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WisdomTree Investments Inc. (NASDAQ:WETF)

Q4 2012 Earnings Conference Call

February 1, 2013 09:00 AM ET

Executives

Stuart Bell

Jonathan Steinberg - CEO and President

Amit Muni - Executive Vice President – Finance & CFO

Luciano Siracusano - Executive Vice President–Head of Sales and Chief Investment Strategist

Analysts

Mark Irizarry - Goldman Sachs

Steve Fullerton - Citi

Mike Grondahl - Piper Jaffray

Adam Beatty - Bank of America Merrill Lynch

Mac Sykes - Gabelli and Company

Matthew Kelley - Morgan Stanley

Todd Wachsman - Morgan Stanley

Dan Weiskopf - Forefront Capital

Operator

Good day, ladies and gentlemen and welcome to the WisdomTree Fourth Quarter Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to introduce your host for today’s conference WisdomTree. You may begin.

Stuart Bell

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 Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements generally can be identified by these forward-looking terminology such as believe, expect, anticipate and similar expressions suggesting future outcomes or events. Such forward-looking statements reflect our current expectations regarding future events and operating performance and speak only as of the date of this presentation. Such forward-looking statements are based on a number of assumptions which may prove to be incorrect. Forward-looking statements involve significant risks and uncertainties, should not be read as guarantees of future performance or results and will not necessarily be accurate indications of whether or not, or the times at or by which, such performance or results will be achieved. A number of risks and other 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 company’s annual report on Form 10-K for the fiscal year ended December 31, 2011.

Now it is my pleasure to turn the call over to WisdomTree’s CEO, Jonathan Steinberg.

Jonathan Steinberg

Thank you, Stuart. Good morning, everybody and welcome to WisdomTree’s fourth quarter and year-end conference call for 2012. Fellow shareholders, 2012 was another record year. Our assets under management rose 50% to end the year at $18.3 billion. We had inflows in the fourth quarter of $1.1 billion and a record $4.7 billion of inflows to the year.

We also had record revenues, $23.6 million in the fourth quarter, up 46% year-over-year and $84.8 million for the full year, up 30%. Pro forma net income more than tripled to $5.1 million in the fourth quarter and to $14.8 million for the full year.

We also expanded our gross and pre-tax profit margins. Key metrics which display our corporate discipline. Amit Muni, WisdomTree CFO later on this call will walk you through our financial statements and update our expense guidance.

We also ended our joint venture with Mellon Capital on very favorable terms. We launched two new ETFs, emerging market corporate bonds, and China ex-Financials. In addition to all of the above, we also completed two stock offerings in 2012, completed our search for a new COO and we successfully ended the patent litigation. As in prior years, it was the completeness of our execution across all business functions that define the year. It is simply a testament to the talent and dedication of the 70 person team that WisdomTree has been fortunate enough to assemble.

2013 is off to a fast start with almost $2 billion of inflows to date. We are having trouble updating our website this morning but our assets under management would be approximately $21 billion, an all-time record, which is up another 15% in just one month.

Yesterday, we launched our second active bond fund with Western as sub-advisor, global corporate bonds or GLCB. WisdomTree is currently the second largest player in active bonds, behind PIMCO and I expect that over the next few years this will be an area of continued activity for our firm. Let’s continue.

It was also a record year for the ETF industry. ETFs had inflows of $55 billion in the fourth quarter. In the middle column you can see that equity ETFs took in $133 billion, while equity mutual funds lost another $153 billion. Fixed income ETFs took in $52 billion, or 15% of fixed income inflows. On the right hand side you can see the industry took in $185 billion, again this is an all-time record for the ETF industry and represents 49% of total inflows between ETFs and mutual funds. It’s important to remember, ETFs represent only 11% of the long term assets, so as an industry, ETFs are making tremendous progress and we have a big runway of growth ahead of us. I am sure everyone on this call is already aware of my strong belief that ETFs will eventually be the dominant structure in asset management.

Now let’s look at WisdomTree’s inflows on the next page. As stated earlier, fourth quarter inflows came in just over $1 billion. In the middle column you can see how our annual inflows have increased over the last four years to over $4.7 billion in 2012. Later on this call, we will put that number into better context and compare it to other leading asset managers. On the right you can see how our assets under management have grown over the last few years. For perspective, just think, on March 9, 2009 during the height of the financial crisis, WisdomTree’s assets bottomed at just $2.4 billion, less than four years later we have approximately $21 billion. We have made stunning progress as a firm in a short amount of time. We simply have incredible momentum.

Now, let’s look at our inflows by asset class. As you can see, in the fourth quarter international equities lateral inflows with $620 million. For those of you watching us closely you know that our Japanese hedged equity DXJ is responsible for the lion’s share of that number. We continue to see strength in our emerging market equity suite as well. We did experience some domestic dividend outflows as there was tax uncertainty with respect to the fiscal cliff at the end of the year. On the right you can see the inflows for the full year with just a very strong year of growth, diversified across all of our equities.

While we have deserted in the past that we strive for concentration, meaning we want bigger allocations in bigger funds, we do note that the continued fast growth at DXJ has now provided us with greater balance across our emerging developed in US asset classes.

Now on the next page let’s look at our market share of inflows. For the fourth quarter we took in 1.9% of the industry inflows. For the full year, we took in 2.6%. WisdomTree’s market share of the industry’s assets is currently 1.5%, so 2.6% of inflows means we are growing our business and taking market share. That said, market share was one of the few metrics where we missed our target in 2012. As in prior years, we have been targeting 3% to 5% of industry inflows. We continue to target 3% to 5% of industry inflows. We hope to do better in 2013 and as already noted we are off to a very strong start this new year.

Now let’s take a different look at our equity flows. This chart shows the 10 ETF sponsors who garnered the largest equity inflows. As you would expect, the big three dominate equities, both WisdomTree with $4.7 billion had the fourth best inflows of all ETF sponsors and that translated into 4% of the equity inflows. Even as we continue to diversify our product offerings, equities remain an important cornerstone of our business with 85% of our total assets. We have a global suite of equity ETFs. We have a focus and a strength on dividend-based portfolios. We have a strength in emerging markets and we are proving innovator as demonstrated by DXJ which combines equities with the currency forward over lag. Overall we remain very well positioned in equities.

On the next page let’s look at the performance of our funds. This chart references our equity performance. We under performed in our one year numbers. To give you a little color on the one-year performance numbers, 2012 was generally a year of higher volatility which in an environment in which higher better, higher volatility stocks performed well. The majority of our equity funds are dividend weighted, which typically exhibit characteristics of lower volatility. So in the short term, these strategies generally underperformed. With our 3, 5 and since inception numbers remain compelling.

Now, let’s look at our organic growth as compared to the other leading public companies and asset managers. Many of you on today’s call are already familiar with this slide. WisdomTree remains the fastest growing publically traded asset manager with 39% organic growth. I think this is an immensely important metric for the shareholders of WisdomTree. And as the only pure play publically traded ETF sponsor, we remain uniquely well positioned for equity investors who want exposure to the ETF industry. On the right we compare WisdomTree’s organic growth in assets to that of the other leading ETF sponsors. Again, WisdomTree with 39% growth came in second to PIMCO. WisdomTree is very focused on organic growth and we think it is important that we continue to growth our market share within the ETF industry.

Let’s check our progress on the next page. Here you can see WisdomTree’s rankings over the last four years. In 2009, we were the ninth largest sponsor with $6 billion in assets. In that year, we were less than half the size of Deutsche Bank and just one quarter the size of ProShares. By the end of 2012, we were 50% larger than Deutsche Bank and we were 87% of ProShares. In the very last box we show you a more recent snapshot as of January 30. Because of our very strong start to 2013, we are continuing to make significant progress towards our stated longer term goal of being in the top 5 of all US ETF sponsors. We still have plenty of hard work ahead of us, but again because of the mainstream nature of our equities and the success that we have had in diversifying into new asset classes and our general prowess in product development, we remain committed to that longer term goal of being in the top 5.

Now it is my pleasure to introduce Amit Muni, WisdomTree’s CFO.

Amit Muni

Thank you, Jono, and good morning, everyone. I would like to begin by first reviewing our overall financial results. This was another record quarter and year for WisdomTree. Revenues continue to grow reaching $23.6 million in the fourth quarter, up 46% from the fourth quarter of last year. Our pro forma operating expenses increased only 22% to $18.5 million, and pro forma operating income more than tripled from the fourth quarter of last year to $5.1 million. For the full year, revenues increased 30% to $84.8 million yet pro forma operating expenses increased only 14% to $70 million and pro forma operating income also more than tripled to $14.8 million.

The operating leverage in our business model has also translated to attractive margin metrics which you can see on the next slide.

Our gross margin increased to 68% in the fourth quarter compared to 62% in the fourth quarter of last year, and for the full year, was 66%. Gross margins were flat compared to the third quarter due to timing of tax-related payment for one of our funds. Our pretax operating margin also grew significantly to 22% in the fourth quarter from 6% in the fourth quarter of last year, and 18% for the full year. Pre-tax margins were also flat compared to the third quarter. Our expenses are typically less in the third quarter so the third quarter is seasonally high. The higher margins are being driven by strong revenue growth which we can review on the next slide.

Our ETF revenues reached a record $23 million in the fourth quarter due to higher average assets under management, which you can see in the bottom of this slide. For the full year, ETF revenues increased to $84 million. You can see that this was a very strong equity year for us, particularly in emerging markets and then the US. Our average advisory fee remains unchanged compared to the third quarter, at 54 basis points, and down from 55 basis points on a full year basis due to the change in mix of our assets. As you will see, when we update our website, our average revenue capture is still at 54 basis points today.

Now let’s review our expenses on the next group of slides. First, I would like to go through the major changes in our 2012 expenses. We ended 2011 with $61.2 million in operating expenses. Higher incentive compensation due to our strong performance as well as additional headcount to support our growth increased the compensation related expenses by $2.8 million. Higher assets under management increased variable fund costs by $1.9 million and non-variable fund cost by $1.2 million. Increased marketing and sales initiatives to support our ETS increased expenses by $900,000.

General and administrative overhead expenses increased also by $900,000. Being an exchange-listed company for a full year and performing all the regulatory requirements increased expenses by $600,000. And lastly, other related costs increased $500,000, ending the year with $70 million in expenses.

In next slide, I will go through our expenses for the quarter. I will quickly go through the expenses changes compared to the third quarter, which you can see in the chart on the top-left corner. Compensation cost increased 8% due to higher accrued incentive compensation due to our strong results. We have 70 employees today.

Fund cost increased 12% due to higher assets under management related expenses. Marketing costs increased 89%. We typically reduced these expenses in the third quarter and increased them to a more normalized levels in the fourth. Sales cost increased 27%, primarily due to higher levels of sales-related activities. Professional fees decreased 40% due to the end of our variable stock-based compensation costs.

Third-party sharing cost increased 9% due to higher profit levels in our joint venture with the Bank of New York. Other expenses decreased 7% from lower overhead and admin-related costs. Included in our results this quarter is the full settlement amount of $700,000 we received from ending our litigation with research affiliates.

We have also incurred net legal expenses after insurance reimbursement of $176,000 this quarter. We also incurred expenses of $353,000 related to our second offering in November. On the right-hand side of this slide, you can see that expenses continued to decline as a percentage of our revenues and we expect this trend to continue with higher assets.

Our balance sheet and cash liquidity continues to grow along with our strong bottom line results. We have total assets of $63 million at December 31st, which is primarily comprised of $41 million of cash and cash equivalents, a $11 million in investments and $9 million in revenues from the WisdomTree funds. We had a 125 million common shares outstanding and 139 million shares in total, when you include our auctions and restricted stock.

I would like to give you some guidance for 2013. While we will not give guidance on revenue, except to say it is our goal to capture 3% to 5% of the industry inflows on an annual basis. Due to our transparency, you can follow our revenues from the IRS section of our website on a daily basis. But I would like to give you some guidance on how we are thinking about our baseline operating expenses in 2013 on the next slide.

We ended 2012 with total expenses excluding non-operating items of $70 million. We will no longer have variable stock-based compensation, which results from savings of approximately $2.2 million. At the end of 2012, we ended our joint venture with the Bank of New York. This results in net savings of approximately $2 million based on the asset levels and our current fixed income products at the end of the year.

This year, we changed our equity granting practice to one that is more normally followed in the financial service industry. In the past, we had granted meaningful equity awards when a new employee joins the company and generally no further awards until that equity invests. This practice is typical for startup companies. Now, employees will receive equity grants each year as part of their compensation as opposed to once every three or four years. This change will result in higher stock-based compensation cost in 2013 and future years, as you will remember, we have been experiencing lower stock-based comp as our employees invest in their previously granted equity awards.

As a result of this change and other compensation decisions we have already made, we expect baseline compensation cost to increase by $1.2 million. We anticipate our general overhead and administrative cost will increase by $1.4 million. Annualizing our fund-related expenses based on year-end asset levels and taking into account other one-time items in 2012, result in an increase of $2 million.

We have always carefully balanced managing our expenses with investing in our business when the right opportunities were presented. Given the growth trajectory of the ETF industry and our own business, we believe the time is right to increase these investments. In 2012, we gave guidance that we would invest $2.5 million back into our business.

For the coming year, we intend to invest $5 million to $8 million on strategic initiatives to continue to support and accelerate our growth. These growth initiatives include expanding our marketing efforts to further support our existing and new products and enhancing the WisdomTree brand. Second, it includes continuous product development initiatives and new ETF launches to further our diversification efforts. Third, it includes adding to our staffing levels, particularly in sales and other function that support our sales efforts to continue to grow our top line revenues.

Lastly, it includes additional resources and tools for our sales force to support their efforts. Remember, that these strategic investments are discretionary and we can accelerate or decrease them based on market conditions, as we had proven through our fiscal discipline in the past. However, we believe these investments will pay off with increased assets and contribute to faster growth rates in the long run.

This will result in 2013 baseline operating expenses of $75 million to $78 million. This baseline expense will increase from higher fund costs due to increases in our asset level, which is more than completely offset by higher revenues. Remember as we stated on our last call, we expect our gross margins to be between 70% and 75% based on today’s asset mix. And correspondingly, higher AUM inflows will result in higher compensation-related costs.

As we have demonstrated, there is attractive financial scale in our business model and our investment and strategic growth initiatives will not change that. In fact, we believe it will enhance it. We are revising our longer-term guidance and believe that at $35 billion in assets, not $40 billion, we should have a 40% pre-tax operating margin and we are managing and targeting our business to have amongst its highest pre-tax operating margins, a well publicly traded asset managers.

Before I turn it back to Jon, I would like to just give you an update on our results so far in January. As Jonathan stated in his opening remarks, 2013 is off to a terrific start. As of this morning, our AUMs are approximately 21 billion and we generated nearly 2 billion in net inflows for the month, of which 1.1 billion came in our Japan Equity Fund, DXJ. Our average AUM is up 15% from the fourth quarter, which will further drive our revenues higher in the first quarter. You can see on the bottom right-hand side, the ETF industry has had strong inflows and equities so far.

So, to summarize, we have had another great year with record revenues and expanding margins. Now, it’s the time to make the right investments to support our growth and our goal is to become one of the top five leading ETF sponsors. Thank you, I am going to turn it back to Jonathan.

Jonathan Steinberg

Thank you very much, Amit. As I noted earlier, 2012 can be characterized as a busy year of impressive execution at the corporate level. We completed several important tasks, which place the company on even stronger footing today. And as proven by our growth in strong results, we never took our eye off the business. Our house is in order and 2013 looks to be a promising year.

I would like to end by discussing the new slide, which shows the top asset gathering complexes across all ETFs and mutual fund firms over the last two years. WisdomTree ranked 26th in asset gathering in 2011 and 22nd in 2012.

As I look at this list of names, I ask what would it take for WisdomTree to become a top 20 or even a top 10 asset gatherer? The answer is, one, continued growth of the ETFs at the expense of mutual funds, that’s a given; stronger and more favorable sentiment towards equities, I am hopeful; three, continued demand for dividend-based strategies.

I think the resolution to taxes on dividends at the end of the year makes this highly likely. Fourth, continued strength in emerging markets, given. And five, further innovation and adoption of active bonds, I am very optimistic. And as I see it, WisdomTree is extremely well-positioned for the future. We are very well positioned relative to the other firms on this list.

Our goals for the coming year are to continue executing at these very high levels and to maintain high relative growth. We have a strong mainstream defensible product set, with an enviable long-term performance record. We have a great brand, a superior business model, and a truly talented operating team. It should all translate into an exciting 2013.

This ends the planned portion of today’s call. I thank you for your interest and support. And now, let’s open it up to questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Mark Irizarry of Goldman Sachs. Your line is now open.

Mark Irizarry - Goldman Sachs

Great, thanks. Mark Irizarry of Goldman Sachs. Jon, in terms of, lot of debate around the equities, equity flows and what we are seeing, seasonality versus sort of secular and structural, can you just speak to sort of what you guys, you know, where you guys are coming out on that, what impact if any that’s having on the business?

Jonathan Steinberg

It’s very new, you are talking literally about just one month. There tends to be sort of 401-k strength in the early part of the quarter. So, I would say it seemed seasonal. Certainly, ETFs have nothing to prove. We are sort of the dominant play for equity. So, really the burden is on the mutual fund industry. I am not sure I see any trends. I mean, it’s certainly too early to make any conclusions.

Mark Irizarry - Goldman Sachs

Okay. And then just on some of the guidance and strategic growth initiatives, can you talk about the philosophy for launching funds, number of launches, and then if you can comment on your latest for launch – I am curious how the (inaudible) how that works.

Jonathan Steinberg

I will talk philosophically. So, when we discuss fund launches, we are always trying to do something that’s first-to-market or something innovative, a differentiated approach that we are adding choice to the market. We have never launched a ‘me too’ proxy. We will continue to do that. The guidance that we have given is three to five new funds a year. For the last two years, we were on the low end of that. This year, you should expect to be at the high end of that range. So, five or six funds would be not to be surprising.

Amit Muni

As far as the fee structure on the new fund, we don’t disclose the fee that we pay to our sub-advisors, but ETFs are generally lower fee products and they have to work within that fee structure.

Jonathan Steinberg

And as you can tell, we have obviously been very disciplined in our all of our business arrangement and what continue to be.

Mark Irizarry - Goldman Sachs

Gotcha. And then when you think about the sort of the number of ETFs versus the depth of the market there you are launching in, like how can you help us understand when you launch something like the new global bond, the ETF, what you think the uptake would be, and then, how to sort of the – when you think about the five, are you launching more in niches or are these all deep markets that you are thinking about out there?

Jonathan Steinberg

It’s very hard to open up a new asset class. So, Global Corporate Bonds is it’s a really new asset class, but it’s the first actively managed execution. So, that happens to be a deep market. What I would just say is new funds are positive. Obviously, you try to be an active gatherer in the year that you launch them, but it’s really more than just a year that you will launch them. So, last year, we launched emerging market corporate bonds, and it took maybe 105 million in the first year. But it’s not about the first year. What is it going to do in the second, third or fourth and fifth years? We really don’t launch anything that we don’t think has the ability to be a $1 billion fund.

Mark Irizarry - Goldman Sachs

Okay. And then, Amit, just on the gross margin guidance, I guess 70% to 75% is the range, how should we think about the way that ramps up closer to 75% versus 70%, and I appreciate any color on just sort of the overall operating leverage that you expect to see in 2013 if the current state of growth of the business continues?

Amit Muni

Sure. So, as far as gross margins, so we gave that range of 70% to 75%, that’s really all going to depend on mix of assets, where we see the flows coming on. On an average basis, the incremental gross margins are about 80%. Some of our funds, larger funds will have incremental margins close into the higher end of the 80%. So, it really all will depend on where we see those flows coming in.

As far as the longer-term margins, we have improved the guidance that we have given before, and now we believe that 35 billion, we will get to that 40% operating margin. And, you know, Mark, I think you have to remember, we are a young company, we are in a fast-growing industry and we are in growth mode. And we are focusing on growing that top line revenue, continuing that long-term goal of becoming a top five ETF player. We will always carefully manage those investments with our bottom line results, but you can see today we are offering leverage in the business, and these are all the early days.

I think directionally we are going to continue to head towards that 40% margin. And remember that as we stated before, it is the goal of this management team that we will operate and target this business to be at the highest end of all the operating margin range of traditional asset managers.

Mark Irizarry - Goldman Sachs

Okay. Great, thanks.

Operator

Thank you. Our next question comes from Bill Katz of Citi, your line is now open.

Steve Fullerton - Citi

Hi, this is actually Steve Fullerton filling in for Bill Katz. Quick question, with the fee rate ticking up recently in the recent releases, I know some may be due to DXJ, where directionally should we look at the fee rate looking out ’13, ’14 and ’15?

Jonathan Steinberg

On our website, we give you the aggregate bps that we collect. We make no guidance on that. The money will flow where the money will flow, and so our domestic equities are lower fee, our emerging markets are higher fee and it just the mix will determine it.

Steve Fullerton - Citi

Okay. And can you just update as to the amount of the NOL and just to confirm, that is after-tax, correct?

Amit Muni

Yes, so we are updating that number now, given it’s the end of the year. Last year, it was at $48 million and that’s the after-tax amount. In our 10-k, we will update you with what the current number is. But right now, it’s at $48 million.

Steve Fullerton - Citi

Okay. One more quick one, just looking at the transient [ph] alternative bucket, is there any outlook on what you guys are looking to do with those funds?

Jonathan Steinberg

We have a few alternatives, it’s an area that because of all of the regulatory-exempted release that we have, it’s something that we are focused on. We want to grow the existing funds, and you will see some selective launches in that space overtime, but we are bullish on alternatives in the ETF format.

Steve Fullerton - Citi

Okay. Great, thanks a lot guys.

Operator

Thank you. Our next question comes from Mike Grondahl of Piper Jaffray. Your line is now open.

Mike Grondahl - Piper Jaffray

Yes, thanks for taking my question, guys. The first one, could you talk a little bit about your marketing strategy for GLCB, just so we can kind of understand, when you roll out a fund, how you kind of – the different avenues that you market into?

Jonathan Steinberg

Thanks Mike. It’s consistent across every fund. Certain teams are easier from a marketing standpoint, but all of our sales material obviously is organized. We have a very engaged database and client base that we are always communicating to. And we are supporting it with some selective advertising, both online and sometimes in print and sometimes on TV, but you have to take it fund by fund. So, I wouldn’t make a generalization. We get behind certain funds when we see an easier, cleaner marketing strategy against that fund.

Mike Grondahl - Piper Jaffray

Okay. And then, maybe just one more as a follow-up, the Japan fund, DXJ has had an amazing couple of months. As a fund like that, really picks up that kind of steam, do you kind of shift gears and say, ‘hey, now it’s time to market this one.’ It’s hot or how do you react to a situation like that?

Jonathan Steinberg

So, I think our execution on DXJ was very strong. We launched the fund originally in the initial 20 funds in June of 2006. We shifted the fund to hedge out or mitigate the currency exposure, and then we actually adjusted the underlying basket of equities to tilt towards exporters. So, we became a truly differentiated fund. In December, we saw that there was political movement that would be extraordinarily constructive, and we started from a research side very aggressively updating our clients as well as the media to the shift within Japan and how well it positioned DXJ for those exchanges. And then, as you saw that it had a very strong end of year. Now, towards marketing, we get to sort of quiet as you get into the holidays regardless and we always come back in January.

So, in January, if you probably notice that we also started to promote the fund on television and continue our online and print push and so that we try to just max it out, so that the world was aware of this unique exposure in the world of ETFs, and that now takes on a life of its own.

Mike Grondahl - Piper Jaffray

Gotcha, helpful. Thanks guys.

Jonathan Steinberg

Thank you.

Operator

Thank you. Our next question comes from Adam Beatty of Bank of America Merrill Lynch. Your line is now up.

Adam Beatty - Bank of America Merrill Lynch

Thank you and good morning. Just a follow-up question on the strategic initiatives. Appreciate your comments on the new product launches, which I think are still crucial to the firm. Now, in terms of the other items there, marketing and sales support, maybe if you could just give some detail around, if there are channels that you are focusing on or other objectives that you have for that spend?

Jonathan Steinberg

So, like in a couple of components, we are not going to get into specifics, you know, dollar value versus each one, I would say it’s just continuing to do what we do today, which is continuing to push the brand, continuing to support our existing products and new products, continuing to add resources, technology resources and life to our sales staff, continuing to add bodies to help grow that top line revenue. There are maybe some small initiatives in there to look at broadening some of the distribution channel that we may have, but a lot of it is just really continuing to do what we do today, which are accelerating the rate of how we support that effort. Luciano, would you like to add any color?

Luciano Siracusano

Yes, I would just say that we are going to continue to add sales people both on the outside as well as on the inside across the RA, wirehouse, institutional channels. We already had hires this year on our capital markets team and on our outside wirehouse team. So, we are definitely leaning into this year, and we want to make sure we have a full capability to take advantage of what we see out there in the marketplace.

Adam Beatty - Bank of America Merrill Lynch

Okay, thanks. Appreciate the color. And then maybe a follow-up on the NOL. My recollection is that at a certain point, you are going to have to recognize that asset and that’s going to lead to some GAAP accounting event. Maybe give us an update on that and my understanding is that’s based on sort of a level of earnings beyond trace amounts. Is that a quarter-by-quarter evaluation in your accounts or more of an annual thing?

Jonathan Steinberg

Sure. So, we have a NOL today on the U.S. GAAP. We will take that NOL in when we believe it is more likely to, not that we will be profitable for the foreseeable future and be able to use those NOLs. Our auditors tell us that they generally like to see at least one to two years of solid operating earnings before we get over that more likely than that threshold from a GAAP perspective. So, right now what we are doing is we are taking it in every quarter, but at some point, we will have whatever the balances remain, when we get over that threshold, we will take it all into our income statement from a GAAP perspective. But remember, from a cash perspective, we still don’t have the cash flow going out and have to pay those taxes. It will just be a book entry.

Adam Beatty - Bank of America Merrill Lynch

Right, understood. And so, I guess 2012 would probably count as a year of solid operating income under that, right?

Jonathan Steinberg

Yes, again. We have been told it takes like one to two years. So, I don’t see that happening in the short term that we take in.

Adam Beatty - Bank of America Merrill Lynch

Right, got it. Okay, thanks very much. And then, turning more towards product development philosophy you have, obviously the DXJ has done very well, and you just launched Global Fund. In terms of the trade-off between a fund that’s kind of global, go anywhere versus maybe regional fund that can obviously benefit from hot market at a given time, what’s your philosophy around that?

Jonathan Steinberg

You got to take each idea as its own case. Looking at the existing offerings in the marketplace, a regional idea can be extraordinarily large as an opportunity, global obviously it’s going to be large, but you just can’t look at it in a vacuum. So, everything again, it just must add choice to the market to be differentiated. I mean we try to line up new funds with market sentiment, but that happens to be very challenging, because of the sort of the laborious process it takes to actually launch the funds. So, timing it to the moment is not the easiest thing, and we are not really, we are trying, but I wouldn’t put much hope there. So, again, we just look for the bit in each opportunity, we take it one by one.

Adam Beatty - Bank of America Merrill Lynch

Got it, thanks very much guys. Much appreciated, that’s all I had today.

Jonathan Steinberg

Thank you.

Operator

(Operator Instructions) Our next question comes from Mac Sykes of Gabelli and Company. Your line is now open.

Mac Sykes - Gabelli and Company

Good morning gentlemen, congratulations on the results and certainly the efforts this year. I jumped on the call a little bit late, but and maybe you did explain this, Jon, but I wanted to get, it was interesting to get more of your thoughts. I mean, you have seen a sharp acceleration certainly in the industry in the fall in this year, but maybe you could give us some more specifics on what you are seeing in the industry now versus maybe a year ago and any new launches that you expect to continue this year?

Jonathan Steinberg

I think the industry on merit continues to take market share against other structures. And what we do find is that particularly that we always meet skeptics, since it’s just good as it’s going to be. But I think historically, certainly in my, let’s say, seven or eight years of the industry, the ETF industry itself has always been underestimated. So, on merit, full transparency, greater liquidity, greater tax efficiency, no minimums, no gating, no lock-ups, only one share class, no incentive fees, is the best of class, and on merit, we are educating all of the intermediaries and the retail investors at every level including the media and it’s just we are picking up steam and I don’t think this train is ever going to slow down. I think it’s only accelerating and I don’t see how it’s going to stop.

So, we are seeing the trends. You know, the thing that we suffer like all asset managers, we just suffer from market sentiment. But there was a lot that was taken, a lot was done with respect to the fiscal cliff at the end of the year that was just constructive for investing in general and there is a tremendous amount of money on the sideline. So, net-net, I am very optimistic.

Mac Sykes - Gabelli and Company

Terrific. And I think Western received its own exemptive relief last year. Will that impact your relationship with them going forward or in terms of marketing, or maybe competition for products?

Jonathan Steinberg

I am sorry. Could you just repeat the question?

Mac Sykes - Gabelli and Company

I think Western Asset received its own exemptive relief. I was just curious if that might impact your relationship with them in terms of marketing or competition with products going forward.

Jonathan Steinberg

To clarify, Legg Mason, the parent company received exempted relief. As I understand, the subsidiaries do have a lot of independence but our relationship with Western is not exclusive, I expect that Western will launch funds under the Legg Mason brand, but I think that they will continue to launch funds with us as well. It’s still early, so we will see how it all plays out, but it feels like we have a strong and growing relationship with Western.

Mac Sykes - Gabelli and Company

My last question, on the DXJ flows, congratulations, but can you talk a little bit about the diversification of those flows? Is it being driven by specific channel or region, just any sort of color on how that’s coming together?

Luciano Siracusano

This is Luciano. It’s been very broad based. We are seeing tremendous interest across all the channels. There has literally been thousands of trades in DXJ in January. One of the things that’s going on is that a lot of asset managers have been under waged pan equities for some time. So, as interest comes back into Japan, folks who are looking for the Japanese exposure but they are also looking to hedge the impact of the yen. This is a long term trend or even a secular trend that could last a few years. This is actually a tactical beta way to get exposure to get that investment thing. Right now, for all kinds of purposes it’s the only ETF in town that gives people this exposure. So, this is a fund that’s trading 1 million, 2 million shares a day and it’s taking on a life of its own. So, I would say the interest is very broad-based and Japan is a very large important market in terms of global equity markets.

Jonathan Steinberg

Just a little more color. When we launched our funds and DXJ was one of our original funds in June of 2006, the leading fund in Japan at that time had $9 billion in assets. So, today that fund 7 years later it may be a little less than $6 billion. We are $2.5 billion, so it shows you that ETFs as an industry have grown immensely in those 7 years, but Japan has actually shrunk. There is a tremendous amount of upside I think to the category as Luc indicated.

Mac Sykes - Gabelli and Company

Great, thank you very much.

Operator

Thank you. Our next question comes from Matt Kelley of Morgan Stanley, your line is now open.

Matthew Kelley - Morgan Stanley

Good morning guys, thanks for taking my questions. I just wanted to ask a little bit more detailed question on the penetration or the uptick you are seeing by channel currently? Are there any, where are you seeing the incremental buyer more, is it in the resale brokerage, or RAs, or institutions getting more involved? Where are you seeing the incremental buyer for your product?

Luciano Siracusano

This is Luciano again. It’s really across the board. I mean, last year was a very strong year for the wirehouse channel for WisdomTree. We got to a point where the wirehouse team in aggregate was contributing pretty much as comparable to what the RA team contributed. So, I would say on a relative basis last year we saw gains on the wirehouse channel. But in aggregate, we are seeing increased interest across all three channels. We are seeing more firms with at least $1 million dollars in WisdomTree funds, more branches with at least $1 million. The number of clients we have is increasing, the number of large clients we are having is increasing. So, I would say it’s just a gradual gaining of traction across the board. As these funds take on longer histories and become larger they open themselves up to larger interest, including derivatives that are trading around the fund. So, with volume we get volume. A lot of these funds are at all-time highs in shares outstanding and a lot of the activity in the channels are as highest as they have ever been.

Matthew Kelley - Morgan Stanley

Okay. And then, maybe this one is for Amit. In terms of the margin guidance again, I know everybody has asked the same thing here, but just taking the different way, you did between 21.5% and 22% for the quarter, a little over $17 billion AUM. Your guidance at $35 billion, or 40%, I have been thinking what Jono was saying about the product launch is being on the upper end this year. Is it fair to assume, as you hit the end of those product launches, you may get more acceleration at that point towards your margin target than you would through the first half of this year?

Amit Muni

I wouldn’t focus so much on the shorter term. But given that longer term guidance which we have taken down now to $35 billion in assets to get to that 40% operating margin. That’s what I said. We are in growth mode, we want to invest in the business. You may get a little bit noise quarter-over-quarter, but directionally we are headed that way. A lot of it is going to depend upon markets, I mean, how fast these funds take in money versus others. But directionally, we are headed towards that margin. And remember, I have talked to you about the gross margins, 70% to 75%, the incremental margins on that are on average 80%. Some of our larger funds are closer to the higher 80%, so we start to see higher flows into those larger funds that’s going to improve those margins. We don’t look at it on a fund by fund basis but more of just entire family.

Jonathan Steinberg

And also, I gave you sort of guidance for 2013, but it’s not going to slow down, I don’t think in 2014. I think that over the next 24 months WisdomTree will be more aggressive in new products than we were over the prior 24 months. Because what we have also done, we have closed funds, we have repurposed funds, so the existing product suite it is immensely efficient right now. And then we took care of all these corporate issues in 2012. So, you will just see a more aggressive tone in general in 2013, I think and ’14.

Matthew Kelley - Morgan Stanley

Okay. That’s helpful. And then final one from me, just on thoughts on product launches outside of Europe. How attractive is that? How is it penetrate? How could you potentially do that? Thanks, guys.

Jonathan Steinberg

I am not sure I understood the question. Please, before you get off, you said outside of Europe?

Matthew Kelley - Morgan Stanley

Sorry, if I did, I apologize. I meant, outside the US, thoughts for Europe, potential Asia longer term. Where do you think there is, is the most attractive to enter the market outside the US?

Jonathan Steinberg

Sure. ETFs are not just a US phenomenon, it’s a global phenomenon. What we have done is a couple of things. One is, we actually have listed about 10 or 12 of our ETFs in Mexico and we have a relationship with the Compass Group that are selling those funds in Latin America to the institutional channel there. We have also set up a usage structure in doubling, and what that will allow us to do is launch ETFs in Europe and Asia, if the right opportunities presented themselves. It’s a low cost to keep that going but it gives us the option to do something. Right now, we are just sort of seeing it, if the right opportunity comes up for us to really turn that on. I would say probably – I don’t want to say Europe, but probably leaning more towards Asia, I would imagine if we are going to do something overseas.

Luciano Siracusano

We still evaluate it quarter-by-quarter and because we are making so much progress quarter-by-quarter, maybe our tolerance for investment might change over time, but at the moment we are still very very much focused on the US market share.

Matthew Kelley - Morgan Stanley

Great, thanks guys.

Operator

Thank you. Our next question comes from Todd Wachsman of Morgan Stanley, your line is now open.

Todd Wachsman - Morgan Stanley

Hi, good morning, gentlemen and congratulations on just an outstanding quarter and year. A couple of questions. First I would like you to talk a little bit about your progress in the 401(k) space and really trying to get the ETFs within that space? Secondly, with regard to the Japan area, might it make sense to do something with the yen DFJ, just a thought? And lastly, the advertisements for DXJ which we always see on CNBC, I don’t know if you guys know this but it’s gone completely viral on YouTube, it so far seen like 137,000 views for that, which I thought was impressive. Anyway, so that was basically my question with regard to 401(k) and 401(k) market share growth, maybe potentially hedging yen and the Japan small cap.

Luciano Siracusano

Hi, well, thank you for the questions, Todd, this is Luciano. With respect to 401(k), 401(k) represents about 1% of our ETF assets, so we are seeing some good progress there. We may good progress in 2012 in terms of expanding the number of 401(k) record keepers and 401(k) ETF enabled custodians of that kind of work together and kind of an end-to-end solution, but then allows other folks who were interested in getting into the 401(k) market using ETFs within that system to expand their business. So, we are talking to other money management firms out there that use ETFs as part of their models, helping educate them about how to get greater transaction, utilizing this broader 401(k) system. So, I would expect continued progress in that channel. But again, it’s a very small percentage of our overall assets today. With respect to hedging out other currencies, you know, in other parts of the world that’s something we are always evaluating, always interested in feedback from clients, particularly in areas of the world that could benefit from a weakening currency that was being hedged by our ability to use forwards (inaudible) products that we will certainly consider that around the world where it makes sense. With respect to social media, that’s been a big initiative of the marketing department over the last year and we are starting to see some really interesting, as you mentioned, viral repercussions to it. We are blogging on a regular basis and we are also getting our content out into broader social media forums, including from your own attestations YouTube and we are certainly encouraged that the DXJ TV ads are seeing that after within the free media.

Todd Wachsman - Morgan Stanley

Thank you. I think that’s really just incredible, keep up the good work. I look forward to see what you guys come up with next.

Jonathan Steinberg

Thank you very much. We appreciate your support.

Luciano Siracusano

Thank you.

Operator

And our next question comes from Dan Weiskopf of Forefront, your line is now open.

Dan Weiskopf - Forefront Capital

Actually, thanks very much guys, my questions have been asked.

Jonathan Steinberg

Alright Dan, thank you. Are there any more questions? Well, with that I think we just want to thank you again for all of your support and interest in WisdomTree and we look forward to speaking to you in a few months. Thanks.

Operator

Ladies and gentlemen, thank you for participating in today’s conference. This concludes today’s program. You may all disconnect. Everyone, have a great day.

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