WisdomTree, Inc.
Q4 2017 Earnings Call Transcript

Published: 2 Feb 2018

[Operator:]

Good day, ladies and gentlemen, and welcome to the WisdomTree Q4 Earnings Conference Call. [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:]

Thank you. 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, 2016. 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 operating item for the quarter, discuss recent flow diversification trends, and provide some guidance on how we are thinking about 2018. I'll then turn the call over to Kurt MacAlpine, our Global Head of Distribution for comments around some key initiatives, before John will make some closing remarks and we open the call to Q&A. Beginning on Slide 3, our USA AUM grew to $46.8 billion at the end of the fourth quarter, primarily due to positive market movement. The U.S. dollar's continued decline versus the euro drove significant outflows from hedge that largely offset flows in our other ETF categories, as the middle truck shows. The chart on the right reflects our flows x hedge and DXJ, which total $1.1 billion for the quarter. The strongest quarterly result in 5 years and that strength has continued through January. Turning to the next slide, we can dig into where we are seeing flow strength. During the quarter, we saw continued strong demand for non-U.S. SmallCap Strategies which had aggregate inflows of $435 million. Our suite of domestic fixed income ETF had the strongest quarter ever with $179 million of inflows driven by AGGY, which continues to build an impressive performance track record versus passive benchmarks and -- the most sophisticated active managers. During the fourth quarter, the dollar again was fairly stable and sentiment briefly improved towards Japan. WisdomTree took a $0.94 out of every dollar that went into the currency hedged Japan team. This illustrates that the flow challenges we had with the DXJ hedged are market sentiment driven and when sentiment turns, we lead the flows given our competitive strength in the currency hedge category. This quarter also show diversified record flows, with 48 different fund generating inflows. 11 of our ETFs, across a broad range of strategies, producing greater than $50 million of inflows and 10 funds generating record portal inflows. We believe the momentum and diversification, we are now experiencing, is a direct result of the investments we've made over the last several quarters around solutions, technology and new distribution channels, which is part of the strategy we laid out a year ago, which I'd like to discuss on the next slide. We have taken active steps to diversify and grow our asset base. This includes investing in new distribution channels like the relationship we recently announced with TD. Harnessing big data to make our distribution efforts more targeted. Investing in technology initiatives like our digital tools, which helps advisors build portfolios, optimizing WisdomTree ETFs and lastly, building out an adviser solutions program platform could deepen our relationship with advisers. These initiatives rolled out in the quarter and we have -- and they have one end goal, to increase flows into our ETFs and we are now seeing the results of these actions starting to take form. As you can see in the top chart on this slide, the net flow breadth has accelerated in the past several months. We have seen a significant increase in the number of funds with creations on a daily basis. Over the past 2 years on average, we saw 2 to 3 funds create on a daily basis. That has recently increased to nearly 5 funds in the fourth quarter and 8 funds so far in January. In addition, a record 48 U.S. ETF generated net inflows for the quarter, reflecting a combination of core strategic funds as well as more tactical exposures. These flows have translated into greater AUM in our core strategic funds, which you can see in the chart on the bottom of this slide. These core strategic funds generated more than $4 billion in net inflows over the past 2 years, representing a 15% annualized organic growth rate, including $820 million of inflows during the fourth quarter. These core strategic funds now make up 52% of our AUM versus 35% 2 years ago. We are very encouraged by these signs of accelerated and diversified flows and will continue to focus our efforts on initiatives that we believe are driving it. Now turning to our financial results on page 7. Revenues increased 19% from the fourth quarter of last year to $61.4 million. Net income was $200,000 for the quarter, or $5.2 million adjusted for 2 unusual items. During the quarter, we incurred $4.5 million of advisor fees, associated with our announced acquisition of ETF Securities, and our loan an option agreement with AdvisorEngine. We also incurred a $400,000 charge to write down the value of our deferred tax assets as a result of the new tax reform rules. The elevated tax rate in the quarter reflected the nondeductability of the transaction cost and our international segment losses as well as the write-down of our deferred tax asset. We also have some specific events occurred in the fourth quarter, we drove up compensation expense. The first relates to incentive compensation. We typically award incentive compensation in a mix of cash and stock, which vest over 3 years. The cash portion of the incentive compensation is recorded as an expense in the current year and the stock portion is recognized as an expense over the 3-year vesting period. In the fourth quarter, we made the determination to change the writing more towards cash, so we would incur less stock-based compensation expense in future periods. This change result in a higher expense in the fourth quarter than what we had initially planned, but it also reduced charges in future periods. This change did not result in a higher total bonus to employees, just in how we record the bonus expense. Second, in the quarter, we increase the incentive compensation pool to recognize the achievement of key milestones, involving several important strategic initiatives, as well as the hiring of the key executives. And lastly, because of the tax reform rules, we accelerated the vesting of certain stock awards, originally scheduled to vest in January, in order for the company to maximize tax deductibility of the award. Now I'd like to turn our thoughts to 2018 guidance on the next slide. This is the guidance for our existing business and does not include the ETF Securities transaction. Starting with our U.S. Business segment and walking down the expense line items on our income statements, starting with compensation. We expect compensation to be in the range of 27% to 29% of U.S. revenues, which is down from 32% in 2017. For fund operating cost, we give guidance as gross margin. Historically, gross margin included fund operating cost and third-party revenue sharing. Given the success of our relationships with key decision platforms like PD and Schwab and our marketing arrangement with the Compass Group, we are no longer including third-party sharing as part of gross margin, since it's really a distribution-related cost. Therefore, gross margins going forward will only include advisor fee revenues, less fund operating cost because it's more accurate to model. We expect the revised gross margin to be 84% in the near-term. Third-party sharing cost are approximately 2.6% of revenues today, and we expect it to range between 2.6% and 3% of revenues each quarter, depending upon the growth of AUM with our distribution partners. We will continue to give updating guidance on both gross margin and third-party sharing each quarter. We also expect a nominal increase in other overhead costs. To maintain our competitive position and leadership in the fast-growing ETF industry, it is important to make continued investments in our business to drive long-term growth. We expect to invest $3 million to $5 million this year on strategic growth initiatives, which will focus on expanding our distribution abilities, specifically around adviser solutions. Continuing to build our technology initiatives, focused on distribution and advisor-oriented technology through our investments in AdvisorEngine. In addition, we will continue to invest in product and brand awareness as well as launching 6 to 8 new ETFs in 2018. We believe this amount balances the need to make the right photos strategic investments and manage our cost base. Turning now oversees. Our international segment losses are improving and we expect them to have $7 million to $10 million of losses in 2018. Again, this is a prior to the ETF Securities transaction, which will immediately make our international segment profitable. Our U.S. tax rate will be 28% and 33% on a consolidated basis, because of the nondeductibility of our foreign losses. After the ETF Securities transaction, our consolidated tax rate is expected to be approximately 30%. Now I'd like to give you an update on the ETF Securities transaction. The integration process is going well and is well on its way and we are proceeding to a close, which is expected sometime at the end of the first quarter. We will give updated guidance of the business on our next earnings call, but in the meantime, we are in target with our previously announced synergies and their contribution of approximately $19 million of net income in 2018. Their AUM has increased as we announced the deal and now stands at $18.2 billion. Now an update on our results so far this quarter. As of yesterday, our U.S. AUM is up to approximately $48 billion driven by continued market strength, while DXJ and HEDJ have waited on net inflows, we've seen a continuation of the strong flow diversity with nearly $800 million of inflows in January, excluding those 2 funds. One of the strongest months in the firms industry. Now I'd like to turn the call over to Kurt MacAlpine, our Global Head of Distribution to discuss several of the key drivers beyond -- behind the improved flow diversity and momentum.

[Kurt MacAlpine:]

Good morning, everyone. As Jon has mentioned, excluding DXJ and HEDJ, our net flows and the diversification of those flows have picked up considerably in the last four months. Since October 1, we bought in $2.1 billion in net new money across 56 of our ETFs, with no one hot category or categories driving the majority of the flows. Legally this step-change increase can be attributed in part to the rollout of our adviser solutions program, which was officially released in late September 2017. You've heard a lot over the last few quarters about the strategic spend, within distribution, and we wanted to provide you some visibility into the new solutions program that we built with this investments. When we launched the effort to build the program, we did it with 2 primary objectives in mind. First, we wanted to make it easier for clients and prospects to do business with us; and second, we want to build deeper relationships with advisors and platforms that expand beyond providing product ideas. In building a program, we wanted to ensure that what we designed was differentiated relative to anything else available. To achieve this, we developed a new program in collaboration with our best clients and prospects and focused it on the most relevant challenges or headwind they're facing in their business today. What they told us is they needed our help and support with 8 things. So starting from the top with Evolve the Client Experience. First, they need to evolve how they are working with their clients and offer an experience that better incorporates technology as a core part of their offering. Second, they're struggling to increase share wallet with their existing clients and are looking for ways to create additional capacity and the practice so they can focus more attention on them. Third, there struggling to attract new clients and are looking for ways to better position themselves to win new businesses. Fourth, at their business is becoming more commoditized by Robo-advisers and they're looking for ways to differentiate themselves by offering more than data or legacy out for seeking products. Faced, we wanted to expand their teams and involve how they are working internally. Sixth and seventh, depending on their age, many looking to scale their business requisition or to invest their business and retire. And age, that recognize the need to evolve how they operate and recognize that their clients there demanding and there embrace technology and the way that they have not done historically. As you can see from the diagram on the slide, our new program provide solutions directly address each of the challenges that our clients are facing. We've got a chance to look at program from other asset managers, beyond the topics that we are focused on, there are two things that we offer that they are unrivaled by anything else available in the market today. We are differentiating ourselves based on technology that is designed to empower, not compared with the advisor and we are differentiating and partnering with the words leading academics. The entire adviser solutions platform as delivered by our industry-leading technology and a user-friendly and scalable manner and we are providing best clients and prospects with direct access to hear from, brainstorm and problem-solve with the world-leading experts on the topics they've identified to be most relevant to them. I won't talk you through all the details in each of the elements of the program, but I would like to share two examples with you. First, under the Deliver Uncommon Investment Results Section. One of the most frequent complaints we've heard from clients is that they love their product, but that their platforms did not provide them with the tools to understand how they fit, alongside the other holdings they have in their portfolio. In response, we rolled out a new Digital Portfolio Construction tool, named DPD or Digital Portfolio Developer. In the first 3 months after we launched, we had over 4000 unit portfolio runs, exceeding even our most aggressive expectations for the tool. This incredibly strong adoption at launch immediately demonstrates how much demand there was in the marketplace for a tool or capability like this. Second, under Do More Business with Existing Clients, we made our model portfolios available on 2 primary platforms in the fourth quarter, the investment platform and the TD Ameritrade platform. Advisors have been asking for help from us on the investing side of the business, so they can free up capital to spend more time on financial planning and client service. We delivered with a suite of model portfolios that blend alpha and beta into an easy-to-execute open-architecture solution. Despite this just launching, we've already generated strong advisor adoption and have experienced positive net flows. The feedback from advisors has been very positive and theses open-architecture portfolios have provided them with a compelling, outsourced investment solution. Hopefully this high-level overview of the solutions program provided you with a glimpse into some of the actions that we are taking to helped us achieve the significant increase we've experienced in our net flows and the breadth of products that we are selling. I would now like to turn the call over to Jona to discuss his thoughts on the quarter and the year-end.

[Jonathan Steinberg:]

Thank you. Good morning, everyone. We have an incredible year-end. The combination of the announced ETF Securities acquisition in November, the launch of our solution program in September, the distribution relationship with TD Ameritrade in October and AdvisorEngine's acquisition of juncture at the end of December makes the word transformative with the appropriate descriptor for 2017. When the ETF securities of deal closes in the next couple of months, WisdomTree will have immediate scale in Europe with nearly $20 billion of assets under management and $100 million of run rate revenues. Our European business will have been transformed and since Europe is the second largest and the second most important ETF market in the world, WETF will have been transformed. We'll also have succeeded in materially diversifying our business and reducing concentration risks. While the deal hasn't yet closed, clear benefits would have been seen over the past few months as the U.S. dollar slid to multiyear lows and goal prices and other commodities have rallied. It seems our timing couldn't have been better. As global growth is expected to accelerate in a synchronized manner for the first time in many years, I expect demand for commodity ETPs to increase, making this transaction even more attractive. In addition to the strong strategic merits of the deal, it will be at least $0.11 accretive in the first 12 months. Taking the strategic and financial merits of the deal together, this was the best transaction done in the ETF space since BlackRock bought [indiscernible] shares. Turning to Slide 12. While we are excited about the diversification benefits of the ETF Securities transactions, other investments we made in recent years, around the products and distribution, are driving broader organic growth here in the United States. I want to reiterate some of the points made by both Amit and Kurt. Inflows in Q4 XDXJ and HEDJ were the highest levels they have been in 5 years and 2018 is off to an even faster start. The flow diversification is evident regardless of how you cut the data by number of funds, asset classes or fund vintages. It's undeniable. I'm particularly optimistic by the broad and strengthening emerging market flows we've been seeing. In terms of product development, WisdomTree remains a powerful innovator. In addition to product development, investments and distribution have also played a key role in improving flow breath. One important distribution when was the inclusion and TD Ameritrade's a new commission free ETF platform and model marketplace. WisdomTree has 74 funds on the platform, representing the majority of the smart data offerings in nearly 25% of the entire platform. Our positioning in this program would not have been possible without the product suite we've built over the past decade. At this new platform has already had an impact on flows and flow diversification, driving hundreds of millions of inflows across a broad range of funds since the October launch. We've talked a lot over the past 4 to 5 quarters about how we envision technology, revolutionizing the wealth management to industry and the importance it will play in determining the winners and losers among asset managers. And 2017, WisdomTree make considerable progress on technology initiatives that will help fostered deeper relationships with more financial Advisors. In 2017, we help facilitate 3 acquisitions for AdvisorEngine, which dramatically improve their platform with enhanced client prospecting, goals based planning and CRM tools for Advisors. In particular, the acquisition of juncture was transformational for AdvisorEngine. The deal brings 12,000 FAA's across 1,500 forms, advising over $600 billion in assets into the business. This represents a tremendous up-selling opportunity for AdvisorEngine and cross-selling opportunity for WisdomTree. As Kurt discussed, since the September launch of our distinctive solutions program, including our portfolio construction tool, DPD, WisdomTree has received excellent advisor feedback and we can see this positively impacting flows. While still a very early, there seem to be a lot of success and leverage to our efforts as best captured by the number of funds creating on a daily basis. Let's focus on the big picture. ETF flows to the industry exploded to $464 billion in the U.S. in 2017. I expect $7 trillion to $10 trillion of flows globally over the next 10 years. This year's accomplishment illustrated our aggressive approach to complete for the massive global opportunity. We've never been better positioned to capitalize on the global growth of the ETF industry. Now let's open the call to questions.

[Operator:]

[Operator Instructions]. And our first question will come from line of Craig Siegenthaler with Crédit Suisse.

[Craig Siegenthaler:]

So just wanted to start on AdvisorEngine. Should we expect to see the first set of flows and wins really show up in ETF AUM in 2018, so this year? Or do you think it's more better to have a conservative assumption in more like 2019?

[Amit Muni:]

I would think you'll see some in '18 and it's accelerated over time, for sure. You know AdvisorEngine, sort of, around their traction and growth, engagement in reaction to the platform that has been incredible. And also reaction from the industry, from the advisor industry to the juncture transaction has been incredibly positive. But it is a long sales cycle and the efforts by their team and it is a small team, to buy juncture and to negotiate with WisdomTree took considerable resources. But juncture is significantly larger from a revenue standpoint than AdvisorEngine, and the cross-selling should just lead to faster organic growth. And then juncture should also lead to model opportunities for WisdomTree, even away from AdvisorEngine. So all in totality should grow this year and accelerate over time.

[Craig Siegenthaler:]

Got it. And I want to follow-up on China and your emerging market products. And we noticed China X [indiscernible] is having a really good run here and also the index behind S&P 500 China is also in a good run. Is your sales team seeing better traction on the EM suite and really China specifically? And are there additional opportunities to add these products to platform, like we saw with some of the wins with Ameritrade?

[Jonathan Steinberg:]

This is Jonah. Let me answer the first question, and I would just say absolutely we're see a lot of interest in EMEA broadly. We are seeing interest in China and those two particular funds, really, we think are extremely unique in the industry. China X data on enterprises is really beta for China, removing the risk of state ownership. And as you mentioned, that saw significant flows in 2017 from a very low base. We recently launched the China 500, along with, based on the S&P China 500 index. And that in effect is data for China. That's the broadest China exposure that exists, it includes both eight-shares and A-shares and as China becomes a bigger part of global market cap and folks need to allocate in a greater way to China, that could be the go-to fund to get broad data exposure to the Chinese equity market. So we are very excited about both of them and that's the direction I would say we are very excited about broad emerging markets X data on the horizon as well, which beat the MSI Emerging Market Index last year by 5000 basis points. People are just starting to discover that fund, X S O E.

[Kurt MacAlpine:]

And then Craig, on the second part of your question, it's Kurt MacAlpine here. Around the placement of these funds on different platforms. And the X data on enterprise suite is and has been present on many platforms, which was part of the reason you've seen strong adoption recently. And as of yesterday, we just placed the S&P China 500 on the TD Ameritrade platform for commission-free trading. So as you know, that fund just launched in December. The asset base is growing nicely, the trading volumes are quite strong, so we anticipate that we will continue to gain traction on a variety of platforms as that fund grows.

[Amit Muni:]

And let me just add -- so a couple of thing. So first, the China 500 is the first true beta fund ever launched. You can't say any of the ETFs, based on any of the other indexes, is true beta, they're way too narrow to be considered beta. So again, if you're going to do beta, you have to be first so it's very exciting. The speed with which the fund has opened on its trading. And has created, is faster than most launches that we've ever had. We've said to you, it's not often that -- it's not often about year 1, but years 2,3, and 4 but this is certainly off to an incredibly fast start. And then earlier in my prepared remarks, I spoke about vintages. And not only are you seeing China 500, which was launched just a couple of weeks ago or X data old enterprises, emerging market funds, a couple of years ago, but also DDM and DGS are also strongly creating as well. So that's what I was referring to in the sheer breadth of what we are doing and it's very encouraging, particularly from a fee standpoint and a fee-compression standpoint to see both historically powerful funds at the firm and new funds at the firm creating at the same time. But thanks for your question.

[Operator:]

And our next question comes on the line of Bill Katz with Citigroup.

[William Katz:]

Just a quick question on the pending ETF Securities. John, you mentioned that you said about $0.11 accretion, I was just sort of looking at what you had set at the time of the transaction. And maybe it's a mixing apples and oranges, which it could very well be. But sure shows $0.09. So I guess just a couple of questions around that, is one -- what is the -- I think you're using the similar level of assets versus what's in there today, so am I just mishearing? Or is there a little bit of a subtle shift in the guidance?

[Jonathan Steinberg:]

No, there is no change in guidance. The numbers that we gave was the 12-month number, as opposed to the 2018 calendar year amount. So there's been no change in the guidance from when we announced the transaction. We look at upgrading guidance after the transaction closes probably the first quarter call.

[William Katz:]

Got it. But that is based again on AUM, not today's AUM, right?

[Jonathan Steinberg:]

That's correct.

[William Katz:]

Okay, and then just big picture question, Jonah, thanks for the sort of longer-term forecast on flows. So to do the quick math again maybe this is a little rounded as well. But looks like you have about 1% market share in aggregate in your U.S. business versus some of these flows, the $46 semi-billion you mentioned for the industry. How do you think about the incremental growth for your franchise, against some of the market share assumptions you've laid out in prior calls? Is there an incremental catalyst here that you can potentially close the gap versus what we've seen more recently?

[Jonathan Steinberg:]

Yes. So, one I know that's answered both with, we've seen massive headwinds with DXJ and HEDJ. So that absolute numbers are masking lots of potential, but taking that out, still you need to see significant growth beyond that to match the targets that I've laid out for the firm. I am encouraged by the leverage that we are seeing on some of the platforms and the tools. It is still very early days. There is also, when you marry sort of data with our digital marketing, another point of great leverage and a lot of these are just starting to hit. One of the things that we tried to do on this call, because we've had so much activity in the recent -- just in the recent past, a lot of this we -- was repeated, but we wanted you to have a better sense of all in the totality of what we are doing. We definitely feeling that the efforts that we have undertaken over the last couple of years, whether it's around new products, and so just to take market share and we're still growing in early things come. If you want to do better in the next 10 years and in the prior 10 years, domestic fixed income would be a good category to contribute more. So there is you know from the products standpoints, things like that, we are excited about that and the liquid alts. I mean, yesterday we just launched Russel 2000 put-right to complement the S&P 500 put-right to go into the suite of liquid alts we've been launching, another relatively new category. And these funds, they take some time to establish. I mean, one thing I've said to this group before and one of the changes over the past decade is the difficulty it is to launch a new fund. But we are starting to see very broad participation from many of the new funds over the last 1, 2, 3, 4 years. And then just the technology. I think that you have a real chance to see an additional leverage as the tools have been rolled out as our sales team and will market team are taking full advantage and our clients are learning how to interact with us and them in a new way. But net of it all, I am in no way backing off of the past guidance. So I've said in the past, something like 5% to the flows or more, which we translate, I think, into something like 10% of the revenues of the flow or more. And that's still the business plan, the business model and the aspirational goals of the firm.

[Operator:]

And our next question will come from the line of Surinder Thind with Jeffrey's.

[Surinder Thind:]

I'd like to start with a question on AdvisorEngine. Obviously, it appears that there's good reason to be optimistic about some of the investments that you're making. Can you maybe help me provide some color around, or understand, the one-year option to buy out the remaining steak -- why one year, why not something longer, 3 years? What could be the delta versus maybe having to spot out the remaining stake at this point, versus waiting a year, or having the option to wait a year?

[Amit Muni:]

Thank you for your question. One, as one of the analysts follows investment, this is a really relevant story for you and we think this has the chance to be, sort of, an investment on the new tax act for the future. So as a small firm, and WisdomTree is large with AdvisorEngine, but significantly smaller than, let's say, a BlackRock. It's not as easy as for us to put a start-up through our income statements. So we have to be creative in how we do this. We think peak losses are in 2018 and so the option allows us to avoid most of the losses and certainly the losses for 2018 and we think it's gets better on a going-forward basis after that. In terms of a longer-term option, we didn't control it. You are dealing with shareholders and management teams at AdvisorEngine and it's not an easy thing for them to understand. They partnered with us, we are working well together, but they now agree to sell themselves at our discretion and actually get the benefit of the liquidity of that. So it's just a balance. If you could have had an in infinite options, that would be better, but I think it was really quite creative and flexible with the entrepreneurs we are dealing with and is sensitive to what public company shareholders and we are quite sophisticated in terms of sort of corporate financing structuring as ATF security deals represented are AdvisorEngine juncture represented. So we are trying to be. Every party involved. But it isn't easy being an asset manager our size and trying to compete with BlackRock and Vanguard.

[Surinder Thind:]

Understood. That's actually very helpful. And then perhaps, a question or two for Amit here. Amit, you provided some color around the so-called one-time items around the comp expense in the quarter. Any color around how much of that was being pulled forward with the stock-based comp. And then the other question related to that is, I think in the past you've also decided to use more cash or change the cash and stock-based comp mix. And so I think this is the second time that you guys have done that. Maybe any color there around just how you guys think about stock-based comp, in general, going forward, and if this is a new mix level to think about?

[Amit Muni:]

Sure. So I would say, we've changed the mix, as you noted back in 2016. We did it again in '17. Usually it's when things become unusual, right? As I mentioned in 2016, because of our results, the bonus tools, were so low that we had to shift more into cash. In 2017, the reason we did it, it was just moved ranging our expense base for future period, so we felt it was better take the expense in now. But I think, in a normal environment, I wouldn't expect to see any sort of shifting like that. I would expect them are then sort of, as you've seen, sort of historically how was sort after study makes. As far as -- how much we accelerated, if we do not accelerate or change that makes, we would have been within the guidance then we get beginning of the year. So rally that the presets [ph] that's over above the 31% top end of the garden site. As far as the acceleration of the stock awards, that was about roughly $600,000 we shifted from January to December.

[Surinder Thind:]

Understood. And then one final question, just kind of a more of a big picture item. In terms of what you guys just talked about, recently launching new product and stuff. How we should think about the pipeline going forward at this point? Obviously, a lot of investment has been made and a lot of products were launched, as Jon and you noted a few years back, and are beginning to get traction and stuff. But how should we think about this year and your outlook for the pipeline?

[Jonathan Steinberg:]

So Amit gave some guidance about 6 to 8 funds for the year, I think we've done 3 already. We have, and I'm feeling very, very good about our talked about the prowess -- I can't tell you how excited I am for the liquid alts and our fixed income. Our creativity seems to be undiminished, so I feel really good about it. Now we run in cycles, so we launch funds, every once in a while, we close funds. We try to create and keep a healthy mix. And I think really nothing has changed. We've been very efficient and disciplined since we launched the firm in 2000 -- 2006 and I think we'll continue. But I would say, this would means that you guys always ask us about competition. It is hard for the rest of the industry to keep pace with WisdomTree. We recently made some quarries into, more aggressive quarries, into Active ETF. You are going to see us do more on those bases as well. So again, really one of the great core strengths of the firm.

[Operator:]

And our next question will come from the line of Michael Carrier with Bank of America.

[Jeffrey Ambrosi:]

This is Jeff for Mike. Just on the international segment losses. I guess, when will those be deductible, if your mind is on that. So that will become deductible, once those businesses turn profitable. Then we'll be able to recognize the kind of wealth that we've been accumulating on them. So it's just a matter of timing. So we are driving these businesses on a standalone basis to get the profitability as soon as they can. And Amit?

[Amit Muni:]

Obviously with the ETF Securities transaction, the holistic international segment becomes profitable, but we have to look at each one of those international businesses on a discrete basis.

[Jonathan Steinberg:]

And what business were you referring to as not profitable?

[Amit Muni:]

Our existing European platform.

[Jeffrey Ambrosi:]

Right.

[Operator:]

And our next question will come from the line of Robert Lee with KBW.

[Robert Lee:]

Maybe going back to advisor solutions, maybe, this is -- Jona, following up on the comment you made before. Can you maybe help us understand a little bit of advisor solutions, is different from some of the other things. I mean, INVESCO and acquired this gem step, which targets the advisor market. In addition to the advisor market for many years and head into the platform. So I'm just trying to get a sense competitively how you kind of think of advisor solution versus some of those others that are targeting with a similar strategy with the same marketplace?

[Kurt MacAlpine:]

Just to clarify the question, this is Kurt MacAlpine here. You were referring to AdvisorEngine, relative to a jumpstart with the totality of the solution program?

[Robert Lee:]

Well, it's really more of the technology and being able to capture that advisor and sign them up. I mean, it seems like many of your competitors are also trying to use technology to drive delivery of their models as well.

[Jonathan Steinberg:]

Okay. Here I think you're taking more about AdvisorEngine, which is a subset of the full solutions program. So AdvisorEngine, let's just taking it against Gem Step and against Envestnet. So Gem Step or even a future advisors is more about Robo. And AdvisorEngine is a much broader -- it's really the full digital platform, all the way from prospecting to billing, including Robo. And Robo is one of the more important aspects that got WisdomTree excited, because that's allows us to put, sort of, be the easy button for our model portfolio. But Robo itself is not what AdvisorEngine is. AdvisorEngine is more in Envestnet, but built on a new tech stack and the technology enhancements today, you know, on tech built in the last year or two versus Envestnet. They were visionary, but they started in the late 1980s and it creates it's own legacy issues, which really are not that flexible and scalable. And so we do think there's a tremendous opportunity to compete with them, as we hear from their client base frustration in the usability and the intuitiveness of that tech and then from the asset ETF sponsors who have gotten into Robo, they're only competing with the sliver of what we are going for.

[Robert Lee:]

Okay. And then maybe a follow-up question just on the pending transaction. Just kind of curious, any change in thought about how we should think about the financing of it? Or your expectation for paying down this debt, once it comes on, just given changes in taxes going forward? And maybe, as a second part of that, are there any tax benefits? I'm assuming maybe there's some tax-deductible goodwill that will be created with this?

[Amit Muni:]

So we are currently looking at how we are going to be structuring the transaction to optimize the taxes around. We are waiting some clarification on all of the tax reform rules that we are going on. So when we close the transaction, we'll talk more about that, how that would expect the tax rate. And as far as how we are financing the transaction, it's still the same, combination of debt and cash in our balance sheet, as well as 30 million shares of stock that we'll be given to the ETF Security shareholders.

[Operator:]

And our next question will come from the line of Mac Sykes with Gabelli.

[Macrae Sykes:]

I know you list your percentage of flows versus the industry, but we also know the bulk of the industry flows are going into more commoditized beta products. Is there any way to parse out your flows away from the local me-too products? And how should we think about that industry growth rate, in terms of coming from smart data more differentiated solutions? Is that faster at this point than the overall ETF trends?

[Jonathan Steinberg:]

Kurt or Lou wants to add to this, I would say we've always had incredibly strong data in the marketplace from when we launched, the largest ETF sponsor in the world had always been a part of the business and they've always taken very, very strong market share. Nothing has really changed in the dynamic of beta versus alternatives. The most important number is, from an investor standpoint, is the act of few returns. We have a history of creating value. We are seeing lots of funds, both historically and new are creating value. You are seeing the advisor get more sophisticated in what they are demanding from their models and from their exposures and their learning that it's not just active mutual funds or beta ETFs that are the choice that they have. We spent a tremendous amount of time over the last ticket educating on modern alpha and how -- and now we are really educating on how you incorporate into your portfolio. And I've given you numbers of growth -- market share expectations and revenues of market share flows versus the industry and there's always going to be an opportunity for those funds that create value. And they will come in cycles, it won't be a straight line where either beta is doing exponentially better, or even smart beta is doing exponentially better. But one point of leverage on the side of smart beta, is there is an educational process taking place right now. I mean, the first models ever to come out that marry beta and smart beta have only just recently started to come to the marketplace. So I'm very encouraged about our side of the business. And then on the other side, let me say, WisdomTree has some data. China 500 is data. Floating-rate treasuries is data. So we have chosen to play in the data space, where we can be first. So anyway, we are competing for the whole pie.

[Kurt MacAlpine:]

Just another thing as well, just to tie it back to the solutions program, AdvisorEngine, the data investments that we are making is, one of the things that we found, because the majority of our products, our alpha-generating strategies is, the single driver or single most important driver or barrier to our flows, it has been having platforms and avenues to get in front of Advisors. And we found from an industry of many other firms, we found that you can have 2 to 3 quality investment conversations a year on products, but when you start to marry those product with industry-leading technology, with adviser solutions with world-leading academics, we believe that we are increasing and we are seeing this in our activities, that we are -- these tools are allowing us to go deeper with advisers. When we go deeper with Advisors, we have more forms in front of them to share our investment processes and methodologies. And we believe quite strongly that that's leading to better flows and part of the driver of the uptick that you've seen from October onward.

[Luciano Siracusano:]

This is Luciano, we are late in the economic cycle. And this is typically a time when you see beta and momentum outperforming these factors. So it shouldn't surprise people that huge flows are going into beta, if you look at data as an actual factor. The nice thing about WisdomTree is that we give you exposures to other factors that can also come into play in different parts of the cycle. And so I would say that the key take away for me is how much money is actually coming into the ETF industry. And the fact that it's coming into low feed is great, because eventually the money that's in low feed data will also need to go other places, because there is risks to being 100% beta, 100% of the time.

[Macrae Sykes:]

And you've done a nice job at the TD relationships in the ETFs, and we've had from them, especially in their last call about how they are really embracing social media platforms, trading through Facebook et cetera. Have you talked -- I don't think I've seen any iteration of this, but maybe you can just talk about, sort of, how you're thinking about embracing social media, getting on the platforms and some of your digital engagements as well?

[Kurt MacAlpine:]

So I guess if the question is about the marketing efforts more broadly. I think there's two benefits to apply firm like TD, which is also true for Schwab or Armand X or Equestrian in other markets. So one is that it allows us to reduce the friction of doing business with Advisors, so we do hear them from some advises that one of the pain points of the cost of trading, the complexities around rebalancing. So in the example of a thing like TD, we are not only able to offer 74 commission-free funds, but we also have the only seven named commission-free models on the TD platform. So in terms of how we are accessing advisors, it's a combination of our distribution, our wholesale sales efforts, our investment strategy and model teams and also our marketing efforts, which are a combination of advertising, digital and social media engagements. So I would say, social for WisdomTree is really been a very strong suit for us. If you look at the number of followers on Twitter, LinkedIn, YouTube and things like that, I mean, we are in the absolute kind of top-end, top decile of the industry and it's definitely platforms that we are using to engage Advisors. But it's just part of a broader marketing and distribution effort that we are bringing to the market.

[Operator:]

And our next question will come from the line of Chris Shutler with William Blair.

[Christopher Shutler:]

First, I want to get your thoughts on the new factor classifications system and factor box being rolled out by MSCI and BlackRock. Is that something you would support or you think is a good thing for the industry? Just wanted to get your thoughts there?

[Luciano Siracusano:]

This is Luciano again. And anything that increases awareness and education around factors, I think, is a net plus for WisdomTree. We are actually were marketing, over a year ago, this notion of moving away from the Morningstar style boxes toward the five major smart beta factor. So that's actually been a key part of our investment strategy and marketing message for the last year. It doesn't surprise us that other folks are following in that direction now. And we think it's interesting that a lot of the innovations being led by index providers who were predominantly all halfway a decade ago. We view there a coming into the space is really is a validation of what we saw over a decade ago. And that's just going to accelerate the learning curve and make modern alpha as a third option, a much more predominant trend going forward.

[Christopher Shutler:]

Okay. And the only other one, in the advisor channel, could you give us a sense of much of the AGM today in the channel you believe is in, kind of, a home office model versus individual FA selecting the funds? I know you may not have perfect data, but just sort of a rough sense, what products do you have the most -- have the most AUM that are in-home office models today?

[Kurt MacAlpine:]

So in terms of our asset mix, there's really two types of models. If you think about the home office, there's a full discussion models, where they are doing the large trades. And then there's a lot of the paper guidance models as well. I would say that, kind of, as Jona had mentioned before, historically, a lot of the models have been overly simplistic, where they are just legacy alpha models using mutual funds. We've started to see a pretty large shift away from this mindset towards a more modern mindset, which is blending beta, smart beta in modern alpha. And we are showing quite well in those areas. So it's more of a nascent part of the marketplace today, but WisdomTree has given our history, our track record, our experience in this space has some pretty strong placement. What we are waiting to see now is that these platforms and these models really drive adoption throughout the field and have Advisors start to use them more frequently. In terms of our DXJ/HEDJ importantly, these are often seen as the defaults or are seen as the default of currency headphones in their category. Of those are the forms that you see most predominantly in the models. -- in the legacy model so it appears to describe the fact that those models were only beta-focused. They had opted to use DXJ and HEDJ as the core allocation of those models. And in instances where the core hedging is still present in those models, we are still present with those exposures.

[Operator:]

And our next question will come from the line of Alexander Blostein with Goldman Sachs.

[Ryan Bailey:]

This is actually Ryan Bailey. So firstly what I wanted to ask about was this quarter, it seems that you're focused on your U.S. business DXJ and HEDJ, in terms of flows, at least. So what I'm wondering is, beyond 2018, how do you think about DXJ and HEDJ as a percentage of AUM? And considering that those had typically had pretty high incidental margins, how might that change WisdomTree's overall profitability?

[Jonathan Steinberg:]

So I'll talk about it -- those franchises, the DXJ and HEDJ franchises are incredibly important to WisdomTree. In the first part of the fourth quarter, you had some -- a momentary burst of positive investment sentiment towards currently hedged Japan and as Amit referenced in his opening remarks, we took almost 95% of the flow into the category. So in moments we are the currency, the dollar is strong and Japan or Europe are in favor, we think that those will be growing stream and a UM's and contributors to margin and when they're not to the tractors why and that's they've been into tractors, the reason that we made such a great emphasis to talk about the ex-DXJ/HEDJ in this particular quarter was to really just try to bring attention to the sheer step change in breadth of funds creating on a daily basis, which we think as really an early indicator of maybe great potential, I mean, for those who have been following WisdomTree for a long time, Bill Katz followed us when we are pink sheet stock. So in 2008, when the words coming to an end and the forms are trading at $0.50 a share and WisdomTree at $800 million of flows, that was maybe the thing to keep your eye on that would have been the indicator of future growth and greatness which ideas we sort of demonstrated over the last 9 or 10 years. If I look today and though the words are coming to an aunt, but you're seeing a collapse in the dollar, our largest exposures are taking it on the chain, we are seeing something very extraordinary that we feel is tied to the recent efforts around solutions and models and other things and it feels to me that there is a similarity between those 2 types of metric. I feel incredibly good about what we're doing. But what I would also strive to you is, don't discount the value of our franchise-leading funds.

[Ryan Bailey:]

Understood. And I guess, maybe two quick modeling questions, Amit. As we think about the $4.5 million of transaction-related cost, how should we split those across expense items. I'm guessing it's mainly comp, but maybe that was something in G&A? And then based on a prior question, should we take it that the $19 million of accretion from ETF Security to 2018 doesn't have any benefit from, I guess, tax savings?

[Amit Muni:]

Sure. So the $4.5 million is all in professional fees, so those are just advisers that we've paid in connection with the 2 transaction. And as far as the accretion, that is an after-tax number, so it does include any of the tax benefit that we would get.

[Operator:]

And our next question will come from the line of Brent Harkin from UBS.

[Brent Harkin:]

First just a clean-up question, and apologies if you hit on this, but the tax rate guide, does that include the impact of stock-based comp? And if so, what would that impact be?

[Jonathan Steinberg:]

It does take into account the stock-based comp, but remember because of the new rules around stock-based comp, we gave information and if you look at the supplemental appendix, it has that's articles as a future stock-based comp that we are investing in the potential tax is related to that. We do take into account I'm assuming a little bit of that in the tax and the tax value that we gave, what if you just follow that information, you should be able to keep track of that as an incremental tax and because of that.

[Brent Harkin:]

Okay, so we should refer to the appendix and the guide is basically excluding that. I'm not really sure because you said take into account a little bit of it so I was trying to.

[Jonathan Steinberg:]

We assumed a little bit of it, but the best thing to do is look at that supplement and then we can talk back at the end of every quarter on what the tax impact, it's already public.

[Brent Harkin:]

Fair enough. Than last one for me. You guys obviously spoke to the comp based -- of stock-based comp acceleration in 4Q, which makes a lot of sense giving tax yield implications. But I believe he also said that you increase the incentive full for some milestones, you're starving if you could maybe walk through some of those, obviously, one of them was pulling off the best deals since PGI, but if you could maybe put point on those muscles, that would be great to.

[Jonathan Steinberg:]

That was give you a summary of all of the big highlights that we use. I'm in, that would be the biggest 1 when we the TD, the challenger AdvisorEngine plus the ETF securities really goes are the points that this team deserves to be rewarded for.

[Operator:]

And our next question will come from the line of Keith Housum with Northcoast Research.

[Keith Housum:]

Just two housekeeping items. On the ETF Securities transaction, I noticed that you slightly have and are on target to realize $5 million of identified cost synergies, is any of that included in your $19 million benefit you expect in 2018?

[Amit Muni:]

Yes, it is.

[Keith Housum:]

Okay, all of it is?

[Amit Muni:]

Yes.

[Keith Housum:]

Got it. And just to remind us, as I switch gears over to AdvisorEngine. If I remember right, you guys expect AdvisorEngine to primarily provide increase distribution in AUM, but also As a time to sort of revenue from the model, such as that. So as you think about AdvisorEngine, can you a little bit about how should we think about that in terms of '18? What happens if the options is actually in '19, if you have a scope you can give us around that.

[Amit Muni:]

Sure. So as a business -- as general talk about how as Advisors engined grayscale increments a long-term effort that we have sweatsuit as with the juncture acquisition there billions of scale will be enhanced by that, so we would expect to see over time the model start to take traction and we start to see some revenue coming in from that. When we did exercise the option, we will consolidate Advisors engine so we wouldn't have other things revenue trend would just be included as part of our total revenues.

[Keith Housum:]

Got you. is any willow million dollars or $10 million opportunity and spoken for writers X.

[Amit Muni:]

No, we're not giving any guidance on that right now.

[Operator:]

Ladies and gentlemen, this is all the time we are focusing today. So now at this time, I'll hand the conference back over to Mr. Jonathan Steinberg, WisdomTree Chief Executive Officer. Some closing comments or remarks.

[Jonathan Steinberg:]

Just want to thank all of you, for your time and interest and I will speak to you next quarter. Thank you.

[Operator:]

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