Q1 2024 Wisdomtree Inc Earnings Call

Participants

Jessica Zaloom; Head of Corporate Communications; Wisdomtree Inc

Bryan Edmiston; Chief Financial Officer; Wisdomtree Inc

R. Jarrett Lilien; President, Chief Operating Officer; Wisdomtree Inc

Jonathan Steinberg; Chief Executive Officer, Director; Wisdomtree Inc

Jeremy Campbell; Director of Investor Relations; Wisdomtree Inc

William Peck; Head of Digital Assets; Wisdomtree Inc

Jeremy Schwartz; Global Chief Investment Officer; Wisdomtree Inc

Adam Beatty; Analyst; UBS

Keith Housum; Analyst; Northcoast Research

Michael Cyprys; Analyst; Morgan Stanley

George Sutton; Analyst; Craig-Hallum

Presentation

Operator

Greetings. Welcome to the WisdomTree First Quarter 2024 earnings call. (Operator Instructions) As a reminder, this conference is being recorded. At this time, I'll turn the conference over to Jessica Zoom, Head of Corporate Communications. Jessica, you may begin.

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. As 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 31st, 2023, with entry assumes no duty and does not undertake to update any forward looking statements.
Now it's my pleasure to turn the call over to WisdomTree's CFO, Brian Evans.

Bryan Edmiston

Thanks. Thank you, Jessica, and good morning, everyone. Let me begin by sharing our results for the first quarter, along with commentary on our expense guidance before turning the call over to Jerry and Jojo for additional updates on our business.
We continue to demonstrate our ability to grow organically, having generated $2 billion of net inflows during the quarter. Sustainable flows have been a continuing theme with over three years of positive momentum. And our results this quarter illustrate the breadth and depth of our product lineup and serve as a proof point in our ability to put points on the board away from USFRR.
$2 billion of inflows were broad and diverse and generally into products with higher fees, which is remixed our blended fee rate higher, setting the table for higher revenue capture for the second quarter. Our inflows, coupled with positive market movement, resulted in us ending the quarter with record AUM of $107.2 billion. This is driving revenue growth and expanding margins, demonstrating the scalability of our business model, continuing organic growth, coupled with disciplined expense and capital management alongside positive market conditions is the formula for further margin expansion and accelerated EPS growth.
Next slide. Revenues were $96.8 million, an increase of 6.6% from the fourth quarter and up 18% from the prior year quarter, driven by higher average AUM. We have also observed adjusted operating margins expanding over 820 basis points versus the first quarter of last year or 280 basis points organically when adjusting for the impact of our gold royalty buyout, which we accomplished in the second quarter of last year. Our adjusted net income for the quarter was $20.3 million or $0.12 a share.
Next slide our adjusted operating expenses were up 5% for the quarter. The largest contributor was compensation as we experienced elevated seasonality in the amount of compensation we report in the first quarter due payroll taxes, benefits and other items. In connection with the payment of year-end bonuses. Fund management expenses were also higher, driven by higher average AUM.
Next slide. Now a few comments on our forecasted expense guidance. Our forecasted compensation expense remains unchanged, ranging from $108 million to $118 million. This guidance 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, where we sit today a quarter into the year. And given a strong start, we would anticipate trending towards the upper half of this range.
Our discretionary spending was $14.9 million in the first quarter. We are reiterating our full year discretionary spending guidance of $64 million to $68 million as we anticipate an uptick in marketing spend in connection with our national rollout. We've been three prime, we reported a gross margin of 79.4% in the first quarter. We are maintaining our gross margin guidance of 79% to 80%, considering current AUM levels and 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 was $2.3 million in the first quarter. We are maintaining our guidance of $10 million to $11 million for the year. We are also maintaining our annual adjusted interest expense guidance of $14 million. As a reminder, our adjusted interest expense guidance 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 last November.
Our interest income during the first quarter was $1.4 million. We are increasing our interest income guidance for the year by $1 million to $5 million. Based upon the magnitude of our forecasted interest earning assets, our adjusted tax rate was 24.9% in the first quarter and our guidance of 24% to 25% remains unchanged, and our weighted average diluted shares were $165.3 million during the first quarter.
And our guidance of $156 million to $168 million for the year remains unchanged as well. That said, this guidance does not take into consideration any incremental shares associated with our convertible notes. Our current stock price of roughly $9 per share is up over 30% year to date and is approaching a nine 54 conversion price related to our convertible notes scheduled to mature in 2028.
While the notes require principal to be paid in cash, our diluted shares would need to be increased for any incremental shares associated with the conversion option once our stock price exceeds $9.54 per share. An illustration is including included within our earnings presentation to assist in quantifying the incremental shares associated with the conversion option going forward.
That's all I have. I will now turn the call over to Jarrett.

R. Jarrett Lilien

Thanks, Brian, and good morning, everyone. We are excited to report another strong quarter with robust net inflows, record AUM and expanding operating margins, which all reflect our continued leadership in delivering innovative products and solutions for every market environment in every part of the cycle. We're also excited about our progress in tokenized assets in blockchain enabled finance, which are reshaping the future of our industry and creating new opportunities for growth and value creation.
As Brian mentioned, Q1 started with nearly $2 billion of net inflows, driven by the breadth and depth of our product lineup, especially in higher fee funds. Our India earnings fund and our currency hedge strategies attracted strong demand as did commodity funds such as silver and copper. In total, the fee rate on our gross inflows was 49 basis points, which helped drive our overall blended fees higher combined with a supportive market.
We ended Q1 with record AUM of $107.2 billion, up 18.2% year over year and 7.1% sequentially. We are proud of these results, which reflect our ability to deliver consistent and diversified growth across our product suite models also continued to be a steady growth driver. As a reminder, our approach is to grow the number of advisors who have access to our models while also further penetrating that market and growing the number of advisers actively using WisdomTree models.
Based on our current pipeline, we expect our accessible market to grow to about 80,000 advisors by year end up from 70,000 at the end of last year. Additionally, after adding a thousand new advisor model users in 2023, we're on track to maintain that cadence of new adviser growth in 2024.
The ongoing traction in models has driven growth in model AUM to about $3.5 billion at the end of March, outpacing the growth of our firm-wide AUM. Overall, we remain very bullish on the long runway for model assets growth in the quarters and years ahead.
We're also pleased to report that we delivered another strong quarter in margin expansion and earnings growth, demonstrating our scalable operating model and our ability to leverage our AUM growth.
Our total operating margin increased by 820 basis points year over year to 30%, of which 540 basis points was from smart deal-making and opportunistically buying out the gold royalty payment last spring and 280 basis points was organically driven by growth and operational efficiency. Our adjusted earnings per share increased by 71% year over year to $0.12, reflecting top line growth and margin expansion dropping to the bottom line.
We remain focused on driving expanded operating margins and earnings growth in 2024 and beyond. And we continue to believe that tokenized datasets in blockchain enabled finance represent a huge growth opportunity for WisdomTree as they open new markets, attract new customers and create new revenue streams.
Back in 2020, we talked about our AUM growth opportunity driven by our diversified product suite models. We talked about our scalable operating model and how growth and operational efficiency will drive margin expansion. And we talked about the potential of tokenized assets and blockchain enabled finance each quarter since we have delivered on those opportunities.
And each quarter, our growth momentum shines brighter, our margins have been expanding, and we further solidify our position, the tokenized assets we used to be alone and talking about many of these themes. But now we have some company. We like to say that if you want to know what the industry is going to do tomorrow, look at what WisdomTree is doing today.
In conclusion, we are confident that we have the right strategy, the right products the right team and the right culture to continue to create value for our clients and shareholders in the long term, we remain extremely bullish about 2024 and beyond. And we continue to drive organic growth, expand our margins and 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, Jerre, and good morning, everyone. Been a great start to the year. Record AUM, strong flows, higher fees, 820 basis points of margin expansion, driving a 71% increase in earnings per share. First, the first quarter of last year, we are executing and the key drivers that will propel the next $100 billion of AUM growth, those drivers being ETFs, model portfolios, tokenization and WisdomTree prime.
Importantly, I want to remind everyone that all of the digital spend, including marketing is fully baked into our guidance for 2024. It's important to remember as marketing really begins in early May now, the most important milestone in the quarter was the receipt of wisdom trees trust charter from the New York State Department of Financial Services.
Defs is the premier regulator for digital asset businesses in the U.S. and the operation of a trust company in this space has been a core component of our strategy. Simply put, we think that the Trust Company is a strong counterparty for our retail and institutional customers, and we think it will open up a number of business opportunities for us going forward.
More specifically, trust charter, just two things. First, it allows us to onboard New York customers to WisdomTree prime. Second, the Trust Company gives us the ability to offer products and perform services under DEFS supervision with associated legal protections. Specifically the trust company can perform. We do here a custody of digital assets issue, DEFS approved stablecoins and manage stablecoin reserves.
Now from an availability perspective and including the upcoming launch in New York, 75% of the U.S. population across 41 states have access to WisdomTree prime on the product and feature front. We also hit another key milestone in the first quarter with the launch of our debit card to prime users. Card is available both physically and digitally through Apple and Google Pay platforms and ties WisdomTree prime customers, asset balance in the payment ecosystem.
Initially, customers will be able to offer auto debit from the dollar token balances, but we will expand that functionality. Two other asset classes like our money market fund gold and crypto in the coming quarters with the trust charter and the launch of the debit card. As I already mentioned in early May, we will be increasing our marketing efforts going forward. It's too early to share any takeaways, but this is the effort that will generate further downloads, funded accounts and activity.
This is the beginning. We are seeing increasing interest in tokenization in the asset management space. As many of you may have known our combination of retail and institutional distribution, our regulatory licenses and our broad suite of tokenized assets and funds across asset classes positions us as the early leader in this space.
We are looking to press this advantage in the coming months. This is only the beginning. As I continue to mention in recent calls, 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 post tokenization.
Now let's turn the call over to Jeremy Campbell, WisdomTree's head of investor store relations All right.

Jeremy Campbell

Thank you, Joe, and good morning, everybody. Operator, let's so let's open up the lines and go directly to some questions from our analysts.

Question and Answer Session

Operator

(Operator Instructions)
Adam Beatty, UBS.

Adam Beatty

Thank you and good morning, I wanted to ask, as you roll out prime and from the retail initiatives, there have been some kind of prominent examples in recent years of other firms. You're trying to go from an institutional kind of set up to a more retail approach and then backing away from that strategy. So just wanted to get your thoughts on your obviously, you've seen that studied at how WisdomTree's offering is differentiated and how you succeed there?

Jonathan Steinberg

Thanks, but thank you. So, Adam, let me start and then maybe we'll you'll jump in. First, I'd say that WisdomTree is already and has, from the very beginning been a direct-to-consumer brand within investments. So online brokerage accounts. I had seen our TV ads starting 17 years ago. And you know I've been interacting with us on a direct to retail basis on from the very beginning. This is fully integrated into what we're doing with prime on further delves into the consumer space for sure.
It is a new business line though, it really is built on the infrastructure of the core business, and we're starting with the sort of the low hanging fruit and investors, people most interested in money are people that we know or gotten to know over the course of the past 20 years, and it will build incrementally over time. But by keeping our costs extremely low.
And as we do this, I think that we'll be able to find a cost effective marketing message. And that's the reason for the early testing in small incremental bites, which is what we've said from the very beginning. And so what we're talking about it in May is just of an increase in marketing spend and it will just continue to be increased and incremental ways through the up for the rest of the year.
But will what would you add to that? And I think a lot of that was covered?

William Peck

Well, John, no, I just said, you know, we're doing both and I think they're mutually kind of beneficial and self-reinforcing. I mean, one of the big excuse me core parts about our tokenization platform, is it the same platform being applied both to retail and institutional? We've spoken a lot about prime. We're going to be have more announcements coming up for that institutional portal that we have alluded to in the past. So it's both and they're both mutually self-reinforcing and there's a good flywheel effect from both of them.

Adam Beatty

Fair enough. I appreciate the context around around direct to retail. And I wanted to follow-up on kind of the flywheel effect and the synergies. One of the things that we sometimes hear from investors is there tends to be a mentality and we'll just sort of address the point a little bit. But that tends to be a mentality of prime and tokenization being separate from the core business of WisdomTree. So maybe if you could talk a little bit about the synergies and how some of the marketing spend might help your legacy business as well, thanks.

Jonathan Steinberg

What should I take that your hand?

William Peck

I'll start, John, and I'm happy to start. I mean, I think that it's completely leveraging the core competencies of WisdomTree, right, a tokenized fund or tokenized asset looks very similar in a lot of ways right to like an exchange-traded product instead of being listed on the New York Stock Exchange or you know, fixed in Switzerland, it could be listed on a kind of available on blockchain. So it's very similar core competencies to what we have. I think in maybe a different distribution set right now, but it's definitely leveraging kind of what WisdomTree does today.

Jonathan Steinberg

Andre, I think you said just already for Hydraulics, which is tapping into regulatory prowess, product development, prowess of marketing prowess, even our engineering team, which had been building the solutions business of the core business has been tapped and expanded to help with, you know, the user interface and other elements of the technology build of our digital assets. And so synergy all along well as well as overlapping vendor relationship management. So those are some of the elements that just come to mind in terms of how well the WisdomTree footprint was and four is for trying to tackle the digital asset opportunity.

Operator

Keith Housum, Northcoast Research.

Keith Housum

Good morning, guys. Congrats. I appreciate the commentary on WisdomTree, but if we come back to the ETF part of the business. Perhaps, John, you can give a little summary about the new product creation over the past, say four or five quarters, and then what the vision is for new product creation going forward.

Jonathan Steinberg

And well, I'm going to I'll very, very quickly touch on it, but Jeremy Schwartz, I'll turn it over to you and one of the things that we've done and we it is expanded one of our internal brands of quality as a family and as a foundational arm, a factor that we build a lot of our funds on we started by not only did the original factor funds overweight to quality, but then we go to more specific quality families.
We started with a quality dividend growth. Our largest equity fund. We've taken that internationally in recent years into the usage format. And we recently over the last year, we launched quality growth, which has had just an extraordinary performance in this past quarter, first quarter and maybe to actually it more recently than that, it could have been in the second quarter that we launched the usage version of quality growth.
But Jack, Jeremy, why don't you talk a little bit more about some of the product strategies that we've launched recently?

Jeremy Schwartz

Yes, we've been continually trying to diversify the product set for market environments where you have something in all market environments. And I think what you've seen with quality growth and our investment in Fanatics is that exact playing out in our usage family. We have about $1 billion a half in thematics across over 10 different, as you say, more sector-specific versions of not just the tech sector, but cloud in cyber and AI and so now you have a real growth lead type of fund family, you can compete in. And in the U.S., we have almost $1 billion in that somatic range.
So $2.5 billion in the sort of sector specific growth areas. The quality dividend growth family and the firm is up to it was almost $15 billion across the U.S. and in Europe or maybe even more than $15 billion across that family and is taking a lot of those those inflows.
And we continue to broaden out how do we it go beyond USFR. for fixed income, we've been investing in broader enhanced yield indexes for bringing a longer duration exposures and our efficient core family for equities, which combined stocks with bond futures is another way people can add duration to portfolios. And we're seeing that both in the U.S. and recently launched that in Europe.
So we continue to be innovative in the funds that we launch in trying to help diversify the overall business with that approach.

Keith Housum

Craig, if I can follow up there and I'm sure AUM is the easiest way to measure success in some of these new funds, but how do you guys evaluate the success of these funds outside of just AUM growth?

R. Jarrett Lilien

I've made media, I can jump in this. Well, Gerry, jumping in for just a quick one, I think, and Jeremy, you can you can talk about measuring the new launches.
But you know, our overall strategy is about growth. And so growth is about having that diversified product suite and then enhancing it with innovative launches. And that's been a strategy that's been working for us very well over the last several years where we're looking to generally launch about 20 new funds a year, and we're not changing that.
That's sort of the pace we're looking at this year as well. And again, it's a strategy that's working well for us as evidenced by more than three years of consistent organic growth. That really is leading the industry in terms of organic growth so it's a very sound strategy and we're continuing with it.

Jonathan Steinberg

Jeremy did want to add any?

Jeremy Schwartz

The only thing I would say in addition to the individual products, we continue to launch more models, and you'll hear us talk about how to get diversified flow. It's going beyond the single tickers sale in the model portfolio businesses and really the best way we can do to launch innovative models as well.
Certainly, we've had a lot of success with the single-branded models for the big platforms, and that's also part of our Prime offering is single token fund, which is the overlap between sort of the prime business in the traditional business and how they there's synergies there.
But we continue to launch a very interesting new models that leverage our new funds. So I think you'll see you continue see that as another source of growth for us.

Operator

Michael Cyprys, Morgan Stanley.

Michael Cyprys

Great. Thank you. Wanted to dig in a bit on the models, if we could. I was hoping you could maybe talk to some of the steps you're taking to drive greater adoption with new advisors using your models. I think you mentioned that 70,000 advisors right now is sort of the accessible market. I understand that's likely to expand this year. Just curious how penetrated you are within that 70,000 in terms of the number that are actually using your models and some of this talk about some of the steps that you're taking to improve that penetration?

Jonathan Steinberg

Jarrett?

R. Jarrett Lilien

Yes, that's one of our major focuses, and we talked about it last quarter that it's a there's a formula there. We want to do expand the accessible market. So those are the number of financial advisors that can access our models. And at the end of the year that was at 70,000. And then of course, you want to penetrate that accessible market. And as of the end of last year, we had taken the number to 2000 advisors.
So our penetration was under 3%. And that's one of the exciting things is that and we still have a lot more of that addressable market to penetrate now so far this year, we've already seen growth on both. We're growing the accessible market. And today in the accessible market, we've been really successful on getting on to some of the best platforms and with the firms that are most focused on this trend. So we're on Merrill's platform, Morgan Stanley's platform, LPL's platform, and that's a big part of the effort how do we get on more platforms and grow our accessible market.
But then then the game is on and now you're the doors open and you have to walk through it and start convincing the individual advisors of how good our product is. And that's done with very good our sales, a lot of great research, a lot of great models as Jeremy mentioned earlier, we've got, you know, not so secret weapon with Jeremy Siegel and we go in and we tried to win the hearts and minds.
And last year we took our time, you know the number of advisors using our models, but we doubled the number from 1,000 to 2000. We were rough adding roughly 250 new advisors per quarter. We're on that same pace this year. So another great thing about this business is you have real visibility into the pipeline.
So already out there, as we said in the prepared remarks, we have great visibility to that accessible market. We expect it to be 80,000 and possibly more by the end of the year. But just what we know is in the pipeline. And then we also can see that we're growing our penetration.
And another thing is just sort of the and seasoning. We know when someone starts on their first day with one of our models, it might be for one of their clients and they're testing it out. And we know as they get more comfortable, they start using the models for a bigger portion of that client's portfolio and then start adding more clients.
And so we're at the very early stages because a lot of the advisors that have started with us are early in the seasoning process. So given you a lot there, but we're growing the addressable market, we're growing our penetration, and we're also beginning to seize in those advisors that we've onboarded.

Michael Cyprys

Great. Thanks so much. And just a follow-up question on WisdomTree prime. I was hoping you could maybe talk about your go to market strategy. Talk about some of the steps that you're going to be taken to bring awareness to the offering and bring customers directly to WisdomTree and what sort of success look like to you as you look out over the next couple of years and understand it to your earlier comment that you've been a D2C business for a bit, but maybe you could just remind us on what portion of the ETFs today are held in self-directed brokerage accounts?

Jonathan Steinberg

Bill, do you want to start?

William Peck

Yes, I'm happy to start. And then if you have anything else to add John, I think it was just that and it's what you've been talking about in the past on lean marketing, focusing on digital and organic first. So that could be targeting App Store search ad, things like that for people who are looking at some of the themes that we've got, a very clear example of that would be digital gold.
There's a large universe of people out there who are buying gold, very appealing, a digital gold product with instant settlement that's appealing to them. We want to target that user and continue to monetize that user.
So that's the type of people that are going to be targeting on addition to the organic and press strategy that we've got going on as well and a big piece of that has been adding features and also adding states and being available to additional people in the US. So the New York, you know, TrustCo announcement was a big part of that being open to new customers in the coming weeks will be a big part of that.

Jonathan Steinberg

So that's the type of marketing strategy that we're going to be leaning into and I would say Asia from a penetration on the core business to retail just AUM, it's something I don't have an exact, but it's sort of a $9 billion to $10 billion number of the $99.9 billion number out of the total with the US being more retail-oriented than Europe and that $9 billion in brokerage self-directed?

Operator

(Operator Instructions) George Sutton, Craig-Hallum.

George Sutton

Morning, this is Adam on for George. Thanks for taking my questions on with respect to WisdomTree prime and the it received the NYDFS approval, I was curious, is this helped push forward any of the conversation with respect to third party white labeling? Will you want to start?

William Peck

Yes. I guess I worked on now. I think the I'm like John said earlier in the call, the trust charter opens up new customers to us, but it's also a really strong regulated counterparty for people to be doing business with so on lots of B to B and B to B to C opportunities. The trust charter is a great kind of way to do that. And you actually see other businesses in the market today who have that trust charter who have lots of white labeling style strategies around that. So that very much is a good step along that kind of just white labeling for B to B and B to B to C More tablets.

George Sutton

Great. And then I know it's early days with respect to the debit card offering, but I was curious if there's any insights you could share about the initial response from the existing users.

William Peck

Initial response has been great. Yes, our job just jumped in there. It's actually been very helpful in terms of our marketing strategy. And we've seen an uptick with debit card messaging. We're seeing people, you know, open the cards beginning to spend on it. So the debit card has been a it's always been a key component of it, and that's being borne out in the marketing so far.

George Sutton

Great. And then just with respect to flows so far through Q2, obviously, there's a little bit of a headwind in the European business. Curious if you had any additional color on what's driving that?

Jonathan Steinberg

Jeremy or Jarrett, you want to Stork one of you.

R. Jarrett Lilien

Sure. I can give a start. And Gerry, you jump in and you know what we've seen is some money in motion. You've seen some repositioning, especially in commodities. So you've seen some big moves and in Europe, you tend to see that it's chunky business and it tends to move, you know, in big blocks at one time and then comes back into the market. So in terms of a customer distribution, though still growing the number of customers still feel very positive.
And one area where you can really see it is in our usage business, which is now over $6 billion, and that is an important part of the European growth strategies. And again, the product development strategy is to continue to launch you since we launched it as you grow, you sit and you yesterday, I believe in Europe, and we've seen inflows into you sits every year since 2014.
So still feeling very good about what's going on in Europe, but the nature of the business is pretty chunky when when money moves around and people change your allocations. And also though you it's great to talk about the US for I know a lot last year and the year before a lot of people we're asking.
Okay. Are you worried about USFR. because we've seen some great flows there and are point always was no, this is a core holding number one. So if we're not even when interest rates change direction or not expecting large outflows, you may see some but more importantly, as a core holding in for many a cash substitute, it puts us in a position to be in the conversation of where that money goes.
And you saw that in the first quarter in spades where you saw some money moving out of USFR., but moving into things like degrow into India into the currency hedge strategies into models and really helping drive something really significant in the first quarter was the quality of the overall flows into basically higher fee products, but driving real revenue growth and so on a lot of great things going on with the flows, both in Europe and the US.

Operator

Thank you. At this time, we've reached the end of our question-and-answer session. I'll turn the floor back to management for closing remarks.

Jonathan Steinberg

This is Miguel China Steinberg. I don't think we have any closing remarks. We want to thank you all for your time. And attention and support, and we'll speak to next quarter. Thanks, everybody. Have a great day.

Operator

This will conclude today's conference. You may disconnect your lines at this time and have a wonderful day.