WisdomTree, Inc. (WT) Q3 2014 Earnings Report, Transcript and Summary

: Good day, ladies and gentlemen, and welcome to the WisdomTree's Third Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Stuart Bell, with WisdomTree's Investor Relations. You may begin.

: Good morning. Before we begin, I would like to reference our legal disclaimer available in today's presentation. This presentation may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which are generally identified by terms such as believe, expect, anticipate and similar expressions suggesting future outcomes or events. Forward-looking statements reflect our current expectations regarding future events and operating performance and speak only as of the date when made. Forward-looking statements are subject to numerous assumptions, risks and uncertainties, which may prove to be incorrect. Such statements should not be read as guarantees of future results and will not necessarily be accurate indications of whether or not, or the times at or by which, such results will be achieved. A number of factors could cause actual results to differ materially from the results discussed in forward-looking statements, including but not limited to, the risks set forth in this presentation and in the Risk Factors section of the company's Annual Report on Form 10-K for the year ended December 31, 2013. Now it's my pleasure to turn the call over to WisdomTree's CEO, Jonathan Steinberg.

: Good morning, everyone, and welcome to WisdomTree's Third Quarter Conference Call. Let's begin. WisdomTree reported another quarter of record revenues and very strong financial results. This was driven by $748 million in net inflows. In the current strong dollar environment, we seemed very well positioned. We continue to see strength in our currency hedged equity platform. Also, the firm remains focused on our rising rate fixed income product suite where we have seen early investor adoption despite the protracted low interest rate environment. Today's results against the backdrop of an extremely complex and uncertain world underscores the value of our clean and efficient business model. This allows us to remain focused on our products and our clients, while we continue to demonstrate expense discipline and earnings power. Before I turn the call over to WisdomTree CFO, Amit Muni, I'd like to acknowledge 2 important business highlights. First is the lower effective GAAP tax rate, now down to 38% from a previously estimated 45% rate. This lower tax rate will have a meaningful impact on bottom line earnings going forward, placing WisdomTree in an even stronger financial position. Second, on the back of this momentum, we have expanded our capital management program to include a return of capital. The result is a program I can proudly say reflects WisdomTree's strength, philosophy and commitment to our shareholders. The company's Board of Directors has declared a quarterly cash dividend of $0.08 per share. This regular dividend is a powerful reflection of our confidence in our business model and in our future prospects. With strategic cash reserves of $165 million to date, we have initiated the dividend in an comfortable but healthy $0.08 a share, which is approximately 50% of our cash earnings. As for guidance and future expectations, we will only seek to raise the dividend from here upon significant growth in assets under management. WisdomTree strives to be a transparent and shareholder-friendly company. Our dividend policy marks our commitment to capital discipline and the alignment of incentives between this management team and our shareholders. Lastly, the board has also approved a $100 million share buyback program over the course of 3 years. This allows us to fully mitigate share count creep, plus gives us additional flexibility to be opportunistic. Let me be very clear. We will continue to invest aggressively to pursue our ambitious growth goals here in the U.S. and in other international ETF markets. Why expand our capital management program now? First, it's the right thing to do for shareholders, full stop. Also, and this is very important, because of our capital-like business model plus our increasing scale coupled with our significant NOL and now lower tax rate as well as our strategic cash reserves, we are in the terrific position to have the resources for both growth investment and a return of capital. Said another way, today's announcement has no impact on our ability to carry out our strategic growth plans. In fact, last week marked a significant milestone in WisdomTree's history and our commitment to becoming a truly global ETF player. Last Friday, our European ETF platform, which we established earlier this year, launched our first WisdomTree use of ETFs on the London stock exchange. I want to congratulate our London-based team and the operating team here in New York for their tremendous execution. Our European ETFs are up and running and our U.S. business has not missed a step. In fact, the U.S. businesses experienced -- experiencing strong momentum fourth quarter to date, with a combination of inflows across our U.S. Equity suite, our currently hedged Equity suite as well as our new strong dollar fund, USDU. This is only the beginning of WisdomTree's global growth strategy. With that, it is my pleasure to turn the call over to Amit.

: Thank you, Jono, and good morning, everyone. Jono has given you highlights for the quarter, but let me go into some of the details before opening it up to Q&A. So let's begin on Slide 3 by reviewing the U.S. ETF industry statistics in the third quarter. Industry flows declined slightly from the second quarter to $48.5 billion. As you can see on the chart in the middle, U.S. Equities led the flows with $25 billion, of which 40% came from the S&P 500 fund, SPY. Fixed income and other equity categories also experienced inflows. As the next slide reflects our flows improved. We had net inflows of $748 million in the third quarter, up from the first and second quarters of this year. You can see the categories of our flows for the quarter on the right. We had $1.5 billion of inflows into our hedged equity funds, primarily HEDJ, as well as inflows into our suite of rising rate fixed income ETFs. The flows into these funds clearly reflect the strength of our innovation and product development capabilities. As we have said before, it's not what a fund does in its early days, but what it can take in over time once the product lines up with market sentiment. Partly offsetting the $1.5 billion of inflows was $800 million of outflows, primarily in our unhedged European equity ETF as well as DXJ. Turning to the next slide, you can see the strength we demonstrated in the European category. For the third quarter and on a year-to-date basis, WisdomTree was a leading asset gatherer in European-focused ETFs. This was due to the success of our fund, HEDJ, which hedges out the euro. Through DXJ, WisdomTree put the concept of currency hedging on the map, and we continue to be a leader in the category. You can see in the third quarter, while our larger competitors faced outflows, we had inflows. We believe this is because of one of our key competitive strengths, that is our differentiated offering like our hedged equity ETFs. Turning to Slide 6. You can see we were ranked 10th in U.S. ETF flows for the third quarter, and our market share was 1.5%. Turning to Slide 7, we were ranked eighth in organic growth when compared to the top 10 U.S. ETF sponsors. I want to focus your attention to the chart on the right. We were ranked eighth when comparing our organic growth rate to the other publicly traded asset managers. Despite outflows for the first half of the year and what we would call modest inflows in the third quarter, our ranking continues to improve significantly. And the positive flow momentum so far this quarter bodes well for us to continue to move up the rankings. We continue to remain optimistic on our long-term positioning in the asset classes in which we compete. On Slide 8, we show you how our ETFs have performed according to their Morningstar peer groups. These comparisons take into account fees and transaction costs, and reflect how our equity fixed income and alternative ETFs performed against active and passive managed -- passive and actively managed mutual funds and other ETFs. In evaluating the performance of these funds, you can see for the 5 years, 68% of our ETFs outperformed their peer group. Put another way, 91% of the roughly $35 billion invested in our ETFs were in funds that beat their peers, a statistic we are proud of. Now I'd like to update you on our European business on Slide 9. Our Boost-branded products are continuing to grow, reaching $123 million and they're approximately $150 million today. We launched additional commodity and equity Boost products in Italy and Germany, as well as listed a series of fixed income products in the U.K. and Italy. A week ago, we launched our first set of WisdomTree-branded ETFs on the London stock exchange and are targeting to list 2 to 4 more ETFs before the end of the year. We are excited about the opportunity Europe brings to grow our franchise, and we look forward to continue to build upon the business's success in the coming years. On Slide 11, we can start to go through our financials. Despite the challenging market, we continue to generate record financial results. We recorded revenues of $47.1 million in the third quarter, an increase of 19% for the third quarter of last year. Pretax income was up 35% to $20.3 million. Net income was essentially flat with the second quarter. We believe pretax income is a better measure to compare our current results to prior periods as we were not reporting tax expense because of our net operating losses. For the first 9 months of this year, revenues increased 26% and pretax income was up 62% to nearly $57 million. Turning to Slide 12. You can see from the chart on the left that our average mix has not changed significantly. And as the chart on the right reflects, we continue to see revenue growth and practically all our categories as we continue to focus on building a diversified product offering. As a result of inflows into some of our higher fee ETFs, our average revenue capture increased to 52 basis points in the third quarter. On the next slide, we can review our key margin metrics. Gross margin for our U.S.-listed ETF business was essentially flat with the second quarter at 82% and with 81% on a year-to-date basis. We do expect our gross margins to remain at the 82% to 83% level in the near term. In the chart on the right, you can see our total pretax operating margin decline slightly to 43% compared to the second quarter. Pretax margins for our U.S-listed ETF business, which is comparable to prior periods, was 46.6%. Our pretax margins were particularly high in the second quarter, as we significantly reduced compensation cost as a result of reflecting net outflows for the first half of the year. To the right, you can see for the first 9 months, our U.S. margins increased to almost 45% on only $34.5 billion of average AUM. Next, we'll review expenses on Slide 14. Second quarter total expenses were $24 million. We had $692,000 in expenses in the second quarter related to our acquisition of Boost. Compensation costs increased $2.2 million as a result of positive flows we experienced in the third quarter. Total operating expenses for our European business increased $732,000, as we continue to build out the operating team and prepare for the launch of our WisdomTree use of ETFs. Higher average AUM resulted in an increase of $426,000 in variable fund cost, and we had another $160,000 in other fund-related expenses. Marketing and sales-related spending increased by $100,000 leading to total expenses of $26.9 million for the third quarter, an increase of 12% from the second quarter. As the next slide reflects, we continue to make investments to grow our business, yet balance it with expense discipline, as our expenses continue to decline as a percent of revenues. We are on track to spend in the low range of our $6 million to $9 million of strategic spending for the year. And because of the decrease in incentive compensation in our baseline expense amount due to our flow performance so far this year versus last year, our expenses in the U.S. will be less than $110 million to $113 million guidance for the full year. On the next slide, we can review the strength of our balance sheet. Total assets grew to $202 million at the end of the quarter, which was primarily comprised of cash and investments. You can see from the chart on the right our continued revenue growth and the leverage of our business model translates into powerful cash flow generation ending the quarter with nearly $164 million in cash and investments. Because of this powerful cash flow generation and the scalability of our business model, we feel the time is right to institute a capital return program. Turning to Slide 17. Our return of capital program will have 2 components. First, our board has declared an $0.08 quarterly cash dividend. The record date will be November 12th and paid on November 26th. This will be an ongoing cash dividend maintained at this level and may increase as we experience meaningful growth in AUM. The second component is a 3-year $100 million stock buyback. The purpose of this buyback is to make purchases in the open market to eliminate share count increases as a result of issuing equity to our employees as well as opportunistic buying. This program reflects the fact that we have a capital-like business, coupled with a business model that generates significant cash as we scale. WisdomTree is a growth company. We are fortunate enough to have the resources, to have dry powder to allow us to be aggressive and opportunistic, as we continue to see an open-ended runway of growth ahead of us as well as the ability to return excess cash to our shareholders. Now I'd like to update you on taxes. We completed a state tax analysis this quarter, which allowed us to reallocate income to other states from New York, which has lowered our baseline operating tax rate from 45% to approximately 38%. As a result, we took a charge of $1.3 million to tax expense this quarter to reflect a lower value for our deferred tax asset, which was previously calculated at the higher 45% rate as well as accounting for certain nondeductible expenses associated with our acquisition of Boost. While our baseline rate is now approximately 38%, this rate may change as our income percentage in each state changes, as well as accounting for nondeductible expenses. Even though we record GAAP tax expense, we do not pay cash taxes because of our tax losses. As we can see on the bottom left-hand chart on Slide 18, at the end of the quarter, the amount of pretax income going forward that is shielded from taxes is approximately $102 million, and we continue to generate tax losses because of the deductibility of our equity awards we granted to employees. As you can see from the chart in the middle, assuming our closing stock price yesterday, we potentially have another $83 million of pretax income, which would be shielded from cash taxes in the future. Lastly, I'd like to update you on our flow so far this month. AUM has grown to $36.1 billion from the back of $754 million of inflows, a strong start for the fourth quarter. So in summary, I believe this quarter can be characterized as a period of improvement, continued strength and progress. We continue to focus on growth opportunities, such as expanding our product offering for diversification and positioning for the long term. We expanded our distribution reach through international expansion efforts. Our headcount has grown as we focus on growing our top line revenues. These growth initiatives our complimented by our efficient and scalable business model that generates significant cash as we scale, which leads us to managing our capital in the best way to maximize shareholder value, both through investing back in the business to support our growth to become one of the top 5 leading ETFs sponsors in the world and returning excess capital to our shareholders through dividends and buybacks. Thank you. And now let's open it up to Q&A.

: [Operator Instructions] Our first question comes of the line of Tom Whitehead of Morgan Stanley.

: I wanted to touch on the margin guidance quickly. I know -- so the current target was I guess 40% at $35 billion. You guys surpassed that this quarter. And then the next target you had out there was $55 billion to $60 billion of assets, 50% margin. Can you maybe update us on how we should think about that next target in light of how you guys surpassed the existing expectations?

: Tom, it's Amit. Yes, so we're still -- the guidance is still good that we gave the longer term, the $55 billion to $60 billion at a 50% pretax operating margin. Next quarter when we give guidance on sort of our operating expenses going forward, we'll give some future thoughts on pretax margin targets. But for now, we're sticking with our original guidance.

: Okay. And then just with all that was going on in capital return this quarter, with the dividend and the buybacks, can you maybe update us on how we should think about product development and product launches going forward? And sort of what the capital allocation policy will be from here considering what you guys have initiated this quarter?

: Tom, it's Jono. We gave guidance of 8 to 10 launches for new fund launches at the beginning of the year. I think we've done 8 so far. I think, we'll probably come in at the low-end, so around 10 ETFs launched this year. I don't think that the capital management has any influence at all on future fund launches. None whatsoever.

: Our next question comes of the line of Surinder Thind of Jefferies.

: Just following up on kind of the launch of your European operations. Any color on kind of the why you picked those 4 particular products to launch. And then maybe -- can we -- you also talked about maybe another 2 to 4 the rest of this quarter. Would that kind of round out your first round of launches? Or should we expect also something else beyond that maybe in 1Q?

: Surinder, it's Jono. With us on the call today is Luciano Siracusano, WisdomTree's Chief Investment Strategist. He's actually calling in from London. And so Luc, maybe you can take the first part of this answer.

: Sure. So the reason we launched the 4 uses that we did is we think that reflects WisdomTree's basic approach to indexing around the world. We launched 2 large cap portfolios that we call equity income strategies that are designed to maximize, starting dividend yield. And certainly, we understand that there's a lot of interest in London and elsewhere in Europe for products that produce more dividend income. And so we wanted to take advantage of WisdomTree's unique weighting methodology -- weighting by the dividend stream. We also launched 2 small-cap portfolios. One, to cover European continent and then one to cover the U.S. that, in effect, gives investors exposure to small caps, dividend-weighted, again, touching upon the small-cap value premium. There's a lot of interest in Europe in so-called smart beta indexes, and these particular strategies tap into those value premiums and size premiums that people looking to get exposure towards. Third reason is we've had success with the strategies in the U.S. As you're aware of, the strategies that have U.S. compliments or clones, 3 of them have assets in the range of $800 million to $1 billion. So we've certainly seen interest. Funds that we're going to launch going forward, they're -- relate to the same strategies, but in emerging markets and Asia. And obviously, we've had a lot of success with our emerging market, small-cap and our emerging market equity in coming to U.S. So we're just trying to replicate that abroad.

: Very good. And then maybe just turning to Boost as well. You guys are definitely seeing some good growth there in terms of the total AUM. And on top of that, you've also launched some additional products. How are you guys thinking about the Boost operations? And are they just, more or less, going to be kind of run in parallel at this point with the -- your other -- the normal usage products?

: Surinder, it's Jono again. So we are maintaining the Boost brand. We're very excited about their particular executions, the leverage going to inverse daily beta from all different asset classes. And so they'll continue to give energy into those funds. And we have been building up our staff to help us with the UCITS launches. So you'll have, actually, 2 different types of strategies in the European market. They will run them complimentary.

: Fair enough. Maybe just if I can reask the question. We should continue to see more product introductions and Boost as well the same way that we have more expectations for kind of the WisdomTree Europe as well, is that correct?

: Absolutely, that is correct.

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

: Just Jono or Amit. So as you think past the use of the net operating levels carried forward, which I guess based on your pace of pretax income will be sometime next year or early '16. You mentioned, Jono, that you'll be paying out as a percentage of your cash flow. So I'm curious how you think about a more normalized payout ratio is looking out into '16 and '17, if that's the right way to think about it?

: So we're paying at around 54% of our cash in dividends currently, and we don't exactly predict when the NOLs will expire. But we think that we're obviously very optimistic about future growth prospects. And so I think that as we get towards becoming a cash taxpayer, you'll find that the numbers would be more traditional on a GAAP basis.

: Yes. And just related to that, as you think about the balance sheet, obviously with the buyback now in place, how much cash do you think you really need to run the business at the end of the day? And I know you have a very strong balance sheet and somewhat conservative view on that cash level. So curious, if push came to shove, how much would you be willing to sort of draw that down if the stock were to pull back in a material way?

: Bill, it's Amit. So we have $164 million of cash and investments today. We think that this roughly, this cash level, we feel very confident that we have the ability to continue to invest in the business, to continue to have dry powder to be opportunistic, as well as to have excess cash to return back to our shareholders. These are sort of the right levels to do both.

: Okay. Just got more housekeeping items for me. Amit, you mentioned that your expenses for this year will be less in that range of $110 million to $113 million. If you look at year-to-date, so the difference just sort of is about $31 million, $32 million range for the fourth quarter. Is that a reasonable thought process?

: Yes, so if you look at -- we've been running -- I'll talk about the U.S. business. We've been running $25 million, $26 million of total expenses for the U.S. business in the last several quarters. We should see a couple million bucks uptake in that, probably in Q4, as we continue to spend. So that would -- that just kind of give you some rough ideas. But again, I think, the -- when you look at our baseline operating expenses, we will be coming in less than that $110 million to $113 million guidance.

: Okay. And then I guess just strategically, I think you were recently added on Schwab's platform and Schwab and a number of their peers continue to focus on boosting ETFs. Any early feedback in terms of how you're doing on that particular platform? And what's the pipeline for other distribution platforms that might be out there? That might be used that are replicating the strategy?

: Bill, it's Jono. We don't really comment on individual platform success. I mean, we're excited to be on the platform. We think Schwab is really putting a lot of energy into expanding the ETF marketplace, so we're very excited about it. And obviously, if we develop new platforms with other companies, we'll announce those at the time.

: Okay. And just one last one. As you think about all the ins and outs in terms of the flows, how you think about the fee rate from here?

: We continue to be very comfortable with the way we have positioned our company and our funds from -- within today's marketplace. It's our strategy that we really thought of 8 and 10 years ago. It's really holding up in today's marketplace. So we think we feel very comfortable with the way we've been pricing our sort of our low fee innovation model.

: Our next question comes from the line of Dain Haukos of Piper Jaffray.

: I'm actually on for Mike this morning. But just kind of circling back to Boost. I know, historically, you'd said $4 million to $6 million loss in 2014. And it looks like with the $1.5 million loss in the second quarter and the third quarter, you're tracking towards the low end of that range. I'm just kind of curious, what's driving that towards the lower end? Is it expense control? Is it better revenues than expected? Better AUM growth? Just kind of curious if you can give me a small color there.

: Sure. I would -- Like you said, we're on track to be within that range guidance that we gave. We were conservative in thinking about the cost of launching the WisdomTree UCITS funds. And you're going to continue to see a ramp-up in expenses in the fourth quarter, as we continue to build up the operating team there. You'll get the full -- another full quarter of costs of launching the Boost-related products, as well as the WisdomTree products. And so it's just really a matter of just being conservative of how we sort of expecting the expenses to come in.

: And not -- this is Jono. Dain, this is Jono. And just the operating team in London, they're real entrepreneurs and they watch their pennies very carefully. That's part of it as well. They're really very careful.

: Okay. that's great to hear. How many people do you have working over in London?

: We have about 24 or 25 people there now.

: Okay, all right. Because I'm just curious for the headcount perspective. Can you break down the U.S. and Europe at this point? You said 114 in the release.

: Yes, as of right now, we have about 100 -- I think we hired somebody yesterday. So we've got 100 employees in the U.S. today and, like I said, the balance about 24 or 25 in Europe.

: Okay, that's great. And then last question. With the launches that you had for Europe, it looks like DFE similar -- I'm sure it's probably the same product as what you have on the U.S. exchanges, do you guys have any timing as to when you'll give the AUM data like you do on your U.S. funds at this point?

: Yes. We're working through that now on our website. We're hoping within the next couple of weeks we should be able to have that all sorted out. And so you should be able to see the European AUM just like you do the U.S. AUM.

: Our next question comes of the line of Douglas Sipkin of Susquehanna.

: Just a couple of questions. First, on product and then maybe just some modeling stuff. So just shifting to October, obviously, it's been a really good month so far. A lot of strength out of the domestic products, particularly DLN I believe, and I was just wondering if there was anything that went on there unique with the platform acceptance? Or was it really just someone saying we want more exposure here? It just seems like you had such a huge inflow in the product, kind of out of the blue. So I was just wondering if something changed somewhere on the platform?

: Luc, would you want to start with this?

: Sure. So you're absolutely correct. We've had a very strong month in October and it has been led by inflows into DLN, which is our large cap dividend strategy. And I will say we've also had pretty good inflows into some of the other dividend equity strategies as well. But DLN has led it. We don't comment on particular clients and what they're doing until that data may become public through public sources. But we do have, obviously, large holders of the funds if you look at the traditional filings and sometimes those large holders can make large purchases at inflection points in the market. And you certainly had a lot of volatility in October where people decided to make changes to portfolios based on what was going on in global asset classes. And when you get that opportunity, sometimes a large fund can become larger quickly when larger buyers are buying in, in larger sizes.

: Okay. So that's helpful. I appreciate that we can look for the disclosures when they come out. And then obviously, real time, it looks like you got more easing in Japan. DXJ, obviously, a grand flammable or grand slam seeding I guess at around -- I think, it's like $11 billion or something like that. I mean, do you guys feel like there is potential for a new wave of DXJ inflows based off of this news? I mean, obviously the product has grown so fast and people have gotten their exposures up dramatically into Japan through this over the last, let's call it, 15 months. So I'm just wondering, do you think there's enough juice left to drive flows given what we saw out of Japan this morning effectively?

: Doug, it's Jono. With us today, because we weren't sure how the technology would work with Luciano being in London, is our Director of Research, Jeremy Schwartz, and I'll let him -- I caution him about predicting anything about flows, but he'll comment on Japan.

: It was a very big move overnight. You had a 2-part package from the Bank of Japan providing a lot more monetary stimulus as well as the GPIF, which is the biggest pension fund in the world, who shifted their allocations away from JGBs targeting 60% down to 35%, increasing their Japanese equities and their foreign equities, which is a huge positive stimulus to the market. You see what the yen is doing now, about JPY 1.12. Just a few weeks ago, it was only JPY 1.06, so we've had a huge move. But this really gets back to the bigger question why take currency risks generally? So we have this big platform with currency hedging that we think is gaining acceptance of why do you really -- want the euro or why do you want the yen? And we think -- I think we're still early days in -- that concept's going out there. So I think there -- from that perspective, there is attractiveness, but Japan also -- from a valuation standpoint, is also one of the more reasonably priced markets. If you look at DXJ, it's only around the 13 to 14 PE versus the U.S., 16 to 17 or higher. Europe is in the middle. So from a valuation standpoint, it's -- I think there's a lot of positive momentum there, then you have the BOJ and GIR [ph] further supports -- that's very supportive. Then you look overnight also what happened. We had this very robust lineup of Japan with -- beyond DXJ, so we launched this currency hedged sector family as well. If you look what happened last night, financials were up 6.5%. Real estate stock, which is also part of the BOJ easing program, was up. Some of them were up 10%, and we have a financial DXJF. In real estate, DXJR, that should also be focused on the new. So we think we have a very robust family there that's really sort of cutting-edge for that market.

: Great. No, that's helpful and I appreciate the detail. And then maybe final question for Jono. So maybe about 1.5 weeks ago, the SEC did a preliminary rejection of a couple of the nontransparent ETF platforms. I'm just curious, for your perspective, do you think that, that shuts that avenue down for good? Or do you think maybe they'll be more tweaking to the models to maybe get that to market at some point? I'm just curious of your perspective in light of that SEC color.

: Thank you. So you know that I have not been particularly optimistic about a nontransparent active, first, getting regulatory approval. And if they did get regulatory approval, I wasn't particularly excited about their commercial application. You can't -- so I think for those that were counting on nontransparent active as a way into the ETF market with what happened last week or the week before, there's certainly significantly enhanced regulatory risk that those strategies or executions will not be allowed to come to market, certainly not in the near term. I can't definitively say that they won't ever come, but it certainly been delayed for the foreseeable future.

: Our next question comes of the line of Adam Beatty of Bank of America Merrill Lynch.

: Just a question on the Boost products. Obviously, you're focused right now since it's their home base on distribution in Europe. What do you think the appetite is for those products globally and specifically in the U.S? And what are your admittedly long-range plans around that?

: So this is Jono, Adam. Thanks for the question. So we have no intention certainly at the moment to bring the Boost product set to the United States. In terms of the potential for the Boost product set, you look at the European market at about $500 billion versus $1.9 trillion in the U.S., and you can make some sort of estimates when you look at some of the leveraging inverse players here in the United States. So between ProShares and direction, you've got something like $35 billion or so. And we -- so there is a shot that those kinds of strategies with Boost hopes to be a leader in could have maybe 1/4 of the U.S. market maybe.

: Great. And just one other. In terms of the strategic spending this year, Amit indicated that you're maybe coming in at the low end of the range, which -- I guess, is a little bit surprising especially given that the level of strategic activity seems to be continuing unabated. Can you maybe square the circle on that for me? Is it something around timing over expenses? Or just some efficiencies that you didn't expect?

: Yes. Adam, it's Amit. It's -- some of its efficiencies, some of it's -- the launch -- fund launches. We were predicting 10 to 15 new launches. Look, we're coming in to the low end of that range. We did have to slowdown our fund launches during the transition from the back of New York to State Street for our back office. So it's a combination of that as well that's bringing us down to that -- the lower end of that range.

: And would you expect -- I mean, I guess it's still a little preliminary. But in terms of next year, would you expect an increase in that level?

: We'll give updated guidance on our strategic spending initiatives and plans in our next call.

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

: The -- just going back to the nontransparent ETF -- so many questions, I guess, around the feasibility of them. I'm curious on your thoughts, Jono, on consolidation opportunities. Obviously, you're out there with a capital plan, but just curious how you think maybe, over time, you might be positioned to be a consolidator of some of the nontransparent active ideas that might be out there, maybe not from, obviously, the big players, but just curious on your thoughts on industry consolidation.

: So we've made 1 small acquisition with Boost now WisdomTree Europe. We are seeing -- I would imagine, but we feel like we're seeing all of the deals that are being shown, so we are in the loop. So we're looking at everything. We do have the resources to execute on anything that we choose to go after, but I would say that, as we've said in the past, historically, we have such a high return on organic growth that we have a very high hurdle for M&A. And in terms of more broadly, with respect to consolidation, what we've always said and what I think many of the analysts have also noted, is that they're just a scarcity of players. And when you combine that with the maybe the delay or the complete shutdown of nontransparent active, sort of the balance between supply and demand, shifts even further. So I wouldn't be surprised if you see some more over time.

: Okay, great. And then just any update on the alternative ETF opportunity for you guys and also the fixed income build, just curious how you see that shaping up over time.

: We're -- we have -- one of the leading alternatives with our managed futures ETF, and we're completely focused on trying to build out more of liquid alts as a suite within the WisdomTree product suite, and we're -- we've probably never been more excited about our efforts in fixed income. The -- particularly the rising rates that we launched last year, we are starting to see some traction there. So we will continue to put energy in both of those as sort of for mine and Amit's perspective. We're interested in trying to diversify whenever possible.

: And then, Amit, just on the grosses and as you look ahead. If we are in a sort of another leg for DXJ, how should we think about just some of the bigger funds getting bigger in the gross margin guidance?

: Sure. So gross margins we're predicting again still be within the 82% to 83% level. We have to see some meaningful increase in AUM before that sort of starts to tick up. We also continue to look at other expenses that we have that we outsource if there's other opportunities to save money there. But as you said, larger funds for us are much more profitable, something like DXJ has got -- like 95% incremental margins that's just the attractiveness as we scale. But I think overall, that overall guidance of sticking within the 82% to 83% is what you should think about.

: Our next question comes of the line of Mac Sykes of Gabelli.

: First, congratulations on the quarterly announcements, it's certainly a terrific representation of the progress you guys have made over these years. My first question is just more practical. In terms of the buyback, how are you thinking about valuation and the levels that might be opportunistic?

: Mac, it's Amit. So we're not going to get into the details of sort of our thoughts on the opportunistic buying. The primary goal of the $100 million buyback is to help eliminate the share count creeps. Second would be, to be opportunistic. And so a lot will depend on market conditions at the time, what are our growth -- other growth-type investments and so. I just say it's open for us to be opportunistic at the time.

: And on the fixed income side referred from a number of asset managers about the share opportunity from the PIMCO fallout, are you guys talking -- targeting your marketing efforts to potentially take advantage of this transition flows? I mean, do you highlight this as a potential opportunity for you in the near term?

: We're -- I think, we are those who -- we are more focused on our very specific execution. I'm not sure we were -- we would be the logical parking for the outflows from PIMCO. So I don't think that's where we were playing.

: Our next question comes from the line of Chris Shutler of William Blair. Christopher Shutler - William Blair & Company L.L.C., Research Division: : Just one question on the European business. Can you just talk about kind of the distribution effort there over time and specifically, what you're doing in Europe to get your products in and models in and maybe how you're marketing to the FAs in Europe?

: Thank you. So this is Jono. The approach is going to be very similar to what we're doing in the United States. It will be very sophisticated sales people and the products have both Boost and WisdomTree bring to the market are very unique, so you need to be -- the front-line people have to be very sharp. We'll support that with research like we do in the United States, P.R. and very selective market just like in the United States. And again, we'll be targeting the financial intermediary and the institutional investor. Again, just like the United States. So the program, I think, is there's a lot of synergy in the approach.

: Our next question comes of the line of John Dunn of Sidoti & Company. John Joseph Dunn - Sidoti & Company, Inc.: : Just given your -- always been every other conference call, but institutional clients rebouncing into passive. Can you just talk about some of the differences between how you sell to the different sleeves within institutional?

: Luc, would you want to try this one?

: Stages in terms of ETF adoption. So we have kind of a 2-pronged approach, which is to work with institutions that are already using ETFs and there you'll find foundations and endowments. Certainly, mutual funds who are ETF users and institutional asset managers to, some extent, hedge funds. And at the same time, we're also trying to convert new institutional users to begin using ETFs. We've had some success. [Technical Difficulty]

: I think we lost Luc there for a second. We are -- I don't want to put words into Luciano's month. But the institutional channel itself has tremendous disparity between user knowledge. And there are certainly some institutions that are very, very sophisticated within that channel. For WisdomTree, the mutual funds and the hedge funds are the largest users. Pensions and endowments have come next. And so to the earliest adopters, you mean not the earliest, the most recent to come to the ETF industry would be the insurance channel, which is brand new. But the channel really requires a lot of education in its very early days.

: Thank you. I'm showing no further questions, I'll hand the call over to Mr. Jonathan Steinberg for any closing remarks.

: I just want to thank all of you for your time and attention this morning, and we will speak to you again next quarter. Thank you, everybody.

: Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may now disconnect. Have a great day, everyone.