WisdomTree, Inc.
Q1 2018 Earnings Call Transcript

Published: 27 Apr 2018

[Operator:]

Good day, ladies and gentlemen, and welcome to the WisdomTree Q1 Earnings Conference Call. At this time, all participants are in a listen-only mode. Following management's prepared remarks, we will host a question-and-answer session, and our instructions will be given at that time. [Operator Instructions] As a reminder, this conference call is being recorded for replay purposes. It is now my pleasure to hand the conference over to Mr. Jason Weyeneth, Director of Investor Relations. Sir, you may begin.

[Jason Weyeneth:]

Good morning. Before we begin, I'd 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, 2017. WisdomTree 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, Amit Muni.

[Amit Muni:]

Thank you, Jason, and good morning everyone. Most of our operating data is already known, so I'll quickly go through the important items for the quarter, discuss recent flow diversification trends, and provide a brief update on ETF Securities. I'll then turn the call over to Jona for some closing remarks before opening it up for Q&A. So, beginning on slide three, our U.S. AUM was $42.9 billion at the end of the first quarter, due to a combination of net outflows and market depreciation. The U.S. dollar's continued decline versus the euro and the yen drove significant outflows from HEDJ and DXJ and more than offset inflows into other categories as the middle chart shows. The chart on the right reflects our flows ex-HEDJ and DXJ, which totaled $1.3 billion for the quarter, the strongest quarterly result in five years. In fact not only were these flows at record levels, they also demonstrated solid diversification across categories and funds as we highlight on the next slide. Excluding DXJ and HEDJ, the $1.3 billion of inflows we generated in the U.S. listed ETFs represented 18% annualized organic growth, and significantly outpaced the broader U.S. ETF market, which struggled in February and March as volatility returned to the markets. Our suite of emerging market products generated broad based inflows with nine of 10 funds producing inflows that totaled $418 million. This was also the strongest quarter for flows in this category over the last five years. During the quarter, we saw continued strong demand for our non-U.S. small caps strategies, which had aggregate inflows of $610 million driven by our un-hedged Japan small cap fund DFJ. Our suite of domestic fixed income ETFs also had their strongest quarter ever with $225 million of inflows driven by AGGY, which continues to build an impressive performance track record versus both passive benchmarks and active managers. This quarter also showed diversified record flows with 11 of our ETFs across a broad range of strategies producing greater than $50 million of inflows, and seven funds generating record quarterly inflows. We believe the momentum in diversification we are now experiencing is a direct result of our strategic initiatives around advisor solutions, investments in technology, and entering new distribution channels and partnerships. These initiatives are focused around deepening client relationships and driving broader and stronger flows into our funds, as you can see on the next slide. As the first chart reflects, the net flow breadth has accelerated in the past several months. We are seeing a significant increase in the number of funds with creations on a daily basis. Over the past two years, on average, we saw two to three funds create on a daily basis that increased nearly five funds in the fourth quarter with the launch of our Advisor Solutions program and TD Ameritrade's new commission-free ETF platform. During the first quarter it expanded further to almost six funds a day as initiatives continue to take hold. In addition, a record 51 U.S. listed ETFs generated net inflows for the quarter, reflecting a combination of core funds as well as more tactical exposures. These flows have translated into a greater percentage of our AUM in our core funds, which you can see in the chart on the bottom of this slide. These funds generated $805 million in first quarter flows, and now make up 56% of our U.S.-listed AUM versus 35% two years ago. We're very pleased to start seeing the return from these important investments we've made to diversify and stabilize our asset base. Now, turning to our financial results on slide six. Although revenues declined due to lower average assets under management, net income grew to $9.4 million reflecting more normalized incentive compensation levels and the benefits from recently enacted corporate tax reform. During the quarter we incurred $2 million of costs associated with our acquisition of ETF Securities. Adjusting for the deal-related costs net income would have been $11.3 million or $0.08 per share. Also this quarter, we had a one-time item and other income of approximately $600,000, and tax expense was lower as we recognized a tax-based compensation benefit of approximately $300,000 in the quarter. Turning to our expenses, on slide seven, total expenses excluding acquisition-related costs declined 14% sequentially to $43.6 million. The decline is primarily driven by lower incentive compensation. The U.S. segment comp ratio of 29% was at the high end of our guidance range, reflecting the combination of seasonally higher payroll taxes and lower revenues due to negative market movement. Turning to margins, on slide eight, gross margins for the quarter were 83.8%, down slightly from the fourth quarter due to lower average AUM. Based on current AUM levels we expect our current gross margins to range between 83.5% to 84%. As shown in the chart on the right, our pretax margins were down sequentially reflecting the lower incentive compensation accruals. Now I have to give you an update on the ETF Securities transaction. The transaction closed on April 11th, adding $17.6 billion to our AUM. The integration process is well on its way, and we are excited about where we sit today. There are a few updates to numbers we have previously disclosed. Based on the asset levels that closed, the EBITDA contribution from the ETF Securities business has changed to $29.9 million due to the transaction closing in April, instead of March which we had originally anticipated. Second, GAAP interest expense on the debt we are taking to fund the transaction is higher due to the amortization of the debt financing cost over the three-year debt term. In addition, the LIBOR rate is higher from when we first announced the deal. Net income will be approximately $16 million in 2018 based on the asset levels at closing. There is no change to our synergy target of approximately $5 million. We anticipate a $22 million in one-time deal-related expenses and integration costs. That number will now be -- approximately $60 million since we are recognizing the debt-related expenses over the long-term. The final acquisition cost was $523 million made up of 30 million shares of WisdomTree stock and $253 million of cash. We plan to file pro forma financial statement in the next week or two. We should provide much more detailed information to assist you with your modeling. Now, an update on the results so far this quarter. As of yesterday, our global AUM totaled approximately $63 billion reflecting the acquisition in addition to modest net inflows and positive market movement. You can see in the pie chart post the ETF securities transaction we have a much more diversified asset base. And the chart on the right reflects our global inflows by region. Now, I would like to turn the call over to Jona for some closing remarks.

[Jonathan Steinberg:]

Thank you, Amit. Good morning everyone. I share the frustration our investors and employees that despite persistent and expanding growth across our products and distribution channels that these results do not offset the $3.5 billion of outflows in our two largest currency products which continue to suffer from a declining U.S. dollar. It is not enough to show an encouraging trend line. We must return to a historical growth trajectory with positive net inflows. That said, it would be a mistake to let market conditions completely mask certain crucial developments which have proved to be sustainable and scalable and which I believe reflect the emerging transformation or continued evolution of our business. As Amit highlighted on several slides, we continue to see material improvement in the breadth and depth of flows. The number of funds creating on a daily basis expanded further to a record of almost six funds a day. The 51 funds with net inflows for the quarter was also a record reflecting the impact of recent initiatives. Importantly, the 51 funds of net creations had weighted average revenue capture of 46 basis points highlighting that expense ratios alone aren’t allocation decision and reaffirms WisdomTree’s product strategy and execution. Our core strategic fund, which represent more than 56% of our U.S. listed AUM, continue to generate double digit organic growth. It’s all result of the team we have assembled. It’s the innovative product offerings and the performance trace record we’ve built. It’s the expanded distribution reach including our positioning in TD Ameritrade commission free trading platform and model marketplace which continues to be a material driver of asset growth. And most recently, it’s the multi-faceted advisor solutions program which we launched this past fall. I am very proud that earlier this month our advisor solutions platform was named Fund Innovation of the Year at the Mutual Fund Industry Awards further credentialing what financial intermediaries are quickly recognizing as a truly differentiated and innovative solutions program that can help FAs grow their businesses better serve their clients and help them tackle the biggest challenges they face today which are many. I expect many more successes to come in the future from these initiatives and hard work. Since announcing the ETF securities transaction in November, we have talked a lot about the strategic and financial merits of the deal, the ability to accelerate growth in the second largest ETF market, the diversification benefits from the commodity focus, and the strong day one accretion. Having spent time in London last week following the closing of the acquisition, I am even more confident that this was the right transaction for WisdomTree. We welcomed 42 new colleagues to the firm and the combined team is in place. I am proud of the work done by the employees from both firms to make the initial stages of integration a success. And I am excited to see what this already cohesive team can accomplish over the coming quarters and years. Without a doubt or positioning and growth outlook has never been stronger in Europe. Beyond the U.S. and Europe, we continue to position the firm to participate in long-term global growth of ETFs. In February, we announced a distribution agreement with Hong Kong based Premia Partners to distribute WisdomTree products to institution investors in Asia ex-Japan. Like the Compass Group relationship for Latin America, we believe this one will prove to an attractive and cost-effective way to drive growth from investors in this region. And in Canada, we continue to leverage aspects of our U.S. infrastructure to generate strong growth in the region. Year-to-date our Canadian franchise has generated nearly 100% annualized organic growth. Though off of a small base, it’s still very encouraging. The combination of strengthening underlying fundamentals in the U.S. franchise and the improved scale and positioning of our international operations makes WisdomTree a truly unique and irreplaceable asset. While outflows from DXJ and HEDJ have been a significant headwind recently, WisdomTree is working with more advisors today than at any time in the firm's history. And those advisors on average own more WisdomTree products than ever. We've never been in a better position to serve our clients and capitalize on the global growth of the ETF industry. I thank you for your interest in WisdomTree and would be happy to take your questions now.

[Operator:]

Thank you, sir. [Operator Instructions] And our first question will come from the line of Craig Siegenthaler with Credit Suisse. Your line is now open.

[Craig Siegenthaler:]

Thanks. Good morning, Jona and Amit.

[Jonathan Steinberg:]

Good morning, Craig.

[Craig Siegenthaler:]

I wanted to start on the technology business. Can we get an update on the timing and size of flows that we should expect from the AdvisorEngine cross-sell?

[Jonathan Steinberg:]

Kurt, why don't you take that one…

[Kurt MacAlpine:]

Hey, Craig, this is Kurt MacAlpine here, Global Head of Distribution. So the AdvisorEngine platform and the feedback around that platform continues to be excellent. Over the course of the past quarter, we have a record number of advisors using the platform and a record amount of AUM on the platform. As you think about the sale for AdvisorEngine, there's the technology sale and then there's the model portfolio sale that follows. We do have some critical wins that we will be announcing in the coming weeks, and then those assets should be onboarded starting later this year and primarily through 2019.

[Craig Siegenthaler:]

Thanks, Kurt. And then just real quick on the ETF securities business, I think they had half a billion of outflows in 1Q and I also think the commodity segment for the industry was inflowing. So I was just wondering is that merger-related or is there anything to call out there?

[Kurt MacAlpine:]

Hey, Craig, it's Kurt again. So if you look at the ETF securities business for the first quarter, they had $641 million in redemptions, $516 million of that came from the gold funds. So if you look at the U.S. listed gold funds as a category as a whole they only generated ex-ETF securities $300 million in net flows. Most of the $516 million of redemptions came from one client that moved to a proprietary in-house solution. So it's actually magnifying the flows relative to the underlying impact across clients. So looking forward we remain very optimistic about the position -- ETF securities position in gold and across commodities and with the integration behind us I think we're well positioned to continue to capture a significant market share in those categories.

[Craig Siegenthaler:]

Thank you, Kurt.

[Operator:]

Thank you. And our next question will come from the line of Bill Katz with Citigroup. Your line is now open.

[Bill Katz:]

Okay, yes, thank you very much. And I just want to come back to the cross-sell opportunity, because it seemed like there's a bunch of good things going on. Could you tell me -- walk us through where you sort of stand in terms of the penetration on the Ameritrade platform and maybe what you're seeing elsewhere? That's number one. And then number two, you mentioned that you're doing more work with more advisors than ever before. Are there any metrics you can share with us to give us a sense of that ramp that you're seeing and maybe toss in how you're doing with the core portfolio away from the international hedge book?

[Kurt MacAlpine:]

Sure. So Bill, it's Kurt here again. So on TD Ameritrade, we don't disclose flows at the individual platform level, but I can tell you that the TD relationship was a material contributor to the strength of the firm's flows ex-DXJ and HEDJ. So in addition to having the commission for ETFs available for execution on the platform now, we do have a suite of model portfolios that are also live on the platform and we've seen strong flows to date as it relates to those particular model portfolios as well. We do remain very excited about the TD relationship and believe it's going to continue to be a significant contributor to net flows for the RA and the retail channels for us. In terms of your second question around -- Jona mentioned the points around -- we are doing business with more advisors than we ever have in the past and they're -- so the breadth of the advisors and the depth of the relationships that we have is certainly getting better. We do think that's in part tied to the data intelligence efforts that we have under way, better screening and identifying who we should be targeting, hitting them with the right messages and then also having the solutions program where we now have the ability to go much deeper with them whether it's on the portfolio construction side or on the advisor services and supports side. So those -- we're very early days both in the TD relationship and the solutions program. But I think that the trends and the impact we're seeing is very constructive and probably ahead of schedule relative to what we've expected given they'd both just launched late last year.

[Jonathan Steinberg:]

Let me just add also, Bill, that in the first quarter, AdvisorEngine acquired the leading in CRM firm for financial intermediaries called Juncture. Juncture has 1,500 firms. So it's about 12,000 FAs advising on about 600 billion of AUM. And so that's also a tremendous cross selling opportunity both for AdvisorEngine, upselling them from that software to the bigger platform, but also upselling them to models for WisdomTree just to throw that out as well.

[Bill Katz:]

Okay, and just one follow-up -- thanks for taking the questions this morning -- for Amit. Amit, thanks for the guidance on the gross margin. Was that tactically a second quarter guide or was that a more structural guide in terms of natural limit to the business or to the extent that AUM were to sort of rebuild in the U.S. you would expect that that margin might expand?

[Amit Muni:]

It's much more short-term given the AUM level that we see today. As we do see the AUM level scale because of the pricing that we have with our third party service providers, we would expect to see an uptick in those gross margins. So that was a much more short-term oriented guidance.

[Bill Katz:]

Okay. Could I ask you one more question? Jona, one of the things that's been coming up, at least I've been reading a fair amount on is the competitive pressure building in Europe around pricing. A bunch of third party players have been cutting pricing very quickly. And you mentioned that you've seen a lot of good growth at higher fee levels. So maybe the answer is no. What's your sense on pressure to the business in Europe pro forma with the ETF platform. Do you see any risk to the business, and if so how should we think about that?

[Jonathan Steinberg:]

So there's no question, Bill, that the dynamic that you're seeing here, you're seeing there as well. So that's one element. Of the 17.6 billion of AUM, about 11 billion is in gold. In gold, there is significant competition. The rest of their AUM is really broad based commodities. It could be like nickel and other metals and other commodities. There they almost have no competition. We have, in many of the funds, 80% to 95% market share around certain exposures. So there we're facing much less pricing competition than you're seeing in non-exclusive indexes or even proprietary smart beta. So I sort of feel very optimistic from an overall picture that ETF Securities is very well-positioned from a pricing standpoint on a going forward basis. And with an uptick in inflation expectations with global growth being strong, maybe we'll get lucky from a timing standpoint that the exposures will be more in favor on a going forward basis just than they've historically been. The commodities will be in a stronger demand. And we're actually seeing that both with our GCC funds here in the United States and in WisdomTree Europe's broad based commodity fund, which I think had something like $70 million of flow in the quarter as well. So net- net, we're feeling strong about our place for pricing and the commodity exposures in general.

[Bill Katz:]

Great. Thanks again for taking our questions this morning.

[Operator:]

Thank you. Our next question will come from the line of Surinder Thind with Jefferies. Your line is now open.

[Surinder Thind:]

Good morning, guys. I want to start with just the DXJ/HEDJ. Can you provide us update about where incremental margins might be at this point? Obviously, if we were to rewind a couple of years, AUM levels were in the $18-$20 billion range. We're about a third of that at this point and just how those margins scale with where AUM is but today AUM is a bit lower than current levels?

[Jonathan Steinberg:]

Sure, Surinder. They're still very, very attractive margins for us, incremental margins close to -- in the low 90s for those funds because they had scaled to those levels. So they're still very profitable funds for us even at the asset level that they are today.

[Surinder Thind:]

Understood. And where does the margins generally inflect? Is it around $2 billion -- $3 billion of AUM or how should we think about where they really…

[Jonathan Steinberg:]

Yes, we don't give as much of that granularity. You do know that the breakeven is about $50 million. You can see at the current asset level that we have today incremental margins on the old model platform are like 86%-87%. But it doesn't take long for it to start to really get to attractive margins. So hopefully that helps fill in…

[Surinder Thind:]

Fair enough. And then just wanted to touch base on Europe, one of the impacts that was put forward as a result of the MiFID regulations was that it might drive greater use of ETFs and our index funds. Have you guys noticed any kind of a change in the conversations over there or any color that you can kind of provide on the environment other than just kind of the secular trends that have been existing already?

[Jonathan Steinberg:]

Sure. And let me just say, overall, and then maybe if Kurt has a comment or two. I think still the early days for MiFID. What we're hearing right now is generally it's been very well received. The assets are putting more transparency around the liquidity of products, omni exchanges have been beneficial. But I think it's still the early days for that.

[Kurt MacAlpine:]

Yes, and even from our hardcore business perspective with the ETF Securities acquisition we have seen a material increase in the breadth of the conversations we're having. In the platforms we're having those conversations on I'd say my commentary is more related to the acquisition and how it's benefiting us more broadly from there.

[Surinder Thind:]

Understood. And then maybe one more quick question. Are there any considerations around the way you guys do the reporting currently or how we should think about it? Obviously there's the GAAP numbers, there's non-GAAP. It seems like maybe there's maybe a more consistent approach to presenting the materials. I just seems like there's different view points on the financials at this point.

[Jonathan Steinberg:]

Yes. So in a few weeks, Surinder, we're going to be publishing pro forma financial statements. And in that I'm going to be providing a little bit more guidance of how we're thinking about reporting our financial results going forward now that we have a much broader platform with debt on the balance sheet and the like. So stay tuned. Just give me a few weeks. And I think once you see that we can get on the phone and we can walk through it.

[Surinder Thind:]

Okay, thank you. That's it for me.

[Operator:]

Thank you. And our next question will from the line of Brian Bedell with Deutsche Bank. Your line is now open.

[Brian Bedell:]

Great, thanks. Good morning, guys. Thanks for taking my question. Just for some more guidance. Just if you can talk a little bit about the dynamic of the growth in third-party sharing agreements' expense, is that still, do you think, going to be in a sub-3% range or would you expect that to grow with the success of the Ameritrade platform? And also comp revenue guidance inclusive of the ETF Securities business.

[Jonathan Steinberg:]

Sure. So, on the third-party sharing; we came in a little bit on the higher side of the guidance that we gave. I think it's a combination of, first, the success that we're seeing on these platforms, which is a good thing. But also the fact that we did have lower revenues from the HEDJ and DXJ outflows which are generally not on these platform, so we have a little bit of a mismatch there. But I do expect at these asset today we should still be within that 2.6% to 3% range, but closer to the levels that you see today. On the comp-to-revenue ration, we came in on the higher end of the range there. Some of it is seasonal. We do have higher payroll taxes in the first quarter. And also we did, as we pointed out in the presentations, we did have very strong flows ex HEDJ and DXJ which has been a concretive effort that we've had at the firm. We do think about compensation on a full-year basis. And so when you think about all those factors we came in within the guidance that we gave, and that guidance still holds going forward.

[Brian Bedell:]

With ETF Securities for the year?

[Jonathan Steinberg:]

So with the ETF Securities, so that's the U.S. business. With the ETF Securities transaction once we publish pro forma financial statements in a few weeks we're going to be giving updated guidance on the overall - our international segment. And so I think so stay tuned for that. And then once you see that we can hop on the phone and kind of walk through that.

[Brian Bedell:]

Got it. And then just as a follow-up, either for Jonathan or Kurt, back on AdvisorEngine, obviously a hot topic, with a lot of your competitors also trying to develop this. But inclusive of juncture now where you've got a pretty sizable FA force that's on the platform. How are you seeing the competitive positioning versus, just to throw out a couple different platforms, say, Jemstep and Investco, and Aladdin for Wealth of BlackRock, do you tend to see the Mono portfolio and AdvisorEngine in the same shop. So in other words the advisors have a choice of a couple or are they really in a standalone basis. In other words, not competing against those and you're really looking to compete by signing up new firms on an [technical difficulty] basis.

[Jonathan Steinberg:]

I'll start with the AdvisorEngine part and you'll just, Kurt, on the model side. But from AdvisorEngine, they had a very strong initial vision. They were, before they got to us, undercapitalized so they weren’t really in a position to win mandate. But since we've made the investment about, maybe 14-16 months ago we have been winning business. The vision was really broader than the other sort of Robo advisors that people had invested in. And we think ours was the better execution, that the needs of the financial intermediary are broader than just Robo. And so from prospecting, which we strengthened through the initial acquisition of Credible all the way through to Robo to integrating CRM into the platform though it is open architecture and modular. So if you want to use Salesforce or something else AdvisorEngine is perfectly situated to accommodate any of those sort of open architecture questions. But the fully integrated approach is really resonating with the decision markers at these firms. As others I think have said. And one thing that is different from the others, from their initial vision was always B2B2C instead of B2C. And it is a challenge to upgrade your technology platform to be as robust to handle the enterprise requirements to be able to deal with B2B. So we think that we have a lot of strengths in our program similar to what you've heard from others. It's a long sales process, but we're starting to really -- we've been together now for a length of time. And so we'll start to have continued or show continued wins in that space, as Kurt said earlier. But the AUM from that platform would really start to show up in '19. Kurt, on models?

[Kurt MacAlpine:]

Sure. So if you think about the sales cycle for something like AdvisorEngine, some firms that are making the decision to digitize their platform are putting the technology decision together with the asset allocation or model portfolio decision. Others are doing it separately. So I think for us the benefit of the investment that we have in AdvisorEngine and the partnership we have with them, we also have a seat at the table. So even if the investment decision is following the technology decision there is a follow-up for WisdomTree. In some instances, like some you'll hear more about in the coming weeks and months, those decisions were made together where the technology decision and the investment decision was made at once, and we're well positioned to benefit from that. But even in instances where we don’t, let's just say, a firm decides to keep their own model portfolios but digitize their business in onboard through the AdvisorEngine platform. Those that process and experience, given how we've integrated the sales process between the two firms, we believe that that technology onboarding in a much better place than where we started. And there's lots of follow-ups for WisdomTree in our specific funds to be present in someone's customized model as well. So I would say it's really upfront, there's a chance for us to win the model portfolio. If not, if the decisions are separated we can win it on the backend. And worst case scenario, which isn’t a bad scenario is, we have a much deeper relationship with particular firms to sell individual strategies into their models.

[Jonathan Steinberg:]

And models are being sold separate of AdvisorEngine, so it's its own effort standalone which is generating success on its own. And there's also a tool that we've created that sits on the Web site that allow -- so it's not quite selling models, but it does allow the advisor to create their own models. And it helps them figure out how to best integrate WisdomTree into their own model design. So the model effort, on its own, is a very robust push here at the firm.

[Amit Muni:]

Yes, to the point that Jona just mentioned, so you really mentioned two firms, Jemstep on the front-end, which kind of directly competes with AdvisorEngine in some instances, and then Aladdin for wealth, which our competitor that would be what we call digital portfolio developer, as Jona mentioned. So this is a fully digitized solution on our Web site that allows people to conduct very detailed portfolio analytics in a very user-friendly format. We launched that in October. And to date we've already run over 8,500 individual portfolio construction analysis through this tool in addition to all of the human-based portfolio construction services that we're doing as well. So that tool is a better proxy for Aladdin for Wealth. And I think the start that we've gotten off to, and that has been truly remarkable. A lot of advisors are using it many, many times. Some of them even using it as their core portfolio construction tool. And each month we continue to see more advisors using it and those advisors using it more frequently. So I'd say we're excited about the prospects for that as well.

[Brian Bedell:]

That's great color. I know it's very early days but is your sort of market share within that open architecture platform something that you will track and be able to see over time?

[Jonathan Steinberg:]

Yes, over time. I got this still here early days, but over time as it grows, yes, we will be disclosing certain key metrics, but it's still too early today.

[Kurt MacAlpine:]

But because we're only a $64 billion asset manager even with open architecture these models are driving significantly higher usage numbers to the WisdomTree portion than we've historically had.

[Brian Bedell:]

Exactly, right. Now looking forward to progress on that thing. So much for all the color.

[Jonathan Steinberg:]

Thank you.

[Operator:]

Thank you. And our next question will come from the line of Michael Cyprys with Morgan Stanley. Your line is now open.

[Michael Cyprys:]

Hi, good morning. Thanks for taking the question. Just curious with the transaction close now, how you're thinking about use of cash, balance sheet strategy, and allocation? And when you think, if at all, share buybacks would be back in the discussions?

[Kurt MacAlpine:]

Sure, Mike. So we did put a lot of thought about how we allocate our capital when we announced the dividend change in light of ETF Securities transaction. We just put debt on our balance sheet. And at these AUM levels we feel very comfortable with the way we're allocating our capital now. We feel we have the right amount of cash for investing in growth. Make sure we have the right powder in case there's opportunities out there. We have to be able to service the debt. And we have a return on capital program already in place. So I think here as the AUM level scales we'll see how best to allocated that excess cash between those buckets. But right now it's too early to say how that would change. But we feel comfortable in the mix that we have today.

[Michael Cyprys:]

Okay. And just as a follow-up question, noticed you -- I think had closed a number of ETFs over the past couple of quarters. Just curious if you could update us on how you're thinking about product shelf in terms of other potential closures that we could see, but then also if you could touch upon some of the new product initiatives on the horizon? Thanks.

[Jonathan Steinberg:]

So, this is Jona. Historically we've, from time to time, closed some funds. What we did recently was nothing out of the ordinary. We're very optimistic about our new product launches. And that is actually a global statement. So you'll see I think a very aggressive relative to maybe last year product launches in Europe relative to what we were doing last year in Europe. Canada continues to launch new funds. And you will see more products coming out of the United States. And you'll see where it makes sense for product development to be coordinated globally. The most effective thing is to own proprietary IP and have it launched around the world so we get real scale and leverage on our research and marketing efforts. But you're going to see us continue to fill out fixed income liquid alts and other Active we've recently been doing. You'll see more of all of that on a going-forward basis. And the successes that we've seen from a flow perspective, that 51 funds, it was really every vintage fund launch is participating in the flow. And so, again, we just have a great sense of optimism on a going forward basis around new products.

[Michael Cyprys:]

Great. Thank you.

[Operator:]

Thank you. And our next question will come from the line of Chris Shutler with William Blair. Your line is now open.

[Chris Shutler:]

Hi, guys. Good morning. On the third-party sharing expense increase hearing you saying most of that was TD. And I think you said that your revenue share tiers down as assets grow. Is that correct?

[Kurt MacAlpine:]

We don’t give disclosure, Chris, on sort of how that fee breakdown is. But, yes, obviously the success we're seeing on the TD platform is helping to drive that. As well as Compass, the relationship we have there in Latin America.

[Jonathan Steinberg:]

And again, as I mentioned in my comments, that we have a new Compass-like relationship for Asia ex-Japan, so that'll show up in the same line item.

[Chris Shutler:]

Okay. And then just one other one, we saw that you recently filed three international multifactor funds which -- it would add to the U.S. multifactor fund you introduced last June. Definitely seem like interesting products given the fact they're actively managed, have currency hedging. Just talk about the distribution strategy for those, how you see advisors using some of the multifactor products would be helpful? Thanks.

[Jeremy Schwartz:]

Hi. This is Jeremy Schwartz, the Director of Research here, and overseeing the development of these strategies here. It is one of the things we're very, very excited about in terms of we've been investing in both Active capabilities as well as this multifactor process generally, as well as this dynamic hedging process. And the branding shows you how much conviction we have in the process generally. We were the first one to think about taking the currency risk off the table with HEDJ and DXJ. But we're also the first firm to pioneer this more active approach to currency management with our dynamic family and funds like DDWM which is one of the leaders today in dynamic hedging. And so you could see with this new multifactor having a value-added equity process, but then being unique to add this active currency overlay we're all so very excited about these. So we think this is really the future for international investing with that combined package together. So we're excited about that.

[Chris Shutler:]

Thank you.

[Operator:]

Thank you. And our next question will come from the line of Brent Harkin with UBS. Your line is now open.

[Brent Harkin:]

Good morning guys. Thanks for taking the question. Had a follow-up question on the third-party distribution expense guide, just curious about what about what assumptions are embedded in staying under that 3% of revs. Is that including the additional revenues that are going to come on from the ETF Securities transaction or does that guide exclude the incoming rev?

[Amit Muni:]

Yes, that's only for our U.S. business. When we issue pro forma financial statements in the coming weeks we'll have some more disclosure around there to help build your modeling and guiding that number. But that 2.6% to 3% is only for the U.S. segment.

[Brent Harkin:]

Okay. So it wouldn’t include the Compass and the Asian deal that you guys just referred to?

[Amit Muni:]

It does. Those relationships primarily benefits our U.S. business segment. There's a little bit of it that benefits our international segment. But the primary benefit is the U.S.

[Jonathan Steinberg:]

But let me just say, as we continue to launch UCID funds and our UCID funds continue to scale the third-party selling into Latin America and Asia UCIDs will be a very attractive platform. And that is one of the major reasons why you need a strong and robust European platform so that you can absolutely access the global investor who over time will prefer, in my opinion, the usage structure to the 40 Act. So in that you will see that they participate in the usage structure.

[Brent Harkin:]

Okay. So over time as it evolves it may become a bigger item in the international segment too…

[Jonathan Steinberg:]

Yes. And again, we are really trying to make the synergies of the organization work. So passing leads back from the U.S. to Europe, from Europe to the U.S., and to other parts of the world, we're really trying to run a coordinated global firm here. So you'll see more of that. And obviously if, Kurt, you want to add anything please don’t let me steal your thunder. No, I guess he doesn’t.

[Brent Harkin:]

Cool. And then last one from me. You guys adjusted some of the acquisition-related guidance. It looks like the change in financing was specified as a GAAP impact. Do you guys intend to exclude financing costs from the adjusted results or am I reading too much into that?

[Amit Muni:]

No. So you'll see when the issue the pro forma financial statements we're going to be starting to have operating income and non-operating items. So, interest expense as by definition will a non-operating item. But I think once you see the pro forma and we'll walk through how we're thinking about the guidance and reporting our results it'll be a little bit clear then.

[Brent Harkin:]

Amit, you know how to build up some suspense here into that release.

[Amit Muni:]

Oh, yes, nicely. If this is not exciting stuff, I'm sorry.

[Brent Harkin:]

Thanks for the color guys.

[Amit Muni:]

All right.

[Operator:]

Thank you. And our next question will come from the line of Alex Blostein with Goldman Sachs. Your line is now open.

[Alex Blostein:]

Yes, hi, guys. Good morning. Want to go back to the revenue surge opportunity with ETF Securities now that you guys kind of have the business under one roof. Can you, I guess, spend a couple of minutes on which channels and which products you expect to kind of lead in terms of cross selling with the existing business, and what should kind of drive the synergies over the next 12 to 24 months? And I guess as a follow-up to that, so the expense guide synergy hasn’t changed, but wondering what kind of incremental investments you guys might need to still make in that business as you build out scale?

[Amit Muni:]

Let me start off with the last question, and then I'll give it Kurt to talk about distribution. The guidance that we have for the ETF Securities business incorporates any incremental spend that we think we would need to do as we integrate that business, so that you shouldn’t see anything beyond the guidance that we've already given on that.

[Kurt MacAlpine:]

In regards to distribution, I believe that the acquisition will help accelerate the growth of the UCITS platform that we built in Europe. So, first off, we brought over a great team from the ETF Securities that not only has experience selling commodity, but they also have experience selling UCITS as well. So there is no real learning curve in terms of getting familiar and comfortable with the structure. Second, the scale that we now in Europe is nearly a $20 billion firms [indiscernible] to make a lot of investments in distribution that we have wanted to make, that will position us to take share from competitors similar to the investments that we have been making here in the U.S. And the third, the ETF Securities acquisition has provided with WisdomTree with access to a lot of these intermediary platforms that we didn’t have access to prior to the acquisition. So, for whatever reason, the platforms in Europe tend to be more restrictive than the platforms in the U.S. And by -- through the acquisition of ETF Securities, the WisdomTree UCITS fund had been absorbed into those overall relationships providing access for investors and advisors to users that didn’t have access to us before. And these statements are true literally across all of the market that we are distributing in Europe. So, it’s not a particular phenomenon from U.K. versus Germany. It’s really true across the board.

[Jeremy Schwartz:]

This is Jeremy Schwartz. Just to add briefly on how we are trying to support that from a research perspective, one of my key deputies Chris Gannatti has been with us for eight years here in the U.S. We recently transferred him over to lead the European research team and since we also believe we going to have content synergies with Chris helping with research efforts over there. And at this stage in this cycle, we have been talking a lot about how we have kind of alluded to this that some of the -- when the market sold off earlier this year, fears of rising inflation leading to interest rate, we do believe commodities generally have increasing diversification today, and we are going to able to leverage the insights from the ETF Securities platforms coming on and commodities work that they doing, feeding into both product development and just general solutions for our clients. And so, we are excited about all those synergies from the research and product development standpoint as well.

[Alex Blostein:]

Got it. Great. Thanks, guys.

[Operator:]

Thank you. And our next question will come from the line of Keith Housum with Northcoast Research. Your line is now open.

[Keith Housum:]

Great. Thanks guys. I appreciate the opportunity. Amit, just a little bit of a housekeeping here, with the interest rate rising environment here, are you guys going to be [indiscernible] risk on the debt?

[Amit Muni:]

Yes, something that we are looking right now to see the cost of it. So, if we do, we will obviously disclose that, but it is something that we are looking at.

[Keith Housum:]

Okay. Can you just remind us the type of debt that you guys are taking on and what’s your plan in terms of priority of paying down that debt compared to your other opportunity to use the capital?

[Amit Muni:]

I would say it’s still the early days. We just put the debt on. I think we have to wait to see how the asset levels scales from here to see how we are going to pay that down. But we think right now that the mix that we have of allocating capital is at the right level. So of somehow this is -- it’s too early to tell, let’s see how the business progresses from here.

[Keith Housum:]

Okay. And just a final question for you, I was looking at your employee count over the past both sequentially in the past year. It looks like your employee count has been down especially international. Do we assume that was kind of right from the ETF Securities acquisition and get rid of people that you might have -- early on?

[Amit Muni:]

Yes, so the headcount decline that you saw in the international segment was in preparation of the ETF Securities transaction.

[Jonathan Steinberg:]

And just employees overall, you are seeing efficiencies created through our investment and technology which is also keeping headcount sort of flat or down.

[Keith Housum:]

Great. Thank you, guys.

[Operator:]

Thank you. Our next question will come from line of Mac Sykes with Gabelli. Your line is now open.

[Mac Sykes:]

Good morning and congratulations on the close of this transaction. I had a two part question. One for Amit, basically around the same kind of topics but one for Amit kind of one in general, so the question is that can you talk about client feedback during those volatile days in the quarter in February? And then given some of the news around volatility products, do you think there was any impact to sales more broadly for the ETF business or a decline in investor confidence just given some of the more dramatic aspects in those products?

[Jeremy Schwartz:]

This is Jeremy speaking again on from the research perspective. I think if anything we have seen during the past crisis period is that ETF remains most robust structure out there. Yes, some of the volatility products move up. And we had -- and that was some of the sense of what created the volatility fears. But in a way ETF shined through. They are fully transparent. You understand what you call -- and compared to some of the more active structures where they are more opaque, you don’t really know what’s going on there. And even [indiscernible] products generally there too, there are some really big blow ups with active strategy that people didn’t understand what was going on in those funds versus the ETFs, you know exactly what the strategy is and why it performs the way it does. And so, we think if anything it just keeps shining the merits of the benefits of the ETF structure even in these more complex volatility products. We had big active blow ups just as you had on from the ETF. So that’s I think generally what we are seeing from the ETF.

[Amit Muni:]

I think on the from a distribution front if you look at the impact of WisdomTree given the market volatility and kind of redemption the industry saw in February and March, we actually generated 11% positive organic growth in those months while the industry itself was experiencing redemption. So I think it’s just a testaments to some of the initiatives we doing. The role that we playing in educating advisors to some of the points Jeremy mentioned on the structure and also have our strategies there.

[Jonathan Steinberg:]

And just one last point I would say that much of there is an immediacy to the ETF portion of an investor’s book of business. And so, as the markets were unsettled you might see people taking some trading out of certain things fasters in ETFs just because they are market sensitive and that’s portion of their book of business. But again, I wouldn’t in any way read any lack of confidence in the overall industry flows. This doesn’t change anything in the expectations of incredibly strong robust industry flows globally really going forward uninterrupted.

[Keith Housum:]

Great. Thank you for the call.

[Operator:]

Thank you. And our next question will come from line of Craig Siegenthaler with Credit Suisse. Your line is now open.

[Craig Siegenthaler:]

Thanks. Just two follow-ups here, first one, would delta between GAAP and non-GAAP, it is just going about 2.1 million higher than the 1.9 million 1Q ‘18. I am just trying to estimate the pickup in amortization.

[Amit Muni:]

Yes, the difference between 8.8 and 6 will be the non-GAAP amount, the additional debt financing cost that we have to spread over the three year debt term.

[Craig Siegenthaler:]

Okay. And then on taxes, will your tax rates dropped down into 24% just because now you are going to be profitable in Europe for the first time when the deal closes?

[Amit Muni:]

So we have to look at each one of our businesses in Europe separately. We just can’t offset one against the other unfortunately. So, on a consolidated basis after the ETF Securities transaction, we think our overall effective rate will be about 30%. So, down from the 33% that you see in the first quarter, but we have to wait until each one of those business segments within Europe turn profitable. And then be able to shelter some of the income because of losses that we built up.

[Craig Siegenthaler:]

And this may be a simple question, but if U.S. tax rate is 24 and tax rates outside the U.S. are somewhere between 15 and 20, why is your overall tax rate 30?

[Amit Muni:]

Well, we have state taxes, don’t forget. So that increases our rate here in the U.S. There is non-deductible -- certain of our expenses are non-deductible like related to executive comps, so that also helps drive rates up as well as the fact that we can’t recognize some of the losses today in our international segment and that also helps drive the rate up. I can walk you through it. I think if you look, Craig, in our last presentation we kind of walk through the rate. Maybe we can take it offline. I can walk you through each one of those pieces.

[Craig Siegenthaler:]

Thanks, Amit.

[Amit Muni:]

Okay.

[Operator:]

Thank you. And I am showing no further questions at this time. So, now it’s my pleasure to hand the conference back over to Mr. Jonathan Steinberg, Chief Executive Officer for some closing comments or remarks.

[Jonathan Steinberg:]

I just want to thank you all for your interest in WisdomTree. And we’ll speak to you in 90 days. Have a great day everybody. Bye.

[Operator:]

Ladies and gentlemen, thank you for your participation on today’s conference. This does conclude our program and you may all disconnect. Everybody have a wonderful day.