WisdomTree(WT) - 2019 Q4 - Annual Report

Financial Performance - Operating revenues for the year ended December 31, 2019, were $268.4 million, a decrease of 2.1% from 2018 due to a 3 basis point decline in average global advisory fees and lower average AUM of U.S. listed products [40]. - Total operating expenses increased by 1.0% to $214.9 million, driven by expenses from the ETFS acquired business and higher compensation expenses [40]. - The company reported a net loss of $10.4 million for the year ended December 31, 2019, compared to a net income of $36.6 million in 2018, including impairment charges of $30.7 million [40]. Assets Under Management (AUM) - As of December 31, 2019, the aggregate AUM of ETPs globally was $6.2 trillion, with the company ranking as the fourteenth largest ETP sponsor based on AUM [42][43]. - Total AUM of Commodity & Currency products was $20.3 billion as of December 31, 2019 [65]. - Total AUM of U.S. Equity products was $17.9 billion as of December 31, 2019 [66]. - Total AUM of International Developed Market Equity products was $13.4 billion as of December 31, 2019 [67]. - Total AUM of Emerging Market Equity products was $6.5 billion as of December 31, 2019 [68]. - Total AUM of Fixed Income products was $3.9 billion as of December 31, 2019 [69]. - Total AUM of Leveraged & Inverse products was $1.1 billion as of December 31, 2019 [71]. - Total AUM of Alternative products was $0.4 billion as of December 31, 2019 [72]. Market Trends and Innovations - The shift to fee-based models among financial advisors is expected to benefit the ETF industry, as ETFs generally charge lower fees than mutual funds [50]. - The elimination of trading commissions for ETFs by major custodial platforms is anticipated to positively impact the ETF industry by reducing trading costs [51]. - The company aims to continue innovating in the ETF space, focusing on alternative strategies and digital assets to capture additional market share [50]. - The company has launched several industry firsts, including the first actively managed currency ETF and the first gold and oil ETPs via the acquisition of ETFS [56]. - The SEC approved Rule 6c-11 in September 2019, simplifying the rules governing ETFs [64]. - The company is focused on innovative product development, particularly through its Modern Alpha approach, which combines active and passive management to create cost-effective investment products [80]. - The company has a strategic focus on launching differentiated ETFs, aiming to introduce products that can be first to market or offer significant improvements over existing products [80]. Competitive Landscape - The ETF industry is highly competitive, with significant pressure from larger firms that can offer lower fees, with some funds being offered at fees of 20 bps or less, attracting approximately 76% of net flows globally over the last three years [84]. - Despite the fee pressure, the company believes its competitive product offerings and ability to generate strong after-fee performance will help maintain its market position [86]. - Fee reductions by competitors have been a trend, with some funds being offered at fees of 20 bps or less, attracting 76% of net flows globally over the last three years [132]. Regulatory Environment - The company is subject to extensive U.S. regulations, including the Investment Advisers Act and the Investment Company Act, which impose various compliance costs and operational requirements [89]. - The SEC's approval of Rule 6c-11 in 2019 simplifies the rules governing ETFs, allowing issuers to operate more efficiently without the need for exemptive relief [93]. - The company has expanded its international presence, with subsidiaries subject to regulatory systems comparable to those in the U.S., which may impact operations and compliance costs [92]. Risks and Challenges - WisdomTree's business is subject to risks from declining prices of securities and commodities, which can adversely affect AUM and revenues [118]. - The company does not hedge against fluctuations in the price of gold, which could impact revenues from ETPs backed by gold [124]. - The company relies on third-party distribution channels, and increased competition could impair its distribution capabilities and negatively affect AUM levels [135]. - Many WisdomTree ETPs have a limited track record, which could lead to poor investment performance and a decline in revenues [137]. - The uncertainty surrounding Brexit may negatively impact revenues and investor confidence, affecting AUM [145]. - Catastrophic events could disrupt business operations and adversely affect revenues and expenses [146]. - The company relies on State Street Bank and other third-party vendors for critical services, and their failure could harm operations [149][150]. - Risk management policies may not fully mitigate exposure to risks, including employee misconduct, potentially harming financial condition [160]. Financial Obligations and Capital Structure - The company has an outstanding term loan of $179.0 million and a $50.0 million revolving credit facility, with borrowings at a floating rate maturing on April 11, 2021 [166]. - The company’s credit agreement includes covenants that may limit business activities, including restrictions on incurring additional indebtedness [166]. - The company’s ability to pay dividends is subject to the discretion of its Board of Directors and may be limited by financial conditions and covenants [196]. Employee and Operational Insights - As of December 31, 2019, WisdomTree had 208 full-time employees, with 137 in the U.S. Business segment and 71 in the International Business segment [113]. - The company is dependent on retaining key personnel, with a competitive market for skilled employees potentially impacting operations and financial condition [164]. - The company's expenses are subject to fluctuations, which can materially affect operating results from quarter to quarter [165]. Intellectual Property and Reputation - The company has applied for an additional patent related to its index methodology, which may not be issued, impacting competitive advantage [177]. - Damage to the company's reputation could adversely affect its ability to maintain and grow assets under management (AUM) and attract employees [184]. - The advisory fees from WisdomTree ETFs are subject to review by Independent Trustees, who may determine that fees are too high, adversely affecting revenues [182].