OTC Markets Group Inc.

ladies and gentlemen today's conference is scheduled to begin shortly please continue to stand by thank you for your patience Thank you. Thank you. Thank you. Ladies and gentlemen, thank you for standing by and welcome to the OTC Markets Group first quarter 2022 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. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star then zero. I would now like to hand the conference over to your speaker, Mr. Dan Zinn, General Counsel. Please go ahead.

Thank you, Operator. Good morning, and welcome to the OTC Markets Group First Quarter 2022 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 2021 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.

Thank you, Dan. Good morning, everyone. Thank you for joining us today. The tragic war in Ukraine and the ongoing effects of the COVID pandemic continue to influence communities and economies across the globe. The resulting volatility impacts the broker dealers, companies, and investors that rely on our markets and our data. One point remains clear. We must continue to adapt in a changing business environment. It is crucial that especially in uncertain times, that we focus on areas where we have control of the inputs. To be agents of positive change and deliver consistent improvement that creates ongoing value for our clients. Our team's dedication, collaboration, and execution across all levels remains extraordinary. I am honored to work with this talented group. We all share a commitment, to serving our clients, ensuring that our mission-critical markets operate smoothly today, and building our services for a better tomorrow. Against this backdrop, our business delivered solid results during the first quarter. Our year-over-year growth slowed following record results in unprecedented trading volumes during the first quarter of 2021. We saw lower transaction-based revenues consistent with industry-wide trends. while user demand for our corporate services and market data business lines continued their upward trajectory. This shifted the overall balance of our business lines, with corporate services growth and market data subscription revenues taking up the slack for lower transaction fees. Gross revenues remained roughly flat year over year, while revenues less transaction-based expenses, net income, operating profit margin, and earnings per share all experience growth. Antonia will cover our financial results in more detail in a few moments. We remain big believers in including transaction-based fees in our revenue mix. Clients benefit from the variability of costs tracking their trading volumes, and we share upside opportunities in strong trading environments. With last quarter's normalized volumes, our OTC Link team has continued to grind away, growing subscribers across ATSs and gaining market share on our ECNs. Our broker-dealer subscribers can choose from the tailored trading models we offer through OTC Link ATS, OTC Link ECN, and OTC Link NQB to best suit their needs. Subscriber growth is also a testament to the value of our network, as broker-dealers use our regulated trading systems to serve investors and find better trade executions. Following the SEC's amendments to Rule 15C2-11 last year, OTC Link ATS's role as a qualified IDQS has allowed our subscribers to rely on our publicly available determinations regarding Rule 211 compliance. Our work eases broker-dealer regulatory burdens, increases the number of securities available to trade, and supports a more transparent public market. Our critical regulatory role is now an integral role and part of the fabric of our nation's markets, a responsibility we take with the utmost dedication to serving our subscribers. Data-driven markets improve information for investors while supporting industry-wide compliance initiatives. We intend to build our enhanced regulatory role to create new opportunities for our clients to be more successful. Security and uptime of our core SCI regulated trading systems are always a top priority. and throughout the first quarter of 2022, we delivered consistent, reliable service to our broker-dealer community. It is a testament to our engineering and operations team's focus on quality of service and system security. Demand for our corporate services products and services remained strong in the first quarter, drawing on the momentum generated last year. The Rule 211 changes led to significant growth in demand for our disclosure and news services, and our OTCQX and OTCQB markets continued to expand. The nearly 1,800 companies on these markets, as of the end of the first quarter, exemplify the value of our data-driven premium market standards and technology platform for digitalizing disclosure, demonstrating compliance, and distributing governance credentials. Our market data licensing business also continued to grow during the first quarter. While the number of non-professional users declined, reflecting lower retail participation in the U.S. equity markets as well as changes in broker-dealers moving to enterprise licenses, the broader Global and domestic interest in our markets and the data we provide led to strong increases in professional users and enterprise subscribers. We are thrilled to have recently closed our acquisition of substantially all of the assets of Blue Sky Data Corp. We have long felt this acquisition was the right fit for our company and our subscribers. We now offer comprehensive data regarding state Blue Sky law compliance for over 100,000 equity and debt securities, in addition to the federal compliance data we already provide. Our Blue Sky data offering will help broker-dealers, financial advisors, public companies, investors, and other interested market participants improve their understanding of and compliance with state securities laws. It is a multi-sided platform business where increased compliance by issuers and improved automation by broker-dealers will benefit both sides. Our market data and technology teams are working hard to quickly integrate the Blue Sky Data Corp business and onboard Blue Sky subscribers that are new clients. We are also excited to welcome several new employees as part of the transition to the OTC Markets team. With the addition of Blue Sky data, we remain focused on growing our global subscriber base and providing enhanced compliance data to a wider group of industry participants. Throughout the first months of 2022, we have continued to pursue our four strategic initiatives structured around continuing to serve our clients and shareholders. One, drive sustainable revenue growth across each of our business lines that increases the long-term per share earnings power. Two, commercialize our enhanced regulatory status under Rule 211 to create new opportunities for public companies and broker-dealers. Three, advocate for additional regulatory recognition of our markets to increase the value of being public. Four, pursue corporate development efforts to grow and diversify our product suite and client base. In closing, I'm pleased to announce that on May 10th, our Board of Directors declared a quarterly dividend of 18 cents per share, payable later this month. 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. As I discuss our results for the quarter ended March 31, 2022, any reference made to prior period comparatives will refer to the first quarter of 2021. I would like to start by recognizing the continuous commitment of our entire OTC Markets team to supporting our subscribers and delivering on our strategic priorities. Turning to page 12 for an overview of our first quarter 2022 revenues. Coming off of a remarkable year of growth in 2021, OTC Markets Group continued to benefit from the strong customer demand for our corporate services products and market data licensing offerings while experiencing a significant moderation of trading activity and reduced retail participation in the U.S. equity market. We generated $25.9 million in gross revenues, flat as compared to the same prior year period, while revenues less transaction-based expenses increased 8%. In our OTC-linked business, gross revenues declined 47%, primarily as a result of lower trading volumes and consequently lower transaction-based revenues generated by OTC Link ECN. The surge in trading activity that we experienced in early 2021 to over 70,000 transactions per day moderated over the course of the year and remained at more normalized levels in the first quarter of 2022 at approximately 39,000 transactions per day. As a result, in the first quarter, OTC Link ECN saw a 64% decline in gross revenues with an offsetting decline in transaction-based expenses of 57%. The overall decline in OTC Link revenues was partially offset by growth in revenue from our consolidated audit trail reporting service and our fixed connectivity services. LTC Link ETN continued to attract new subscribers and ended the first quarter with 98 subscribers, up from 82 as of March 31st, 2021. On LTC Link ATS, we saw a reversal of a long-term trend of broker-dealer consolidation and an increase in our subscribers to 90, up from 82 at the end of the prior year period. Trading volumes are highly unpredictable and could decline further. Furthermore, changes in our broker-dealer subscribers' trading behavior could also impact the transaction-based revenues and transaction-based expenses that OTC Link generates. Revenues from our market data licensing business increased 9%, with revenues from professional users up 12%, driven by a 10% increase in pro-user counts. With respect to nonprofessional users, we saw a reduced level of retail participation in the U.S. equity market, which drove a 31% decline in our nonpro user count and a corresponding 26% decrease in revenues from nonpro users. Historically and in the normal course of business, we have seen significant fluctuations in the number of nonprofessional users, and we may experience a further decline in the coming months. Offsetting that was a strong 19% growth in revenues from internal system licenses, delayed data licenses, and other data services, and a 20% increase in broker-dealer enterprise license revenues. Turning to our corporate services business. Corporate services revenues grew by 51% in the first quarter, with strong growth in revenues from our premium OTCQX and OTCQB offerings, as well as our DNS product, which increased 26%, 52%, and 120%, respectively. As a result of the enhanced current information requirements under Rule 211, during 2021, A significant number of companies sought to join our OTCQX and OTCQB markets or to subscribe to our DNS product. The higher number of corporate services subscribers in turn drove the growth in revenues quarter over quarter. Contributing to the growth were also incremental price increases for our OTCQX and OTCQB market tiers that became effective January 1st, 2022. In the first quarter, we added 33 OTCQX companies compared to 52 new sales in the prior quarter. We ended the current quarter with 571 companies on the OTCQX market, up from 482 at the end of the prior period. On OTCQB, we added 113 new companies in the first quarter compared to 108 added in the prior quarter. and finished with 1,224 OTCQB companies, up from 962 at the end of the prior year period. We also saw a significant increase in pink companies subscribing to DNS and other products to 1,584 at the end of the quarter, double the number at the end of the prior year period. Turning to page 13 for review of our expenses. On a quarter-over-quarter basis, operating expenses increased by 12%. The primary driver was a 14% increase in compensation and benefits, reflecting higher headcount, annual salary increases, an increase in incentive compensation, and higher commissions. ID infrastructure costs increased 20%, also contributing to the overall increase in operating expenses. Compensation and benefits comprise 68% of our total operating expenses during the first quarter compared to 67% in the prior year period. In summary, on page 14, we delivered solid results during the first quarter of 2022 with income from operations increasing 3% and operating margin expanding to 34.4% up from 33.2% in the prior year quarter. Net income increased 11%, while our diluted earnings per share grew 9%. In addition to certain gap and other measures, management utilizes adjusted EBITDA, which is a non-gap measure, excluding non-cash stock-based compensation expenses. Our adjusted EBITDA was 10.3 million in the first quarter, Of 2022, up 4% and hour-adjusted diluted earnings per share were 84 cents, up 2%. Cash flows from operating activities amounted to 0.5 million compared to 3.6 million in the prior quarter. The higher net income we generated in the first quarter of 2022 was more than offset by greater changes in assets and liabilities due to timing of payments to vendors and taxing authorities. Free cash flows for the quarter were 0.3 million compared to 3.4 million in the prior quarter. Turning to page 15, during the first quarter of 2022, we returned a total of 4.9 million in the form of dividends and through our stock buyback program. an increase of 49% compared to 3.3 million in the prior quarter. We remain focused on our strategic initiatives on enhancing the value of our products and services to issuers and broker-dealer subscribers, on growing our business, and delivering long-term value to our stockholders. With that, I would like to thank everyone for your time, and I'll pass it back to the operator to open the line for questions.

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 with Sidoti & Co. Please go ahead.

Good morning. Thanks for taking my question in the next quarter. Can you just discuss maybe your thoughts around kind of the rising interest rate environment, possible slowdown in the global economy, just How do you think about that impacting the business going forward? What measures can you take in place to offset that?

Chris, thanks for that question. I am not a highly skilled global economist and able to predict what is going to take place in the future. And also, I've learned from my history as a trader, when you've actually timed something perfectly, you get stuck in that market, that prediction, and you kind of get into a corner. The way we look at it is we want to be in business on the sunny days, and we want to sail safely through the stormy days. We have a mix of business lines. Some of them give us a little bit more predictability into what we're seeing. And, you know, in the cycle that we've seen right now, we don't have the trading volume business, but we do have for transaction counts, but we are actually seeing a lot of data flowing through the system. So we have to keep improving the system. And on the business side, we've strengthened, you know, really because of the two 11 process, the ability for companies to, for, for, for, for companies to want to be engaged in making sure that they're distributing current disclosure, they're demonstrating their compliance with securities law and, and, and, and, and they're also, you know, demonstrating their, their ESG credentials. They're really, their governance is, and, and, and their kind of global citizenship of complying with laws. So that side of it is, in that environment, we're seeing pretty strong retention in our corporate services and our market data business, is that could change. We will adjust the business as that goes forward. Now, we really believe we have an opportunity to build commercial value on top of what is the regulatory part of 211 And that's where we get the long-term expansion of the business. There's more companies going public around the world on their local exchanges. That's a good opportunity. There's a real line blurring between public and private markets. That's an opportunity. But none of these opportunities, we have direct control over the immediate future. So we play, we look at where our revenues are, we have a margin, and that could tighten up if it gets worse, but we will always get our costs in line if the environment gets worse because we want to be coming out of any storm strong.

I appreciate that. Thanks for that answer. Just around the Blue Sky Data Corp acquisition, can you just talk about how quickly you expect that to be integrated? And then could you add any profit metrics around that, or how do you expect to monetize that under your platform? Thank you.

So I'll give a high level on that. It just is we approached this acquisition, which was a bit tough on the team, was the idea of cut it close. which was we wanted to integrate the acquisition into our platform, that it's our technology, that we're not running their legacy technology. They had a very high-quality reputation, but it's a handcrafted product. And so we wanted to change the process and use what we built for 211 and our own Blue Sky product to take very quickly take their knowledge to compare our feed to their feed and expand the areas we didn't cover while adding in the areas they didn't cover. And so, you know, our plan is to have everything cut over by the end of June, which is, you know, gives us some real room. The second part is they have skilled people who both, in the domain knowledge and client service as well as data quality specialists. So it gives us revenues to support at a different point in the business process to improve our data quality. And that's where we look at it from that side. I mean, I wish we could do numerous acquisitions like this. There's not that many out there. And there's going to be other acquisitions where we have to take on legacy technology that we have to run, and we can't consolidate it in. But Blue Sky Data is a great product that fits really well with us.

Chris, to add, in terms of the impact, or benefit for our business, we expect to add approximately 30 clients with the Blue Sky transaction. If you think of where it fits perfectly, we do have a Blue Sky product in our market data licensing business, and this acquisition adds a lot of depth and breadth for that product in terms of the client opportunity, so that's where we see the greatest financial benefit.

I appreciate that. And one last point is how we look at acquisitions is, you know, you can put whatever numbers you want in the spreadsheet and what other exit value. The real part is can we be a good custodian and grow the revenues? You know, put in, you know, is and create more demand and then also find other products that can solve client problems. So, you know, our making big statements coming into the acquisition is, you know, I think we'd much prefer to have a track record three years later and say this is the revenues that we created and this is the other problems we were able to solve that clients are willing to pay us for. Sure.

I appreciate that. And then maybe one just last question for me, following C-211, are you continuing to see more companies join post the quarter itself, still under the C-11 rule?

Chris, I think the numbers speak for themselves. As you saw, we have seen an increased number across QXQB and the pink subscribers that pay for DNS. As you would recall in the past, our pink subscribers, the subscribers to DNS tend to have a little higher turnover than our premium markets. So in any given quarter, we may see companies joining versus removing themselves from a paid subscriber due to compliance reasons or being acquired for all sorts of other reasons. But, yes, we do continue to see strong demand for our products across corporate services in 2022.

And, Chris, just to add from the 211 perspective, you know, it's sort of what we talked about a little bit last year where there was this event, a point-in-time event where a number of companies were pointing to that compliance date as, as a real driver for joining particularly our DNS service and making sure they could get their disclosure out to investors. And so we've seen that number stay relatively steady, as you can see from the quarterly report and the earnings. And that was kind of what we were hoping and expecting would happen at that point. And then the additional companies coming on to QX and QB, we've attributed over time some of that to the 211 impact and the additional attention on our markets. as well as just our strong outbound sales effort. And so that has all remained consistent. So it's kind of a mix of 211 and just the general environment and sales effort that's led to the results.

Sure. No, I appreciate that. Thank you very much for the time, and I'll jump back in queue.

Thank you. As a reminder, if you have a question, please press the star, then one key. So operator – No questions from the queue at this time. I would like to turn the call back over to management for any closing remarks. Actually, we do have a follow-up from Chris McGinnis. Please go ahead.

Yeah, thanks. Sorry about that. I didn't realize. I guess just on the cost, Antonio, just maybe on the cost for 1Q, that compensation level, should that start to trend down a little bit, just kind of given, you know, I think some resets in Q1? You know, can you just talk about the cost structure as you expect throughout the year?

Yes, you did see an increase of our operating expenses of 12% quarter on quarter, driven mostly by our compensation and benefits expense. There were some discrete reasons for that as we continued to invest in our highly talented team. We focused very much on remaining competitive, and we did implement certain annual salary increases at the end of 2021, which became effective at the beginning of the year. That contributed to approximately a third of the overall increase in comp and benefits with the rest due to our higher headcount. We will, as Cromwell pointed out, add a handful of employees from Blue Sky Data Corps, so you should expect that to impact our compensation and benefits line item starting from June and onward. We remain focused on maintaining the security, reliability, and availability of our systems. So in terms of ongoing investment in IT and infrastructure, we would see that continuing as well as it has in the past. That added, that was a 20% increase vis-a-vis last quarter and contributed to the overall growth in expenses. Those are the two main items I would focus on, Chris, going forward. The remaining, we tend to run pretty lean for the remaining line items, and we tend to be quite thoughtful in terms of our cost control. There are a few other variable elements there that we have discussed in the past within professional and consulting. We have variable expenses related to the trading volume, so those would move around pretty much in lockstep with the ECM's revenue and LINCS revenue. We saw a bit of a decline in that line item. considering the lower volumes this quarter. But overall, the rest of the expense structure remains relatively fixed, and we have more control over some of these discretionary expenses. So we will remain very focused to Cromwell's earlier point on our margin, on our cost structure, how exactly it will evolve quarter over quarter. We will obviously communicate at the right time. But those are the main items I point out in terms of things to watch for.

Great. Very helpful. Thanks, Antonia. And then just kind of a question thinking about the changes within market data around the professional user and non-professional user. Is one of those two more profitable than the others, just kind of given that drop-off in the non-professional user?

We have our pricing is available on our website. As you know, we are open, transparent, and connected, and we do publish our pricing schedules for all product lines. So you can see that certainly the professional users have a higher pricing rate than the nonprofessional users, and that indeed would imply a greater impact on our revenue market data licensing revenue in terms of changing user counts.

Okay, great. Thank you for that. And then just lastly, you spent a lot of time on your analyst data around, you know, the international markets. Can you just talk a little bit about the investment to kind of go out and grab those, you know, those companies that are out there in those newer markets that you're targeting? Thank you.

Yeah, Chris, I think it's a, you know, the way we think about growing revenues is, you We've been a company that's building a platform. So for a good part of it, we've been working on new things to sell. But there's really, you know, I look at it, there's kind of three parts of potential revenues. There's one part of potential revenues, which we saw under Rule 211, was we have a product. it's understood what it's used for and it's needed for and people are coming in and you just have to sell it, the more you sell, the power of the platform scales and the network effect takes place. That's a really important where, but it's understood we have the product and it's understood by the subscriber to that product of what it does and the real value for them. Then there's the second part is where we have the platform, but the value and understanding of the potential paying client is not where it needs to be yet. So I would say in Canada, our international markets are clearly understood. The value quotient is well-defined, and the time to market and usefulness is there. from the client perspective. So that's a product that we just want to sell, sell, sell. There are certain industries where that takes place because we have a critical mass in that industry and we're able to jump to different countries. In the global space, there's a second side is really where you've got the capacity, you've built the platform, but you really need to build up the client understanding And that's our global expansion. That's our, you know, that's in many ways of our domestic expansion. You know, how could you do an institutional registered offering onto our OTCQX market as we had a cannabis REIT, a U.S.-based cannabis REIT do in last fall? And getting that understanding out there, the value and how that works smoothly is And then there's the third category is the stuff where we're building something new. And, you know, there we haven't fully built a functioning piece that we've seen people using. But we're also, you know, there's not an understanding fully how to use these things. And, you know, there's a lot of companies always out there in the space with ideas for that. And really their client is the venture capitalist community rather than rather than rather than the paying clients often. So, but we work on those things too. But it's really, it's a balance of selling, you know, the known product, educating to make the unknown known, and building the next thing is how I go to the opportunity. You can add up the numbers of all the global companies around the world. You can also add up how many companies are on our premium markets versus how many total securities are traded on our markets. And we will keep investing in our platform. We look at our margin as a way to be good commercial operators, have safety to stay profitable through tough times. But we also look at revenues that we're going to keep reinvesting in the products that clients are paying for so they get a stronger platform. that's constantly improving.

Well, I appreciate the time today again. Thanks for taking my questions and good luck in Q2. Thank you, Chris.

Thanks, Chris.

And speakers, I'm showing no further questions at this time. I'll turn the call back over to management for any closing remarks.

Thanks, Operator. And maybe before Cromwell gets to his closing remarks, we had a question come in through a different channel that I just wanted to pose to Cromwell. I think, Cromwell, you've done a nice job of answering this throughout your answers to some of Chris's questions. But the question was, I know you did not give guidance, nor do you pre-commit to revenue targets, but I was hoping you could give investors an idea of how you think internally about the revenue opportunity you're going after over the long term, say the five- to ten-year period. So, Cromwell, anything you want to add on that?

Thanks, Dan, and thank you to the person who sent in that question. For the long term, we have immediate products that we think we can sell more of, and that's very helpful because that lets us, A, provide returns on our investment of building and supporting those products back to our shareholders, but also keep investing in the future. We will continue to invest in our people and platform forever, is And those opportunities are we have immediate opportunities in front of us which you can see which of our products have been growing. We have other opportunities where you can see we're marketing out to clients to talk about and we're trying to create more educational material. And then there's other opportunities. where they're still in the figuring out stage and we don't really talk a ton about those with the exception of trying to find first mover clients and understand that area. Where I would say is I'm still excited. I'm a large shareholder of the company and I think there are a lot of things that we can do, especially in a place where the large global exchange groups have a different problem set, and they're also seeking twice the margins we want and twice the margins that we think are well-earned to support the broker-dealer community, to support companies, and that value of what we're doing And our focus of building a market that can fit a wide spectrum of different companies, securities, broker-dealers, and appropriately price risk and deliver best execution is a real opportunity.

All right. That's great. Thanks, Romo. I'll turn it back to you for any remaining closing remarks.

Thank you, Operator. I want to thank each of you for joining us today. I would encourage you to read our first full quarter report and the accompanying earnings press release. 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 updating you on key initiatives that continue to shape the integrity and the competitiveness of the public markets.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.