Q3 2019 Earnings Call
Thank you, Jason and good morning, everyone.
Let me walk through the important items for the quarter and then turn the call over to Jono before we open the lines for QNX.
So beginning on slide three.
Assets under management were little change that 60 billion as modest market appreciation was offset by net outflows.
We had $670 million net outflows in the quarter driven by continued outflows from de exchange hedge and a large client outflow of roughly 900 million from U.S. so far.
Excluding HEDJ and DXJ Jay flows were roughly breakeven.
Some highlights for our flows this quarter.
In emerging markets the industry overall experienced outflows for the second straight quarter. However, we continue to see demand across our end product suite in particular are small cap products and X state owned enterprise fund excess so we which has now crossed 500 million assets.
On the domestic equity side, we continue to generate consistent inflows with the third quarter, representing the eighth consecutive quarter of inflows.
We continued to have success scaling our domestic fixed income platform from just under 1 billion at the beginning of 2018 to almost 4 billion today.
Our yield enhanced aggregate bond fund Aggie generated inflows of over 200 million the third consecutive quarter of inflows.
Hmm of roughly 1 billion at an impressive track record. The fund is very well positioned for the current market environment.
And lastly, we continue to generate strong flows into our commodity based products, which was led by the strength of our European gold and other precious metals, which generated inflows of 734 million in the quarter across gold silver and platinum.
Our year do they flow market share remains strong at roughly 26% for gold and 65% for other precious metals.
Continuing with Europe as you can see on the next slide.
This quarter, we completed our rebranding and product rationalization post P.T.F. securities transaction last year.
We closed 192 products, representing a net 125 million or they you win and renamed all the funds under the Wisdomtree branded.
With this now complete as you can see in the chart on this slide we now offer one of the most innovative ranges of eats yes in Europe and are well positioned to grow and meet our overall platform.
Now turning to the financial results on slide five.
Revenues were just under 68 million up 2% for the quarter driven by higher average Hey, you win partially offset by lower revenue capture due to a you want a mix shift.
On a GAAP basis, we had net income of 4.2 million or two cents per share.
Excluding non operating items adjusted net income was 10.6 million or six cents a share.
The primary difference between GAAP and adjusted results. This quarter was a 6 million after tax noncash charge for our future gold commitment payments, reflecting the increase in gold prices during the quarter.
Turning to margins on the next slide.
Our adjusted operating margin was 24% for the quarter, which was up nearly four percentage points from the second quarter.
Gross margins for our U.S. segment were 80.8% up 50 basis points sequentially, reflecting the benefit of our previously discussed the vendor renegotiations.
We continue to expect gross margins in the U.S. of 80% to 81% at similar asset levels.
Gross margins for our international segment expanded over three percentage points sequentially driven by the growth an average you win as well as the benefit of vendor renegotiations.
We continue to expect gross margins in the international segment of 70% to 72% a closer to the higher end of the range.
On the next slide you can see the change in our expenses.
For the U.S. segment operating expenses remained well controlled.
Compensation is trending within the full year guidance range, we gave at the beginning of the year and barring a meaningful change in our results or the market environment, We would expect fourth quarter compensation at similar levels.
The decline in third party distribution costs reflects the benefits from or renegotiate from renegotiated fees that took effect during the quarter.
While we anticipated a modest seasonal increase in marketing and sales spending into year end, we expect the full year results to be at or below our prior year 40 million guidance.
International segment expenses decreased 3%, excluding a U.M. driven costs.
Partially reflecting the seasonal slowdown in sales and marketing activity.
Now turning to slide eight.
Regarding our revenue sharing relationships with the online brokers.
Fees, we pay to Schwab T D and E trade made up approximately 50% or 700000 or the third party revenue sharing cost this quarter.
As a reminder, these fees are to support commission free trading of R. S and data packages to aid our distribution efforts.
As a result of these platforms eliminating commissions for each yes, we expect to realize savings in the five to $700000 range in the fourth quarter.
We're in discussions with these platforms regarding how they may evolve their programs and potential fees going forward.
Now, let's turn the call over to John .
Thank you want it and good morning, everyone.
As you know beginning in October of 2017, we signed numerous distribution agreements that allow our funds to trade Commission free also providing us with valuable data to drive better distribution effectiveness.
Earlier this month several of the largest ARIA custodian platforms announced their decisions to eliminate commissions for EPS. This is clearly a positive development for wisdomtree, while we do lose the exclusivity we enjoyed on some of these platforms as I mentioned, there will be a significant an immediate reduction.
And third party distribution expenses.
Also the move to commission free trading for all creates opportunities that other platforms, where we were previously disadvantaged, particularly exciting is the opportunity at fidelity, the second largest or a custodian.
We are now better positioned than at any other time to target advisors, who custody there.
We expect fidelity to be a more significant contributor to our growth going forward.
Finally, the elimination of commissions for EPS should drive accelerated adoption of the ETF structure and that's a pure play MTF asset manager. This is very positive for us.
Switching gears model portfolios remains an area of continued focus and investment for us in September we announced the hiring of Scott Welsh as the CIO of model portfolios. In this newly created roll Scott will lead our asset allocation team and investment Committee Scott brings.
Significant expertise and after the allocation.
From his prior roles as CIO of dynasty financial partners, a large outsource solutions provider to R&D A's.
We're also enhancing our relationship with Professor G. Jeremy Siegel and have recently began developing and collaborating on model portfolios professors Siegel is our original solutions expert and since and since our launch as a firm has always been closely associated with Wisdomtree. This deepening of our working relationship.
It is very exciting and could prove to be very meaningful to model flows in the future.
Before we take your questions I'd like to just take a moment to publicly thank Michael Steinhart, who retired from the board earlier. This week after serving 15 years as Wisdomtrees Chairman Michael's vision and insights have been invaluable to Wisdomtrees transformation from a research company in 2004 to a globally diversified.
<unk> performance oriented asset manager, we are today I wish him the very best in retirement. Thank you for your interest in Wisdomtree and we'd be happy to take your questions now.
As a reminder to ask a question you'll need to press star one on your telephone to withdraw your question press the pound keep our first question comes from Craig Siegenthaler.
With credit Suisse. You May proceed with your question.
Thanks, Good morning, Johnno on it.
Good morning, Greg Good morning.
Have a view on if the commission free ETF trading in fractional share trading well actually opened the door to more direct index investing and if this could actually provide a new source of competition for the vehicle.
So I don't have a strong opinion on that at the moment I've seen how some people have referenced did for the four one k. market, but I don't think.
I, just wonder how that will evolve.
And I also think creating your sort of.
Baskets.
Feels more like it's a self directed.
Trading vehicle versus a asset management competition, but I'm.
So I don't have a strong opinion on that particular question at the moment really.
Okay.
Just as my follow up here the in similar topic down, but the second largest CTF managed in the world didn't pay shelf. These before so looks like this could really level the playing field for them across all platforms. Just wondering if you have any thoughts on that trend because you could see.
Heavier competition not manager.
So you know they've always.
Even though they they've always been included on every platform that really haven't been excluded the.
Consumer demand Ford has forced the advisor to incorporate them into there.
Executions of models from the very beginning.
It certainly will help them a little bit I guess in commodities Commoditized beta where they may no longer be the lowest fee competitor, but I'm not sure changes the dynamic for lowest fee beta dramatically.
Thank you John .
Thank you. Our next question comes from Dan Fannon with Jefferies. Sir You May proceed with your question.
Good morning, this is actually James steel filling in for Dan.
So just curious on it seems as though throughout the quarter sentiment toward European equities seem to improve quite a bit and absolute performance for hedge remains strong so.
And quarter to date things have kind of turned up in terms of flows. So just curious if theres kind of an improving outlook, there or any conversations that you're having with clients that could indicate had just kind of reaching a trough year.
Hi, This is Jeremy Schwartz global head of research I mean, certainly pointed out the performance has been incredibly strong both year to date and really over the long run.
We remain very committed to currency hedging both in hedge and across the broader platform.
Did you today, a five star fund, beating basically every new European front over the last five years, but broader things like our international hedge quality given growth EISG is a five star funded in the four large cap growth category. So we think there's three opportunities still to take share from traditional unhedged in that broader category, we keep innovating.
With dynamic hedging with things like our dynamic BWM DDW MDD, a less international small happened brother also five star fund and starting to get more meaningful track record.
But you're right that as treat sentiment improves China in the U.S. come towards a deal whether it's any the global focused firms from Europe to Japan, and generally emerging markets to you're starting to see more interest and a bottoming of sentiment we believe.
This is John we haven't really seen a change were creations in the hedge product we have seen some spotty, but positive flows in Dx Jay recently, so maybe it shows some signal in turning up sentiment.
Great Thanks and.
Secondly, just on the the third party distribution relationships understanding that you part of the relationship is some data that helps you with your distribution efforts just curious what the effect on that is if you will still be receiving that or.
Or any update there.
Yes, Tom it Yeah, I mean look the platforms are still working through how they're going to evolve their programs. We do expect that there would be some sort of data package that they were still offer to us. So I would expect our fees to be going forward to be more of a fixed nature rather than variable as we've seen in the past.
Got it thank you.
Thank you. Our next question comes from my carrier with Bank of America. You May proceed with your question.
Hi, guys. This is actually Sean comment on for Mike I'm, just going back to the commission free platform. So obviously, it's a benefit next quarter.
But would you expect renegotiation with these platform and could that mean that the benefit next quarter as more temporary.
Hi, it's on that so as I've mentioned, the the the platform Theres still evolving their programs. We were in discussions with them. We don't know how it will eventually end up.
So it's hard to say what they will be I do expect there will be savings and as I've mentioned as a minimum I think you know front, we probably will be go into more of a fixed fee scenario versus a variable fee. That's tied to you win so I do expect to be significantly less than what were what we're paying today. So I do expect some of that cost savings you see into Q4.
To carry forward into 2020.
Got it and then just on commodity commodity flows so they've been strong over the past couple of quarters, but they can be volatile time.
So are you are your product benefiting more from an overall industry trend with positive flows or is it that you're taking share from competitors.
Hi, This is John so.
He is really we've been benefiting from interest in commodities in general.
Were very strong in gold, which is like in the United States, a pretty competitive subset of the commodity category.
The we've been taking our flow our share of flow are a U.M. share flow year to date.
When you go broader commodities and omni touched on this before.
We have much less competition in broader metals grains and other commodities in some cases the market share numbers are in the.
Or low to mid Ninetys and so that it just very very positive commodities in general for us.
Okay. Thank you.
Thank you. Our next question comes from Robert Lee with KBW. You May proceed with your question.
Hi, This is Jeff trends on for roughly thanks for taking my question I just wanted to.
No. It can perhaps quantify the proportion of sales are flows coming from model portfolios.
Yeah, it's on it so we havent disclosed that number at this time, you don't want to get once it gets to a meaningful amount will start talking to talking about those numbers a little bit more broadly, but it's growing quickly put out but off of a smaller base, it's relatively new.
Effort for Wisdomtree, but we're excited about the refinements that we're making to those efforts with the recent announcements of Scott and professors siegal.
Okay. Thanks, and then if I can follow up.
But the elimination of the commissions is that going to force.
Perhaps more spending on advertising.
As it gets more crowded.
The on these platforms.
You know I think that.
What you're left with is on how you compete.
Wisdomtree has got a strong brand recognition among advisors, we've got a scaled and diversified product offering with excellent track records and highly differentiated solutions program. So we plan on winning on Merit. We also support those efforts with strong data Cabot capabilities.
And very targeted digital marketing and the element this ties to your question the digital marketing.
Is the very easy to track from a an effectiveness standpoint, and so I think it'll be very controlled but.
Very controlled and also Youll only do it when it's effective so I don't think it'll be a meaningful increase in marketing from that standpoint no.
Okay, great. Thank you.
Thank you. Our next question comes from Michael Cypress with Morgan Stanley You May proceed with your question.
Hey, good morning, Thanks for taking the question just hoping to hear or maybe an update on product development initiatives. As you look out to 2020 also saw in the release that looks like you're cutting some products in Europe . If you could talk a little bit more around that and probably how you're thinking about putting the product shelf versus areas of new development.
So.
The.
Pruning in Europe , we just a part of our planned restructuring.
Post merging our our European business with MTF Securities, particularly a certain cost in Europe were going up some of those products that were very small just didnt make economic sense and there was also a lot of overlap between some of our products and the.
Company that we acquired and so that was just a natural cleaning up.
United States, we've been very efficient in.
Re purposing older funds as a part of our product development as well as selectively launching newer funds. Most recently we launched.
Some tactical trading exposures, most recently, our emerging cloud fund, which we launched both in the United States and in Europe simultaneously and it's been getting some nice traction very quickly out of the gate I.
I think you'll see some more.
Effort around fixed income, where we've had efforts over the last.
Yeah, I would say and so you'll see more there.
We'll be doing some.
So anyway, we should be pretty active I think on product development, we can't get too specific because it's very competitive on a product development standpoint.
Great and then just maybe you could give us a little bit of an update on Advisorengine. I know you guys talked a lot about a about that and the past just where we stand today in terms of the assets trends on the platform there how you're thinking about I know you have an option to buy and I think part on the rest of the remaining stake how are you guys are thinking about that.
Forward from here.
Perfect Im going to let Jarrett lilien.
Our recently appointed President and COO answer that question.
For those of you that don't know Jerre, yet he joined the management team two years ago as head of emerging technologies. He has actually been our representative on the board of Advisorengine for the last few years.
And he's been with Wisdomtree prior to that were eight years on our board Wisdomtrees Board and so we know I'm extremely well and he's had just a distinguished career in financial services.
Prior to joining Wisdomtree. So Jarrett maybe you can answer that question on AG sure. Thanks, John .
You know our approach on Advisorengine is really all about optimizing not only the partnership at our investment there.
And I feel very confident that we're doing both of those.
In particular on advisor engine the business itself the pipeline there remains strong.
They're currently Onboarding some important new customers we've had some joint.
Wins that have been nice to see.
But really advisor engine is part of our broader solutions program, where we're looking for ways to.
Really help our advisor clients be more successful. So overall again, it's about optimizing our partnership and our investment and we're doing both.
Okay. Thank you.
Thank you. Our next question comes from Brennan Hawken, Yes, you May proceed with your question.
Hi, good morning, Thanks for taking the question.
Just wanted to get back to the.
Emission free platforms I think it was in your second quarter deck that you disclosed that the organic growth rate was about four times, 21% trailing 12 month growth rate and that that represented about a quarter of your us.
So backing into rough numbers, it looks like about $2 billion inflows from those platforms I understand that X HEDJ and DXJ Jay but.
Just wanted to make sure that that's reasonably the right way to think about it and what do you think happens to that growth rate.
Do you think that the existing platforms drop and then there's some kind of partial offset with fidelity like what's the way to think about that going forward. Thank him on the one who took the first part no. Yes. The math you did in the numbers is is correct that that's the right way of thinking about it and I guess, what I would say as we head.
Various levels of exclusivity and of those that have.
Lowered or were eliminated.
Commissions on EPS.
Many of them were modest to just an open playing field, regardless and so I don't think it's going to be Oh.
A negative I think that you'll get the the fidelity uptick as well as just more ETF flows in general because pretty much all end investors know you can get access to EPS more competitively now with less resistance in friction into the system. So I.
I think net net we expected to be a a net positive.
Okay. Okay. Thank you for that and then follow up question I know the discussions with the with the platforms are ongoing some of them the flag in their cause that they're considering a couple of different options such as a platform fee.
Maybe there is a consideration of some.
A potential Rev shares for for like an attractive shelf space component.
I know that probably being included in that set of commission free EFS had a shelf space benefit before do you think that that might actually provide some.
Benefits to the flows on a go forward do you think that would actually be attractive for you guys. How are you thinking about that as you as you enter into the negotiations at this stage.
I think you got to this is John I think you have to wait to see what they put forward. It's a little early to know certainly be costs of our willingness to enter into a sort of more exclusive.
Relationships prior to them all going Commission free we certainly are comfortable considering that but we'll make those evaluations when we hear what their offerings, but we have to wait to see what theyre doing.
Yep figured but worth a shot thanks John .
Welcome.
Okay.
Thank you. Our next question comes from Keith how something with Northcoast Research you May proceed with your question.
Good morning, guys. So what's the closure of a 192 extra products over in Europe should we expect to see a significant decrease in summary operating expenses over in Europe .
It's on this I wouldn't say significant we did have some it was net positive for us from a from a from a gross margin perspective.
So that's.
One of the reasons why we think the gross margins will be on the slightly higher in the range that we gave.
And some of the some of the expenses were and.
Sort of regulatory and anticipated to rise and so we took action prior to that so.
It would have just been worse, if we hadnt I guess is what I'm, saying.
Okay Fair enough and then following up in the question I was asked earlier about the commodity funds you pointed out as well fixed incomes have a good years well for you guys is there any such that you guys are taking share there or is it kind of like a rising tide is raising all boats.
Yes, so there's a few unique position we are fixing mtwos and calling it the wisdomtree barbell as two of our anchor is of the floating rate Treasury fund, where we're actually the leader in floating rate treasuries any sort of the shortest duration treasury product and interestingly with the yield curve and versions that were there for.
While it's really when the highest feuding treasury securities. This willingly treasury, because there's a spread.
Today, it's a 30 basis point spread over T bills.
That's really making that a anchor at the short end sort of cash like.
Type security.
And at the long end, our yield enhance AG aggie that on the talked about both of them combined have generate over a billion dollars. It flows this year and that Aggie is a five star core Morningstar core bond fund, that's increasing the yield over the traditional lag and so we believe those two will be they're gaining share they're both very can.
Kind of offering that the long end in the short end to end. So we think that barbell is going to resonate and we've been talking up model portfolios are fixed income model portfolios had been delivering great returns over their track record and we think those will be attractive for the whole fixed income suite.
So if I summarize your ancillary sounds like on a periphery of the fixed income were always sounds like you guys labor taking share in that space is that correct.
Yes.
But for US you know of product development Wise, you know domestic fixed income has been a concerted effort over the last few years were relatively new in the space. So we're very pleased with the traction that we're receiving.
Okay, and then finally with the fidelity relationship just if you private them or color on why you guys are disadvantaged is the fact that you guys were not as part of the commission free platform, there and now it's everybody to them all playing field.
Yes so.
One of the elements of commission free trading was levels of exclusivity. So one ETF sponsor in particular had a sprint.
A more exclusive relationship with fidelity than all others, and then fidelity opened up their platform only to their mutual fund partners that had ETF sponsors and.
We just could not track through at this time.
We thought eventually we might have been able to but now it's open to us so.
That's why we're excited about it and be cost of the sheer size up the Dallas platform. It has the chance to be constructive and now we can really target our solutions program to a significantly larger number of Barclays.
Great. Thank you.
Thank you. Our next question comes from Mac Sykes Gabelli you May proceed with your question.
Hi, good morning, everyone.
Yes.
On seems well timed it also.
Partner.
Your goals for the funds instrument strategy for marketing if different from current products.
Yes, I think within tree was very well known for our dividend value investing and trying to get more sort of growth oriented products I think with our modern tech platform before this and now this sort of cloud computing space and you actually right working with Bessemer venture partners, who can collaborate with the NASDAQ to create this index was a.
Great.
Great partner and we created some content we went to their private cloud 100 event and had some of their Ceos in partners on on her podcasts and so it is anything new space for us and we're excited about the growth potential and that in that space. It really diversifies, our product offering you might see more in those spaces as sort of.
Tactical.
Trading opportunities.
And I will say that marketing does play a role often in new fund launches and so you might see some specific efforts to continue to build on the very quick momentum, we got right out of the gate.
Thank you.
Thank you. Our next question comes from Robert Lee with KBW. You May proceed with your question.
Hi, This is Jeff on for Rob again, just had one quick follow up.
In regards to.
The philosophy and of launching products.
And the pass you're essentially willing to try almost any product then costs much tweeted out there for a while.
Has that philosophy changed maybe due to higher cost of launching products or the fact, maybe creates too much confusion.
We'd be perhaps less willing to let products linger for a longer period of time.
So as John So I think I would be a little more nuanced on the answer.
We were very very aggressive always as we launched the firm.
In launching product, we knew that there was lot of white space and we sought to really.
Feel voids had existed in the market now you have to be just more there's just less so in general that.
You had to be very specific you have to have clearly defined differentiated product that can stand out in a more crowded market.
We always if we can want differentiated product.
And so I would you say.
We.
I think we're prudent in our selection of new fund offerings.
And again, what I said earlier, we've actually re purpose to number of funds things like.
Taking some dynamic currency hedging and turn them into what we thought was a better execution in.
Multi factor positioning so I think that we've been very nuance there so that the product set as it exists today is much more efficient than it's ever been.
So I feel very good about product strategy always.
Okay, great. Thanks very much.
Thank you I'm not showing any further questions at this time I would now like to turn the call back over to Jonathan Steinberg Wisdomtree CEO for any further remarks.
I just want to thank every one for your time in interest this morning, and we'll speak to next quarter. Thank you have a good day.
Thank you ladies and gentlemen. This concludes today's conference call. Thank you participating you may now disconnect.