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spk01: Good day and thank you for standing by. Welcome to the OTC Markets Group third quarter 2023 earnings conference call and webcast. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising you that your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Dan Vinn, General Counsel. Please go ahead.
spk04: Thank you, Operator. Good morning, and welcome to the OTC Markets Group third quarter 2023 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 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.
spk07: Thank you, Dan. Good morning, everyone.
spk02: Thank you for joining us today. I will discuss at a high level our financial results for the third quarter of 2023 and review our strategic initiatives for the remainder of this year and heading into 2024. Overall, gross and net revenues continued to increase, with each metric up 4% this quarter. Expenses remained elevated, up 12% during the quarter, leading to decreases in operating margin for the third quarter and the first nine months of the year. Net income and earnings per share increased slightly this quarter due to a reduction in our effective tax rate. Antonia will cover our financial results in more detail in a few moments. Our acquisitions of Blue Sky Data Corp and Edgar Online continue to be drivers of change in our financial and operating results. The Blue Sky product is now fully integrated into our platform, and we are focused on ways to expand coverage, streamline operations, and address future needs for our subscribers. The optimization of Edgar Online remains in its early stages. From the start, we anticipated that this integration would involve a significant effort and that putting the operations on stable commercial footing would take place over several years. Notably, the Edgar Online acquisition added ongoing operating costs as well as certain non-recurring transitional expenses. As with each of our business lines, our ongoing investments in the Edgar Online business will be strategic and based on client demand, operational efficiency, and competitive opportunities. In the first nine months, financial markets saw a risk-off environment with lower overall market activity and trading volumes. Our performance in this economic environment highlights the strength of our diversified business model. Today, there are over 2,600 securities of companies with over a billion dollar market cap traded on the OTC market. They traded $238 billion in dollar volume through the end of Q3, and 88% of overall dollar volume. International company ADRs and ordinary shares, including those billion-dollar companies, are now 77% of the securities quoted and over 85% of the dollar volume. These numbers contradict a standard narrative that OTC markets is primarily for smaller companies or speculative petty stocks. It is a testament to the work our people have done building our platforms and processes that today our regulated markets connect the world's leading global companies with U.S. investors. And that global reach factors heavily into the opportunities we pursue as part of our strategic plan. With respect to our three business lines, Market data licensing again led the way, with revenue up 22% during the third quarter. This increase was due to the contribution from Edgar Online and organic growth. For the first nine months of the year, market data is up 23%. Revenue from OTC Link is down 10% during the quarter, and corporate services is down 3%. Corporate services revenues remained impacted by decreases in the number of companies on the OTCQX and OTCQB markets. as well as a reduction in companies using our disclosure and news service, or DNS. Voluntary renewal rates for the OTCQX and OTCQB markets remain similar to prior years. The decrease largely stems from a combination of slower new sales and downgrading companies that are unable to maintain compliance with each market's rules. We have never shied away from flagging risks based on disclosure, stock promotion, bankruptcy, and other potential public interest concerns to inform investors. Enforcing the financial and governance standards of OTCQX and OTCQB is important to the integrity of these markets. The revenue we lose when we reject unqualified companies or remove those that fail to meet our ongoing financial standards ultimately support the value for companies that qualify for OTCQX and OTCQB. OTC Link revenue has decreased throughout the year, primarily due to lower message and trading volumes across our ATSs. While we do not control trading volume, we continue to prioritize subscriber growth to expand our networks. The reliability and uptime of our core trading platform remains a top priority. We take our regulatory obligations seriously, including those under SEC regulation SCI, and we value the trust our subscribers place in us to operate our mission critical systems efficiently and effectively. Based on the shifting trends across our business lines, for the third quarter, corporate services represented approximately 42% of our overall revenue. Market data licensing accounted for 41%, and OTC Link accounted for 17%. Throughout the year, I have discussed our five strategic initiatives for 2023. First, coming together as one team on one platform to build the value of one share. During the third quarter, we worked to retain enterprise clients and optimize the Edgar Online technology in a robust cloud environment. We have made progress in reducing the number of outside consultants we originally hired to facilitate the technology transition. As we finish this stage of technology work, we will shift our attention to optimizing operations and unlocking the value of these robust data sets. Second, commercializing our role as a regulated market operator and delivering visible client value. We regain momentum in our Blue Sky initiative this year, with 40 U.S. jurisdictions now recognizing our markets under the Blue Sky manual exemptions. We must continue to engage with the 14 remaining jurisdictions and ensure that blue sky coverage for companies and investors in those states that can meet those high standards. We also have significant work to do in commercializing our role as a qualified interdealer quotation system under SEC Rule 15 C-211. Third, prioritizing client-facing application development and improving our data. As our business and our company have grown over time, there can be a temptation to focus all of our energy on protecting the house and maintaining existing systems. It is management's job to ensure that we have the capacity to develop new features and useful functions for our clients, specifically leveraging the troves of data we have at our disposal. It is well within our reach to expand the depth of services we offer, digitalize disclosure, and further distribute useful financial information to our subscribers. Fourth, improving OTC Link functionality and reducing operational exposure and business risk. In early May, we received FINRA approval to permit digital asset securities to be traded by broker-dealers on OTC Link ATS. While there remains intense debate about what may qualify as a digital asset security, we see a long-term opportunity as more digital assets move into entities regulated by the SEC and FINRA. Our FINRA approval has allowed us to start developing plans to help facilitate regulated broker dealer trading in these assets in a lawful and compliant manner. A fully integrated solution requires connections between broker-dealers, custodians, and trading platforms. More regulatory and industry-wide work remains to be done and we will continue to provide updates on our progress. Finally, because we operate as owners and capitalists, our final strategic initiative is creating strong net revenue growth and delivering sustainable profitability that increases long-term per share earnings. Our results thus far this year show top line increases. However, the corresponding rise in expenses has kept us from reaching our goals in the short term. As managers of a public company, we have three important roles to play. First, we must be good stewards of the business to serve clients and help our colleagues succeed. Second, we must act as sharp commercial operators in managing our resources carefully. And third, be fiduciaries for the shareholders to deliver sustainable financial results that will increase the underlying value of each individual share. We have invested in acquiring and developing a deep pool of data across the OTC-enlisted markets. We must engage with our clients and thoughtfully commercialize that data. By adding new capabilities that drive sustainable revenue growth, we will generate greater operating profits and drive long-term earnings per share. In closing, I am pleased to announce that on November 6, our Board of Directors declared a special dividend of $150 per share. and a quarterly dividend of 18 cents per share, payable in December. These dividends reflect our ongoing commitment to providing superior shareholder returns. With that, I will turn the call over to Antonia.
spk09: Thank you, Cromwell, and thank you everyone for joining us today. I would like to start by thanking our entire RTC Markets team for their continued commitment to supporting and servicing our subscribers integrating our acquisitions, and driving our business forward. As I discuss our results for the quarter ended September 30, 2023, any reference made to prior period comparatives will refer to the third quarter of 2022. As a reminder, our results reflect a full quarter impact of the Edgar Online acquisition, which closed in November of 2022. Turning to page seven for review of our third quarter revenues. We generated $27 million in gross revenues, up 4%, compared to the prior year period. Revenues less transaction-based expenses were up 5%. OTC Link's gross revenues were down 10% compared to the prior year period. OTC Link ECM and OTC Link NQB saw a 12% decline in transaction-based revenues and a commensurate 12% reduction in transaction-based expenses primarily due to lower trading volumes. Our OTC Link ATS on OTC Link ATS revenues from messages declined 19% and QAP1 statement fees decreased 30% respectively, also due to reduced trading activity. Against this backdrop of declining volumes, our team continued to grow the number of subscribers to OTC Link ECN with 108 subscribers at the end of the quarter up from 105 at the end of the prior year period. OTC Link ATS had 87 subscribers compared to 88 on September 30, 2022. Trading volumes are highly unpredictable and could vary significantly period to period. Revenues from our market data licensing business were up 22% quarter over quarter. Due to the contribution of the November 22, acquisition of Edgar Online, as well as subscriber growth and price increases for certain licenses. Pro user accounts were up 11%, with the corresponding revenues up 9%. Revenues from internal system licenses, delayed data licenses, and other data services increased 9%, and revenues from market data connectivity fees increased 85% in both instances due to subscriber growth and price increases for certain licenses. Partially offsetting these increases was a 24% decline in revenues from non-pro users, driven by a 22% reduction in period and non-professional user counts. Historically and in the normal course of business, we have seen significant changes in the number of non-professional users as market volumes and retail participation on our markets fluctuate, and we may experience a further decline in the future. Corporate services revenues decreased 3% in the third quarter. OTCQX revenues were up 1%, with incremental price increases affected for 2023, offsetting a reduced number of companies on the OTCQX market. OTCQB revenues declined 6%, and DNS revenues decreased 5%, respectively, due to a lower number of subscribers, offsetting the impact of pricing adjustments. In the third quarter, we added 28 OTCQX companies compared to 36 new sales in the prior quarter. We had 595 OTCQX companies as of September 30, 2023, compared to 609 as of September 30, 2022. For the annual OTCQX subscription period beginning January 1, 2023, we achieved a 95% retention rate relatively unchanged from 96% in the prior year. On OTCQB, we added 46 new companies in the third quarter, compared to 93 in the prior year period, and had 1,166 OTCQB companies at the end of the quarter, down from 1,245 at the end of September 2022. We had 1,496 pink companies subscribing to DNS and other products at the end of the third quarter, down 5% from 1,567 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 15C-211 becoming effective in September of 2021. This elevated number of DNS subscribers during the first six months of 2022 began to reverse in the third quarter of 2022 and has remained at lower levels through the first nine months of 2023. The month-to-month variability in subscriber numbers is driven by new sales offset by the impact of compliance downgrades and corporate events, as well as voluntary non-renewals in the case of OTTQB and DNS. Turning now to expenses on page 11. On a quarter-over-quarter basis, operating expenses increased 12%. The primary drivers of expense growth were an 11% increase in compensation and benefits and a 35% increase in IT infrastructure and information services costs. The increase in compensation and benefits reflects higher headcount, including employees from Edgar Online, annual base salary increases, and an increase in stock-based incentive compensation, partially offset by lower commissions. Compensation and benefits comprise 63% of our total operating expenses during the third quarter, compared to 64% in the prior year period. IT infrastructure 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. Turning to page 12. In the third quarter, income from operations declined 5%, while net income increased 3%, with a lower effective tax rate and interest income earned, offsetting the decline in operating income. Operating profit margin was 32.7%, compared to 35.9% in the prior year quarter. In addition to certain GAAP and other measures, management utilizes adjusted EBITDA, a non-GAAP measure, which excludes non-cash stock-based compensation expenses. Our adjusted EBITDA was 10.5 million in the third quarter, and our adjusted diluted earnings per share were 87 cents, each down 1% compared to the prior year period. Cash flow from operating activities and free cash flows for the quarter each amounted to $7.9 million compared to $9.2 million in the prior year quarter. Turning to page 13, during the third quarter we returned a total of $2.1 million to investors in the form of dividends unchanged from the prior year period. We remain focused on growing our business operating as prudent stewards of shareholder capital and delivering long-term value to our stockholders. With that, I would like to thank everyone for your time and pass it back to the operator to open the line for questions.
spk01: Thank you. As a reminder, to ask a question at this time, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please stand by while we compile our Q&A roster. And our first question is going to come from the line of Steve Silver with Argus Research Corporation. Your line is open. Please go ahead.
spk03: Thank you, Operator, and congratulations on being able to continue returning capital to shareholders through the special dividends, even during these uneven markets. It's really a testament to the performance of the team. I guess my first question, in the disclosure on a quarterly basis, there's been discussion about how the OTC link subscriber base or the addressable market is a little bit more limited at this time in terms of future growth. I'm curious as to whether you could put any parameters around the continued growth opportunity in the subscribers for the market data licensing among professional users. That seems to be the largest source of growth right now. Just curious to see how you see that pipeline moving forward.
spk02: Thank you for the question. We, as you know, don't make forward predictions. You know, our view is the more content we put on our network of securities trading, the more connections we make out, the more we're going to sell data. And I don't, the, you know, we've been making, connecting to more international broker-dealers, more international market data systems, and improving the quality of securities traded on our markets. And so, you know, those are the levers that we look to do.
spk09: And Steve, as a reminder, the members of RTC Links platforms could only be U.S. domiciled and registered broker dealers, while our market data could be consumed by those subscribers as well as foreign broker dealers. So the opportunity for the market data sets is broader than the subscriber base to OTC Link, even though, of course, there is a connection between the two.
spk03: That's helpful. Great. And then one quick question just about the OTCQB and QX member base. It's been very resilient given all the unevenness around the markets. Can you put any color around in terms of the reduction of the number of companies on the two platforms, whether most of them are just in terms of compliance or whether you've seen maybe a higher proportion of companies ceasing operations given the current client?
spk02: So there's compliance and there's, you know, there's, financial distress, uh, which is really a compliance issue too, because if a company is financially distressed, it really, you know, it shouldn't be on our OTCQX market. And, you know, I think the interesting dynamic is we're doing a very good job internationally and taking our message of, of, of the things we do for international companies, which is, you know, Just digitalize and distribute and normalize their disclosure and make it so there's no blank screens or empty machines under their U.S. symbol. And then there's the other side is share their their their compliance governance and and being lawful securities under U.S. securities law, rather federal or state law. for brokers to trade, for investment advisors to advise on, to go into the solicited investable market. And so that's where we've done really well. I mean, I think if you've read some of our recent blog posts, you've seen that a lot of the very speculative domestic issues are on the exchanges today. You know, there's You know, there's lots of penny stocks that keep doing reverse splits listed on the exchanges. And that takes away from, you know, we used to see companies that would get delisted from the exchanges much earlier in their cycle, but By the time smaller U.S. companies that may need to focus on their operations and struggle, they just keep doing reverse splits and effectively issue more shares to debtors, which is effectively going through bankruptcy. And that has kind of changed the dynamic of things sliding down on the domestic side.
spk06: Okay, that's fantastic. Thanks so much, and congratulations on the quarter.
spk07: Thank you.
spk01: Thank you. And one moment as we move on to our next question. And our next question is going to come from the line of Brendan McCarthy with Sudoti. Your line is open. Please go ahead.
spk05: Great. Good morning, everybody, and thank you for taking my question today. Just to start off, you know, I notice interest income becoming a bigger part of the picture, you know, this quarter compared to the same quarter last year. I guess, can you just talk about your strategy as far as capital allocation and cash on the balance sheet? I noticed short-term investments as a new line item on the balance sheet. How can investors think about just this interest income going forward?
spk08: Thanks for the question, Brendan.
spk09: Obviously, as the economic environment has changed and interest rates have increased, we have reacted appropriately to um take advantage of the opportunities to earn additional income on the corporate cash in terms of our capital allocation strategy it has remained quite consistent over the uh over the past of the company and as you know it is mostly focused on paying quarry dividend and again a special dividend uh this quarter as well In terms of interest income, how investors should think of it, we certainly remain very focused on driving our operating income, first and foremost, our sales and keeping our costs under control. But given the opportunities, we will continue to take advantage of the ability to earn financial income on our cash.
spk02: And yeah, I think at a high, this is Cromwell at a high level, you know, one of my favorite books that I think every public company CEO should read is the outsiders. And it's a good coverage of some successful outperforming companies that, um, that were thoughtful about investors capital. And, you know, there's some parts that I disagree with. They make a hero of the CEO. when these organizations, it's everyone in the organization being aligned within the culture of being stewards, commercial and fiduciaries. And I also, they put too much into what shows up in the financial reports as capital allocation versus resource allocation. And you can break... not many public companies are great at providing, you know, capital returns over the longterm. And that's something we aspire to is, and you can look at it two different ways. There's one way is build a businesses from organic growth that create capital over the longterm and grow in a, in a positive, profitable manner. And I think we've done that pretty well. And when we've been focused on that organic growth side, we have thought of ourselves in many ways the way Buffett will buy very good companies that serve their clients well, and he sucks all the capital out. So he takes away capital allocation from the management and pulls it up to where he's got a superior skill and he allocates it out there. We luckily have some great shareholders, so we push out on dividends is the second part is, can we get to the second stage now that we have some scale to be able to deploy capital efficiently in acquisitions? That's a very hard game. We have started small, you know, places where, you know, if we make a mistake, and we will make mistakes as we learn how to do this, is we won't blow up or sink the ship. And so that's the part where I would like to, over time, be a good organization of adding in profitable opportunities. But if you look at the news side is... you know, the old bulls on the hill of Buffett is building up all his cash. He's not out there buying things. And it's good for us to use this time to focus on our operations, focus on shifting, you know, making our business more competitive. And especially if the dynamic change from with the 15C211 rule changes and with market volumes going, you know, just the wind at our backs, and the waves are backs and the tide with us is to going to learn how to, how to, you know, actively swim upstream. And, you know, and that, and, and, you know, that part will be good for our organization and, you know, you know, mashing, merging, mashing together, the technologies, the people, the processes, and not being happy with the status quo. is important for us building a strong company for shareholders over the long term.
spk05: Great. That's helpful. Thanks for the insight. And then looking at the quarterly expenses, it looks like, from my perspective, total operating costs have actually trended downward, both from a year-over-year growth perspective and as well as a percent of revenue since the first quarter of this year. Just curious, do you think it's reasonable to say maybe the worst of the integration costs are behind the company?
spk09: To point out to what Cromwell said earlier, we do not give forward guidance on either revenue or expenses, but I would remind you that we did identify certain non-recurring expenses that we incurred early in the year related to the integration. We had a transition services agreement. We incurred additional data center costs for a period of time while we were transitioning the technology to a cloud environment. And of course, we did expect those to phase out as we continue to progress. In terms of future expectations, again, we do not provide forward guidance.
spk02: I mean, we had to hire consultants for the lift and shift. They stayed around too long. I think originally we had something like seven or eight, and we're now down to one. And hopefully the team will be able to onboard all those skills. So, you know, where we took on an EOL technology team who is smart engineers with good business understanding, they were complete novices. outside the data center type environment. And, you know, they have been learning by doing. And it's, you know, hopefully been an incredible opportunity for them to learn a bunch of interesting things. They've worked incredibly hard to, to, to do a bunch of work that that is, you don't see from the outside world and really isn't diving into the cool new stuff in the future yet, but they've learned how to operate this. And when I talk about stewardship of the EOL business is we've kept the data quality so we can keep the clients. And so it can be relied upon. You know, we knew EOL as a vendor because the data quality was so important for our data driven compliance processes. And, you know, that has been a real important threshold. Now, what we do and use, you know, interesting ways to expand the opportunities with that. I cannot tell you, like, how exactly that will move forward because there are variables and there are, you know, competitive opportunities, but there's also competitive threats. But we will hopefully, you know, by the end of the year, be able to start thinking about that. those ideas, but that's with using our internal resources.
spk05: Understood. That's helpful. And then looking at the market data licensing segment, I know you mentioned the bulk growth there from your perspective driven by the past acquisitions. Just wondering if you can disclose the inorganic growth metric from quarter to quarter.
spk09: In prior quarters, you will find a disclosure in our quarterly earnings calls identifying the percentage of growth that was attributable to the two acquisitions versus organic growth.
spk08: I would say approximately half of the growth was inorganic versus organic this quarter.
spk05: Okay. Okay. And the last question from, from me, I'm just curious about the compliance downgrade process. Um, you know, what would you say is the primary factor driving the compliance downgrades? You know, I'm sure it's inflationary pressure and the higher interest rates, you know, playing a big role, but just kind of curious as to your thoughts on what are the primary drivers there?
spk02: I mean, we're, we're part, it's part of the business cycle where when capital becomes tighter, you know, the risk off environment changes. And, you know, that said, there's opportunities in the data world because, you know, for us, being able to sell into the brokerage industry, a lot of the data points that we look at around companies that aren't on our markets because, you know, we track promotions. And we track promotion out to the broker dealers and clearing firms, not only for OTC securities, but listed securities. And I can tell you, when you look at promoted securities versus dollar volume, our team has done a really great job improving market integrity. And there's a lot of stuff going on in exchanges, which nobody's looking at. And it puts our model against theirs. We believe that our role as a market operator with a lot of different types of securities and disclosure standards is to put the data out there so investors can make their own decision. Exchanges like to blind buy the brand, and it's hard for them to talk about various risks of individual securities. And I believe our model is better for small capital formation in creating efficient pricing.
spk05: Got it. Thank you, Cromwell. Thank you, Antonio. Appreciate your time.
spk01: You're welcome.
spk07: Thank you.
spk01: Thank you. And I would like to turn the conference back over to Cromwell Coulson for any further remarks.
spk07: Thank you, Operator.
spk02: I want to thank each of you for joining us today. I would encourage you to read our full third 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 the public markets.
spk07: this concludes today's conference call thank you for participating you may now disconnect
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