Earnings Call Transcript - WT Q2 2024

Operator, Operator

Greetings and welcome to the WisdomTree Q2 2024 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jessica Zaloom, Head of Corporate Communications. Thank you, Jessica. You may begin.

Jessica Zaloom, Head of Corporate Communications

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 31st, 2023, and quarterly report on Form 10-Q for the quarter ended March 31st, 2024. 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 CFO, Bryan Edmiston.

Bryan Edmiston, CFO

Thank you, Jessica and good morning everyone. I'll be covering our second quarter results, along with commentary on our forward-looking guidance before turning the call over to Jarrett and Jono for additional updates on our business. We ended the quarter with record AUM of $109.7 billion, driven primarily by favorable market conditions. And while our flows were largely muted during the quarter due to outflows from our commodity products, which tend to be tactical in nature, we continue observing strong engagement in our U.S.-listed ETFs and offshore UCITS ETF suite. These products generated a combined $1.9 billion of net inflows during the quarter and nearly $4.2 billion of net inflows year-to-date, representing an 11% annualized pace of year-to-date organic growth. Our flow profile over the course of the year has remixed our blended fee rate higher, averaging approximately 37 basis points during the quarter. Our record AUM continues to drive revenue growth and expanding margins, demonstrating the scalability of our business model. Revenues were $107 million during the quarter, an increase of 10.5% from the first quarter and up approximately 25% versus the prior year quarter, driven by higher average AUM. We also observed an 87% increase in other revenue versus the first quarter due to updates in asset-based revenue arrangements on certain European-listed products. Other revenue totaled $8.1 million this quarter and reflects ETP revenues captured away from the expense ratio, providing further revenue diversification. Looking back over the longer term, the magnitude of other revenue generated this quarter is almost five times what was realized in June of 2022. There are asset-based and transaction-based elements driving other revenue and while difficult to forecast, we would suggest the magnitude of other revenue generated in this most recent quarter serves as a fair approximation of what we could expect going forward. On a year-to-date basis, our revenues have grown 21.5%, and our adjusted operating margin was 32.6%, representing an expansion of over 840 basis points versus the prior year, or 480 basis points organically when adjusting for the impact of our gold royalty buyout, which was accomplished in May of last year. Our adjusted net income for the quarter was $27.1 million or $0.16 a share. Now a few comments on our forecasted guidance. We are updating our forecasted compensation expense guidance, which will be provided as a percentage of revenue going forward, rather than as a range of fixed dollar amounts. Having taken into consideration a variety of scenarios, including the potential magnitude of workflows over the course of the year, revenue and operating income growth, forecasted margin expansion, and our share price performance in relation to our peers, we currently estimate our comp to revenue ratio to be 28% to 29% for the year. This range is largely aligned with current Street estimates and would represent a compensation ratio lower than the 31.4% we realized last year. Our discretionary spending was $30.5 million year-to-date. We are reiterating our full year discretionary spending guidance of $64 million to $68 million. The range is largely dependent on the magnitude of marketing spend associated with WisdomTree Prime over the remainder of the year, as we continue testing messages to further define our target customers while enhancing the app with additional features. Due to seasonality, the discretionary spend for the remainder of the year will likely be more skewed toward the fourth quarter. We reported a gross margin of 81.2% in the second quarter, and we are updating our gross margin guidance to be between 80% and 81% for the year, a one percentage point improvement considering current AUM levels and higher forecasted other revenue going forward. If AUM scales higher from continued organic flow growth or favorable market conditions, we would anticipate further gross margin expansion. Our third-party distribution expense was $5 million year-to-date. 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 year-to-date was $2.8 million, and we are maintaining our interest income guidance for the year to be about $5 million, based upon the magnitude of our forecasted interest-earning assets. Our adjusted tax rate was 25% in the second quarter and our guidance of 24% to 25% remains unchanged. Our weighted average diluted shares were $165.9 million year-to-date and our guidance of $166 million to $168 million for the year remains unchanged as well. As a reminder, this guidance does not take into consideration any variability in shares associated with our convertible notes. Our current stock, which is approaching $11 per share, is higher than the 954 conversion price related to convertible notes scheduled to mature in 2028. While our 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 $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.

Jarrett Lilien, CEO

Thank you, Bryan, and good morning everyone. In the second quarter, WisdomTree had another strong quarter of AUM growth and expanding operating margins all while continuing to ramp up our efforts in tokenized assets and blockchain-enabled finance, which we expect will open up new revenue opportunities for us in the coming years. In the quarter, we generated $340 million of net inflows, but the underlying trends were even more impressive. To start, we experienced meaningful flows into our more strategic product lineup in the US and into our UCITS business in Europe, where we have achieved 11% annualized organic growth this year. Further over the past several quarters, net inflows have come into higher fee funds, which has provided a boost to our blended fee rate, which now stands at 37 basis points, expanding from 36 basis points last year. Finally, while we continue to see growth across current customers, as measured by average funds held per customer and total AUM per customer, we're also seeing healthy growth in new customers, which gives us confidence in continued growth going forward. 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 this accessible market and growing the number of advisers actively using WisdomTree models. Last quarter, I mentioned that our accessible market stood at 70,000 advisers and that we expected it to grow to about 80,000 advisers by year-end. I'm happy to report that we now have new partnerships in hand, which will take our accessible market to over 85,000 advisers and nearly $18 trillion of assets by year-end. Further, the stability and predictability of our pipeline continues to hold as we continue to add new adviser model users at our expected pace of approximately $250 per quarter, while our model AUM continues to grow at a rate of 10% to 12% of US ETF flows. We're also ramping up our portfolio consultation service, where we assist advisers who build their own client portfolios and are looking for help in improving risk-adjusted returns. This is another tool in our portfolio solutions offering that helps to generate sticky flows and assets that are stackable on top of our already strong organic growth profile. Here, our models team analyzes each portfolio and recommends enhancements. We have recently improved our review process, greatly increasing our capacity and efficiency, reducing turnaround times from a couple of weeks to a couple of days, allowing us to service a greater number of advisers and drive further net inflows. Speaking of efficiency, it was another strong quarter of margin expansion achieved by expanding our other revenue streams on top of disciplined expense management. On the revenue side, we've been proactive with our European counterparties, and we've been able to capture additional asset and transaction-based revenue streams that we previously did not share in. As Bryan mentioned, this quarter's approximate $8 million run rate seems sustainable going forward each quarter, which is roughly double the 2023 run rate and almost five times the 2022 and earlier year run rates. We also showcased margin expansion once again in the quarter, with our margins up 570 basis points from last quarter and up over 800 basis points year-over-year, delivering Q2 operating margins of 35.3%. This margin expansion is a combination of disciplined expense management, but also a function of scale. Based on our 50% plus incremental margin, we see a meaningful opportunity for further margin expansion in the years to come. In conclusion, we're generating strong revenue growth from flows, from market, and from opening up new revenue streams. With well-managed expenses and scale benefits, we are expanding our operating margins. And all of that translates into an accelerated pace of earnings growth and strong returns for shareholders. And with that, I will now turn it over to Jono.

Jono Steinberg, CEO

Thank you, Jarrett, and hello everyone. Today, I will be brief. WisdomTree continues to thrive with record assets under management. Our efficiency once again on display as margins have expanded by over 800 basis points from last year, achieving over a 35% operating margin for the second quarter. Earnings per share was up 78% year-over-year and 33% sequentially. Momentum remains strong. As I reflect on both our prior accomplishments and the opportunities ahead of us, with only 300 employees worldwide, I'm not only proud of how much WisdomTree has accomplished but that we have achieved success so efficiently and ahead of the curve. WisdomTree continually strives to be forward-looking in our mission, and those efforts are bearing fruit today while also setting the company up for success in the future. Nearly five years ago, we launched our first crypto ETP in Europe and began strategically thinking about opportunities in both tokenization and blockchain-enabled finance. Although the lengthy regulatory process has taken longer than we initially anticipated, my optimism and confidence about the opportunity ahead is greater today than when we first began the journey. As we've mentioned on prior calls, we are pursuing both business-to-business and direct-to-consumer efforts. On the B2B side, we expect to provide a broader update next quarter when our institutional platform is expected to go live. On WisdomTree Prime, our direct-to-consumer effort, we are now live in 44 states and available to nearly 80% of the U.S. population with more to come in the near future. Early marketing campaigns are proving key learnings, allowing us to tighten our client segment focus and allowing us to test newer approaches like reward offers and in-app marketing campaigns. With the marketing campaigns really in the early stages and the institutional platform launching in the next few months, it is still too early to share any new digital asset metrics. However, we are committed to begin sharing more metrics with you early next year in line with the timing of our 2025 guidance. As I continue to mention in recent quarters, it's a very exciting time for WisdomTree. We have record assets under management, a meaningful margin expansion opportunity, and leverage to secular shifts in ETFs and tokenization. Thank you. Operator, would you please turn the call over to our Head of Investor Relations, Jeremy Campbell, and we will take some questions from our retail shareholders.

Jeremy Campbell, Head of Investor Relations

Hey, thank you, Jono, and good morning, everybody. Per usual, we will take a couple of questions here from retail shareholders, and then take it over to you guys to ask some questions on management. So first one, Jono, I'm going to direct this to you is, what is the company's five-year plan?

Jono Steinberg, CEO

Thank you, Jeremy. WisdomTree is blessed in that we compete in many of the most exciting areas of asset management. And by that, I mean, global ETFs, models and solutions, plus tokenization and blockchain-enabled finance. When you try looking out five years, it's always about getting the prioritization of investments right that you're able to grow today and be in a position to grow tomorrow or five years out. If you look back five years, we did get our prioritization of investments right, and we executed. This quarter's results proves that. This quarter also proves how well our business model scales. So if you're looking out five years from now, it's continued execution against our current strategic initiatives, continued expansion of the global ETF lineup, growing our global AUM of ETFs through stellar performance, what we call modern alpha, and it's working and driving results in our proprietary funds. It's also having our team, our fantastic sales, marketing and research teams work together to drive growth. Very important to us is that we continue to grow our UCITS lineup and our AUM in Europe just generally. UCITS have grown from nearly zero AUM five years ago to nearly $7 billion today. We're very bullish on what the next five years in usage will be. And we need to continue to expand our portfolio solutions franchise to a much larger percentage of our overall AUM, leading to even greater stability of inflows as well as just greater stability of AUM. And we execute against our early leadership position to drive a sizable footprint in tokenized assets and blockchain-enabled finance. It's a priority that we grow that business line profitably and that it accelerates our overall growth rate. And as always, we need to do all of that in a very disciplined approach to expenses. But if we continue to do all of that, we'll see much higher AUM. It will translate into much higher margins that are materially higher than where we are today and drive accelerated growth in earnings per share, which should hopefully continue to lead to a meaningful appreciation in our stock like we've seen in the last four and five years. I think that answers the question, Jeremy.

Jeremy Campbell, Head of Investor Relations

Great. Thanks, Jono. Well, we'll cut it there on that one. So operator, please feel free to open up the line for questions from the analyst meet.

Operator, Operator

Great. We will now be conducting a question-and-answer session. Thank you. Our first question comes from the line of Mike Grondahl with Northland Securities. Please proceed with your question.

Mike Grondahl, Analyst

Hey, guys. Thanks. And congratulations on a nice quarter. On the models and their accessibility increasing to 85,000 advisers on year end, what was the driver of that? Was that a couple of wins? And then secondly, could you just talk about how penetration of those accessible advisers is going?

Jono Steinberg, CEO

Jarrett, why don't you start?

Jarrett Lilien, CEO

Sure. Yes, you pretty much put your finger on it on growing the accessible market that's a couple of additional wins on a couple of additional major platforms. And so we've anticipated a number of wins, but a couple of them came sooner than even we had planned. So great news there. Your next part of your question is really also very important and where a big part of our focus is every model win is really a two-part project. One, you've got to win with the organization and get on the platform. And then number two, once you're on the platform, it's sort of hand-to-hand combat, and you've got to then work on the individual advisers. So that's where we are now. That's where the focus is. And that's going quite well also, where the pace of bringing on new advisers each quarter continues as we expected. But I will say that's an area of increased focus. Again, in that two-part battle early, the majority of focus was let's get on more platforms. Let's have more advisers have access to our models. We're now shifting the focus really to let's start penetrating even quicker than we are today, but both sides are going quite well.

Bryan Edmiston, CFO

And I'll just add that our pipeline is as strong as it's ever been. I don't think we've ever been as confident about the pipeline of penetration. So thanks for the question, Mike.

Jono Steinberg, CEO

Yes. And I'd just add one other quick thing. When you look at it, 85,000 advisers, that's about 28% of the advisers in the US. So there's still room to go there, but that 28% controls $18 trillion of advised assets in the country, which is two-thirds of the advised assets. So we've done a great job of penetrating the accessible market and now the focus, again, really shifts more to penetration.

Operator, Operator

Thank you. Our next question comes from the line of Keith Housum with Northcoast Research. Please proceed with your question.

Keith Housum, Analyst

Great, thank you. I want to challenge you a bit on the European fund outflows. It appears that the commodity and currency funds have experienced outflows for 15 of the last 17 quarters. It seems there might be an underlying issue that goes beyond a simple tactical situation. Could you provide some insight into what steps you are taking to potentially reverse this trend?

Jono Steinberg, CEO

I'm going to begin, and then Jarrett, feel free to join in. When we examine our presence in Europe, we see a significant bias towards commodities. We recognized this with the acquisition of ETF Securities five years ago. Our main goal after the acquisition, aside from integration and cost reduction, was to diversify our revenue beyond just gold and commodities. We have been working on this, but commodities still make up a much larger portion compared to our other offerings. That's all the insight I have on this matter.

Jarrett Lilien, CEO

Yes. Thanks, Jono. I was on mute. Yes, just piling on really two things. But first is the sort of tactical nature of the commodity suite that Jono mentioned, and the way that people that invest in commodities use them. And when you see generally pricing going up, clients are selling into it. And when prices are coming down, clients are buying into that, and that's the sort of tactical nature. So that is the nature of a large part of the suite. You also have to look at the UCITS business, which is a separate from that, and that's been an area of focus for us that, as Jono has already mentioned, it grew from zero several years ago to nearly $7 billion today. And then finally, if you look at a big part of what we talked about in the prepared comments was on the other revenue side. So the overall revenue capture is actually very healthy. And actually, overall, you put that all together, it's the opposite of broken, Europe is a high contributor to our overall results and is going fantastically well.

Keith Housum, Analyst

Great. Thanks. And that other income is a great surprise for the quarter. I know investors appreciate that. And I can switch gears and with one follow-up question actually going back to the modeling. You guys are making great progress in the US with the advisers. How about with Europe? Is Europe an opportunity down the road? Or is that also where you guys are working at right now as well?

Jono Steinberg, CEO

Jarrett?

Jarrett Lilien, CEO

Yes, we see it as an opportunity. The market there is somewhat different and more fragmented, especially in terms of servicing advisers. Recently, we announced a deal in Europe where we are now providing our models through a platform partner, marking our first entry into that area. This showcases that there are additional international opportunities, which represent the next frontier for us in terms of models.

Keith Housum, Analyst

Great. Thank you. Appreciate it.

Operator, Operator

Thank you. Our next question comes from the line of George Sutton with Craig-Hallum. Please proceed with your question.

Unidentified Analyst, Analyst

Good morning, everyone. It’s Logan filling in for George, who is currently attending the Bitcoin Conference in Nashville. Following up on the first question regarding the models, one takeaway from the conference is that Bitcoin ETFs could soon be incorporated into some of the larger investment firms' models within the next six months. I'm curious if you are seeing a similar demand and how you think this will develop.

Jono Steinberg, CEO

Jeremy, would you want to touch on that?

Jeremy Schwartz, Global CIO

Sure, this is Jeremy Schwartz, Global CIO. We have been at the forefront of launching a collection of crypto models. We developed models with a 5% allocation to Bitcoin, originally from a 60/40 perspective, believing that bonds were less appealing at that time. We shifted 60% of funding from bonds and created an 80/20 model funded from stocks with a higher risk profile. We continue to manage these models and consider them within our complete suite. Additionally, we recently launched a geopolitical risk aware model that includes allocations to Bitcoin.

Unidentified Analyst, Analyst

Got it. Appreciate it. And just one other. I know you've talked about the Prime offering and slowly ramping the marketing spend there. Is there a point at which you guys really start to pick that up? Is there something that would trigger that?

Jono Steinberg, CEO

Will, do you want to start?

Will Peck, Head of Digital Assets

Yes, hey, it's Will Peck, Head of Digital Assets. Yeah, I mean I think as we continue to get full state coverage, if you look at the map, there's a big stake missing in Texas. So we continue to get full state coverage and continue to expand the full product feature offering that we have in WisdomTree Prime, we'll continue to increase that marketing spend. And I think it's just continuing to do it to manage all that way. Like we mentioned in the prepared remarks, we're actually seeing great results so far, declining cost of customer acquisition, accelerating open account growth. So, continuing to lean into that and growth in there.

Operator, Operator

Thank you. Our next question comes from the line of Michael Cyprys with Morgan Stanley. Please proceed with your question.

Anna Lee, Analyst

Good morning. This is Anna Lee filling in for Mike. I'm interested in your perspective on potential strategic or inorganic growth opportunities, such as acquisitions, partnerships, or joint ventures. What are you currently exploring, and how much time is your team dedicating to this? Thank you.

Jono Steinberg, CEO

I'll start. We're always looking for opportunities and we evaluate many options. We're very selective, but I want to highlight that, whether through mergers and acquisitions, like our two acquisitions to expand our presence in Europe, or through investments that support the launch of our digital asset platforms, there are opportunities available. However, I want to emphasize that our primary focus is on organic growth, and we maintain a high standard for any potential mergers and acquisitions. Our acquisitions have been very beneficial, which is not always easy to achieve through acquisitions. However, if we can find a way to strategically enhance our position, we tend to look ahead to where we anticipate growth will occur, and we aim to continually strengthen that position. I believe that addresses the question. Jarrett, do you have anything to add?

Bryan Edmiston, CFO

Hey Jono, it's Bryan. I think the only thing that I would just point out, we've been very episodic in the recent past. If you recall, just a year ago, we bought out our Gold Royalty obligation. It was a highly accretive transaction for us. We bought back preferred shares from the World Gold Council that we had previously issued on favorable terms. And we've been buying back stock over the course of the past few years as well as paying down some debt. So, it's not just as it relates to just on the acquisition front, but if you think through the capital management priorities as well, we just don't want you to lose sight of that.

Jono Steinberg, CEO

Great point Bryan, thanks for adding that.

Anna Lee, Analyst

Perfect. And then maybe just a follow-up. Could you guys give us an update on new product creation and maybe talk about kind of your key areas of focus and where you see the most opportunity? Thanks.

Jono Steinberg, CEO

Jeremy, would you address that? Obviously, you can't disclose everything, but please go ahead, Jeremy.

Jeremy Campbell, Head of Investor Relations

Yes, I'd say we've been very focused on core exposures and continue to diversify the product set. I think high level we are as diversified as a business as we've been when you look at it holistically with U.S. and Europe. We started off very value focused in the U.S., and we're all waiting for the major value rotation in the market, but we've been increasingly focused on the quality franchise within WisdomTree, quality dividend growth, but now also quality growth. So, we launched quality a CDRW in the U.S. at the end of 2022, right after the big bear market in tech, that fund is now up to almost $0.5 billion. We further launched that in Europe to get the global synergies, but we launched mid and small-cap versions of that in the U.S. So, sort of rounding out the product suite. We've been focused on thematic as part of that franchise and growth products as well. In Europe, we continue to have very strong flows and continue to launch a lot of interesting products. We launched a mega-trend product that is a collection of themes. All trying to get diversified exposure. And so I think we're doing a lot in things like our efficient core family to give room for alternatives. We did that in the US. Some of our performing products this year have been in that efficient core with gold overlays in the US, but they also then launched efficient core for the US markets over in Europe. I think we're going to do more with that concept. But yeah, we're continuing to execute and try to diversify the overall product mix that we have.

Jono Steinberg, CEO

Since we established the firm 20 years ago, we have developed a diverse range of funds. We are continually looking to strategically enhance our product offerings, but the primary focus is to grow our funds to over $10 billion. I believe there is significant potential within our current suite, and we can achieve much more with it.

Operator, Operator

Thank you. Our next question comes from Chris Kotowski with Oppenheimer. Please proceed with your question.

Chris Kotowski, Analyst

Yeah. Good morning. Most of mine have been asked, but I was just curious on the other revenues, if you could flesh that out a little bit more. Like is that pure incremental revenue? And I'm just wondering you're generally guiding to 50% incremental margins. Are these like 50% margin dollars? Or is it like 100% pure incremental? And then as an analyst, I'm always trying to model every line item P times Q. And over time, does that grow? And does it grow with European AUM? Or what does it grow with if it grows?

Jono Steinberg, CEO

Great question, Chris. One off…

Bryan Edmiston, CFO

Yes, I'll take that question. So as it relates to just run rate, I think there's a couple of different elements going through other revenue. And there certainly is a mix of asset-based elements and there's transaction-based elements. So on the asset base side, if AUM were to grow, we may see a little bit of an uplift in other revenue. I don't want to jump to conclusions about that. I believe that the $8 million run rate mentioned in the prepared remarks is a reasonable estimate to consider for future modeling in the meantime. There isn't much of an expense offset to account for. The only point I can make is that our compensation plans are highly performance driven, so if there is a slight increase in revenue, it may lead to a small increase in compensation as well. However, it is definitely healthier than a 50% incremental margin when considering the effects of the other revenue.

Chris Kotowski, Analyst

Great. Thank you. That's it for me.

Operator, Operator

Thank you. There are no further questions at this time. I'd like to turn the floor back over to Jonathan Steinberg for closing comments.

Jono Steinberg, CEO

Thank you, everybody. We appreciate your time and your support. We'll speak to you next quarter. Enjoy your beautiful Friday in the summer. Bye, everybody.

Operator, Operator

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.