WisdomTree, Inc. (WT) Q4 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the WisdomTree Q4 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I'd now like to turn the conference over to your host today from WisdomTree Investor Relations, Mr. Stuart Bell. Sir, you may begin.

Thank you. 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 included, 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, and Quarterly Report on Form 10-Q for the fiscal quarter ended December 30, 2013. Now it is my pleasure to turn the call over to WisdomTree's CFO, Amit Muni.

Thank you, Stu, and good morning, everyone. 2013 was a fantastic year for WisdomTree, and as you can see on today's agenda, I am proud to begin today's call going through our operational and financial results for the fourth quarter and the full year. Moving down the agenda, one of the most important drivers for our future growth is continued product innovation, and Luciano Siracusano, our Chief Investment Strategist, will give you an overview of the ETFs we launched in 2013. Next, along with reporting our results today, we also announced some exciting news on our plans to expand into Europe through a majority investment in London-based ETP-sponsored Boost. Also on today's call, we will give you expense guidance for 2014 and talk about longer-term margin targets. We also want to update you on the status of our net operating loss carryforward. And then we'll open it up to questions. So let's begin on Slide 3, with what happened in the U.S. ETF industry this year. Industry flows for the fourth quarter increased almost $59 billion and ended the year with approximately $180 million -- $180 billion in net inflows. This was slightly down from the levels seen in 2012. Remember, these are ETF flows which excludes exchange-traded notes. On the right, you can see it was a very strong year for equity flows, but commodities, predominantly gold-related products, experienced outflows. As the next slide reflects, our flows increased from the third and fourth quarter of last year to $2.3 billion. Flows into DXJ made up about 40% of the flows in the fourth quarter. We attained record levels of net inflows of $14 billion for the year. This record was in due in large part to the success of DXJ, which contributed almost 70% of the flows. But as we always said, while we are proud of the success of DXJ, it is also what we accomplish away from DXJ that is as important, as you can see on Slide 5. We took in $1.3 billion of net inflows in addition to DXJ in the fourth quarter and $4.5 billion for the year. In the fourth quarter, we experienced outflows in emerging market equity and fixed income ETFs, which was similar to market sentiment. You can see the success of our diversification strategies so that we can take money in different market cycles. On the next slide, you can see our market share of net inflows increased to 3.9% in the fourth quarter and reached a record of 8% for the full year. Remember, market share is a volatile number quarter-to-quarter, but we target between 3% to 5% of industry inflows on an annual basis. On Slide 7, you can see our inflow ranking in the industry. WisdomTree was the seventh best ETF asset gatherer in the U.S. in the fourth quarter and the fifth for the year. Even more impressive was our ranking when you include mutual fund families. Even though we were ranked 55th largest by asset levels, we were the ninth best asset gatherer when comparing us against ETF and mutual fund families. This is an achievement we are extremely proud of. This impressive growth is also reflected on the next slide where we compare our growth rates. WisdomTree, again, have the fastest organic growth rate of any publicly traded asset manager, and when you compare us against the top 10 ETF sponsors, we have the second fastest growth rate. Again, impressive numbers. These record-setting operational results translated into record financial results. As you can see on Slide 10, revenues climbed to $43 million in the fourth quarter, an increase of 83% from the same quarter last year, yet expenses only increased 46%. Our net income more than tripled to $16.5 million or $0.12 per share compared to the fourth quarter of last year. For the full year, revenues were up 76% and net income increased nearly fivefold to $51.5 million. On the next slide, we'll go through the key drivers of our revenue growth. Starting from the left, you can see our AUM increased by $2.3 billion of net inflows and $1.2 billion of positive market movement. While period end AUM was up 11%, average AUM increased 9%. On the right, you can see our overall mix remained relatively stable, which caused our fee rate to remain at 51 basis points, as reflected on Slide 12. Our ETF revenues reached a record of nearly $43 million in the fourth quarter, driven by growth in the international, the emerging markets and U.S. categories as compared to the third quarter. You can see our emerging market revenues only make up about 30% of our revenues today, when last year at this time, emerging markets made up about 50%. Again, you can see we are much more diversified today. On Slide 13, you can see our key margin metrics. Our gross margin increased to 78% in the fourth quarter, primarily due to higher revenues. Gross margin for the year was 76%, just slightly higher than the 70% to 75% guidance we gave at the beginning of 2013. Our pretax operating margin remained relatively flat at 38% in the fourth quarter. Remember, the third quarter has seasonally lower expenses which typically results in higher margins. We had the same dynamic last year. Pretax margins for the full year climbed to 34%. Again, this is only on $28 billion of average assets. On the next slide, I will review our expenses compared to the third quarter. Q3 total expenses were $25 million. We increased our marketing and sales-related spending, which added $657,000 in expense. Due to our strong results and headcount increases, compensation was up, yet was offset by lower stock-based compensation. As we previously discussed, we incurred double rent in the fourth quarter for new office space, as well as writing off certain assets related to the space we vacated at the end of the year. Higher AUM and the launch of additional ETFs increased fund-related cost, partly offset by lower transactional-related fees. We incurred about $300,000 in expenses related to our investment in Boost, which Luciano will talk about in a few minutes, and other professional fees of $189,000 to lead to expenses for the fourth quarter to be nearly $27 million. As the next slide reflects, our expenses continue to decline as a percentage of revenues contributing to our expanding margins, in particular our fund-related and compensation costs. You can see on a full year basis our compensation is within our previous guidance of targeting 24% to 26% of revenue. Moving on to Slide 16, you can see the strength of our balance sheet and liquidity. We have total assets of $142 million at the end of the year, which is primarily comprised of $104 million of cash and cash equivalents and $12 million in investments. We had 130 million common shares outstanding and 140 million shares in total when you include our options and restricted stocks. Now I'd like to give you an update on our current flows. As you can see on Slide 17, so far this month, we experienced slight net outflows, primarily due to the negative market sentiment to emerging markets, which also caused us to experience $1.5 billion in negative market movement. This is in line with industry trends. Despite that, as you can see in the middle chart, our average AUM so far is up 2% this month. That second bar should say Q1, not Q3. However, as you can see on the right, we are generating inflows in equities despite the industry experiencing outflows in that category. Now I'd like to turn the call over to Luciano to talk about our 2013 launches and how they laid the foundation for our further growth.

Thank you, Amit. WisdomTree rolled out 15 new products at a prolific pace in 2013. We created innovative choices for investors that aligned with major macro investment themes, themes that could influence allocation decisions in the year ahead. WisdomTree established a beachhead in the $240 billion U.S. fixed income ETF category with the launch of a suite of rising rate solutions that are designed to help investors manage interest rate risks. From Barclays, WisdomTree licensed a Zero Duration and Negative 5-Year Duration version of the Barclays U.S. Aggregate Index. These are the industry's first Zero and Negative Duration ETFs based of the Barclays Agg, the broadest benchmark of the U.S. investment-grade bond market. From Bank of America Merrill Lynch, WisdomTree licensed the Zero and Negative Duration versions of its Zero to 5-Year High-Yield Index. These new ETFs from WisdomTree allow investors to shorten duration on their bond exposures without changing their investment strategy or their asset allocations. We've extended this concept to Japan, giving investors a way to capitalize should interest rates rise on Japanese government bonds or should the yen continue to fall against the U.S. dollar. In the fourth quarter, WisdomTree positioned itself for a stronger U.S. dollar environment by launching the industry's first Bullish Dollar ETF inside the '40 Act. This ETF provides exposure to a new Bloomberg Index that measures the dollar's movement against the broad basket of developed and emerging market currencies. We also expanded our Hedged Equity franchise, launching new funds that provide access to equity markets in the U.K., Germany, Korea and small cap companies in Japan, while hedging out those foreign currencies. And to complement our higher dividend yielding strategies, in 2013, WisdomTree launched a new family of dividend growth ETFs, covering U.S. large-cap and small-cap stocks, as well as companies listed in emerging markets. Each of these ETFs is based on new WisdomTree Indexes that we believe have the potential to identify companies poised to generate dividend growth going forward. Finally in 2013, we launched a new emerging market ETF tracking WisdomTree Index that attempts to identify companies with exposure to the emerging market consumer. All in all, it was a terrific year for WisdomTree's product development and product execution teams. On page 19, we show how WisdomTree's broad product set has performed relative to their peer groups, as characterized by Morningstar. These comparisons take into account fees and transaction cost and display how WisdomTree's equity, fixed income and alternative ETFs have performed against actively managed mutual funds, index funds and ETFs. In evaluating the performance of our funds, you can see in the far right column that since their respective inceptions, 56% of WisdomTree's 50 applicable equity bond and alternative ETFs outperformed their peer group. Put another way, 85% of the nearly $34 billion invested in WisdomTree's applicable 50 stock bond and alternative ETFs were in these 28 peer-beating funds. Now I turn the call over to our CEO, Jono Steinberg.

Thank you, Luciano. Good morning, everyone. Now I'd like to update you on our international growth plans. But first, I'd like to remind you of the steps we have already taken to expand our global footprint. We have cross-listed ETFs in Mexico and have a marketing relationship with the Compass Group to serve the institutional market in Latin America. We filed notifications making some of our ETFs available for sale in Japan through Japanese securities firms. Today, approximately 6% of our assets under management are held by non-U.S. investors, and WisdomTree is the eighth largest ETF sponsor globally. As the second-largest ETF market following the U.S., Europe is a strategically important market, and entering Europe is the natural next step given our stage of development. It is also a market undergoing many of the same regulatory and structural developments which have powered ETF adoption in the United States. As regulators, intermediaries and end investors are moving away from commissions and opaque incentive fee models because of regulatory initiatives like the U.K.'s Retail Distribution Review, or RDR, we believe ETFs will continue to take on greater appeal in Europe. We are excited about today's announcement. We have outlined our plans to expand into Europe through a majority stake in Boost, a U.K.-based ETP provider founded by industry veterans Hector McNeil and Nik Bienkowski. Both were managing partners of ETF Securities and were pivotal in growing that company from start-up to $22 billion in assets under management by 2010. Hector and Nik will lead our efforts to build out a local European platform with a select range of new UCITS ETFs under the WisdomTree grant. They will also continue to manage and grow the Boost lineup of short and leveraged fully collateralized ETPs under the Boost brand. Simply put, we think this is the right time for WisdomTree to pursue this market and the right team to lead our efforts. By acquiring the talent and infrastructure behind Boost, we have designed a highly efficient and controlled manner by which to grow our European business. In some significant ways, this parallels the way that we launched our U.S. business. At that time, 2 key elements contributed to our current success. First, we were always well-capitalized. Second, we align the company with the industry's best talent. We hired iShares' ETF General Counsel, placed one of their co-founders, Bruce Lavine, as our President and we took on their RIA and wire house sales leaders. We made key hires and we gave them the resources to make long-term decisions for the business. We are essentially repeating this model for WisdomTree Europe. We think Hector and Nik are 2 of the best in the business, and $20 million in working capital means they do not need to make short-term compromises but can focus on making the right decisions for long-term success. On the next slide, we review the key terms of the transaction. WisdomTree will expand into Europe through a majority stake in Boost. We will invest $20 million in working capital to fund the build-out of a local European platform. We believe this is sufficient capital to fuel the business for 4 years. The payout at the end of 4 years is based on WisdomTree's global AUM multiple and also factors in the profitability of the European business. The deal is designed to reward profitable growth, as well as creating integrated European operations. We think this is a smart deal that rewards both parties for sustainable growth. We expect the transaction to close in the first half of 2014, subject to regulatory approval and other customary closing conditions. Now I'd like to turn the call back to Amit.

Thank you, Jono. Now I'd like to update you on 2 items, starting first with expense guidance for 2014. As reflected on Slide 22, we ended 2013 with expenses of $97.9 million. The savings from migrating our fund accounting and administration services from the Bank of New York to State Street will yield approximately $5.7 million in savings based on our AUM at the end of 2013. Annualizing our fund-related expenses based on year end asset levels and other cost associated with ETFs launched in 2013, fund-related costs will increase by $3.6 million. As a result of compensation decisions we already made, we expect baseline compensation cost to increase by $2.8 million. We anticipate our general overhead and administration costs will increase by $2.3 million. Stock-based compensation will increase by $1.4 million and lastly, due to moving offices, occupancy cost will increase by $1.4 million. 2013 was a year of investment. We plan to spend between $5 million to $8 million last year on strategic growth initiatives, and we ended up spending close to the $8 million. We believe continued investment in our business is important for our long-term competitive positioning in growth. Therefore, for the coming year, we intend to invest $6 million to $9 million on strategic growth initiatives to continue to support and accelerate our growth. These growth initiatives are similar to last year. Continue to expand our marketing efforts to further support our existing and new products, as well as enhance the WisdomTree brand. Second, continued product development initiatives and new ETF launches to bolster our product offerings. And lastly, adding to our staffing levels, particularly in sales and other functions that support our sales efforts to continue to grow our top line revenues. Remember, these strategic investments are discretionary and we can either accelerate them or decrease them based on market conditions. However, we believe these investments will pay off in increased assets and contribute to faster growth rates in the long run. This will result in 2014 baseline operating expenses of $110 million to $113 million. Fund-related cost will either increase or decrease from this baseline expense based on changes in our AUM from the beginning of the year. In addition, incentive compensation will increase or decrease based on our operating results. Two other important data points to remember. First, our gross margins are expected to be between 77% and 80% in 2014 based on our current asset mix. And second, we are targeting our compensation cost to be between 20% and 23% of revenue for the full year 2014. As we have demonstrated, there is attractive financial scale in our business model. However, we are a growth company and the early innings of an industry on the rise. Therefore, we need to balance growth and profitability. We have previously given guidance that we expect a pretax margin of 40% at $35 billion of average AUM. But as we stated at the beginning of 2013, it was the right time to invest in our business. We launched more ETFs to capitalize on opportunities. We hired more people to support these funds and grow our revenue and invested in marketing and sales. Those investments were important building blocks for our long-term success, and we believe we should continue them. Therefore, our cost base has changed and the 40% margin would be reached at $35 billion of AUM once the savings from State Street are realized, assuming our current revenue capture of 51 basis points. As we have previously stated, it is our goal to have the highest pretax margin of any traditional publicly traded asset manager. That goal has not changed. We are managing our business to have a 50% pretax margin at approximately $55 billion to $60 billion of average AUM, assuming our current revenue capture. This level will put us at the highest margins, yet at only a fraction of the assets held by our competitors. Lastly, I'd like to review our net operating loss carryforward. As you can see on the left-hand side of Slide 23 and Box 1, we ended 2012 with $137 million pretax NOL. We were profitable in 2013 and used up approximately $58 million of that NOL. However, we added to our tax loss. We get a tax benefit for the in-the-money value of options when they are exercised by our employees, as well as the value of restricted stock when they vest. In 2013, that added about $65 million to our NOL. We therefore estimate that our NOL will be around $144 million at the end of 2013. Said another way, next $144 million of pretax income will be shielded from the income tax. So moving the Box 2, we continue to have outstanding options at unvested restricted stock, so when those options get exercised or when that stock vest, we will gain additional benefits to our NOL. And that value will be primarily determined by our stock price and when employees exercise or invest. Moving to Box 3, we try to answer the question of how much could that benefit be based on the current level of outstanding options and restricted stock. We have approximately 7.8 million options outstanding with the weighted average strike price of $1.29. If those options were exercised tomorrow, using our closing stock price from yesterday, that would contribute $104 million to our NOL. We also have 2.4 million shares of unvested outstanding restricted stock. If all that stock vested tomorrow, assuming yesterday's closing stock price, that would contribute about $36 million to our NOL. So in total, we potentially can add $139 million to our NOL on top of the $144 million we ended in 2013. Now obviously, all these options and restricted stock will be not be exercised or vest tomorrow, so how should you think about this? In Box 4, the table reflects when options will be expiring to help give you the most conservative timing of when options could be exercised and we realize the benefit. But remember, about 95% of our options are vested already and could be exercised in the very short-term. On the bottom, we show you how many shares of restricted stock will vest in the future. To help you summarize the significance of this update, the primary takeaway is that we have significant additions to our NOL ahead of us that will fluctuate based on our stock price. Roughly speaking, every dollar swing in our stock price will increase or decrease that NOL potential by around $10 million. We will continue to provide additional information on future calls to help you monitor this benefit. So to summarize, we had a breakout year. We will continue to capitalize and expand on the growth investments we've made in 2013 to further enhance our competitive positioning and growth opportunities. Let me turn it back to Jono.

Thank you, Amit. As I'm sure everyone is aware, 2013 was a phenomenal year for WisdomTree by every metric. As you also know, 2013 was also a year of significant investment. In the beginning of the year, we laid out our strategic growth plan to spend up to $8 million for new products, more people and expanded marketing. Over the course of the year, we launched 15 new funds, expanding our product suite by 30% and increased our headcount by 20% and our marketing by more than 50%. We are setting the table for future growth while remaining very disciplined on costs. We said we would spend up to $8 million and we spent only $8 million. Our great investment was the new products. We bolstered our product set in important categories like dividend growth and currency-hedged equities. We also entered domestic fixed income, a massive opportunity set in which we previously did not compete. We are excited about our rising rates suite for traditional fixed income investors. But as everyone who has met with the WisdomTree management team knows, we take a long-term view on fund launches. Sometimes, very rarely, you catch lightning in a bottle out of the gate, but more frequently, it's about the potential 2 years out or more. Our Europe SmallCap fund, DFE, and our Europe Hedged Equity Fund, HEDJ or HEDJ, are 2 great examples. DFE was one of our original 20 funds launched in 2006 and HEDJ was actually our first currency hedged ETF in 2009. At the start of 2013, 13 months ago, they were both sub-$50 million funds. But today, DFE is on its way to becoming our next billion-dollar fund with $940 million in assets and HEDJ has $750 million. With 61 funds, our product set has tremendous potential. 2013 was an intentionally aggressive year. These investments enhanced our strategic position. As I look at the ETF market -- I'm sorry, as I look at the ETF marketplace today, that's the only opportunity. WisdomTree is one of the fortunate few to have established a mainstream scalable ETF business. We have more than doubled our cash position to over $100 million, and with our further NOL enhancements, we can comfortably afford to invest in the future. We believe the U.S. ETF market is still in its early stages of growth with only 11% of the mutual fund industry's assets. We are completely committed to the U.S. market. But we know that the ETFs are a global phenomenon, so we are also making the investments to compete on a global stage. WisdomTree Europe represents our most important effort to date. As the second largest ETF market in the world, Europe represents a significant expansion of our potential customer base and opportunity set. As I stated earlier, we structured our investment in Boost much the same way we started WisdomTree 7 years ago, from a strong capital position led by the best industry talent. 2013 was a great year, but we are not satisfied. We continue to plant seeds for the future because all we see is opportunity ahead. With this, let me close out our plan presentation, and we can open up the call to questions.

[Operator Instructions] Our first question comes from the line of Surinder Thind of Jefferies.

Thought I would just start by touching base on the European opportunity. Assuming -- how should we think about the, I guess, the timeline and pace for launching new products, assuming regulatory approvals? So let's say you got it on June 30 of this year, how soon after that could you launch new products? And then how are you guys thinking about that?

Thanks for the question. This is Jono. We probably won't be launching WisdomTree-branded UCITS ETFs until the fourth quarter. And as we stated in the press release, we're not replicating the WisdomTree product sets. It'll be a selected offering. But we have to be -- I don't want to give you too much clarity on what we'll be launching at that time. It's very similar to the U.S. business when we talk about future funds. We don't want to tip our hand to our competitors in those markets. But it'll be a controlled rollout, and then we'll continue to invest in new funds as we achieve successes.

Okay. And then related to that, I think the European market tends to be a little more -- a bit more fragmented than the U.S. in terms of like the sales process, meaning how products get sold in, let's say, the U.K. is different from how you would sell it in Italy or France or Germany for that matter. So is that going to be a bit more of a challenge in the U.S. in terms of getting distribution and in getting sales into some of these products?

So Boost is, right now, in London and also in Italy. And one of the reasons that we chose this approach is that we're dealing with local industry veterans who has been successful across all of Europe. And so you're right, it is fragmented, it's a challenge, but the team that we've recruited that we're investing against has done it in the past. And so we did -- we've entered this market with our eyes wide open.

Our next question comes from the line of Chris Shutler of William Blair. Christopher Shutler - William Blair & Company L.L.C., Research Division: On the funds that you're planning on rolling out in Europe, are those going to be UCITS versions of your existing products, or are we talking only strategies or some mix of the 2?

It will be a mix of the 2. Christopher Shutler - William Blair & Company L.L.C., Research Division: Okay, fair enough. And then, how should we think about the cost of rolling out a new ETF in Europe versus the U.S.? Is it similar? Is it different? And are the expenses associated with the rollout of the ETF part of the $20 million that you plan to invest?

Right. So Chris, so we're going to invest $20 million of working capital, and we think that that's enough to get the business to break even in the 4-year period. We're going to be -- it's a controlled launch, so I don't want to get into all the details of the cost of an ETF UCITS launch in Europe versus here in the U.S. But one thing I would say there, because there are 2 product sets out there, the Boost products has very different economic, much more attractive economics than UCITS WisdomTree ETF. It has a very different cost base. But I would say, again, it's more of a controlled rollout, and we think $20 million capital is enough to get it to breakeven in 4 years.

And let me just add. So there is an initial ramp-up in expenses as we're building some of the infrastructure to actually launch UCITS funds, and then the cost will normalize as you launch the funds themselves. And just to reiterate what Amit was saying, the existing Boost business has the potential to be significantly higher margin than -- even the WisdomTree U.S. business. Christopher Shutler - William Blair & Company L.L.C., Research Division: Okay. Amit, And then if you don't mind, I'll just sneak one more in. Just the GAAP tax rate, what are your expectations for 2014?

We're in New York State, we're in New York City, a 45% tax rate is not unreasonable.

Our next question comes from Mike Grondahl of Piper Jaffray.

Can you talk a little bit about your marketing strategy around the rising rate funds?

Sure. This is Luciano. So we have just rolled out the Negative and Zero Duration Funds. We're educating the marketplace about them. We have a webinar yesterday. We have about 100 FPs on the call, so we are in the process now of trying to sell those funds into the RIA and the institutional channels. We're still trying to get them improved on different wire house platforms. So we are going to put a full effort behind that. You mentioned rising rates. On Tuesday, there's going to be a new security that's going to come out from WisdomTree, particular on it was USFR, and this going to be the first floating rate treasury ETF in the industry. WisdomTree is scheduled to launch that on Tuesday and this will track a new security from the treasury. It's the first in security in 20 years since they launch TIPS, and we think that's going to have a great appeal across channels for investors who want to invest in treasuries but also get a floating rate that will reset as interest rates rise. So we're going to be marketing that very aggressively.

Yes. And Mike, we'll continue -- we have a very integrated approach where sales, research and marketing work together to create demand and awareness for our funds. And well, we plan on being very aggressive throughout the year on the rising rate theme.

Yes, it seems like a very big opportunity. And then of these 14, 15 new funds, which one are you most hopeful for? Or any sleepers in there that you really think could -- that where initially interest has been shown? And I can see the AUM, but just curious if you'd handicap them.

It's very hard to handicap, and also it's really dependent upon market sentiment. And as you know, market sentiment can change. And like the perfect example is how a European small cap could start 2013 with $30 million in assets and today have almost $950 million because Europe is in favor. So there's so much potential within the whole products set, including the recently launched funds, but also the historical funds that we launched over the last few years.

Our next question comes from the line of Marc Irizarry of Goldman Sachs.

Jono, can you take us through the strategic rationale for the WisdomTree Europe and the deal with Boost? And in particular, I'm curious how long has this sort of been in the works? And maybe you can give us also some comments, some perspective on the financial hurdles, and how you thought about the financial rationale for the transaction?

Certainly. So as you know, we have been discussing and analyzing our international opportunities for a number of years. We have been particularly focused on the European market, which is the second-largest ETF market by a large percentage. It's of similar market, same language, relatively close from time zone. I would think of that this deal, the $20 million is going in as working capital. No Boost shareholders are taking out any money during -- at this time. So it's almost -- the term has been used in ACCU higher, but this is a combination of real organic growth, coupled with a back-end payment based on success that we'll look into their profitability. So they were in the process of looking to raise money and we've been talking -- they launched their company only 1 year ago. And as we were talking to them, what they were doing, it really didn't make sense for us to just make an investment in them. We're not interested in pursuing their vision solely. It was really about creating a WisdomTree into Europe. And now, we have an offshore fund family, this European UCITS family between the American '40 Act funds and the European UCITS. That really opens up the vast majority of the investable world. There are some small markets or some markets that doesn't accept either of those 2, but we really now are talking to most of the world's money. And so, it seems like the $20 million is really like 3 or 4 months worth of capital or cash flow. So it just felt like it was something easy to do. Amit, anything you want to add?

And from a -- the question is sort of about how are we think about structuring the transaction. We thought about how do we -- because they're not taking out any cash upfront, how do we properly incentivize them to really grow the business and focus on the long-term? And so the way we thought about it is, we're going to buy out their remaining 25% ownership based upon the asset levels of the European business and looking at the profitability of it. That's going to be based upon, basically, about 25% of our global AUM multiple. So it's overall accretive transaction the way we structured it for the WisdomTree shareholders.

Okay. Now with the 15 products or so that you've launched in '13, is, I guess, that's above what you do on average, and I think, this is probably Europe, lots of launches. When you think about, going forward, the pace of launches and maybe, I don't know how, Amit, if you could comment on how that plays into maybe what we should expect in terms of gross margins, but how should we think about the sort of product, the pace of product development for you guys?

Before Amit gives you sort gross margin, let me just say that our expectation for 2014 is to probably launch another 10 to 15 funds this year.

And as far as gross margins, we think it will probably be between 77% and 80% during the year. As we continue to launch funds, the cost of our fund, once we move to State Street, will drop to about $175,000 on average compared to $225,000. It's -- so it'll add cost initially when we launched some funds and until it gets to scale, and that's why we think comfortably a 77% to 80% gross margin is the range you should be thinking about.

Our next question comes from the line of Bill Katz of Citi.

Just coming back to the deal again, it seems very interesting. Can you talk a little bit about how you came about Boost versus intentionally linking up strategically with potentially a bigger player, which might allow for faster adoption and growth into the marketplace?

Yes. So this deal, from a risk standpoint, is quite minimal. So we have $100 million in cash. We more than doubled our cash. The -- as I said a moment ago, $20 million is roughly 3 to 4 months of worth of cash flow. And why this was such an attractive size is, we're not looking to acquire somebody just to be opportunistic. We're looking to create WisdomTree Europe. This is about WisdomTree's brand, WisdomTree's approach and a very large or larger company. It might be hard to get that kind of feel out there that their existing business might be too different from what we're doing. So that was part of why we did it this way.

I would add, Bill, we're entrepreneurial growth company. And when we look across Europe, there's not that many folks out there who have built a business from scratch, and that was one of the attractions of partnering with Hector and Nik, you have 2 individuals who have built a very successful business. It just -- it fits very nicely to the WisdomTree culture.

And then one last thing, what we have said in the last -- on prior calls about potential transactions is we have a very high hurdle because our organic growth has been so fast. This is really -- there's a lot of what is involved in this deal is about organic growth. We're taking $20 million. I mean, it's almost like we had just gone out and hired a headhunter and recruited a team with a back-end payment.

Makes sense. Okay. And then just unrelated question but I'm certainly curious, has been asking your peers as well, there's been, I guess, sort of a step-up discussion around non-transparent ETFs. Sort of wondering what you see for that opportunity, Jono? And then any risk or pros for WisdomTree against that?

I think that there's much more conversation from the analysts who follow the asset management industry than really been the ETF industry. We're not -- we don't have any sense that it's at any -- at all close. And I'm also not convinced that, if it ever gets approved, and I'm not sure if it does get approved, but if it ever gets approved, that there's a big customer demand for it. It seems it could be viewed as a step in the wrong direction for investors who love the benefits of the ETF structure which includes transparency. So I'm not so optimistic, but I understand why some traditional firms are trying to pursue it.

I'll just throw one more question there. If you go back to, Amit, your guidance exclusive of the investment you're making today, could you frame out what the magnitude of the investment will be for '14 or '15 in terms of expenses?

Sure. So you're right. The expense guidance I gave is just of our existing U.S. business. So we're going to invest $20 million. We're expecting anywhere from maybe $5 million to $7 million of additional burn from the European expansion. Maybe in '15, you may see something like maybe $6 million to $8 million as we continue to ramp in. And then, hopefully, as the assets continue to grow, you'll see that start to trail off. So think about $5 million to $7 million for '14, maybe $6 million to $8 million for the following year.

And the only other thing that we will give -- we'll get sensitivity to is it really depends upon mix because of the different economics of the 2 businesses.

Our next question comes from the line of Mac Sykes of Gabelli & Company.

Can you talk about the distribution channels of DXJ? We've talked about this in the past, just talking about the -- where they come from and potentially the different redemption velocities with those channels? Just trying to understand potentially some of the risks in terms of a correction in Japan.

Sure. Mac, this is Luciano. So what we saw in the fourth quarter was continued strong inflows into DXJ across the major channels in the U.S. So the NFS channel, the RIA channel and the institutional channel continue to take in strong inflows. I would say that the institutional share in the fourth quarter was greater than its historic share across our other products. Where we did see outflows was in international and a lot of the outflows emanated from Chile. As best as we can tell, from what the Chilean pensions have reported publicly, there were several hundred million dollars of DXJ redemptions in October, November time frame from Chile. But net-net, as Amit said, DXJ had created almost $1 billion in the fourth quarter. So we still see very strong demand for it and we've considered to see that for the first few weeks of the year.

In terms of just sort of the potential correction in Japan, should we think about the different channels as having different potential redemption velocities? I mean, will we expect institutional customers to move quicker, or if we did see a decrease in the country or the fund versus retail or...

It's hard to say, it's hard to generalize. There are some RIAs which is buy and hold for long periods of times. There others who are running ETF models that are fairly tactical that come in and out. So I wouldn't -- I don't think you can really extrapolate quite that way. I think what we've seen over the last year is typically when the yen is weakening, the Japanese equity market is appreciating, flows that are very strong, when the yen appreciates on risk-off environments and Japanese stocks sell off, you tend to see some redemptions in those little windows.

So what I would say, when I look at the Japan exposures at WisdomTree and really throughout the broader ETF industry, there still seems to be a lot of conviction in the Japan trade. From just a flow standpoint, it's been a volatile market for maybe last 6 or 7 months, but it's been a net positive asset-gathering category.

Our next question is from the line of Adam Beatty of Bank of America Merrill Lynch.

Just a question, maybe some color on Boost's existing business. I recognize that maybe the organic growth opportunity is perhaps overshadowing that. But what's your feeling on the areas that they're involved in? Any outlook for that? And also, how are the results going to be reflected in your financial results?

I'll take the first part, and Amit you can talk about the second. So we -- their business is daily leveraged beta, fully collateralized note business. We think it's actually a very elegant solution. This fully collateralized note takes away almost really any of the risk, the financial risk of the traditional note business about being a debt instrument. So fully collateralized, segregated money, very, very attractive. It's really targeting, just like in the United States, a subset of the broader market, a very active tactical investor. And so they have -- it's a low-cost to launch a fund. They have about 51 funds right now, about $60 million in assets. They have only been in business about a year, so it has the ability to scale quickly like any ETF. So we're very positive on the potential outlook for the Boost side of the business. I mean, really, our hope would be that we build the little pro shares, the equivalent of a pro shares for Europe.

And I'm sorry, Adam. Can you just repeat the second part of your question?

Just in terms of reflecting Boost's financial results on WisdomTree's financials.

Sure. So we're taking a majority -- we'll own 75% of the entity, so we'll consolidate it and show minority interest. And going forward, we'll show a breakout of how the economics of that business plans, so you can still see the attractiveness of the existing U.S. business. So we'll show our results on a pro forma basis and you can track both sides.

Got it. And if I could, just one more quick one. On the NOL, is there a potential for sort of current or future option grants or restricted stock to generate additional NOLs?

Absolutely. It's part of -- all of our employees compensation, they do get equity. It's an important part of their compensation. So we'll continue to generate NOLs going forward. What you're seeing, really, is the benefit of -- that we've had from all of the options that we granted in the early part of the year when we're a start-up and we were assembling the WisdomTree team. All those options were sent at very low strike prices, and that we're seeing the benefit of the increase in our stock prices and increase in our NOL as a result of that.

Our next question comes from the line of John Dunn of Sidoti & Company. John Joseph Dunn - Sidoti & Company, LLC: I had a question on the -- are there any other -- are there other areas in the model like the State Street cost saves where there are leverage you can pull to dial back or have cost saves?

John, I would say, we always look at ways that we can try to reduce cost. The migration to State Street was one of the big expense that we did a few years ago. We had renegotiate some of our portfolio management fees. So we'll always try to look for ways for us to reduce cost. The State Street was one of the bigger ones that we had. There are other things out there, but we always try to find ways to do that.

And just to add a little bit to that, as we scale, it becomes easier to apply that kind of leverage. So scale will help. John Joseph Dunn - Sidoti & Company, LLC: Right. Makes sense. And then can you just talk a little bit more on what you're doing in Latin America?

Well, we have a -- this is Luciano. We have a third-party distribution agreement through Compass. So Compass represents us in Latin America, in Chile, and in Mexico and in several other countries down there. So they're selling our ETFs, particularly the ones that have been approved for sale for the Chilean pensions, as well as the ones that have been cross-listed in Mexico. So we've certainly saw a good uptake in international inflows for most of 2013, and that's one of the reasons we're expanding our global footprint.

Thank you. And ladies and gentlemen, this does conclude our Q&A session. I'd like to turn the conference back over to WisdomTree for any closing remarks.

I just want to thank you all for your interest and support, and we'll get back to you in 90 days. Thank you all.

Ladies and gentlemen, thank you for your attendance in today's conference. This does conclude the program, and you may all disconnect. Have a great rest of your day.