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WisdomTree Investments, Inc. (NASDAQ:WETF)

Q2 2014 Earnings Conference Call

August 1, 2014 9:00 AM ET

Executives

Stuart Bell – Director-Investor Relations

Jonathan Steinberg – President and Chief Executive Officer

Amit Muni – Executive Vice President-Finance and Chief Financial Officer

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

Analysts

Jason L. Weyeneth – Sterne, Agee & Leach, Inc.

Surinder Thind – Jefferies LLC

Tom Whitehead – Morgan Stanley & Co. LLC

Douglas C. Sipkin – Susquehanna Financial Group LLLP

William R. Katz – Citigroup Global Markets Inc.

Chris C. Shutler – William Blair & Co. LLC

Dain A. Haukos – Piper Jaffray & Co

Marc S. Irizarry – Goldman Sachs Group Inc.

Adam Beatty – Bank of America Merrill Lynch

John J. Dunn – Sidoti & Co. LLC.

Operator

Good day ladies and gentlemen and welcome to the WisdomTree Second Quarter Earnings Conference Call. At this time all participants are in a listen-only mode. Later, we’ll conduct a question-and-answer session, and instructions will follow at that time. (Operator Instructions) As a reminder this conference call maybe recorded.

I’d now like to introduce your host for today’s conference WisdomTree. Please go ahead.

Stuart Bell

Thank you. 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 the use of forward-looking terminologies 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 included, 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, 2013.

Now, it is my pleasure to turn the call over to WisdomTree’s CFO, Amit Muni.

Amit Muni

Thank you, Stu, and good morning, everyone. On today’s call, I will review our operating and financial results for the second quarter, update you on WisdomTree Europe, discuss guidance for the second half of the year, and lastly update you on our results so far in the third quarter. Jon will then make some closing comments before opening it up to Q&A.

So let’s begin on Slide 3 by reviewing the U.S. ETF industry statistics for the second quarter. As you can see on the chart on the left, industry closely bounded to nearly $57 billion from the low level seen in the first quarter. The middle common chart reflects flows by category and as you see all asset classes experienced inflows, except Japanese focused equities. In the far right column you can see the Japan’s equity market was up 4.9% and the Yen weakened slightly against the dollar.

As the next Slide reflects our operating results mirrored these industry trends. We had net inflows of $300 million in the second quarter. The net number was low as we experienced outflows of $1.3 billion in DXJ and another $300 million in our emerging markets equity, and fixed income, and currency ETFs. However, on the positive side, we had $1.9 billion of inflows primarily into our European-themed and India ETFs. A core part of our strategy is to continue to build out our product line, so we have the right ETFs that meets investor demand in different market cycles.

Our results in the last two quarters reflect the benefits of that strategy, when we look at our gross inflows, not just our net inflows.

Turning to the next Slide, you can see the strength we demonstrated in the European category. We are the third best asset gatherer in this category, and our market share increased compared to the first quarter to 19% of the flows. Our Europe Hedged Equity Fund, HEDJ, gathered $716 million of inflows in the second quarter, nearly doubled what it gathered in the first quarter.

HEDJ set another example of our product innovation as investors turn to WisdomTree and looking for hedged equity strategy. In the middle chart, you can see the flow rankings for the U.S. ETF industry, and on the right, our market share of the totaled U.S. industry flows with and without DXJ.

As next Slide reflects, our first half net outflows caused us to have negative organic growth, when you compare us against the publicly traded asset managers and U.S. ETF industry participants. While the ranking improved in the first quarter, we are still very disappointed with this statistics. We are still feeling the effects of the negative sentiments towards our largest exposures. However, we continue to have a long-term view of our business and a long-term opportunities for these asset classes.

On Slide 7, we show you how our ETF have performed relative to their peer groups as categorized by Morningstar. These comparisons take into account fees and transaction costs and reflects our equity, fixed income, and alternative ETFs have performed against actively managed, and indexed mutual funds, and other ETFs. In evaluating the performance of these funds, you can see in the far right column that since their respective inceptions 56% of our ETFs outperformed their peer group. Put another way 82% of the approximately $33 billion invested in our ETFs were in these peer bidding funds.

Now let’s turn for the financials beginning on Slide 9. Despite the challenging market, we continue to generate solid financial results. We recorded record revenues of $44.1 million in the second quarter, an increase of 18% from the second quarter of last year. Pre-tax income was up 65% to $20.1 million. For the first half of the year, revenues increased 31% and pre-tax income was up an impressive 82% to $36.6 million.

We have broken out the results of WisdomTree Europe on the few slides, so it’s easier to compare our results to prior periods. U.S. listed refers to the old WisdomTree, which are the results of our U.S. listed ETF business which makes up the vast majority of our financial and operating loss.

Turning to Slide 10, you can see our average mix has changed. The hedged equity category mix and revenues declined as a result of outflows in DXJ, a slight increase in our emerging market mix offset the revenue decline. This was primarily due to the strong inflows we experienced in our India EPI. We also continued to experience steady revenue growth in the international and U.S categories quarter-after-quarter. Our average revenue capture remains at 51 basis points. However, because of the strong demand we saw on our India fund, which carries a 83 basis points fee, our average rate increased to 52 basis points in the third quarter, as you can check on our website everyday.

On the next Slide, we can review our key margin metrics. Gross margin for our U.S listed ETF business increased to 82.4% in the second quarter. This was due to cost savings from transferring our fund accounting, administration, and custody services from Bank of New York to State Street, which took effect on April 1.

And the chart, on the right, you can see our pre-tax operating margin increased to 49.4% for our U.S listed ETF business, and 45.6% on a combined basis with our European operations. To the right, you can see the first half of the year, our margins increased to 44% for the U.S listed business, and 42% on a combined basis.

Our pre-tax margins were particularly high this quarter as we significantly reduced compensation cost, as a result of reflecting net outflows for the first of the year. So I caution you not to extrapolate the second quarter margin.

Next, we will review expenses on Slide 12. First quarter total expenses were $26.4 million. We incurred expenses of $818,000 in June related expenses in the first quarter for acquisition of Boost. Compensation cost decreased by $2.3 million, due to lower accrued incentive compensation as a result of reflecting net outflows for the first half of the year partly offset by higher headcount related expenses. We realized $1.8 million in savings from the transition to State Street.

Marketing and sales related spending increased by $449,000 and other funding related cost increased by $301,000 due to listing of new ETFs. Included in the quarter was $1.1 million expenses for our European operations.

Lastly, the Europe business incurred a final $690,000 in deal related closing cost. We ended the second quarter with expenses of $24 million.

As Slide 13 reflects, we continue to carefully manage our cost base, yet make the right investments in the business as our expenses continue to decline as a percent of revenues. You can see our compensation cost declined significantly as a percentage of revenue, and are 18.8% for the first half of the year, below our previously target range because of the net outflows we had in the first half. We still expect our compensation cost to be between 20% and 23% of revenues for the full year, assuming flows normalized, but closer to the lower end of that range.

On the next Slide, we can review our balance sheet. We have total asset of $179.8 million at the end of the quarter, which is primarily comprised of $128.8 million of cash and $12.2 million in investments. You can see from the two charts on the rights, our continued revenue growth and leverage of our business model translates into powerful cash generation ending the quarter with the $128 million working capital and $141 million in cash and investments. Building up cash and having the dry powder will allow us to be aggressive and opportunistic as we see an open-ended run rate for growth ahead of us.

Once we generate excess cash beyond our investments needs, we would look to return capital to our shareholders in some fraction. Now I would like to update you on our European business. We closed down our acquisition of Boost in April and remain the company WisdomTree Europe. Our team in London is continuing to grow the Boost brand of equity and commodity ETPs. As you can see on the chart AUM increased 31% to $130 million. We launched four additional Boost ETPs in Germany and cross-listed four commodities ETP from the Italian exchange. In May, we had the London team in New York to begin integration and planning for listing WisdomTree branded ETFs in Europe. We are targeting on launching a handful of ETFs in the fourth quarter of this year.

On the next slide, we can go through the financial for Europe. In the supplemental table in our press release, we broke out the results from European business and you can see those results on the left hand side of the slide. The average revenue capture on the Boost branded products is 82 basis points. The business had expenses of $1.6 million as I mentioned earlier 692,000 of that was related to closing cost that won’t be repeated. The business had a pre-tax loss of $1.6 million for the quarter. We cannot recognize any income tax benefit from the loss which Europe generated expect for certain Europe expenses incurred in the U.S.

We are projecting the business will generate a pre-tax total loss of $4.6 million this year and $69 million in 2015. We legally owned 75% of WisdomTree Europe and under our agreement with the Boost shareholders we will buyout their 25% ownership at the end of four years. The price of these bull shares is a predefined formula based on the European AUM and tied to our enterprise value of our global AUM at the time of measurement and affected by the profitability of the European business.

The payout will be in cash over two years. We will recognize the change in the fair value of this buyout liability through our income statements over four years. We do not recognize any expense this quarter as the current estimate fair value is not greater than the minimum buyout. Because we are required to buyout their interest from the U.S. GAAP perspective, we own 100% of the WisdomTree Europe today and will not reflect on minority interest.

Now, I would like to update you on two items. The first is taxes. Beginning this quarter, we began to record GAAP tax expense at a rate of 45.4% on our U.S. business as a result of recording our deferred tax asset last quarter. Even though we are recording tax expense, we will not be paying cash taxes because of our NOL. Unfortunately as I mentioned we cannot offset any taxes for the losses generated by our European business. So our effective tax rate will be higher on a consolidated basis until the European business is profitable, at this point we can then recognize use their NOLs.

Our U.S. NOL balance on a pre-tax basis is $120 million or about $55 million asset tax. Said in another way we will not take cash taxes on our net $120 million of pre-tax income on our U.S. business. That is why when discussing our results we will focus on pre-tax income, not net income.

Next on our strategic growth initiatives. We gave guidance that we expect to spend $69 million on strategic growth initiative this year. These investments will cover additional headcount primarily in revenue producing parts of the business.

Second continue to aggressively launch funds, we are targeting launching 10 to 15 new ETF this year and have lost eight already.

And lastly continue to invest in marketing and sales related initiatives to support our growth and build our brand. To date, we have spent approximately $2 million or $4 million on an annualized basis which is less than $69 million we have planned. We expect to increase our spending in the second half of the year and are projecting we will be to the mid to low end of the $69 million range for the year.

Lastly, I would like to update you on our flow so far this month. The industry flows were starting of late with $9.5 billion so far this month. All categories except Japanese focused ETF to enclose. We are following a similar trend of the industry and our second quarter results. We are seeing strength in Europe and India as well as our US equity ETF. However, we are closing DXJ – net outflows about $200 million so far quarters.

So in summary despite the challenging environment, we demonstrated solid financial results and improved margins reflecting the strength of our business model. Now, let me turn it over to Jonathan.

Jonathan Steinberg

Thank you, Amit. Good morning everyone. Today I will be brief. Despite challenges the second quarter in many ways was our best quarter ever. The challenge was due to $1.3 billion of outflows from DXJ, still we are able to raise an additional $1.6 billion making us positive for the quarter admirable, but not enough to be great. What made the quarter outstanding was record average assets, record revenues, record pre-tax profits, record cash flows, record margins, and record number of billion dollar funds.

We cannot control which markets go in and out of favor, but they are aspects of the business that we do control and we are executing against those things incredibly well. We are clearly demonstrating the efficiency power and potential of the WisdomTree franchise. As many of you know, we are passionate about the ETF industry, and see nearly open-ended opportunity.

On a personnel level, speaking before you today, as CEO of the eighth largest ETF sponsor in the world, the fifth largest in the U.S. after having just generated $25 million in cash flow and ending the quarter with more than $140 million in cash and investments, at sometimes can’t believe how well positioned WisdomTree is within asset management worldwide.

We have demonstrated how well we can manage the business to periods of volatility. We have also showed you that we are capable of exclusive growth, and we have achieved one of the highest operating margins of any publicly traded asset manager in spite of our relative size. The future for WisdomTree has never been brighter.

Thank you for you attention. Now, let’s take questions.

Question-and-Answer Session

Operator

(Operator Instruction) Our first question comes from the line of Jason Weyeneth from Sterne Agee. Your line is open.

Jason L. Weyeneth – Sterne, Agee & Leach, Inc.

Thank you. First question I guess is just on the growth spending. Is there anything in particular that was driving the slowdown just from the standpoint of the first half and also towards the lower end, is it sort of driven by the environment, or is it just the timing issue and maybe some of that just gets pushed out into 2015?

Jonathan Steinberg

Hi, Jason. I would say it was mostly timing. I mean we did spend a little bit more on the marketing side than we had originally planned, but the headcount team in a little bit later. So I think it was really more timing, which is why we’ve given the guidance that we do expect the second half to sort of pick up some of the amounts that we weren’t able to really deploy in the first half of this year.

Jason L. Weyeneth – Sterne, Agee & Leach, Inc.

Thanks. And then just on the headcount, as we think about it longer-term, it’s not to see it scaled up quite a bit over the past four quarter to six quarters, I think we were around $70 million, be getting it to as in 2013 a little over $100 million today, realized some of that’s boost. Just how do you think about headcount growth and where it starts the level off when that piece of growth starts to slow and maybe the platform scales a little bit more versus a more level headcount?

Jonathan Steinberg

Sure. About 11 people came in from the Europe acquisition. and so as we talked about last year, continuing to grow our headcount was one of the initiatives that we wanted to do this year, it has been mostly on the revenue producing parts of the business, as well as the overall operations of the business. And so we want to continue to do that this year. We are still very much focused on growth and continue to grow the top line revenue. But that the beauty of business model is that our headcount, we can double our AUMs, but the headcount is not going to double as a result of that. So really what we’re doing is we are focusing on what we want to do to help really grow the business.

We’ll continue to focus on growing mostly on the revenue producing parts of the business, on the headcount. But it’s really incremental at the end of the day that we’re talking about. Right, we’re not talking about WisdomTree going from 100 people to 200 people in a matter of the year. It’s really been more of a controlled build out, where we see that we can penetrate more and really help see results from the headcount increase.

Jason L. Weyeneth – Sterne, Agee & Leach, Inc.

Great, thank you.

Operator

Thank you. Our next question will be coming from the line Surinder Thind from Jefferies. Your line is open.

Surinder Thind – Jefferies LLC

Hi. Good morning, guys.

Jonathan Steinberg

Good morning.

Surinder Thind – Jefferies LLC

Just a quick question on guidance. So is there any change to your actual full year guidance on expenses, because I think at last, there was between the $110,000 to $113,000 range, because currently you guys are running well below that, and I understand that there will be a pickup in the second half, but I think just wanted to get your thoughts on that?

Jonathan Steinberg

Yes. now we are really expecting the core to still be between that range, well probably, because of the slowness in spending in the first half of the year and the results that we saw from the inflow levels will probably be closer towards the middle end of that, but the overall core expense is still within their guidance of the range that we gave.

Surinder Thind – Jefferies LLC

Okay. And in terms of your cash continues to build nicely, I think you mentioned that you guys think about it in terms of the capital return policy more around, when you guys started generating excess cash. But in the meantime, any thoughts around maybe offsetting any dilution or anything like that?

Jonathan Steinberg

So today, we do, do a little bit of buyback when our employees invest in their stock awards; we buy back the payroll tax portion of it. And so I would just say, just generally speaking, when you think about capital management and WisdomTree, I think the two things that we have to recognize.

First is, we do recognize the fact that we are generating a lot of cash, and that’s really as a result of the fact that we have a very capitalized business and the operating leverage in our business model. And second is that we do see a tremendous amount of growth opportunities ahead of us. And we are a growth company and we want to make the right investments to help where we grow throughout the business. But as we’ve also said this, we’re not going to let our cash just continue to build. And at some point, once we have the cash beyond our investment needs, we’ll look to return that, and either through dividends or buybacks, or some sort of combination. So it’s something that we’re thinking about.

Surinder Thind – Jefferies LLC

Thank you. And then maybe one other question, obviously, Europe has generally been pretty good area strength for you guys in terms of flows. But more recently, there has been a bit of a divergence between the DFE and the HEDJ, any insight into that at all?

Luciano Siracusano

Yes. Surinder, this is Luciano. so we have seen continued strong inflows into hedge, which of course, edges out the currency. So those are really two different choices people are making, if they were trying to limit volatility, they’re typically drifting towards hedge, which is a larger capital program that you’re trying to take advantage of the European recovery, they’ve been searching towards the small caps have a very big run over the last 12 months. so it doesn’t surprise us, but some people are taking some shifts off the table. But again, we continue to see strong inflows into the hedged European product.

Surinder Thind – Jefferies LLC

Okay, thanks a lot guys, it’s very helpful. and a great quarter.

Operator

Thank you. Our next question will be coming from the line of Tom Whitehead from Morgan Stanley. Your line is open.

Tom Whitehead – Morgan Stanley & Co. LLC

Hi, guys good morning and thanks for taking my questions. Just the first one I had was on comp. So could you maybe provide some color on how the incentive complex is, I know it reflects this with flows, but maybe if you could give us some insight into sort of the range that we can expect in a good quarter and a bad quarter. And then if it’s possible also sort of like stakes and variable component of that line?

Luciano Siracusano

Sure. so let me just speak to this generally, right. I mean our compensation program is tied to our performance, right. and we had the results of having net outflows for the first half of the year. we didn’t have the performance and then our compensation is going to be adjusted to reflect that. We do expect, we gave guidance over this year that we expect our compensation to be between 20% and 23% of revenues, I mean that’s assuming we have some normalized flow levels, and we came in less than that in the first half of this year from a percentage basis of 18..8% through the first half of year as a result of that.

So it shows you the operating leverage that we have in the business model that when people asked what are some of the leverage that we have compensated our AUM declines or flow levels are down, compensation is one of the levels that we have. We are expecting flows to normalize and we do expect to be closer to the probably low and 20% to 23% range. And so if you sort of look at the year-to-date numbers, I’ll give you some idea of how the numbers complex based upon flow levels.

Jonathan Steinberg

Tom, this is Jonathan, just the – if you are asking for the metrics we do flows, market share, margins, and stock price total to return, and those are the metrics that we’re looking at when we think about compensation.

Tom Whitehead – Morgan Stanley & Co. LLC

Great, that’s helpful. And then just another one, I know you spoke about capital return a little bit earlier, but I guess could you maybe update us on how the discussions with the board, or discussions you had internally regarding the dividend in particular, have gone; have got even come up, which what seems to be preference there for capital return. And then just digging into the comment about generating excess cash beyond investment needs maybe sort of how close you guys might be to crossing that hurdle? Thanks.

Jonathan Steinberg

Sure. So I really can’t speak to conversation of that we’re having with the Board. But just I sort of laid out what were – the overall thoughts that we have that affect our thinking on the return of capital. And so it’s something that we’re thinking about currently, that’s where we all can say about it right now.

Tom Whitehead – Morgan Stanley & Co. LLC

Okay. Thanks for taking my questions.

Operator

Thank you. Our next question will come from the line of Douglas Sipkin from Susquehanna. Your line is open.

Douglas C. Sipkin – Susquehanna Financial Group LLLP

Yes. Thank you and good morning, guys. Just wanted to add a couple of questions, wanted to talk a little bit more about the margin, I mean I guess I appreciate the flexibility in the compensation. So that was nice to see, are you guys still sort of standing to sort of rough margin targets, 40% and about $35 billion an AUM, I mean or it just feels like even with the comp, better where you got this quarter, it sounds like still that’s probably still too low of a target. Is that a fair assessment?

Jonathan Steinberg

So we gave that. we have two margin targets that we have, more of a short-term and about $35 billion of average assets, we’re expecting 40% pretax margins. And if you look at our first half results, which I’d say, it’s a little bit more representative, a little bit more normalized, and see we averaged $34 billion in assets than we had about 42%, on the U.S. business about 44% operating margin.

So you see a lot of the savings from stage three, flowing as a result of that. So we are sort of meeting that shorter-term target and then longer-term. we laid out; it’s about $55 billion to $50 billion of average assets. We’re expecting 50% operating margin. And so that’s assuming some levels of flows. And so those two margin targets would still impact, it gives us enough room to make investments in the business that will help focus on our growth.

Douglas C. Sipkin – Susquehanna Financial Group LLLP

Great, okay. That’s helpful. Second question, so I know it’s early, it does feel like the market maybe is starting to think a little bit more about interest rates, I know the Fed fund’s features have been moving a little bit. So I’m just curious, I know you guys had a big launch with the fixed income products. And there hasn’t been much action there yet, I was just curious if what the dialogues are like with some of those products, our people getting to learn about them, or close to pull in the trigger. I mean how would you frame that right now?

Luciano Siracusano

Hi, this is Luciano. So I would say that we have seen some interest in the U.S. dollar of our product that’s up to over 15 million of assets, we’ve launched that in the last two years. So that is, if you look at the market yesterday, that was actually, one of the few asset classes that was up. So I think we’ll see continued interest in that particularly if the dollar strengthens relative to our currencies.

With respect to the interest rate strategies, I think it’s really anti-fixed income strategies. Those are – when people view them, they view them where they have alternatives to help manage interest rate risk. So the environment will reach wise, they should have some reception, both of people who want to manage rate risk and also people who want to capitalize and try to perhaps decline in down positions with the strategy that we grow from value.

So what I would tell you is that we’re all having conversions where we can lift those funds by our approved on some of the platforms within the warehouses, but we’ll particularly try getting the ROA channel and some of the independent broker dealers and regional broker dealers, which we used in. And I would say that there is interest, I mean they’re monitoring them, they’re looking at them and they’re figuring out when is the right environment to start using them and I would you say that, we started the years with 10-year treasuries of 3%. They’ve backed up a little, but they’re still the 2.5% range. So I think you need to see a little bit more market movement. It certainly is some of the data that came out yesterday could suggest that rates may rise sooner, sooner than previously expect.

Douglas C. Sipkin – Susquehanna Financial Group LLLP

So I guess if I’m just understanding the product a little bit better. It feels like the long end is what really needs to probably inside some interest in those products, the 10-year obviously has got in the opposite direction so far this year to sort of probably really get people to take actions, is that a fair assessment?

Jonathan Steinberg

Yes. And I would say the other piece of that is just that we need to develop a little bit longer history in terms of monthly distributions and we have a high yield product that takes interest rates down to zero. And if we can demonstrate that product can pay 2.5%, 3% maybe 3.5% year. Some people will just buy it for the income with zero duration. So as these products go longer histories, that’s another important point before people started to use them.

Douglas C. Sipkin – Susquehanna Financial Group LLLP

Great. and then just the last question on Boost, I guess obviously, some nice trends in terms of the AUM growth; obviously, it’s a low base, but you’re still seeing nice trends there. I mean what if at all did sort of the investment, or effectively acquisition from WisdomTree due to Boost, did it help them with their specific products. Or I mean are you validating what they are doing, I mean was there any sort of benefit from you guys putting an investment in there, or is it really still kind of distinct?

Jonathan Steinberg

No. I would say, when we made the investment in Boost, it gave them some credibility in the marketplace. They are very excited about the acquisitions. So I think that helped really spur some of the growth, as well as just they’re continuing to educate the marketplace that differentiate themselves in the European space and that’s also helping further AUM. Will you make the investment; their funds had only been in the market for a year. so they are just getting growing on their own Boost products.

Douglas C. Sipkin – Susquehanna Financial Group LLLP

Got you, great. and then just last one and I could probably do the math, but I figure out that I ask you to make my life easier, I mean you guys know roughly the AUM level at a Europe that’s you sort of break-even, I know where way is away from that given your guidance, but I just figured out to take a shot?

Jonathan Steinberg

No. We haven’t given that because really, there is the one piece that’s missing is when we start to launch the WisdomTree branded ETFs in Europe. And so once we sort of have, it’s going to start off with the handful of funds initially, and then we’ll continue to launch as we see success there. and so that’s really going to help it is defined the cost base they’d really build there. and so it’s sort of really, too early to tell you what a break-even is. I think just more generally speaking, we’re investing $20 million into the business. We think conservatively, it will get the break-even in about four years using that $20 million.

Douglas C. Sipkin – Susquehanna Financial Group LLLP

Great, hats off. Well, thanks a lot.

Jonathan Steinberg

Right.

Operator

Thank you. Our next question will be coming from the line of Bill Katz from Citi. Your line is open.

William R. Katz – Citigroup Global Markets Inc.

Okay, thanks. Good morning everybody. When you step back and you’ve done very well with the DXJ, I mean that sort of outsource of rate, but yet, a hedge data and quite well as a partial offset. How do you think about allocating marketing dollars, and just a root question is given the dynamics is going on right now, how do you sort of get back into a more decisive net inflow number. Do you need to sort of boost the aggregate marketing spend, or maybe just refine into more of different set of products at this point time?

Jonathan Steinberg

Hi, this is Jon. Merely, we do have highly concentrated positions in Japan and in emerging markets, and so we’ve seen with their negative sentiment outflows, you have seen as you indicated strength in our European exposures, you’ve seen a real strong rebound within emerging markets in our Indian ETF. Our marketing spend is really appropriate, it really is what we had said, many times in the past on these calls and in one-on-one meetings that the product sets need to align with market sentiment. I’m not – I don’t think you’re going to have to see any sort of dramatic change in marketing to turn the flows around.

William R. Katz – Citigroup Global Markets Inc.

Okay. second question, a big picture question for you, a couple of your peers of iShares and PowerShares to BlackRock and Invesco respectively have spoken about the structural opportunity in Europe just giving some of the regulatory changes specifically RDR. I’m just wondering when we have Boost obviously, early days. But what strategy will you have to sort of differentiate yourself is those two come; I guess I’ll take down a little bit more of any stronghold in those markets. is it just a market self is good up, very wide and give a chance for WisdomTree, or how you specifically planned to maybe take some share in that market?

Jonathan Steinberg

So the regulatory changes, was one of the impetus for us to make the investment at the time that we did. we see that sort of advise being, a critical component for ETF success within the market. the way we differentiate ourselves, the way that we always differentiate ourselves with original product, we want the boost product set is differentiated and what we bring over will be differentiated. So I think our business model will be very similar to what we’re doing here in United States. It wasn’t easy to do eight years ago, starting in U.S. we had no illusion that will be easy in Europe, but long-term goal, I’d like to be at a top 10 play within Europe.

William R. Katz – Citigroup Global Markets Inc.

Got you.

Jonathan Steinberg

and get perspective, that’s about a $7 billion AUM today.

William R. Katz – Citigroup Global Markets Inc.

Okay. It’s helpful, I just want to leave on that, when you think about the gross margin, that came was I think most of us looking forward form here. how do you think that plays out, is it still 83, 84 or are there other opportunities to take that to a higher level?

Jonathan Steinberg

I think the assets are going to have to scale a lot more, and before we see sort of an uptick or a significant change in mix. So I would say, I’m still very comfortable with sort of 82 to 83 range that we’ve given, you saw we were at 824. We are going to continue to launch funds in the second half of the year, and so that will have an effect on that gross margin. so we’re pretty comfortable still staying within the guidance.

William R. Katz – Citigroup Global Markets Inc.

Okay. Thank you very much for taking my questions.

Jonathan Steinberg

Thanks, Bill.

Operator

Thank you. Our next question comes from the line of Chris Shutler from William Blair. Your line is open.

Chris C. Shutler – William Blair & Co. LLC

Hi, guys good morning. First, a question on competition. so with Blackrock rolling out at a hedged version of the Japan ETF earlier this year and I know it uses the underlying cap-weighted, unhedged ETF, which is obviously very liquid, which is pretty unique structure. how do you view that as maybe changing the competitive dynamic going forward and does it influence how you guys are going to think about product launches?

Luciano Siracusano

Hi, Chris. This is Luciano. It really hasn’t impacted us too much. we’re already facing competition in current; you had space against that same underlying index. S this is back with this more meet your product offerings. that’s not really changed the calculus for us. we are obviously the leader in the space in Japan in terms of assets, volumes, executions, spread and there’s also enacted option market around our particular ETF solutions.

So once you established that I believe, it’s very harder for someone who is coming in the third or fourth to that region. We also have a slightly different methodology that can create advantages quickly in down markets in terms of living in some of the downside in volatility. So I think we’re very well positioned in Japan. And we would expect we have stated in kind of the leadership position as it has after these competitive products of the launch in the marketplace.

Jonathan Steinberg

And just add to it, we also launched the series of Japan sector currency-hedged products, which is another way for us to participate in that being, which will give investors many more choices if that’s how they want to play Japan in a currency-hedged environment.

Chris C. Shutler – William Blair & Co. LLC

Yes, it makes sense. And then you guys mentioned expanding that the products at a couple of time now to make sure that you’re well positioned for all kind of cycles and sentiments. So just hoping you could give us a couple of examples, particularly with your – as you see content writing exposures in Japan and EM? Thanks.

Jonathan Steinberg

Really, where – we don’t really go into specifics, all you can assume is you’re continuing to see product in all of buffs that we have the products in that. And we had most of the industry covered at this point. So you’ll just continue to see product we rolled out all the time.

Chris C. Shutler – William Blair & Co. LLC

But just within the existing products that Jon, I mean within like the Japanese with DXJ, or something like that, DEM do you have products that you feel are complementary and investor can move from one product to another product?

Jonathan Steinberg

Absolutely. I mean first one, we think we have products in the market today that affords investors that opportunity and we’ll always, I mean one of the metrics that we look at when launching new products is diversification, it’s not the only metric by any means, but it is one of them.

Chris C. Shutler – William Blair & Co. LLC

Okay. Thank you.

Operator

Thank you. Our next question comes from the line of Dain Haukos from Piper Jaffray. Your line is open.

Dain A. Haukos – Piper Jaffray & Co

Hey guys, Dan on for Mike. A quick question here, you size up at all the opportunity potential for the Boost into like if you use the 11 sales people or the 11 people you’ve heard at Boost in Europe. The opportunity for Europe into U.S. sales?

Luciano Siracusano

Well, this is Luciano speaking. the Boost team is going to focus on selling both the ETPs and the UCITS in Europe. to the extent, there are institutional investors around the world who were interested in the UCITS that could also be a potential way to leverage that team. We’re going to continue to sell the U.S. registered funds in United States with the U.S. sales team, but we think as we get a global footprint and WisdomTree is expanding around the world. We could see a residual benefit, or institutions start to get more interest in the U.S. registered funds as well, simply because WisdomTree’s brand is growing being amplified around the world.

Dain A. Haukos – Piper Jaffray & Co

Okay. And is there any like opportunity like size of that opportunity, or is it still kind of, if there is not real numbers around that?

Jonathan Steinberg

We don’t have specific numbers. But you do here anecdotally from our competitors that foreign buyers into U.S. ETF is a major contributor to the U.S asset base. and so we do think it was one of the decisions that encouraged us to expand our footprint globally.

Dain A. Haukos – Piper Jaffray & Co

Okay. and then just one other question on the new products that I know you’re talking about rolling out there for the second half, how should we think about that – is that all going to come in a long pool, kind of comes spread out towards the quarter, what are you guys, what was into year decision-making process as you look at rolling out some of those new products?

Jonathan Steinberg

It’s easy to launch products one at a time, unless it really is tied together in some sort of theme like what we did with the hedged, the interest rate funds. So, it’s going to be hard for us to give you that guidance in advance, we now have 69 funds. We have the most funds that we’ve ever had. We are very comfortable in launching funds and finding opportunities, we continue to see opportunities. but it’s hard for us to give you the blue print that you can count on, in terms of timing, sequence and specifics.

Dain A. Haukos – Piper Jaffray & Co

Okay, great. thanks. Congrats on the quarter.

Jonathan Steinberg

Thank you.

Operator:

Thank you. our next question comes from the line of Macrae Sykes from Gabelli. your line is open.

Macrae Sykes – Gabelli & Company, Inc.

Well, good morning, gentlemen. I have a question, I think it’s a tough question to answer, but I’m still going to try to give a shot. I guess it goes to when you have your conversations with investors; they’re looking at the hedged currency products, but there’s the Europe DXJ and you also have peered currency products. How many of them specific to the country currency products, how many of those we pass through are driven of the product by sort of that outlook for specific currencies versus the underlying index or country returns. And if you there is somewhere in the segment those people or investors, is there a different aspect to sort of their timing, or do with the currency folks tend to be a little bit more higher velocity than sort of the peered investors in terms of those products. I guess just trying to see if there is any sensitivity, whether it’s DXJ-hedged J products, in terms of just expectations around currency, exhaust with us of sort of the country returns?

Jonathan Steinberg

Well, I would say it’s very specific to the particular fund. In the case of hedged, I think people understand when they buy the foreign equity, if their hope is to buy it, completely unhedged during the – making two bets, making one bet on the equities and making one bet on the currency. And I think we’ve educated the advisors that if they’re not comfortable, making 100% bet on the currency by being unhedged.

That just makes sense to hedge some of that exposure. So I think some of the advisors are doing it to limit the volatility in the portfolio, some of them are doing it because you’re getting direction from the home office, or research, that’s basically saying if you have a choice we think it should be hedging the currencies right now.

In the case of Japan, obviously last year, I mean the government was pretty direct in terms of its intention and the market read that, and the Yen weakened considerably, and the equity market allowed. There’s been a consolidation in the first six months of the year, but the policy hasn’t changed. And there’s plenty of earnings growth happening in Japanese companies and the valuations are very attractive. So I would say there people are making a separate calculation based on Japanese equity earnings growth, evaluations, and really think the currency goes from here.

So I would say it’s case by case by country, and certainly there are plenty of advisors who allocate internally based on country, they do country rotations and they attempt to beat MSCI world and giving them the ability to make the country cool and make the currency cool if they want to, just another tool that they can use. And we have started to see some interest in some of our other country funds beyond just Japan and Europe. And we would expect that to go forward, as more and more people get educated about currencies impact on total returns.

Macrae Sykes – Gabelli & Company, Inc.

Great. Thank you, Jon.

Operator

Thank you. Our next question comes from the line of Marc Irizarry from Goldman Sachs. Your line is open.

Marc S. Irizarry – Goldman Sachs Group Inc.

Great, thanks. Maybe Jon and also for Luciano just in terms of your distribution channels that you’re in, you’re obviously being global might be an aspiration, or is an aspiration over time, you got the UK piece now. But how do you think about some of the opportunities to broaden out distribution where you on from that perspective, maybe address the 41k and DC channels as well thanks.

Jonathan Steinberg

Well Marc on the 41k as you know right now ETFs within 41k is a relatively small number. It is $1.7 trillion in ETF assets, estimates of ETFs and 41k is in the $10 billion to $15 billion range. So right now it’s less than 1% of the entire industry. We’re about 1% of our assets are in 41k retirement platforms. So the strategy there is to work with the RIA money managers, who are using WisdomTree in their models. And then help them get connected to platforms so that can get distribution on the retirement side.

And there’s probably a bit half a doze now that we’re working with that are starting to get penetration there. As other major record keepers start to open up their platforms and allow ETFs in, that's going to be a driver of ETF growth going forward in 41k channel. And we’ve seen recent news in the last few months about some major brokers and custodians getting involve in that space. So that will ultimately put pressure on the other broker deal and the other record keepers to make a ETF enabled offering both to drive down fee and to get best of product on the platform menu. And so we see the growth of 41K is still a big opportunity, but it’s a very slow moving freight train at this point.

Luciano Siracusano

And Marc, we do have a dedicated team to that channel, which we’ll grow appropriately when the time is right. Another channel where we’re seeing some very early interest would be in the insurance channel, we’ve got again an institutional team that is attacking the insurance channel. And I’d say that it feels from some of the different channels that this is really the very earliest stage of the ETF industry with those channels. So a lot of growth is still ahead and we’ve all the resources that we need to appropriately invest against any opportunities as they appear, when they appear.

Marc S. Irizarry – Goldman Sachs Group Inc.

Okay. And then just – and just going back to the gross margins for a second. I get the guidance. But can you give us some sense I guess and obviously this is some market movement in there, but it sort of the maturation curve of as new products come in, I mean would you think you would stay at the bottom end of that range as new products come onboard.

Jonathan Steinberg

Yes. So we’re talking about gross margins and so, there is a big driver there in this quarter was the transition to State Street. And so it cost us about a 175,000 to launch a new ETF. We're still going to continue to launch ETFs in the second half of year. So when you carry over the effect of the fund loans, the fund that we launched so far this year into second half new funds. I think staying within that – the numbers that you see now 80 to 83, probably closer to the higher end of that range is the right area that you should be right now and think that over the next couple of quarters.

Marc S. Irizarry – Goldman Sachs Group Inc.

Great, thanks.

Operator

Thank you. Our next question comes from the line of Adam Beatty from Bank of America. Your line is open.

Adam Beatty – Bank of America Merrill Lynch

Good morning. Thanks for taking my questions. Firstly the follow-up on Europe and your strategy there I guess from the standpoint of products or the product strategies that you rolling out the same as the one here in the U.S. are they differentiated and how do you sort of make decisions on sequencing that and want to go first. And also on country market, how you select kind of Germany and Italy, where you decide of roll things out and is there leverage once you want the product in one country to bring it to other country? Thanks.

Luciano Siracusano

Hi Adam, this is Luciano. We are not going to disclose what products we are launching today or considering launching obviously for competitive reasons, but as you get closer to the launch we’ll share that with you. I’d say generally, what we’re going to try to do is take advantage of WisdomTree strengths, obviously we have certain strategies in America that have longer track record that people can at least look into NOI index to get in terms of how they’ve done historically. And we’re also going to listen to our team on the ground in Europe, which is much closer to the local markets particularly the local exchanges and what might make the best sense in terms of riddles. So I would just say, as you are get closer to launch, we’ll have more details for you, but that’s something that we’re anticipating to do in the fourth quarter this year.

Jonathan Steinberg

And as you do launch funds there will always be the opportunity to cross list within Europe. So we’ve already gone from London to Italy and others within the booth product sets today.

Adam Beatty – Bank of America Merrill Lynch

Thanks. I appreciate that. Also you mentioned, the AUM levels of the various product and reaching $1 billion or $100 million, obviously there is economic leverage there, in terms sort of marketing is it more of an awareness thing or are there certain levels, I guess implying maybe liquidity where clients open up who might not to been willing to take the product to more even level?

Luciano Siracusano

There are certain gate keepers that have size limits, assets limits, liquidity limit, length of time limit, so all of those are factors within the certain segments of the market. We look, there are economics related to certain size levels, so sort of reduced a rough $50 million in AUM is sort of a breakeven. So when we talk about like, we’ve 31 funds with $100 million in assets, most funds are getting launched with 5 million in seed, so if you get to $100 million it represents customer acceptance to some level for the $100 million you really do have quite a lot of optionality. And then what we’ve seen is, so what’s interesting form our product strategies today, we have 69 funds, 45% of them have $100 million and more on assets. From those 31 funds of the $100 million in assets, we’ve seen 35% of them go to $1 million or more. So I feel that from a products standpoint, we’ve been immensely successful, I feel very comfortable we’ve done in the past and that will continue to do going forward.

Adam Beatty – Bank of America Merrill Lynch

It sounds like using the word momentum would not be necessarily inappropriate?

Jonathan Steinberg

Would not be inappropriate.

Adam Beatty – Bank of America Merrill Lynch

Right. Yes, great. And thanks very much. And just one quick follow-up for Amit on the competition, just on the measurement period there you had kind of choppy flows in first quarter and then actually improving in second and the comp seems to respond to the first half numbers. Would you do that half-half, if flows wouldn’t change about in third quarter, should we expect the difference or how is that measured?

Amit Muni

Sure, so, you said it right, it sort of like half-half, we see what we’re doing, we pay our salespeople twice a year. And so we have a little bit more sense of or true up so to speak when we get to the first half number. And as the year progresses, we’ve more, more confident. So what our operating results are going to be in the four factors that we look at for our compensation to come up with the right number. And so that not as much in the first quarter and then you’ve hopefully a little bit of true up again in the fourth quarter.

Adam Beatty – Bank of America Merrill Lynch

Great. Thank you for taking all my questions.

Jonathan Steinberg

Thank you, Adam.

Operator

Thank you. Our final question comes from the line of John Dunn from Sidoti. Your line is open.

John J. Dunn – Sidoti & Co. LLC.

Hi, good morning. I wanted to ask maybe you could give us an update on what you are seeing and your views on the non-transparent ETF fund?

Luciano Siracusano

There certainly is a lot of media attention to it, there are certainly seems to be a lot of attention from the traditional active mutual fund industry that may see this as one way to enter the ETF marketplace in a way that would be less disruptive to their historical business. I had never met an adviser, though, who as ever asked for product in a non-transparent format. So it all comes not from the customer base that’s in the market today. We only see it from the media, from the analysts, and from the executives of the traditional firms.

John J. Dunn – Sidoti & Co. LLC.

Got it. Thank you very much.

Jonathan Steinberg

That’s the last question. We want to thank you again for your interest and attention in WisdomTree and we will speak to you next quarter. Thank you, everybody.

Operator

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

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