OTC Markets Group Inc.

Good day and thank you for standing by. Welcome to the OTC Markets Group third quarter 2024 earnings conference call and webcast. At this time, all participants are in a listen-only mode. Please be advised that today's conference is being recorded. After the speaker's presentation, there will be a question and answer session. To ask a question, 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. I would now like to hand the conference over to your speaker today, Dan Zinn, General Counsel and Chief of Staff.

Thank you, Operator. Good morning, and welcome to the OTC Markets Group third quarter 2024 earnings conference call. With me today are Pramil Kulson, 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 2023 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 Colson.

Thank you, Dan. Good morning, everyone. Thank you for joining us today. I will discuss our third quarter 2024 results at a high level and review our operational and strategic priorities. Gross revenues grew 1% and net revenues 2% versus the third quarter of 2023. and were flat over the first nine months of the year as compared to last year. OTC Link continued to experience growth, up 16% during the quarter. Market data revenue licensing decreased by 1% and corporate services revenue decreased 2%. Antonia will review our financial results in greater detail in a few moments. OTC LINK's strong third quarter and its 8% growth over the first nine months of the year was due to increased trading volume across our markets. While we do not control market activity in any given quarter, we can improve the trading experience and expand our base of broker-dealer subscribers. Earlier this year, we announced the launch of OTC Overnight and In our third quarter report published yesterday, we discussed adding Moon ATS for overnight trading of NMS securities to our offering. We will offer overnight trading sessions from 8 p.m. to 4 a.m. Eastern Time, Sunday through Thursday. Our broker-dealer subscribers will be able to access thousands of exchange-listed and OTC securities during Asian market hours at European market open and overnight in the US. Our mission is to create better informed and more efficient data-driven markets. In pursuing that mission, a first guiding principle is that our markets empower regulated broker-dealers to lawfully trade any security that has investor demand. Initiatives such as overnight trading for OTC and NMS securities expand our value offering for subscribers. The corporate services business has been impacted by a reduced number of subscribers throughout the year. OTCQB has continued to see a number of financially stressed smaller companies drop from the market due to non-renewals or non-compliance with the OTCQB rules. Our OTCQX Best Market, OTCQB Venture Market, and suite of corporate services products provide a framework for public companies to own their symbols serve shareholders, demonstrate compliance with regulations, and engage with investors. For global companies, we provide a unique and streamlined way to connect a company's local primary listing to US valuations and secondary liquidity. A second guiding principle is that greater issuer engagement drives market quality, price efficiency, and trading volumes by improving visibility information availability, data integrity, and compliance. This benefits investors, brokers, and our markets. In October, we announced our plans to transform the pink current market into a new market, OTCID, a basic reporting market for companies that actively engage with U.S. investors through ongoing disclosure, management certifications, and timely share data. We expect to launch OTC ID in July of 2025. Our OTCQX, OTCQB, and paint markets have become recognized brands, ingrained in trading, regulatory, and compliance processes across the industry. As a result, we identified a need to better connect companies that actively engage with their U.S. investors, are willing to demonstrate compliance with securities laws and do not qualify for OTCQX or OTCQB. Issuers that are now in the PINC current market that do not provide updated information, ongoing reporting, and the required management certifications will see their securities transition to the PINC limited market or to the expert restricted market. This distinction will make it clear that the issuer has limited to no relationship with OTC Markets Group. For issuers that choose not to take an active role, the pink limited market will serve as a warning for investors of potential risks and information asymmetries, while still allowing broker dealers to serve clients willing to trade these securities. The pink brand will make it completely clear that responsibility for any market imperfections lies with the companies that are not connected. Our market data results continue to show both positive signs and highlight areas we want to focus on. Going forward, we need to devote resources to creating client value with Edgar Online data sets and developing new solutions for subscribers. The market data business delivers useful information onto investor screens and into broker-dealer machines. The more thoughtfully and widely our data is used, the stronger our data-driven market model becomes. Market data will serve a vital role in distributing the real-time data that will support the overnight trading business. We pursue growth through new products and improved service offerings that offer increased functionality and value for subscribers and take seriously our responsibility to be careful commercial operators and thoughtful stewards of our shareholders' resources. Our operating expenses were flat during the third quarter and grew by approximately 1% during the first nine months of the year. Compensation and benefits costs which are always among our highest expenses, have included continued enhancements to our compliance, market integrity, and cybersecurity functions. Operating in a highly regulated space requires that we stay vigilant in meeting our obligations and our responsibilities to our clients, regulators, and shareholders. On a more macro level, we continue to make progress in our five strategic priorities this year, First, one team, one platform, driving results to build the value of one share. Under this initiative, we continue to integrate our teams and consolidate our technology platforms to drive operational efficiencies and client value. Second, increase the number of securities on our markets. Our near-term opportunity is greater global trade, supported by overnight access to the securities trading on our markets and on the US exchanges. Non-US securities compromised over 90% of the dollar volume traded on our markets in the third quarter. We also seek to increase the breadth and depth of ADR and foreign ordinary shares traded in US dollars by US broker dealers. Third, transform the client connection and improve the quality of information. With more connected companies, Our market data business has the capacity to stream company information that creates better trading decisions, facilitates investment analysis, and supports operational and compliance processes. Better markets become bigger markets. Fourth, mitigate operational risk and strengthen regulatory compliance. In keeping with our focus on market integrity and compliance, we invest in our core trading infrastructure, operational processes, and risk management systems, as well as our regulatory procedures. Fifth, grow revenue across business lines and align resources with long-term value creation. We continue to focus on being good stewards of all our markets and thoughtful commercial operators to align our operating costs with recurring revenue generation and growth. In closing, I'm pleased to announce that on November 4th, our Board of Directors declared a special dividend of $1.50 and a quarterly dividend of 18 cents per share, each payable in December. These dividends reflect our ongoing commitment to providing superior shareholder returns. With that, I will turn the call over to Antonia.

Thank you, Cromwell, and thank you all for joining our call today. I would like to start by thanking our entire RTC Markets team for their continuing commitment to improving our markets, providing enhanced functionality to our subscribers, and for delivering results and driving our business forward. As I discuss our results for the quarter ended September 30, 2024, any reference made to prior period comparatives will refer to the third quarter of 2023. Turning to page eight for review of our third quarter revenues. We generated 27.4 million in gross revenues, up 1% as compared to the prior year period. Revenues less transaction-based expenses were essentially unchanged. OTC Link's gross revenues increased 16% and represented 19% of our gross revenues. Revenues from OTC Link ECN and OTC Link NQB increased 24% due to higher share volume executed. As an offset, transaction-based expenses also increased 24%. Additionally, OTC Link ATS saw a 20% increase in revenues from messages due to fee increases combined with a slightly higher message volume. OTC Link also saw an increase in certain connectivity revenue, due to the introduction of additional fees at the beginning of 2024. OTC Link finished the third quarter with 114 subscribers on OTC Link ECN and 80 subscribers on OTC Link ATS and had 139 unique subscribers across our ATSs. At the end of the prior year period, OTC Link had 108 and 87 subscribers on OTC Link ECN and OTC Link ATS, respectively, and 136 unique subscribers. Trading volumes remain highly unpredictable and could decline or increase further in the future. Revenues from our market data licensing business declined 1% quarter over quarter and contributed 40% of our gross revenues. Pro-user revenues decreased 6% and non-pro-user revenues declined 7%, in each case due to a reduction in user counts. Historically, 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 market fluctuate, and we may experience a further decline in the future. Revenues from Edgar Online decreased 15% due to subscriber cancellation. Partially offsetting these decreases were a 13% increase in revenues from internal system licenses, delayed data licenses, and other data services, and a 19% increase in revenues from our Blue Sky data products, with additional subscriptions and pricing adjustments contributing to the increase. Corporate services revenues, which comprise 41% of our gross revenues, decreased 2% in the third quarter. OTCQV and DNS revenues decreased 3% and 8% respectively due to a lower number of companies on the OTCQV market and a lower number of subscribers to DNS in the third quarter compared to the prior quarter. OTCQX revenues increased 3% as the annual incremental pricing adjustments effective January 1, 2024 served to offset the decline in OTCQX companies. In the third quarter, we added 18 OTCQX companies compared to 28 in the prior quarter and finished the period with 566 OTCQX companies down 5%. For the annual OTCQX subscription period beginning January 1, 2024, we achieved a 93% retention rate compared to 95% in the prior year. On RPCQB, we added 46 new companies in the third quarter, unchanged from the prior period, and had 1,062 OTCQB companies at the end of the quarter, down 9%. We had 1,379 PIN companies subscribing to GNS and other products at the end of the third quarter, down 8%. These engaged PIN companies, which have a relationship with OTC Markets Group through our disclosure offerings, represented approximately 13% of all PINC securities traded on our platforms at the end of the third quarter of 2024, and accounted for approximately 15% of all PINC securities at the end of the prior year period. Month-to-month variability in our corporate services subscribers is driven by new sales, offset by non-renewals, corporate events, and compliance downgrades. Turning now to expenses on page nine. On a quarter-over-quarter basis, operating expenses were essentially unchanged. A 1% increase in compensation and benefits expenses, a 3% increase in IT infrastructure and information services expenses, and an 18% increase in depreciation and amortization were largely offset by a 9% decline in professional and consulting fees and a 10% decrease in general administrative and other costs. The increase in compensation and benefits reflects higher stock-based incentive compensation as a result of the cumulative impact of prior year grants, as well as increased employee benefits partially offset by lower commissions and cash-based incentive compensation. Compensation and benefits comprise 63% of our total operating expenses during the third quarter, unchanged from the prior year period. IT infrastructure and information services expenses increased due to ongoing investments in our platforms and products, and depreciation and amortization increased due to timing of amortization charges for software placed in service in 2023 and related to Edgar Online. Professional and consulting fees decreased primarily due to the elimination of certain non-recurring expenses related to Edgar Online that were incurred during the prior year period and lower legal fees. General administrative and other costs decreased primarily due to lower bad debts partially offset by higher internal travel and entertainment and bank fees. Turning to page 10. In the third quarter, income from operations and net income each increased 1%. Operating profit margin was largely unchanged at 32.4% compared to 32.7% 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 expense. Our adjusted EBITDA was 10.8 million in the third quarter of 2024, and our adjusted diluted earnings per share were 89 cents, each up 2%, compared to the prior year period. Cash provided by operating activities amounted to 5.9 million compared to 7.9 million in the prior year quarter. Free cash flows for the quarter were 5.8 million compared to 7.9 million in the prior year quarter. Turning to page 11. During the third quarter of 2024, we returned a total of $2.2 million to investors in the form of dividends, compared to $2.1 million in the prior quarter. 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 for questions.

Thank you. As a reminder, to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. One moment for questions. Our first question comes from Steve Silver with Argus Research Corporation. You may proceed.

Thanks, operator, and good morning, everybody. Thanks for taking the questions. It's great to see the continuation of the Special Dividend Program. The first question is around the timing for the launch of OTCID. I was curious as to to whether it would require a lot of technology infrastructure for a July 25 launch date. Just curious if there's any color behind the timing for the launch.

Thank you for the question. It requires a lot of little changes because of the various different systems. However, it also allows us to go through and streamline our processes, because the market tiers, the tiering of markets has really been about different data-driven standards, qualitative and quantitative. So trying to build a streamlined process for issuers to be able to engage in the market, stream the fundamental data into the market, and certify compliance with securities laws, whatever reporting standard they use is universal across our markets.

Great. And is there any early thoughts in terms of how that designation will be priced, perhaps incrementally above the traditional pink market and maybe somewhere in between that pricing and what you're seeing with OTCQB?

Yeah, I think you're hitting it kind of the way we think about the market setup. These are companies, as Kamal noted, that are largely not going to qualify for OTCQB or OTCQX. And so the price point is going to reflect that difference between a more premium market like OTCQB or QX and a lower tier.

And it also reflects the value of being on a regulated market. We have a large market integrity team who spends a fair amount of resources with the engaged companies. And that qualitative side of having an integrity team has really improved the quality of markets for OTCQX, OTCQB, and OTCID should also happen because as great as we make our trading platform, as much technology that our broker-dealer subscribers use to provide efficient, low-cost trade and executions, as I said in the call, you can't build a market just on supply-demand. market imperfections will be through the information asymmetries, opacity and risk will be there unless the issuer takes ownership of their symbol and provides ongoing information.

Great. And one more, if I may. I know obviously the election is very fresh around us, but are there any early thoughts in terms of any potential changes at the SEC that maybe have been on your radar screen heading into the election? that you might have your eye on post transfer?

Generally speaking, our issues are not partisan and don't really flow with the change in administration. Most of the time when we're advocating at the SEC or FINRA, even on Capitol Hill, it's us waving our arms and trying to get those folks to pay attention to the issues that are most important to OTC brokers and companies and investors. The election, for better or worse, doesn't really impact our plans in that way. There's plenty of long-term SEC and FINRA staff that we'll continue to work with and kind of push for the same kinds of market structure reforms.

And I'd say that empowering the staff, because so many improvements to markets are small, incremental plumbing changes, removing inefficiencies, figuring out a way to do better. And the staff is very devoted and thoughtful. So empowering the staff at the SEC should be a real positive for all market participants.

Great. I appreciate the color. Thanks so much.

Thank you. Our next question comes from Brendan McCarthy with Sidoti. You may proceed.

Great. Good morning, everybody. Thanks for taking my questions. I just wanted to start off talking about OTC overnight. I know it was just launched in September, but just curious if that had an impact or much of an impact on the quarterly increase in total dollar volume in the third quarter.

Hey, Brandon. Thanks for the question. It's better to think about our overnight offering as a combination of OTC and NMS. So we, you know, as Cromwell noted, we made our filing for NMS overnight trading in July. The way that rule works, there's a 120-day period for the SEC to approve it. Coming up to the end of that, they are the SEC. They can, of course, extend their deadlines, so there's no guarantee of anything. But we're really looking at it as offering to our almost 140 unique appropriate dealer subscribers the opportunity to trade both OTC and NMS. And once that is the offering, and they're able to kind of one-stop shop, that's when I think you'll start to see more updates from us on how that impacts the results.

Understood. Thanks, Dan. But just to clarify, there were, I guess, a handful of securities that were made available to trade on NQB in September, is that?

There hasn't been any revenue effect from that. Got it. Okay. Thanks. I just wanted to turn to Edgar online. It's just clients want the whole offering. And it's a different process to get both dial tone for NMS as to get dial tone for OTC. Our clients are going to want to come in and do one programming session across those two connections.

Got it. Thanks, Cromwell. I just wanted to turn to Edgar online if you could. provide any additional color on how subscriber or how the subscriber count has trended in recent quarters?

Definitely, Brendan, thank you for the question. We did provide information on the subscriber count in our quarterly report. At the end of September, we had approximately 480. At the end of June, we reported approximately 500, and we ended last year, by December 2023, we had about 520, a little over. So that gives you a sense of how we have, what our experience with subscriber comes has been. This year, we continue to monitor the trend. And to Cromwell's earlier point, we're turning our attention to improving the product offering to integrating data sets and enhancing the value over time.

development resources are now going towards a mix of new features to support our various business lines and rebuilding some of the pieces of the technology that you can do better with modern cloud services.

Got it. And I wanted to turn to corporate subscribers. I guess over the past few quarters, has the sales cycle or sales success rate, has that changed noticeably at all in recent quarters in 2024 for OTC, QX, and QB?

In the beginning of the year, we shifted our sales teams around to be more regionally focused. And as part of that shift is getting that footing is moving forward i i would not make any predictions forward forward because however i think the otc id market is going to streamline the way we've built these this tiered market structure and as i said make it completely clear the pink brand is the orphaned securities. And it plays a really important role in capital formation that it provides a transparent, regulated market to electronically trade these securities. However, it will always be an imperfect market without issue or participation. And, you know, the history is my history of a value investor. was we would dig around for companies. We'd find companies where the information wasn't easily available. We also discounted those shares because we knew management was very often not aligned with outside investor value creation, and often from disinterested to hostile. We do have pink securities that trade a lot based on demand because of their own products or other areas. And we want to support that and we will always make it as efficient as possible. But the best path to making our markets better and pursuing our mission is engaging a higher percentage of issuers and their We can use the functionality that we built both for the trading community and the framework for public companies to do the right things for their investors to build a very competitive alternative to the traditional legacy exchanges for being public in a less costly or painful manner.

Got it. Thanks, Cromwell.

That's helpful. It's all for me. Thank you. And as a reminder, to ask a question, please press star 1-1 on your telephone. One moment for questions. And I'm not showing any further questions at this time. I would now like to turn the call back over to Cromwell Colson for any closing remarks.

Thank you, Operator. I want to thank each of you for joining us today. I would encourage you to read our full 2024 third quarter report and earnings press release for more information. 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 our key initiatives that will continue to shape the integrity and competitiveness of the public markets.

Thank you. This concludes the conference. Thank you for your participation. You may now disconnect.