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Greetings, and welcome to the WisdomTree First Quarter 2023 Earnings Call. [Operator Instructions] Please note that this conference is being recorded. I will now turn the conference over to our host, Jessica Zaloom, Head of Corporate Communications. Thank you. You may begin.
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 the 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's CFO, Bryan Edmiston.
Thank you, Jessica, and welcome, 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 Jarrett and Jono for additional updates on our business. First quarter marks a strong start to the year, having generated $6.3 billion of net flows, the third best quarter in our history. Flows were well balanced between our U.S. listed and European products with assets gathered primarily in our fixed income, commodity, emerging markets and international equity categories. There's now been 10 consecutive quarters, generating positive flows and our first quarter flows translates into a 31% annualized organic flow growth rate. Our AUM ended the quarter at $90.7 billion, a new milestone and a record level, up almost 11% from the prior quarter, primarily from positive flows, but also favorable market movements. Our AUM currently stands at $91.2 billion, slightly higher from the end of March, having benefited from further positive market movement. Next slide. Revenues were $82 million, an increase of 12% from the fourth quarter due to our higher average AUM. We also recognized higher other income, stemming from large flows into some of our European listed products. This revenue may change quarter-over-quarter depending upon AUM changes due to market movement or the velocity of flows arising from these products. Adjusted net income was $11.2 million or $0.07 a share. Our non-GAAP results exclude a noncash after-tax gain of $20.6 million for our future gold commitment payments as well as a loss of $9.7 million recognized on the extinguishment of our convertible notes and $5.9 million in other net nonoperating losses. Next slide. Our adjusted operating expenses were up 4.7% 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 to payroll taxes, benefits and other items in connection with the payment of year-end bonuses. Next slide. Now a few comments on our forecasted expense guidance. We are narrowing our forecasted compensation guidance by increasing the low end of our range given the strong start to the year. We now estimate compensation to range from $100 million to $106 million. The range considers variability in incentive compensation with drivers including the magnitude of our flows, our share price performance in relation to our peers as well as revenue, operating income and operating margin performance. Given the strong start to the year, we anticipate trending toward the high end of this range. Our discretionary spending was $13.2 million in the first quarter. We are reiterating our full year discretionary spending guidance of $56 million to $59 million as we anticipate an uptick in marketing spend. We reported a gross margin of 79.1% in the first quarter. We are maintaining our gross margin guidance of 78% for the year, given anticipated product launches, changes in other income, which may rise or fall depending upon the magnitude of flows of our European listed products and uncertain market conditions. Our contractual gold payment expense is forecasted to be $18 million, assuming gold prices remain flat at current levels. As a reminder, this expense is based on us paying 9,500 ounces of gold on an annual basis and is measured based upon monthly average gold prices. Our third-party distribution expense was $2.2 million in the first quarter. We are currently trending toward the high end of our full year guidance of approximately $8 million to $9 million. Our adjusted tax rate was 22.7% for the quarter, and we are maintaining our tax rate guidance of 23%. In this past quarter, we refinanced $130 million of our $175 million convertible notes that were coming due in the second quarter. The remaining outstanding notes will be settled in June of this year. Our interest cost for the second quarter is estimated to be $4.1 million, which should then reduce to $3.5 million per quarter going forward. That's all I have. I will now turn the call over to Jarrett.
Thanks, Bryan, and Good morning, everyone. Our strong results continue to showcase great breadth, depth and momentum. To give some perspective, Q2 last year was the seventh best quarter in company history. Q4 last year was our fifth best quarter in company history. Q1 this year with $6.3 billion of net inflows was our third best quarter and our 10th consecutive quarter of inflows. Last year, we had organic growth of 16% best-in-class versus our peers. 2023's annualized organic growth rate now stands at 31% and continues to be best-in-class. Q1 generated net inflows in 6 of 8 of our major product categories. Our managed model suite continues to gain momentum and is now available in a turnkey manner at wirehouses, independent broker-dealers and RIAs. In fact, our models are now available to over 65,000 financial advisers across the U.S. We ended Q1 with $90.7 billion in AUM, an all-time high and AUM now stands at nearly $92 billion. We have an efficient and scalable model with incremental margins in our ETP and models business well north of 50%. Continued AUM growth from both flows and normalizing markets will drive higher overall operating margins. Finally, recent market turmoil has validated our methodical approach to tokenized assets and blockchain-enabled finance. We are excited about the upcoming launch of WisdomTree Prime and its suite of blockchain-enabled funds, golden dollar tokens and Bitcoin and Ether. In all, we continue to perform and drive positive momentum, and we remain excited about our business. And with that, let me turn it over to Jono.
Thank you, Jarrett. I get asked a lot, what has changed at WisdomTree over the years. I think that our very strong first quarter really showcases what's different today. Back in 2015, WisdomTree had its 2 strongest quarters of net inflows, but 2 funds made up 90% of that flow. Contrast that to today, where we had our third strongest quarter of net inflows, but the top 2 funds only represent 55% of the total, 4 funds took in more than $1 billion in the quarter, with nearly half of our 350 global products generating positive inflows for the firm. Our European business had its best quarter in both inflows and revenues since the acquisition back in 2018. I am confident that our strong and steady organic growth will continue throughout 2023 and beyond on the back of our strong fund performance, broad product suite and our ever-expanding model franchise. We're also on the precipice of launching our suite of digital products and solutions that cements WisdomTree as a leader in tokenization and blockchain-enabled finance. Citi recently published a report in March that forecast between $4 trillion to $5 trillion of tokenized digital securities by 2030. I am pleased to report that our wallet, WisdomTree Prime, remains on track for an initial launch in App Store in Q2, where customers will be able to invest across our suite of 9 blockchain-enabled funds, our gold and dollar tokens and direct crypto like Bitcoin and Ether. Over the past several years, we've developed a market-leading set of capabilities in tokenization and blockchain-enabled finance as others are just getting up to speed. With WisdomTree Prime, I believe we have one of the great early use cases for these new technologies. But then the Q2 launch is not the end of the line, but it's really just the beginning. Throughout 2023, we will continually enhance WisdomTree Prime's platform with new products and features that furthers its appeal. The platform is iterative, not static and the optionality for future innovation is bound lift. In sum, WisdomTree is on the right track. I expect our net flows momentum to continue, driven by our strong product lineup and growth in our model franchise, and I am excited for all of you to try out WisdomTree Prime platform later this year. With that, operator, can you turn the call over to our Head of Investor Relations, Jeremy Campbell, to take some questions from our shareholders.
All right. Thanks, Jono, and good morning, everybody. Before I turn the call over to Q&A from our Say shareholders and then our analyst community, just going to ask to keep your questions focused on the quarterly results and our business generally as we will not be discussing proxy-related matters. The first question from our retail shareholders in the Say platform is directed towards Jeremy Schwartz, our Global Chief Investment Officer. And the question is, how has WisdomTree capitalized on a market environment where investors are looking for yield and where do you see advisers allocating within fixed income today?
Great question, Jeremy. Thanks for that. Clearly, one of the big successes at the firm has been the growth of our floating rate treasury ETF, USFR and the treasury, you only started issuing those bonds less than a decade ago, and there was really not a lot of interest at the start because there weren't any rates. But now with 2 hiking cycles in the books, this has been the center stage of the fixed income market and clearly, USFR is benefiting. But as far as further allocations beyond that, we have a lot of interest, and particularly with the inverted yield curve, still a lot of interest in the short duration segment. But we've also seen the recent success and launch of our WisdomTree Voya yield-enhanced Universal bond fund. Voya has been a great sub-adviser for us, and we collaborated on developing this enhanced yield exposure that's come to bring in over $1 billion of inflows in AUM just this year, and this is a great core solution we can offer for that total market bond exposure combining both high yield and core bonds. We continue to see interest in our high-yield fundamental proprietary indexes that offer over 8% yields today, something we find to add a lot of value. And that enhanced yield core, combined with our other enhanced yields, give us a real robust solution for when people want to add more duration back to portfolios. Beyond fixed income, the question asked about yield and certainly high-yield strategies, particularly international high yields for developing and emerging markets are starting to see a lot of inflows for us this year, over about $0.5 billion in emerging markets and high dividend international. And really, what we say is having a solution for all types of market environments has been our long-stated goal and what we see this year, as Jono has emphasized, is more robust diversification than we've had really ever before.
Great. And then the second question, Jeremy, I'm going to ask you to stay on and give some color here and then maybe our President and COO, Jarrett Lilien, can add some color as well. But the second question is, if the Fed positive hikes are beginning to cut rates, what do you think will happen to flows in our U.S. floating rate ETF? And how much, if any, of a headwind do you think that presents the total flow profile for WisdomTree?
Well, clearly, it's been a great success and rising rates might be causing a segment to use it tactically for managing those fixed income portfolios. And -- but year-to-date is taken in $2 billion. And in the market, the futures markets are starting to pencil in clearly another hike next week and then a pause in some cuts over the next 12 months, but still bringing yields to above around a 3% level 12 months from now in those futures markets. The feds keep saying they're going to stay higher for longer, but we shall see how that all develops, where I actually think that it could hold in robustly. There still might be opportunities to grow use cases for USFR beyond how it's been used historically. In many ways, the funds competing for ultra-short duration assets like cash deposits and banks. And what you see this year is a huge surge to flows in money market funds, not necessarily because of fears of safety of deposits in banks, but because the banks aren't paying really appropriate interest rates and our investment team started talking about the term bank walk as the slow move away from banks paying almost nothing to really treasuries and USFR paying around 5%. And so higher yields, higher rates over those traditional checking and spending counts, I think that's going to be with us for some time even during a rate cut cycle. So I think USFR still can gain market share there. Now longer term, WisdomTree Prime is all about making it easier to spend off exposures like this, this type of floating rate, treasury vehicle or other treasuries. And so helping expand use cases, both for USFR and the digital offering is what we look forward to extend the recent success.
Yes. And maybe just adding to that with similar comments, but from a different perspective. When we're talking to advisers, some do view USFR as a fixed income product. Other view it as smart cash, a cash alternative, as Jeremy was saying. And this is really important because the average adviser allocates roughly 8% to 18% to cash depending on the market. So either way, whether fixed income or smart cash alternative, it's a core holding which makes it sticky and a long-term part of any portfolio. In addition, when money moves in and out of the product, we being WisdomTree are in the conversation as to where the money moves, and we have a broad suite of products that can now be part of that conversation. And Q1 is really proof of all of this. When we look at last year, USFR was a major contributor to our flows. As Jeremy said, we've had some inflows this year, but about half the pace as a year ago, yet Q1, even with that slowdown was the third best quarter in our 17-year history. So what you saw was that USFR remains sticky and discussions and flows shifted to other funds in our product suite, which was good. So bottom line, USFR, it remains an important part of our product arsenal. But also just jumping on another thing that Jeremy mentioned. Digital USFR is an exciting part of our coming WisdomTree Prime launch. And just as it's a core holding for advisers, we expect it will be a core holding for our WisdomTree Prime wallet holders, where experience tells us that cash holdings can range between 15% and 30%. So again, it's core to us in our ETF business. We also expect it to be a very good and important and core part of our WisdomTree Prime offering.
Great. Thanks for that color, Jarrett. Jeremy, you're a popular man today because we have another products-related question from our retail shareholders. The final question from the Say platform is how is your product development strategy evolved over the past few years? And what are WisdomTree's advantages?
We love talking product on my team. And our product strategy focuses on innovation and value-add, whether through the proprietary indexing or unique exposures and betas of the various asset classes, really a core advantage with routes to our inception was building our own intellectual property. Many of the competing firms licensed third-party IP, but having a strong team, investment team that can build indexes across equities, fixed income, of -- it gives us unique perspective on the markets and owning the IP creates this positive feedback loop for marketing and distribution, which can get supported by great content and thought leadership, innovative tools that showcases all of our investment stories. I'd say over the recent years, we're seeing those investment insights further compound with the model portfolio work that we've been talking about, which gives us another unique vantage point to see our product lineup, and we think about holistically for solutions in that model offering, what can make it more robust. It's definitely leading to even further ideas from a product standpoint. And I might say, finally, based on this track record of building innovative solutions, we're seeing clients and industry participants come to us with more and more flow of new ideas. And our team values those very carefully. It's great to get direct feedback on what clients find most interesting and valuable. And a lot of our best innovations have come from this type of engagement we have with clients. So in short, there's no shortage of new ideas, both product and structure innovation has been a key strength of WisdomTree.
Great. Thanks, Jeremy. Operator, please feel free to open up the Q&A to our analyst community.
[Operator Instructions] Our first question comes from Brennan Hawken with UBS.
So you're on the verge of launching Prime. So I was just interested in hearing what your latest plan expectations for costs and how you define success for this platform in the next few years?
Will -- maybe, Will Peck, who runs Digital Asset at WisdomTree maybe is on the call. Will, why don't you start? And then Bryan, there was a question about costs. So maybe you could just finish off after that.
Yes. Thank you, Jono, and good morning, everyone. So as we previously said, we're exiting beta this quarter, rolling out in many, but not all states in the U.S. as well. Really, what we've been doing since we've been in beta is just getting a lot of feedback from early users, kind of implementing that in terms of the different changes that we might make, like the app interface and just doing operational testing overall. So that's gone quite well. We're very happy with it. Excited to be on track to be rolling out more in Q2. I'd say going forward, this year is all about kind of engagement with customers, so people coming in, seeing how they're using it, seeing if they're using it for more and more stuff as well as adding more and more features, right. So unlike kind of an ETF that you put out with this, it's not a finished product on day 1. It's a constantly iterative changing thing that we want to keep improving and adding more and more features. So for us, it's really about learning from our customers' initiative this year and then adding more and more features. And then over time, when we be disclosing more and more KPIs as well in terms of success, engagement and, of course, revenue and profits for the firm from that.
And then on the cost side, the digital spend is embedded in our comp and discretionary spending guidance. I think from recollection, we were at $11 million to $12 million last year. High teens is the number this year as we launched Prime. We've been disciplined in our spending. If we're going to see a significant uptick in the future, it would be because we're seeing success on the platform.
Okay. So that my team's number is the right way to think about it, unless there's a material amount of momentum behind the product. Is that fair?
Yes, that's fair. Correct.
And I would just add that the cost of the rollout really starting in Q2, but rolling out through the rest of the year, unlikely that there will be any change in guidance, what's the upside this -- it takes time to get to learn -- what drives that from.
Okay. And then what kind of -- sorry, can you hear me?
Yes. I can hear you.
Great. Excellent. What contribution from model core and that channels did you guys see here in flows in the quarter? And are you continuing to see that contribution grow as time goes on?
Jarrett, why don't you start with the model answer?
Yes. Models continue to be a major part of the story for the quarter. They continue to contribute where we've been indicating, they've been about 12% of flows. But that number is set to increase. We've been adding partners to the platform in terms of wirehouses, but also RIAs and IBDs. As I said, we now have 65,000 -- over 65,000 advisers have access to our platform, but that number is increasing. And then as we've spoken about on past calls, there are a number of sort of steps that you need to take. One is establishing the partnership, and that can be a long lead time of getting on to a wirehouse platform, for instance, in a meaningful way, that whole process could take a year. But once you get there, then the real work begins because now you've got to go out and really win the hearts and minds of the actual advisers. So what we've seen in all of last year, but also what we've seen so far in Q1 is we're having more success on those initial steps, adding more partners, but we're also then having success on that second step, which is getting more exposure to more advisers and more individual advisers using the models. So momentum there is also fantastic, sticky assets. We talk about it all the time. So that is still going extremely well, early innings and growing in significance.
That's great. And just to sort of follow-up there, given that continued momentum, what do you think is reasonable to expect maybe even a range for that 12% move to over the next couple of years?
We haven't gone out with any kind of forecast as we never do really forecasting any of our flows. But I would just say that, that number should be increasing. We are looking at as models become a more significant part of the business, what would be appropriate additional metrics, which we'll be looking to add at some point. But right now, all I can say is it's still contributing as we've been indicating and that that's a growing number, and you should expect it to continue to grow.
Our next question comes from Michael Brown with KBW.
This is Aidan Hall filling in for Michael Brown. I just had a follow-up on WisdomTree Prime and the announced acquisition of Securrency Transfers. Is -- can you talk about the strategic rationale behind this? And should we be thinking about additional bolt-on acquisitions for enhanced capabilities going forward?
Will, why don't you start again?
Yes, you cut out a little bit there for me, but I think you were asking about the purchase of Securrency Transfers, now WisdomTree Transfers. So this was really just about bringing an operational function in-house, frankly, one that we kind of thought from the start that we might want to do. Securrency's core competency is kind of licensing software. This was kind of an enabler for them, but it was really more of a core function in terms of what we needed to do. So it just made sense for both parties in terms of bringing this function in-house. It was a small acquisition like financially immaterial, but just strengthens what we've got going on, and we added some new capabilities there. In the future, we can explore other ways to kind of monetize that as well. But right now, it's really just focused on supporting the digital funds that we've got going on.
Great. And then just switching gears a little bit. Embedded in your gross margin guidance is the expectation for product launches. Can you just highlight some of the products you're expecting to bring to market this year? And how that is really adjusting to meet client demand?
So we'll turn it over to Jeremy, but we don't flag for competitive reasons, product launches in advance. But Jeremy, maybe there's some broad ways to describe it. I don't know, why don't you take a shot?
Yes. Obviously, what we've been doing of late that we still have conviction in, so that's a good -- you'll keep track with the filings of what we plan to do. You're seeing diversification. You're seeing us do more in fixed income. You see with that enhanced yield, Voya strategy we talked about, that's just a great additional core building block. You saw us do more with option strategies last year. You saw our target range fund, which is up about $50 million with a unique index from Volos that sort of provide downside protection. We have 2 option funds today. I think we have a lot of interest in that space. You see us in thematics. We've been growing our megatrend family. And our European team has been leading some of the inflows, but things like artificial intelligence, which is a few hundred million in Europe and doing very, very nicely this year. We brought that to the U.S. That's started to take off a bit. And you can see us doing more in some of those growth areas of the market as we started with value. You've seen us launch some more interesting growth strategies of late and the megatrend family being part of that. So I think those are 3 areas. And generally, we like to add diversifiers to what we're doing. So you look for interesting diversifiers, traditional stocks and bonds, and we'll continue to do that as well.
[Operator Instructions] Our next question comes from Michael Cyprys with Morgan Stanley.
This is Michelle Foley on for Mike. My question is about the distribution of WisdomTree Prime. How have you been trying to sell this to clients, like what's the approach here? And what actions are you taking?
Will, again, you want to start?
Yes, I'll start. And I'll start kind of distribution for WisdomTree Prime to retail customers. So as we said in the past, we're focused on lean marketing. So that's really digital channels, finding out what's working and then continuing to press the advantage where we find it. Two areas where we're finding kind of initial early interest that we've spoken about before. One is around gold. I mean there's actually an article in the journal recently about a bunch of crypto investors now googling how to buy gold. I mean that's perfect for us, and it's where we're actually seeing a lot of initial success in our marketing. And the second is around cash management yield, right. We've spoken about it a lot on this call, a digital fund for floating rate notes has a great yield right now kind of having a good user experience, kind of being able to connect that more closer to payments. I mean, that's a killer product feature, and it's something we're definitely going to be marketing on. So getting to those self-directed retail investors kind of with those 2 messages as well as some others are some areas we're going to start right now. But as I said, lean marketing, so if we find something else working, we're going to go there as well. And I guess the second part of that question is outside of WisdomTree Prime, there's a lot of opportunities as well. So those might not be as kind of clear cut or well baked, but I think we're seeing every day that tokenization is an increasing topic amongst financial services firms. We just joined the Avalanche Testnet spruce with some other big names in terms of testing out some different ideas there. So in terms of the platform that we've created, which WisdomTree Prime is one component of, there's lots of opportunities for distribution of the tokenized assets and digital funds that we've built, and we're looking forward to pursuing those more in the future as well.
Great. And just as a follow-up, the regulatory backdrop seems to be getting a bit tougher for digital assets with some of the actions that have been taken by the SEC. So just curious what your views are on that and to what extent that might impact the strategy?
Tougher for some, but not necessarily for us. I mean, we, from the start, have not been surprised by some of the crackdowns that we've seen. And each of them are kind of specific instances. But one of our core competencies compared to especially some of the early movers or the start-ups in the space who are comfortable dealing with regulators and regulation, and that's proved to be kind of a key value-add for us right now, a strategic differentiator. So we're not fazed by this at all, and we're looking forward to continuing to engage with the regulators just like we did to get these products effective in the first place. So all good from our front.
Thank you. There are no further questions at this time. I will now hand it back to WisdomTree's CEO, Jonathan Steinberg, for closing remarks.
No more remarks. Thank you, everybody, for your attention today. We'll speak to you next quarter.
Thank you. This concludes today's conference. All parties may disconnect. Have a great day.