WisdomTree, Inc. Q2 FY2021 Earnings Call

Thank you all for joining us today for the WisdomTree second quarter earnings call. I would like to hand the call over to Jessica Zaloom, who is the Head of Corporate Communications and Public Relations.

Good morning. Before we begin, I would like to reference our legal disclaimer available in today's presentation. This presentation may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. 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, 2020. WisdomTree assumes no duty and does not undertake to update any forward-looking statements. Now it is my pleasure to turn the call over to WisdomTree's CEO, Jonathan Steinberg.

Thank you, Jess, and good morning, everyone. Many businesses across financial services are struggling to balance legacy business models and the conflicts that arise with fast-moving technological advancements, but not WisdomTree. Our Q2 results tell a story of continued growth and strong execution against our business goals and longer-term strategic initiatives. We are increasing the breadth and balance of our organic growth through Q2 and year-to-date through July. We are doing so with consistent and increasing efficiency and agility aided by our remote-first operating model. It was simply a clean and strong quarter marked by several standout operating accomplishments and milestones which Bryan and Jarrett will cover in their remarks. With the results we are achieving each passing quarter, I am increasingly confident in our long-term positioning. The focus and flexibility of our business model have enabled us to retain and attract world-class talent, drive strong operating results, and engage with our clients in whichever modality they desire with an ever-expanding set of resources. We are building on the quality, quantity, and overall mix of our client engagements. The track records and value proposition of our product and model portfolio offerings, along with sophisticated investment analytics and practice management resources, allow us to help advisers address the central challenges of their practices. Through our investments in tomorrow's growth, we are quickly establishing an expert voice around digital assets, cryptocurrencies, and blockchain-enabled decentralized financial services, or simply DeFi. Through these efforts, we are deepening the existing relationships and partnering at an enterprise level with key platforms in every channel, including some of the largest national RIA groups. It's an exciting time to be in financial services, and WisdomTree couldn't be better positioned. Now I will turn the call over to our President and COO, Jarrett Lilien, to review our progress and results in greater detail.

Thanks, Jono. As Jono just highlighted, Q2 was a strong quarter. I would add to it and say it was a quarter extending a string of strong quarters. And in July, Europe is showing positive flows and the U.S. is in its 13th consecutive month of organic growth, its best streak since 2015. The headline is strong, but so are the supporting metrics. Breadth and depth continue to strengthen. In the U.S., we are continuing a trend where the percentage of monthly inflowing funds is increasing and the percentage of monthly outflowing funds is decreasing. We are seeing particular strength in our large blend, emerging markets, and China funds. In Europe, UCITS and thematics have been the star, but we are also seeing growth in industrial metals, copper, and silver. And while there's been volatility in gold, we believe we have the best gold suite in the market and three of our top ten flowing European funds year-to-date have been gold funds. We also see sustained momentum in our flows. In the quarter, nearly 90% of our U.S. funds saw AUM increase, and nearly one-third hit new all-time AUM highs. Globally, we now have 34 funds with AUM over $500 million and 21 over $1 billion. Further, the quality of our global flows is also showing up in fees where we have seen average fees flat to up in both Europe and the U.S. this year. The overall product suite is well positioned, and we continue to bolster it with new launches and enhancements to current funds. Year-to-date, we have launched 11 new funds. And consistent with previous guidance, we expect to launch roughly the same number over the remainder of the year. In terms of enhancements, last year, we made major improvements to our oil suite, and this year, we added ESG and enhanced risk screens across our European and U.S. funds. We also rolled out improvements across certain fixed income, commodities, and alternatives products in the U.S. In all cases, these enhancements have paid dividends and highlight one of WisdomTree's differentiators as we seek to have the best structured and best-performing products in the market. We also continue to be excited about our growth in models. This past quarter, we launched ESG models and crypto models. Our pipeline remains strong. This continues to be a focus initiative, and we continue to be excited about the impact of models on overall flows. Another major focus is to not only invest in today's growth as we are clearly doing successfully but to also invest in tomorrow's growth. We continue to make progress with our digital assets initiatives, both organically and inorganically. In Q2, we launched our ETHW ETP in Europe, and we made investments into both Securrency and Onramp, two important digital assets partners. As Jono foreshadowed, we look forward to exciting announcements to come. And we're doing all of this while we improve process and workflows and increase efficiency. This has been another focus that is paying dividends as both our gross margins and operating margins are expanding. As I said last quarter, and I'll say again this quarter, we are executing well on all fronts. We have momentum, and we are generating strong organic growth. Let me now turn it over to Bryan to bring it all together with the numbers.

Thank you, Jarrett. Beginning on Slide 5, our AUM at June 30 was $73.9 billion, representing a record quarter and an increase of 6% versus the prior quarter, driven by positive market movements and net inflows. We generated in excess of $900 million of inflows during the quarter, spanning multiple asset classes, including our emerging markets, international equity, U.S. equity, and fixed income products. Our commodities products saw mixed results with strong flows in copper and broad industrial metals, which were offset by outflows in gold, nickel, and oil. As Jarrett had previously mentioned, our U.S.-listed ETFs have generated positive inflows for 12 consecutive months, and 21 of our ETFs have over $1 billion in AUM. Momentum continues into Q3 as our AUM currently stands at $74.3 billion, $400 million greater than where we ended the quarter. Inflows in July are in excess of $500 million, or $2.7 billion year-to-date. Now turning to our financial results on Slide 6. Revenues were $78 million, an increase of 7% from the prior quarter due to our higher AUM. Adjusted net income was $16.8 million, or $0.10 a share, up 34% from the prior quarter. This quarter, we recognized a non-cash after-tax gain of $500,000 for our future gold commitment payments and $300,000 in other non-operating items. Turning to margins on the next slide. We've experienced meaningful margin expansion with our operating income margin in excess of 30% and our gross margins in excess of 79% for the quarter. This expansion demonstrates the operating leverage of our business model. This is the second consecutive quarter that we've recognized gross margins in excess of 78%, a level we have not experienced in almost three years. We are updating our gross margin guidance, which we now expect to fall within a range of 78% to 79%, a 1% uptick from our prior guidance. On the next slide, you will see the change in our expenses. Our operating expenses were down slightly from the first quarter. Higher third-party distribution fees, fund costs, and marketing and sales expenses were offset by lower compensation expense. Our compensation expense was lower due to reduced stock-based compensation, as well as the prior quarter including the impact of seasonal payroll taxes. Our full-year compensation guidance remains at approximately $85 million, unchanged from what was communicated last quarter. Discretionary spending during the quarter was $11 million, and our full-year guidance remains unchanged at $49 million as marketing and sales expenses are anticipated to increase during the second half of the year. Turning to the next slide. In June, we raised $150 million via a convertible note offering. The proceeds provide us with dry powder for organic and inorganic growth initiatives. It also positions us to pay down our pre-existing convertible notes at the opportune time. We raised these funds from a position of strength when our stock price was $6.90 per share, and the transaction was EPS neutral. The notes are a 5-year term and were issued with a 3.25% coupon, one percentage point lower than our notes issued last year. The conversion price is $11.04, and we have the ability to redeem the notes at a stock price of $14.35. Please be mindful of the EPS consequences associated with our convertible notes. While our notes require principal to be paid in cash at maturity or upon conversion, incremental shares associated with an in-the-money conversion option are includable in the diluted EPS share count. Refer to the appendix for a computation of the 3 million shares added to our diluted share count associated with our convertible notes issued last year. The shareholder-friendly strong execution of our recent convertible note offering adds strength to our balance sheet and flexibility to our capital management program, which includes our quarterly dividend payment, share buybacks, and debt management. In connection with this issuance, we'd repurchased 4.5 million shares of our common stock. And since the beginning of last year, we've repurchased 13.4 million shares for approximately $66 million. We may consider future opportunistic stock repurchases. However, that decision will be weighed against the desire to ultimately reduce our debt and strategically invest in growth. We believe our strong results reported today and the ongoing efficiency and scale of our business positions us well to continue delivering shareholder returns while investing in the business for the future. One other thing to note, we have hired a Head of Investor Relations, Jeremy Campbell, previously from Barclays, and we are looking forward to him starting with us next week. That's all I have. I will now turn the call over for questions.

Our first question comes from Brennan Hawken with UBS.

So just was hoping for maybe an update on the dialogue around the U.S. Bitcoin filing and the tokenized gold product. How is that going? How is the experience in Europe adding to that discussion with the regulators? And is there anything you can say there? I know it might be a bit tricky.

Thank you. I'll take this one, Brennan. We are having productive discussions with the SEC. The current delay in the approval process was anticipated. Our position remains unchanged; we believe we will be among the first to receive approvals for U.S. Bitcoin ETPs. Our experience in Europe has reassured regulators, and we think we have launched the best-structured institutional quality cryptocurrency ETPs for both Bitcoin and Ethereum there. Additionally, I want to emphasize a broader narrative; while you mentioned digital gold, I believe the filing for digital treasuries is extremely significant and could be even more exciting than a Bitcoin ETP filing. We're evolving the '40 Act with our treasury filing, creating a new type of regulated tokens that will be integrated into the blockchain using Securrency's technology to fully leverage blockchain's potential. These regulated tokens will lead us into what I describe as responsible DeFi. Our ongoing communications with the SEC and regulators have been promising, and we anticipate balanced regulations that will foster innovation rather than hinder it, allowing for blockchain-enabled financial services to thrive. We believe DeFi will eliminate numerous financial intermediaries and disrupt existing business models. While we haven't fully disclosed our plans, our strategy regarding regulated tokens and responsible DeFi will become clearer in the upcoming quarters. Ultimately, investing, savings, and payments are set to converge on the same technology stack, and the efficiencies that will emerge from this convergence are difficult to fully grasp at this point. Current barriers, such as various gated technologies, will be dismantled, paving the way for innovations. For WisdomTree, we are highly confident that this will enhance the user experience. We are in a prime position to capture market share, which will result in strong economics and a diversified business model with multiple revenue streams. So, that’s a long answer to your question, Brennan. I hope it addresses your concerns.

I appreciate the credit you gave me, Jono. I've tried to understand the mechanics in the past, but I understand that due to competitive reasons, you may be limited in what you can share about it. I'm looking forward to learning more. Changing topics, can you discuss the models? They're becoming increasingly important, especially for the broker-sold channel. What is the penetration you're seeing? Do you have any statistics regarding model penetration and the assets in those models? Which channels are resonating the most, and what is driving that adoption? Any insights on this would be very helpful.

Jarrett, could you begin there? Jeremy, you might want to add your thoughts after that. So, Jarrett, please go ahead.

Sure. Well, as we mention every quarter, it's a focus initiative for us, but it's not a recent one. We recognized many years ago that one of the most important macro trends in wealth management was the move to models, model adoption. So we've been focused on this for years, and we've organized ourselves in a way to support this and support adviser adoption. And really, there are multiple channels that we work on. We look at sort of the most obvious one, winning positions in existing adviser and home office models. But then a little less obvious, we also work with advisers to help them with customized models. And then as we've been talking about more recently, we work to build our own models for third-party model platforms like with Merrill Lynch, and very soon, we have another announcement of another major wirehouse win on the third-party model platform. So it's really a multi-tiered approach. Right now, we're not breaking out the flows, but the initiative is gaining more traction, and I think that's really evident in our flows. It certainly is contributing to, again, in the U.S., 13 consecutive months of net inflows. They're stickier assets. They're deeper client relationships. So we do look to disclose more data points at some point, probably for next year, but we're extremely happy with the results that we've got year-to-date.

I'll just add one quick point, Brennan, to that. You started off asking about the crypto filings. One of the things we've highlighted is a plus crypto model that we did in conjunction with our investment in Onramp; they are one of the platforms enabling direct access to crypto. We launched a press release announcing a series of three different models related to that plus crypto model, and we're having really great early conversations with large and small RIAs, institutions, and investors about it. We're currently engaging in that area, which is great.

Our next question comes from Robert Lee with KBW.

This is for Rob. In addition to the ETFs launched in Europe, could you discuss some other digital products you might introduce? I know you mentioned a digital wallet, and could you also share the time frame you are considering for monetizing any new investments?

Okay. I'll start. WisdomTree is focused on responsible DeFi, which includes cryptocurrencies. We currently have two crypto offerings in Europe, with plans to introduce more as they become approved in the U.S. There will also be crypto exposures available in the ETP format in the U.S., and we're bringing these to market through models and separate managed accounts. We view crypto as an asset class, acknowledging its importance to investors, and we aim to establish a significant presence in this space. Additionally, in the DeFi sector, we initiated a strategic investment in Securrency about two years ago, leading their Series A and co-leading their Series B. We're pleased to see participation from other institutional investors like State Street and U.S. Bank in Securrency's Series B. Our investment reflects our belief in Securrency's technology, which enables us to leverage regulated tokens on the blockchain, enhancing interoperability and enabling peer-to-peer exchanges. We're using our investment in Securrency to introduce regulated tokens that are not easily replicated. We have discussed gold treasuries and dollar tokens, and we will also have a wallet for economic and business model purposes, with more details coming in the next quarters. We previously indicated that our gold tokens and treasury tokens would be launched towards the end of the fourth quarter or early in the first quarter, and we remain committed to that timeline. This is an exciting opportunity for us. Our team, including our new CFO, Bryan Edmiston, our President and COO, Jarrett Lilien, and others like Jessica Zaloom and Jeremy Schwartz, will focus on expanding our public company coverage beyond traditional institutional asset management. With the wallet, we will engage more directly with retail investors while also broadening our institutional coverage to include fintech and emerging DeFi sectors like Coinbase and payment solutions. The opportunities we anticipate, along with the economics and business models we expect to achieve, will become clearer by the end of the year and in the upcoming quarters, making it a focal point for 2022. I hope that answers your question.

Great. That's very helpful. And maybe if I could just ask one more on flows. So well, recently, some of your non-U.S. flows have been a bit more skewed towards commodity and currency products. Could you talk a bit about how you're thinking about expanding your non-U.S. footprint sort of beyond that core franchise?

I think, Jeremy, maybe you could start there? And Jarrett, if you wanted to add on if Jeremy leaves anything off.

Our European business has seen significant growth since we acquired the ETF Securities business, which is a leader in commodities in Europe. We maintain a macro perspective, recognizing that inflation is approaching and that bonds are yielding negatively when adjusted for inflation, particularly the TIPS. This has led us to favor broad-based gold and commodities as effective inflation hedges. Currently, our diversification is much stronger than at the start of the year, with our commodities allocation decreasing from over 26% to 21%. This change reflects a shift in Europe toward thematic investments, such as cloud computing, artificial intelligence, and battery solutions. We have introduced new commodity funds focused on enhanced energy and agriculture, which have attracted interest. Additionally, our recent filings in Europe, which include thematics beyond commodities, are gaining traction. We have a robust product lineup and are continuing to expand our offerings in growth technology and innovative commodity solutions that stand out in the market.

Yes. I would like to add that the situation has been quite interesting. The business in Europe initially focused heavily on commodities. However, we are utilizing our expertise in that area in many of our digital asset projects, which rely on how commodity products function, making it a core strength for us. This provides significant advantages. It’s a strong business, and we aim to maintain our leading position. Meanwhile, in the U.S., we have achieved considerable success beyond commodities. We are looking to bring some of the valuable intellectual property we have from the commodity sector while also sharing the intellectual property we have from the equity sector. This year, the fastest-growing segment in Europe has moved away from commodities towards UCITS and other areas.

Our next question comes from Michael Cyprys with Morgan Stanley.

Just want to circle back to the European crypto products that you have. If you could just give us a little bit of an update on some of the distribution changes that you guys have been putting in place in terms of the evolution there, broadening out access across broader Europe, how that is going? And what are some of the actions you guys are taking?

I'll start, but if Jarrett or Jeremy want to add anything, please do. We began with Bitcoin and have now included Ethereum. Although we have approvals in Europe, the market is still managed on a country-by-country basis, with each regulator having unique requirements. This makes it challenging to achieve complete distribution across Europe right from the outset. Since we launched with Bitcoin on the Swiss Stock Exchange, we've expanded into Germany and have opened up to more institutional and retail investors through some strategic repositioning. We're working to extend our reach throughout Europe. We've also added Coinbase as a secondary custodian alongside Swissquote, ensuring strong investor safety. From Switzerland, we're seeing a lot of engagement in Frankfurt as well. The key to increasing participation will depend on the growth of the asset class, which has been mostly volatile and lately improved a bit. Earlier this year, Bitcoin experienced outflows, but we've since reversed that trend with strong inflows. Ethereum also had a quick launch and rapid market adoption. Overall, we're optimistic, and there are more opportunities for additional applications or launches in Europe. We're supporting this with our well-regarded research, making us a significant resource for investors in Europe, especially institutional ones, as they look to incorporate crypto into their overall investment strategies.

Nothing.

Maybe just as a follow-up, just curious how do you think about getting your crypto products on more platforms in Europe? And if you're able to kind of help quantify the number of platforms that it's available on today relative to, say, three months ago? And any sort of targets that you have for where you'd like that to be in 12 months?

Jarrett, do you have anything to add, or Jeremy, is there something more you would like to say about that?

I would say it's similar to other new asset classes. It's about education and understanding the demand from the platforms. In the U.S., we are engaging with many clients related to our Onramp investment; people are interested in knowing what their clients are doing. We estimate that around 15% to 20% of clients of registered investment advisors are exploring options outside of their advisory services. Therefore, we need to gain a deeper understanding of the asset class and often the end clients, so we can be more informed than the advisers. Providing education is the starting point for us. In the U.S., we are involved in this Onramp academy, offering educational content. Europe is also delivering excellent research and market coverage. It's a lengthy educational journey, and as platforms choose to provide more options, we are positioned with some of the top regulated products. I believe you'll see us competing for those opportunities as platforms seek to expand their offerings.

I wanted to mention that it's valuable to discuss cross-listings because, while they may seem minor, they are essential for expanding distribution. As Jono indicated, the regulatory landscape is still quite fragmented. However, there's been progress, such as recent news from Germany allowing institutional accounts to allocate up to 20% of their assets to cryptocurrency. It's crucial for us to be positioned correctly and support this development. Additionally, as Jerry pointed out, we need to focus on education, collaborate with regulators, and stay engaged as the situation evolves.

What’s interesting about cryptocurrencies, particularly Bitcoin, is that it has largely been driven by retail investors, with minimal participation from institutions. This has occurred despite retail investors lacking support from traditional financial services. Recently, JPMorgan, which has historically been critical of Bitcoin, announced that their advisers can now assist clients in accessing crypto. I believe there is significant potential for growth in the cryptocurrency asset class ahead.

Our next question comes from Keith Housum with Northcoast Research.

Just to follow up a little more on the U.S. crypto experience. With the retail investor tending to be more faster money in and out, is that a risk to the ETF strategy? Or does it not matter if it's long term versus short term?

I'm going to address this. Crypto is ideal for ETFs or ETPs. Our approach is to simplify trading for challenging assets, and the efficiency with which investors can trade amidst volatility is incredibly compelling. I believe there will be a time when the general retail investor will prefer managed accounts and ETPs rather than setting up their own crypto wallets. There has certainly been strong early adoption from more tech-savvy users who utilize crypto wallets. However, as crypto becomes more mainstream, I anticipate a significant adoption increase among traditional investors that WisdomTree targets with ETPs.

Great. That's helpful. Bryan, I have a follow-up question for you regarding revenue on the other income line. Other income has been increasing consistently each quarter. Can you remind us what is included in the other income line and what is driving that growth?

Yes, that line includes creation redemption fees, licensing fees, and some other miscellaneous revenues. Some of this revenue is based on transactions, while others are based on assets under management. The amount we recognized this quarter should serve as a reliable indicator for what to expect in the future.

And I'm not showing any further questions at this time. I'd like to turn the call back to Jonathan Steinberg, the CEO, for any closing remarks.

Thank you, everybody. I just want to thank you for your interest in WisdomTree, and we will speak to you over the course of the quarter and next quarter. Have a great day. Bye, everybody.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.