WisdomTree, Inc. (WT) Q2 2021 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the WisdomTree second quarter earnings call. [Operator Instructions] I would now like to turn the call over to your host, Jessica Zaloom, Head of Corporate Communications and Public 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. A number of factors could cause actual results to differ materially from the results discussed in forward-looking statements, including, but not limited to, the risks set forth in this presentation and in the Risk Factors section of WisdomTree's annual report on Form 10-K for the year ended December 31, 2020. WisdomTree assumes no duty and does not undertake to update any forward-looking statements. Now it is my pleasure to turn the call over to WisdomTree's CEO, Jonathan Steinberg.

Thank you, Jess, and good morning, everyone. Many businesses across financial services are struggling to balance legacy business models and the conflicts that arise with fast-moving technological advancements, but not WisdomTree. Our Q2 results tell a story of continued growth and strong execution against our business goals and longer-term strategic initiatives. We are increasing the breadth and balance of our organic growth through Q2 and year-to-date through July. We are doing so with consistent and increasing efficiency and agility aided by our remote first operating model. It was simply a clean and strong quarter marked by several standout operating accomplishments and milestones which Bryan and Jarrett will cover in their remarks. With the results we are achieving each passing quarter, I am increasingly confident in our long-term positioning. The focus and flexibility of our business model has enabled us to retain and attract world-class talent, drive strong operating results and engage with our clients in whichever modality they desire with an ever-expanding set of resources. We are building on the quality, quantity and overall mix of our client engagements. The track records and value proposition of our product and model portfolio offerings along with sophisticated investment analytics and practice management resources allow us to help advisers address the central challenges of their practices. Through our investments in tomorrow's growth, we are quickly establishing an expert voice around digital assets, cryptocurrencies and blockchain-enabled decentralized financial services, or simply DeFi. Through these efforts, we are deepening the existing relationships and partnering at an enterprise level with key platforms in every channel, including some of the largest national RIA groups. It's an exciting time to be in financial services, and WisdomTree couldn't be better positioned. Now I will turn the call over to our President and COO, Jarrett Lilien, to review our progress and results in greater detail.

Thanks, Jono. As Jono just highlighted, Q2 was a strong quarter. I would add to it and say it was a quarter extending a string of strong quarters. And in July, Europe is showing positive flows and U.S. is in its 13th consecutive month of organic growth, its best streak since 2015. The headline is strong but so are the supporting metrics. Breadth and depth continue to strengthen. In the U.S., we are continuing a trend where the percentage of monthly inflowing funds is increasing and the percentage of monthly outflowing funds is decreasing. We are seeing particular strength in our large blend, emerging markets and China funds. In Europe, UCITS and thematics have been the star, but we are also seeing growth in industrial metals, copper and silver. And while there's been volatility in gold, we believe we have the best gold suite in the market and 3 of our top 10 flowing European funds year-to-date have been gold funds. We also see sustained momentum in our flows. In the quarter, nearly 90% of our U.S. funds saw AUM increase and nearly 1/3 hit new all-time AUM highs. Globally, we now have 34 funds with AUM over $500 million and 21 over $1 billion. Further, the quality of our global flows is also showing up in fees where we have seen average fees flat to up in both Europe and the U.S. this year. Next slide, please. The overall product suite is well positioned, and we continue to bolster it with new launches and enhancements to current funds. Year-to-date, we have launched 11 new funds. And consistent with previous guidance, we expect to launch roughly the same number over the remainder of the year. In terms of enhancements, last year, we made major improvements to our oil suite, and this year, we added ESG and enhanced risk screens across our European and U.S. funds. We also rolled out improvements across certain fixed income, commodities and alternatives products in the U.S. In all cases, these enhancements have paid dividends and highlight one of WisdomTree's differentiators as we seek to have the best structured and best-performing products in the market. We also continue to be excited about our growth in models. This past quarter, we launched ESG models and plus crypto models. Our pipeline remains strong. This continues to be a focus initiative, and we continue to be excited about the impact of models on overall flows. Another major focus is to not only invest in today's growth as we are clearly doing successfully but to also invest in tomorrow's growth. We continue to make progress with our digital assets initiatives, both organically and inorganically. In Q2, we launched our ETHW ETP in Europe, and we made investments into both Securrency and Onramp, 2 important digital assets partners. As Jono foreshadowed, we look forward to exciting announcements to come. And we're doing all of this while we improve process and workflows and increase efficiency. This has been another focus that is paying dividends as both our gross margins and operating margins are expanding. As I said last quarter, and we'll say again this quarter, we are executing well on all fronts. We have momentum, and we are generating strong organic growth. Let me now turn it over to Bryan to bring it all together with the numbers.

Thank you, Jarrett. Beginning on Slide 5, our AUM at June 30 was $73.9 billion, representing a record quarter and an increase of 6% versus the prior quarter, driven by positive market movements and net inflows. We generated in excess of $900 million of inflows during the quarter, spanning multiple asset classes, including our emerging markets, international equity, U.S. equity and fixed income products. Our commodities products saw mixed results with strong flows in copper and broad industrial metals, which were offset by outflows in gold, nickel and oil. As Jarrett had previously mentioned, our U.S.-listed ETFs have generated positive inflows for 12 consecutive months, and 21 of our ETFs have over $1 billion in AUM. Momentum continues into Q3 as our AUM currently stands at $74.3 billion, $400 million greater than where we ended the quarter. Inflows in July are in excess of $500 million or $2.7 billion year-to-date. Now turning to our financial results on Slide 6. Revenues were $78 million, an increase of 7% from the prior quarter due to our higher AUM. Adjusted net income was $16.8 million or $0.10 a share, up 34% from the prior quarter. This quarter, we recognized a noncash after-tax gain of $500,000 for our future gold commitment payments and $300,000 in other nonoperating items. Turning to margins on the next slide. We've experienced meaningful margin expansion with our operating income margin in excess of 30% and our gross margins in excess of 79% for the quarter. This expansion demonstrates the operating leverage of our business model. This is the second consecutive quarter that we've recognized gross margins in excess of 78%, a level we have not experienced in almost 3 years. We are updating our gross margin guidance, which we now expect to fall within a range of 78% to 79%, a 1% uptick from prior guidance. On the next slide, you will see the change in our expenses. Our operating expenses were down slightly from the first quarter. Higher third-party distribution fees, fund costs and marketing and sales expenses were offset by lower compensation expense. Our compensation expense was lower due to reduced stock-based compensation as well as the prior quarter including the impact of seasonal payroll taxes. Our full year compensation guidance remains at approximately $85 million, unchanged from what was communicated last quarter. Discretionary spending during the quarter was $11 million, and our full year guidance remains unchanged at $49 million as marketing and sales expenses are anticipated to increase during the second half of the year. Turning to the next slide. In June, we raised $150 million via a convertible note offering. The proceeds provide us with dry powder for organic and inorganic growth initiatives. It also positions us to pay down our pre-existing convertible notes at the opportune time. We raised these funds from a position of strength when our stock price was $6.90 per share and the transaction was EPS neutral. The notes are a 5-year term and were issued with a 3.25% coupon, 1 percentage point lower than our notes issued last year. The conversion price is $11.04, and we have the ability to redeem the notes at a stock price of $14.35. Please be mindful of the EPS consequences associated with our convertible notes. While our notes require principal to be paid in cash at maturity or upon conversion, incremental shares associated with an in-the-money conversion option are includable in the diluted EPS share count. Refer to the appendix for a computation of the 3 million shares added to our diluted share count associated with our convertible notes issued last year. The shareholder-friendly strong execution of our recent convertible note offering adds strength to our balance sheet and flexibility to our capital management program, which includes our quarterly dividend payment, share buybacks and debt management. In connection with this issuance, we'd repurchase 4.5 million shares of our common stock. And since the beginning of last year, we've repurchased 13.4 million shares for approximately $66 million. We may consider future opportunistic stock repurchases. However, that decision will be weighed against the desire to ultimately reduce our debt and strategically invest in growth. We believe our strong results reported today and the ongoing efficiency and scale of our business positions us well to continue delivering shareholder returns while investing in the business for the future. One other thing to note, we have hired a Head of Investor Relations, Jeremy Campbell, previously from Barclays, and we are looking forward to him starting with us next week. That's all I have. I will now turn the call over for questions.

[Operator Instructions] Our first question comes from Brennan Hawken with UBS.

So just was hoping for maybe an update on the dialogue around the U.S. Bitcoin filing and the tokenized gold product. How is that going? How is the experience in Europe adding to that discussion with the regulators? And is there anything you can say there? I know it might be a bit tricky.

Thank you. Sure. I'll take this one, Brennan. So we are in constructive conversations with the SEC. The delay at this stage of the approval process was not unexpected. And really, there is no change in our prior statements that we believe we'll be first or in the first wave of approvals for U.S. Bitcoin ETPs. And yes, our experience in Europe is very comforting to the regulators, and we believe we have the sort of best structured institutional quality -- cryptocurrency ETPs, both Bitcoin and Ethereum that have been launched in Europe. But I would say beyond that, I wouldn't lose sight of what I think is the bigger story, which is -- you touched on it with digital gold, but I would also add digital treasuries, that filing I think is very, very important and potentially even more exciting than a Bitcoin ETP filing. With that, we are evolving the '40 Act with our treasury filing. We are creating a new wrapper, call it regulated tokens, and our regulated tokens will be native to the blockchain, using Securrency's technology to really unlock the potential of the blockchain. Now regulated tokens take us really into what I would call -- I called it DeFi, but I think it's even more nuanced. I would call it responsible DeFi, which means regulated DeFi. And again, our communications with the SEC and the regulators, we are expecting and we are encouraged by their reaction. So we are expecting measured balanced regulations that doesn't stifle innovation, but instead unlocks blockchain-enabled financial services. We believe that DeFi will remove many financial intermediaries. It's going to be very disruptive to existing business models. And really where -- what I -- it's hard to -- we haven't been fully clear on our plans, and it's going to be more obvious what we are doing in regulated tokens and responsible DeFi in the coming quarters. But the big picture is investing, savings and payments are going to be on the same technology stack. And the -- it's hard for you to truly imagine the efficiencies that will come when investing in savings and payments. There are barriers, these gated walls, these different technologies that exist in today's environment. I think it's going to unlock in effect -- innovations. And -- so the benefits for WisdomTree, to be very clear, we are highly confident we're going to enhance the user experience. We're at a first-mover advantage to take market share, and it's going to lead to very strong economics and a diversified business model and diversified revenue streams. So a long answer, Brennan, to your question. I hope I covered it.

You gave me a little extra credit in there, actually, Jono. So I appreciate that, certainly, on the forefront. And it's something I've tried to explore the mechanics of you in the past, but I get that from a competitive perspective, you might not -- you might be limited in what you can say given how disruptive it is. So I appreciate that color and look forward to learning more about it. Shifting gears a bit. The models, could you guys -- these are increasingly important vehicles, particularly for the broker-sold channel. Can you talk about the penetration that you're seeing? Where are those -- maybe some statistics that you have around model penetration, the assets that you have currently in those models? What channels that's really resonating in? And what channels are driving that adoption? Any color on that front would be really helpful.

Jarrett, do you mind starting there? And I don't know maybe -- Jeremy, you might want to add at the end. But certainly, Jarrett, why don't you start?

Sure. Well, as we mention every quarter, it's a focus initiative for us, but it's not a recent one. We recognized many years ago that one of the most important macro trends in wealth management was the move to models, models adoption. So we've been focused on this for years, and we've organized ourselves in a way to support this and support adviser adoption. And really, there are multiple channels that we work on. We look at sort of the most obvious one, winning positions in existing adviser and home office models. But then a little less obvious, we also work with advisers to help them with customized models. And then as we've been talking about more recently, we work to build our own models for third-party model platforms like with Merrill Lynch, and very soon, we have another announcement of another major wirehouse win on the third-party model platform. So it's really a multi-tiered approach. Right now, we're not breaking out the flows, but the initiative is gaining more traction, and I think that's really evident in our flows. It certainly is contributing to, again, in the U.S., 13 consecutive months of net inflows. They're stickier assets. They're deeper client relationships. So we do look to disclose more data points at some point, probably for next year, but we're extremely happy with the results that we've got year-to-date.

I'll just add one quick point, Brennan, to that. You asked -- you started off asking about the crypto filings. And one of the things we highlighted is a plus crypto model that we did in conjunction, we mentioned the investment in Onramp, they're one of these platforms that are enabling direct access to crypto. And we have launched -- we did a press release announcing that plus crypto model series with 3 different models, and we're having real great early conversations with large RIAs, small RIAs, institutions, investors on that plus crypto model series. So we're even engaging there currently, which is great.

Our next question comes from Robert Lee with KBW.

This is [indiscernible] on for Rob. So in addition to the ETFs rolled out in Europe, could you talk about some other digital products you may roll out? I know you had talked about digital wallet. And then maybe also the time frame you are thinking about in terms of monetizing any new investments?

Okay. I'll start. So WisdomTree really -- if the category is broadly, and I think it's best described as responsible DeFi, and within DeFi, you have cryptocurrencies, which we have 2 in Europe, and there will be more in Europe; and when the U.S. approves, there'll be crypto exposures in the ETP format in the U.S. as well. And we're also bringing it to market through models and SMAs. So we're trying to bring crypto, which we view as an asset class, and we don't want to romanticize it, we don't want to villainize it, but we know it is of interest to investors, and we are participating and we are creating a leading voice there. In addition, within the DeFi category, you have blockchain-enabled financial services. There, we began with a strategic investment in Securrency about 2 years ago. We led their Series A and co-led their Series B. And we were very, very pleased to see how other institutional investors, most notably, State Street and U.S. Bank participated with us in Securrency Series B. Now we've made the investment because we thought that and what we're finding out is Securrency's technology is allowing us to get the benefit out of regulated tokens on the blockchain. So things like [ interoptability ] and peer-to-peer movement of exchange is what we're seeing and expecting. Within -- so we're using our blockchain investment in Securrency to launch that degree, not easily replicated, regulated tokens. We've spoken about gold treasuries and the dollar. And yes, there will be a wallet for economics and for business model purposes. We will give more color to that in coming quarters. We had given guidance that in the -- sort of towards the end of the fourth quarter or early in the first quarter, our gold tokens and treasury tokens will come to market. We're still holding to that. And so very exciting for us. And what I would just say is it's really incumbent on the team that's on this call today. So our new CFO, Bryan Edmiston; our less new but relatively new President and COO, Jarrett Lilien. As Bryan mentioned, we're hiring Jeremy Campbell to Head IR and be a part of our strategy team. But also Jessica Zaloom and Jeremy Schwartz, it's incumbent on this team over the coming quarters to expand our coverage as a public company beyond the institutional traditional asset management coverage group. It's good -- now that with the wallet, we're going to be going direct to retail more. So we're going to be leaning into more direct-to-retail IR, but also within the institutional coverage, expanding into fintech, the emerging category of DeFi, which I think are the coin basis of the world fall within, and then payments as well. And so it's going -- it will become more clear and obvious, the opportunity that we have and the economics and business model that we anticipate to achieve in -- at the end of the year, upcoming quarters, and certainly, be the focal point in 2022. So I hope that answers your question.

Great. That's very helpful. And maybe if I could just ask one more on flows. So well, recently, some of your non-U.S. flows have been a bit more skewed towards commodity and currency products. Could you talk a bit about how you're thinking about expanding your non-U.S. footprint sort of beyond that core franchise?

I think, Jeremy, maybe you could start there? And Jarrett, if you wanted to add on if Jeremy leaves anything off.

Great. So if you look at our European business, it started -- we acquired the ETF Securities business. They are a leader in commodities in Europe. And I think what's interesting is we do have a macro view. We've been saying from the U.S. even that we have this big view, inflation is coming, bonds with negative expected returns on the tips, bonds being negative 1% on inflation-adjusted yield. So we love the positioning in broad-based gold, commodities. All these inflation hedges are very, very valuable. What's interesting is our diversification today is actually way more diversified than we were at the start of the year where we had, call it, over 26% of our assets in commodities. Today, it's down to 21%. And I think some of that is -- well -- and in Europe, in particular, you're seeing broad flows to thematic. So things in cloud computing, artificial intelligence, battery solutions. We've launched new commodity funds for enhanced energy and ex agriculture. So some of the newest commodity funds have also seen some flows. But it is more diversified. And what's exciting is some of our latest vintages of filings in Europe, which are some of these thematics and other things beyond the commodities are resonating. But it's a very strong product set there, and we continue to add around those themes of growth, technology and innovative commodity solutions that are unique to the market.

Yes. And what I'd add to that, too, is it's been very interesting. The business in Europe started as being -- as you said, it was very much commodities driven. But we're leveraging that knowledge in a lot of the digital assets work that we do leverages the way that the commodity products work where it's really a core competency for us. So we get great benefit from it. It's a great business. We're a leader. We want to continue it. But at the same time, in the U.S., we've had great success away from commodities. And we're -- while we're looking to really import some of the valuable sort of IP we've got on the commodity side, we're also looking to export the IP that we've got on the equity side. So the fastest-growing area in Europe for this year has been away from commodities, and it's been more in the UCITS and the -- down there.

Our next question comes from Michael Cyprys with Morgan Stanley.

Just want to circle back to the European crypto products that you have. If you could just give us a little bit of an update on some of the distribution changes that you guys have been putting in place in terms of the evolution there, broadening out access across broader Europe, how that is going? And what are some of the actions you guys are taking?

I guess I'll start, but whether Jarrett or Jeremy, if I leave something off, please help. So we started with Bitcoin, we have added to it Ethereum. We've taken some -- and even though you have approvals in Europe, it is still market by market, every regulator has a different twist. And so it's not easy to get sort of the full distribution of Europe from the start. So since we made the first launches building on the Swiss Stock Exchange listing of Bitcoin, we have now cross-listed into Germany and opened it up to additional institutional and retail investors through some repositioning. So we're starting to broaden it out more broadly throughout all of Europe. We've also added Coinbase as a second custodian to Swissquote. So again, really best in best structure, most protected investor safety. And also from Switzerland, I guess, I've mentioned Frankfurt, so the German Exchange, so we're seeing a lot of engagement. The key to the uptake, though, will be the asset class going up, and it's been volatile mostly on the downside. It has recently had a bit of a bump up. But in the early part of the year, Bitcoin had outflows. Now we've reversed that, and they're strongly positive. But we had to reverse some early outflows there. And then Ethereum came out with a very quick launch and market adoption. So net-net, we're feeling very good, and there's more opportunity for additional filings or launches within Europe. And we're backing it up with what we always do, which is incredible research. And so I think many investors in Europe and institutional investors are finding us to be an important voice on how to work crypto broadly into their overall book of business. Jeremy or Jarrett, anything you want to add?

Nothing.

Maybe just as a follow-up, just curious how do you think about getting your crypto products on more platforms in Europe? And if you're able to kind of help quantify the number of platforms that it's available on today relative to, say, 3 months ago? And any sort of targets that you have for where you'd like that to be in 12 months?

Jarrett, do you have the -- or Jeremy, is there something more that you might say about that?

I would say it's largely the same as all new asset classes. It's sort of an education and really getting the demand from the platforms. I mean what we see in the U.S. is that there's a lot the clients that we're talking to and tied to our Onramp investment is people want to know what their clients are doing, and we've estimated maybe 15% to 20% of clients of RIAs are doing it away from them. And so we need to start understanding, a, the asset class, and often, the end clients to know more than the advisers. And so trying to provide education is at the starting point of what we're doing. So in the U.S., we're part of this Onramp academy, providing content. Europe is providing a lot of great research and coverage to their markets. And it's a long education process and the more that the platforms decide -- I mean you see that globally that more and more banks and -- are providing access to their customers, and we have some of those leading regulated products. So I think you'll see us competing for those well as the platforms want to add more choice there.

Well, what I was going to add was just it's good to have an opportunity to talk about things like the cross listings because they might not sound a lot, but they're really about broadening distribution every time, as Jono said, it's still a patchwork of regulators. But you're seeing -- and a big thing that helps with getting on different platforms is not only the cross listings, but seeing the regulators kind of open up a little more. And there was news today, I think, in Germany about now allowing for institutional accounts to allow up to 20% of assets to be in the cryptocurrency. So we've got to continue to just be in the right place and to allow it to happen. And then as Jerry said, work on the education, work with the regulators and just be there while this continues to open up.

And the only thing I'll add is what's interesting about cryptocurrencies or Bitcoin, it's almost been 100% retail, almost no institutional participation at all. And it's happened with retail without the support of their traditional financial service relationships. I think it just -- you saw recently that JPMorgan is now, which has been a strong critic historically of Bitcoin is now allowing all of their advisers to help their clients access crypto. So I think there's tremendous growth in the asset class of cryptocurrencies are still to come.

Our next question comes from Keith Housum with Northcoast Research.

Just to follow up a little more on the U.S. crypto experience. With the retail investor tending to be more faster money in and out, is that a risk to the ETF strategy? Or does it not matter if it's long term versus short term?

I'm going to answer this. Crypto was -- is perfect for ETFs or ETPs. What we do is make difficult things to trade easy, and the volatility, the way that investors can trade with such efficiency is just going to prove to be very, very compelling. And there will be a period where broad retail, I think, will prefer the SMAs and the ETPs as opposed to opening up their own wallet. There's certainly been a strong early adoption from the technologically sophisticated ecosystem that uses wallets for crypto. But as it goes more mainstream, I think there's going to be a big adoption curve due to the more traditional investor that WisdomTree serves who are ETPs.

Great. That's helpful. And Bryan, this is just a follow-up question or a second question for you -- revenue -- on the other income line. Other income has been going up pretty consistently quarter-over-quarter. Can you just remind us what's in the other income line? And what's the driver of that growth?

Yes. That line is capturing -- there's creation redemption fees in there. There's some licensing fees, and there's some other miscellaneous revenues. Some of it's transaction-based, some of it's AUM-based. I'd say the amount that we recognized this quarter should be a good proxy for what to expect going forward.

And I'm not showing any further questions at this time. I'd like to turn the call back to Jonathan Steinberg, the CEO, for any closing remarks.

Thank you, everybody. I just want to thank you for your interest in WisdomTree, and we will speak to you over the course of the quarter and next quarter. Have a great day. Bye, everybody.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.