Q3 2023 WisdomTree Inc Earnings Call
Greetings and welcome to the wisdom treat.
Third quarter 2023 earnings call.
At this time all participants are in a listen only mode.
A question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad as a reminder, this conference is being recorded.
It is not my pleasure to turn it over to Jessica <unk> head of corporate communications to begin thank you.
Good morning, before we begin I would like to reference our legal disclaimer available in todays presentation.
The 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 rest set forth in this presentation and in the risk factors section of the wisdom tree.
<unk> annual report on Form 10-K for the year ended December 31st 2022, whereas the tree assumes no duty and does not undertake to update any forward looking statements now it is my pleasure to turn the call over to waste increased CFO Bryan and mixed in.
Thank you Jessica and good morning, everyone.
We ended the quarter with $93 7 billion of a U N.
Unchanged from the prior quarter as our inflows serve to offset unfavorable market conditions.
We generated 2 billion 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 and the prior year.
Okay.
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 slow growth rate.
Our AUM currently stands at $94 1 billion slightly higher from the end of September having benefited from further inflows.
Slide.
Revenues were $90 4 million, an increase of five 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% that's compared to 25% 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's royalty buy out 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 10 cents a share.
Next slide.
Our adjusted operating expenses were up one 7% for the quarter.
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 expense is driven by our performance based compensation plans, which consider our organic growth revenue gross.
Margin expansion and our share price performance in relation to our peers, whereby we currently ranked 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 81% in the third quarter and we are updating our gross margin guidance to be between 79, and 80% from 79%, which.
Which we believe should be sustainable at current AUM levels.
Our forecasted third party distribution expenses being updated to be between $9 million $10 million driven largely by the growth we're 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 be between three and a half to 4 million for the year.
That's all I have I'll now turn the call over to Jarrett.
Yeah.
Thank you, Brian and good morning, everyone.
Our strategy continues to be clear and straightforward, which is to deliver industry leading organic growth.
To expand our operating margins and to lead the industry's evolution until denies that sits in blockchain enabled finance.
In each corner, 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.
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.
And we have confidence in our three years of momentum will continue.
Our existing clients continue to grow in average size well 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 more.
Total growth cylinders working together agreed.
A great example is our experience with our U S floating rate Treasury Fund U S. F. R E.
Driving strong flows it's also driving new customers roughly 40% of advisors buying U S. F are first time users of wisdom tree products and services and we are already seeing a development path.
And our managed model solutions.
Well speaking of models.
Well they are still in the early innings of growth. They continue to be one of the largest and longest growth runways. We have here.
Here our strategy is twofold first is to continue to build a large group of recurring model users at large distribution partners.
Second is to pursue the RNA.
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 and are available on some of the largest distribution platforms in U S wealth management, including Merrell Morgan Stanley L. P. L cast stress the terror and Schwab in total over 65000 advisors have access to our models at these firms.
And there is a long growth runway head.
Merrell for example, our model assets are now over half a billion.
With approximately 850 advisers using at least one of our seven available models and nearly 60% of the lose advisors, having more than one client in our models both the AUM and the number of advisers had doubled from this time last year.
Likewise, we've launched managed models at L. P. L earlier this summer.
As of the end of September well from a lower base, we've already doubled our model assets from June levels. Once again, our client relationships are becoming larger broader and deeper.
Side, the very large distribution networks, our strategy is to provide a bespoke models experience for the broad arc.
An independent broker dealer marketplace about a year ago, we launched our portfolio and gross solutions effort. It offers a custom model experience together with automated trading and rebalancing services, which is essentially an easy button for implementation of wisdom trees managed.
Models.
To date, we've on boarded eight clients ranging in size from 100 billion two 1 billion in assets, but more importantly, we have a pipeline of over 60 or as an IBD as representing potential partners with over 60 billion in assets under management.
Overall wisdom tree is well positioned with a large distribution platforms and has a differentiated approach to the RIAA 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.
Given our high incremental margins all of this growth continues and will continue to grow our operating margins third corner saw operating margins expand by 900 basis points versus the year ago period, and as Brian has highlighted roughly 570 basis points.
This increase was driven by management proactively resolve the marigold obligation well 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 wisdom tree prime with a growing product and feature set now available in 33 states.
And all of these are exciting times at wisdom tree 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 until <unk> assets and blockchain enabled finance with that let me now turn it over to John.
Thank you Jarrod and good morning, everyone.
I'm very proud of wisdom tree is the ability to execute on our goals to drive positive results.
As Brian 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 few years.
Our integration of technology into every aspect of our business is why we can treat can do more and less resources than any other asset manager.
All of this against the backdrop of over $11 billion 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 wisdom tree workforce and our unique culture.
It is from this very strong foundation, we have been able to leverage the skill set of our entire company.
Product legal research ops tech et cetera, alongside a dedicated and focused digital asset team.
Men are first mover status in Coke innovation and launch wisdom tree crime.
Starting with wisdom tree 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 apps the availability across the United States.
To enhance the product and features of the platform.
We continue to test and iterate, our marketing messaging for low cost high ROI customer acquisition and four explore strategic partnerships and other business development efforts.
I am 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 her wallet within 21 states in the past month, we expanded the availability to 12 additional states.
Wisdom tree 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 wisdom tree Siegel branded digital funds.
Where customers can deploy a model like experience with just one click.
From here.
Specced, new features and capabilities.
Peer to peer transfers and payments in coming quarters.
On the marketing side.
We believe it 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.
This is a better use of capital.
That said.
We are seeing encouraging early signs on both our tactical spend and our message it.
The acquisition cost of each app download is in line with our modeled expectations.
The key messages for our user acquisitions are tracking in line with our beta test.
And we remain laser focused on high ROI customer acquisition.
As our marketing budget expense going into 2024.
And we'll be measured thoughtful and under control.
Every additional state added where feature enhancement.
For product launched.
And its generated interest and what wisdom tree 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 b to B and B to B to C applications for both our platform and product suite that could unlock additional token as Asian revenue streams in the future.
Wisdom tree has put in a lot of hard work.
Our leadership status in <unk>.
As the only provider with a broad suite of products.
But the market is starting to wake up to the opportunities in coconut station with blocked of exploration and early positioning in this space.
This is not only a validation of our <unk> strategy, but also underscores wisdom trees early mover position.
As I mentioned in recent quarters.
It's very exciting times for wisdom tree.
We have best in class organic growth.
A meaningful margin expansion.
A meaningful margin expansion story and.
And meaningful leverage to the secular shift towards choke innovation.
Thank you and now operator would you please turn the call over to Jeremy Campbell, our head of Investor Relations to field some questions from our shareholders.
Alright, Thanks, Jonathan and good morning, everybody.
Similar to prior quarters, we're going to take some questions from the se platform from our retail shareholders. The first one I'm going 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.
Well, thanks, Jeremy and and that is a great question very relevant to todays markets there.
The recent data have all come in very very strong.
In 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.
We believe were among the very best positioned asset managers for this dynamic U S. F. Our floating rate Treasury check 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've seen a lot of money go from money market funds.
Are there treasury short duration products have all benefited but theres still trillions of cash in banks, earning meter rates and so we educate clients every day about the opportunity for this floating rate treasuries. He efforts at the other cash management solutions, but we have a broad lineup of Etfs that have compelling value propositions for these for these.
Great dynamics.
This year, we launched our enhanced yield Universal fund with Voya, that's attracted over a $1 billion in assets and in less than 12 months and we have longer term solutions core bond solutions high yield Etfs mortgage related funds that are becoming better opportunities as these yields rise.
In our fixed income auto 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.
Now of course, we had things beyond fixed income and you could see even just this year, how well diversified the flows have been we've got over 24 products with 100 billion of inflows this year ranging from the commodities in Europe fanatics like artificial intelligence that had been working both in Europe and in U S and I'd say the highlight.
Of the year and what I see the biggest franchise ahead has been our quality dividend growth franchise, which has taken in 300 billion globally. This year are very exciting.
Ross 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 and each of these markets and we think it's well positioned for further flows are ahead now to summarize I just say, we already heard the breadth and depth of the inflows have very diversified opportunities ahead.
Okay.
Great. Thanks, Jeremy for.
The second question I'm going to have our head of digital assets ballpark answer it.
Well. The question is in the Oregon is a little bit unclear, but I think the heart of the question is around evolving regulatory regime for both crypto and blockchain Tech, So where does wisdom tree see the regulatory regime overtime and how does it fit within our crypto and <unk> plants.
Thanks, Jeremy and good morning, everyone. So I guess I'll answer this by saying I think theres a lot that can be done within existing rules and regulations here in the U S. I mean sure. There are some things you can point to that we should have more clarity on that I think some of the big issues of weight in the U S. Like Altcoins aren't really a part of our business model here in the U S. A.
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.
I think the ability to innovate within this environment has been a major advantage for wisdom tree at the company at this current nominal time, so it's actually an advantage for us and we're looking forward to continuing to press it going forward.
Great and.
Well stay on deck for me here because the last question, we can take from our retail shareholder base is a probably one you've heard quite a bit lately with all the new slow but is there any update on the bitcoin Etfs.
Well it does seem like there's been some exciting momentum right. Its certainly been in the news a lot you've seen a lot of competitors and others do things here, we remain very focused on our spot Bitcoin Etfs, we think it's the best execution for the asset class and the traditional channels in the U S and we're looking forward to continue engaging with regulators on it the big points I'd make though is that unlike a lot of other financial service.
The storms in the U S wisdom tree does actually have <expletive> one product in the market today, that's both in Europe, where we've got a leading set of Etp's that have had positive inflows. This year, but also its in the U S for retail customers with wisdom tree Prime we're leveraging the same cold storage custody model, but an ETF would use I would just think we're doing it with more utility on the wallet. So bitcoin in the U S for <unk>.
Tell investors is something that we already offer today, we think it's actually a very good experience with the wisdom tree problem and we're looking forward to continuing depressed that and hone in on that in our marketing messaging going forward.
Great. Thanks.
Operator, that's all we have from the state platform for this quarter. So please feel free to open up the lines for the sell side community.
Thank you and for those on the phone if you'd like to ask a question press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two to remove your question from the queue.
Our first question comes from Chris Kotowski with Oppenheimer <unk> Company. Please state your question.
Hi, Yeah, good morning, and thanks for taking my question I'm looking at Slide 10, and the $2 5 billion that you have in the model managed models I think last quarter, you indicated that it was around 12% of flow is and I wonder if you can kind of update us on that metric as it is it.
Increasing or decreasing as a percent of flows and.
Just any more color that you can have oh.
On the momentum there.
Jarrett why don't you take that first.
Sure.
Yes, 12% overall is still a pretty good number but really at the heart of your question. The momentum is picking up and it's picking up as I mentioned, we're adding more platform partners. So that gives us bigger reach we said 65000 advisors.
They have access today.
When we add a new platform partner that number goes up.
We're getting more advisers using more of our models.
And we're getting more of our advisors getting more of their clients in our models and so all of those things are increasing the momentum.
Another thing I can say that actually it wasn't in the.
Yeah.
Repaired remarks.
I'll speak to the momentum is that this last quarter Q3 was the best quarter on record for us. So far in terms of model flows. So overall I think 12% is it is a number that's going to gradually go upwards.
But al and it needs going upwards as it is evidenced in the third quarter, but also all the elements for increasing momentum are there and are active so we're very happy with the momentum we're seeing in models.
Okay, Great and then on wisdom tree Prime.
Page 12, we showed the map.
Thinking about it.
If you look at the first states that you are active and is there anything that one can see in terms of the monthly trends of subscribers to two prime.
Yeah.
Sure.
I think that go ahead sorry.
Yeah sure just really echoing what John said earlier, we've been testing that our hypotheses around marketing messaging of these states are were getting cost per install in line with our modeled expectations, we're seeing which messaging is working and we're leaning into that so that's really the learnings that we've done that so far which is I think a prudent use of shareholder capital at this point in time.
Okay, Great. That's it for me thank you.
Yeah.
Our next question comes from Adam Beatty with UBS. Please state your question.
Alright, Thank you and good morning, I'm actually a multipart question around the model portfolios a bit of a follow up to what Chris was asking about just now I'm. Just wondering obviously you know gaining more platforms is you know kind of job one and the priority right now, but beyond that just how you're thinking about kind of wallet share of.
Model portfolios and within that of wisdom tree at the various clients that you've already on boarded and the second part is perhaps more importantly, what you're doing you mentioned kind of you know one button trades and what have you, but what other operational kind of initiatives that you have to grow that wallet share once you get on those platform.
Thanks.
Yes.
Jared I mean, you might want to take this and I'm not sure maybe Jeremy Schwartz has something to add as well.
Okay well.
First of all.
You know there is there.
The different approaches that I spoke about.
Getting on large platforms like Merrill and Morgan Stanley very important there has been a development time.
One year on our platform as you mentioned.
Adam that's the first victory.
But really that's just gotten you in the door.
And the reward is it you are allowed in the door now you had the real work begins where you've got to go out and get the advisors excited about what youre doing so on the large platforms a lot of what we're doing is educational material out of support for models. We have a lot of model tools that we've provided.
<unk> to our customers and sometimes before you see a real ramp up on a large platform. It can be about a year before you get that real traction you've seen it in in Merrell and some of the things that I pointed out how we've seen a doubling in assets and advisors in the last year.
They were one of the first on the models.
The big platform players. So we've got that kind of momentum building with our other.
Platform partners than on the <unk> and <unk>.
There you do have more of an operational component, where we want to help those advisors, who don't have the same resource at the wires have some big platforms.
We help them build their models implement their models trade their models and Thats really the replication of the wire house easy button.
The other thing I'd add.
Is that I guess, you know if you think about it every sale is a model sale.
If in the old days, when we were just going before we had a models effort you were still trying to win a position in an existing adviser at home office model now what we get to go out and do is provide a model solution, which when we have a win there too.
Multi ticker when it's a very long term and sticky win.
But that's sort of.
A second type of model when is the third party mono platforms. Then the third is that working with advisers to customize their models for them and in some operational or workflow issues, but the other thing that <unk> heard and one of the answers from.
From an accident genres remarks is through wisdom tree prime.
It's another models opportunity and soon we'll be launching nos effectively wisdom tree Seagull funds.
Bonds that is really a models like experience. So it's a it's another model opportunity for us So hopefully I answered your question, but.
Kind of opportunity, there and a ton of momentum.
That's great. Thank you I you mentioned, Jeremy I don't know if Jeremy wants to weigh in.
Yes, we do.
Yeah, I think the we're certainly doing a lot with professor Siegel.
We as you heard about the Merrell models have we're working on at the Morgan Stanley models, we have that those coming in prime he's been a leading figure for us on.
This idea of interest rates when I talked about the senior economist upgradings outlook for rates he's been a big proponent of where things are going so well.
All of those things are mutually beneficial and in driving this diversified close that.
Excellent that's great detail exactly exactly what I was working for every sale is a model say Oh I love. It all for me today. Thanks a lot.
Thanks, Adam.
Thank you and a reminder to ask a question press Star One. Our next question comes from Mike Brown with K B W. Please state your question.
Great. Thank you for taking my question.
I guess, just starting with the USF arc product. That's it's clearly been a major success here, but it is I guess levered to rising rates.
I suppose it's hard to say.
But how much of the assets do you think are more tactical in nature that could be at risk when the fed starts to cut versus how much might just be more of a cash allocation that could be could be stickier and then maybe just a quick follow on how much of the flows.
Just maybe a percentage has come from the models and therefore could probably be more sticky. Thank.
Thank you.
Jeremy you want to start and then maybe Jarrett.
Yeah.
Well, so I I think I gave this view that we think rates the long term rates I alluded that we think rates could stay higher for longer you would've thought if rates can be really painful you would've seen more of a slowdown even this year and so we think sort of the longer term settling of rates is that they may not fall back to that zero Ray.
Environment that you had that even sort of the 10 year, maybe it settles at 3% over the longer run in <unk>.
Versus where it got down to sub 1% on the 10 years. So there's we don't think these rates are going back down quickly anytime soon.
Yes.
There is definitely a a a group who uses the phrase cash randomly talked about prime as one of the nice features of how do we take it to the next level of adding spending features on top of these things theres a huge opportunity across the interest rate curve in prime for things like that so the cash management solutions are getting extended but we're not just reliant on U S. FRE that's been that.
Best place to be for the last 18 months, but we have a very robust fixed income lineup. We have a lot. We have a lot of new users to wisdom tree from U S F or theres, something like 40% of U S. F. Our clients had been new users and so we can.
Now help there and talk about where they're going next and we have a very robust set of opportunities in our fixed income lineup to position them and we're going to keep working on more so you'll hear more from us on the product set but we you know we think we're well positioned today, but we will further develop some new things both in prime and in an ETF world to keep those assets in our lineup.
Yeah, and let me, let me double down on some of those messages as well.
Big picture and again I already mentioned, we're growing we've got three years of three consecutive years 12 consecutive quarters of organic growth, we're doing that because we're adding more advisor clients.
Growing at a double digit rate, but within that we're also adding more products per advisor more AUM per adviser.
And that puts hopefully in context, how great U S. CFR has been for us.
40% of the advisors buying USF are first time users and that sets them down that development path for us where what we're seeing is the next most purchased product of ours after USF or ends up being.
D. G. R. W. <unk> models and so it's this great sort of entry way product.
For new customers and existing customers when you look at the customers now.
Some view it as fixed income.
But others view it as cash and it typical adviser at any time is 10% to 20% in cash.
We also had again, how this all fits really well with wisdom tree Prime we have digitally U S. F R and a retail customers typically 15% to 30% in cash. So there is a long life for this product it's a great pre.
<unk>, it's a great relationship product, it's a core holding and so we couldnt be more happy with the product.
Okay, Great and then if I.
Change gear to the wisdom tree prime.
Wait to see the launch in 12 additional states, but I guess it sounds like you won't reach a full national rollout by year end. So what states are really the toughest ones to get done.
Can you just give us a view into that process, what's needed to get them over the hump here and.
When you and when you get to 50, I guess, what's what's maybe the updated timeframe on when you might get to 50, and then just to give US a view as to maybe when that marketing will start to kind of pick up more in earnest, which I think was one of the.
Guideposts that you mentioned.
Well why don't you start.
Yeah happy to so I'm no different states have different rules I mean, some operate under exemption 70 to get licenses for and then certainly in New York, They've got kind of a strict regime around crypto assets in kind of a very forward and I think mature approach towards regulation for the asset, but some of these things just take time right.
So I think our guidance around being in substantially all states or substantially all of the population by the end of the year like we are on track for that and that will position us for a broader national rollout in Q1.
Yes, Mike I, just wanted to make sure that you heard me in the prepared remarks, we expect to be virtually 100% of the country, where 100% of the population by the end of the year.
Okay.
Okay, great. Thank you for that.
Yeah.
Thank you there are no further questions at this time I'll hand, the floor back to Jonathan Steinberg for closing remarks.
Thank you.
As we are closing out 2023 and are preparing for 2024 and beyond.
I am comforted and I am gratified by the fact that wisdom tree in the most enviable position.
We are levered to almost all of the most exciting growth drivers in asset management, and more and more broadly financial services.
Whether it's global Etfs models and solutions.
War Token addition, bitcoin and blockchain enabled finance.
We are there we are early and we are a leader.
Truly 2024 in the next few years could be the most rewarding with the fastest growth that we've had at any time and wisdom tree history and so.
Yes.
First of all we thank you for your time today on the call and we will update you on our progress next quarter. So thank you everybody have a good day.
Thank you. This concludes today's conference all parties may disconnect have a great day.