WisdomTree, Inc. (NYSE:WT) Q4 2023 Earnings Call Transcript

WisdomTree, Inc. (NYSE:WT) Q4 2023 Earnings Call Transcript February 2, 2024

WisdomTree, Inc. misses on earnings expectations. Reported EPS is $ EPS, expectations were $0.11. WT isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Hello, and welcome to the WisdomTree Q4 2023 Earnings Conference Call and Webcast. [Operator Instructions] A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to turn the call over to Jessica Zaloom, Head of Corporate Communications. Please go ahead, Jessica.

Jessica Zaloom: Good morning. Before we begin, I would like to reference our legal disclaimer available in today’s presentation. This presentation may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. A number of factors could cause actual results to differ materially from the results discussed in forward-looking statements, including, but not limited to, the risks set forth in this presentation and in the Risk Factors section of WisdomTree’s annual report on Form 10-K for the year ended December 31, 2022. WisdomTree assumes no duty and does not undertake to update any forward-looking statements. Now, it is my pleasure to turn the call over to WisdomTree CFO, Bryan Edmiston.

Bryan Edmiston: Thank you, Jessica, and good morning, everyone. I’ll begin my remarks with the recap of 2023 and our fourth quarter results, followed by our 2024 expense guidance before turning it over to Jarrett and Jono for additional updates on our business. 2023 has been a year of transformation and table setting for the future. We generated $10.4 billion of inflows during the year, which translated into a 13% organic flow growth rate. And flow diversification is driving our average fee capture on our flows upward, which was about 2x greater than our fee capture in the prior year. And while we experienced modest outflows in the fourth quarter, revenue grew organically as we captured positive run rate revenues on our flows as we outflowed from lower fee products while inflowing into products with a higher fee capture.

Continued organic growth and positive market conditions has resulted in the achievement of record revenue and AUM levels, while capital management actions undertaken by management has driven meaningful margin expansion and EPS accretion. The buyout of our gold royalty obligation in the spring was 15% accretive and drove operating margin expansion by over 500 basis points. This transaction also cleaned up our balance sheet, eliminating a perpetual obligation and reduced the volatility in our quarterly financial results. Consideration paid included $50 million in cash and the issuance of preferred stock convertible into 13 million shares of our common stock. In November, we repurchased these shares for $84.4 million, $40 million of which was paid upfront and the remainder payable in equal annual installments over the next three years with no requirement to pay interest.

The implied price per share is $6.02 when considering the interest free financing element of the transaction and the stock repurchase was approximately 7% accretive. These actions taken together with record AUM of a $100 billion at year end serve as a strong foundation in jumping off point as we turn the page into 2024. Revenue growth going forward is naturally derived from our AUM ending the year at a level greater than our average AUM over this past year. That coupled with continuing organic growth and favorable market conditions as well as disciplined expense and capital management, is the formula for margin expansion and EPS accretion. Our AUM currently stands at a $100.6 billion, up slightly from the end of December, resulting from $300 million of inflows in positive market movement.

Next slide. Revenues were $90.8 million, essentially flat as compared to the third quarter as the increase in our AUM was more heavily weighted toward the latter part of the year. As just mentioned, our ending AUM of a $100 billion, which is greater than our average AUM for the year, serves as a nice tailwind for future growth. For the year, we experienced revenue growth of 16% and adjusted operating income growth of 45%. This translated into 540 basis points of adjusted operating margin expansion or 140 basis points of organic adjusted operating margin expansion when excluding the impact of our gold royalty buyout that occurred earlier this year. Adjusted net income for the quarter was $18.6 million or $0.11 per share. Next slide. Our operating expenses were up 1.7% for the quarter, driven by higher marketing, fund costs and sales-related expenses.

We ended the year toward the high end of our compensation and discretionary spending expense guidance. Next slide. Now a few comments on our 2024 expense guidance. We are forecasting our compensation expense to range from $108 million to $118 million. This guidance includes planned hires as well as year-end compensation adjustments and the annualization of hires made during 2023. The range considers variability in incentive compensation with drivers including the magnitude of our flows, revenue and operating income growth, margin expansion, and our share price performance in relation to our peers. Also, just a reminder that we experienced elevated seasonality in the amount of compensation we report in the first quarter as we recognized payroll taxes benefits and other items in connection with year-end bonuses.

We estimate first quarter compensation expense to be approximately $30 million to $31 million. Discretionary spending is anticipated to range from $64 million to $68 million as compared to $59.3 million recognized in 2023. The modest uptick incorporates planned expenses for our national rollout of WisdomTree Prime, including our measured approach towards marketing and other related costs. Our gross margin is anticipated to be about 79% to 80% at current AUM levels and taking into consideration fund launches anticipated during the course of the year. If AUM scales higher from continued organic growth or favorable market conditions, we would anticipate further gross margin expansion. Our third-party distribution expense is anticipated to range from $10 million to $11 million as we expand our partnerships and grow AUM on the platforms.

Our adjusted interest expenses forecasted to be about $14 million as compared to almost $15 million in 2023 as we paid down $45 million of debt this past June. Our adjusted interest expense is exclusive of any interest cost we are required to impute under GAAP related to our interest free financing of the shares we repurchased from the World Gold Council in November of this past year. Our interest income is estimated to be approximately $4 million in 2024 taking into consideration the magnitude of our investible assets and current interest rates. Our adjusted tax rate is expected to be about 24% to 25%, a slight uptick versus last year to account for the full-year impact of the UK rate change to 25% that went in effect on April 1st of last year.

And our weighted average diluted shares are estimated to be between $166 million and $168 million as compared to $171 million this past quarter. The decline is primarily due to the recognition of the remaining half of the 13.1 million share equivalents recently repurchased is that repurchase occurred midway through the fourth quarter. That’s all I have. I’ll now turn the call over to Jarrett.

Jarrett Lilien: Thank you, Bryan, and good morning, everyone. We are incredibly proud of our accomplishments in 2023. We have industry-leading organic growth, expanding operating margins and a leadership position in tokenized assets and blockchain enabled finance. We have strong momentum build over several years, which we now carry into 2024 and beyond. As Bryan mentioned, our $10 plus billion of net inflows in 2023 generated best-in-class organic growth versus our peers extending our annual inflow streak to three consecutive years, where we have gathered over $27 billion in cumulative net inflows during that timeframe. Further, our ability to consistently drive strong organic growth is helping us reach new milestones. In December, WisdomTree reached $100 billion in assets under management for the first time, and we are now focused on delivering the next $100 billion.

So how do we get there? It starts with our differentiated product lineup where we have products and solutions for every market environment in every part of the market cycle. In 2024, we will continue to augment our product lineup with the types of innovative and differentiated fund launches that are WisdomTree hallmarks. Separately, we will continue to drive flow growth by deepening relationships with existing clients while also adding new clients as we did in 2023. Last year, we deepened relationships and saw a 20% lift in the number of clients that hold multiple WisdomTree products, while at the same time we grew our overall client base by more than 20% Growing and deepening relationships with existing clients while at the same time adding new ones, our growth compounders and represent a pipeline of future inflows.

A key additional growth driver is building upon momentum in our models business. Given this increased momentum, we are going to begin showcasing quarterly metrics that will better allow analysts and investors to benchmark our success and better understand and underwrite the steady cadence of our future growth. To begin our definition of model AUM is AUM in a model, where we control the allocation decision. We feel this distinction is important as some of our peers include single tickers in home office or advisor models in their figures, we do not. Second, we are now branding our models initiative as WisdomTree portfolio solutions, which encompasses all $3.2 billion of total assets sitting in model strategies where WisdomTree drives the portfolio allocation, whether it’s at a wirehouse or in the RIA independent broker dealer channel.

In the U.S., there are roughly 300,000 financial advisors in aggregate with over $27 trillion in assets under management. This is our addressable market. Today, our accessible market, which is the number of advisors and RIAs who have access to our models, is about 70,000. And our current penetration of this accessible market is under 3%, meaning that today we have 2,000 advisors that are using at least one of our models. Providing more color of the 2,000 current model clients, more than 1,000 were added in the past 12 months. Overall, in 2023, our organic model AUM. Growth was nearly 40% while our advisor client growth was over 100%. And this gives us visibility and confidence in our model flow growth over the next several quarters is our experience tells us that AUM growth follows client growth.

Overall, growing our accessible market, penetrating this accessible market, and adding new advisors while deepening wallet share with current advisors as they gather additional assets for their end customers, translates into a strong pipeline of future AUM and earnings growth. And as Bryan detailed earlier, we are doing this on well-managed expense guidance that will help us continue to deliver high incremental margins and drive expanded operating margins and earnings growth in 2024. In sum, I’m extremely bullish about 2024 and beyond as we continue to drive organic growth, expand our margins, and continue to lead the industry’s evolution in tokenized assets and blockchain enabled finance. And with that, let me now turn it over to Jono.

Jonathan Steinberg: Thank you, Jarrett, and good morning, everyone. What a terrific year 2023 was. Over $100 billion of AUM, over $10 billion of inflows, over 500 basis points of margin expansion and a 42% increase in earnings per share. Building on recent years of strong momentum, I’m very bullish on WisdomTree’s future. And while I’m proud that WisdomTree achieved a $100 billion of assets, I’m optimistic that the next $100 billion will take significantly less time. One of the reasons for that optimism is the expectation that Tokenization and WisdomTree Prime will contribute significantly to our overall organic growth in the years ahead. WisdomTree has put a lot of hard work to cement our leadership status in tokenization. However, the market is moving quickly and some of our traditional finance peers are starting to talk up the enormous opportunity in tokenization.

This is not only a validation of our tokenization strategy, but also underscores the importance of WisdomTree’s strong early mover position, the attractiveness of our strategy and the need to maintain our multi-year head start. Regarding digital assets, similar to last quarter, I want to frame my remarks around our key goals. First, increase the availability of WisdomTree Prime across the United States. Second, enhance the Prime experience through additional product and features. Third, deploy a targeted marketing effort to drive user growth. And fourth, explore opportunities for strategic partnerships. On the geographic front, we’ve made additional progress since last quarter’s call with five additional states. WisdomTree Prime is now available to approximately 70% of the U.S. population across 38 states.

There are a lot of variables in receiving state approvals, which differ by state with some states taking longer than anticipated. But we are in the home stretch and confident that most of the rest of the population will have access to WisdomTree Prime in the coming weeks. We are continually looking at different products or features that enhance the value proposition of the Prime experience. In December, we launched three WisdomTree Siegel branded digital funds where customers can deploy a model like experience with just one-click. Additionally, our digital money market fund is now live and available to customers inside WisdomTree Prime. And finally, I’m pleased to announce that the debit card is currently live in internal product testing and being successfully used at merchants, including through Apple Pay, and it’s slated to be available to WisdomTree Prime customers by the end of February.

As previously discussed, we believe it’s wise to limit marketing spend until we are available across most of the U.S. and we have our initial full suite of product and service features. To us that is being prudent with our capital. Our nationwide rollout is now expected to start by late Q1, early Q2. That’s the point where you should expect us to lean into the marketing efforts that will begin to generate both downloads and growth in funded accounts. However, I want to stress that the guidance that Bryan gave this morning fully contemplates all of the planned WisdomTree Prime marketing spend for 2024. Finally, we see a meaningful opportunity to leverage strategic relationships to drive both growth of the WisdomTree Prime platform as well as revenue opportunities outside of Prime.

We have several active B2B and B2B2C conversations in the pipeline, and we think that many of those efforts will further diversify our revenue streams and offer new topline growth opportunities. For example, we see a significant opportunity to distribute our funds and gold token to and through established partners, platforms and ecosystems outside of WisdomTree Prime. These types of relationships will naturally be episodic in nature, so we may not have an update for you each quarter, but each would likely be meaningful in nature when they do cross the finish line. As I have mentioned in recent quarters, it’s a very exciting time for WisdomTree. We have best-in-class organic growth, a meaningful margin expansion opportunity and leverage to the secular shift towards tokenization.

And now operator, will you please turn the call over to Jeremy Campbell, our Head of Investor Relations, to field some questions from our shareholders.

A – Jeremy Campbell: All right. Thanks, Jono. Good morning, everybody. Like prior quarters, we’re going to take some questions here from the Say platform from our retail shareholders. A few this quarter were all kind of along the same lines. So I want to condense them actually into just one question. This is to our President and COO, Jarrett Lilien. Jarrett, the question is we are now about three weeks into the Bitcoin ETFs going live. What are some of the early takeaways and what’s your plan to grow in a crowded field?

Jarrett Lilien: All right. Thanks, Jeremy. Yes, let’s start with a few takeaways. First of all, this was really a unique situation where you had 11 beta funds that all came to the market at the same time and all with cutthroat fees and fee waivers. A second takeaway is that while demand was solid, not all of it was new money. There’s a lot of swapping out of gray scale and pro shares into other products. And also many competitors were able to use their own balance sheet to put into funds or use discretionary allocations from other funds or we’re able to lean on captive distribution to drive early flows. So you pull that all together, a very unique launch. Yes, some solid demand, but also some noise in the early numbers. In terms of WisdomTree, just to remember for us, this is another ETF launch.

We launched over 20 funds each year and you look at our track record, we’ve generated three consecutive years of organic growth and industry-leading organic growth last year. Also remember that we are managing today eight crypto ETPs in Europe with over $0.5 billion of AUM, where last year, we generated 37% organic growth, in this year so far, we are leading European crypto inflow growth. So overall, we’re confident in our ability and our track record in growing AUM. That said, it does take time, especially in our model because these products are not yet available on many adviser platforms, which is where we would expect to see most of our flows. But I’d make one final point, really a larger point is that we believe the best use case for Bitcoin is not in an ETF, but is actually inside of WisdomTree Prime where not only can you hold Bitcoin together with other digital assets, you also get added utility in the form of payments and peer-to-peer functionality that doesn’t come with an ETF.

So that’s the early look and obviously, more to come.

Jeremy Campbell: Great. Thanks, Jarrett. All right, operator, we can open up the lines here to take some questions from the analyst community at this point.

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Q&A Session

Operator: Certainly. [Operator Instructions] Our first question is coming from Adam Beatty from UBS. Your line is now live.

Adam Beatty: Thank you, and good morning. I wanted to ask about Portfolio Solutions. I appreciate the new metrics. I think the way you’re measuring it and tracking it makes a lot of sense. It looks like as we look at the addressable market versus the accessible market that WisdomTree has already managed to capture over half the addressable AUM with less than 25% of the advisers. So that, to me, suggests that there might be a bit of a shift in your approach toward maximizing that accessible market that you’ve kind of already got on the table. So check me on that, whether or not that’s correct. And then maybe if you could talk about your goals for the year in that context? Thank you.

Jonathan Steinberg: Thanks, Adam. Jarrett, why don’t you start?

Jarrett Lilien: Sure. Yes, I think you have it right. Of course, we would like to keep increasing that accessible market. But again, you read it right. Our real key is penetrating what we have today. And we’re already seeing that. I mean the confidence that we have is, again, now 2,000 advisers using our models with 1,000 coming in the last year. We’re also able to see sort of vintages of seasoning. What it means when somebody starts and where they get to after three months, six months, a year or what have you? So you’re absolutely right. It’s all about the penetrating that accessible market. That’s really the main goal for 2024.

Adam Beatty: Excellent. Thank you. I appreciate that. And then just one more maybe for Bryan around operating margin and potential upside there. It looks like pretty good cost control, the guidance for 2024 looks to be – to have some opportunity. And yet the gross margin is kind of more or less where it was before and you didn’t guide adjusted operating margin. So if that’s a better way to talk about it, feel free to do that. But just wondering what kind of operating leverage you might see to the extent that you hit the high end of your other targets? Thank you.

Bryan Edmiston: Yes. So look, there is certainly operating leverage in our business model. We showed expansion of 540 basis points this past year. And if you strip out the impact of the gold buyout was 140 basis points of organic expansion. As we go forward from here, it’s really – it’s a story about scale. It’s a story about continued organic growth. It’s a story about cooperating market conditions and capitalizing on our strategic initiatives. But when you think about expansion going forward, I’d suggest that you view our ability to expand margins through the lens of achieving incremental margins greater than 50% in up revenue environments. And that would imply a very long runway with respect to margin expansion as we scale.

Adam Beatty: Excellent. Got it. Thank you very much.

Operator: Thank you. Next question today is coming from Mike Brown from KBW. Your line is now live.

Michael Brown: Okay. Great. Thanks for taking my questions. I was looking at Slide 14. And on that slide, you lay out some use cases for tokenization across the industry. Can you just expand on how you think this trend can progress for the industry? How has investor uptake been? What’s the education required? And I guess maybe expand on why this could be a better wrapper or better mousetrap than the ETF and how will that dynamic play out over the next five or 10 years?

Jonathan Steinberg: Hey, Will. Will Peck, Head of WisdomTree Digital Assets. Why don’t you take the first crack at this?

Will Peck: Yes, happy to. So just on Slide 14, we’re showing where a lot of our traditional and alternative asset management competitors are doing in the [indiscernible] banks. Clearly, it’s been a large uptick in activity. There’s been some live product, but a lot of this has been POCs so far, proof of concepts, things like that. So in terms of actual investor demand at this point, you’re seeing some stuff in the defi space in terms of token addition of real world assets, but it’s still very early. In terms of the advantages, I like to focus on three things. Liquidity, transparency and standardization. Those are three things that you can see in terms of the benefits that tokenization provide versus traditional rails for financial assets.

So we’re very encouraged by what we’re seeing in the industry so far, but we’re also encouraged by our ability and nimbleness to actually bring live product to market, which we think is going to give us an advantage versus a lot of other people today. So does that answer your question?

Michael Brown: I guess maybe if you could just expand a little bit on the key advantages versus ETFs and perhaps what that growth potential could be longer term and maybe what’s the key impediments to delivering on that growth potential?

Will Peck: Yes. So again, I see the key advantages versus ETFs or kind of traditional ways to hold assets being liquidity, transparency and standardization, right? So liquidity, the ability to trade something 24/7, 365 if you’re getting the right market participants in there, transparency kind of providing much greater visibility to market participants in terms of who is holding what assets, where it’s sitting at in different parts of the life cycle. And then finally, around standardization, I think blockchain, you look at like something an ERC-20 token in a wallet. The ability to hold any asset like that, and all you need is a compatible wallet, we think has a lot of potential and power versus kind of traditional assets or traditional ways of holding assets over time.