OTC Markets Group Q3 2023 Earnings Call Transcript

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Provided by Quartr
November 9, 2023

There are 6 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to the OTC Markets Group Third Quarter 2023 Earnings Conference Call and Webcast. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Dan Vinn, General Counsel.

Operator

Please go ahead.

Speaker 1

Thank you, operator. Good morning, and welcome to the OTC Markets Group 3rd quarter 2023 earnings conference call. With me today are Cromwell Coulson, our President and Chief Executive Officer and Antonio Georgieva, our Chief Financial Officer. Today's call will be accompanied by a slide presentation. Our earnings press release and the presentation are each available on our site.

Speaker 1

Certain statements during this call and in our presentation may relate to future events or expectations and as such may constitute forward looking statements. Actual results may differ materially from these forward looking statements. Information concerning risks and uncertainties that may impact our actual results is contained in the Risk Factors section of our 2022 annual report, which is also available on our website. For more information, please refer to the Safe Harbor statement on Slide 3 of the earnings presentation. With that, I'd like to turn the call over to Cromwell Coulson.

Speaker 2

Thank you, Dan. Good morning, everyone. Thank you for joining us today. I will discuss at a high level our financial results for the Q3 of 2023 and review our strategic initiatives for the remainder of this year and heading into 2024. Overall, gross and net revenues continued to increase with each metric up 4% this quarter.

Speaker 2

Expenses remained elevated, up 12% during the quarter, leading to decreases in operating margin for the 3rd quarter and the 1st 9 months of the year. Net income and earnings per share increased slightly this quarter due to a reduction in our effective tax rate. Antonio will cover our financial results in more detail in a few moments. Our acquisitions of Blue Sky Data Corp. And EDGAR Online continue to be drivers of change in our financial and operating results.

Speaker 2

The Blue Sky product is now fully integrated into our platform and we are focused on ways to expand coverage, streamline operations and address future needs for our subscribers. The optimization of EDGAR Online remains in its early stages. From the start, we anticipate that this integration would involve a significant effort and that putting the operations on stable commercial footing would take place over several years. Notably, The EDGAR Online acquisition added ongoing operating costs as well as certain non recurring transitional expenses. As with each of our business lines, our ongoing investments in the EDGAR Online business will be strategic and based on client demand, In the 1st 9 months, financial markets saw a risk off environment with lower overall market activity and trading volumes.

Speaker 2

Our performance in this economic environment highlights the strength of our diversified business model. Today, There are over 2,600 secondurities of companies with over $1,000,000,000 market cap traded on the OTC market. They traded $238,000,000,000 in dollar volume through the end of Q3 and 88% of overall dollar volume. International company ADRs and ordinary shares, including those $1,000,000,000 companies are now 77% of the securities quoted and over 85% of the dollar volume. These numbers contradict a standard narrative that OTC Markets is primarily for smaller companies or speculative penny stocks.

Speaker 2

It is a testament to the work our people have done building our platforms and processes that today our regulated markets connect The world's leading global companies with U. S. Investors and that global reach factors heavily into the opportunities we pursue as part of our strategic plan. With respect to our 3 business lines, market data licensing again led the way with revenue up 22% during the Q3. This increase was due to the contribution from EDGAR Online and organic growth.

Speaker 2

For the 1st 9 months of the year, Market data is up 23%. Revenue from OTC Link is down 10% during the quarter and corporate services is down 3%. Corporate services revenues remained impacted by decreases in the number of companies on the OTCQX and OTCQB markets, as well as a reduction in companies using our disclosure and news service or DNS. Voluntary renewal rates for the OTCQX and OTCQB CQB markets remained similar to prior years. The decrease largely stems from a combination of slower new sales and downgrading companies that are unable to maintain compliance with each market's rules.

Speaker 2

We have never shied away from flagging risk based on Disclosure, stock promotion, bankruptcy and other potential public interest concerns to inform investors. Enforcing the financial and governance standards of OTCQX and OTCQB is important to the integrity of these markets. The revenue we lose when we reject unqualified companies or remove those that fail to meet our ongoing financial standards ultimately support the value for companies that qualify for OTCQX and OTCQB. OTC Link revenue has decreased throughout the year, primarily due to lower message and trading volumes across our ATSs. While we do not control trading volume, we continue to prioritize subscriber growth to expand our networks.

Speaker 2

The reliability and uptime of our core trading platform remains a top priority. We take our regulatory obligations seriously, including those under SEC Regulation SCI and we value the trust our subscribers place in us to operate our mission critical systems efficiently and effectively. Based on the shifting trends across our business lines, for the Q3, Corporate services represented approximately 42% of our overall revenue. Market data licensing accounted for 41% and OTC Link accounted for 17%. Throughout the year, I have discussed our 5 strategic initiatives for 2023.

Speaker 2

1st, coming together as one team on one platform to build the value of 1 share. During the Q3, we worked to retain enterprise clients and optimize the EDGAR online technology in a robust cloud environment. We have made progress in reducing the number of outside consultants we originally hired to facilitate the technology transition. As we finish this stage of technology work, we will shift our attention to optimizing operations and unlocking the value of these robust datasets. 2nd, commercializing our role as a regulated market operator and delivering visible client value.

Speaker 2

We regained momentum in our Blue Sky initiative this year with 40 U. S. Jurisdictions now recognizing our markets under the Blue Sky manual exemptions. We must continue to engage with the 14 remaining jurisdictions and ensure that Blue Sky coverage for companies and investors in those states that can meet those high standards. We also have significant work to do in commercializing our role as a qualified interdealer quotation system under SEC Rule 15c211.

Speaker 2

3rd, prioritizing client facing application development and improving our data. As our business and our company have grown over time, There can be a temptation to focus all of our energy on protecting the house and maintaining existing systems. It is management's job to ensure that we have Capacity to develop new features and useful functions for our clients, specifically leveraging the troves of data we have at our disposal. It is well within our reach to expand the depth of services we offer, digitalize disclosure and further distribute useful financial information to our 4th, improving OTC Link functionality and reducing operational risk and operational Exposure and Business Risk. In early May, we received FINRA approval to permit digital asset securities to be traded by broker dealers on OTC Lake ATS.

Speaker 2

While there remains intense debate about what may qualify as a digital asset security, We see a long term opportunity as more digital assets move into entities regulated by the SEC and FINRA. Our FINRA approval has allowed us to start developing plans to help facilitate regulated Broker dealer trading in these assets in a lawful and compliant manner. A fully integrated solution requires connections between broker dealers, custodians and trading platforms. More regulatory and industry wide work remains to be done and we will continue to provide updates on our progress. Finally, because we operate as owners and capitalists, Our final strategic initiative is creating strong net revenue growth and delivering sustainable profitability that increases long term per share earnings.

Speaker 2

Our results thus far this year show top line increases. However, the corresponding rise in expenses has kept us from reaching our goals in the short term. As managers of a public company, we have 3 important roles to play. 1st, We must be good stewards of the business to serve clients and help our colleagues succeed. 2nd, We must act as sharp commercial operators in managing our resources carefully.

Speaker 2

And third, be fiduciaries for the shareholders to deliver Sustainable financial results that will increase the underlying value of each individual share. We have invested in acquiring and developing a deep pool of data across the OTC enlisted markets. We must engage with our clients and thoughtfully commercialize that data. By adding new capabilities that drive sustainable revenue growth, we will generate greater operating profits and drive long term earnings per share. In closing, I am pleased to announce that on November 6, our Board of Directors declared a special dividend of $1.50 per share and a quarterly dividend of $0.18 per share payable in December.

Speaker 2

These dividends reflect our ongoing With that, I will turn the call over to Antonia.

Speaker 3

Thank you, Karamo, and thank you, everyone, for joining us today. I would like to start by thanking our entire OTC Markets team for their continued commitment to supporting and servicing our subscribers, integrating our acquisitions and driving our business forward. As I discuss our results for the quarter ended September 30, 2023, any reference made to prior period comparatives will refer to the Q3 of 2022. As a reminder, our results reflect a full quarter impact of the EDGAR Online acquisition, which closed in November of 2022. Turning to Page 7 for review of our 3rd quarter revenues.

Speaker 3

We generated $27,000,000 in gross revenues, up 4% compared to the prior year period. Revenues less transaction based expenses were up 5%. OTC Link's gross revenues were down 10% compared to the prior year period. OtisLink ECN and OtisLink NQB So a 12% decline in transaction based revenues and a commensurate 12% reduction in transaction based expenses, primarily due to lower trading volumes. Our OTC Link ATS on our OTC Link ATS revenues From messages declined 19% and coupon statement fees decreased 30%, respectively, also due to reduced trading activity.

Speaker 3

Against this backdrop of declining volumes, our team continued to grow the number of subscribers to Otisilent KCN with 108 subscribers at the end of the quarter, up from 105 at the end of the prior year period. OTC Link AGS has 87 subscribers compared to 88 on September 30, 2022. Trading volumes are highly unpredictable and could vary significantly period to period. Revenues from our market data licensing business were up 22% quarter over quarter due to the contribution of the November 22 Acquisition of EDGAR online as well as subscriber growth and price increases for certain licenses. Pro user accounts were up 11% With the corresponding revenues up 9%.

Speaker 3

Revenues from internal system licenses, delayed data licenses and other data services increased 9% And revenues from market data connectivity fees increased 85% in both instances due to subscriber growth and price increases for certain licenses. Partially offsetting these increases was a 24% decline in revenues from non pro users, driven by a 22% reduction Historically and in the normal course of business, we have seen significant changes in the number of non professional users As market volumes and retail participation on our markets fluctuate and we may experience a further decline in the future. Corporate services revenues decreased 3% in the 3rd quarter. OTCQX revenues were up 1% with incremental price increases effective for 2023, offsetting a reduced number of companies on the OTCQX market. OTCQB revenues declined 6% and D and S revenues decreased 5%, respectively, due to a lower number of subscribers offsetting the impact of pricing adjustments.

Speaker 3

In the Q3, we added 28 OTCQX Companies compared to 36 new sales in the prior year quarter. We had 595 OTCQX companies as of September 30, 2023 compared to 609 as of September 30, 2022. For the annual OTCQX subscription period beginning January 1, 2023, we achieved a 95% retention rate, relatively unchanged from 96% in the prior year. On OptiC QB, we added 46 new companies in the 3rd quarter, compared to 93 in the prior year period and had 1166 OPCQB companies at the end of the quarter, down from 12.45 at the end of September 2022. We had 1496 Driving to D and S and other products at the end of the 3rd quarter, down 5% from 1567 at the end of the prior year period.

Speaker 3

During the prior year quarter, we saw a significantly higher number of D and S subscribers in connection with the amendments to Rule 15c211 becoming effective in September of 2021. This elevated number of DNS subscribers during the 1st 6 months of 2022 began to reverse in the Q3 of 2022 and has remained at lower levels through the 1st 9 months of 2023. The month to month variability in subscriber numbers is driven by new sales offset by the impact of compliance downgrades and corporate events as well as voluntary non renewals in the case of OTT QB and D and S. Turning now to expenses on Page 11. On a quarter over quarter basis, operating expenses increased 12%.

Speaker 3

The primary drivers of expense growth were an 11% increase in compensation and benefits and a 35% increase in IT infrastructure and information services costs. The increase in compensation and benefits reflects higher headcount, including employees from EDGAR Online, Annual base salary increases and an increase in stock based incentive compensation, partially offset by lower commissions. Compensation and benefits comprised 63% of our total operating expenses during the 3rd quarter compared to 64% in the prior year period. IT Infrastructure Information Services costs increased primarily as a result of the acquisition Now EDGAR Online as we added the technology, data services and data center calls supporting the EDGAR Online platform. Turning to Page 12.

Speaker 3

In the Q3, income from operations declined 5%, while net income increased 3% with a lower effective tax rate and interest income earned offsetting the decline in operating income. Operating profit margin was 32.7 percent compared to 35.9% in the prior year quarter. In addition to certain GAAP and other measures, management utilizes adjusted EBITDA, a non GAAP measure, which Our adjusted EBITDA was $10,500,000 in the 3rd quarter and our adjusted diluted Earnings per share were $0.87 each down 1% compared to the prior year period. Cash flow from operating activities and free cash flows for the quarter each amounted to $7,900,000 compared to $9,200,000 in the prior year quarter. Turning to Page 13.

Speaker 3

During the Q3, we returned a total of $2,100,000 to investors in the form of dividends, unchanged from the prior year period. We remain focused on growing our business, operating as prudent stewards of shareholder capital and delivering long term value to our stockholders. With that, I would like to thank everyone for your time and pass it back to the operator to open the line for questions. Thank

Operator

And our first question is going to come from the line of Steve Silver with Argus Research Corporation, your line is open. Please go ahead.

Speaker 4

Thank you, operator, and congratulations on being able to continue returning capital Shareholders through the special dividends, even during these uneven markets. It's really a testament to the performance of the team. I guess my first question, in the disclosure on a quarterly basis, there's been discussion about how the OTC Link subscriber base The addressable market is a little bit more limited at this time in terms of future growth. I'm curious as to whether you could put any parameters around The continued growth opportunity in the subscribers for the market data licensing among professional users, that seems to be the largest Source of growth right now. Just curious to see what how you see that pipeline moving forward?

Speaker 2

Thank you for the question. We, as you know, don't make forward predictions. Our view is the more content we put on our network of securities trading, the more connections we make out, the more we're going to sell data. And I don't we've been making connecting to More international broker dealers, more international market data systems and improving the quality of securities Traded on our markets. And so those are the levers that we look to do.

Speaker 3

And Steve, as a reminder, the members of OTC Link's platforms could only be U. S. And registered broker dealers, while our market data could be consumed by Those subscribers as well as foreign broker dealers. So the opportunity for the market data sets is broader than the subscriber base to RPC Link, even though of course there is a connection between the 2.

Speaker 4

That's helpful. Great. And then one quick question just about the OTCQB and QX Member base, it's been very resilient given all the unevenness around the markets. Can you put any color around In terms of the reduction of the number of companies on the 2 platforms, Whether most of them are just in terms of compliance or whether you've seen maybe a higher proportion of companies

Speaker 2

So there's compliance And there's financial distress, which is really a compliance issue too, Because of a company's financially distressed, it really shouldn't be on our OTCQX market. And I think the interesting dynamic is we're doing a very good job internationally. And taking our message Of the things we do for international companies, which is digitalize and distribute and normalize And make it so there's no blank screens or empty machines under their U. S. Symbol.

Speaker 2

And then there's the other side is share their compliance governance and being lawful Securities under U. S. Securities law, rather federal or state, for brokers to trade, for broker preferred investment advisers to advise on To go into the solicited investable market. And so that's where we've done really well. I mean, I think If you've read some of our recent blog posts, you've seen that a lot of the very speculative domestic issues are on the exchanges today.

Speaker 2

There's lots of penny stocks that keep doing reverse splits listed on the exchanges. And that takes away from we used to see companies that would get delisted From the exchanges much earlier in their cycle, but by the time smaller U. S. Companies That may need to focus on their operations and struggle, they just keep doing reverse splits, which and effectively issue more shares to debtors, Which is effectively going through bankruptcy. And that has kind of changed the dynamic of things sliding down on the domestic side.

Speaker 4

Okay. That's fantastic. Thanks so much and congratulations on the quarter.

Speaker 2

Thank you.

Operator

Thank you. And one moment as we move on to our next question. And our next question is going to come from the line of Brennan McCarthy with Sidoti. Your line is open. Please go ahead.

Speaker 5

Great. Good morning, everybody, and thank you for taking my question today. Just to start off, I noticed Interest income becoming a bigger part of the picture this quarter compared to the same quarter last year. I guess, can you just talk about your strategy as far as Capital allocation and cash on the balance sheet, I noticed short term investments as a new line item on the balance sheet. Yes.

Speaker 5

How can investors think about just this interest income going forward?

Speaker 3

Thanks for the question, Brendan. Obviously, as the economic environment has changed And interest rates have increased. We have reacted appropriately to take advantage Of the opportunities to earn additional income on the corporate cash. In terms of our capital allocation strategy, it has remained quite consistent over the past of the company. And as you know, it is mostly focused on bank or dividend and again a special dividend this quarter as well.

Speaker 3

In terms of interest income, we remain how investors should think of it. We Certainly remain very focused on driving our operating income, 1st and foremost, our sales and keeping Our cost under control, but given the opportunities, we will continue to take advantage Of the ability to earn financial income on our cash.

Speaker 2

I think at a high level, one of my favorite books that I think every public company CEO should read is And it's a good coverage of some successful outperforming companies that were thoughtful about investors capital. And there are some parts that I disagree with. They make a hero of the CEO When these organizations, it's everyone in the organization being aligned within the culture Of being Steward's commercial and fiduciaries is and I also They put too much into what shows up in the financial reports as capital allocation And you can break not many public companies Are great at providing capital returns over the long term. And that's something we aspire to is and you can look at it 2 different ways. There's one way is build the businesses from organic growth that Create capital over the long term and grow in a positive profitable manner is and I think we've done that pretty well.

Speaker 2

And when we've been focused on that organic growth side, we have thought of ourselves in many ways the way Buffett We'll buy very good companies that serve their clients well and he sucks all the capital out. So he takes away capital allocation from the management and pulls it up to where he's got a superior skill and he allocates out there. We luckily have some great shareholders. So we push out on dividends. The second part is, can we Get to the 2nd stage now that we have some scale to be able to deploy capital efficiently in acquisitions.

Speaker 2

That's a very hard game. We have started small, places where if we make a mistake And we will make mistakes as we learn how to do this is we won't blow up And so that's the part where I would like to over time Be a good organization of adding in profitable opportunities. But if you look at the news side is The old bulls on the hill of Buffet is building up all his cash. He's not out there buying things. And it's good for us to use this Time to focus on our operations, focus on shifting, making our business more competitive And especially if the dynamic change from with the 15c2-eleven rule changes and with market volumes going just The wind at our backs and the waves at our backs and the tide with us is to going to learn how You'll actively swim upstream.

Speaker 2

And that part will be good for our organization. And meshing, merging, mashing together the Technologies, the people, the processes and not being happy with the status quo is important for us building

Speaker 5

Great. That's helpful. Thanks for the insight. And then looking at the quarterly expenses, It looks like from my perspective, total operating costs have actually trended downward both from a year over year growth perspective as well as a percent of revenue since the Q1 of this year. Just curious, do you think it's reasonable to say maybe the worst of The integration costs are behind the company.

Speaker 3

As to what Cromwell said earlier, we do not give forward guidance on either revenue or expenses, but I would remind you that We did, identify certain non recurring expenses that we incurred earlier in the year related To the integration, we had a transition services agreement. We incurred additional data center costs, for a period of time while we were transitioning the technology to our cloud environment. And, of course, we did expect those to phase out as we continue with to progress. In terms of future expectations, again, we do not provide forward guidance.

Speaker 2

Yes. I mean, We had to hire consultants for the lift and shift. They stayed around too long. I think originally we had something like 7 or 8 and we're now down to 1. And hopefully the team will be able to onboard all those skills.

Speaker 2

So where we I took on an EOL technology team who is smart engineers with good business ownership. They were complete novices Outside the data center type environment and they have been learning by doing. And it's hopefully been an incredible opportunity for them to learn a bunch of interesting things. They worked incredibly hard To do a bunch of work that is you don't see from the outside world and really isn't Diving into the cool new stuff in the future yet, but they've learned how to operate this. And when I talk about stewardship of the EOL business is we've kept the data quality, So we can keep the clients and so it can be relied upon.

Speaker 2

We knew EOL as a vendor because The data quality was so important for our data driven compliance processes. And that has been a real important threshold. Now what we do and use interesting ways to expand the opportunities with that, I cannot tell you Like how exactly that will move forward because there are variables and there are Competitive opportunities, but there's also competitive threats is but we will hopefully by the end of the year be able to start thinking about Those ideas and but that's with using our internal resources.

Speaker 5

Understood. That's helpful. And then looking at the Market Data Licensing segment, I know you mentioned the bulk of growth there From a year over year perspective driven by the past acquisitions, just wondering if you can disclose the inorganic growth Metric from quarter to

Speaker 3

quarter. In prior quarters, you will find You will find disclosure in our quarterly earnings calls Identifying the percentage of growth that was attributable to the 2 acquisitions versus organic growth, I would say approximately half of the growth was inorganic Versus organic this quarter.

Speaker 5

Okay. Okay. And then last question from me. I'm just Curious about the compliance downgrade process. What would you say is the primary factor driving the compliance downgrades?

Speaker 5

I'm sure it's inflationary pressure and the higher interest rates playing a big role, but just kind of curious as to your thoughts on what are the primary drivers there?

Speaker 2

I mean, it's part of the business cycle where when capital becomes tighter, The risk off environment changes. And That said, there's opportunities in the data world because For us being able to sell into the brokerage industry, a lot of the data points that we look at around companies that aren't on our markets, Because we track promotion and we track promotion out to the broker dealers and clearing firms not only for OTC And I can tell you when you look at promoted securities versus dollar volume, Our team has done a really great job improving market integrity. And There's a lot of stuff going on in exchanges, which nobody's looking at. And it puts our model against theirs. We believe that our role as a market operator With a lot of different types of securities and disclosure standards is to put the data out there so investors can make their own decision.

Speaker 2

Exchanges like to blind by the brand and It's hard for them to talk about various risks of individual securities. And I believe our model is better for small capital formation in creating efficient pricing.

Speaker 5

Got it. Thank you, Cromwell. Thank you, Antonio. Appreciate your time.

Speaker 2

Welcome. Thank you.

Operator

Thank you. And I would like to turn the conference back over to Cromwell Coulson for any further remarks.

Speaker 2

Thank you, operator. I want to thank each of you for joining us today. I would encourage you to read our full Q3 report and the earnings press release. Links to both are available on the Investor Relations page of our website. On behalf of the entire team, we look forward to updating you on key initiatives that continue to shape the integrity And competitiveness of the public markets.

Operator

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

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