OTC Markets Group Inc.

Thank you for standing by and welcome to OTC Market Group's second 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 1-1 on your telephone. I would now like to hand the call over to Dan Zinn, General Counsel.

Thank you, Operator. Good morning, and welcome to the OTC Markets Group second 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 three 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. I want to start by congratulating our team on the successful acquisition of Blue Sky Data Corp during the second quarter. We had a tight plan to execute and integrate. Shortly after closing, we quickly cut over production of the Blue Sky compliance data from their systems to ours and welcomed seven employees to our team. The Blue Sky Data Corp business is now fully integrated into our market data offering and technology platform. We offer our clients comprehensive data regarding state law compliance for over 100,000 equity and debt securities, in addition to the federal compliance data we already provided. This additional information enhances issuer compliance allows for greater automation by broker dealers and benefits investors. Over the long term, we see opportunities to add subscribers, broaden Blue Sky compliance, and expand distribution of our data in both equity and debt markets. Our business continued to grow during the second quarter. Following our record results during the first half of 2021, The year over year rate of increase slowed. We had lower transaction based revenues in our OTC link business, tracking the decline in trading volumes from last year's record activity. Our corporate services business achieved another quarter of impressive growth while the market data business line saw incremental growth and started to benefit from the blue sky acquisition. Our overall revenue mix looks similar to the first quarter of this year. with our base of corporate services and market data subscription revenues balancing out lower OTC-linked transaction fees. Our operating profit margin remained relatively flat year over year, while gross revenues grew slightly. Revenues, less transaction-based expenses, net income, and earnings per share all experienced solid growth. Antonia will cover our financial results in more detail in a few moments. We are strong believers that long-term success is not linear. Our overall approach is to focus on the areas in our operations that we can control and finding ways to provide unique value for our clients. This is most apparent in our OTC Link business. With trading volumes normalizing over the first half of this year, our team is focused on adding subscribers, gaining additional market share, and reducing operational risks. Our three trading systems, OTC Link ATS, OTC Link ECN, and OTC Link NQB, offer our broker-dealer subscribers a range of market structure tools from which to choose. Each ATS offers subscribers a different choice. Connected together, they strengthen the overall network of broker-dealer subscribers using our systems to transact efficiently, serve investor needs, and achieve better trade executions. Our OTC Link ECN ended the quarter with more than 100 subscribers for the first time in its history, further demonstrating the value of the business model. Our subscribers also continue to rely on us as a qualified IDQS under SEC Rule 15 . We take great pride in performing this critical monitoring role for our industry, and we are excited to expand the opportunities for companies to go public and be public. Security and uptime of our core SCI regulated trading system remains a priority, and throughout the second quarter, we delivered consistent, reliable service to our broker-dealer community. We earn that every day. Our team's focus on quality, reliability, and regulatory compliance is a core aspect of our processes and culture. The corporate services business reached an exciting milestone last month. with 600 companies on the OTCQX Best Market. After reaching 500 companies just last year, we are proud of this noteworthy achievement. Our goal remains to help companies efficiently inform and access U.S. investors, and with 600 OTCQX companies, along with over 1,200 companies on OTCQB, we are executing on that objective. The remarkable growth of these markets exemplifies the value of our data-driven market standards and tailored public disclosure platform. On the heels of the Rule 211 changes last September, we also continue to see increasing demand for our disclosure and news service, which allows companies to publish current disclosure directly to our website. we saw a 62% increase in the number of companies subscribing to our DNS offering over the prior year. Our market data licensing business saw increases in the number of professional users and enterprise licenses, while the number of non-professional users declined in line with retail investor activity in our markets. The continued incremental organic growth in market data was indicative of broader global and domestic interest in our markets. During the second quarter, we also took another step in broadening our global reach, adding a sales representative in Singapore to cover Asia. This will allow us to better serve international issuers and market data users in the region as we continue to grow and build our network there. Throughout the first half of 2022, We have continued to pursue our four strategic initiatives structured around continuing to serve our clients and shareholders. First, drive sustainable revenue growth across each of our business lines that increases long-term per share earnings power. Second, commercialize our enhanced regulatory status under Rule 211 to create new opportunities for public companies and broker-dealers. Third, advocate for additional regulatory recognition of our markets to increase the value of being public. Fourth, pursue corporate development efforts to grow and diversify our product suite and client base. In closing, I am pleased to announce that on August 9th, our Board of Directors declared a quarterly dividend of 18 cents per share payable in September. This dividend reflects our ongoing commitment to providing superior shareholder returns. With that, I will turn the call over to Antonia.

Thank you, Cromwell, and welcome to everyone on the call today. As I discuss our results for the quarter ended June 30, 2022, Any reference made to prior period comparatives will refer to the second quarter of 2021. I would like to start by thanking our entire RPC Markets team for their dedication to serving our subscribers, maintaining our systems, and delivering on our strategic priorities. Turning to page 12 for a review of our revenues. Despite various factors impacting the economic environment, OTC Markets Group continued to benefit from its diversified business model and revenue streams. Our corporate services business saw continued customer demand for our premium OTCQX and OTCQB markets, as well as our DNS products. Market data licensing benefited from the addition of the Blue Sky Data Corp subscribers and revenues, and the continued demand from professional and enterprise clients, offsetting a decline in non-professional users. OTC Link experienced continuous moderation of trading activity on our markets, impacting its transaction-based revenues. We generated $26 million in gross revenues, up 2% as compared to the same prior year period, while revenues less transaction-based expenses were up 7%. In our OTC Link business, gross revenues declined 33%, primarily as a result of lower trading volumes and consequently, lower transaction-based revenues. The elevated trading activity that we experienced in the first half of 2021 normalized over the subsequent quarters. We executed approximately 35,000 trades per day on OTC Link ECN and OTC Link NQB in the second quarter of 2022, compared to approximately 46,000 executed on OTC Link ECN in the prior quarter, which is a decline of 23%. As a result, gross revenues from OTC Link ECN and OTC Link NQB saw a 50% decline as compared to revenues from OTC Link ECN in the same prior year period. Offsetting this decline was a reduction in transaction-based expenses of 45%. Revenues from OTC Link ATS messages and from QAPP one statement fees decreased 20% and 71% respectively contributing to the overall decline in OTC Link revenues. These were partially offset by growth in subscription-based revenues from our consolidated audit trail reporting service and our fixed connectivity services. OTC Link continued to attract new subscribers and ended the second quarter with 101 subscribers on OTC Link ECN and 88 subscribers on OTC Link ATS. up from 84 and 83, respectively, 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. Our market data licensing business saw an increase in gross revenues of 4%, inclusive of the impact of the acquisition of Blue Sky Data Corp during the second quarter of 2022. Excluding the impact of the acquisition and the impact of an audit recovery fee unique to the prior year period, market data licensing revenues increased 2%. A 4% increase in pro-user counts drove revenues from professional users up 5%. Revenues from internal system licenses, delayed data licenses, and other data services increased 20%, and revenues from broker-dealer enterprise licenses increased 17% due to growth in subscribers. Offsetting these increases was a 41% decline in revenues from non-pro users in line with a 42% decline in period and non-professional user counts. Historically and in the normal course of business, we have seen significant changes in the number of nonprofessional users as market volumes and retail participation in the U.S. equity market fluctuate, and we may experience a further decline in the coming months. Corporate services revenues increased 30% in the second quarter. As a result of the enhanced current information requirements under Rule 211 in effect since September of 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. OTCQX revenues increased 7% while OTCQB and DNS revenues increased 34% and 83% respectively. Contributing to the growth were also incremental price increases for our OTTQX and OTTQB marketeers that became effective January 1, 2022. In the second quarter, we added 43 OTTQX companies compared to 70 new sales in the prior quarter and finished the period with 594 OTTQX companies, up from 530 at the end of the prior year period. On OTCQB, we added 64 new companies in the second quarter compared to 114 added in the prior quarter and finished the period with 1,227 OTCQB companies up from 1,020 at the end of the prior year period. We had 1,617 PIN companies subscribing to GNS and other products at the end of the quarter up from 999 at the end of the prior year period. Turning to page 13 for a review of our expenses. On a quarter-over-quarter basis, operating expenses increased by 12%. The primary drivers were a 6% increase in compensation and benefits expense, reflecting higher headcount, annual base salary increases, and an increase in incentive compensation, and a 62% increase in professional and consulting fees, primarily related to M&A, advisory, due diligence, and transition services expenses incurring connection with the acquisition of Blue Sky Data Corp. Compensation and benefits comprise 62% of our total operating expenses during the second quarter compared to 65% in the prior year period. Turning to page 14. We increased income from operations by 1% and delivered an operating margin of 36.7% compared to 37% in the prior year quarter. Net income increased 5% and diluted earnings per share grew 3%, respectively. In addition to certain GAAP and other measures, management utilizes adjusted EBITDA, a non-GAAP measure which excludes non-cash stock-based compensation expenses. Our adjusted EBITDA was 10.7 million in the second quarter of 2022, up 4%, and our adjusted diluted earnings per share were 88 cents, up 2%. Cash flows from operating activities amounted to 7.1 million for the quarter, compared to 11.5 million in the prior year quarter, and free cash flows were 6.4 million compared to 11.3 million. Turning to page 15, during the second quarter of 2022, we returned a total of $2.1 million in the form of dividends, an increase of 21% compared to $1.8 million in the prior quarter. We remain focused on our strategic initiatives, on enhancing value, the value of our products and services to issuers and broker-dealers, on growing our business 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 you. As a reminder, to ask a question, you will need to press star 1-1 on your telephone. Again, that's star 1-1 on your telephone to ask a question. Please stand by while we compile the Q&A roster. Our first question comes from the line of Maria Backer of Sedoti. Maria Backer, your line is open.

Thank you. Can you talk a little bit about how you see some of the opportunities, you know, now that you've closed the Blue Sky acquisition, how you see some of the opportunities to leverage that in terms of potentially cross-selling within your existing customer base or maybe expanding the customer base?

This is Cromwell. Thank you, Maria, for that question. With the blue sky data, it's an interesting acquisition because there is the OTC equity space, which we know very well for secondary markets, but there's also debt securities. And what's interesting about OTC equities is you have one group of equities which are self-directed investors and then you have larger global companies which investment advisors own they'll buy either the ADRs or the F shares that are listed on foreign exchanges and there there's more compliance around being able to solicit orders because if you don't comply with blue sky when an order is solicited there's this idea under securities law called right of revocation, which means the client can cancel the trade. And so working with Blue Sky Compliance there makes it easier for these great global companies, emerging ones, to be accessible into the advisory networks of the US. And that leads to the debt market. And, you know, bonds have less risk of sales practice problems, but blue sky compliance applies to bonds as well. And the bond market, unlike the equities market, has a lot higher level of solicited order flow. Bonds aren't bought, they get sold. And as firms go through and look at where they have compliance risks, they want to make sure that the securities they're selling are federally compliant and within each jurisdiction they operate. And it's complicated. I mean, it's like sales tax software. So it's, you know, sales compliance software on a jurisdiction by jurisdiction basis. So there's really interesting spots to go out there and educate. And then if you think about the multi-sided part of our platform, which is Blue Sky Data is a business. It is what it is. And this is the compliance is how they work through it. But we have an ability to reach out to corporate issuers, have them make changes, and in fact, even have ones provide more disclosure into the market, which really amplifies the power of this platform. Now, if we hear that investment advisors in Minnesota can't buy an ADR, we can contact the company. Now the company could say, we don't care about Minnesota, but those type of companies end up with activist shareholders because they're not maximizing their potential to be public. So that's how I look at it is the bigger growth, but it's a lot of complicated things that we have to talk about and getting people to focus on running compliant operations, and then building that into the workflow and the automation. Does that give a good picture, Bria?

Yes, thank you. That was very comprehensive. Thank you.

Marla? Thank you. Again, to ask a question, press star 1 1 on your telephone. Again, that's star 1 1 on your telephone to ask a question. Our next question comes from Steve Silver of Argus Research. Steve Silver, your line is open.

Good morning, and thanks for taking the question. Congratulations on the continued strong results in corporate services, especially just in terms of the expansion in the corporate client base. I noticed that you continue to add international companies to the client roster. I was just trying to get a sense of your current thoughts in terms of the pipeline for opportunity for continued addition of international companies onto the corporate client base. Thanks so much.

Well, Steve, you know, one of our core values is be a capitalist and, you know, we're big believers that, you know, the world is, you know, more companies are going to go public around the world. It won't be linear. Uh, international markets will get more sophisticated and competitive. And as that takes place, the one thing lacking in a local listing is distribution into the United States and compliance. So you add that one piece in, so there's companies, and then you add the second part of it is, is ESG. which is a lot of people think about the environmental, but the social and governance and for international companies doing two things really, you know, focusing on informing their shareholders, wherever that shareholder exists, not caring where they come in to own it or through what structure, but treating them all equally broadly. And then the second part is compliance with the laws of every jurisdiction and that you exist in. And so if your securities trade in the US, 12G32B is a fantastic exemption. The alternative is you have to register with the FCC. So, you know, being listed on a local exchange, providing your disclosure in English, you know, and material events, it's a really efficient way to do it. And it's kind of a gimme that you want to demonstrate you're compliant with that. And it also wraps into a bunch of places like Blue Sky, where a lot of states use 12G3-2B, but you need a confirmation from the issuer. So you need the issuers to take an active role in demonstrating their compliance because a passerby can't look inside their corporate headquarters from the street and say, hey, these people are 12G3-2B compliance. So we think it's super interesting.

So just to follow up on what Cromwell was talking about. Oh, sorry, Steve. This is Dan. Just to follow up on what Cromwell was talking about, because terms that we use all the time in here are not always apparent to everybody else. 12G32B is a securities law exemption that allows a foreign company to take whatever information it's providing on its home country exchange and make it available in English to investors in the U.S., That's a service we provide that can make their information public on our system. And that really is the underlying principle of what Cromwell is talking about with having those companies access our markets in a much easier manner.

Great. It's very helpful. Thanks so much.

Thank you. At this time, I'd like to turn the call back over to Cromwell Colson for any closing remarks. Sir?

Thank you, Operator. I want to thank each of you for joining us today. I would encourage you to read our full second 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, 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 competitiveness of the public markets.

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