WisdomTree, Inc. Q1 FY2024 Earnings Call

Greetings. Welcome to the WisdomTree First Quarter 2024 Earnings Call. As a reminder, this conference is being recorded. I will now hand the call over to Jessica Zaloom, Head of Corporate Communications. Jessica, you may begin.

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, 2023. 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 CFO, Bryan Edmiston.

Thank you, Jessica, and good morning, everyone. Let me begin by sharing our results for the first quarter, along with commentary on our expense guidance before turning the call over to Jarrett and Jono for additional updates on our business. We continue to demonstrate our ability to grow organically, having generated $2 billion of net inflows during the quarter. Sustainable flows have been a continuing theme with over three years of positive momentum, and our results this quarter illustrate the breadth and depth of our product lineup and serve as proof points in our ability to deliver results away from USFR. Our $2 billion of inflows were broad and diverse, generally into products with higher fees, which has remixed our blended fee rate higher, setting the table for higher revenue capture for the second quarter. Our inflows, coupled with positive market movement, resulted in us ending the quarter with record AUM of $107.2 billion. This is driving revenue growth and expanding margins, demonstrating the scalability of our business model. Continuing organic growth, coupled with disciplined expense and capital management alongside positive market conditions, is the formula for further margin expansion and accelerated EPS growth. Revenues were $96.8 million, an increase of 6.6% in the fourth quarter and up 18% from the prior year quarter, driven by higher average AUM. We have also observed adjusted operating margins expanding over 820 basis points versus the first quarter of last year, or 280 basis points organically when adjusting for the impact of our gold royalty buyout, which we accomplished in the second quarter of last year. Our adjusted net income for the quarter was $20.3 million or $0.12 a share. Our adjusted operating expenses were up 5% for the quarter. The largest contributor was compensation as we experienced elevated seasonality in the amount of compensation we report in the first quarter, due to payroll taxes, benefits, and other items in connection with the payment of year-end bonuses. Fund management expenses were also higher, driven by higher average AUM. Now a few comments on our forecasted expense guidance. Our forecasted compensation expense remains unchanged, ranging from $108 million to $118 million. This guidance considers variability in incentive compensation with drivers including the magnitude of our flows, revenue and operating income growth, margin expansion, and our share price performance in relation to our peers. Where we sit today, a quarter into the year and given the strong start, we would anticipate trending towards the upper half of this range. Our discretionary spending was $14.9 million in the first quarter. We are reiterating our full-year discretionary spending guidance of $64 million to $68 million as we anticipate an uptick in marketing spend in connection with our national rollout of WisdomTree Prime. We reported a gross margin of 79.4% in the first quarter. We are maintaining our gross margin guidance of 79% to 80%, considering current AUM levels and fund launches anticipated during the course of the year. If AUM scales higher from continued organic growth or favorable market conditions, we would anticipate further gross margin expansion. Our third-party distribution expense was $2.3 million in the first quarter. We are maintaining our guidance of $10 million to $11 million for the year. We are also maintaining our annual adjusted interest expense guidance of $14 million. As a reminder, our adjusted interest expense guidance is exclusive of any interest costs we are required to impute under GAAP related to our interest-free financing of the shares we repurchased from the World Gold Council last November. Our interest income during the first quarter was $1.4 million. We are increasing our interest income guidance for the year by $1 million to $5 million based upon the magnitude of our forecasted interest-earning assets. Our adjusted tax rate was 24.9% in the first quarter, and our guidance of 24% to 25% remains unchanged. Our weighted average diluted shares were $165.3 million during the first quarter and our guidance of $166 million to $168 million for the year remains unchanged as well. That said, this guidance does not take into consideration any incremental shares associated with our convertible notes. Our current stock price of roughly $9 per share is up over 30% year-to-date and is approaching the $9.54 conversion price related to our convertible notes scheduled to mature in 2028. While the notes require principal to be paid in cash, our diluted shares would need to be increased for any incremental shares associated with the conversion option once our stock price exceeds the $9.54 per share. An illustration is included within our earnings presentation to assist in quantifying the incremental shares associated with the conversion option going forward. That's all I have. I will now turn the call over to Jarrett.

All right. Thanks, Bryan, and good morning, everyone. We are excited to report another strong quarter with robust net inflows, record AUM, and expanding operating margins, which all reflect our continued leadership in delivering innovative products and solutions for every market environment in every part of the cycle. We're also excited about our progress in tokenized assets and blockchain-enabled finance, which are reshaping the future of our industry and creating new opportunities for growth and value creation. As Bryan mentioned, Q1 started with nearly $2 billion of net inflows, driven by the breadth and depth of our product lineup, especially in higher fee funds. Our India earnings fund and our currency hedge strategies attracted strong demand as did commodity funds such as silver and copper. In total, the fee rate and our gross inflows were 49 basis points, which helped drive our overall blended fees higher. Combined with the supportive market, we ended Q1 with record AUM of $107.2 billion, up 18.2% year-over-year and 7.1% sequentially. We are proud of these results, which reflect our ability to deliver consistent and diversified growth across our product suite. Models also continue to be a steady growth driver. As a reminder, our approach is to grow the number of advisers who have access to our models while also further penetrating that market and growing the number of advisers actively using WisdomTree models. Based on our current pipeline, we expect our accessible market to grow to about 80,000 advisers by year-end, up from 70,000 at the end of last year. Additionally, after adding 1,000 new adviser model users in 2023, we're on track to maintain that cadence of new adviser growth in 2024. The ongoing traction in models has driven growth in model AUM to about $3.5 billion at the end of March, outpacing the growth of our firm-wide AUM. Overall, we remain very bullish on the long runway for model assets growth in the quarters and years ahead. We're also pleased to report that we delivered another strong quarter in margin expansion and earnings growth, demonstrating our scalable operating model and our ability to leverage our AUM growth. Our total operating margin increased by 820 basis points year-over-year to 30%, of which 540 basis points was from smart dealmaking and opportunistically buying out the gold royalty payment last spring, and 280 basis points was organically driven by growth and operational efficiency. Our adjusted earnings per share increased by 71% year-over-year to $0.12, reflecting top line growth and margin expansion dropping to the bottom line. We remain focused on driving expanded operating margins and earnings growth in 2024 and beyond. We continue to believe that tokenized assets and blockchain-enabled finance represent a huge growth opportunity for WisdomTree as they open new markets, attract new customers, and create new revenue streams. Back in 2020, we talked about our AUM growth opportunity driven by our diversified product suite models. We talked about our scalable operating model and how growth and operational efficiency would drive margin expansion, and we talked about the potential of tokenized assets and blockchain-enabled finance. Each quarter since, we have delivered on those opportunities. Our growth momentum shines brighter every quarter, our margins have been expanding, and we further solidify our position in tokenized assets. We used to be alone in talking about many of these themes, but now we have some company. We like to say that if you want to know what the industry is going to do tomorrow, look at what WisdomTree is doing today. In conclusion, we are confident that we have the right strategy, the right products, the right team, and the right culture to continue to create value for our clients and shareholders in the long term. We remain extremely bullish about 2024 and beyond, and we continue to drive organic growth, expand our margins, and lead the industry's evolution in tokenized assets and blockchain-enabled finance. And with that, let me now turn it over to Jono.

Thank you, Jarrett, and good morning, everyone. It's been a great start to the year. Record AUM, strong flows, higher fees, 820 basis points of margin expansion, driving a 71% increase in earnings per share versus the first quarter of last year. We are executing on the key drivers that will propel the next $100 billion of AUM growth. Those drivers are ETFs, model portfolios, tokenization, and WisdomTree Prime. Importantly, I want to remind everyone that all of the digital spend, including marketing, is fully baked into our guidance for 2024. It's important to remember as marketing really begins in early May. Now the most important milestone in the quarter was the receipt of WisdomTree's trust charter from the New York State Department of Financial Services. DFS is the premier regulator for digital asset businesses in the U.S., and the operation of a trust company in this space has been a core component of our strategy. Simply put, we think that the trust company is a strong counterparty for our retail and institutional customers, and we think it will open up a number of business opportunities for us going forward. More specifically, the trust charter does two things for us. First, it allows us to onboard New York customers to WisdomTree Prime. Second, the trust company gives us the ability to offer products and perform services under DFS supervision with associated legal protections. Specifically, the trust company can perform fiduciary custody of digital assets, issue DFS approved stablecoins, and manage stablecoin reserves. Now from an availability perspective, and including the upcoming launch in New York, 75% of the U.S. population across 41 states have access to WisdomTree Prime. On the product and feature front, we also hit another key milestone in the first quarter with the launch of our debit card to prime users. The card is available both physically and digitally through Apple and Google Pay platforms and ties a WisdomTree Prime customer's asset balance to the payments ecosystem. Initially, customers will be able to auto debit from the dollar token balances, but we will expand that functionality to other asset classes like our money market fund, gold, and crypto in the coming quarters. With the trust charter and the launch of the debit card, as I already mentioned, in early May, we will be increasing our marketing efforts going forward. It's too early to share any takeaways, but this is the effort that will generate further downloads, funded accounts, and activity. This is the beginning. We are seeing increasing interest in tokenization in the asset management space, as many of you may have noted. Our combination of retail and institutional distribution, our regulatory licenses, and our broad suite of tokenized assets and funds across asset classes position us as the early leader in the space. We are looking to press this advantage in the coming months. This is only the beginning. As I continue to mention in recent calls, it's a very exciting time for WisdomTree. We have best-in-class organic growth, a meaningful margin expansion opportunity, and leverage to the secular shift towards tokenization.

All right. Thank you, Jono, and good morning, everybody. Operator, let's open up the lines and go directly to some questions from our analysts.

I wanted to ask, as you roll out Prime and some of the retail initiatives, there have been some kind of prominent examples in recent years of other firms trying to go from an institutional kind of setup to a more retail approach and then backing away from that strategy. So I just wanted to get your thoughts on, obviously, you've seen that and studied how WisdomTree's offering is differentiated and how you'll succeed there?

Adam, let me start and then maybe Will, you'll jump in. First, I'd say that WisdomTree is already and has from the very beginning been a direct-to-consumer brand within investments. So online brokerage accounts have seen our TV ads starting 17 years ago and have been interacting with us on a direct-to-retail basis from the very beginning. This is fully integrated into what we're doing with Prime, further delving into the consumer space for sure. It isn't a new business line, though; it really is built on the infrastructure of the core business, and we're starting with the sort of the low-hanging fruit of investors, people most interested in money, people that we've known or gotten to know over the course of the past 20 years, and it will build incrementally over time. But by keeping our costs extremely low as we do this, I think that we'll be able to find a cost-effective marketing message, and that's the reason for the early testing in small incremental bites, which is what we said from the very beginning. And so what we're talking about in May is just an increase in marketing spend, and it will just continue to be increased in incremental ways for the rest of the year. Will, what would you add to that?

No, I think a lot of that was covered well, Jono. I'd just add, we're doing both. And I think they're mutually beneficial and self-reinforcing. I mean one of the co-parts about our tokenization platform is that the same platform is being applied both to retail and institutional. We've spoken a lot about Prime, but we're going to have more announcements coming up for that institutional portal that we've alluded to in the past. So it's both, and they're both mutually reinforcing, and there's a good flywheel effect from both of them.

Fair enough. Yes. I appreciate the context around direct to retail. And I wanted to follow up on kind of the flywheel effect on the synergies. One of the things that we sometimes hear from investors is there tends to be a mentality, and we'll just sort of address the point a little bit, but there tends to be a mentality of Prime and tokenization being separate from the core business of WisdomTree. So maybe if you could talk a little bit about the synergies and how some of the marketing spend might help your legacy business as well.

Will, should I take that and go ahead?

I'll start, Jono. I'm happy to start. I mean, I think that it's completely leveraging the core competencies of WisdomTree. A tokenized fund or a tokenized asset looks very similar in a lot of ways to like an exchange-traded product. Instead of being listed on the New York Stock Exchange or fixed in Switzerland, it could be listed on kind of available on blockchain. So it's very similar core competencies to what we have. I think maybe a different distribution set right now, but it's definitely leveraging kind of what WisdomTree does today.

We're just tapping into regulatory prowess, product development prowess, marketing prowess, even our engineering team, which had been building the solutions business of the core business has been tapped and expanded to help with the user interface and other elements of the technology builds of our digital assets. And so synergy all along as well as overlapping vendor relationship management. So those are some of the elements that have come to mind in terms of how well the WisdomTree footprint was or is or is trying to tackle the digital asset opportunity.

I appreciate the commentary on WisdomTree. But if we come back to the ETF part of the business, perhaps Jono you can give a little summary about the new product creation over the past, say, 4 or 5 quarters and then what the vision is for new product creation going forward?

I'm going to quickly touch on this, and then I'll turn it over to Jeremy Schwartz. One thing we've done is expand our internal brand focused on quality, which is a foundation for many of our funds. We started with the original factor funds that emphasized quality, and then we developed a more specific quality family. We began with quality dividend growth, our largest equity fund, and have taken that internationally in recent years. Recently, we launched quality growth, which has shown remarkable performance. This past quarter, or possibly more recently in the second quarter, we introduced the usage version of quality growth. Jarrett and Jeremy, could you discuss some of the product strategies we've launched recently?

Yes. We've been continually trying to diversify the product set for market environments to have something in all market environments. And I think what you've seen with quality growth and our investment in thematics is that exact playing out. In our UCITS family, we have about $1.5 billion in thematics across over 10 different sector-specific versions, not just in the tech sector but in cloud, cyber, and AI. And so now you have a real growth-led family you can compete in. In the U.S., we have almost $1 billion in that thematic range, so $2.5 billion in these sort of sector-specific growth areas. The quality dividend growth family in the firm is up to almost $15 billion across the U.S. and Europe, or maybe even more than $15 billion across that family and is taking a lot of those inflows. We're continuing to broaden out how we go beyond USFR for fixed income. We've been investing in broader enhanced yield indexes for bringing longer-duration exposures, and our efficient core family for equities, which combines stocks with bond futures, is another way people can add duration to portfolios, and we're seeing that both in the U.S. and recently launched that in Europe. So we continue to try to be innovative in the funds that we launch and try to help diversify the overall business with that approach.

Great. If I can follow up there. And I'm sure AUM is the easiest way to measure success in some of these new funds. But how do you guys evaluate the success of these funds outside of just AUM growth?

Maybe I can jump in. This is Jarrett jumping in for just a quick one. I think, and Jeremy, you can talk about measuring the new launches. But our overall strategy is about growth. And so growth is about having that diversified product suite and then enhancing it with innovative launches. And that's been a strategy that's been working for us very well over the last several years, where we're looking to generally launch about 20 new funds a year, and we're not changing that. That's sort of the pace we're looking at this year as well. And again, it's a strategy that's working well for us as evidenced by more than three years of consistent organic growth that really is leading the industry in terms of organic growth. So it's a very sound strategy, and we're continuing with it.

Jeremy, do you want to add any?

In addition to our individual products, we are consistently launching more models. We focus on diversifying our flow, moving beyond single ticker sales in the Model Portfolio business. We are also continuing to introduce innovative models, and we have seen significant success with our Siegel branded models for major platforms. The Siegel token fund represents the intersection of our prime and traditional businesses, showcasing the synergies between them. Moreover, we are excited to launch new models that utilize our new funds, which we believe will serve as another growth avenue for us.

I wanted to explore the models further. Could you discuss some of the steps you are taking to encourage greater adoption among new advisers using your models? You mentioned that 70,000 advisers represent the accessible market, which is expected to grow this year. I'm interested in how deep your penetration is within that group in terms of those actually utilizing your models and what steps you are taking to enhance that penetration.

Jarrett?

Yes, that is one of our main priorities. We discussed this last quarter, noting that we have a strategy in place. Our goal is to expand the accessible market, which refers to the number of financial advisers who can utilize our models. By the end of last year, that figure reached 70,000. We also aim to increase our penetration within this accessible market. As of last year, we had expanded our user base to 2,000 advisers, giving us a penetration rate of under 3%. This is exciting because there is still a significant addressable market available for us to reach. So far this year, we have experienced growth on both fronts. We are expanding the accessible market and successfully entering top platforms with firms focused on this trend, such as Merrill, Morgan Stanley, and LPL. This is key to our strategy—getting onto more platforms to grow our accessible market. Once that door is open, we need to persuade individual advisers of the value of our product, which is achieved through effective sales, strong research, and excellent models. Last year, we managed to double the number of advisers using our models from 1,000 to 2,000, adding about 250 new advisers each quarter, and we are maintaining that pace this year. Another strength of this business is our visibility into the pipeline. As mentioned in the prepared remarks, we have a clear expectation that the accessible market could increase to 80,000 or more by the end of the year based on what we see in the pipeline, along with the growth in our penetration rate.

And just a follow-up question on WisdomTree Prime. I was hoping you could maybe talk about your go-to-market strategy. Talk about some of the steps that you're going to be taking to bring awareness to the offering and bring customers directly to WisdomTree. And what does sort of success look like to you as you look out over the next couple of years, and understand your earlier comment that you've been a DTDC business for a bit. Maybe you could just remind us on what portion of the ETFs today are held in self-directed brokerage accounts.

Will, do you want to start?

Yes, I’m glad to begin. Jono, feel free to add anything. As you've mentioned before, we’re focused on lean marketing, emphasizing digital and organic methods. This includes targeting app store search ads for individuals interested in our themes. A clear example is the digital gold concept. There’s a significant audience that finds gold enticing, and a digital gold product with instant settlement will attract them. Our goal is to reach and continue monetizing these users, along with our organic and press strategies. A crucial aspect of this approach involves enhancing our features and expanding availability to more customers in the U.S. The announcement regarding New York Trust Co is a significant step in this direction, as we prepare to serve New York customers in the coming weeks. This outlines the marketing strategy we plan to pursue.

And I would say from a penetration on the core business to retail, just AUM; it's something I don't have exact numbers for, but it's sort of a $9 billion to $10 billion number. Yes, $9 billion number out of the total, with the U.S. being more retail-oriented than Europe.

With respect to WisdomTree Prime and the receivable of the NYDFS approval. I was curious, does this help push forward any of the conversations with respect to third-party white labeling?

Will, do you want to start?

Yes, it would. As Jono mentioned earlier in the call, the trust charter allows us to serve New York customers and also provides a strong regulated partner for business transactions. This makes it a valuable asset for various B2B and B2B2C opportunities. Additionally, several companies in the market currently holding that trust charter utilize effective white labeling strategies. Therefore, it represents a significant step in our approach to white labeling and broadly in B2B and B2B2C initiatives.

Great. And then I know it's early days with respect to the debit card offering, but I was curious if there's any insights you could share about the initial response from existing users.

The initial response has been excellent. It's been very beneficial for our marketing strategy. We've noticed an increase in debit card messaging. People are starting to open the cards and making purchases with them. The debit card has always been an essential part of our approach, and we’re seeing positive results in our marketing so far.

Great. And then just with respect to flow so far through Q2. Obviously, there's a little bit of a headwind in the European business. Just curious if you had any additional color on what's driving that?

Jeremy or Jarrett, would you like to begin?

Certainly. I'll start, and Jarrett can join in. We've noticed some shifting funds, particularly in commodities, showing significant movements. In Europe, the business operates in large chunks, which can lead to sudden changes in the market. Despite this, we continue to increase our customer base, particularly evident in our UCITS segment, which has now surpassed $6 billion and is crucial to our growth in Europe. Our ongoing strategy involves launching more UCITS products, like the QGRW UCITS that we introduced yesterday in Europe. We have experienced positive inflows into UCITS every year since 2014, which gives us confidence in the European market. However, it's important to note the nature of the business can lead to large-scale fund movements as clients adjust their allocations. Turning to the U.S., we have received questions in the past couple of years regarding USFR, especially with the favorable inflows we’ve seen. Our response remains that we view this as a core holding, meaning we don't anticipate significant outflows even if interest rates shift. There may be some movement, but as a key asset for many and a cash alternative, it keeps us actively engaged in discussions about fund allocation. This was particularly evident in the first quarter when some funds transitioned out of USFR but were directed towards GGRW, India, and currency hedge strategies, significantly contributing to revenue through increased inflows into higher-fee products. Overall, there are many positive developments regarding fund flows in both Europe and the U.S.

Thank you. At this time, we've reached the end of our question-and-answer session. I'll turn the floor back to management for closing remarks.

This is me, Jono Steinberg. I don't think we have any closing remarks. We want to thank you all for your time and attention and support, and we'll speak to you next quarter. Thanks, everybody. Have a great day.

This will conclude today's conference. You may disconnect your lines at this time, and have a wonderful day.