OTC Markets Group Inc.

Good day, and thank you for standing by. Welcome to the OTC Markets Group first quarter 2021 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. To ask a question during the session, you will need to press star 1 on your telephone. If you require any further assistance, please press star and zero. I would now like to hand the conference over to your speaker today, Dan Zinn, General Counsel, and please go ahead.

Thank you, Operator. Good morning, and welcome to the OTC Markets Group First Quarter 2021 Earnings Conference Call. With me today are Cromwell Coulson, our President and Chief Executive Officer, and Antonia 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 website. 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 2020 annual report which is also available on our website. For more information, please refer to the safe harbor statement on slide three of the earnings presentation. With that, I'd like to turn the call over to Cromwell Coulson.

Cromwell Coulson Thank you, Dan. Good morning, everyone. Thank you for joining us today. As we look back on more than a year of living with the global pandemic, I remain impressed by our incredible team's hard work and achievements at OTC Markets Group. I am proud of our colleagues' continued ability to serve our clients, stay connected, and deliver excellent results. Everyone in our organization has been impacted differently. They each have risen to the challenges presented and demonstrated the best of our company values. Thank you. We continue to support our colleagues' safe return to work. As New York and Washington reopen this summer, we are focused on bringing our teams together in a thoughtful manner so each person can best perform their role. Our goal is to inspire individual contributions, foster productive collaboration, and Most importantly, maximize our collective success. We saw a surge in trading volumes that stressed systems across the industry during the first quarter and increased transaction counts on OTC Link ATS and OTC Link ECN. With those substantial trading volumes, capital markets activity, and continued client engagement, we delivered record results during the first quarter. with gross revenues growing 57% and net income growing 77% compared to the first quarter last year. As a result, our earnings per share grew and our operating profit margin experienced significant expansion. Antonio will cover our financial results in more detail in a few moments. We are also pleased to report another quarter of providing reliable, consistent service to our subscribers. The secure, compliant, and effective operation of our regulated ATS trading systems is a collaborative team effort every trading day. Activity on our markets is moderated since the peak days earlier in the year. However, our trading volumes remain robust. Keeping stock markets running and serving our broker-dealer subscribers during volatile times is core to our mission of creating better informed and more efficient financial markets. We deliver mission-critical infrastructure for broker-dealers. We bring the benefits of public trading to a wide spectrum of securities. We efficiently fulfill the capital formation needs of a broad range of U.S. and global companies. The more useful we make our technology platform and data, the greater value we will offer clients. We will continue to invest in our people and platform to increase earnings power for shareholders in the years to come. We spoke last quarter about our ability to focus on longer-term goals while adjusting to the unique conditions of 2020. One of those goals was the creation of a third ATS named OTC Link NQB. This new ATS will be a fully attributable inter-dealer quotation system with matching engine functionality. The addition of OTC Link NQB to complement our existing regulated ATS will provide our subscribers with a choice of market structures to best serve their clients and their best execution needs. We expect OTC Link NQB to be operational before our next earnings call, and we look forward to discussing that along with other market enhancements in the future. Our corporate services business has continued to build off of the momentum from the end of 2020, and our OTCQX market is at its highest number of companies. Our OTCQX and OTCQB markets offer an alternative path for companies to be public. Using our data-driven market standards and technology platform, companies can ensure their investors have access to high-quality disclosure materials. Increased interest in these markets reinforces the vital role we play as a global gateway for companies to access the U.S. market in an efficient and cost-effective manner. Our market data licensing business also experienced strong results during the first quarter, driven largely by broader interest and participation in our markets. Our enhanced compliance data has tracked increased interest, and we continue to expand our reach by adding distributors internationally. it is exciting to watch our business lines come together to strengthen our overall platform to be public and better inform investors. Our data-driven, open, transparent and connected approach makes trading more efficient, allows public companies to demonstrate compliance with securities laws and improves compliance processes for broker-dealers and execution quality for investors. On the regulatory front, we remain focused on implementing changes related to the SEC's amended rule 15C2-11. With a compliance date upcoming in September 2021, we have been hard at work with the Commission and SEC staff to ensure an efficient industry-wide rollout of the new standards this September. We continue discussions with the SEC regarding creating an expert market, a regulated electronic market for brokers and other sophisticated investors to continue interacting in securities that are no longer eligible for public broker-dealer quotations under the rule. With the recent confirmation of Gary Gensler as chair of the SEC, we look forward to working with the Commission on the expert market and other regulatory priorities in the coming months. Building on a strong first quarter momentum, we are well positioned to execute in the three primary strategic initiatives that will guide us throughout 2021. First, we must successfully implement changes related to amended Rule 15C211. The rule offers us an exciting opportunity to enhance the level of disclosure available for investors, create efficiencies for broker-dealers, and bring more companies public onto our markets. Secondly, we will remain laser-focused on improving the functionality and ensuring the reliability of our trading systems. The increased trading volumes and innovation in our markets provide opportunities for continued growth, and we must continue to deliver reliable, compliant, and efficient trading systems to earn our broker-dealer-subscriber's business every day. Finally, we must support the issuers that rely on our OTCQX and OTCQB markets to inform their investors, be efficiently traded by broker-dealers, and demonstrate compliance with securities regulations and good corporate governance. In closing, we are pleased to announce that on May 3rd, our Board of Directors declared a quarterly dividend of $0.15 per share payable in June. This dividend reflects our ongoing commitment to providing superior shareholder returns. With that, I will turn the call over to Antonia.

Thank you, Cromwell. Thank you, everyone, on the call today for joining us for the review of our first quarter results. Our team at OTC Markets once again demonstrated continued commitment to our clients and subscribers and delivered strong results across our businesses. As I review the results for the quarter ended March 31st, 2021, please do keep in mind that any reference made to prior period comparatives will refer to the first quarter of 2020. We continue to experience record volumes of trading activity on our markets and a robust pace of new sales. As a result, we concluded the first quarter of 2021 with $26.1 million in gross revenues up 57%, and all three of our business lines delivered strong quarter-over-quarter growth. In our OTC Link business, revenues were up 210%. OTC Link experienced unprecedented volumes on OTC Link ATS and OTC Link ECN, in line with the overall volume of U.S. equity market activity during the quarter. As a result, OTC Link's transaction-based revenue increased substantially. OTC Link ECN saw an 822% increase in gross revenues for the quarter. The average daily transactions executed on OTC Link ECN increased over 10 times from the prior quarter to reach over 70,000. Additionally, we added nine new subscribers to OTC Link ECN, to end the current quarter with 82 subscribers, which is a net increase of 21 compared to the prior quarter. Transaction-based expenses comprised of rebates that we pay to subscribers providing liquidity on our OTC Link ECN increased by 3.1 million, or 708%, which is reflective of the robust trading activity. Revenues from our market data licensing business were up 17%, driven by significant growth in users and certain price increases. Revenues from professional users were up 6%, while revenues from non-professional users increased 138%, reflecting a likewise quarter-over-quarter increase in the ending number of non-professional users. We also saw an increase in revenue from internal, derived, and other data services of 30%, primarily due to user growth and price increases. The elevated trading volumes we experienced in the first quarter have begun to moderate and could decline further, potentially affecting both our trading revenues as well as the number of professional and non-professional users of our data. The transaction-based revenue that OTC Link generates is strongly correlated with the volume of activity on our markets. However, future trading volumes are highly uncertain and cannot be predicted. Furthermore, while we have experienced substantial increase in non-professional users since March of last year, that number tends to fluctuate significantly in response to volatility in the markets and changes in retail trading interests, and we may experience a decline in the number of users as trading volumes continue to normalize. Turning now to our corporate services business. Revenues in the quarter grew by 21%, driven by continuing strong growth in companies joining our premier markets, OTCQX and OTCQB, and price increases that became effective January 1st, 2021. Additionally, we also saw continued growth in our virtual investor conferences and disclosure and news services products. OTC QX revenues increased 26%. We saw 52 new QX additions in the first quarter, up from 9 sales in the prior quarter. We ended the current quarter with 482 companies on the QX market. up by 68 companies compared to the 414 companies as of the prior quarter. OTCQB revenues increased by 13%. The strong QB sales of 83 new subscriptions in the first quarter continued the trend that we saw at the end of 2020. The number of QB companies reached 962, up from 893 companies as of the prior quarter. we have continued to see similar encouraging trends in terms of new sales and insurance engagement continuing in the second quarter of 2021. Turning now to expenses. On a quarter-over-quarter basis, operating expenses increased by 22%. The primary drivers were a 19% increase in compensation expense and a 153% increase in professional and consulting fees, which was largely due to an increase in clearing and regulatory compliance fees related to the elevated volume of trading on OTC Link ECN. IT infrastructure costs also contributed to the increase, partially offset by a decline in marketing. The increase in compensation primarily reflects the impact of annual salary increases and an increase in incentive compensation, as well as an increase in commissions, which was related to the higher sales we experienced. In summary, the first quarter of 2021 marked our 17th consecutive quarter of revenue growth. We delivered 88% quarter over quarter growth in income from operations and 77% growth in net income. our operating profit margin expanded to 33.2% compared to 28.2% in the prior quarter. In addition to certain gap and other measures, management utilizes a non-gap measure, adjusted EBITDA, which excludes non-cash stock-based compensation expense. For the first quarter of 2021, our adjusted EBITDA was up 70%, to $9.9 million. Cash flows from operating activities amounted to $3.6 million, up from $200,000 in the prior quarter, reflective of the significant growth in net income. Free cash flows for the quarter were $3.4 million, compared to a small free cash outflow in the prior quarter. In our capital allocation policy, we remain focused on returning cash to investors in the form of dividends and through our stock repurchase program. During the first quarter of 2021, we returned a total of $3.3 million compared to $5.3 million in the prior quarter. The decline in the amount of cash returned to stockholders was primarily related to a decrease in share repurchases. from 3.5 million in the first quarter of 2020 to 1.5 million in the first quarter of 2021. During the remainder of the year, we will continue to focus on generating profitable top-line growth and delivering long-term value for our stockholders. With that, I would like to thank everyone for your time and open up the discussion for questions. Operator? Please open the line.

Thank you. Thank you. As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key.

Please stand by while we compile the Q&A roster. Our first question comes from Chris McGinnis of Sidoti and Company.

Morning. It's Nick Bigelow on for Chris McGinnis. Thank you for taking my questions, and congratulations on the strong results. In looking at the strength of the first quarter 21 revenue, could you talk about the trends since the end of the quarter in market data and corporate services segment? Are you seeing an acceleration or deceleration in the strength from the 1 to 21 period, and if you could talk about the major drivers of the improvement as well. Thank you.

Certainly, I will take this. This is Antonia. As you saw in the first quarter, the largest change or outperformance we experienced was due to our transaction-based revenue, which increased substantially, as we discussed. But our business remains largely subscription-based with still majority of our revenue attributable to long-term subscription-based contracts, which is the predominant type of revenue we generate in market data licensing and corporate services. So we do continue to see consistent and robust results in those two business lines. Continuation of the trends, of course, as you would expect, we're not providing forward guidance on our numbers for second quarter, but as we indicated, we continue to see very strong pipeline in our corporate services business, and our market data licensing continues to benefit from the larger number of users we have today, though as we warned that could change. especially on the non-professional user side. And we have also benefited from certain price increases that will continue for the rest of the year since they became effective earlier. Hope that addresses your question.

Yes, thank you. And then also impressive was the operating leverage on the sales growth in the quarter. Given the rates of revenue growth you're seeing, is the current cost structure sustainable or do you need to invest in better support that growth. Thank you.

This is Cromwell. Thank you for that question. I think we look at it as an opportunity to invest in our growth. We believe that we have a platform which in places like serving broker-dealers or allowing companies to be public or enhancing the usefulness of our data, all of those areas we have long lists of things we'd like to do to make it better. And we also believe that because where we came from in serving the broker-dealer community as a vendor and we look to deliver value to the broker-dealer community rather than as some of our larger multinational exchange competitors look to extract value. So, you know, there's opportunities to do things. And, you know, we have, I think we have very nice margins, but, you know, we're not looking to hockey stick our margins. And instead, we're looking to expand the utility of our platform for broker-dealer subscribers because we have a very cost-competitive platform. I mean, if you look at, I mean, one of the numbers I think is pretty interesting is about the amount of transactions, dollar volume of transactions that went across our ATSs in 2020 versus the amount of transactions that went across a large public crypto exchange. ATS provider and, you know, their fees versus nominal volume is over 50 times what our trading services fees are. So you think about that is and, you know, I think and, you know, we have a very cost effective platform and we think that we can continue to deliver that and help broker dealers, you know, be efficient and informed in trading securities.

Sounds great. Thanks for taking my questions, and good luck in 2Q. Great.

Thank you.

As a reminder, to ask a question, you will need to press star 1 on your telephone. I'm showing no further questions at this time. I would now like to turn it back to Cromwell Coulson for closing remarks.

Thank you, Operator. We want to thank all of you for joining us today. I encourage each of you to read our full earnings report and view our inaugural OTC Markets Virtual Investor Day. Links to both are available on the investor relations page of our website. On behalf of the entire team at OTC Markets Group, we wish you and your families continued health and safety, and we look forward to connecting with you again soon. Thank you.

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