Q2 2021 Wisdom Tree Investments Inc Earnings Call

Okay.

Ladies and gentlemen, thank you for standing by and walk through the wisdom tree second quarter earnings call. At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question during the session.

Actual new depressed star 1 on your telephone if you require any further assistance. Please press Star then zero.

I would now like to turn the call over to your host just because a little head of corporate communications and public relations you may begin.

Good morning before you.

He began 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 with interest annual report on form 10-K for the year ended December 31.2020.

With century assumes no duty and does not undertake to update any forward looking statements.

Now it.

It's my pleasure to turn the call over to wisdom tree 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.

And the logical advancements, but not wisdom tree.

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 stand out operating.

Taking your accomplishments and milestones, which Brian and Jeremy will cover in their remarks.

With the results, we are achieving each passing quarter I'm increasingly confident in our long term positioning the focus and flexibility of our business model has enabled us to retain.

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 from our client engagements.

That's the track records and value proposition of our product and bottled portfolio offerings, along with sophisticated investment analytics and practice management resources.

Allow us to help advisors address the central challenges of their practices.

Through our investments in Tomorrow's growth.

We're quickly establishing an expert voice around digital assets crypto currencies and blockchain enabled decentralized financial services, we're simply defy.

Through these efforts we are deepening.

Existing relationships and partnering at an enterprise level with key platforms in every channel, including some of the largest national RNA groups.

It's an exciting time to be in financial services, and wisdom tree couldnt 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, Jonathan.

As John has just highlighted Q2 is a strong quarter.

I would add to it and say it was a quarter extending our string of strong.

<unk> quarters and in July Europe is showing positive flows in the U S is in its 13th consecutive month of organic growth its best streak since 2015.

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 inflow in funds is increasing and the percentage of monthly outflow ing funds is decreasing we.

We are seeing particular strength in our large blend emerging markets and China funds in Europe UCITS informatics.

X had 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.

The sustained momentum in our flows in the quarter nearly 90% of our U S funds.

AUM increase and nearly a third hit new all time AUM highs globally. We now have 34 funds with AUM over $500 million in 'twenty 1 over.

$1 billion.

Further the quality of our global flows is also showing up in fees, where we have seen average fees flat up in both Europe and the U S. This year.

Next slide please.

The overall product suite is well positioned and.

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 improved.

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.

It ends and highlight 1 of wisdom trees 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 ether ETP in Europe, and we made investments into both security and on ramp to important digital assets partners as Jonathan 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.

In 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 Brian to bring it all together with the numbers.

Thank you Kurt.

Beginning on slide 5 our AUM at June 30 was 70.

Say again, <unk> 9 billion.

Representing a record quarter and an increase from 6% versus the prior quarter driven by positive market movement in net inflows.

Generation in excess of $900 million of inflows during the quarter spanning multiple asset classes include.

Including our emerging markets.

International equity U S equity and fixed income products are.

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.

It's Jarrett had previously mentioned our U S listed Etfs have generated.

Positive influence 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 or in excess of 500.

Were $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.

Net income was $16.8 million for 10 cents a share.

Up 34% from the prior quarter.

This quarter, we recognized a noncash after tax gain of 500000 for our future gold commitment payments and 300000 in other non operating items.

Turning to margins on the next slide.

We are exploring.

Spearing 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%.

<unk> a level, we have not experienced that almost 3 years.

We are updating our gross margin guidance, which we now expect to fall within a range of 78% 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.

<unk> 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 preexisting.

<unk> 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% coupons.

1 percentage point lower than our.

Issued last year.

The conversion price is 11 O 4 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 principle to be paid in cash at maturity.

<unk> or upon conversion increase.

Incremental share associated with an in the money conversion option are includible 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 add strength to our balance sheet and flexibility to our capital management program, which includes our quarterly dividend payments share buybacks and debt management.

In connection with this issuance, we repurchased 4.5 million shares.

Shares of our common stock.

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 their desire to ultimately reduce our debt and strategically.

<unk> 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.

1 other thing to note we.

We have hired a head of Investor relations.

Nations, Jeremy Campbell previously from Barclays and we're looking forward to him starting with US next week.

That's all I have I will now turn the call over for questions.

Ladies and gentlemen, if you have a question or a communist. This time. Please press. The star then the 1 key on your Touchtone telephone.

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Our first question comes from Brennan Hawken with UBS.

Hi, good morning, Thanks for taking my question.

So just was hoping for maybe an update.

On the.

The dialogue around the U S b.

Quinn.

And token is a gold product.

How's 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 1.

Filed and so.

You know 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 will be first.

First we're in the first wave of approvals for U S Bitcoin Etp's and yes, our experience.

In Europe is very comforting to the regulators and we believe we have the best structured.

Institutional quality.

Uh huh.

Kurt <unk> PS, both bitcoin and ethereum that had 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 a digital goals.

But I would also add digital treasuries that filing I think is very very important to me.

Really even more exciting than our bitcoin ETP filing.

With that.

Evolving the 40 act with our Treasury filing we are creating a new wrapper.

Call it regulated tokens and.

Our regulated tokens will be needed to the blockchain using securities technology to really unlock the potential of the blockchain now.

Regulate tokens.

He goes really into what I would call I called the D..5, but I think it's even more nuanced I would call it.

Responsible defy.

Which means regulated deep client and again.

Our.

Communications with the FCC and the regulators.

We are expecting and we are encouraged by their reaction. So we are expecting measured balanced regulation.

That doesn't stifle innovation.

Dead on.

Locks blockchain enabled financial services.

We believe that.

You know defy will remove.

Many financial intermediaries, it's going to be very.

<unk> to existing business models and really weird.

It's hard to we haven't been fully clear on our plant.

It's going to be.

More obvious what we are doing in our regulated tokens and responsible defy in the coming quarters, but.

You know 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.

Fishing fees that will come when investing in savings and payments there arent.

Barriers these gated walls use different technologies that.

<unk> exist in today's environment, I think it's going to unlock innovation and you know so you know the benefits from wisdom tree to be very clear.

We're highly confident we're going to enhance.

Enhance the user experience.

And our first mover advantage and take more.

Share and it's going to lead to very strong economics, and the diversified business model and diversified revenue streams. So a.

Long answer brands into your question I Hope I covered it.

You gave me a little extra credit and they're actually Jonathan So I appreciate that.

[laughter] 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.

Given how disruptive it is so I appreciate that color.

Look forward to learning more about it.

Shifting gears a bit.

The models are.

You guys. These are increasingly important vehicles, particularly for the broker sold channel.

Can you talk about.

The penetration that you're seeing where those are and maybe some statistics that you have around model penetration.

The assets.

We have currently in those models with what channels, that's really resonating in and what channels are driving that.

That adoption any color on that front would be really helpful. Thank you.

Jared do you mind, starting there and I don't know, maybe Jeremy you might want to add at the end, but certainly jarrett water use.

Sure.

Well as we've mentioned every quarter, it's a focus initiative for us, but it's it's not a recent 1 we recognize many years ago that 1 of the.

Most important macro trends in wealth management was the move to models models.

So we've been focused on this for years and we've organized ourselves in a way to support this and support advisor adoption and really there are multiple channels that we work on.

We look at.

You know sort of the most obvious 1.

Saddam positions in existing adviser and home office models.

But then a little less obvious we also work with advisors 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 platform.

Wins like with Merrill Lynch and very soon we.

Have another announcement of another major wire house 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.

Many 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 Av.

Net inflows.

They're stickier assets or 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.

Great Thanks for that.

I'll just add 1 quick point, Brian to that are you ask you start off asking about.

The crypto filings and 1 of the things we highlighted is a plus crypto model that we did in conjunction we mentioned the investment in non ramp there..1 of these platforms that are enabling direct access to crypto and we have launched a we did a press release announcing that plus crypto model series with 3 different models.

I mean, we all great early conversations with large <unk>, Inc.

The tuition and that's turned on that plus crypto model theory, where even engaging there currently which is which is great.

Thanks for the color.

Okay.

Our next question comes from Robert.

And where have you W.

Good morning. This is Mary go on for Rod.

For taking my question.

So in addition to the ETF rolled out in Europe could you talk about some other digital products you may rollout I know you had talked about the digital wallet.

And then maybe also the timeframe you are thinking about in terms of monetizing any new investments.

Okay.

I'll start.

So.

Wisdom tree really if the category is broadly.

And I think it's best described as responsible day.

In defy you have crypto currencies, which we have 2 in Europe, and there'll be more in Europe, and when the U S approves there'll be crypto.

Net exposures ETP format in the U S as well and we're also bringing it to market through models and estimates.

So we're trying to bring you know crypto, which we view as an asset class and we don't want to romanticize that we don't want to build an idea, 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 defy category you have.

Blockchain enabled financial services, there, we began with a strategic investments in security about 2 years ago, We led their series day at.

And co led their series B and we were very very pleased to see how.

Institutional investors most.

Notably our state Street at U S Bank participated with us in secure and C series B now we'd made the investments because we thought that and what we're finding out is.

Secure technology is allowing us to get.

The benefit.

Of regulated tokens on the blockchain, so things like interoperability and peer to peer of movement of exchange is what we're seeing and expecting with him. So so we're using our blockchain investments in security to launch that.

Arey not easily replicated regulated tokens, we've spoken about.

Gold.

Treasuries in 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.

Towards the end of the fourth quarter or early in the first quarter odds are gold tokens and treasury tokens will come to market, we're still holding to that and so very exciting for us.

What I would just say is it's really.

Incumbent.

The team that's on this call today.

So our new CFO, Bryan Edmundston hour, less new but relatively new president and COO Jarrett lilien.

As Brian mentioned, we're hiring Jeremy Campbell to head IR and be a part of our strategy team, but also Jessica because the room and Jeremy Schwartz. It's incumbent on this team over the coming quarters to expand our coverage.

As a public company beyond the institutional.

Our traditional asset management.

Yeah.

Coverage group.

Now that with the wallet, we're gonna be going direct to retail more so we're gonna be leaning.

Leaning into a more direct to retail IR, but also within the institutional coverage expanding into.

Mid pack the emerging category of defy, which I think like the coin basis of coin bases 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.

<unk> got to achieve in the you know.

At the end of the year upcoming quarters, and certainly be the focal point in 2022, So I hope that answers your question.

Great. Thank you that's very helpful and maybe if I can just ask 1 more on flows so recently.

Recently from a near your non U S flow has been a bit more skewed towards commodity and currency products could you talk a bit about how you are thinking about expanding your.

Your non U S footprint sort of beyond that core franchise.

I think Jeremy.

Maybe you could start there and Jared if you wanted to add on to Jeremy Lisa anything off.

Great. So if you look at our European business. It started Oh, we have we have.

Acquired 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 though we have this big view inflation is coming our bonds with negative expected returns on the tips bonds being a negative 1% on inflation adjusted yield. So we love the positioning in broad based gold commodities. All these inflation hedges are very very valuable.

As our diversification today is is actually way more diversified than we were at the star there where we had.

You know call it over 26% of our assets in commodities today, it's down to 21% and I think some of that is well in in in Europe in particular, you're seeing broad flows to the matic.

It's interesting is in cloud computing artificial intelligence battery solutions.

We've watched new commodity funds for enhanced energy and agriculture.

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.

Wings in Europe, which are some of the informatics and other things beyond the commodities are resonating.

But you know, 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.

Yeah, what I'd add to that too.

So it's been very interesting you know the business in Europe.

Darted as being as you as you said it was very much commodity driven.

But were leveraging that knowledge in a lot of the digital assets work that we do leverage is the way that the commodity products.

<unk>.

It's a 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.

<unk>.

Value Bowl.

You know 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 its been more in the UCITS and the.

<unk> done there.

Great. Thank you so much.

Our next question comes from Michael Cyprus with Morgan Stanley.

Sure.

Hey, good morning, guys. Thanks for taking the question just wanted to circle back to the European Crypto products that you have if you could just.

A little bit of an update on some of the distribution.

The changes that you guys have been putting in place in terms of the evolution there broadening out access across.

<unk> Europe, how that is going and what are some of the actions you guys are taking.

I guess, I'll start, but whether jared or Jeremy.

If I leave something off please.

Started with bitcoin.

We have added to it the cerium.

We've taken some.

And even though you have approvals in Europe.

It is still.

Market by market every regulator has a different.

Twisted joke, it's not easy.

Do you get sort of the full distribution of Europe from the store. So since we've made but first launches.

Building on the Swiss stock exchange listing of Bitcoin, we have now crossed listed into Germany.

And what I can.

2 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 Swiss quote so again really best in.

In.

That structure, most protected our investors safety.

Also from Switzerland.

I guess I've mentioned Frankfurt, so the Germany's James so.

We're seeing a lot of engagement.

Key to the uptake though.

We 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 you know 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 the cerium came out with a with a very quick launch and end market adoption. So net net we're feeling very good and there's more opportunity for additional.

Filings, where 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 I guess yard and you want to add.

I guess, just maybe isn't.

Maybe just as a follow up just curious you know 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 you know any sort of targets that you have from.

Like that to be in in 12 months.

Cherokee you have Oh, Jeremy is there something more you might say about that.

I would say, it's largely the same as as all new asset classes, it's sort of an education and and really getting the day.

Where you'd like from the platforms I mean, what we see.

In the U S is that Theres a lot of the Mi the clients that we're talking to and hydro Onramp investment is people want to know what their clients are doing and we've estimated maybe 15% to 20% of clients of ours as are doing it away from them and so need to start understanding a the asset class and often does.

Demand clients no more than the advisors and so you know trying to write education is at the starting point, what we're doing so in the U S where 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 you know it's a it's a it's a long an education process.

The more that the platforms decided I mean see that globally that more and more banks and are providing access to their customers and we have some of those leading regulated product. So I think you'll see us competing for those well as the platform to add more and more choice there.

Yeah.

Got it.

And the melanoma is going to add was just you know 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.

John has said you know, it's still a patchwork of regulators.

But you see in.

A big thing that helps with getting on different platforms is not only the cross listings, but seen the regulators kind of open up a little more than there was news today I think in Germany about now, allowing for institutional accounts to allow up to 20%.

Of assets to be into crypto currency.

Currencies. So we've got to continue to just be in the right place into allow it to happen and then as Jeff 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.

Crypto currencies or bitcoin.

It's almost 100% retail.

No institutional participation at all and it has happened with retail without the support of their traditional financial service relationships I think it just.

You saw recently that J P. Morgan is now which has been a.

Strong critic historically, a bitcoin is now, allowing all of their advisors to help their.

Our clients access crypto. So I think there is tremendous growth in the asset classes crypto currencies are still to come.

Great. Thank you.

Our next question comes from Keith <unk> with Northcoast research.

Good morning, guys just to follow up a little more on the European Crypto experienced.

With a retail investor tends to be more faster money in and out is that a risk to the ETF strategy or does it not matter if it is.

Versus short term.

I'm going to answer this.

Crypto.

Perfect for Etfs or <unk>, what we do.

He's made difficult things to trade easy.

And the volatility.

The.

Long term debt investors can trade with Chuck efficiency is just going to prove to be very very compelling and there will be a periods.

Broad retail I think will prefer the actually amazed in the GGP as opposed to opening up their own wallet share.

Certainly been strong.

Early adoption from the obstacle.

Absolutely sophisticated.

Eco system that uses wallets, where crypto.

But it's as it goes more mainstream I think theres going to be a big adoption curve through the more traditional.

Invesco that wisdom tree share absorb etp's.

Great. That's helpful. Thank you and Brian. This is just a follow up question or a second question for the revenue.

And other income 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.

Yeah.

Line of capturing this creation redemption fees in there there is some licensing fees and there is some other miscellaneous revenues.

Some of it's transaction based some of it.

AUM base.

I'd say the amount that we recognized this quarter it should be a good proxy for what to expect going forward.

Growth great. Thank you.

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

Thank you everybody I just wanted to thank you for your interest in wisdom tree and we will speak to you over the course of the quarter and next quarter have a great.

Our debt.

Everybody.

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