WisdomTree, Inc. (WT) Earnings Call Transcript & Summary

Greetings, and welcome to the WisdomTree Business Update Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jessica Zaloom, Head of Corporate Communications. Thank you. Ms. Zaloom, you may begin.

Thank you. This presentation may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. A number of factors could cause actual results to differ materially from the results discussed in forward-looking statements, including, but not limited to, the risks set forth in this presentation and in the Risk Factors section of WisdomTree's annual report on Form 10-K for the year ended December 31, 2022, as amended. WisdomTree assumes no duty and does not undertake to update any forward-looking statements. Now it is my pleasure to turn the call over to WisdomTree's CEO, Jonathan Steinberg.

Thank you, Jess. And I want to thank everyone who joined this call on such short notice, so we truly appreciate it. I think that the press release and the numbers speak for themselves, but I'm still going to ask Bryan to walk you through the transaction. So Bryan, why don't you walk us through the numbers, please?

Thanks, Jon. I'm going to start with a quick reminder that the contractual gold payments were an obligation that we inherited in connection with the acquisition of our European business from ETFS. The obligation had previously required us to pay 9,500 ounces of gold per year through 2058, which would then reduce to approximately 6,300 ounces of gold per year continuing into perpetuity. The subsidiary of the World Gold Council ultimately received 2/3 of the gold payments, while an entity controlled by Graham Tuckwell, who's also Chairman of ETFS, received the remaining 1/3. The expense associated with the gold payments were about $17 million in 2022 and approximately $4.5 million during the first quarter of 2023. We carried this obligation on our balance sheet at $180 million at March 31. Today, we fully resolved the obligation for approximately $137 million. Under the terms of the transaction, a subsidiary of the World Gold Council received about $4.4 million in cash and nonvoting preferred shares convertible into about 13.1 million shares of our common stock. The entity controlled by Graham Tuckwell received about $45.6 million in cash. The transaction generates roughly 15% EPS accretion versus the current 2023 consensus EPS estimates, $13 million of net income improvement and expands our operating margins by 530 basis points. We are, in effect, reducing our operating expenses by about $18 million per year by eliminating a payment obligation that was perpetual in nature. Settling this obligation, which has been confusing to analysts and investors cleans up our balance sheet, rises of the mark-to-market P&L volatility and is a positive development for strategic optionality and our multiple. Now let's turn to the next slide where we've provided an illustrative comparison of our annualized Q1 results to annualize Q1 results adjusted for the buyout. Again, this -- this is an illustrative example of the moving parts to the P&L before and after today's transaction, which should assist our investors and analysts with updates to their models. A couple of things. The contractual gold payment expense is reduced to 0. We're forecasting about a $2 million reduction in net interest income versus annualized Q1 levels as the $50 million cash payment was partially funded from our investment portfolio. We issued preferred stock that's convertible into about 13.1 million new shares of common stock as part of the transaction. So those are being added to our diluted shares outstanding. We're also increasing our diluted shares by approximately 1.5 million under the premise that this accretive transaction will impact the number of shares we ultimately issue in connection with our convertible notes that mature in June. As illustrated, the pro forma scenario showed 17% accretion versus annualized Q1 levels. However, compared to current Street models, we're estimating about 15% accretion versus 2023 estimates. Keep in mind, this slide is for illustrative purposes only and uses an annualized version of our recently reported Q1 results. So when you recently updated guidance around compensation and interest expense as discussed during our Q1 earnings call is not included in the illustration. With that, let me open it up to questions.

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] And our first question is from Brennan Hawken with UBS.

You touched on this a bit in the prepared remarks saying that it was partially, $50 million cash was partially funded from the investment portfolio. But where is the $50 million being sourced from? And how should we be thinking about that as far as the balance sheet goes.

Bryan?

Yes, I got it. So I mean, the $50 million was sourced from just cash we had on hand, a combination of cash and securities that we had on hand. It doesn't change our balance sheet profile at all, no incremental debt being added to the balance sheet. The deferred obligation is coming off the balance sheet. So it cleans that up, but it was purely a use of cash on hand, including from our investments. And that's -- sorry, and that's just -- that's one of the reasons why in the illustration, we're suggesting that we take our interest income down a little bit versus where we were in Q1.

Yes. Perfectly sensible. Thanks for that. Actually, kind of curious, this is, of course, tied to the acquisition of ETF Securities, and there is currently a proxy indication out there from that same entity. So there's been a bit of back and forth, but just curious what your updated views are on that proxy proposal and whether or not this development plays in at all to any of those dynamics in how we should think about the potential for Board composition or any other strategic implications?

So this is Jon. I'll take that question. No, from -- I would consider these very separate. So this was dealing solely with the gold royalty obligation. We've resolved it, and we'll see how the proxy situation plays out, but you can't tie them to.

Okay. Fine. Fair enough. One then follow-up question, Jon, I believe you guys have been on the record saying that your -- you don't necessarily believe that the board members that are proposed would enhance the Board. Could you give maybe a little bit more specificity and color around what drives that decision just so we can help understand your perspective a bit better?

What I would say is WisdomTree is a highly functioning organization. We do more on less people than any other asset manager, I think, in the world. We have a tremendous culture and there's trust at every level of the organization. I think that we have the skills. We have in our DNA, the asset management skills that obviously, we couldn't raise $6 billion in the quarter if we didn't have asset management shops. You could see by some of the recent additions to the Board where we took our most recent director, Daniela, came with a background from payments from Visa and PayPal. On this year's slate, we've added 1 new director candidate, [ Shamla ], who's got a background in information security coming as the Chief Information and Trust Officer at IBM, Her background in cyber and digital transformation is on par with anyone in the world. I think that we're trying to strategically build out diversification of backgrounds to work with our core historical strength in asset management. And we did keep from the -- from last year's cooperation agreement, Lynn Blake was one of last year's -- the candidates from the proxy contest that we agreed to take on and we kept her. You'll know that the Board unanimously supported, including Debbie Fuhr, unanimously supported the Board and the strategy. So I think we're operating at an incredibly high efficiency level and we're just of the mind that the activist group is not constructive, not as constructive as what we bring to the table. But obviously, the shareholders will vote their opinion come June.