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WETF > SEC Filings for WETF > Form 10-Q on 7-Nov-2013All Recent SEC Filings

Show all filings for WISDOMTREE INVESTMENTS, INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for WISDOMTREE INVESTMENTS, INC.


7-Nov-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements and the related notes and the other financial information included elsewhere in this Report. In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below. For a more complete description of the risks noted above and other risks that could cause our actual results to materially differ from our current expectations, please see the section entitled "Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012 and our Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2013. We assume no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, unless required by law.

Our Business

We were the fifth largest sponsor of ETFs in the United States based on AUM, with AUM of approximately $31.4 billion as of September 30, 2013. An ETF is an investment fund that holds securities such as stocks or bonds and trades at approximately the same price as the net asset value of its underlying assets. ETFs offer exposure to a wide variety of investment themes, including domestic, international and emerging market equities, fixed income securities, currencies or commodities, as well as securities in specific industries and countries. We currently offer a comprehensive family of 53 ETFs, which includes 40 equity ETFs, six fixed income ETFs, five currency ETFs and two alternative strategy ETFs.

Through our operating subsidiary, we provide investment advisory and other management services to the WisdomTree ETFs. In exchange for providing these services, we receive advisory fee revenues based on a percentage of the ETFs average daily net assets under management. Our expenses are predominantly related to selling, operating and marketing our ETFs. We have contracted with third parties to provide certain operational services for the ETFs.

We distribute our ETFs through all major channels within the asset management industry, including brokerage firms, registered investment advisors, institutional investors, private wealth managers and discount brokers. We do not target our ETFs for sale directly to the retail segment but rather to the financial advisor who acts as the intermediary between the end-client and us.

Our revenues are highly correlated to the level and relative mix of our AUM, as well as the fee rate associated with our ETFs. While our AUM has increased on an annual basis, we have experienced fluctuations on a quarterly basis due to changes in net inflows and market movement. A significant portion of our AUM is invested in securities issued outside of the United States. Accordingly, our AUM and our revenues are affected by movements in global capital market levels and the strengthening or weakening of the U.S. dollar against other currencies. It is our belief that our ability to generate inflows into our ETFs, coupled with general stock market trends, will have the greatest impact on our business.


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Market Environment

Economic conditions improved during the third quarter. As the charts below reflect, global equity indexes rebounded from the end of the second quarter. Concerns over European sovereign debt risk and growth concerns in the emerging markets declined and more importantly, U.S. economic indicators improved. This contributed to generally higher global equity prices. As a result, the U.S Federal Reserve signaled that a reduction of asset purchases at some point during the second half of 2013 would have been likely if the economic recovery continues. This contributed to more challenging markets during the latter half of the third quarter as interest rates and volatility increased. On September 18, 2013, the Federal Reserve announced it would not taper its economic stimulus program.

The following chart reflects the returns of the S&P 500, MSCI EAFE and MSCI Emerging Market indexes on a quarterly basis:

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As the charts below reflect, flows into ETFs increased from the second quarter; however, mutual funds continued to experience outflows primarily driven by outflows from fixed income products due to rising short term interest rates, although ETFs continued to experience net inflows into fixed income products:

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Our Results

Our AUM increased 71.5% in the first nine months of 2013, reaching $31.4 billion at September 30, 2013, primarily due to $12.0 billion of net inflows. We have experienced significant inflows in our Japanese hedged equity ETF in 2013 which accounted for $8.8 billion, or 73%, of our inflows. Political and economic policy changes in Japan, in particular the Japanese government's desire to implement policies which have decreased the value of the Yen, drove increased investor interest in the region and our Japanese hedged equity ETF.

Our net inflows were $1.2 billion in the third quarter of 2013, which declined from $5.9 billion in the first quarter and $5.0 billion in the second quarter. We experienced lower levels of inflows into our Japan hedged equity ETF due to the strengthening of the Yen versus the U.S. dollar as well as volatility in the Japanese markets. In addition, due to rising interest rates, we experienced outflows in our fixed income ETFs.

Our market share of industry net inflows was 2.1% in the third quarter of 2013 and 9.8% for the first nine months of 2013. Our target is to achieve 3% to 5% of industry inflows on an annual basis. Our above target performance for the first nine months of 2013 was due to the strong inflows we experienced in our Japan hedged equity ETF.

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We continue to achieve record financial results. We recorded revenues of $39.6 million in the third quarter of 2013, up 83.0% from the third quarter of last year primarily due to higher average AUM from record net inflows. Our expenses increased 44.0% compared to the third quarter of last year, due to higher compensation costs resulting from our record level of net inflows, higher fund related costs resulting from higher average AUM and marketing related spending to support our growth. Included in the third quarter of 2012 were $0.2 million of net expenses related to our patent litigation. Our third quarter net income reached a record $15.0 million as compared to $4.5 million over the same period last year and our pre-tax operating margin reached 38% as compared to 21%.

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Other Developments

As the ETF industry grows, competition is increasing. For example, in August 2013, Charles Schwab & Co. launched six ETFs using the Russell fundamental indexes with fees generally equivalent with our comparable ETFs. In September 2013, iShares filed a registration statement for three currency hedged equity ETFs including a Japan hedged equity ETF. Also, Deutsche Bank launched three additional currency hedged equity ETFs. We do not know what effect, if any, the launch of these ETFs may have on our business. Within the ETF industry, being a first mover, or one of the first providers of ETFs in a particular asset class, can be a significant advantage, as the first ETF in a category to attract scale in AUM and trading liquidity is generally viewed as the most attractive ETF. We believe that our early launch of ETFs in a number of asset classes or strategies, including fundamental weighting and currency hedging, positions us well to maintain our position as one of the leaders of the ETF industry.

In September, 2013, we entered into an agreement with State Street Bank and Trust Company to transfer fund administration and custody services from Bank of New York Mellon, effective April 1, 2014. As a result of this change, we expect costs savings and an improvement in our gross margins. For example, if State Street's pricing had been in effect in the third quarter, fund expenses would have been approximately 1.5 million lower, or 6 million in annualized savings. This would have translated into a four percentage point improvement to our gross margins.


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Non-GAAP Financial Measurements

Gross margin is a non-GAAP financial measurement which we believe provides useful and meaningful information as it is a financial measurement management reviews when evaluating the Company's operating results. We define gross margin as total revenues less fund management and administration expenses and third-party sharing arrangements. We believe this financial measurement provides investors with a consistent way to analyze the amount we retain after paying third party service providers to operate our ETFs and third party marketing agents whose fees are associated with our AUM level. The following table reflects the calculation of our gross margin and gross margin percentage:

                                                     Three Months                        Nine Months
                                                         Ended                              Ended
                                              Sept. 30,         Sept. 30,        Sept. 30,        Sept. 30,
                                                2013              2012              2013             2012
GAAP total revenue                           $    39,630       $    21,661       $  106,302       $   61,224
Fund management and administration                (8,794 )          (5,671 )        (26,123 )        (16,677 )
Third party sharing arrangements                    (374 )          (1,194 )           (913 )         (4,168 )

Gross margin                                 $    30,462       $    14,796       $   79,266       $   40,379
Gross margin percentage                             76.9 %            68.3 %           74.6 %           66.0 %


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Key Operating Statistics

The following table presents key operating statistics that serve as indicators
for the performance of our business:



                                                                  Three Months Ended                                     Nine Months Ended
                                                 September 30,         June 30,          September 30,          September 30,          September 30,
                                                     2013                2013                2012                   2013                   2012
Total ETFs (in millions)
Beginning of period assets                      $        28,975        $  25,103        $        15,004        $        18,286        $        12,182
Inflows/(outflows)                                        1,160            4,962                  1,036                 12,015                  3,673
Market appreciation/(depreciation)                        1,217           (1,090 )                  743                  1,051                    928

End of period assets                            $        31,352        $  28,975        $        16,783        $        31,352        $        16,783

Average assets during the period                $        30,473        $  28,390        $        15,769        $        26,932        $        15,051
ETF Industry and Market Share
(in billions)
ETF industry net inflows                        $          55.4        $    15.4        $          51.8        $         123.0        $         130.0
WisdomTree market share of industry inflows                 2.1 %           32.2 %                  2.0 %                  9.8 %                  2.8 %
International Developed Equity ETFs
(in millions)
Beginning of period assets                      $        12,903        $   8,525        $         2,846        $         3,732        $         2,407
Inflows/(outflows)                                          957            4,433                    (58 )                9,600                    381
Market appreciation/(depreciation)                          771              (55 )                  108                  1,299                    108

End of period assets                            $        14,631        $  12,903        $         2,896        $        14,631        $         2,896

Average assets during the period                $        14,063        $  11,444        $         2,859        $        10,526        $         2,798
Emerging Markets Equity ETFs
(in millions)
Beginning of period assets                      $         7,172        $   8,071        $         5,430        $         7,332        $         3,613
Inflows/(outflows)                                          286              (51 )                  736                  1,111                  2,596
Market appreciation/(depreciation)                          245             (848 )                  376                   (740 )                  333

End of period assets                            $         7,703        $   7,172        $         6,542        $         7,703        $         6,542

Average assets during the period                $         7,289        $   7,964        $         5,915        $         7,719        $         5,365
US Equity ETFs (in millions)
Beginning of period assets                      $         5,777        $   5,161        $         4,094        $         4,371        $         3,429
Inflows/(outflows)                                          273              547                    363                  1,111                    815
Market appreciation/(depreciation)                          221               69                    183                    789                    396

End of period assets                            $         6,271        $   5,777        $         4,640        $         6,271        $         4,640

Average assets during the period                $         6,214        $   5,541        $         4,393        $         5,502        $         4,161
Fixed Income ETFs (in millions)
Beginning of period assets                      $         2,437        $   2,600        $         1,698        $         2,118        $         1,506
Inflows/(outflows)                                         (320 )             78                    148                    266                    301
Market appreciation/(depreciation)                          (22 )           (241 )                   58                   (289 )                   97

End of period assets                            $         2,095        $   2,437        $         1,904        $         2,095        $         1,904

Average assets during the period                $         2,246        $   2,700        $         1,749        $         2,466        $         1,697
Currency ETFs (in millions)
Beginning of period assets                      $           547        $     626        $           769        $           611        $           950
Inflows/(outflows)                                          (48 )            (62 )                 (129 )                  (98 )                 (315 )
Market appreciation/(depreciation)                            3              (17 )                   14                    (11 )                   19

End of period assets                            $           502        $     547        $           654        $           502        $           654

Average assets during the period                $           515        $     607        $           694        $           586        $           819
Alternative Strategy ETFs (in millions)
Beginning of period assets                      $           139        $     120        $           167        $           122        $           277
Inflows/(outflows)                                           12               17                    (24 )                   25                   (105 )
Market appreciation/(depreciation)                           (1 )              2                      4                      3                    (25 )

End of period assets                            $           150        $     139        $           147        $           150        $           147

Average assets during the period                $           146        $     134        $           159        $           133        $           211


Table of Contents
                                                        Three Months Ended                                         Nine Months Ended
                                     September 30,           June 30,           September 30,           September 30,             September 30,
                                         2013                  2013                 2012                     2013                     2012
Average ETF assets during the
period
International developed equity
ETFs                                             46 %               40 %                    18 %                     39 %                     19 %
Emerging markets equity ETFs                     24 %               28 %                    38 %                     29 %                     36 %
US equity ETFs                                   20 %               20 %                    28 %                     20 %                     28 %
Fixed income ETFs                                 7 %               10 %                    11 %                      9 %                     11 %
Currency ETFs                                     2 %                2 %                     4 %                      2 %                      5 %
Alternative strategy ETFs                         1 %                0 %                     1 %                      1 %                      1 %

Total                                           100 %              100 %                   100 %                    100 %                    100 %

Average ETF advisory fee
during the period
Alternative strategy ETFs                      0.94 %             0.94 %                  0.94 %                   0.94 %                   0.95 %
Emerging markets equity ETFs                   0.66 %             0.66 %                  0.67 %                   0.66 %                   0.67 %
Fixed income ETFs                              0.55 %             0.55 %                  0.55 %                   0.55 %                   0.55 %
Currency ETFs                                  0.50 %             0.51 %                  0.50 %                   0.50 %                   0.50 %
International developed equity
ETFs                                           0.50 %             0.50 %                  0.54 %                   0.51 %                   0.54 %
US equity ETFs                                 0.35 %             0.35 %                  0.35 %                   0.35 %                   0.35 %

Blended total                                  0.51 %             0.52 %                  0.54 %                   0.52 %                   0.54 %

Number of ETFs-end of the period

                                                      Three Months Ended                                        Nine Months Ended
                                   September 30,            June 30,           September 30,          September 30,            September 30,
                                        2013                  2013                 2012                   2013                     2012
International developed
equity ETFs                                     20                  20                     18                     20                       18
US equity ETFs                                  13                  12                     12                     13                       12
Emerging markets equity ETFs                     7                   5                      5                      7                        5
Fixed income ETFs                                6                   6                      5                      6                        5
Currency ETFs                                    5                   5                      7                      5                        7
Alternative strategy ETFs                        2                   2                      2                      2                        2

Total                                           53                  50                     49                     53                       49

Headcount                                       84                  79                     70                     84                       70

Note: Previously issued statistics may be restated due to trade adjustments

Source: Investment Company Institute, Bloomberg, WisdomTree


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Three Months Ended September 30, 2013 Compared to September 30, 2012

Revenues



                                                     Three Months Ended
                                                        September 30,                              Percent
                                                    2013             2012           Change          Change
Average assets under management (in millions)     $  30,473        $ 15,769        $ 14,704            93.2 %
Average ETF advisory fee                               0.51 %          0.54 %         (0.03 )
ETF advisory fees (in thousands)                  $  39,437        $ 21,440        $ 17,997            83.9 %
Other income (in thousands)                             193             221             (28 )         (12.7 %)

Total revenues (in thousands)                     $  39,630        $ 21,661        $ 17,969            83.0 %

ETF advisory fees

ETF advisory fees revenue increased 83.9% from $21.4 million in the three months ended September 30, 2012 to $39.4 million in the comparable period in 2013. This increase was primarily due to higher average AUM as a result of strong net inflows, in particular, into our Japanese hedged equity ETF, as well as market appreciation. Our average fee declined to 0.51% from 0.54% over the same period due to the change in mix of our AUM, primarily due to the strong flows into our Japanese hedged equity ETF which is priced at 0.48%.

Other income

Other income remained relatively unchanged at $0.2 million in the three months ended September 30, 2012 and 2013 as higher interest and investment income from larger available cash balances were offset by lower revenue due to the termination of a licensing arrangement for one of our indexes.

Expenses



                                            Three Months Ended
                                               September 30,                       Percent
 (in thousands)                              2013          2012       Change        Change
 Compensation and benefits                $    9,648     $  5,734     $ 3,914          68.3 %
 Fund management and administration            8,794        5,671       3,123          55.1 %
 Marketing and advertising                     2,031          862       1,169         135.6 %
 Sales and business development                1,305          831         474          57.0 %
 Professional and consulting fees                542        1,305        (763 )       (58.5 %)
 Occupancy, communication and equipment          723          374         349          93.3 %
 Depreciation and amortization                    84           79           5           6.3 %
 Third-party sharing arrangements                374        1,194        (820 )       (68.7 %)
 Other                                         1,164          859         305          35.5 %
 Patent litigation, net                           -           219        (219 )          na

 Total expenses                           $   24,665     $ 17,128     $ 7,537          44.0 %

                                                     Three Months Ended
                                                        September 30,
          As a Percent of Revenues:                  2013            2012
          Compensation and benefits                     24.3 %        26.5 %
          Fund management and administration            22.2 %        26.2 %
          Marketing and advertising                      5.1 %         4.0 %
          Sales and business development                 3.3 %         3.8 %
          Professional and consulting fees               1.4 %         6.0 %
          Occupancy, communication and equipment         1.8 %         1.7 %
          Depreciation and amortization                  0.2 %         0.4 %
          Third-party sharing arrangements               1.0 %         5.5 %
          Other                                          2.9 %         4.0 %
          Patent litigation, net                          -            1.0 %

          Total expenses                                62.2 %        79.1 %


Table of Contents

Compensation and benefits

Compensation and benefits expense increased 68.3% from $5.7 million in the three months ended September 30, 2012 to $9.6 million in the comparable period in 2013. This increase was primarily due to higher accrued incentive compensation due to our record level of net inflows on a year to date basis in 2013; higher headcount related expenses to support our growth; and higher stock based compensation due to the recognition of expense for equity awards granted to our employees as part of 2012 year-end compensation. Our headcount at the end of the third quarter of 2013 was 84 compared to 70 at the end of the third quarter of 2012.

Fund management and administration

Fund management and administration expenses increased 55.1% from $5.7 million in the three months ended September 30, 2012 to $8.8 million in the comparable period in 2013. At the end of 2012, we ended our joint venture with BNY Mellon. As a result, we began to record certain operating costs related to our currency and fixed income ETFs, which were previously recognized by BNY Mellon as part of the joint venture. This resulted in approximately $0.5 million in higher costs during the third quarter of 2013. Higher average AUM resulted in a $2.3 million increase in portfolio management, fund administration, accounting, index licensing, regulatory and distribution fees. We had 49 ETFs at September 30, 2012 compared to 53 at September 30, 2013.

Marketing and advertising

Marketing and advertising expense increased by $1.2 million from $0.9 million in the three months ended September 30, 2012 to $2.0 million in the comparable period in 2013 primarily due to higher levels of online, print and television advertising. In the past, due to seasonality, we decreased marketing spending in the third quarter; however, we increased spending this quarter to support our growth.

Sales and business development

. . .

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