Operator: Good day, and thank you for standing by. Welcome to the WisdomTree Q2 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded.
I would now like to hand the conference over to your speaker today, Jessica Zaloom, Head of Corporate Communications.

Jessica Zaloom: Good morning.

Before we begin, I would like to reference our legal disclaimer available in today's presentation. This presentation may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. A number of factors could cause actual results to differ materially from the results discussed in forward-looking statements including, but not limited to, the risks set forth in this presentation and in the Risk Factors section of the WisdomTree annual report on Form 10-K for the year ended December 31, 2021, 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 CFO, Bryan Edmiston.

Bryan Edmiston: Thank you, Jessica, and welcome, everyone. I'm going to start by reviewing the results of the second quarter, and we'll then turn the call over to Jarrett and Jono for additional updates on our business. . We have been operating in a market environment with heightened volatility as broad-based equities declined about 15% this quarter. Despite the overall volatility, we achieved $4 billion of inflows this quarter our strongest flowing quarter since 2015, and our AUM is well positioned as over 2/3 of our offerings are tethered to current themes such as rising rates, inflation and value rotation.

Accordingly, our AUM at June 30 was $74.3 billion, down only 6% during the quarter. Negative market movement was partly offset by our inflows with our floating rate treasury product, USFR, performing as a safe haven in the way comprising rates as the FedEx detain runaway inflation. Our growth story is a success. Our annualized organic growth rate is about 13%, and the story isn't only about USFR. We continue to demonstrate sustained momentum, having generated positive inflows for 7 consecutive quarters across many asset categories, including U.S.

equities, emerging markets, international equities as well as fixed income. The breadth of our product line that has us well positioned to navigate the volatility we are seeing today.
Our AUM currently stands at $74.3 billion, unchanged from the end of the quarter, as flows of over $400 million in July have been offset by negative market movement. We are focused on controlling our costs in the wake of the market turbulence, and I will circle back on updated expense guidance in a moment. Next slide.

Revenues were $77.3 million, a decrease of 1% from the prior quarter due to a 1 basis point decline in our average advisory fee. Adjusted net income was $11.3 million or $0.07 a share. Our non-GAAP results, excluding noncash after-tax gain of $2.3 million for our future gold commitment payments, and $4 million in other net nonoperating losses. Our adjusted net income also excludes $2 million of expenses incurred in response to an activist campaign. We do not anticipate incurring any significant activist campaign expenses during the remainder of this year.

Next slide. Our adjusted operating expenses were up 2% for the quarter. We experienced higher fund costs due to recent product launches and sales-related expenses were up as well. These increases were offset by lower third-party distribution expenses as market volatility has suppressed AUM growth on our Latin American platform. Next slide.

Now circling back to our forecasted expense guidance. In the prior quarter, we communicated compensation was anticipated to migrate toward the high end of our guidance range given our strong organic growth. While our growth persists, we are tightening our guidance and reducing the high end of our range by $3 million as we temper hiring plans in the wake of uncertain market conditions. Our compensation guidance is now $96 million to $99 million. We had previously communicated discretionary spending guidance ranging from $49 million to $57 million.

This spend has been well managed to date, warranting a reduction in the high end of our range. Our discretionary spending guidance is now $51 million to $53 million. Our digital asset spend, which is included in our compensation and discretionary spending guidance, now ranges from $11 million to $12 million. Previously, we communicated a range of $9 million to $14 million. This quarter, we reported a gross margin of 79%.

A 1% decline due to recent fund launches and higher transaction-related fees. At current AUM and flow levels, we would anticipate a gross margin of approximately 79% for the year. We are reducing our contractual gold payment guidance by $1 million to between $17 million and $18 million given recent declines in the price of gold. As a reminder, this expense is based on us paying 9,500 ounces of gold on an annual basis and is measured based upon monthly average gold prices. Estimated third-party distribution fees are being revised downward by $1 million to approximately $8.5 million given the impact of market volatility on the AUM on our platforms.

And our tax rate remains unchanged at 21% to 22%.
That's all I have. I will now turn the call over to Jarrett.

Robert Lilien: Thanks, Bryan. For those who have participated in WisdomTree calls over the past couple of years, you've heard me outline our perpetual focus on growth, both today's growth and tomorrow's on efficiency and on team.

We feel if we take care of these items, the results take care of themselves.
Another constant theme, which is especially relevant in difficult markets, is to control what we can and to execute our plan and to deliver results. In terms of today's growth despite a very challenging market environment, WisdomTree has executed against plan and delivered another impressive quarter generating nearly $4 billion of quarterly inflows, bringing year-to-date net inflows to $5.7 billion and delivering a best-in-class 13% annualized organic growth rate.
And today's organic growth isn't a sudden development. It's been building and growing for several years, while tomorrow's growth will be driven by a combination of sustaining our current momentum and adding to it our digital assets growth initiatives.

In terms of sustaining current momentum, our product performance and positioning remains incredibly strong with 82% of our U.S. AUM beating Morningstar benchmarks, and most of our global AUM levered to themes like inflation hedging, increasing rates and the rotation to value. Our AUM has never been so well diversified, and product performance and positioning has yielded breadth and depth of flows across our entire global product suite. Additionally, we also continue to execute on our managed models vision, and this focus continues to deliver. Our strategy remains two-pronged.

First, we are focused on partner platforms such as Merrill Lynch, Morgan Stanley and others. And second, we are focused on RIAs in the independent broker space, strengthened by our recent launch of the WisdomTree Portfolio and Growth Solutions platform.
The beauty of the models business is that once you win adviser mind share, flows are recurring in nature and stackable on top of our current inflow profile, we remain excited about the trajectory of our models franchise and see a long growth runway ahead. We are also executing and delivering on our digital assets vision. As we have discussed before, our straightforward vision is to bring crypto exposures mainstream through ETPs and separately managed accounts, while also bringing mainstream financial assets into the digital ecosystem through blockchain-enabled funds and assets.

Jono will talk more about this in a moment, but our approach has been disciplined and measured and designed to leverage the core competencies and efficiencies of our core ETF business. It is exciting to see our steady march towards rollout on schedule and at hand. As important as growth is operational efficiency, we have built an ETF business that is extremely scalable and delivers robust incremental margins. Over the past several years, we've made many operational improvements and now have incremental margins well more than 50%. This means as markets normalize and we continue to execute on our growth strategy, that we will be able to do it on expanding margins with a vision and goal of having best-in-class operating margins as we scale higher.

Finally, we have the best and most productive team in the industry. Our sales team outpunches our competition as evidenced by our best-in-class organic growth. And our overall AUM and revenue per employee is well above industry average. Meanwhile, our employee satisfaction is high and our employee attrition is low. The benefits to us are large and the cost of those in the industry with lesser performance is high.

We believe these results are due to our clearly communicated vision and to the satisfaction the team takes in executing well and delivering results. All in all, our focus on growth, efficiency and team is paying off. We are executing and delivering outstanding results in all areas under our control, with strong sustainable growth today, coupled with momentum in digital assets initiatives to drive future growth, all on top of scalable infrastructure driving exciting incremental margins, we remain enthusiastic and optimistic about the future. With that, let me now turn it over to Jono.

Jonathan Steinberg: Thank you, Jarrett.

We are in the business of providing the best structured transparent products. Today, that is ETFs, where we have a very successful business and I'm really pleased with how well WisdomTree's core ETF franchises performing in the face of a seriously tough macro environment. We are seeing strong organic growth, one of very few in the industry engagement with our clients remains incredibly high, and we have product positioning and flow momentum that gives us confidence in sustainable growth.
Our digital asset approach, as Jarrett mentioned, has been disciplined and focused on leveraging all of the efficiencies that the core ETF franchise provides. We have 250 employees at WisdomTree and the hard work of each of them is of relevance and is transferable to bringing asset management onto the blockchain.

Tokenization will be the structured and transparent products of tomorrow, making it a natural evolution of our business model. And while others stiff arm the regulators, we knew our deep regulatory knowledge was and still is a key early advantage to future success. Our advantages, our knowledge and experience in regulated transparent exposures. Before this crypto winter, there was pressure to keep up with high flying new entrants with robust funding with Super Bowl Ads and too good to be true offerings. The landscape has changed dramatically.

Money isn't free. While some companies have struggled with the realities of regulation and risk management and other companies have lost the trust of their customers and investors completely, for WisdomTree, the timing of this crypto winter is very constructive and brings lots of opportunity. Our trusted brand and responsible DeFi approach to digital assets is serving us well. Frankly, we are better positioned to navigate these challenging markets than many, and it is exciting to see our rollout plans coming to fruition.
WisdomTree Prime is live in initial phases of beta testing.

Since our last update, we've minted a dollar token and minting our gold token is imminent. Key early products on our road map. We are building in a disciplined and measured manner, and we will roll out to more states and users in future months as we enhance our third-party distribution capabilities with these digital asset products and services. Our focus on continuously innovating the products and adding new features will distinguish us in the marketplace and help drive future growth. This is the road map.

Start with a unique and curated client experience, then iterate and evolve the platform, launch new products and functionality, all to unify spending, savings, and investing. Call it a consumer finance super app, a digital wallet or its own unique thing, the end goal is to deliver financial services to customers faster, cheaper and with better outcomes than exist today. Simply put, our digital asset strategy is on track. We will continue to leverage the efficiencies of having an established and well-managed ETF franchise, setting the table to start seeing top line revenue from digital assets in 2023 without a significant uptick in costs for steady, disciplined and responsible march continues that see a massive growth runway ahead for WisdomTree.
Thank you.

Now let's open the call to questions.

Jeremy Campbell: All right, everybody. This is Jeremy Campbell, Head of Investor Relations, over here at WisdomTree. And similar to prior quarters, we are going to kick off the Q&A session with some questions from our retail shareholders via the Say platform. So question one is some of your EM products have had exposure to Russian securities in the past.

What, if anything, has WisdomTree done to mitigate these risks? And is Russian security still a significant portion of the emerging market portfolios?

Jonathan Steinberg: What do we have, Jeremy Schwartz, our global CIO answer that question. Jeremy, do you mind starting?

Jeremy Schwartz: Great. Thank you. Emerging markets is a real strength for WisdomTree. We have 3 broad-based and diversified emerging market ETFs with real scale, 2 of which now have 15-year anniversaries this year and approximately $6.5 billion of AUM split between these 3 diversified ETFs.

The short answer is Russian securities have been marked to 0 across this lineup. So there's really no further downside risk to the NAV of ETF shareholders. And the real question going forward is how do you manage the upside? Is there upside in these securities at any point in the future? And for WisdomTree, this is a real competitive advantage of being a self-indexing firm. What you've seen across the industry has been index providers kicking out Russia of the indexes for a lot of the political pressure.
And if you think about trying to recapture value if these securities ever have value, it's perhaps not best just to sell the very first day you can.

And so we're going to try to navigate that to capture value over time. And again, that's a real competitive advantage for our self-indexing approach. Just a quick comment on performance because the main story this year has been a large value rotation and Russian securities did look like they were value stock to start the year. They had high dividends, low PE ratios. And we do have a strong presence of high-dividend ETFs, one of those original 15-year anniversaries.

Despite being overweight Russia compared to the market, our high-dividend EM ETF is still a top [indiscernible] emerging market fund according to Morningstar, both year-to-date and the last year. It's attracted over $250 million of inflows showing how much has been the value rotation is driving performance.
The small-cap ETF, DGS, which I believe is the largest small-cap ETF globally by AUM, sort of big feed for Modern Alpha and [ non-cap world ] ETFs is also a top decile performer this year and the last 1 year. It's coming up on 15 years history later this year. It's also taken in $350 million year-to-date.

And so while growth is underperforming. Our core ex-state-owned franchise still has a very good long-run track record, about $2.5 billion of assets there. Still long run good performance in the top 3 deciles. And so it's a solid foundation to build on, if growth returns in emerging markets. But just summarizing, there's no further downside risk to Russia from NAV, only upside.

We have a very strong franchise of emerging market ETFs for this very challenging environment.

Jonathan Steinberg: Thank you, Jeremy. Jeremy Campbell, next question?

Jeremy Campbell: Yes. The second state question is why is WisdomTree so committed to digital assets? What growth are you anticipating in this space? And do you think RIAs and FAs will put client assets into digital assets in the coming years?

Jonathan Steinberg: Okay, Jeremy. Look, I'll take that question to start.

Will Peck, who is our Head of Digital Assets, is also on the call. And Will, if you -- if I leave something out, feel free to add to it. So it's a very good question. It's a very important question to WisdomTree. As Jarrett said in the earlier part of the call, our digital acted vision, simply put is, first, bring crypto the asset class, things like Bitcoin and Ethereum to Main Street.

And then second, bring traditional assets or exposures onto the blockchain. Things like gold or treasuries. So with the first part, bringing crypto to Main Street, we do that today in Europe the ETPs and in the U.S. through direct indexing. It's very early days, but it is a huge opportunity.

We know there is end client interest in it. Wealth Management in the U.S. alone is a $30 trillion AUM. So just a small allocation is a big opportunity. and WisdomTree's trusted brand with advisers puts us in a strong place to help FAs and RIAs help their own clients to safely and compliantly invest in crypto, the asset class.

Regarding the second part of our vision to digital assets, bringing traditional assets onto the blockchain, it's -- over time, we expect all financial assets to eventually move on to the blockchain infrastructure. As I said earlier, I think it's the best, most efficient, transparent wrapper for tomorrow. And what we mean by that statement, sort of best wrapper, expect things like faster settlement greater automation, which will drive faster, cheaper customization. There is going to be instant and nearly free communication with customers and there's a globalness to the offerings because blockchain infrastructure are global rails. So all of this sort of best outcomes for consumers is why we're convinced that assets will migrate on to this new infrastructure.

And again, WisdomTree for the second part of our vision is very well positioned. Our prowess in product development, our strength in compliance now and also compliance where we're now integrating RegTech like security into our products, very helpful. So -- and then our discipline and effective approach to marketing and our trusted brands, all of these should help drive success and position us well. And it's why we really see digital assets as just a natural extension of our core ETF franchise.
And with respect to the growth -- the revenue, as I said, we see this creating a tremendous opportunity for WisdomTree as savings, investing and payments all converge onto this new infrastructure, and as I said in the earlier part of the call, we expect this part of our business in digital assets to start achieving revenue in 2023, and all of that without a significant uptick in costs.

So that's my answer.

William Peck: And Jono, just stepping in. The only thing I'd add is, I'm glad we started when we did. I mean, we're certainly seeing over the past few months, a large tick in some of our traditional asset management competitors investing in this space, whether making minority investments in different startups or kind of doing some of their own initiatives. So I feel like we -- it was good that we got ahead of it when we did a couple of years ago.

Jonathan Steinberg: Thank you, Will. Jeremy?

Jeremy Campbell: Great. Thanks, everybody. Operator, you can now open up the call to questions from our analyst community.

Operator: [Operator Instructions] And our first question will come from Rit Roy of Jefferies.

Ritwik Roy: So the crypto winter has been tough to say the least, and we can kind of see that in your end of period marks for the asset class. But you guys did allude to the current opportunity set as being attractive given your guys' business mix and you have managed to avoid outflows, albeit kind of narrow. Could you point to any specific products or maybe marketing efforts that have been effective in keeping this investor capital onto the platform? Or maybe is it more of a function just because of the pace of product launches being a nation sort of platform for you guys?

Jonathan Steinberg: [indiscernible] crack is this?

William Peck: Yes, sure. I think anyone who's been looking at crypto for a few years now shouldn't be surprised by this kind of volatility, right? It's not the first time that you've seen a downturn like this even in like the past 3, 4 years. So I think you can kind of peel back the term crypto winter into kind of 3 different categories.

One is there's definitely been a slowdown in VC funding and hiring. You see that with like firms like Coinbase needing to lay off people other things going on.
For WisdomTree, that's definitely been an advantage. It's a great advantage for recruiting. It's a great advantage in terms of competition.

So we view that as definitely a positive for us. The second is the actual asset prices themselves. Some of this was compounded by things moving down, frankly, because of the entire market, all asset classes beyond crypto were moving down, which compounded by some crypto-specific things where the [ LUNA NESS ] and some other of these firms had core risk management, let's say, which kind of compounded the event. I mean, for us and for our client set, it's actually a great opportunity. We've actually picked up market share in granite.

It's from small numbers in the European market for our crypto ETPs as some of our more retail focused competitors have actually lost a lot of assets in this time frame. And so for our clients that they see it as a good entry point opportunity. We're continuing to have great conversations there. We see that both in the U.S. and in Europe.

The third thing I'd say is kind of related to the second is that a lot of firms broke trust. I don't need to name the specific firms, but whether it was through just uncollateralized loans to kind of a hedge fund at the center of this all to doing things with customer money that people just didn't really understand. So with these bankruptcies, with these client losses, I think a lot of people are -- like don't trust their counterparts in the crypto space the same way. And so I think coming to it from WisdomTree with a great brand reputation, kind of culture of risk management regulation, we're going to be well served to pick up a lot of customers for that, both in the ETPs, indexes and in WisdomTree Prime, which will be coming out soon. So for us, it's -- actually, it's great across all those areas.

Jonathan Steinberg: Thank you, Will. Jeremy, next question?

Jeremy Campbell: Operator?

Operator: Yes. Our next question will come from Michael Brown of KBW.

Unknown Analyst: This is [ Eden Hall ] filling in for Michael Brown. I was wondering if you could talk about the models business a little bit more.

And more specifically, if you could talk about the difference in strategy between the large wirehouse partner platforms versus the smaller RIA independent broker space. That would be great.

Jonathan Steinberg: Sure. Great question. Jarrett, do you mind starting?

Robert Lilien: Sure.

And it's a great question. And it's an important part of today's growth but also tomorrow's growth. We're seeing already models contributing to the breadth and depth and to the organic growth rate that we've seen so far this year. And really the models momentum that we've got is giving us a lot of confidence in that organic growth continuing. As to your question on the different strategies, it is a two-pronged approach.

One is the larger platforms like the Merrill and Morgan Stanley. And there, what you're doing, you're getting on to the managed model platforms, third-party model platforms. And it's a big task getting a victory there. First, you have to win the contest of just getting on to the platform, which can take a year or more. Once you're on the platform, the second victory that you need to achieve is to get adviser mind share.

And that's really down to hand-to-hand combat. You've got the door opened by the house but then you've got to go in and get the mind share from the individual advisers. Typically, what you see there is, again, it can be a year or so to get the initial victory. And then really maybe another year before you see traction in that hand-to-hand combat. So we're now over a year, almost 2 years with Merrill Lynch and you're seeing great traction there, and it's growing in its momentum.

And it's a great piece of business. It's an annuity once you've got that mind share. Also, another thing I'd say about the whole models business is that it's multi-ticker victory. Typically when you're going out and selling ETFs and you convince an adviser that one of our products is great, it's a single ticker victory. With a model, it's a multiple ticker victory that compound upon itself.

What you've also seen in that channel is Morgan Stanley was another victory that we achieved, victory #1, just a little over a year ago, and now we're beginning to see that traction in the second category of victory.
So again, that's sort of category 1 the major wirehouses and we're continuing to see more penetration there, not only with additional partners but also with additional models with existing partners. So everything going very well there.
The second prong is the RIAs and the IBDs. And what we're working on there is slightly different.

With the wirehouses, you've got an infrastructure that is really quick to implement. So if you're an adviser at a wirehouse and you like one of our models, it's all set up for you operationally and really, you can click to implement.
With the RIA and IBD community, there are a lot of things that don't exist. First of all, just the models, the model infrastructure, and we work with our partners to customize models that is part our IP, it could be all our IP, but it also includes theirs. But then the next important thing is being able to create that easy button, that click-to-implement button, which is a big impediment for a lot of the RIA and IBDs to get into models.

So that is a major part of the product differentiation on that side. Right now, we're doing very well. We just launched towards the end of April, our portfolio and growth solutions platform. We already have a very strong pipeline, adding weekly to the pipeline. We've already had a couple of wins in that category, which is great after such a recent launch.

So again, just another thing that's adding to the momentum that we've got in the business and our best-in-class organic growth.

Jonathan Steinberg: Thank you, Jarrett. Jerry Schwartz, could you maybe add a little bit about our relationship with Professor Jeremy Siegel and how he adds to our mind share and our ability to win business, do you mind talking about his involvement in models?

Jeremy Schwartz: Yes, I would love to. This has been a year where you've had challenges to the traditional 60-40. You've had bonds not providing the core diversification they did historically because of all those challenging inflation dynamics that we talked about.

So one of the things we -- people had talked about the death of 60-40, but WisdomTree was way ahead of that. And right before the pandemic, we have launched a 75-25 as the new 60-40. And then we branded a Siegel Longevity Model tied to that. And that's one of the things on one of those key wire platforms. It's also part of the Merrill models having the Siegel income models as part of that.

And it's something we're doing a lot around.
I've been working with Dr. Siegel now for 20 years. And later this quarter, we'll be publishing the sixth edition of Stocks for the Long Run. And for the first time in our relationship, I'll be joining as a co-author on the book.

And we talk a lot about how sort of long-term force is driving lower expected returns in core bonds are going to be with us for some time in stock. They're a great long run inflation hedge, great for the current dynamic and WisdomTree's models, which are -- include a lot of IP from 15 years ago. It's been a market environment where it's been really as strong as it's been for dividends, high dividends, in particular, that are good anchor to all those Siegel branded model portfolio. So we're incredibly well positioned with Siegel as well as we've ever been, and he's a big part of those future models and only going to grow even more as the new book comes out and we have to feature that a little bit more later this year.

Jonathan Steinberg: Jeremy.

Jeremy Campbell, next question?

Jeremy Campbell: Operator, what's in the queue?

Operator: I'm showing no further questions at this time. I would now like to turn the call back over to Jonathan Steinberg, CEO for closing remarks.

Jonathan Steinberg: Thank you very much. We'll just thank you for your participation on the call. We look forward to speaking to you next quarter.

Thank you.

Operator: This concludes today's conference. Thank you for participating. You may now disconnect.