WisdomTree, Inc. (NYSE:WT) Q3 2023 Earnings Call Transcript
WisdomTree, Inc. (NYSE:WT) Q3 2023 Earnings Call Transcript October 27, 2023
WisdomTree, Inc. misses on earnings expectations. Reported EPS is $0.0733 EPS, expectations were $0.1.
Operator: Greetings and welcome to WisdomTree Third Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to turn it over to Jessica Zaloom, Head of Corporate Communications to begin. Thank you.
Jessica Zaloom: 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, 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 CFO, Bryan Edmiston.
Bryan Edmiston: Thank you, Jessica, and good morning, everyone. We ended the quarter with $93.7 billion of AUM, unchanged from the prior quarter as our inflows served to offset unfavorable market conditions. We generated $2 million of inflows in the quarter, which were broad and diverse across seven of our eight product categories. Diversification is driving year-to-date average fee capture on our flows upward, which was more than two times greater than our fee capture in the prior year. Our flows are strong and stable as it has been now been 12 consecutive quarters of flowing positive. Our year-to-date flows through September of $10.7 billion translates into a 17% annualized organic flow growth rate. Our AUM currently stands at 94.1 billion slightly higher from the end of September, having benefited from further inflows.
Next slide. Revenues were 90.4 million, an increase of 5.5% from the second quarter and up 24.9% versus the prior year quarter. Our revenues are growing and our margins are expanding. Our operating margin in the third quarter was 29.5% as compared to 20.5% in the third quarter of last year. Our margins have benefited by the settlement of our contractual gold payment obligation last quarter which has been a meaningful contributor to this expansion, but not the only contributor. When excluding the impact of the gold royalty buyout, our margins have expanded 330 basis points versus the third quarter of last year, demonstrating the scalability of our business model. This margin expansion is translating into earnings per share growth. Our adjusted net income was $18 million or $0.10 a share.
Next slide. Our adjusted operating expenses were up 1.7% for the quarter. This was driven primarily by higher incentive compensation as well as higher third-party distribution fees payable to our marketing agent in Latin America, as we have experienced roughly 70% AUM growth in the region since the beginning of the year. These increases were partly offset by lower contractual gold payments and marketing expenses. Next slide. Now a few comments on our forecasted expense guidance. Variability in our compensation expenses driven by our performance-based compensation plans, which consider our organic growth, revenue growth, margin expansion and our share price performance in relation to our peers whereby we currently rank number one out of 13. Given our performance to date, we anticipate our compensation expense to be near the high-end of our guidance range.
We anticipate our discretionary spending to be near the high-end of our guidance range as well, having recognized $43.4 million in discretionary spending year-to-date and forecasted Q4 seasonal spend. We reported a gross margin of 80.1% in the third quarter, and we are updating our gross margin guidance to be between 79% and 80% from 79%, which we believe should be sustainable at current AUM levels. Our forecasted third-party distribution expense is being updated to be between $9 million and $10 million driven largely by the growth we are experiencing in Latin America. And our interest income is trending higher given the magnitude of our invested assets and higher interest rates. We now anticipate our interest income to between $3.5 million to $4 million for the year.
That's all I have. I will now turn the call over to Jarrett.
Jarrett Lilien: Thank you, Bryan, and good morning, everyone. Our strategy continues to be clear and straight forward, which is to deliver industry leading organic growth to expand our operating margins, and to lead the industry's evolution in tokenized assets and blockchain enabled finance. In each quarter, we consistently deliver results against this strategy as we did again this quarter. In the third quarter, we generated nearly $2 billion of net inflows, our 12th consecutive quarter of net inflows. Year-to-date, we've now generated approximately $11 billion of net inflows, representing a 17% annualized organic growth rate, which continues to be best-in-class among all publicly traded U.S. asset managers. And we have confidence that our three years of momentum will continue.
Our existing clients continue to grow in average size, while also utilizing more of our products and services. In other words, our client relationships are becoming larger, broader, and deeper. In addition, we are adding new clients at a double-digit rate. Taken together, we have multiple growth cylinders working together. A great example is our experience with our U.S. Floating Rate Treasury Fund, USFR. While driving strong flows, it is also driving new customers. Roughly 40% of advisors buying USFR are our first time users of WisdomTree products and services, and we are already seeing a development path where these advisors are expanding their relationship with the WisdomTree into additional products like our quality dividend growth front and our managed model solutions.
Speaking of models, while they are still in the early innings of growth, they continue to be one of the largest and longest growth runways we have. Here our strategy is two-fold. First, it is to continue to build a large group of recurring model users, at large distribution partners. And second is to pursue the RAA and an independent broker dealer channel with a more customized model approach that will allow us to manage a majority of those firms' assets. Today, our models are available on some of the largest distribution platforms in U.S. wealth management including Merrill, Morgan Stanley, LPL, Kestra, Seterra, and Schwab in total over 65,000 advisors have access to our models at these firms, and there is a long growth runway ahead. At Merrill, for example, our model assets are now over $0.5 billion with approximately 850 advisors using at least one of our seven available models and nearly 60% of those advisors having more than one client in our models.
Both the AUM and the number of advisors had doubled from this time last year. Likewise, we launched managed models at LPL earlier this summer. And as of the end of September, while from a lower base, we have already doubled our model assets from June levels. Once again, our client relationships are becoming larger, broader and deeper. Outside the very large distribution networks, our strategy is to provide a bespoke models experience for the broad RAA and independent broker dealer marketplace. About a year ago, we have launched our portfolio and grow solutions effort that offers a custom model experience together with automated trading and rebalancing services, which is essentially an easy button for implementation of WisdomTree's managed models.
To-date, we have on-boarded eight clients ranging in size from a $100 billion to a $1 billion in assets. But more importantly, we have a pipeline of over 60 RAAs and IBDs, representing potential partners with over $60 billion in assets under management. Overall, WisdomTree is well positioned with a large distribution platform and has a differentiated approach to the RAA and IBD market. We continue to score wins in the model space and have a clear and strong line of sight for continued organic growth. And given our high incremental margins, all of this growth continues and will continue to grow our operating margins. Third quarter saw operating margins expand by 900 basis points versus the year ago period. As Brian has highlighted, roughly 570 basis points of this increase was driven by management proactively resolving our gold obligation, while another 330 basis points was driven by enhanced operational efficiencies and organic growth on top of our scalable operating model.
Meanwhile, we continue to make significant and steady progress with WisdomTree Prime with a growing product and feature set now available in 33 states. All-in-all, these are exciting times at WisdomTree as we continue to deliver industry leading organic growth. We continue to expand our operating margins, and we continue to lead the industry's evolution in tokenized assets and blockchain-enabled finance. With that, let me now turn it over to Jona.
Jonathan Steinberg: Thank you, Jarrett, and good morning, everyone. I'm very proud of WisdomTree's ability to execute on our goals to drive positive results. As Bryan and Jarrett discussed earlier, we have strong momentum in our business today and high confidence that the strength will persist for the coming quarters and years. Our foundation has never been stronger with approximately $95 billion in assets under management. We've achieved asset diversification also geographic diversification. Our models and solutions business is world class, as we've been added to almost every major platform in just the last a few years. Our integration of technology into every aspect of our business is why WisdomTree can do more on less resources than any other asset manager.
All of this against the backdrop of over 11 billion in year-to-date inflows on top of last year's over 12 billion in inflows. It has truly been a team effort and I'm very proud of WisdomTree's workforce and our unique culture. It is from this very strong foundation. We've been able to leverage the skill set of our entire company from product, legal, research, ops, tech, et cetera, alongside a dedicated and focused digital asset team to cement our first mover status in tokenization and launch of WisdomTree Prime. Starting with WisdomTree Prime, last quarter, we announced the launch of our mobile app and mentioned that the goals for the remainder of 2023 were; one, to increase the app's availability across the United States, two; enhance the product and features of the platform; three, continue to test and iterate our marketing messaging for low cost, IROI customer acquisition; and four, explore strategic partnerships and other business development efforts.
I'm pleased to report that we've made progress on all four areas since our last call. On the geographic front, recall that the initial launch of our wallet was in 21 states. In the past month, we expanded the availability to 12 additional states. WisdomTree Prime is now available to 60% of the U.S. population and we are on track to have the platform available to substantially all of the U.S. population by year-end. We are also hard at work at continuing to enhance the products and features of the platform. I'm happy to announce that we are currently tracking to have new products available to customers later this quarter including a digital money market fund as well as the launch of three new WisdomTree Siegel branded digital funds, where customers can deploy a model like experience with just one click.
From here, expect new features and capabilities like peer-to-peer transfers and payments in coming quarters. On the marketing side, we believe it's prudent to limit marketing spend until we are available across most of the U.S. and we have our initial full suite of product features. To us, this is a better use of capital. That said, we are seeing encouraging early signs on both our tactical spend and our messaging. The acquisition cost of each app download is in line with our modeled expectations. The key message is for our user acquisitions are tracking in line with our beta tests. And we remain laser focused on high ROI customer acquisition. As our marketing budget expands going into 2024, the spend will be measured thoughtful and under control.
Every additional state added or feature enhancement or product launched has generated interest in what WisdomTree is doing from larger players in the financial and technology industries. So, in addition to our bullish outlook on the organic growth prospects of Prime, we are having many conversations around B2B and B2B2C applications for both our platform and product suite that could unlock additional tokenization revenue streams in the future. WisdomTree has put in a lot of hard work to cement our leadership status in tokenization as the only provider with a broad suite of products. But the market is starting to wake up to the opportunities in tokenization, with lots of exploration and early positioning in the space. This is not only a validation of our tokenization strategy, but also underscores WisdomTree's early mover position.
As I've mentioned in recent quarters, it's very exciting times for WisdomTree. We have best-in-class organic growth, a meaningful margin expansion story, and meaningful leverage to the secular shift towards tokenization. Thank you. And now, Operator, will you please turn the call over to Jeremy Campbell, our Head of Investor Relations, to field some questions from our shareholders?
A - Jeremy Campbell: All right. Thanks, Jona, and good morning, everybody. Similar to prior quarters, we're going to take some questions from the Say platform from our retail shareholders. The first one I'm going to direct to Jeremy Schwartz, our Chief Investment Officer. Jeremy, the question is the fed has tightened a lot in a short period of time. What's the house view on the rate cycle from here and what do you think it means for total net flows across our fund lineup?
Jeremy Schwartz: Well, thanks, Jeremy. And that is a great question, very relevant to today's markets. The recent data have all come in very, very strong and our senior economist has raised an extended forecast for interest rates over, not just the coming quarters but years. And we can see long-term interest rates settling at much higher levels than we thought even just six months ago. So, we're upgrading our outlook for rates. We believe we are among the very best-positioned asset managers for this dynamic. USFR, our floating rate treasury TF with $18 billion of assets, has proven its utility remains one of the best and highest-yielding treasuries in the market because of the inverted yield curve. And you have seen a lot of money go from money market funds, other treasury short duration products have all benefited, but there is still $1 trillion of cash and banks earning meter rates.
And so we educate clients every day about the opportunity for this floating rate treasury ETF versus other cash management solutions, but we have a broad lineup of ETFs that have compelling value propositions for these rate dynamics. Just this year, we launched our enhanced yield universal fund with Voya that's attracted over a $1 billion in assets in less than 12 months. And we have longer-term solutions, core bond solutions, high yield ETFs, mortgage related funds that are becoming better opportunity as these yields rise. And our fixed income model portfolios have delivered very consistent alpha and relative performance versus their benchmarks. So we see really a broad, diversified mix of inflows coming from other yield opportunities ahead.
And now, of course, we have things beyond fixed income. And you could see, even just this year, how well-diversified the flows have been. We have got over 24 products with a $100 million of inflows this year, ranging from the commodities in Europe, thematics like artificial intelligence that have been working both in the Europe and in U.S. And I would say the highlight of the year and what I see the biggest franchise ahead has been our quality dividend growth franchise, which is taken in $300 billion globally this year, a very exciting cross section of funds covering many different regions, but working here in the U.S. and in Europe. And the simplicity of that story, buying high-quality stocks, high profitability stocks resonates each of these markets, and we think it's well-positioned for further flows, ahead.
To summarize, I just say, we already heard the breadth and depth of the inflows have very diversified opportunities ahead.
Jeremy Campbell: For the second question, I have our Head of Digital Assets at Will Peck answer it. Will the question is, and the workings are a little bit unclear, but heart of the question is around evolving regulatory regime for both crypto and blockchain tech. So, where does WisdomTree see the regulatory regime overtime? And how does that fit within our crypto and tokenization plans?
Will Peck: Thanks, Jeremy, and good morning, everyone. So I guess I will answer this by saying, I think there is a lot that can be done within existing rules and relations here in the U.S. I mean, sure, there is some things you can point to that you wish you would have more clarity on. And I think some of the big issues of weight in the U.S. like -- aren't really a part of our business model here in the U.S. On crypto and blockchain impacts a lot of different regulators, state, federal, securities, commodities, banking, AML. And in the U.S., it's not just one body that makes decisions. So, I think things will move at different paces. But I think the ability to innovate within this environment has been a major advantage for WisdomTree as a company, at this current moment in time. So, it is actually an advantage for us and we are looking forward to continuing to press it going forward.
Jeremy Campbell: Great. And we will stay on deck for me here because, the last question we are going to take from a retail shareholder base is, probably one you have heard quite a bit lately without the news flow. But is there any update on the Bitcoin ETF?
Will Peck: Well, it does seem like there has been some exciting momentum. It is certainly been in the news a lot. You have seen a lot of competitors and others do things here. We remain very focused on a spot Bitcoin ETF. We think it is the best execution for the asset class in the traditional channels in the U.S. And we are looking forward to continue engaging with regulators on it. he big points I make though is that, unlike a lot of other financial services firms in the U.S., WisdomTree does actually have Bitcoin product in the market today, that's both in Europe where we have got a leading set of ETPs that have had positive inflows this year, but also it's in the U.S. for retail customers with WisdomTree Prime. We're leveraging the same cold storage custody model that an ETF would use.
We just think we're doing it with more utility in the wallet. So, Bitcoin in the U.S. for retail investors it's something that we already offer today. We think it's actually a very good experience within WisdomTree Prime. And we're looking forward to continuing to press that and hone in on that in marketing messaging going forward.
Jeremy Campbell: Operator, that's all we have from the Say platform for this quarter. So please feel free to open up the line from the sell-side community.
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