OTC Markets Group - Earnings Call - Q1 2020

Transcript

Operator (participant)

Good morning, ladies and gentlemen, and welcome to the OTC Markets Group First Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. If anyone should require assistance during the conference, please press star, then zero, on your touch-tone telephone. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Mr. Dan Zinn, General Counsel. Sir, you may begin.

Dan Zinn (General Counsel)

Thank you, Operator. Good morning. Welcome to the OTC Markets Group First Quarter 2020 Earnings Conference Call. Joining me today are Cromwell Coulson, our President and Chief Executive Officer, and Bea Ordonez, 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 2019 Annual Report and our Quarterly Report for the first quarter of 2020, 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.

Cromwell Coulson (President and CEO)

Thank you, Dan, and good morning, everyone. Thank you for joining us today. Wherever you're calling in from, I hope you and your loved ones are safe. I want to begin our call by expressing our gratitude to the first responders, the healthcare workers, and so many important people who are working today to support us. Those in grocery stores, delivering our packages, collecting our sanitation, helping our neighbors, and each and every person we all rely upon. They have shown up to work, demonstrating extraordinary courage and resilience, maintaining essential services for our communities. They are all our heroes. I also want to acknowledge the team here at OTC Markets for rising to the challenge of these unprecedented times and keeping our stock markets open. We are living through a unique period of human history, a hundred-year viral storm.

While the world is reeling in many ways, we are fortunate that our business continues to operate. We find meaning in the fact that we are able to play a small role in helping the capital markets keep functioning by continuing to serve our subscribers, colleagues, and larger community. While we cannot predict how long these challenges will last, in times of crisis, the stock market provides liquidity for those who need capital and will be a light through the clouds as we find our course forward.

As we noted in our quarterly report, our framework for managing through this challenging environment is grounded in four key principles: supporting our colleagues and prioritizing their safety and well-being, continuing to serve our subscribers and our customers, ensuring that we take the measures necessary in the short term to protect our current operations and safeguard our financial stability, while remaining focused on the critical long-term strategic initiatives that position our business for future growth. I want to note our quarterly report and earnings release present the first quarter results in the context of broader global events, the current economic conditions, and this framework as our compass. We will do the same throughout this call and in response to your questions.

Our first quarter results were strong, with all three of our business lines delivering revenue growth, which overall drove an 8% increase in Top-line Revenue and an 11% increase in Operating Income. We will cover our financial results in greater detail in a few moments, but I want to take a moment to highlight the performance of our OTC Link Business line. OTC Link revenue grew 17%, due in large part to the extremely active market environment that we saw towards the end of the first quarter. Quotation system, which is an SCI entity, continued to support. OTC Link ATS Interdealer Quotation System, which is an SCI entity, continued to support our broker-dealer subscribers and facilitate their trading needs, while our OTC LINK ECN. Including four separate market-wide halts, it took the collective effort of the entire industry to keep stock markets open and meeting investors' liquidity needs.

We met this challenge with the majority of our employees working remotely, beginning in early March. I want to take a moment to personally thank three team members: Mike Medeski, Bart Krezlak, and Steve Hawk, who continued to come to the office and even slept there some nights. They ensured that we could safely have skilled hands in the office to respond immediately to any issue that may arise as we sheltered the rest of the team. I would be remiss if I did not also thank the remainder of our spectacular team, in particular those that have spent countless hours monitoring, planning, and implementing the technology solutions that allow us to run our markets in times of stress. They tirelessly worked to serve our clients and support our entire company so we could all continue to perform our roles from a remote environment.

It is a testament to their hard work and the resilience of the infrastructure that we have built that we are fully operating today and are able to mark another quarter of 100% uptime of core OTC Link ATS systems during market hours. Our business continuity planning is such that we do not need to have a physical presence in order to operate. Robust BP preparations allowed us to move quickly to protect our people and have most of them work remotely. It will also permit us to be careful and conservative in our approach when we start reopening our offices. Systems reliability remains paramount, and while we focus our attention on ensuring our operational capacity during this time, we have not taken our eye off of the longer-term goals. Our management, product design, and engineering teams continue to work on initiatives that will improve our technology platform going forward.

Our marketing team placed significant focus on growing our digital communication capabilities last year, and that has proven vital thus far in 2020. The increased usage of our Virtual Investor Conferences solution during the quarter highlights those capabilities. We are connecting companies to their investors and to each other, even when we can't gather in person. Now more than ever, we embrace our strategic vision for the future that is online, data-driven, and social. Thus far, our corporate services business line has felt the most acute effects of the COVID-19 pandemic, with new sales declining quarter over quarter. Specifically, the small and venture stage companies on the OTCQB market are among those most at risk of being impacted by the recent deterioration in economic conditions.

We are also likely to see a continued decrease in demand for our corporate services products as companies focus on preserving their day-to-day operations during the crisis. Against the backdrop of unprecedented market turmoil and an extraordinarily challenging economic environment, and in line with similar measures taken by NASDAQ and NYSE, we are providing issuers on our OTCQX and OTCQB markets with temporary relief from certain of our market standards related to bid price, market capitalization, market value, and public float through June 2020. Similarly, we have followed the SEC's lead in extending the deadline for certain disclosure filings by up to 45 days. We remain committed to our disclosure-based philosophy and data-driven market standards, and we recognize that temporary relief from certain requirements is an appropriate response to the current environment.

It should be noted that there are hundreds of NASDAQ and NYSE listed companies that will fall out of compliance with share price or financial listing standards. We believe that our OTCQB market, which is a disclosure-based market, can play an important role in giving public companies a way to continue providing disclosure to investors as they address their current financial or economic challenges in a cost-effective and time-efficient manner. Our market data licensing business delivered strong quarter-over-quarter revenue growth from pricing increases in product sales. We also added hot sector data and risk flags to our small-cap listed compliance product covering more than 2,300 NASDAQ and NYSE listed securities. We enhanced the U.S. Bank Holding Company corporate structure data on our website to provide historical data trends and charting functionality on all call report data points from more than 550 U.S.

Community banks trading on the OTCQX, OTCQB, and Pink markets. To achieve our mission of creating better-informed and more efficient financial markets, we must keep adding useful data streams and driving enhanced market transparency. During the first quarter, we continued to work closely with the SEC on significant regulatory proposals impacting our markets. Most notably, on April 8th, we filed our third comment letter on the SEC's proposed amendments to Exchange Act Rule 15c2-11. This rule governs the publication of quotes on our OTC Link ATS Interdealer Quotation System. The SEC's proposal includes a number of positive aspects, such as recognizing our OTCQX, OTCQB, and current information disclosure standards, and allowing brokers and others to rely on our designations to determine whether companies meet the rules' eligibility requirements.

The proposal also includes several debatable elements, including its limitations on startups, early-stage companies, and others that can be unintentionally harmed by shell company definitions. It overly restricts trading transparency and market efficiency for shares of outside investors in companies that cease providing current public information. As a result, the proposal has been met with the differing perspectives from individual and institutional investors, broker-dealers, companies, advisors, and other regulators. We have proposed a number of practical solutions that would modernize and streamline the rule in a more effective manner. We appreciate the SEC's willingness to engage with market participants as they consider how to structure a final rule.

If adopted as currently proposed, a final rule is likely to have some positive impact on our ability to develop future revenue streams but would also introduce complexity and limit the number of securities eligible for quoting on our markets, which is likely to have a negative impact on revenue. We look forward to continuing to work closely with the SEC on this important rulemaking. Finally, I'm pleased to announce that on May 5th, our board of directors declared a quarterly dividend of $0.15 per share payable in June. This dividend reflects our ongoing commitment to provide superior shareholder returns. Unlike a storm in the ocean, there is no satellite map that will tell us when the squalls will pass, so we must concentrate our efforts on safely sailing through whatever trials may appear on the horizon.

We are focused on the safety of our colleagues, serving our clients, remaining operationally and financially strong, and prudently navigating these unprecedented times while positioning ourselves for growth. I am confident that we have the crew to do just that. As I turn the call over to Bea, I want to recognize the work that Bea and the finance team, as well as our legal team, have done to publish our quarterly reports on time. It has taken a big effort to stay on schedule. Thank you, Bea and your team and our legal team, and with that, it's all yours, Bea.

Bea Ordonez (CFO)

Thank you, Cromwell, and thank you all for joining the call today. I hope that everyone is staying healthy and safe. I want to start by commending the efforts of the whole team here at OTC Markets who have pulled together and continue to work every day to support our clients and subscribers through these difficult times. I will now spend a few minutes reviewing our results for the first quarter of 2020. Any reference made to prior period comparatives refers to the first quarter of 2019. As part of our review of our financial results, we will endeavor to provide additional information and disclosure related to how the unfolding COVID-19 pandemic has affected our first quarter results and how it could affect our future performance.

For the first quarter of 2020, we generated $16.6 million in gross revenues, up 8%, with all three of our business lines delivering quarter-over-quarter revenue growth. In the aggregate, the COVID-19 pandemic and the challenging business environment that has resulted from it did not have a material adverse effect on our first quarter revenues, with strong growth in transaction-based trading revenues and the impact of price increases and user growth in our market data business offsetting weak growth in our corporate services business. We operate three distinct business lines that generate diversified revenue streams and serve a broad range of market participants and a wide spectrum of U.S. and global issuers. We benefit from a subscription-based revenue model, with approximately 85% of our revenues coming from subscription-based contracts that are recurring in nature.

We ended the quarter with a strong balance sheet, $23 million in cash on hand and no debt, and are well-positioned to continue to invest in our business and to prudently deploy capital. We have continued to operate our businesses, provide support for our subscribers and customers, and devote resources to enhancing our product suite and to adding subscribers and growing the number of issuers on our markets. We are confident that we are well-positioned to navigate the difficult economic conditions ahead. With that said, it is clear that while considerable uncertainty exists, our operations and financial results in the coming quarters are likely to be impacted by the current macroeconomic environment. Turning now to look in more detail at individual business lines. As we've noted, OTC Link revenues were up 17%. We saw significant volatility in the U.S.

Equity markets throughout the month of March, and this drove a substantial increase in the number of transactions executed on our OTC LINK ECN, as well as a marked increase in the number of quotes and trade messages on our OTC Link ATS. To illustrate, for the month of March, we executed some 213,000 transactions on our ECN, more than double the number of transactions executed during the month of February. This, coupled with the impact of additional subscribers onboarded over the past several months, drove an increase in our ECN revenues for the quarter of 127%. We've continued to see a relatively active market environment during the month of April, and in the short term, it is likely that our OTC Link Business will benefit from the increased volatility and increased trading volumes we are seeing in global equity markets more generally.

However, over the longer term, as broker-dealers and others continue to navigate the difficult environment, it is possible that potential subscribers could delay purchasing or implementation decisions. Further, a prolonged downturn in economic activity could depress trading activity and adversely affect our subscriber base and, in turn, our trading revenues. Revenues from our market data licensing business were up 11%. Effective on January 1, we raised the monthly subscription price for Level 1 and Level 2 professional users of our data, the first such raise since 2014. This, coupled with a 3% quarter-over-quarter increase in the number of reported users, drove a 14% increase in revenues. We also raised the monthly subscription cost of certain of our broker-dealer enterprise licenses, again the first such increase since 2014. This drove a 25% quarter-over-quarter increase in related revenues.

Finally, sales of our data file products and sales of and upgrades to premium versions of our compliance offerings drove a 20% increase in related revenues. As of May 1st, 2020, 44 subscribers use our products to streamline and automate their compliance processes, including almost every institution that is active in the OTC space. We have devoted significant resources to growing our subscriber base and believe that we have captured much of that addressable market for our existing suite of products. Further, consolidation among the larger financial firms is likely to continue and could impact the addressable market, both for our compliance products and for our enterprise-level market data products more generally. With that said, we are devoting internal resources to developing additional products that better serve the complex compliance needs of participants in the OTC and broader U.S. equity markets.

While revenues from our market data business have not thus far been materially impacted by the economic slowdown, it is possible that we could see potential subscribers delaying purchasing decisions, while existing subscribers might look to curtail their spending or cancel services. Revenues from our corporate services business were up 2%. Revenues from our OTCQX market were up 6%, in line with a higher number of companies on the market over the course of the quarter. We benefited from a higher starting point, with 442 companies on the market on January 1st versus 409 companies at the beginning of 2019. We saw a small decline in our annual renewal rate from 94% for the 2019 annual subscription period to 92% for 2020.

Further, we saw a significant slowdown in sales in the current quarter, with nine companies added versus the 30 companies that joined the market during the first quarter of 2019. Thus, at the end of the current quarter, we had 414 companies on the OTCQX market, flat versus the prior year quarter-end. On a quarter-over-quarter basis, the ending number of companies on our OTCQB market has contracted by roughly 5%, driving a 4% decline in revenues. In 2019, we raised market standards on our OTCQB market, which has had the effect of reducing the available pool of domestic companies. Further, relative to 2018, we saw a much less active cannabis market in 2019. As a result, for the year ended December 31st, 2019, we saw a roughly 17% decline in sales, driving a contraction in the number of companies on the OTCQB market at the beginning of 2020.

In addition, we saw a significant drop in new sales during the first quarter, with 28 companies joining the OTCQB market versus the 68 companies added to the market during the prior year quarter. As Cromwell noted during his remarks, OTCQB companies have likely been amongst those most impacted by the rapid deterioration in macroeconomic conditions that occurred in the first quarter. In respect of both our OTCQX and OTCQB markets, we have seen issuers, including global issuers, deferring buying decisions while they adjust to the challenges of the current business climate. Our sales efforts have also had to adapt to the challenges of operating in a remote working environment. We remain cognizant of the very difficult business conditions that exist for some of our issuers and are extending relief, including where appropriate, by extending payment terms and, as Cromwell noted, by providing temporary relief from certain market standards.

To the extent that the current economic downturn becomes more severe or is prolonged, we are likely to see a continued dampening of demand for our corporate services products. Further, we are likely to see an increase in the number of customers, particularly OTCQB customers, who choose not to renew their services at the end of their service term. On the other hand, as noted by Cromwell, a prolonged downturn would, over the longer term, likely result in an uptick in companies delisting from national exchanges and could expand the pool of qualified companies for our markets. Turning now to expenses. On a quarter-over-quarter basis, operating expenses increased by 4%. The primary driver was a 7% increase in our compensation costs, reflecting increased headcount, the impact of annual salary raises, as well as increases in share-based compensation expense and in the cost of providing healthcare coverage for our employees.

This, together with less significant increases in other areas, was partially offset by a decline in our occupancy cost, a result of one-time costs incurred in the prior year quarter. With revenues growing at 8% and expense growth contained at 4%, we delivered 11% quarter-over-quarter growth in income from operations, while net income for the quarter increased by 9%. The company's effective tax rate increased from 13% to 14%, largely as a result of quarter-over-quarter declines in excess tax benefits recognized in respect of stock-based compensation. Cash flows from operating activities for the first quarter amounted to $200,000, a small decrease versus the prior year period, with increases in net income and in the amount of non-cash items offset by changes in our assets and liabilities.

During the first quarter, we used operating cash flows generated, as well as cash on hand, to fund technology infrastructure investments and to return cash to investors in the form of dividends and through our stock buyback program. We returned a total of $5.3 million in the current quarter, up versus the $3.1 million returned in the prior year period, a result of the increase in the number of shares repurchased. In closing, during the first quarter, like so many businesses here in the U.S. and globally, we worked diligently to adapt to our new working environment and to continue to support our colleagues and the thousands of subscribers and issuers we serve. We delivered strong earnings growth while remaining focused on the critical long-term initiatives that position our business for future growth.

While we continue to evaluate the evolving challenges of the current environment, we remain focused on delivering for all of our stakeholders and on continuing to grow to support the needs of our diverse community of clients. With that, I would like to thank everyone for their time and pass it back to the operators to open up the line for questions.

Operator (participant)

Ladies and gentlemen, if you have a question at this time, please press star, then the number one on your telephone keypad. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Once again, that is star one if you would like to ask a question. I am showing there are no questions at this time. Thank you, operator. Ladies and gentlemen.

Dan Zinn (General Counsel)

I want to thank you all for joining us today and encourage you to read our quarterly report for additional perspective. As always, we remain committed to supporting our colleagues, our clients, and our company in these challenging times. On behalf of the entire team, I would like to wish you and your families continued health and safety. We look forward to connecting with you next quarter. Thank you. Wait, operator, there are questions now.

Operator (participant)

Yes, I see. Your first question comes from Chris McGinnis from SIDOTI & Company.

Chris McGinnis (Special Situation Equity Analyst)

Good morning. Thanks for taking my questions. Nice quarter, and I hope you're all healthy and safe.

Can you just maybe talk a little bit about trends maybe in April and maybe how estates start to open up and maybe economies start to unfreeze here, if that's had any changes with the business and just how maybe trends are tracking in April and early May? Thanks.

Bea Ordonez (CFO)

Thank you, Chris, and thanks for your question. I hope you're staying well. Yes, certainly. Look, we've closed out April now, obviously. As I noted, I think during the remarks and as we noted in our quarterly, we've continued to see a fairly active environment during the month of May. To give some context on our OTC LINK ECN, that May we averaged about 8,000 transactions per day. Down from the month of March, we executed an average of 10,000.

Down a little bit, but still up considerably from our average in January and February and on a period-over-period basis, also up considerably. As I noted, that's in part, obviously, a factor of the very active market environment, but also of the significant success we've had in onboarding subscribers over the last several months. If you look at May 1, 2020 versus May 1st last year, we have 61 subscribers connected versus 43 last year. Yeah, as I noted, I think in the short term, our OTC Link Business has some transactional exposure through the ECN business primarily, and we're likely to see a little bit of an uptick there and some tailwinds from the active environment.

In our market data business, again, active environments and more eyeballs on data and so on will likely continue to sort of stay steady state, at least for a little bit. Again, as conditions prolong over a longer period of time, if indeed they do, that is where we might expect to see headwinds sort of through the end of that cycle. Corporate services, again, as we noted through our remarks, is really the area where we saw the fastest impact and where we might see a more prolonged impact. Again, there is significant uncertainty here, but it all sort of depends on the length and severity of any downturn. In terms of April, what we saw in the first quarter, as I noted, was certainly a decline in sales for a whole bunch of reasons. By the middle of the first quarter, we had limited business travel.

We had canceled in-person events at our offices. Both of those represent a significant form of outreach for us. By early May, we had transitioned everybody, including our sales team, to a fully remote working environment. Without a doubt, that had an impact on sales processes and onboarding. In addition, obviously, the market declines, the steep decline in stock prices that we saw in March had an outsized impact on small-cap companies. We saw some not insignificant number of companies in our pipeline fall out of compliance with market standards who would otherwise have qualified. All of that had a drag on sales in the first quarter, which you see in the numbers. In April, we see a little bit of an uptick in OTCQB sales, which is nice.

We added 13 companies to the market in April, which is just a shade down from the 16 that we added for April of last year. We added three companies to our OTCQX market, again, down from the eight we added last year. Signs of life. We have a strong pipeline. As we see, again, we noted during our remarks that exchanges are also extending temporary relief around certain market standards. As we sort of work our way through that cycle and potentially see more delists, we could see more signs of life in that pipeline as well. Really, in terms of longer term in our corporate services, again, a prolonged downturn could dampen demand for our products. At the same time, look, companies will need to access the benefits of being a public market.

If the current climate does become somewhat of a new normal for at least some period of time, companies who have perhaps deferred some of their decisions may start to operate more normally within what is the new framework. We remain pretty bullish around that and are going to continue to do what we've done throughout the quarter, which is to devote resources to outbound sales efforts, to move as much communication online and leverage products like our Virtual Investor Conferences business, and to continue to support our issuers with relief where appropriate and just with the support we've always provided them. I hope that answers your question.

Operator (participant)

As a reminder, if you would like to ask a question, that is star followed by the number one on your telephone keypad. As the presenters are answering your questions, if you could please mute your line.

Your next question comes from Andrew Mitchell from Edison.

Andrew Mitchell (Director and Financial Analyst)

Yes, good morning. Thank you very much. I was wondering if you could comment on the number of broker-dealer participants in OTC Link ATS has shown a further decline in the quarter you're reporting on. I was wondering if there's any sort of specific background to that. Have any of them, I assume not, but have any of them simply transferred to using the ECN and not the ATS? Can you sort of shed some more light on that?

Dan Zinn (General Counsel)

Sure, Andrew. Thanks for the question and hope that you're well. It's the continuation of a trend that we've seen for quite some time where there's just increased consolidation in the space. I think the numbers bear out that we've seen an increase in usage of the ECN. Some of that is crossover.

It's firms using both services since they provide a different experience from a trading perspective. It's not so much that firms are leaving one to join the other. I think the expansion that you see is due to firms taking advantage of both types of services. The general trend in terms of the number of broker-dealer subscribers is really just in keeping with what we've seen over time. Outside of a few that I think have moved from OTC Link ATS to OTC LINK ECN, the general trend is just the overall long term.

Andrew Mitchell (Director and Financial Analyst)

On the ECN, obviously, I assume the main driver, I think you say in the statement, of the increase in transaction-based expenses is obviously the increase in volume. Have there been any significant changes in the terms for participants, the make or take of fees?

Dan Zinn (General Counsel)

No.

We can address this as well from just the pure results perspective. You're right. The increase that you see is really based on the increased volume in the market. That impacts quote and message activity on OTC Link ATS, as well as obviously executions and transactions on OTC LINK ECN. It's not a change in pricing or in the model. It really is all flowing from that impact of increased activity.

Andrew Mitchell (Director and Financial Analyst)

Thank you very much. I think a final one was on the, you flagged up that there's clearly, if things are protracted in terms of the macro effect, a key risk is to the corporate business line. I was wondering, the OTCQX, I think, is a calendar year, primarily a calendar year renewal cycle.

I was just wondering if in OTCQB, there's any lumpiness in terms of when contract renewals come up that may affect when if there is this sort of adverse development, when we might expect to see that becoming more evident.

Bea Ordonez (CFO)

Right. Sure. No. As you know, OTCQX customers renew annually based on a calendar year subscription period. As we noted in our remarks for 2020, we achieved a 92% renewal rate, which again, we're very pleased with, a shade down from 94% last year. We've stayed historically right in that band of 92-94%, and so on. OTCQB customers, as you noted, they renew annually or semi-annually on a rolling renewal calendar based on the anniversary when they joined. We see a little bit of lumpiness, something we did in the earlier years based on how we rolled out that market and onboarded customers.

In a typical month now, we might see somewhere between 75-100 OTCQB customers up for renewal in any given monthly period. To provide a little bit of context, in 2019, our average renewal rate across every renewal cycle that hit through that year was about 93%, up a bit, down a bit in given months. Again, a fairly sticky product with a low rate of voluntary churn off of it. It's early, as we've noted. Look, the real effects kicked in in March in terms of some of the governmental measures that locked down the economy. We are going to have to see how this plays out and continue to evaluate it.

In looking at April as an example, April renewal date and our terms require payment 30 days prior to the beginning of the next service date, we would ordinarily have closed out that period. We so far hit a renewal rate of 84% for April, and we have extended payment release to 14% within that pool of companies. We are certainly lagging where we would expect to be in renewal, but not markedly so. We sort of feel like we can navigate through this. To give a little more context in terms of May, we have seen 70% of companies renew. We are certainly lagging where we were in 2019, but it is early days. We have extended payment release, which we think is appropriate, obviously, given the unprecedented economic conditions.

We will just continue to evaluate that and do what we think best serves the interests of obviously the company and our market standards and so on, but also of our issuers and supporting them through these times. I think it is somewhat hard, obviously, there is significant uncertainty for everybody to really model out what the likely impact is going to be. We are beginning to see some trends, but a lot can change in the next three months, just as a lot changed in the three months leading up to this point.

Cromwell Coulson (President and CEO)

Andrew, thank you very much. Yes, go ahead. Yes, go ahead. Yeah, Andrew, Cromwell. As I said, we do not have a radar map that is going to tell us when the storm is over.

I do believe in these times, managing quarter to quarter is just completely foolish because we know there is the current situation where staying financially strong, serving our clients, protecting our people, and preserving our financial strength. We also know eventually you sail through these things. Nobody can tell you whether there is going to be a U or a V when it comes out. It will. Whether it is six months or two years or three years, our goal is to make it through. Now, I would say there is a challenge now because business all focused on hanging on and dealing with immediate needs across, and everyone was in a different situation in our corporate client world. While traders were, it was going full speed.

As we look at going forward, one of the unique things about venture markets is people think about them as just for new companies coming on. Venture markets, because they are very light on the financial standards, are disclosure-driven. They also give a place for companies to hang on and keep providing information to investors. We have seen that in having Fannie Mae and Freddie Mac, our OTCQB companies. We see that in other companies. In some ways, moving to a market that is disclosure-based while a management team is addressing their challenges is much more efficient for them. Instead of seeing companies on NASDAQ focusing on doing reverse splits to try and keep their stock price up permanently rather than putting the management time to addressing the challenges and building a sustainable business.

In our cycle, OTCQB was a much younger experience in the 2008 crisis. As we look to Canada, we see often that there are a lot of companies that want to hold on to stay on a venture market even when things are not doing well. That for us is helping people understand why it is useful and why it may be a better place than being on a national exchange where the financial standards, you are focusing on short-term financial standards versus long-term sustainability.

Andrew Mitchell (Director and Financial Analyst)

Yeah, that makes a lot of sense. Thank you.

Operator (participant)

Your next question comes from Dave Elias from Elias Asset Management.

Dave Elias (Founder, President, and CIO)

Thank you, everybody. Thank you especially for everybody at the company for hosting the conference call. Congratulations on a very good quarter. I cannot even imagine the backend work that goes on back there to support your work. I have three questions.

Before I question, I want to preface something. The business part, I don't question. You have a strong balance sheet. You have a strong, your revenues are very good. My question is, what, if any, initiatives have you done or plan on doing to increase the liquidity in your stock? I ask this because in your opening statement, you commented on liquidity being an essential facet of the stock market, especially during these difficult times. However, your stock has minimal to no liquidity. That is the first out of three questions.

Cromwell Coulson (President and CEO)

Sorry, just taking myself off mute.

Dave Elias (Founder, President, and CIO)

That is okay.

Cromwell Coulson (President and CEO)

I think every stock would like to have more liquidity. For us, is there enough liquidity for existing shareholders as they roll through, as they go along?

One of the parts I always found interesting was when we were a private company, our conversations with our outside investors were, "When are you selling the company?" In our annual meetings with them, "And when are you selling?" I expected we'd have more investors who wanted to sell. We do not have a ton of investors who want to sell. That is a good thing from us because I look at liquidity as a turnover. There is liquidity in that if you have a ton of liquidity just for liquidity's sake, what you are doing is you are shortening your shareholder duration. We talk to community banks, which often look a lot like our type of shareholder base, where only 5% of their shares turn over in a year.

For the community banks, they're like, "I'd like to have five times liquidity," but then they would be shortening their investor duration. Yes, would we like to think about other ways to increase liquidity as areas go forward? The second part is, I think most people, we see blocks appear in the market, and they trade. There's this idea that makes people happy that I should be able to show up in a smaller company stock, whether exchange-listed or OTC, and be able to sell large block really quickly. It's a bug in markets that there's not liquidity for size in stocks. What we see is it's actually a feature because smaller companies have information asymmetries. If someone shows up wanting immediate liquidity for a large amount of stock, in small companies, you're either going to get speed or price. You don't get both.

What we've seen is when blocks have come along, they've either had to sell over time into the market, or a block shows up, and it hangs out there for two weeks, a month at the market, and the market realizes the seller isn't discounting their shares, doesn't have an informational asymmetry. Often it trades around the market level. That's our part. There are a lot of people outside the industry who will loudly say that we can make this market structure change. It is one of the reasons why we've been also not, as a traditional value investor, buying back as aggressively stock in the public market because that creates a liquidity trap. We prefer dividends in general, and we've done for because employees have smaller windows. That's our general philosophy.

We would love more liquidity, but we think we have an appropriate amount of liquidity. If someone wants to be able to buy a stock that they can buy a huge amount and trade out of in the next 30 seconds, they should concentrate on trading much bigger companies.

Dave Elias (Founder, President, and CIO)

Okay. Thank you. My second question is my second of three questions. While I do see an appreciated dividend, and I do believe a dividend is better than a stock buyback, but that's an opinion. It's not a fact. I would like to see I'm trying to calculate my upside as an investor in a company that has a $325 million market cap concerning that significant revenue growth. When I say significant, I want to be fair because that's a subjective term or it's an opinion. Significant revenue growth being, let's say, year-over-year, double digits, 20%.

How this company is going to grow 20+% per year unless you make an acquisition. My concern is there's only so much upside in a $325 million market cap company unless a major event occurs. I'm trying to look at it from my perspective, and I'm having difficulty finding it because, like I said, I believe what you do is great. I believe the service and everything you do provide to small caps is wonderful. I believe your business is good. I believe that your business is not going to go away, and it's probably going to grow. If I had to make an internal guess, and I understand you don't give guidance or pro forma, nor should you, but I don't see the significant growth. As an investor in a $325 million market cap, I'm having trouble with that.

Can you help me better understand that or how I could look at it? I have one very quick question after this. Sure.

Bea Ordonez (CFO)

Let me try and answer that. Look, it's difficult as I sit here for me to answer how you should view this as an investor given your particular requirements and your particular characteristics as an investor and what your risk-adjusted return might be on this kind of stock and so on and so forth. I think to your point in the question, we have delivered growth over the long term for a very long time. We have a long operating history of delivering earnings growth and of raising the dividends that we pay and the amount of cash we return to investors over the long term while also delivering stock value appreciation.

Look, as every caveat will tell you, past performance does not guarantee future performance. We have continued even over the last several years to expand within our sector of the equities markets to put out more products, to find more niches, to serve more clients and subscribers, to really look at the global opportunity. We have proven over the last several years that we can and will do that to deliver lasting growth and value over the longer term. In terms of our capital allocation policy, as you know, we have paid consistent quarterly dividends. I think it is now our 45th or 46th consistent dividend. We have always raised it, or we have raised it, or looked to raise it in line with that earnings growth.

We will prudently evaluate the current condition, but our long-term goal is to continue to raise the amount of cash we return to investors through dividends and through other programs in line with that earnings growth that, look, we remain confident that we can deliver over the longer term. In terms of your note on acquisitions, yes. Look, we have noted through a couple of earnings calls that we view that as an avenue to really drive more incremental growth through the business. We have certainly been looking at it with some limited success to date. Given the current economic climate, look, it is difficult times, certainly, but they can create opportunities for us and for others. We have certainly seen and are likely to continue to see valuation multiples contract when you compare it to the meteoric highs that we have seen over the past several years.

We may see an opportunity as a result, and we remain willing and able now or in the future to deploy capital if we come across the right opportunity.

Dave Elias (Founder, President, and CIO)

Thank you. My last question. I hope there is some way to go ahead. Thank you. My last question. Thank you again. This is my last question. Sorry for taking so much time. My philosophy, and again, it is more of an opinion as compared to a fact, but my philosophy has pretty much been proven. For any public company to see stock appreciation, they require institutional investors coming in. What are you doing to bring in institutions since you do not have any? Secondly, this becomes a little bit of a quandary, and I do not want to beat a dead horse with a stick, but the liquidity issue.

The liquidity issue, institutional investors, our firm, for example, we wouldn't take a position in a company unless we could buy at least $250,000 worth of a stock. With that being said, right now, I'm having difficulty getting into this stock to get the $250,000, but you don't have institutions. Forgetting my fear in my firm, but without institutional investors, there's only so much a stock will go up. With that being said, I don't want to talk about the liquidity as much, but I do want to talk about what, if anything, are you doing or can you do or do you intend to do to bring in institutional because with retail investors only, that creates almost like a ceiling to what the company's stock can do.Thank you. Thank you again for the call, and congratulations on a great quarter.

Cromwell Coulson (President and CEO)

This is Cromwell.

We do have institutions. They're quieter institutions. A lot of the institutions we see come in are either value or growth with value and small company specialists. A lot of those ones are very happy buying over the long term. They don't want to pay the liquidity premium. They hang around on the bid. They learn these questions. They come visit us for years. It is we are a company with a lot of shareholders who have done well over time, and they don't want us trying to bang home runs. They don't want us. What they want us to do is consistently building out our platform to serve our clients in a sustainable manner. I would say one of the big lies about liquidity in small companies is driven by pipes players.

It's the intermediaries that come in and tell small companies, "I want to invest in your company. I'm a long-term investor. I'm an institution." They go, "But you need more liquidity, so you need to put out aggressive press releases. You need to do things that are on the edge." Those firms just buy shares at a discount and are selling them into the market because they're talking about liquidity is really about how big a door can I arbitrage. Other longer-term investors, if we were doing a capital raise, there'd be a group of institutions that we could go to, and we could expand. We look at that as a line in it. Running a public company to be long-term is, if you want to be super aggressive short-term, shoot them up, guys. There's other markets for that.

We want to provide a sustainable market for public companies where management can focus on long-term and giving their investors the information, the transparency, and the tradability, but without all the burdensomeness. We eat our own cooking. I do not think every company needs to be able to trade a million shares a day to be a public company. That is the problem we are solving in the U.S. If you want us to be something differently, we are probably the wrong stock for you. We have questions from one more person.

We have a follow-up question from Chris McGinnis from SIDOTI & Company.

Chris McGinnis (Special Situation Equity Analyst)

Thanks. Just a quick question. I appreciate taking the time again.

Just on the cost structure, kind of from Q1, kind of going forward for the rest of the year, any changes that you might want to mention or you think it'll probably stay at the same levels on the operating side? Thanks.

Bea Ordonez (CFO)

Thank you, Chris, for your question. Yeah. Look, as I noted through the remarks, there's not big movements in our cost structure quarter over quarter. I think we did a good job in containing expense growth, and that was our plan for 2020. We saw a lot of investment. You've tuned into many calls now, but 2019 was really marked by investment in a bunch of areas. We added headcount. We added infrastructure capabilities, and those capabilities have served us very well now, as we noted during our remarks. That was really an investment year, and we saw the impact to our expense base accordingly.

For 2020, and we had flagged this last year, we largely wanted to contain that expense growth and see some leverage and see some margin expansion. We saw that in Q1. Obviously, as we look forward, life is not quite what we expected it to be, but I do not expect significant changes to our operating expenses over the rest of the year. A large percentage of our expense base is fixed in nature. Roughly 80% is compensation and IT expenses. We do not plan on adding headcount in the short term. All things being equal, we will continue to invest prudently in infrastructure initiatives as we need to and as planned, but we do not plan on significantly upping those costs either. We are a relatively small company, and we run pretty lean. A long way of saying we do not expect significant movement there.

We're focused on not only weathering the storm, but obviously positioning ourselves for the longer term and being able to emerge from this stronger and able to drive future growth. Certainly at this point, and I know other companies have said similar things, we don't plan on reducing headcount in any way or anything like that in the short term. We'll continue to evaluate market conditions. Emerge stronger on the other side. That is the plan. There are no further questions.

Operator (participant)

Thank you.

Cromwell Coulson (President and CEO)

Thank you, operator. Since I've already read my closing remarks, I'd just like to repeat on behalf of the entire team at OTC Markets, we would like to wish you and your families continued health and safety. We look forward to connecting with you again. Thank you.

Operator (participant)

Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day.

You may all disconnect.