WisdomTree, Inc. (WT) Q1 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the WisdomTree Q1 Earnings Conference Call. [Operator Instructions] As a reminder, today's conference is being recorded. I would now like to introduce your host for today's conference call, WisdomTree's Investor Relations, Stuart Bell. 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 Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements generally can be identified by the use of forward-looking terminologies such as believe, expect, anticipate and similar expressions suggesting future outcomes or events. Such forward-looking statements reflect our current expectations regarding future events and operating performance and speak only as of the date of this presentation. Such forward-looking statements are based on a number of assumptions which may prove to be incorrect. Forward-looking statements involve significant risks and uncertainties, should not be read as guarantees of future performance or results and will not necessarily be accurate indications of whether or not, or the times at or by which, such performance or results will be achieved. A number of risks and other 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 the company's annual report on Form 10-K for the fiscal year ended December 31, 2012. Now, it's my pleasure to turn the call over to WisdomTree's CEO, Jonathan Steinberg.

Thank you. Good morning, everybody, and welcome to WisdomTree's first quarter conference call. Fellow shareholders, the first quarter was another record quarter. Our assets under management ended Q1 up 37% to over $25 billion. As of today, our assets are up 50% year-to-date to a record $27.6 billion. We had record inflows of $5.9 billion. Very strong market share inflows of 10.8%. Also, recorded revenues, $29.3 million in Q1, up 53% year-over-year and up 25% sequentially. Record net income of $7.9 million, up over 600% year-over-year and up 49% sequentially. Our pretax profit margin expanded significantly to 27%, a 5 percentage point increase in just 1 quarter's time. This key metric displays our corporate discipline and operational efficiencies. Later on the call, Amit Muni, WisdomTree's CFO, will walk you through our financials and our current expense guidance. Our execution across all business functions define the success of the quarter. It is simply a testament to the talent and dedication of the 72 people at WisdomTree. Our incredible efficiency as a firm is becoming apparent to anyone who is watching our business scale. Finally, the second quarter is also off to another strong start with more than $1.5 billion of inflows quarter-to-date. Let's move on and take a look at WisdomTree's net inflows. As stated in the press release, WisdomTree had $5.9 billion of inflows in Q1. You can see how this compares to the last 4 quarters. In Q1 of 2012, we took in $2.3 billion, which was a record quarter for WisdomTree until this most recent quarter. In fact, if you look at the right-hand side of the page, you can see how Q1 stacked up against the full year inflows of 2011 and 2012. In one quarter alone, this was our best year ever. Let's take a look at our inflows by category. In addition to the $3.9 billion raised by DXJ, our Japan-hedged equity ETF, WisdomTree raised an additional $1.9 billion this quarter. It was a strong and balanced quarter of inflows overall. On the top right, we isolate our current and historical flows in the fixed income category. Q1 was our best quarter ever in fixed income with inflows over $0.5 billion. I do not want this accomplishment to be overlooked in a quarter of great accomplishments. Our growing strength in fixed income is an extremely positive development for our business. On the bottom right chart, we compare our emerging market equity inflows to the other leading ETF sponsors. WisdomTree led all firms in emerging market equity inflows with $876 million. No matter how you look at the quarter, from an inflow perspective, it was simply outstanding and better than everyone's expectations. Now let's look a little bit closer at our Japan inflows. In Q1, at the overall industry level, Japan-focused ETFs took in $5.4 billion. WisdomTree's share of that was 72% or $3.9 billion. Our differentiated approach to product strategy really paid off this quarter. In fact, DXJ led all ETFs across the industry in asset gathering in Q1, a tremendous accomplishment. As we discuss Japan, let me address a question, which has been asked frequently. Where is the money in DXJ coming from? On the right, we look at DXJ's estimated inflows in Q1 by channel and we compare that to our current assets under management by channel for the total complex since the firm’s inception. As you can see, the inflows for DXJ do not differ significantly from our historical patterns of channel representation. One notable development in DXJ's inflows is the healthy 12% from the international channel. DXJ has become a globally recognized security. Taken together, the success of DXJ reinforces WisdomTree's business model, its growth story and also reinforces WisdomTree as an innovative and highly competitive firm within the ETF industry. Now let's look at our market share inflows. On the left, you can see the last 5 quarters of market share. The first quarter, as I said before, was very strong, coming in at 10.8%. I want to remind investors again that market share can be a very volatile metric and can move around dramatically from quarter-to-quarter. On the right side of the page, we put our market share into context. You can see that WisdomTree came in third overall only behind Vanguard and iShares. WisdomTree continues to compete very effectively against the established giants in the ETF industry. Now let's put this quarter into a broader context and compare our inflows in Q1 versus the other leading mutual fund and ETF complexes. WisdomTree was the ninth best asset gatherer overall in Q1 according to Morningstar. This is up significantly from our 2012 ranking. I am incredibly proud of the collective effort of the company, which led to such a significant accomplishment. Being the ninth best asset gatherer, again, exceeded everyone's expectations. Now let's look at WisdomTree's organic growth rates as they compare to the other publicly traded asset managers and leading ETF firms. Many of you on today's call are already familiar with this slide. WisdomTree remains the fastest growing publicly traded asset manager with 32% organic growth in Q1. This is an important metric for WisdomTree shareholders. And as the only pure play publicly traded ETF sponsor, WisdomTree remains uniquely well-positioned for investors who want the direct exposure to the ETF industry. On the right, we compare WisdomTree's organic growth in assets to that of the other leading ETF sponsors. With 32% organic growth, WisdomTree was the fastest growing, in percentage terms, of all of the leading ETF firms. Again, WisdomTree is competing very effectively against the established giant and WisdomTree is taking market share. On the next page, let's look at the performance of our equity funds. The 1 year performance numbers ending March 31, 44% of our funds and 36% of our assets outperformed the no fee benchmarks. Our 3, 5 and since inception numbers remain very compelling. In each of those periods, a clear majority of our funds and assets created outflow. Now it is my pleasure to introduce Amit Muni, WisdomTree's CFO.

Thank you, Jono, and good morning, everyone . Our strong operating results have translated into another record quarter for us financially. Revenues continued to grow, reaching $29.3 million in the first quarter, up 53% from the first quarter of last year and up 25% from the fourth quarter. Our pro forma operating expenses increased only 24% to $21.5 million and our net income was a record $7.9 million or $0.06 per share. On the next slide, you can see how the changes in AUM helped drive our strong revenue growth. The record inflows of $5.9 billion, along with $900 million of positive market movement, drove our AUM higher this quarter. You can see in the bar graph in the middle how the strong flows in DXJ helped drive the 29% increase in our average AUM. These strong flows also affected the mix of our AUM, which is reflected on the right-hand bar chart, resulting international ETFs changing to 29% of our AUM at the end of the quarter. You can see we have a much more balanced product mix now. The operating efficiency and leverage of our business model is clearly apparent when you see the growth in our key margin metrics on the next slide. Our gross margin increased to 72% in the first quarter compared to 68% in the fourth quarter and 63% in the first quarter of last year. Higher AUM as well at the end of our joint venture with the Bank of New York, helped drive these higher gross margins. Our pretax operating margin also grew significantly to 27% in the first quarter from 22% in the fourth quarter and 10% on the first quarter of last year. Remember, we are targeting a 40% pretax operating margin at approximately $35 billion of AUM. The higher margins are being driven by strong ETF revenue growth, which you can review on the next slide. Our ETF revenues reached a record $29 million in the first quarter, with particularly strong revenue growth in international and emerging market ETFs, along with fixed income. Our average advisory fee remain unchanged at 54 basis points, but because of the mix change towards international, it is 53 basis points today. I'd like to review our expenses on the next slide. First I'll go through the major changes in our expenses. We had $18 million of expenses in the fourth quarter. Higher AUM increased fund-related costs by $1.3 million. Due to the positive equity market environment and in-line with our guidance that we will be increasing our investment in marketing and sales-related initiatives this year, marketing and sales spending was up by $1 million. We incurred higher compensation cost of $936,000 due to higher accrued incentive compensation as a result of our strong results, as well as seasonably higher payroll taxes due to bonus payments, and vesting of restricted stock to our employees. We also added 2 new people to our sales force this quarter, bringing our overall headcount to 72. Stock-based compensation increased $381,000. As a result of ending our joint venture with the Bank of New York, fund-related costs increased $566,000, as we incurred fees that were previously paid by the Bank of New York. However, we saved about $1.2 million from no longer having to share revenue. This resulted in net savings of about $640,000. We've also no longer incurred variable stock-based compensation, which saved us $200,000. This resulted in total expenses of $21.5 million for the quarter, an increase of 16%. The next slide reflects the changes in the expense line items. You can see from the chart on the left expenses increased 24% from the first quarter of last year for predominantly the same reasons I gave on the previous slide. On the right-hand side of the slide, you can see that our expenses continued to decline as percent of revenues and on the far right, you can see the 2012 full year amounts. Let me pause here for a moment. I would like to remind you of the expense guidance we gave earlier this year. We plan to invest $5 million to $8 million this year on strategic growth initiatives. This includes additional investments in marketing to support our existing products and new products. Second, sales initiatives and tools to support our sales force. Third, additional ETF launches to further broaden our product offering. And lastly, hiring additional people. While these investments will add additional short-term cost, we believe it will pay off with increased assets and contribute to faster growth rates. So what did we do this quarter towards that investment? This quarter, we added to our sales force, increased our spend for marketing and sales initiatives, and launched a global corporate bond ETF. In total, we spent about $1.3 million and at the same time, generated record revenues, net income and improved margins. We do expect our expenses to continue to decline as a percent of revenues in total, but there may be some seasonal fluctuations and not all line items will decline as a percent of revenues. For example, marketing and sales will fluctuate and may be flat as a percent of revenues compared to the 2012 full year amount. But compensation cost should continue to decline as a percent of revenues and we estimate that compensation, as a percent of revenue, will be between 24% and 26% for the full year 2013, which is down from the 2012 full year amount of 27.4%. And lastly, we will continue to experience positive leverage in our gross margins as our AUM scales. As we have always done, we will carefully manage our expenses and balance them with spending on our growth initiatives. Our balance sheet and cash liquidity continues to improve as you can see on the next slide. We have total assets of $76 million at March 31, which is primarily comprised of $52 million of cash and cash equivalents and $10.7 million in investments, and $11 million in revenues receivable from the WisdomTree Funds. We have 125.6 million common shares outstanding and 140 million shares in total when you include our options and restricted stock. And as a reminder, we have a pretax NOL of $137 million, which tax affected, is $61 million. Now I'd like to give you an update on our results so far in April. The momentum we experienced in the first quarter continues to carryover. As of this morning, our AUM is approximately $27.6 billion and we generated $1.6 billion in net inflows for the month, of which $1.2 billion came in through our Japan-hedged equity fund. Our average AUM is up 23% from the first quarter, which will result in higher revenues in the second quarter. You can see on the bottom right, the ETF industry experienced strong inflows into fixed income in April, followed by equities and large outflows in commodity ETFs. Now before turning it back to Jono, I'd like to update you on an area we are seeing positive momentum. We continue to build out our social media presence by connecting directly with investors. The use of blogs, LinkedIn,, Twitter and YouTube platforms, allowed us to engage with existing and potential clients. Since we started this initiative only 8 months ago, we are experiencing consistent growth in the number of followers and third-party engagements. I encourage you to follow us, which you can do right from our website, for timely access to our research material and market commentary. So to summarize, we had a fabulous quarter, and again, record revenues, net income and expanding margins, reflecting the efficiency and scalability of our business model. The second quarter is off to a great start and I look forward to speaking with you on our next call to update you on our progress. Thank you. And let me turn it back to Jono.

Thank you, Amit. In 2009, WisdomTree stated that we had the longer-term stretch goal of becoming a top 5 player in the U.S. ETF market. I am excited to say that we recently achieved that goal. I am truly very proud of our recent accomplishments, but I am not satisfied. We need to continue to look forward. So we have established a new longer-term stretch goal. We have laid the foundation to become $100 billion asset manager. So that is our new vision, $100 billion in assets under management. I feel strongly that going from 0 to $25 billion in assets will prove more difficult than going through $25 billion to $100 billion. That said, we still have plenty of hard work ahead of us. But for a number of different and compelling reasons, I believe this is an achievable long-term goal. I'd like to identify some of the strengths that WisdomTree possesses, which I believe make this goal possible and even realistic. First, we have a strength in equities, and specifically, the broadest global suite of dividend-based ETFs, which are inherently mainstream scalable strategies and we have a performance record to back it up. Second, we have a proven ability to successfully diversify into new asset classes, from equities to currencies to fixed income and alternatives. If you look at other ETF sponsors, a few but not many have been able to parlay their early success beyond 1 or 2 categories. WisdomTree has a prowess for product development and we made product strategy a focus at the top of our organization. Third, we are effective and efficient marketers. We are intelligently utilizing traditional online and new social media resources to build the brand and to communicate messages, which resonate with financial advisors and their clients. WisdomTree is establishing itself as a trusted brand. Fourth, we have assembled a cohesive veteran leadership team and a deep bench of dedicated employees. We have invested in their development and maintained excellent employee relations. And fifth, most importantly, we have a laser-focused commitment to ETFs, which will continue to take market share, significant market share, from other structures. Again, we are competing effectively with the established giants. WisdomTree will grow with the growth of the ETF marketplace. In the last 7 years, ETFs have had inflows of $1 trillion. I expect significantly more than that over the next 7 years. In summary, Q1 was a transformational quarter for WisdomTree. In the years leading up to today, we laid the foundation to be a leader in the ETF industry. We have the infrastructure. We have the talent and we have the vision. As we continue executing our ambitious growth plan, I am confident that we can reach our new longer-term goal of becoming a $100 billion ETF sponsor and creating significant shareholder value in the process. Thank you for your time, attention and support. This ends the planned portion of today's call. Now let's open this up to some questions.

[Operator Instructions] Our first question comes from Matt Kelley with Morgan Stanley. I apologize, this is actually Marc with your questions from Goldman Sachs.

So just, Jono, on the path to $100 billion, could you talk about how willing you are to sort of ramp-up your spending on any of your initiatives? You called out sort of what you expect this year. But is there sort of a tipping point where maybe you say, all right, the brand is at the point where you need to maybe up that target a little bit, a? And then b, how much of the organization is in place today to get to the $100 billion?

Thank you, Marc. So this quarter was an important quarter for a number of reasons. It -- first, we took in $5.9 billion, as you know, and it was really a breakthrough quarter. What it proved was that we didn't need to take our sales force from 32 to 100 people, we added 2 people. We launched one fund. Our marketing went up incrementally, 19% from the fourth quarter. We didn't have to take it up by a factor of 5 to compete with some of the larger traditional firms. So I would tell you that I believe the $100 billion goal is -- this is primarily a U.S. business, a similar business model in terms of marketing spend, Amit has given you long term margin guidance so you have a sense really of how we think this will play out. Let me just say one -- give a little bit more sort of perspective. Seven years ago, we launched our first ETFs. Over those 7 years, the industry went from $400 billion to $1.4 trillion and during that time, WisdomTree took in 2.5% of those inflows or $25 billion. Again, I expect over the next 7 years significantly more, maybe $1.5 trillion to $2 trillion of inflows, and we did almost 11% of the inflows in the first quarter. Now I'm not saying we'll do that every quarter for sure, but we've given longer-term guidance of 3% to 5% of the industry inflows. If we just do 5% for the next 7 years, you really -- you get there. So I think that -- hopefully that gives you some perspective.

Okay, that's helpful. And then just I guess on -- Amit, on the expense guidance, on that $8 million, is there -- it looks like this quarter $1.3 million, should we expect -- how should we sort of expect this on a quarter seasonality that expenses to play out here?

Yes. So I think we're still in line with that $5 million to $8 million. If you just annualize that $1.3 million, we're closer to the $5 million than the $8 million. But I think, right now, the way we're thinking, we're sort of in the middle of that $5 million to $8 million range.

Okay. Just on DXJ, I would assume that there's a good bit of first mover advantage in the product category. Can you talk a little bit about the competition now. Just as this -- the overall, as a percentage of the ETF business, Japan as a theme, seems to be growing? What are you seeing competitively? And is there sort of any -- is it right to assume that there's a first mover advantage in the product there?

Marc, I'll let Luciano, our Chief Investment Strategist and Head of Sales, answer that question. Luciano?

Marc, so as Jono mentioned in the presentation, DXJ was taking in the majority of the inflows in Japan in the ETF industry in the first quarter. What we've seen is that for people who want hedged currency exposure, they're overwhelmingly using DXJ. For people want the unhedged exposure, they're using the existing Japan ETF that was in the marketplace. One of the things that DXJ has further this point, is it's trading 5 million, 6 million, 7 million shares a day. It's typically trading $0.01 to $0.02 wide. Stock is nearly $50. So that's very meaningful for the larger clients that needs to trade in size, and they're often trading in and out with market orders. There's also options trading around the ETF that give an additional layer of liquidity for people who need to execute more complex strategies. So that's one of the things that sets DXJ apart. Now there will likely be competition in the future, but at this point, DXJ is really the only game in town if you're looking for ETFs that have sizable assets, sizable volume, very tight spreads, deep markets and options. So we think it's in a very strong position.

Marc, the only thing that I would add is that because of how Japan had traded for the last 15 or 20 years, it's really been a poor performer from the global equity markets. It feels that many investors underweight Japan and that the trend does have some legs. When we launched the firm in June of 2006, the category, Japanese equities, only had $9 billion of AUM. And the industry itself has taken in $1 trillion, and you've only seen a couple of billion dollars of growth from that over the last 7 years. So it does feel that there may be some -- people are just underexposed to Japan and maybe chasing the rally.

Our next question comes from Matt Kelley with Morgan Stanley.

So I was hoping you could give a little bit more color on the international investors that you were selling DXJ to. And just kind of -- I'm more interested in your broader comments on the incremental buyer of your products from here. Where you've been strongest in distribution channels in the past. Where do you get the most opportunity for growth in that.

Again, this is Luciano speaking. What we saw in this quarter was interest in DXJ from some of the Latin American institutional investors. We use a third-party manager in Latin America to market our funds to institutions and pensions, particularly the Chilean pension funds were showing interest in DXJ. From a data that they've disclosed publicly, we saw several hundred million dollars of inflows into our DXJ funds. So I would say they were a major driver of the international inflows into the fund in the first quarter, although I would add that we've also seen institutions around the world who are free to buy DXJ in the New York Stock Exchange buy it. And we can see that showing up in some of the international custodial buckets. But our efforts principally are in the United States and we use an outside firm in Latin America to market some of these to the institutions down there.

Okay. And then just following up on that, when these institutions are using DXJ, have you seen them engaging your other products yet? At which ones and is there also somewhat a halo effect not only for them -- for the existing institutions on other products but from one institution to another, kind of word of mouth? Is that -- are you seeing that play out? Or is that something still to come from here?

No, it has been happening. I mean, there's a list of approved ETFs that the Chilean pensions funds, for example, can buy, and there are 6 AFPs down there. So we have seen in the past, them, buying DLN, our large cap dividend fund. We've seen them buying DTN, which excludes the financials. So there are other WisdomTree ETFs that they have access to and they have bought them in the past. And I would just say that our brand is growing down there as DXJ becomes a more popular fund.

Let me just add, in our equities, where we hedged out the currency, that franchise, we actually have seen significant growth in our other fund hedge AG DJ, which very similar in strategy, it's the European exporters, we're to hedge out to euro, about 7 or 8 weeks ago, that fund was maybe $40 million and we've seen increased volumes. And today, it's about $230 million. So it's been a significant driver. And referring to that halo effect, we're certainly seeing more inbound phone calls. I mean, that's a very positive development for the firm. Again, Luciano has touched on the international drivers. And then just the enhanced cash flows in general make us a stronger firm. So there is definitely a halo effect.

Okay, great. And then just one last one for me. Just in terms of -- and this is a little bit nuance, I realize, but in terms of performance of your funds, long term has obviously been quite strong, in near term was a little bit weaker last year. So just curious if you can kind of provide some commentary behind that, when you would expect your funds to really outperform and potentially underperform. Just environments through which your funds perform the best, I guess, will be helpful?

Sure. Again, this is Luciano. So I think if you -- every fund obviously has its own attribution, it's own dynamics. But generally, if you look at the United States, what happened in the 1-year period through March 31, is that the more defensive sectors in the market performed better than the S&P 500: Consumer staples, utilities, telecom, health care. In that type of environment, our domestic dividend funds typically perform well, if they're a little bit more tilted to the defensive sectors. And I think if you look at the fund returns for the last year, generally, that's what you saw, strength on the dividend side, underperformance on the earnings side. And the earnings were more tilted towards the more aggressive sectors: Information technology, financials, materials, energy. So I would say sector performance and where were weighted, as one of the drivers in the short term. Internationally, it's more a focus of our country exposure. And I think, if you look at the 1 year returns, you'll see us lagging on the emerging market side, performing pretty well in the developed world and then a little underperformance in some of our specialty sector funds. We have 4 of them that overall reflect our broad methodology but they are more actively designed strategy with a significant amount of stock selection risk. So in any 1-year period, you can see variability. But what we hope to do is over 4 market cycles, outperform the broader market. And I think we've been pretty successful at that over the last 5 years and since inception. In the last year though, you've had a few of our larger funds with underperformance and that's going to impact the 1-year performance we look at AUM investment and funds are essential.

Our next question comes from Bill Katz with Citigroup.

Just, I want to tackle a question and some bigger picture question. Just, Amit, I was just penciling out some of your guidance here. And I'm just -- I'm coming up with a higher incremental dollar cost on comp and marketing relative to your commentary about this annualizing Q1 plus a little bit on top of that. Am I doing something wrong there? It seems like you have maybe $4 million or $5 million of comp, all else being equal, and maybe you have $1 million or so on marketing. Is that math right? Or am I just overcounting somewhere?

It may have had to do with whatever you're assuming as far as revenue growth. Again, we sort of expect comp for the full year 2013 to be anywhere between 24% and 26% of revenues. When you look at our marketing and sales together, for the full year of 2012, it was about 10.6% of revenues. I think we want -- we said our guidance earlier this year, we wanted to spend more on marketing- and sales-related initiatives to help support our growth. We think it will probably be flat as a percentage of revenues to the year. So yes, you will see continued ramp-up in that as the year progresses. But as far as sort of our base line cost guidance that we gave as well earlier this year, remember, we gave the $75 million to $78 million. That does not include any additional expenses as a result of increased assets or any changes in incentive comp. I would say if you look at our first quarter results, take out those 2 pieces, you'll find that we're still sort of in the middle of that $75 million to $78 million base line amount.

Okay. And so the -- it' d just be a function then -- if revenues rise, will the ratio stay the same? Does an absolute dollar start to play into your thinking at all in terms of governing the earnings?

I think to make it easier for you guys to think about the numbers, we -- I try to tie it into a percentage of revenues. Hopefully that will make it a little bit easier for you guys to think about what we're thinking about spending levels-wise.

Sorry just to press this here. But if you have another quarter like this, I'm not suggesting you will but if you were, and your revenue pop again, the ratio stays the same even on the big surge of revenues?

Obviously, you will continue to see a decline in total of our expenses of the percentage of revenues. But again, I think you have to remember, Bill, we are -- our goal is to invest back into the business to help support our growth. We believe the time is right. And if we see another resurgence in inflow levels and record inflow levels, we're going to continue to invest because we think the time is right. That's why I think you can stay roughly within those percentages levels that we gave you. But in total, you'll see our expenses continue to decline as a percentage of revenues.

Okay, all right. Sorry, I badgered you on that. Second question is you've spoken very strongly about this year being maybe a year for new product launches. And obviously, you had a very good success on your existing franchise. Could you talk a little bit about the outlook for new products and timing and/or where you might be looking at more broadly speaking?

This is Jono, Bill. So as we gave guidance on the last call that we should probably coming in at sort of the higher end of our recent fund launch schedule. We've recently filed for a number of -- I can only talk about what has been publicly filed, but you've seen that some emerging market equities, some domestic dividend funds. And we've also filed to expand our equities where we hedge out currency franchise. So in that area, we've only done 1 year-to-date. So it obviously will be more sort of second half heavy. And that as we get closer to filings, you'll -- they'll become apparent, the timing of it. But we're still planning on launching more funds later this year.

Okay, that's helpful. And then just final for me. Your balance sheet is building here. Your -- you have no debt. And I'm sort of curious as you think about capital management, how you see the free cash flow deployment. Obviously, you're looking at sort of a large goal of AUM. Is this sort of seeding new products, if you will? Is it -- you haven't got -- so I'm sort of curious how you think about maybe buyback at this point versus acquisitions versus other uses?

Yes. The business does generate a good amount of cash. And as we continue to scale, yes, our cash will continue to grow. But remember, we're a growth company. And right now, our focus is to invest that cash back into the business when the right opportunities present themselves. There may be opportunities to use our cash for maybe some M&A. I would say it's probably a higher hurdle for us to look at M&A activity when you look at our own core organic growth rates. Second, there may be opportunities for us to do something internationally. So our focus is really on just sort of building that cash, focus on investing on our growth. And I think in general, investors like to have financial service companies have strong balance sheets. But if we get to a point that we think we can use the cash, we also are focused on creating shareholder value, we would look at doing either stock buybacks or dividends. But in the short term, I would say the focus is really on building the cash balance.

Our next question comes from Mike Grondahl of Piper Jaffray.

First question is just -- I think you filed for like a DXJ small-cap ETF. Can you help us just understand the potential demand for that versus the DXJ you have out there today?

It's just because we're in a quiet period, beyond the fact that we filed, it's very difficult for us to go into it beyond that we have filed. But obviously, we are just seeing tremendous interest in Japan-focused product and in Japan hedged-focused product. But I can't really go beyond it at this moment. I'm sorry.

Okay. Second question is just you're at $27 billion-plus of AUM today with 72 people. When you hit $50 billion, how many employees would you envision you having, Jonathan?

Mike, part of the beauty of our business model is the leverage and the operating efficiency of it, right? We don't -- if we double our assets, we don't necessarily have to double our headcount. That's the beauty and efficiency of the business model. We will continue to see incremental headcount growth from here. That is part of our strategic growth initiatives, to invest -- continue to grow our sales force, but we're talking incremental growth from these levels going forward.

And Amit is giving you some guidance on compensation as a percentage of revenues. So that might help you have some sense. But again, it's not a people-intensive business.

Perfect. And then lastly, with the strong performance of U.S. equities, were you surprised that your inflows into some of your U.S. strategies wasn't stronger?

I wouldn't say -- so it's a very competitive segment of the market. It's been growing. You've noticed that we also filed for some more domestic equities. We'll continue to focus on it. I'm sure we'll have our day in the sun.

Okay. And maybe just one more. In terms of marketing expense, specifically on advertising, how should we think about that going forward?

So marketing -- what we did in the first quarter is a good base line for you to think of. It was up 19% from the fourth quarter. We're very targeted. We're trying to hit the financial intermediary, the institutional investor. What Amit touched on at the very end of his presentation was the social media. So one of the things that has been a very exciting sort of new development for WisdomTree is the way we're using our blog and our social media to communicate messages in a very, very cost-effective manner to an ever-growing group of investors and advisers. And so I really do think that you're going to see, relative to the other firms on the top 10 asset gathering list, will be an amazingly efficient market. I don't think that's going to change going forward.

Our next question comes from Mac Sykes from Gabelli & Company. Macrae Sykes - Gabelli & Company, Inc.: Just one technical question for Amit and I had 2 other follow-ups. What is the run rate for fee rate exiting the quarter for international developed equity?

If you look at the statistics that we published, our stat table, we have the mix there. On a complex-wise basis, it's about -- it's 53 basis points. So as you see, more -- and that really encompasses the mix levels that we see today. Where it's running right now, what we have on the stat table is about -- is 55 basis points on a blended average basis. If you look at -- every day, we publish our AUM on our website, right? And so you can just pull the numbers right from there and look at the run rate from there. But we can take it offline, and I can just show you how to do that, the various data on Excel. Macrae Sykes - Gabelli & Company, Inc.: Yes. Just specifically to international developed because I know it slipped but it's impacting your fee rate. I'm just curious as to what that was exiting the quarter.

We could take it offline, and I can show you how to do it right in Excel. Macrae Sykes - Gabelli & Company, Inc.: Great. And then in light of the strong performance from DXJ in the Japanese region, could you talk about how maybe your near-term thinking on new product has changed at all?

Really, it hasn't changed much. I mean, we are -- we're committed to growing our product suite in dividend-based strategies. We're very high on dividends in light of the resolution to taxes with the fiscal cliff resolution at the end of the year. There'll be some more emerging market equities. And then we've expanded the hedged equity suite. You'll see that in the filings as well. So a lot of it is just more filling out offerings in the buckets that we have today. Macrae Sykes - Gabelli & Company, Inc.: And then you did mention potential M&A international, et cetera. Could you ever see a time, and I'm thinking couple years out as you grow, where you would add a product base outside sort of your core competency and it's fundamentally weighted philosophies?

It's certainly possible, particularly if you're talking about expanding into different asset classes or strengthening in certain asset classes beyond sort of our strength in equities. But as Amit touched on, our return on organic growth -- or organic investment is so high that we have a very high threshold when it comes to potential M&A. And again, we're very, very disciplined and very conscious of shareholder -- creating shareholder value. So we'll be very, very careful if we are incrementally adding to the business through acquisitions. Macrae Sykes - Gabelli & Company, Inc.: And one last question. I mean, thank you for the disclosure on the sort of the channels, where DXJ is receiving its funds. Maybe if you could just go over those different channels and give us a sense of what you expect in terms of stickiness, assuming you -- we do get some volatility going forward. Just what could you expect from the different channels in terms of maybe velocity of a change of mix in that product.

Well, again, this is Luciano. And so I can comment on what we've seen to this point, which is a steady growth in the shares outstanding of DXJ. And I think the DXJ success story, it's really emblematic of the WisdomTree success story. We saw something that was important and of immense value before the rest of the word did, and then we executed on it. And it's not surprising that DXJ has such a great uptake but it was really the only game in town for a long period of time there. People didn't have a way to hedge out the Japanese yen inside the 40 Act ETF and we gave them a solution. And of course the yen is down about 14% year-to-date and the NIKKEI is up about 35%. So I guess the question is how much longer -- or how much further depreciation yen is going to see? How much further depreciation you're going to see in Japanese equity market? I mean, I think that's what's going to drive the flows to DXJ and I think that's a function of the efficacy of the Bank of Japan's policy. We know they have the will now because they keep putting the policy through. They definitely have the wallet. I mean, they can create as much money as they want. The real issue is the efficacy of the policy, and that's going to play out over the next 14 months. They have committed to buying $70 billion to $75 billion of assets per month through 2014. So I would expect this story to play out for the next -- at least the 1.5 years.

Our next question comes from Adam Beatty with Bank of America Merrill Lynch.

Just a quick data point question. Right now where do you put your market share as a percentage of AUM? I didn't see in the deck. Sorry, if I missed it.

I think we're at 1.9% of the industry's assets.

Okay. And that's -- I think that's quite a bit upward from previous years?

You're absolutely right. And obviously, we're playing off of a very strong growth of inflows and it's because our base is relatively small versus the inflows were really making some big progress as market share of assets. You're right, Adam.

Exactly, I appreciate that. Then a question on your April update. It looks like fixed income flows have eased a little bit. And I was just wondering and obviously they were strong before. I was wondering if they were -- what your view is on the trend there and if there are certain areas that are more in demand and whether you might consider more product launches in that area.

Well, we've seen some dollar strength in the first quarter. And when that happens, sometimes people pull back a little bit from the local denominated emerging market debt exposure. But having said that, ELD, which is our local debt product, is up to nearly $2 billion of assets. It continues to have a place in people's minds and portfolios. We have plans to launch additional fixed income products. We're continuing to look at the market. We have a great partner in Western Asset Management. And hopefully going forward, we can fill out some of the parts of the market that haven't been capitalized on yet, using an institutional quality active manager.

Then turning to international. It's come up a couple of times on the call. And I understand your sort of leveraged model of ETFs. In terms of establishing or expanding in international presence, what's your view in terms of the need for boots on the ground or investment in other countries that you might need to do that?

Right now, WisdomTree is a U.S.-listed ETF sponsor and our efforts have been, internationally, really to support the U.S.-listed ETFs. So it is -- at some point, we may want to have additional WisdomTree employee boots on the ground. One, maybe with a properly licensed in local markets to sell the U.S.-listed ETFs, that sort of an easy evolution. But then eventually, over time, there is an opportunity to do locally lifted usage-structured ETFs in certain markets because the ETF phenomenon is a global phenomenon. But at the moment, we're still focused on the U.S. business. And as we evolve, get stronger, we'll update you as we get closer to any sort of change in that -- our plans.

Got it. That's a clear delineation. And then finally, I guess, for Amit, you mentioned a little bit about seasonality, some of the expenses and initiatives that you have, especially I guess around marketing. Just wondering of your view on seasonality, whether the marketing -- there are certain things that you would see in the market, where you to be -- increase your spend opportunistically or there are just periods during the year where you wouldn't necessarily.

Yes. I mean, if you look historically, our marketing expense has generally been a little bit lower in the third quarter because of the summer months. Not quite sure that, that may happen this year, maybe at different levels. But listen, our focus is really to invest back in the business. And if we believe the market opportunity is right to increase the level of investment for marketing, we're going to do that.

One of the things that we have to live within is sort of market sentiment in general. And even still today, market sentiment is quite muted, in my opinion. So I don't think you're going to see just an aggressive blowout in marketing, but we would be responsive if we start to see industry inflows into ETFs expand dramatically.

And just again, remember, so what I -- the thinking on marketing spend in total, we're thinking it will probably be closer to the 2012 levels as a percentage of revenues.

Got it. And just one last one. I'll bother you one more time on the margin. And just kind of bigger broader picture, maybe some comments, you've given guidance on margin levels at certain AUM. And I'm not asking you necessarily to modify that. But it seems just intuitive that there would be a speed limit in terms of how much you can invest and with the rate of flows that you're taking in, maybe not right now, but if it were to continue, it just seems as though your margin AUM relationship might improve somewhat.

I would say we are a growth company. And the ETF industry is in the early innings, and we're focused on growth and growing that top line revenue. And so we're going to invest back in the business. Jono gave his longer-term guidance, the long-term vision that we have for the company. We've given those longer-term margin guidance of 40% operating margin at $35 billion. You've seen the margin potential in our results when you look at it currently. And even that, I would say, that's also in the early innings. I think the important thing is, Adam, to remember is we are running this business to have the highest pretax operating margins of any of the traditional asset managers, and continue to grow it from there.

So the key is we need to continue to scale. And even though we had a great quarter and even though we're at record asset levels, we're still very small relative to many of the companies that we compete with.

Our next question comes from Todd Wachsman with Morgan Stanley.

One of my questions regarding capital allocation was already answered. But I wanted to just talk briefly about a couple of things with regard to 401(k), given that the landscape for 401(k) plans could be changing very rapidly as people are starting to wake up that fundamental indexing is really the wave of the future. How do you plan to take advantage of that? That's my first question. Second thing is with regard to getting ETFs greenlighted very quickly, in terms of new product launches within the wire house channel, what's your strategy to get an expedite approval of any new issues in the wire house channel?

Todd, this is Luciano. Let me answer your second question first. Wire house channel, as there's more ETFs announced and launched, becomes a little bit more of a process in terms of getting through due diligence teams. On the equity side, if we can continue to launch index-based equity products, we hope to be able to hit the wire houses relatively quickly in terms of getting through some of those gates. Some of those gates have to do with asset size and time in the market. So that's just a question of getting through certain threshold levels. One of the things that we've been able to do in the past is to try to launch funds that we know will resonate in the RIA community. And if we can get certain funds to scale quickly and we've done this in the past with ELD and ALD, that has a way of expediting the process on wire house side. So again, we're trying to launch products that we think can resonate against -- across the channels, so that we can get them into the wire houses quicker. 401(k), the important thing about 401(k) is it still is a very large opportunity because there's so much mutual fund money in the 401(k) channel. But right now, 401(k) is really not a driver of ETF asset growth. There's many reasons for that. But one of them is it's a more complicated sale. It has to involve several parties. There's typically an adviser who is advising plan sponsors on what they should be doing. The plan sponsor needs to review it, sometimes in consultation with the participants. And so it's a longer cycle and typically involves focusing on all-in cost across the entire platform. And what WisdomTree is trying to do in our effort is to make people more aware of what that all-in cost is, including the cost of the investment management fee. And hopefully, as more people become more aware of it and become under more scrutiny and even more pressure to lower fees in that channel, the WisdomTree solution will resonate more. And money managers who are using WisdomTree in their 401(k) models will hopefully have greater success in the channel, and that would be really one of our drivers going forward.

Our next question comes from John Dunn with Sidoti. John Joseph Dunn - Sidoti & Company, LLC: Just -- you've referred to putting out more hedged ETFs. When you -- in your conversations, is there a greater interest or acceptance of just hedged ETFs in general in other geographies?

Well, I would just say that currency is an important contributor to the total return of international equities. It's also a contributor to their volatility. And there are some markets, with the currency, adds a lot of volatility. And over time, doesn't really add a great deal to the total return. It can during certain periods. But over longer-term periods, sometimes it can net out. So what we're trying to do is target countries where there is either excessive volatility in the currency that people may not want exposure to or countries where the equities could benefit, depending on the direction of the currency movement. So a lot of advisers allocate internationally by country. And until recently, they had to take on unhedged country exposure in most parts of the world. We've seen in Japan the demand for an alternative. And people don't realize this, but Japan is the second largest country in the world by market cap. There are other countries out there that people use in models and we just think it makes sense to give people an alternative, in case the currency really does enter into their thinking.

And just -- we launched our first equity currency hedge product probably 3 years ago. So there has been an educational process to the financial intermediary over those last 3 years, but there's nothing like such a productive example like DXJ, where it really works to help crystallize people's thinking. And so we do think that this is maybe -- just a new tool in the toolbox for investors, equities where you hedge out currency exposure. So it's something that we have a strength in, and investors have been looking to us for additional thoughts. John Joseph Dunn - Sidoti & Company, LLC: Got you. And then the 2 new salespeople, can you say which channel they're focused on?

One is in the wire house and the other one helps support our sales efforts on our capital markets desk.

Our next question comes from Dan Weiskopf with Forefront.

My question, a lot of them has been answered. But I have to compliment you, frankly, on being aggressive in your promotion, your marketing spend on DXJ because it was so timely. And because there is another product that's similar out there, but your competitor just couldn't react as quickly. The question I have really is if I understand correctly, I think the SEC is reviewing or has made a decision on backtesting? Do you -- can you guys comment on that because I think it's been a positive review, so that you can speak to backtesting more with institutional buyers of your product?

Yes, thank you for the question. We are aware of the recent guidance and our legal and compliance team is reviewing it. We would, of course, love to be able to use some of our backtest returns, particularly with institutional clients. We think our research is very sound. We think it's as plain vanilla and as replicable by others as possible with a definitely rules-based approach. We're going to need to just study a little bit quicker, a little fuller the details of it before we comment further. But I just would say that we've had great success over the last few years, getting people to focus on the real-time performance of our funds. And some of them now have been in the marketplace for 6, nearly 7 years and have done very well. And so as much as we would like to include a longer track record for people who need it, we still think we have a lot to work with the real-time record.

Has the SEC finalized the decision on backtesting?

We're going to need to explore a little further before we comment it. It's really a function of FINRA but we need to study it a little further to -- before we comment to make sure that we're in the final stages of what they've proposed and our understanding of it.

Okay. And then I have to ask a follow-up question, if you would, on the marketing spend. And again, I compliment on your success with DXJ. How often are you reviewing the marketing spend? Is it a weekly, daily, monthly review? And is it aligned with a specific product?

So we're very nimble. There's no question about it. The budget is really annual but we do have an ability to pull back or invest against more strongly if we choose to. The messages, though, is what I think you're talking about, and we are able to get our messages to market very quickly. The team -- we're just a well-oiled machine here. Everybody is focused. So you did see that DXJ and the hedged TV commercials get implemented quite quickly to take advantage of market opportunity. I do believe that is the advantage that WisdomTree has over others.

Our next question comes from Steven Schoenfeld of BlueStar Global Investors. His line actually left the queue. I'll go into our next question from Connie Chen with Chen Planning Consultants.

My question is focusing on that you have been really innovative from day 1. Now that it seems that the trend is instead of only just doing the plain vanilla passive ETFs, a great deal of value-added active management is heating up, and you were ahead of the game and pulled back now. So what are your thinking? And you also mentioned something about international equity currencies, I couldn't help but thinking China is obviously #1 and of course Indonesia and Korea, so I'd like for you to share with us. Last but not the least, I thought I'd put all the questions in, is that you are using social media, which is very smart. Are you saying that you're focused now on not just only, I mean, basically trying to get retail instead of focusing on most of the other -- with institutional clients? And so that would be helpful for me to know and as your directions.

So first with active, WisdomTree is the second largest "active" ETF sponsor that you might use our proprietary fundamentally weighted equity sort of as rules-based active. But at a minimum, they're differentiated. We have really a very strong relationship with Western on active fixed income. And I do think that as newer entrants come into the marketplace, it's going to help expand the total pie. So we're excited about all of the new focus and energy that has been put upon the ETF industry. I think in general, you're going to see it grow the pie dramatically. In terms of the currency hedged equity suite, I would just ask you to check our filings. We have filed for quite a number of them, and you can just see it there, but we are in a quiet period. So we can't really go into it beyond just the name and the focal point of the different strategies. In terms of social media, what we're really doing is we're using it as a way to get our research and commentary out to a much broader audience. So what it allows us to do is have multiple messages being communicated at one time. So -- and it all works in sort of synergy. There's a very aggressive lead with television. We then are supporting it with print and online and then a lot of research, multiple messages a week, which is allowing us to drive investor interest into the full 47 funds at one time. And we're encouraging the advisers that the sales team interacts with to register to help smooth the communications between WisdomTree and them.

Great. And any comment about China, specifically?

It's -- we have not filed for that yet or have not filed for it, but nothing is specific. I mean, we do have the Chinese currency ETF, which is the largest Chinese currency fund.

And last year, we did launch our first Chinese equity fund, which excludes financials. That's been in the market for several months.

I'm not showing any further questions at this time. I'd like to turn the conference back to our hosts for closing remarks.

Well, I just want to thank all of you for your support and your attention, and we look forward to updating you on our next call. Thank you everybody. Have a good day.

Ladies and gentlemen, that concludes today's presentation. You may now disconnect, and have a wonderful day.