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Tuesday, April 30, 2013

Three Things to Know from WisdomTree's Earnings

Reported by Tommy Fernandez

It was a killer quarter for WisdomTree [profile], but founder and chief executive Jonathan Steinberg has no plans of slowing down.

His firm plans to do some big spends to build up its competitive resources and expand its product lineup.

First the basics, which you can glean by perusing the SeekingAlpha and the company earnings' release.

The firm reported a first quarter net income of $7.9 million, or 6 cents per share, compared to $1.1 million, or one cent a share, the same period a year ago.

ETF assets under management were $25.1 billion at March 31, 2013, up nearly 60 percent from $15.7 billion at March 31, 2012.

Net inflows for the first quarter of 2013 were $5.9 billion compared to $2.3 billion in the first quarter of 2012. WisdomTree's market share of industry net inflows was 10.8 percent in the first quarter of 2013 as compared to 4.3 percent in the first quarter of 2012.

Total revenues increased 53.1 percent to a record $29.3 million as compared to the first quarter of 2012, primarily due to higher average AUM as a result of record $5.9 billion of net inflows into the firm's ETFs

There are a lot of interesting things going on in WisdomTree's conference call. Here are three interesting points.

POINT 1: WisdomTree Is Big in Japan, and Elsewhere
POINT 2: WisdomTree Has a Big Shopping List for Growth,…All Organic Please
POINT 3: WisdomTree Is Going Social

Now, to drill down on these points:

POINT 1: WisdomTree Is Big in Japan, and Elsewhere
The lion's share of inflows this quarter went into WisdomTree's DXJ fund. The company is also doing well in the emerging markets space.

Here is what Steinberg had to say on the subject:

In addition to the $3.9 billion raised by DXJ, our Japan-hedged equity ETF, WisdomTree raised an additional $1.9 billion this quarter. It was a strong and balanced quarter of inflows overall. On the top right, we isolate our current and historical flows in the fixed income category. Q1 was our best quarter ever in fixed income with inflows over $0.5 billion. I do not want this accomplishment to be overlooked in a quarter of great accomplishments. Our growing strength in fixed income is an extremely positive development for our business.

On the bottom right chart, we compare our emerging market equity inflows to the other leading ETF sponsors. WisdomTree led all firms in emerging market equity inflows with $876 million. No matter how you look at the quarter, from an inflow perspective, it was simply outstanding and better than everyone's expectations. Now let's look a little bit closer at our Japan inflows.

In Q1, at the overall industry level, Japan-focused ETFs took in $5.4 billion. WisdomTree's share of that was 72% or $3.9 billion. Our differentiated approach to product strategy really paid off this quarter. In fact, DXJ led all ETFs across the industry in asset gathering in Q1, a tremendous accomplishment.

As we discuss Japan, let me address a question, which has been asked frequently. Where is the money in DXJ coming from? On the right, we look at DXJ's estimated inflows in Q1 by channel and we compare that to our current assets under management by channel for the total complex since the firm’s inception. As you can see, the inflows for DXJ do not differ significantly from our historical patterns of channel representation. One notable development in DXJ's inflows is the healthy 12% from the international channel. DXJ has become a globally recognized security. Taken together, the success of DXJ reinforces WisdomTree's business model, its growth story and also reinforces WisdomTree as an innovative and highly competitive firm within the ETF industry. Now let's look at our market share inflows.

POINT 2: WisdomTree Has a Big Shopping List for Growth,…All Organic Please
WisdomTree is spending on a lot of money devoted to growing its sales team and product line. Chief financial officer Amit Muni had this to say on the subject:

I would like to remind you of the expense guidance we gave earlier this year. We plan to invest $5 million to $8 million this year on strategic growth initiatives. This includes additional investments in marketing to support our existing products and new products. Second, sales initiatives and tools to support our sales force. Third, additional ETF launches to further broaden our product offering. And lastly, hiring additional people. While these investments will add additional short-term cost, we believe it will pay off with increased assets and contribute to faster growth rates. So what did we do this quarter towards that investment?

This quarter, we added to our sales force, increased our spend for marketing and sales initiatives, and launched a global corporate bond ETF. In total, we spent about $1.3 million and at the same time, generated record revenues, net income and improved margins. We do expect our expenses to continue to decline as a percent of revenues in total, but there may be some seasonal fluctuations and not all line items will decline as a percent of revenues. For example, marketing and sales will fluctuate and may be flat as a percent of revenues compared to the 2012 full year amount. But compensation cost should continue to decline as a percent of revenues and we estimate that compensation, as a percent of revenue, will be between 24% and 26% for the full year 2013, which is down from the 2012 full year amount of 27.4%. And lastly, we will continue to experience positive leverage in our gross margins as our AUM scales. As we have always done, we will carefully manage our expenses and balance them with spending on our growth initiatives. Our balance sheet and cash liquidity continues to improve as you can see on the next slide.

However, the company wants to focus on organic growth, no acquisitions. This is what Steinberg had to say on the subject during various points in the conference call.

WisdomTree was the ninth best asset gatherer overall in Q1 according to Morningstar. This is up significantly from our 2012 ranking. I am incredibly proud of the collective effort of the company, which led to such a significant accomplishment. Being the ninth best asset gatherer, again, exceeded everyone's expectations. Now let's look at WisdomTree's organic growth rates as they compare to the other publicly traded asset managers and leading ETF firms.

Many of you on today's call are already familiar with this slide. WisdomTree remains the fastest growing publicly traded asset manager with 32% organic growth in Q1. This is an important metric for WisdomTree shareholders. And as the only pure play publicly traded ETF sponsor, WisdomTree remains uniquely well-positioned for investors who want the direct exposure to the ETF industry.

On the right, we compare WisdomTree's organic growth in assets to that of the other leading ETF sponsors. With 32% organic growth, WisdomTree was the fastest growing, in percentage terms, of all of the leading ETF firms. Again, WisdomTree is competing very effectively against the established giant and WisdomTree is taking market share.

Steinberg had this to say about expanding the product line.

Really, it hasn't changed much. I mean, we are -- we're committed to growing our product suite in dividend-based strategies. We're very high on dividends in light of the resolution to taxes with the fiscal cliff resolution at the end of the year. There'll be some more emerging market equities. And then we've expanded the hedged equity suite. You'll see that in the filings as well. So a lot of it is just more filling out offerings in the buckets that we have today.

And, finally, he had this to say regarding acquisitions.

It's certainly possible, particularly if you're talking about expanding into different asset classes or strengthening in certain asset classes beyond sort of our strength in equities. But as Amit touched on, our return on organic growth -- or organic investment is so high that we have a very high threshold when it comes to potential M&A. And again, we're very, very disciplined and very conscious of shareholder -- creating shareholder value. So we'll be very, very careful if we are incrementally adding to the business through acquisitions.

POINT 3: WisdomTree Is Going Social
WisdomTree has embraced social media and the Internet, and it is going well for them. Muni had this to say on the subject.

We continue to build out our social media presence by connecting directly with investors. The use of blogs, LinkedIn,, Twitter and YouTube platforms, allowed us to engage with existing and potential clients. Since we started this initiative only 8 months ago, we are experiencing consistent growth in the number of followers and third-party engagements. I encourage you to follow us, which you can do right from our website, for timely access to our research material and market commentary.

Read more in the SeekingAlpha and the company earnings' release

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