WisdomTree Q1 2023 Earnings Call Transcript

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April 28, 2023

There are 12 speakers on the call.

Operator

Please note that this conference is being recorded. I will now turn the conference over to our host, Jessica Zaloom, Head of Corporate Communications. Thank you. You may begin.

Speaker 1

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 participants are

Speaker 2

in the same period of time.

Speaker 1

The recent factors section of the WisdomTree Annual Report on Form 10 ks for the year ended December 31, 2022. 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 CFO, Brian Edmonson.

Speaker 3

Thank you, Jessica, and welcome, everyone. Let me begin by sharing our results for the Q1 along with commentary on our participate in the prepared remarks before turning the call over to Jarrett and Jono for additional updates on our business. 1st quarter marks a strong start to the year, having generated $6,300,000,000 of net flows, the 3rd best quarter in our history. Flows were well balanced between our U. S.

Speaker 3

Listed and European products with assets gathered primarily in our fixed income, commodity, emerging markets and international equity It's now been 10 consecutive quarters generating positive flows and our 1st quarter flows translate into a 31% annualized organic flow growth rate. Our AUM ended the quarter at $90,700,000,000 participants are in the range of $1,000,000,000 in the Q4 of 2019. Our AUM currently stands at $91,200,000,000 slightly higher from the end of March, having benefited from further positive market movement. Next slide. Revenues were $82,000,000 an increase of 12% from the 4th quarter due to our higher average AUM.

Speaker 3

We also recognized higher other income, stemming from large flows into some of our European listed products. This revenue may change quarter over quarter depending upon AUM changes due to market movement or the velocity of flows arising from these products. Adjusted net income was $11,200,000 or $0.07 a share. Our non GAAP results exclude a non cash after tax gain of $20,600,000 for a future gold commitment payment as well as a loss of 9 in the

Speaker 2

Q1 of 2019. We are pleased with the progress

Speaker 3

we made in the Q1 of 2019. We are pleased with

Speaker 2

the progress we made in the quarter and we

Speaker 3

are pleased with the progress we made in the quarter and we made in the quarter. Next slide. Our adjusted operating expenses were up 4.7% for the quarter. The largest contributor was compensation as we experienced elevated seasonality in the amount of compensation we report in the Q1 due to payroll taxes, benefits and other items in connection with the payment of year end bonuses. Next slide.

Speaker 3

Now a few comments on our forecasted expense guidance. We are narrowing our forecasted compensation guidance by increasing the low end of our range Given the strong start to the year, we now estimate compensation to range from $100,000,000 to $106,000,000 the range considers variability in incentive compensation with drivers including the magnitude of our flows, our share price performance in relation to our peers, as well as revenue, operating income and operating margin performance. Given the strong start to the year, we anticipate trending toward the high end of this range. Our discretionary spending was $13,200,000 in the first quarter. We are reiterating our full year discretionary spending guidance of $56,000,000 to $59,000,000 as we anticipate an uptick in marketing spend.

Speaker 3

We reported a gross margin of 79.1 percent in the Q1. We are maintaining our gross margin guidance of 78% for the year, Given anticipated product launches, changes in other income, which may rise or fall depending upon the magnitude of flows of our European listed products and uncertain market conditions. Our contractual gold payment expense is forecasted to be $18,000,000 assuming gold prices remain flat at current levels. As a reminder, this expense is based on us paying 9,500 ounces of gold on an annual basis and is measured based upon monthly average gold prices. Our 3rd party distribution expense was $2,200,000 in the 1st quarter.

Speaker 3

We are currently trending toward the high end of our full year guidance of approximately $8,000,000 to $9,000,000 Our adjusted tax rate was 22 point 7% for the quarter and we are maintaining our tax rate guidance of 23%. In this past quarter, we refinanced The remaining outstanding notes will be settled in June of this year. Our interest cost for the 2nd quarter is estimated to be $4,100,000 Which should then reduce to $3,500,000 per quarter going forward. That's all I have. I will now turn the call over to Jared.

Speaker 4

Thanks, Brian, and good morning, everyone. Our strong results continue to showcase great breadth, depth and momentum. To give some perspective, Q2 last year was the 7th best quarter in company history. Q4 last year was our 5th best quarter in company history. Q1 this year was 6 $300,000,000 of net inflows was our 3rd best quarter and our 10th consecutive quarter of inflows.

Speaker 4

Last year, we had organic growth of 16%, best in class versus our peers. 2023's annualized organic growth rate now stands at 31% and continues to be best in class. Q1 generated net inflows in 6 of 8 of our major product categories. Our Managed Model are available in a turnkey manner at wirehouses, independent broker dealers and RIAs. In fact, our models are now available to over 65,000 financial advisors across the U.

Speaker 4

S. We ended Q1 with $90,700,000,000 in AUM, an all time high, and AUM now stands at nearly $92,000,000,000 We have an efficient and scalable model with incremental margins in our ETP and Models business well north of 50%. Continued AUM growth from both flows and normalizing markets will drive higher overall operating margins. Finally, Recent market turmoil has validated our methodical approach to tokenized assets and blockchain enabled finance. We are excited about the upcoming launch of WisdomTree Prime and its suite of blockchain enabled funds, are in the range of $1,000,000,000 in the quarter.

Speaker 4

In all, we continue to perform and drive positive momentum, And we remain excited about our business. And with that, let me turn it over to Jono.

Speaker 5

Thank you, Jarrett. I get asked a lot, what has changed at WisdomTree over the years? I think that our very strong Q1 really showcases what's different today. Back in 2015, participants. We we had our 3rd strongest quarter of net inflows, but the top two funds only represent 55% of the total, all participants took in more than $1,000,000,000 in the quarter, with nearly half of our 3.50 global products Generating positive inflows for the firm.

Speaker 5

Our European business had its best quarter In both inflows and revenues since the acquisition back in 2018, I am confident Our strong and steady organic growth will continue throughout 2023 and beyond on the back of our strong fund performance, are participating in our ever expanding model franchise. We're also on the precipice of launching our suite of digital products and solutions that cements WisdomTree as a leader Citi recently published a report in March I'm pleased to report that our wallet, WisdomTree Prime, remains on track for an initial launch in App participate in our Q2, where customers will be able to invest across our suite of 9 blockchain enabled funds, our gold and dollar tokens And direct crypto like Bitcoin and Ether. Over the past several years, we have developed a market leading set of capabilities in are participating in the organization and blockchain enabled finance as others are just getting up to speed. With WisdomTree Prime, I believe we have one of the great early use cases for these new technologies. All participants are in the Q2 launch is not the end of the line, but it's really just the beginning.

Speaker 5

Throughout 2023, we will continually enhance WisdomTree Prime's platform with new products and features that furthers its appeal. The platform is iterative, not static, and the optionality for future innovation is boundless. WisdomTree is on the right track. I expect our net flows momentum to continue, Driven by our strong product lineup and growth in our model franchise, and I am excited for all of you to try out WisdomTree Prime platform With that, operator, can you turn the call over to our Head of Investor Relations, Jeremy Campbell, to take some questions from our shareholders.

Speaker 6

All right. Thanks, Jono, and good morning, everybody. Before I turn the call over are ready to take questions. Just going to ask to keep your questions focused on the quarterly results in our business generally as we will not be discussing proxy related matters. The first question from our retail shareholders in the SAID platform is directed toward Jeremy Schwartz, our Global Chief Investment Officer.

Speaker 6

And the question is, how has WisdomTree capitalized on a market environment where investors are looking for yield and where do you see advisors allocating within fixed income today?

Speaker 7

Great question, Jeremy. Thanks for that. Clearly, one of the big successes at the confirm has been the growth of our floating rate treasury ETF, USFR, and the treasury only started issuing those bonds Less than a decade ago and there was really not a lot of interest at the start because there weren't any rates, but now with 2 hiking cycles in the books, This has been the center stage of the fixed income market and clearly USFR is benefiting. But as far as further allocations beyond that, we have a lot of interest, in particularly with the inverted yield curve still a lot of interest in the short duration segment, but we've also seen the recent success and launch of our participants are in the range of $1,000,000,000 of come to bring in over $1,000,000,000 of inflows in AUM just this year. And this is a great core solution we can offer For that total market bond exposure combining both high yield and core bonds, we continue to see interest in our High yield fundamental proprietary indexes that offer over 8% yield today, something we find to add a lot of value participants and that enhanced yield core combined with our other enhanced yield give us a real robust solution for when people want to add more duration back to portfolios.

Speaker 7

Beyond fixed income, the question asked about yield and certainly High yield strategies, particularly international high yields for developed and emerging markets are starting to see a lot of inflows for us this year, over about 500,000,000 in emerging markets and high dividend international. And really what we say is having a solution for All types of market environment has been our long stated goal and what we see this year as Jono has emphasized is more robust diversification and we've had really ever before.

Speaker 6

Great. And then the second question, Jeremy, I'm going to ask you to stay on and give some color here and then maybe our President and COO, Jared Lilling, can add some color as well. But the second question is, If the Fed pauses hikes or begins to cut rates, what do you think will happen to flows in our U. S. Floating rate ETF?

Speaker 6

And how much if any of a headwind do you think that presents the total flow profile for WisdomTree?

Speaker 7

All participants Well, clearly, it's been a great success and rising rates might be causing a segment to use it tactically for managing those fixed income portfolios. And but year to date has taken in $2,000,000,000 and in the market, the futures markets are starting to pencil in Clearly another hike next week and then a pause in some cuts over the next 12 months, but still bringing yields to above around a 3% level 12 months from now in those futures markets. The Fed keeps saying they're going to stay higher for longer, but we shall see how that all develops, participants Well, I'm actually think that it could hold in robustly. There still might be opportunities to grow use cases for USFR beyond how it's been used I'll participate. Historically, in many ways, the funds competing for ultra short duration assets like cash deposits participants are in banks.

Speaker 7

And what you see this year is a huge surge to flows in money market funds, not necessarily because of fears of are in the safety of deposits in banks, but because the banks are paying really appropriate interest rates and our investment team started talking about the term And so higher yields, higher rates over those traditional checking and spending counts, I think that's going to be with us for some time even during a rate are in a cut cycle. So I think USFR still can gain market share there. Now longer term, WisdomTree Prime is all about making easier to spend off exposures like this, this type of floating rate treasury vehicle or other treasuries and so helping expand use cases both for USFR and the digital offering Is what we look forward to extend the recent success.

Speaker 4

Yes. And maybe just adding to that Some do view USFR as a fixed income product. Other view it as smart Cash, a cash alternative as Jeremy was saying, and this is really important because the average advisor allocate roughly 8% to 18% to cash depending on the market. So either way, whether fixed income or smart cash alternative. It's a core holding, which makes it sticky and a long term part of any portfolio.

Speaker 4

In addition, when money moves in and out of the product, we being WisdomTree are in the conversation as to where the money moves And we have a broad suite of products that can now be part of that conversation. And Q1 is really proof of all of this. When we look at last year, USFR was a major contributor to our flows. As Jeremy said, we've had some inflows this year, but about half the pace as a year ago. Yet Q1 even with that slowdown was the 3rd best quarter in our 17 year history.

Speaker 4

So what you saw was that USFR remains are in the same store. And discussions and flows shifted to other funds in our product suite, which was good. All participants So bottom line, USFR, it remains an important part of our product arsenal, but also just jumping on another thing that Jeremy mentioned. Participants. Digital USFR is an exciting part of our coming WisdomTree Prime launch.

Speaker 4

And just As it's a core holding for advisors, we expect it will be a core holding for our WisdomTree Prime Wallet holders, Where experience tells us that cash holdings can range between 15% 30%. So again, it's core to us in Our ETF business, we also expect it to be a very good and important and core part of our WisdomTree Prime offering.

Speaker 6

Thanks for the color, Jared. Jeremy, you're a popular man today because we have another products related from our retail shareholders. The final question from the Safe platform is, how is your product development strategy evolved over the past few years and what are WisdomTree's advantages?

Speaker 7

We will be talking product on my team. And our product strategy focuses on innovation and value add Whether through the proprietary indexing or unique exposures and betas of the various asset classes, really a core advantage with Roots To our inception was building our own intellectual property. Many of the competing firms license 3rd party IP, but having a strong team, investment team that can build indexes across equities, fixed income, it gives us unique perspective on the markets and owning the IP participants create this positive feedback loop for marketing and distribution, which can get supported by great content and thought leadership, are in the range of innovative tools that showcases all of our investment stories. I'd say over the recent years, we're seeing Those investment insights further compound with the model portfolio work that we've been talking about, which gives us another unique vantage point to see our product lineup that we think about holistically I'll participate. For solutions in that model offering, what can make it more robust?

Speaker 7

It's definitely leading to even further ideas from a product standpoint. I'll participate. And I might say finally, based on this track record of building innovative solutions, we're seeing clients and industry participants come to us with more and more flow of new ideas and our team evaluates those very carefully. It's great to get direct feedback on what clients participants find most interesting and valuable and a lot of our best innovations have come from this type of engagement we have with clients. So In short, there's no shortage of new ideas, both product and structure innovation has been a key strength of WisdomTree.

Speaker 6

Great. Thanks, Jeremy. Operator, please feel free to open up the Q and A to our analyst community.

Operator

Thank you. Our first question comes from Brennan Hawken with UBS.

Speaker 8

Good morning. Thanks for taking my questions. So you're on the verge of launching Prime. So we're just interested in hearing what your latest plans, expectations, costs and How you define success for this platform in the next few years?

Speaker 5

Will, maybe you'll Will Peck, Who runs digital asset at WisdomTree maybe is on the call. Will, why don't you start? And then Brian, there was a question about cost, so maybe you could just finish off after that.

Speaker 9

Yes. Thank you, Jono, and good morning, everyone. So as we previously said, we're exiting beta quarter rolling out in many, but not all states in the U. S. As well.

Speaker 9

Really what we've been doing since we've been in beta is just getting a lot of feedback from early users, kind of implementing that in terms of the different changes that we might make like the app interface and just doing operational testing overall. So that's gone quite well. We're very happy with it. Excited to be on track to be rolling out more in Q2. I'd say going forward, this year is all about kind of engagement with customers.

Speaker 9

So people coming in, seeing how they're using it, are using it for more and more stuff as well as adding more and more features, right? So unlike kind of an ETF that you put out with this, are not a finished product on day 1. It's a constantly iterative changing thing that we want to keep improving and adding more and more features. So all participants are really about learning from our customers initially this year and then adding more and more features. And then over time, we're going to be disclosing more and more KPIs as well in terms of success, are

Speaker 2

participating in the quarter.

Speaker 3

And then on the cost side, participants. The digital spend, it's embedded in our comp and discretionary spending guidance. I think from recollection, we were at $11,000,000 to $12,000,000 last year. High teens is the number this year as we launch Prime. We've been disciplined in our spending.

Speaker 3

If we're going to see a significant uptick in the future, it would be because we're seeing success participate on the platform.

Speaker 8

Okay. So that high teens number is the right way to think about it unless participants. There is a material amount of momentum behind the product. Is that fair?

Speaker 3

Yes, that's fair.

Operator

Correct.

Speaker 5

Okay, great. I would just add that because of the rollout really starting in Q2, but rolling out through are in the range of the year. Unlikely that there will be any change in guidance towards the upside this year.

Speaker 8

Okay. Thanks for that. And then, Sorry, can you hear me? Yes. I can hear you.

Speaker 8

Great, excellent. Thanks. What contribution from Modelcorp participants in that channel. Did you guys see here inflows in the quarter? And are you continuing to see that

Speaker 5

Jared, why don't you start with the model answer?

Speaker 4

Yes. Models continue to be a major part of the story for the quarter. Participants continue to contribute where we've been indicating they've been about 12% of flows, but that number participants have access to our platform, but that number is increasing. And then as we've spoken about on past calls, there are a number of sort of steps that you need to take. 1 is establishing the partnership and that can be a long lead time of getting on to a wirehouse platform, for instance, in a meaningful way.

Speaker 4

That whole process could take a year, but once you get there, then the real work begins because now you've got to go out can really win the hearts and minds of the actual advisors. So what we've seen in all of last year, but also what we've seen so far in are having more success on those initial steps, adding more partners, but we're also then having success on that in the second step, which is getting more exposure to more advisors and more individual advisors using the models. So momentum there is also fantastic. Sticky assets, we talk about it all the time. So that is still going extremely well, early innings and growing in significance.

Speaker 7

That's great. And just to

Speaker 8

sort of follow-up there, given that continued momentum, what do you think is reasonable to expect maybe even a range for that 12% to move to over the next couple of years?

Speaker 4

We haven't gone out with any kind of forecast as we never do really forecasting any of our flows, but I would just say that, That number should be increasing. We are looking at, as models become a more significant part of the business, participants What would be appropriate additional metrics, which we'll be looking to add at some point, but Right now, all I can say is it's still contributing, as we've been indicating And that's a growing number and you should expect it to continue to grow.

Speaker 8

Okay, fair enough. Thanks for taking my questions.

Operator

Ready for questions. Our next question comes from Michael Brown with KBW. Please state your question.

Speaker 10

Hi, good morning. This is Aidan Hall filling in for Michael Brown. Just had a follow-up on WisdomTree Prime and the announced acquisition of are in

Speaker 5

the U. S. Can you talk about

Speaker 10

the strategic rationale behind this? And Should we be thinking about additional bolt on acquisitions for enhanced capabilities going forward?

Speaker 5

Will, why don't you start again?

Speaker 9

Yes. And you cut out a little bit there for me, but I think you were asking about the purchase of currency transfers, now WisdomTree transfers. So this was really just about bringing an operational function in house, frankly, one that we kind of thought from the start that we might want to all currency's core competency is kind of licensing software. This was kind of an enabler for them, but it was really more of a core function in terms of what we needed to do. So just made sense for both parties in terms of bringing this function in house.

Speaker 9

It was a small acquisition, like financially immaterial, I'll but just strengthens what we've got going on and we added some new capabilities for there. In the future, we can explore other ways to kind of monetize that as well. But Right now, it's really just focused on supporting the digital funds that we've got going on.

Speaker 10

Great. And then just switching gears a little bit, Embedded in your gross margin guidance is the expectation for product launches. Can you just highlight some of the products you're expecting to bring to market this year and how that is really adjusting to meet client demand?

Speaker 5

So we'll turn it over to Jeremy, but we don't flag for competitive reasons product launches in advance. But Jeremy maybe there's some broad ways to describe it. I don't know. Why don't you take a shot?

Speaker 7

Yes. I'll just say what we've been doing of late We still have conviction and so that's a good you'll keep track with the filings of what we plan to do. You're seeing Diversification, you're seeing us do more in fixed income. You see with that enhanced yield voyage strategy we talked about, that's just a great additional core are in the building block. You saw us do more with option strategies last year.

Speaker 7

You saw our target range fund, which is up to about $50,000,000 all participants are with a unique index from Volos that should provide downside protection. We have 2 option funds today. I think we have a lot of interest in that space. You see us in thematics. We've been growing our megatrend family And our European team has been leading some of the inflows, but things like artificial intelligence, which is a few 100,000,000 in Europe And doing very, very nicely this year.

Speaker 7

We brought that to the U. S. That's starting to take off a bit. And you could see us doing more in some of those Growth areas of the market since we started with value, you've seen us launch some more interesting growth strategies of late and the MegaTrend family being part of that. So I think those are three areas.

Speaker 7

And generally, we like to add diversifiers to what we're doing. So you look for interesting diversifiers, traditional stocks and bonds, and we'll continue to do that as well.

Operator

Our next question comes from Michael Cyprys with Morgan Stanley. Please state your question.

Speaker 11

Hi, this is Michelle Foley on for Mike. My question is about the distribution of WisdomTree Prime. How Have you been trying to sell this to clients? Like what's the approach here and what actions are you taking?

Speaker 5

Will, again, you want to start?

Speaker 9

I'll start and I'll start kind of distribution for WisdomTree Prime to retail customers. So as we said in the past, we're focused on lean marketing. So that's really digital channels finding out what's working and then continuing to press the advantage where we find it. 2 areas where we're finding kind of initial early interest that we've spoken about before. One is around gold.

Speaker 9

I mean there's actually an article in the journal recently about a bunch of crypto investors now Googling how to buy gold. I mean that's perfect for us and it's where we're actually seeing a lot of initial success participate in the second is around cash management yield, right? Spoken about it a lot on this call. A digital fund for floating rate notes has a great yield right now, are having a good user experience, kind of being able to connect that more closer to payments. I mean, that's a killer product feature and it's something we're be going to be marketing on.

Speaker 9

So getting to those self directed retail investors kind of with those two messages as well as some others are some areas we're going to start right now, but as I said, lean marketing. So I'll as well. So those might not be as kind of clear cut or well baked, but I think we're seeing every day that tokenization is an increasing topic amongst financial services firms. We just joined the Avalanche Testnet, Spruce with some other big names in terms of testing out some different ideas there. So in terms of the platform that we've created, which WisdomTree Prime is are pursuing those more in the

Speaker 2

future as well. Great. Thank you.

Speaker 11

And just as a follow-up, the regulatory backdrop seems to be getting a bit tougher for digital assets with some of the actions that have been taken by the SEC. So just curious what your views are on that and to what extent that might impact the strategy?

Speaker 9

Tougher for some, but not necessarily for us. I mean, we from the start have not been surprised by some of the crackdowns that we've seen. Participants are kind of specific instances, but one of our core competencies compared to especially some of the early movers The startups in the space are comfortable dealing with regulators and regulation. And that's proved to be kind of a key value add for us right now, a strategic differentiator. So we're not phased by this at all and we're looking forward to continuing to engage with the regulators just like we did to get these products effective in the first place.

Speaker 9

So

Operator

Thank you. There are no further questions at are in the same time. I will now hand it back to WisdomTree's CEO, Jonathan Steinberg, for closing remarks.

Speaker 5

No more remarks. Thank you everybody for your attention today. We'll speak to you next quarter.

Operator

Thank you. This concludes today's conference. All parties may disconnect.

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