WisdomTree, Inc. (WT) Q4 2019 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the WisdomTree Q4 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Jason Weyeneth, Director of Investor Relations. Thank you. Please go ahead, sir.

Thank you, and good morning. Before we begin, I'd like to reference our legal disclaimer available in today's presentation. This presentation may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. A number of factors could cause actual results to differ materially from the results discussed in forward-looking statements, including, but not limited to, the risks set forth in this presentation and the Risk Factors section of WisdomTree's annual report on Form 10-K for the year ended December 31, 2019 -- '18. WisdomTree assumes no duty and does not undertake to update any forward-looking statements. Now it's my pleasure to turn the call over to WisdomTree's CFO, Amit Muni.

Thank you, Jason, and good morning, everyone. I'll quickly walk through the important items for the quarter, turn the call over to Jarrett Lilien to walk through our 2020 priorities, and then I'll discuss expense guidance before finally turning the call over to Jono for some closing remarks, and then open up the lines for Q&A. So beginning on Slide 3. Assets under management were a quarterly record of $63.6 billion at year-end, reflecting the combination of net inflows and continued strong global markets. We generated $368 million of net inflows in the quarter, representing 2.5% organic growth. Excluding $192 million of outflows from HEDJ and DXJ, organic growth was 4.2%. HEDJ and DXJ outflows marked the lowest level of attrition in 4.5 years. That, combined with the momentum we are seeing across our business and key initiatives for 2020, we believe represents an inflection point for our growth trajectory. For the full year, net inflows totaled $572 million. Excluding HEDJ and DXJ, net flows for the year were $3.3 billion or 7% organic growth. It is encouraging that those 2 funds are no longer able to completely overshadow the momentum we are generating in other parts of our product platform as total flows have been positive 4 of the past 5 quarters and the first quarter is off to a solid start. Flows in the fourth quarter were led by the strength of our domestic equity, fixed income and emerging market funds. Domestic equities generated inflows of $468 million, representing over 11% organic growth and the ninth consecutive quarter of inflows. Flows were spread across a number of products, illustrating the strength, breadth and positioning of our platform. We generated fixed income flows of $220 million, representing 24% organic growth driven by AGGY, which remains very well positioned given the combination of top decile performance and the low interest rate outlook. Along with our floating rate treasury fund, USFR, we now have 2 core domestic fixed income products with $2.8 billion of combined AUM after having less than $400 million just 2 years ago. For the third straight quarter, we saw strong inflows into our emerging market products, which generated $193 million of inflows, representing 13% organic growth. Flows were led by demand for small caps and our ex state-owned enterprise funds. Demand for these 2 funds has continued in January with nearly $150 million of inflows. Now turning to the financial results on Slide 4. Revenues were just under $69 million, up 2% for the quarter, driven by higher average AUM partially offset by lower revenue capture due to AUM mix shift. On a GAAP basis, we had net income of $4.3 million or $0.02 per share. Excluding nonoperating items, adjusted net income was $10.1 million or $0.06 a share. The primary difference between GAAP and adjusted results this quarter was a $5 million after-tax noncash charge through our future gold commitment payments, reflecting the increase in gold prices during the quarter. We are currently pursuing an exit from our $50 million investment in AdvisorEngine. While the process is not yet finalized, we estimate taking a noncash impairment charge of $22 million to $30 million in the fourth quarter, which is not yet included in our financial results. We hope to have a final amount by the time we file our 10-K in March. Given the process is ongoing, we can't comment further beyond our prepared remarks today. But let me emphasize, we do not anticipate the exit of our investment will drive any asset attrition or change in our organic growth outlook. Turning to margins on the next slide. Our adjusted operating margin was 22% for the quarter, which was down 2 percentage points from the third quarter primarily driven by elevated costs in Europe. Gross margins for our U.S.-listed products were 81.2%, up 40 basis points sequentially, reflecting scaled benefits from higher average AUM. Gross margins for our international-listed products declined 190 basis points to 70.7%, near the midpoint of our 70% to 72% guidance range. The sequential decline reflected costs associated with preparing our products for Brexit as well as the impact from new market-making fee arrangements in Europe. On the next slide, you can see the change in our expenses. For the U.S. segment, operating expenses remained well controlled, growing just 1% sequentially. Fourth quarter compensation expense was $14.9 million, resulting in full year compensation in line with guidance we gave last January. As anticipated, marketing and sales cost increased modestly in the quarter. However, our overall discretionary spending remained well controlled for the full year, coming in $6 million or 13% below our original guidance. Third-party distribution cost declined nearly $500,000, reflecting the benefit from brokerage platforms cutting commissions to 0. International segment expenses increased driven by higher fund cost due to higher average AUM, costs associated with Brexit and the new market-making arrangements that we have. Marketing and sales expenses were up $1.1 million sequentially, driven by costs associated with the launch of our Bitcoin fund in Switzerland. Launched in early January, we believe the fund is the best execution in the market, and at 95 basis points, it is less than half the price of other Bitcoin vehicles in the market and will drive attractive economics to us as it scales. Now I'd like to turn the call over to our President and COO, Jarrett Lilien.

Thank you, Amit, and good morning, everyone. Having been involved with WisdomTree for more than 11 years, including 9 years on the Board of Directors and a little more than 2 years as a member of the executive team, I've always viewed the company as standing for growth, performance and innovation. That has been the case historically, and I believe that to be the case today. I'd like to focus my remarks today around growth and performance, before Jono later discusses innovation. To me, successful growth means organically growing the top line while managing expenses such that you grow margins and have a bottom line that grows faster than the top line. We can achieve that. WisdomTree is at an inflection point and is well positioned to capitalize on tailwinds that I expect will accelerate momentum we are enjoying in parts of our business today. The tailwinds I see that will also drive our 2020 priorities include: a potential rotation from growth to value, the adoption of model portfolios, continued ETF penetration amongst advisers and the firm's strong performance track records. After more than a decade where growth and momentum have outperformed value, we are seeing early signs that a rotation is beginning. With our fundamentally weighted approach to many of our core strategies, we are essentially a value shop with an excellent performance track record. And you cannot shortcut track record, it must be earned over time. Amongst our U.S.-listed ETFs and Europe-listed UCITS, we have 35 4- and 5-star Morningstar-rated strategies. Within value categories, we have 15 4- and 5-star strategies. Additionally, the lower for longer outlook for interest rates plays well to WisdomTree's sweet spot. Beyond our yield-enhanced aggregate bond fund, AGGY, being extremely well positioned with top decile performance across all time periods, this environment will push investors in search of the income towards equities where our dividend-weighted methodologies, many of which are 5-star rated, are well positioned. Regarding model portfolios, advisers are increasingly turning to models as they look to allocate their precious time to the most value-added activities, such as managing client relationships and building their practices. Our Model Portfolio initiative has seen strong and building momentum. During the fourth quarter, we generated over $250 million of net inflows into our models. As you might have seen, yesterday, we officially launched the WisdomTree Professor Siegel models we first discussed last quarter at the TD Ameritrade National Conference. The buzz has been tremendous, and we believe the addition of Scott Welch, who joined our team toward the end of 2019, and the collaboration with Professor Siegel can further accelerate our model momentum in 2020. Big picture, we expect to see continued market share gains for ETFs versus active mutual funds. While we've had considerable success in the RIA channel and while RIAs remain a key focus for WisdomTree, we've also recently put distribution focus on the IBD channel, where ETF adoption has been slower. We estimate IBD adviser allocation to ETFs are roughly half that of RIAs, but they're beginning to converge, particularly as more IBD advisers move to fee-based models. In December, we announced a no transaction fee relationship with LPL where we are one of three ETF sponsors included in the program. While it's early days, we're encouraged by the engagement with LPL advisers and the early momentum. In addition to driving strong top line growth, we remain focused on driving efficiencies within the business in order to deliver strong bottom line growth. A theme for [ '20 ] is divest to reinvest. Recall, we announced plans last fall to exit our Canadian operations. And today, we disclosed our pursuit of an exit from our stake in AdvisorEngine. These decisions are driven by our prioritization of resources to drive growth and our commitment to remaining disciplined, focused and efficient, which we did a good job of in 2019. In addition to the initiatives I spoke about earlier, other areas we plan to invest in 2020 include the launch of a differentiated ESG suite later this spring and our collaboration with Securrency, which Jono will detail more in a moment. Amit will also discuss how we see our 2020 priorities impacting our expenses, but before he does, let me say that we have a lot of momentum as we enter 2020. And again, I believe we are at an inflection point. We've generated net inflows in 4 of the past 5 quarters, including DXJ and HEDJ, which have been headwinds for over 4 years. Further, our U.S.-listed ETFs have generated inflows for 5 consecutive months, the first such stretch since 2015 when DXJ and HEDJ were in favor. While our European-listed commodities products can at times exhibit lumpy and directional flows, they have proven an ability to hold or grow our #1 market share position in key subcategories. Overall, our focus is growth, performance and innovation. We will organically grow revenues, margins and earnings. We will continue to drive strategies that outperform their benchmarks, and we will continue to innovate to propel our business forward. I'd like now to turn the call back to Amit to discuss our 2020 expense guidance in more detail.

Thank you, Jarrett. Before discussing the 2020 guidance, I want to highlight a change we are making to our financial disclosures going forward. Effective in 2020, we will be changing from reporting 2 operating segments to 1 segment. We will continue to disclose operating data for our U.S.- and European-listed products separately, but we will be reporting our financial results on a consolidated basis only. Recall that back in 2014, we were -- we began reporting as 2 segments in order to provide greater transparency into the build-out of our international operations. Now that we are at scale, we manage the company as one global asset management business. Therefore, now is the appropriate time to change to one reporting segment. Now with Jarrett's comments as background for our priorities for 2020, let me update you on our expense guidance, referring to the chart on Slide 8. Compensation expense, including severance, was $77.3 million for 2019 on a consolidated basis. We expect compensation costs to be between $75 million and $85 million for 2020. Gross margins were 77.1%. At current asset mix, we expect gross margins to be between 77% and 78% on a consolidated basis. In the past, we guided third-party distribution fees as a percentage of revenue. Going forward, we think it'll be more accurate to model this on a dollar basis. These fees were $7 million in 2019. We expect 2020 to be flat to 2019 as we reinvest the savings from lower fees from the U.S. online brokers to existing and new global platform relationships. We expect discretionary spending to be flat with 2019 at $51.5 million. As a reminder, our gold payment expense is based on us paying 9,500 ounces of gold a year times the average price of gold for the period. Based on the spot price of gold at January 29, and assuming prices stay flat, this expense would be $14.9 million. And lastly, our consolidated tax rate is expected to decline slightly to 27%, as we benefit from removing losses from our Canada business and a slightly lower U.K. tax rate. Remember, there will be seasonality in our expenses, particularly with higher compensation in the first quarter, due to payroll taxes, lower marketing and selling expenses in the third quarter and higher fund costs in the second quarter due to rebalancings. As we think about priorities for our capital, it remains: to return capital to our shareholders through dividends; pay down of our debt; and maintain adequate dry powder for strategic, organic and inorganic opportunities. While we view our stock as highly attractive at current levels, our credit agreement precludes us from repurchasing stock until our debt balance is below a certain level. As always, we remain disciplined and focused on controlling expenses, balanced with divesting and reinvesting into our core business to help drive future growth. Now I'd like to turn the call over to Jono.

Thank you, Amit, and good morning, everyone. WisdomTree has a history of innovation. It goes all the way back to 1999 when I wrote on the ETF structure and recognized it was the future of investing and a better technology than mutual funds. Globally, the ETF structure has since attracted over $6 trillion of investor money. WisdomTree was a pioneer of self-indexing, bringing many first-to-market strategies to the industry and remains a leader in product innovation, including the December launch of a best-in-class Bitcoin ETP on the Swiss Stock Exchange. Earlier this month, we announced an $8 million investment in a company called Securrency. Securrency is a technology company providing blockchain-based financial service infrastructure with a unique focus on regulatory compliance. Their core innovation is their patent-pending compliance-aware token. Compliance, particularly KYC and AML, is in many ways at the core of financial services. Securrency's identity and compliance framework can support the issuance, trading and servicing of all types of asset classes on the blockchain. We believe their technology will be critical in getting regulatory approval for issuing digital securities and other digital financial instruments. Working with Securrency, WisdomTree will be pursuing the launch of tokenized versions of existing WisdomTree ETFs covering core building blocks and asset classes like gold and treasuries. We would be the first to do this. This would represent one of the best used cases of blockchain in traditional financial services. I think this is a very big deal. These issuances will have a near-term market opportunity within the existing digital asset ecosystem. But longer term, there is even greater potential. We believe financial services will adopt blockchain. Our initiatives, combined with our investment in Securrency, positions WisdomTree to be a true leader in digital assets. At a time that many of our competitors are taking transparency out of ETFs, we are focused on improving what is already the best and most compelling structure in asset management. For our shareholders, it is early days and involves regulatory approval, but this positions WisdomTree at the cutting-edge of blockchain and digital assets with a potentially massive market opportunity that could open up new revenue streams going forward. The implications for WisdomTree extend beyond our current business model. We believe we have the right vision and the right partner to lead the revolution in blockchain-enabled digital assets and regulated financial services. At the same time, our focus on the existing core ETF business remains steadfast. As Amit and Jarrett highlighted, we have a lot to be excited about in the near term. Macro sentiment appears to be shifting more in WisdomTree's favor and aligning with our value-tilted fundamentally weighted approach after a challenging decade. We are seeing strong momentum in our Model Portfolio business at a time when industry demand is accelerating. And we are driving strong operating efficiencies in our business, allowing us to invest in key initiatives, while still being mindful of shareholder resources and overall costs. Despite the recent pressure on our stock, there is a lot to be optimistic about. Thank you for your interest in WisdomTree, and we'd be happy to take your questions now.

[Operator Instructions] Our first question comes from the line of Craig Siegenthaler from Crédit Suisse.

First one on the investment in Securrency. I wanted to see how WisdomTree could individually leverage its blockchain technology? And does WisdomTree have exclusive access? Or can the tech be sold or licensed to third-party managers, too?

Craig, this is Jono. We have very strong commercial protections within the ETP structure, very, very strong. And the technology is very flexible and very broad. So it will lead -- it has many applications in financial services beyond just asset management. I'm not sure I understood the very first part of your question. So if I didn't touch on it, you might just repeat the first part?

Yes. Sorry, Jono. I just wanted to see like maybe, specifically, how WisdomTree as an individual business is going to leverage this? And then also, can your larger competitors, I'm not going to name any names, but can they also license or pay Securrency to use that technology, too?

Okay. So it is early days and there's some work to be done, so I don't want to get too far ahead of myself. But if the industry evolves in line with our vision, there are many use cases for this technology that can transform our business and move us beyond just earning ETF advisory fees. And again, what I would say with respect to ETPs, with respect to Securrency's technology, we have very strong commercial protections.

Got it. And just for my follow-up here on AdvisorEngine, and I know there's not a lot you can talk about in terms of the sale. But a couple of years ago, it was really explained that AdvisorEngine was going to be a really critical component of your U.S. wealth strategy. So -- and listen, this just wasn't sure WisdomTree, but many of your larger U.S. asset managers -- competitors had very similar efforts to leverage digital B2B platforms to better penetrate U.S. wealth. So my question to you, and it's not just WisdomTree, but also, I think for some of your competitors, too, but what has really changed here?

Craig, I wish we could talk a little bit more about some of our thinking around the exit process, but since it is still ongoing, we are very limited on what we can say. So -- but again, let me just reiterate what I said in my prepared remarks that we don't see any negative effect on this on our growth, any negative AUM consequences. Hopefully, by the time we get to your conference at the end of February, we can talk a little bit more. But you have to just bear with us.

Our next question comes from the line of Dan Fannon from Jefferies.

This is actually James Steele filling in for Dan. So my first question is just on the third-party distribution, I think that we were modeling that to be quite a bit lower going forward, just following the 0 commission development. So could you just walk us through kind of your thinking in reinvesting that and kind of what you see the growth potential there is?

Sure. So as Jarrett referenced in his remarks, the initiatives -- one of the main initiatives that we have in 2020 is to go deeper with some of these platforms. The IBD is one of the ones that we referenced as an area that we want to continue to invest in. And so this overall theme of divesting and reinvesting to help spur further growth is the primary reason why we want to take some of the savings that we're getting from the online brokers, reinvesting those savings back into other areas that we can see stronger organic growth, not only here in the U.S., but also internationally.

And this is Jono. So we did announce a commission-free trading program with LPL in the fourth quarter and expect to see more IBD announcements going forward. So that's how you get to a net-net number, that's the same.

Understood. And then just as a follow-up. And I understand if this isn't something that you can go into any further. I appreciate the commentary on the organic growth expectations following the AdvisorEngine divestment. But is this -- is there any expense impact of this? And if so, is that included in the 2020 guidance?

Yes. Anything related to that has already been incorporated into the guidance that we gave for next year.

Our next question comes from the line of Robert Lee from KBW.

This is Jeff Drezner on for Rob Lee. Just a really quick question on fee pressure. In regards to some of your newer products, I'm just wondering perhaps the price point that those are at. I know you mentioned that you have the Bitcoin fund that's at a higher price point, but on average, are the price points coming in much lower? And where do we see the fee rate going forward?

This is Jono. So our Bitcoin ETP at 95 basis points is more than half the -- less than the next offering in the marketplace, but still well above the average fee capture that we have. Our fees had been very steady. Most of the change in mix is sentiment-driven, so some of the domestic fixed incomes could be at a lower price point. But in general, what's important is that everything is priced appropriately and that your after-fee performance is driving alpha. And really, we're really well positioned there from a performance standpoint.

Maybe add to that, too, a big area of our competition is still much higher priced active mutual funds. And we're still early days, as I mentioned in the prepared remarks, with RIAs, and IBDs still hold a lot of mutual funds. And so there is really the focus where we're actually even at our fee level, we're pretty inexpensive.

And I'll add to that. We believe in active in a fully transparent approach. And whether it's our multifactor or smart beta or Modern Alpha or truly transparent active, that's how we approach performance. And we think, again, better than mutual funds and better than the nontransparent ETFs that are discussed. So we're, again, very comfortable with the way we're approaching fees and alpha.

Our next question comes from the line of Michael Cyprys from Morgan Stanley.

Maybe just on your distribution strategy. As you're looking forward from here, what, if any, appetite is there for helping advisers with practice management and software and B2B technology? Is there any sort of appetite for that as you look forward from here?

Yes. That's an important part of our strategy. And it's even a very important part of why I believe our models will be so successful and are showing such momentum today is that, for us, it's about the combination of proprietary thought leadership, proprietary tech tools attached to our models and attached to our ETFS. And when you think about it, the collaboration with Professor Siegel is a great example where he represents great thought leadership. We then have a number of proprietary tech tools that help advisers with their portfolios and their models and the analysis and construction. And then you get to a model that is open architecture but includes predominantly our ETFS, which have the great performance. So you're exactly spot on that the combination of thought leadership, proprietary tech tools that are around things that help advisers be better and then our superior product, that's the formula that we're looking to leverage in 2020.

And this is Jeremy Schwartz, Global Head of Research. Just to add to -- maybe a quick thought to that. If you think about from how we distributed products in the past, a lot of it was individual ticker sales, which led to a lot of lumpy flows, and I think where a lot of the discussions now are these models. So you're getting much more diversified, we think, longer-term sticky asset trends. And just to emphasize on the technology tools, we've been investing in building out our own technology team with a lot of infrastructure internally. And I really -- we are getting very positive feedback. And we have some of the world-class leading tools on our website to help people understand portfolios, how do they fit in their portfolios, what are the characteristics of all of our funds, and that's letting us be better partners to our clients, in addition to all the speakers and sort of help we can give. This adviser experience is a key part of the model platform, and we think we have some of the best adviser experience in addition to the best investment content for people.

Great. That's very helpful. And just as a follow-up question. Jono, you mentioned developing a tokenized version of your ETFs. Just hoping you could talk a little bit more about that. How are you thinking about what the use case there is, your views around that? And what it would take to bring something like that to market, what needs to happen?

So we hope to be first to market with tokens on the blockchain that are regulated as securities. Again, treasuries and gold are our first efforts. I would say that Securrency's compliance token will be the gateway on to the blockchain for regulated financial services and the way that we can meet the regulatory necessities for these tokens to be viewed as securities. I think we have that chance to be first. So the use case is -- from a sort of a digital security standpoint is profound as long as you can do it in a compliant manner, but it'll take a little bit of time for us to share more of the vision.

Our next question comes from the line of Brian Bedell from Deutsche Bank.

This is actually Melinda Roy filling in for Brian Bedell. Maybe going back to strategic priorities for the year. Could you give a little bit more detail about how these priorities have changed for 2020 versus the recent past? And has your thinking around the possibility of pursuing strategic alternatives changed, including the possibility of a sale?

I can take the first piece on how priorities might have changed. And I'd say, actually, it's about getting back to basics and back to our core competencies. Again, in prepared remarks, I mean one of the things we have that really differentiates us is a suite of products with great long-term track records. And again, it's something you can't shortcut, you have to earn it, we've done that. So we don't have to search for a silver bullet. We've got all the silver bullets we need, and so now it's about leveraging that. What we're doing to accelerate that is the addition to some of the stuff Jeremy mentioned around technology solutions, thought leadership. But it's really about leveraging the core competencies that we have and building upon the momentum that we've been showing in the last months, in the last quarters.

With respect to being a part of a larger organization, we do believe that the strategies that we have in place will lead to very strong growth as an independent company. We'd obviously like to see faster organic growth and feel that we're at that inflection point from a standpoint of being held back by the funds like DXJ and HEDJ. We would have had, in 2019, over $3 billion of net flows if those funds had just been neutral. But we do -- we're very cognizant of the fact that we have to create shareholder value. We have not created shareholder value for a while. And I would say that our investment in Securrency really makes us -- continues to make us a very attractive organization in many ways. But at the moment, we're very committed to pursuing our plans as an independent company.

Our next question comes from the line of Mike Carrier from Bank of America.

This is actually Shaun Calnan on for Mike. First, we're just wondering if you guys are seeing more traction on the flows from the online broker platform since they went to the 0 commissions. And then more specifically from Fidelity?

On Ameritrade and Schwab, we were 0 commission already, so we continue to have good flows there. We've got great relationships with both parties and that continues. Bigger picture, we are seeing wider flows. I think the 0 commission environment has been -- on balance, it's been good for ETFs and really levels the playing field. So on balance, a positive.

And it opens up the RIA channel that are custodied at Fidelity. And the just very -- again, playing into the solutions program, it just gives us a wider net to fish in, and we're seeing selective RIAs adopt our programs.

And this is -- it's Jeremy, again. And just to emphasize what Jarrett talked about, the strategic shift away from mutual funds to ETFs, we are hearing feedback from clients on these platforms who are still in mutual funds and have to pay transaction fees on the mutual funds and are not happy with that. And they are, we think -- to the point on just accelerating adoption of ETF, we think there's a lot more to come from that advantage that ETFs have over funds today.

Okay. And then just on the third-party distribution fees, are you guys expecting any additional fees from the online brokers? Or are they comfortable with the current agreements in place?

So the arrangements that we have with them was the revenue share, but also to pay for data. So while the brokers are still sort of working through how they're going to modify their programs, we are expecting some level of fees that we will pay for data, which we think is very important as part of our data intelligence function that we use around our distribution capabilities to better target and segment advisers.

Our next question comes from the line of Brennan Hawken from UBS.

Recognizing you can't say much about the AdvisorEngine side, given the pending transaction. You had said that you didn't expect that to impact your growth outlook. So could you maybe update us on the other digital and solutions efforts that you have going? And what the impact that those efforts are having on your organic growth?

Well, we've got a number of those, and they have many different shapes and forms. We've touched on a lot of it. Some are individuals with various themes and thought leadership positions. Some of it are -- is technology and again a great suite of proprietary tools. These do have a big impact on the future. And Jeremy talked about it, it's -- today, it's not about individual ticker sales, it's about relationships. And what we're about is trying to make our customers better, is to make advisers better, and we're doing that with our solutions, with our thought -- proprietary thought leadership and proprietary technology tools. So a very important part and definitely showing impact from building broader, deeper relationships with our clients.

Let me just add. So the solution that we're most focused on is the outsourced CIO, which drives the Model Portfolio flows. Jarrett did give a number that was new, $250 million of Model Flow in the fourth quarter. And then obviously we think with our long history of collaboration with Professor Siegel, these new Siegel models are probably our best execution in the outsourced CIO space. And with the addition of Scott Welch, who joined us recently from Dynasty as their CIO, we do really feel that, that is the solution that is most tangible to organic growth. We're very comfortable and well positioned in that space.

Great. And then thinking about the balance sheet, could you maybe be a bit more specific in what changed regarding the balance sheet that caused the covenant and now the curtailed or halted buyback? Is it the pending loss from the AdvisorEngine sale that is going to gain -- retain earnings? What -- which part of it was played out there? And what are the metrics that are related there?

Sure, Brennan. No, it's nothing new. Just as part of our credit agreement, as any credit agreement, there is certain covenants that we have in place that allow us to do and not do things. At our current earnings power, we are above the leverage threshold that would allow us to do buybacks. It's about 100 if we can -- at current earnings power. We need to get our debt down to about $150 million, and then we would be able to open up capacity to do buybacks. So it's just the existing covenants that are in place when we took on the loan.

Our next question comes from the line of Keith Housum from Northcoast Research.

As we look at the 2020 expense guidance, can you guys give us a little bit of expectations in terms of growth when you're looking at your compensation guidance, your $75 million to $85 million range?

Sure. So various factors go into what drives our compensation. We set up targets at the beginning of the year around revenues, flows, market share. I think the way -- if I were you, the way to think about it now, sort of the middle of the range is probably a reasonable way to start. And then as we see the year progress, we can give some more granularity if we think it's trending up or down from that midpoint.

So at the midpoint, are you expecting just the same growth in inflows you've had over the past year? Is that the way to think of it?

We don't give top line guidance, but there are various factors that go into what drives that. I think thinking about it at the mid-range is a good way to go right now.

Okay. And then as a follow-up. As I look at your investment in Securrency, how exactly is Securrency going to monetize, I guess, their technology? I'm getting an impression it's more than just through the ETF.

Yes. So they are an infrastructure play. So they'll have lots of potential for licensing, broadly within financial services, and quite frankly, even beyond financial services, but their core initial push is in financial services. And so it is beyond just asset management, yes.

Okay. That's going to be primarily licensing the technology, okay.

At this time, I am showing no further questions. I would like to turn the call back over to Jonathan Steinberg, WisdomTree's CEO, for closing remarks.

I just want to thank you all for your time and interest in WisdomTree, and we will speak to you next quarter. Thank you. Have a good day.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.