helps drive the rates up as well as the fact that we can't recognize some of the losses today in our international segment, and that -- it also helps drive the rate up. I can walk you through it. I think you look, Craig, in our last presentation, we kind of walked through the rate, maybe we can take it offline, and I can walk you through each one of those pieces.

And I'm showing the further questions at this time. So now it's my pleasure to turn the conference back over to Mr. Jonathan Steinberg, Chief Executive Officer, for some closing comments or remarks.

I just want to thank you all for your interest in WisdomTree, and we'll speak to you in 90 days. Have a great day, everybody. Bye.

Ladies and gentlemen, thank you for your participation on today's conference. This does conclude our program, and you may all disconnect. Everybody, have a wonderful day.