OTC Markets Group Inc.

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 Factor 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 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 will discuss our financial results at a high level and review our progress on our 2023 strategic initiatives. I will also highlight our areas of focus for the first quarter and the remainder of this year. Our financial statement saw a fair amount of flux this quarter, largely from the moving parts of our EDGAR online purchase in November of last year. While the EOL asset purchase agreement did not have a high purchase price, incorporating that business into our company includes both transitional expenses and ongoing operating costs that show up in our income statements. Our business continued its trend of top-line growth during the first quarter, with gross revenues and net revenues each up 8% versus last year. Overall expenses have increased this quarter at a higher pace than our revenue growth, which resulted in decreases in net income, earnings per share, and operating margin during the first quarter. Expenses were driven by a number of factors. These include increased headcount and technology operating costs, as well as various one-time acquisition expenses and costs related to moving the EDGAR technology to our cloud environment. With respect to revenue, our market data licensing business expanded strongly. OTC link revenue saw modest growth, which was offset by a decrease in corporate services revenue. Our corporate services revenues were impacted in part by a reduction in companies using our disclosure and news service, or DNS, to maintain compliance with their ongoing disclosure obligations. DNS churn is expected between year-end reporting cycles, and we have seen an uptick in DNS applications as companies that report their financials on a calendar year basis use the service to publish their annual reports and remain compliant with Rule 211. The market data licensing business saw a 26% jump in revenue. largely related to our Blue Sky Data Corp and Edgar Online acquisitions. Certain price increases and organic growth of our existing market data products also played a part in driving revenue this quarter. OTC link revenue increased slightly during the quarter, with decreased trading volumes, certain price increases, and a greater number of broker-dealer subscribers meeting volume-based pricing thresholds, all playing a role in the results. As a result of shifting trends across our business lines, corporate services now represents approximately 42% of our overall revenue. Market data licensing accounts for nearly 39%, and OTC Link accounts for 19%. Antonia will cover our financial results in more detail in a few moments. During our last earnings call, I introduced our five strategic initiatives for 2023. First, coming together as one team on one platform to build the value of one share. Our technology infrastructure and market data teams successfully completed the move of Edgar Online's applications from a legacy physical data center to a cloud environment. We did this while delivering service uptime and retaining key enterprise clients. That collaborative effort not only moved key applications to the cloud where the EOL data and technology can be mixed into our products and platform, it also served to help the EOL team mesh into our own. Second, commercializing our role as a regulated market operator and delivering visible client value. The Edgar Online services are a vital component of our 211 compliance process and disclosure services. With the EOL subject matter experts and technology applications now in our environment, and with our ownership of the trove of structured SEC filing data, we have more data to monetize. Going forward, we will optimize this infrastructure to support our clients, grow our subscription revenues, strengthen our internal compliance processes third prioritizing client facing application development and improving our data we released a new history server to OTC dealer subscribers and will and will be creating new products mixing the EOL blue sky data with our own data sets fourth improving the otc link functionality and reducing operational exposure and business risk last friday we received finra approval to permit digital asset securities to be traded by broker dealers on our otc link ats while not an immediate revenue generator we see a long-term opportunity as more digital assets move into entities regulated by the sec the current unregulated monopoly silo model will change to have segmentation between brokers, dealers, custodians, exchanges, and ATSs. We will work to provide value to broker-dealers seeking to legally trade digital asset securities and to issuers wishing to demonstrate their compliance and provide disclosure into the market. We continue to make reliability and uptime of our core trading platform a top priority across the company. This initiative also underscores that commitment and extends it to provide an enhanced level of service across our three ATSs. It improves our ability to effectively operate our mission critical trading systems under SEC rule SCI. Finally, Because we operate as owners and capitalists, creating strong net revenue growth and delivering sustainable profitability that increases long-term per share earnings. Our results in the first quarter show good top-line growth. However, we know that the value of each share only increases when revenue growth, expense management, and prudent investment all align and endure. Our investments in Edgar Online, Blue Sky Data Corp., and our existing products and services provide fuel in the form of data directed towards the right client problem sets. Our expanded data sets will drive increased revenue. As we align the expenses involved in integrating our new business during this year, we approach our strategic plans as commercial operators and stewards of shareholder value. always with a focus on building sustainable net revenue growth, operating profits, and long-term earnings per share. I look forward to reviewing these initiatives and our strategic direction throughout the course of the year and beyond. In closing, I'm pleased to announce that on May 5th, our Board of Directors declared a quarterly dividend of $0.18 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, Karamo, and thank you all for joining our call today. I would like to start by thanking our entire OTC Markets team for advancing our strategic priorities, making great progress towards the integration of the EDGAR Online acquisition and providing reliable service and support to our subscribers. During the first quarter of 2023, various macroeconomic factors impacted our business and affected certain of our business drivers, including the number of companies subscribing to our corporate services offering. In addition, our results reflect a full quarter impact of the EDGAR Online acquisition. As I discuss our results for the quarter ended March 31, 2023, any reference made to product period comparatives will refer to the first quarter of 2022. Turning to page 7 for review of our first quarter revenues. We generated $28 million in gross revenues, up 8%, as compared to the prior year period. Revenues less transaction-based expenses were also up 8%. OTC Link's gross revenues were essentially flat to the prior year period. A 12% increase in transaction-based revenues from OTC Link ECN and OTC Link NQB as a result of higher fees offsetting lower trading volumes, helped to balance out lower revenues from messages on OTC Link ATS and from QAPP once-in-a-century statement fees, which decreased 20% and 37%, respectively. OTC Link also benefited from growth in revenue from our subscription-based license-to-quote and message primarily driven by fee increases and from our fixed connection services due to higher number of subscribers. Transaction-based expenses increased 18% due to a larger portion of the subscriber base reaching volume-based pricing thresholds on OTC Link ECM and OTC Link NQB. OTC LINK finished the first quarter with 102 subscribers on OTC LINK ECN and 88 subscribers on OTC LINK ATS, as compared to 98 and 90, respectively, at the end of the prior year period. Trading volumes are highly unpredictable and could vary significantly, period to period. Revenues from our market data licensing business were up 26% quarter over quarter, primarily due to the contribution of Blue Sky Data Corp and Edgar Online, which we acquired in 2022. Included in our market data licensing results is certain non-recurring revenue related to assumed deferred revenue that comprised a part of the acquired Edgar Online working capital. Excluding the impact of the acquisitions, market data licensing revenues were up four percent pro user accounts were up one percent with the corresponding revenues also up one percent revenues from internal system licenses delayed data licenses and other data services increased 12 due to growth in subscribers and price increases for certain licenses revenues from market data connect connectivity fees increased 57 as a result of pricing adjustments offsetting these increases was a 31 decline in revenues from non-pro users in line with a 30 reduction 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 our markets fluctuate, and we may experience a further decline in the future. Corporate services revenues decreased 2% in the first quarter. We had a higher average number of companies on the OTCQX and OTCQB markets, which combined with incremental price increases effective for 2023, drove an increase in OTCQX revenues of 4% and an increase in OTCQB revenues of 1%. Revenues from DNS decreased 12% due to a lower average number of companies subscribing to the product. In the first quarter, we added 15 OTCQX companies compared to 33 new sales in the prior quarter. and finished the period with 593 OTCQX companies, up 4%. For the annual OTCQX subscription period beginning January 1st, 2023, we achieved a 95% retention rate compared to 96% in the prior year. On OTCQB, we added 49 new companies in the first quarter, compared to 112 in the prior year period, and had 1,218 OTCQB companies at the end of the quarter, down from 1,224 at the end of March 2022. We had 1,539 pink companies subscribing to DNS and other products at the end of the first quarter, down 5% from 1,584 at the end of the prior year period. During the prior year quarter, we saw a significantly higher number of DNS subscribers in connection with the amendments to Rule 15C211 becoming effective in September of 2021. The number of DNS users gradually declined during the second half of 2022 and the first quarter of 2023, with month-to-month variability driven by non-renewals and corporate events. Turning now to expenses on page 11. On a quarter-over-quarter basis, operating expenses increased 23%, including the impact of approximately $900,000 in one-time, non-recurring expenses related to the integration of Edgar Online. The primary drivers of expense growth were a 17% increase in compensation and benefits, a 35% increase in IT infrastructure and information services costs, and a 34% increase in professional and consulting fees. The increase in compensation and benefits reflects higher headcount, including 14 new employees from Edgar Online, annual base salary increases, and an increase in cash and stock-based incentive compensation, partially offset by lower commissions. Compensation and benefits comprise 64% of our total operating expenses during the first quarter compared to 68% in the prior period. IT infrastructure and information services costs increased primarily as a result of the acquisition of EDGAR Online as we added the technology, data services, and data center costs supporting the EDGAR Online platform. Professional and consulting fees increased due to higher spending on external consulting services and also included certain non-recurring expenses related to EDGAR Online. Further contributing to the growth in operating expenses was a 167% increase in general administrative and other costs, primarily due to higher bad debt. Majority of the bad debt provision in the first quarter related to accounts receivable acquired as part of EDGAR Online's working capital and is not expected to recur. The non-recurring market data licensing revenue stemming from assumed deferred revenue and the increased bad debt provision related to acquired accounts receivable substantially offset each other and did not materially impact our operating income for the quarter ended March 31, 2023. Turning to page 12. In the first quarter, income from operations and net income declined 20% and 17% respectively. Operating profit margin contracted to 25.4% compared to 34.4% in the prior quarter. In addition to certain gap and other measures, management utilizes adjusted EBITDA, a non-cash measure, which excludes non-cash stock-based compensation expenses. and adjusted operating margin, which excludes non-recurring one-time items. Our adjusted EBITDA was 9.2 million in the first quarter of 2023, and our adjusted diluted earnings per share were 75 cents, down 11% compared to the prior year period. Adjusted operating margin was approximately 29%. Cash used in operating activities amounted to 0.4 million, compared to cash provided by operating activities of 0.5 million in the prior quarter. Free cash flows for the quarter were negative 1.4 million compared to positive 0.3 million in the prior quarter. Turning to page 13, during the first quarter of 2023, we returned a total of 5.5 million to investors in the form of dividends and through our stock buyback program. an increase of 13% over the prior year. 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.

Certainly. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again, and please stand by while we compile the Q&A roster. One moment for our first question. And our first question will come from Steve Silver of Argus Research. Your line is open.

Thank you, operator, and good morning, everybody, and thank you for taking the question. In the press release, the release mentions that the company held fewer virtual investor conferences during Q1. I was just curious if there was something seasonal in that result or if there was something more market demand driven in that. I mean, I know that that business is typically not a large revenue generator for the company, but I'm just curious if there's any color on whether the trends in such investor conferences serves as any sort of proxy for the underlying financial health of QX and QV companies, given that the macro environment has remained challenging for so many of them.

Thank you. Part of the online conferences was driven by COVID, and people are wanting more face-to-face activities as well. So I think the mixture is going to move virtual and face-to-face, and then we'll find what the level is for that side. You know, we're recently doing more conferences which have both an in-office presence and a broadcast presence in our office. I think that will be part of the mix going forward as well.

But, Steve, there is also a timing aspect to the number of virtual VESA conferences per quarter. we expect the number to normalize throughout the year.

Great. That's helpful.

We don't think it's going to be like a Peloton business, but people are actually getting out and traveling again, which is overall a pretty good thing.

Yeah, that makes sense. Also, the remarks mentioned the drop-off in the number of subscribers to DNS only for them to start coming back. early in the next year. Has that historically been a trend or is there any reason why companies would let that subscription lapse only to then bring it back a few months later during the annual reporting season?

Yes, it has because they view it more as a compliance than a disclosure. We're making some changes in how we bill for that product going forward to make it an annual service. And so we will see what happens with that. Now, on the other side is, you know, we focus our sales activity on the higher quality companies for OTCQX and OTCQB. And, you know, DNS service is really a demand-driven service. We're trying to provide a tool for companies to put a certain amount of disclosure under Rule 15C-211 into the market, and 15C-211 is a pretty low bar. So it's, you know, it is not as consistent as when you sign up a large global company listed on a leading stock exchange in the world for otcqx okay great thank you so much and congratulations on the edgar online integration progress we still thank you steve we still have a lot of work to do there and but we're you know we're excited about owning the data set because you know the way data works is if you have to buy data from other vendors, their tentacles get much deeper into you. And if you own the data, your opportunity set increases.

Great, thanks.

And one moment for our next question.

And our next question is coming from Christopher Nicholson of ACF Equity Research. Your line is open.

Thank you, operator. Good morning, Cromwell and Antonia. Thank you for the presentation so far. So a couple of questions. Going back to slide 10 with the corporate services subscribers, I just wanted to see if we could get a bit more color on how much of these numbers are accounted for by migrations between the various products, between QXQB and PINC. And how much is new growth? So, for example, is the decline, you know, what proportion of decline from pink might be allocated to a migration to QB, et cetera? So, just a little bit more color on how those numbers for the three products come together.

Thanks, Chris, for the question. have not historically and do not provide that level of specificity around the numbers, but we certainly do continue to see upgrades from QB to QX, and those upgrades are part of the new sales that I mentioned, and we do see upgrades from DNS to QB. We also, as I've explained before, see some companies who may not continuously meet the standards for maintaining QX or QB designation that might move to our DNS product during the period and certain companies may subsequently cure their deficiencies. So there's quite a bit of upwards and downwards movement within our tiers per quarter that would be reflected in the numbers. Just to clarify, when we speak of New QX companies, those would include upgrades from QB. When we speak of new QB sales, those do not include downgrades from QX. They're entirely new sales.

OK. Thank you very much, Antonia, for that. And that's clear. And sorry, I didn't mean to put you particularly on the spot there. So as you know, I'm fairly new to following the company. So my second question, if I may, and I accept I'll get the same response from you on this. In terms of margin, the difference between online conferences and live face-to-face, although I wouldn't necessarily expect you to give me the margin, maybe you could tell us which one is a higher margin product.

But we don't go that deep into the margin side. I mean, this is a you know, we look at the at the online conferences as part of the digital disclosure and the storytelling and connection to your investor community. So it's a tool. And but we're not you know, we've always looked at our business as a flywheel where. Lots of different services energize other services. And, you know, how we, you know, we've always gone by the idea that if people are using the platform, monetizing the platform is not a problem. So market data, trading services, corporate services, each one adds to the other. And if a company is providing better transparency and distributes disclosure more effectively, that is going to improve the trading business because the market's going to be more efficient. That's going to improve the market data business. So we don't get down too deep of which margin versus each one because a lot of our businesses are interconnected.

Okay, Cromwell, so if I understand correctly, do you see that product or that product group as driving bigger ticket items, essentially?

Yes.

That's great. Thank you very much indeed.

We don't want to lose money on it, but it's not where we're going to get rich. And the whole goal has been with this business is to build diverse revenue lines. So we're not tied to one set, and we have a different set of levers to both add value and move pricing over time.

That's great. Thank you very much. Very clear, and we're looking forward to progress with the EDGAR acquisition, which I'd say has to be one of the better ones that companies have made over the last 12 months.

Well, thank you, Christopher, for your confidence. We still have a lot of, you know, optimization and optionality to maximize on this one. But I agree with you, you know, it's got a known downside, which is, and it has a trove of data that is useful across all three of our business lines. So, you know, learning both of the revenues that it brought over and the client relationships, but also how we fit that into our platform and to our existing clients were very early stages.

Thank you very much.

One moment for our next question. And our next question will come from Brendan McCarthy of Sedoti.

Your line is open.

Yes. Good morning, everybody, and thank you for taking my question. My first question here is just regarding the EOL integration process. I'm wondering if you're able to quantify, you know, how far along, you know, the process your company's through, maybe in terms of percentage?

So, I wouldn't do percentage. I'd say legs of the race.

you know, we had to close the deal, which went slower than we wanted to, which made the next, you know, the first part was a sprint because there was a deadline to get their technology out of the data center into the cloud in a virtualized environment. And that was a rush. And, you know, and, you know, their engineers, We're learning along, and so we had expenses from consultants and coaches on how we did it, and we got that out. And the most important part of that was that we didn't have the service fail to lose clients. And we've been re-signing clients because there had been a notification gone out that the services were being end-of-life, and so re-signing and signing ongoing clients was a really important thing to do. Now there's a second pass of other work in the data center that really has the team, both our infrastructure team and the great engineers we got from EOL, working to get to catch up on some things. Great. That's helpful. Thank you. That's going to take us through the summer. We're then going to have those conversations with clients about what do they want more of. We're also going to have some places where clients don't have a conversation with us and sneak away. And that's going to be really great too, because we're going to find out which of the products don't have a competitive pricing or market. So we're going to learn a lot more over the year and we're going to take the, and then, you know, the second half is figuring out what do we want to do to restomod this? And, you know, some of the pieces of technology work, they're like the axle for a car. you don't need to you just need to make sure it's not rust it's well lubricated then there's some other pieces which have worn out and that is like the tires so we may need to switch in some tires to make it run efficiently and then the real part is you know because you know revenues you know revenues are the oxygen and data is the fuel what do we do where we put in the modern fuel injection system or the turbochargers. And in some of those, we'll be doing it to create more business. Other places will do it to be more efficient about carrying a bigger load. And other places, because they stick modern fuel injection systems and turbochargers on total econoboxes to try and, you know, move people very efficiently. And we may do that and use some of the technology from the cloud. But we're very early stages because we need to get the demand right. And then we need to get our internal options right. And then we really need to get to know the technology and what it takes. But, you know, but it's a great data set to own. SEC filings, structured financial data, insider data, and investor data.

Great. That's very helpful.

That's all from me. Thank you.

Thank you.

And I'm showing no further questions. I would now like to turn the conference back to Cromwell Colson for closing remarks.

Thank you, Operator. I would like to make One final point, which is about digital asset securities.

Right now, these securities are not legal for broker dealers to trade within the SEC FINRA regulated structure for the most part. That said, the tide is shifting, and we believe that we have an opportunity to move where it's going and provide value for broker-dealers and issuers and insiders on the disclosure side to allow for transparent regulated trading and also let issuers provide the ongoing disclosure and demonstrate regulatory compliance for this broad range of securities. But it isn't defined which will be securities, you know, how the disclosure will work best. So it is very early stages. However, getting the ability to and start having the conversation with our clients, the broker-dealer community, and also issuers and work through the problem sets with regulators are skill sets that we build up through the 211 process. and through the technology we provide. So it is going to be an interesting opportunity for us over the next decade. But it is not going to be any immediate revenue. But we are moving to where the puck is going. I want to thank each of you for joining us today. I would encourage you to read our full first quarter 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 public markets.

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