OTC Markets Group - Earnings Call - Q4 2024

Transcript

Operator (participant)

Good day, and thank you for standing by. Welcome to the OTC Markets Group Fourth Quarter and Full Year 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 one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. I would now like to hand the conference over to your speaker today, Dan Zinn, General Counsel and Chief of Staff.

Daniel Zinn (General Counsel and Chief of Staff)

Thank you, Operator. Good morning and welcome to the OTC Markets Group Fourth Quarter and Year-End 2024 Earnings Conference Call. With me today are Cromwell Coulson, our President and Chief Executive Officer, and Antonia Georgieva, our Chief Financial Officer. Today's call will be accompanied by a slide presentation. Our earnings press release and the presentation are each available on our website. Certain statements during this call and in our presentation may relate to future events or expectations and, as such, may constitute forward-looking statements. Actual results may differ materially from these forward-looking statements. Information concerning risks and uncertainties that may impact our actual results is contained in the risk factors section of our 2024 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.

Cromwell Coulson (President and CEO)

Thank you, Dan. Good morning, everyone. Thank you for joining us today. I will begin by discussing our year-end 2024 results at a high level and will share our current priorities. Both gross and net revenues grew slightly versus 2023, increasing 1% and producing over $111 million in annual revenues for the first time in our history. Our results continue to highlight the resilience of our business model. Overall, company performance was supported by strong growth in our OTC Link business, a relatively steady state in our market data licensing, and a decrease in corporate services revenue. Antonia will review our financial results in greater detail in a few minutes. OTC Link's strong year was primarily due to increased trading volume across our markets. We strive to provide the best possible trade experience for our broker-dealer subscribers.

While we do not control overall market volume, we were pleased to see that the Link team grew our trading network by expanding our subscriber base. Our market data results revealed areas of growth and shed light on where we still have work to do. We remain committed to expanding the use of our EDGAR Online data and developing new solutions for subscribers. Corporate services continued to see a reduced number of subscribers throughout 2024. OTCQX was impacted by a lower starting number of companies at the beginning of 2024 and slower sales throughout the year. On OTCQB, the attrition was generally related to financially stressed smaller companies dropping from the market for compliance and financial reasons. Our operating expenses also grew slightly during 2024 at approximately 1%.

We are careful to align our resource expenditures with our revenues as we work to find our next opportunity sets to grow the business. I am thankful for the hard work and dedication of our employees who have built this company and whose efforts will sustain our future endeavors. It would be a disservice to our subscribers, colleagues, and shareholders if we viewed maintaining the current state as success. We can never be satisfied with the status quo. I know that I speak for the entire OTC Markets Group team when I say that we are absolutely committed to improving our products, helping our subscribers become more successful, executing on new opportunities, and achieving sustainable growth. To that end, during 2025, we have prioritized two high-profile critical projects. The first major project is overnight trading.

During the second half of last year, we announced OTC Overnight to support trading in OTC securities and MOON ATS to support trading in exchange-listed NMS securities. Each overnight trading session runs from 8:00 P.M. to 4:00 A.M. Eastern Time, Sunday through Thursday. The combination of OTC Overnight and MOON ATS enables our broker-dealer subscribers to access thousands of exchange-listed and OTC securities during Asian market hours, at European market open, and overnight in the U.S. We see significant industry interest in overnight trading, with the exchanges and other new entrants announcing plans to offer similar services for exchange-listed securities in the coming years. We understand that this will be a dynamic space, and we look forward to working with our subscribers and partners across the industry to make overnight trading a success and give the global investment community greater access to U.S. capital markets.

With OTC Overnight, we are able to offer a unique value proposition with a broader range of securities and a track record of operating critical infrastructure. Offering access to OTC securities from around the globe during a timeframe more convenient for more investors was a key reason we pursued overnight trading. We have completed the necessary SEC filings and approvals for OTC Overnight and MOON ATS. We are now onboarding key subscribers and working with industry participants to get the markets running efficiently. Our view towards the overnight trading matches our approach to the markets we have operated for many years. We will offer elegant solutions with reliable and cost-effective services that support our subscribers' success. Ensuring this requires painstaking attention to detail and coordinated teamwork across our organization. Our second critical project is the development of the OTCID Basic Reporting Market, which we announced last October.

This market is for companies that provide ongoing financial disclosure and a management certification and verify their company profile for U.S. investors, brokers, and regulators. Our platforms standardize and stream the information into digital formats that are easily displayed on screens and readable by brokers' machines to support wider IR visibility, fundamental investment analysis, and automated compliance. Since the initial OTCID market announcement, we have published the OTCID application rules as well as hosted a webinar and developed a series of FAQs to provide companies, investors, and brokers with as much information as possible. Any change to the structure of our markets and our disclosure standards requires ample lead time for companies, brokers, and investors. We have been engaged with the impacted companies and plan to launch OTCID market on July 1st, 2025.

The launch of OTCID allows a more detailed distinction and value proposition for each of our markets. Our premium OTCQX Best Market and OTCQB Venture Market have become recognized brands ingrained in trading, regulatory, and compliance processes. OTCID will support companies that publish basic disclosure for investors, including companies that may not be able to qualify for OTCQX or OTCQB, and companies just developing their secondary trading market in the U.S. OTCID will also allow companies to separate themselves from those quoted on Pink Limited, where companies that do not certify their compliance with established reporting standards have limited availability of disclosure or financial information and may not support their U.S. market. These securities will continue to be identified with a yield sign to warn investors to proceed with caution.

Importantly, our market structure will clarify whether a company is actively engaged in supplying ongoing information to U.S. investors, which is an important input for an efficient market pricing process. The Pink Limited market and the Expert Restricted market will still support broker-dealer best execution obligations while making it clear that there is limited to no involvement of the issuer and that greater information asymmetries may exist. Investors will need to dig deeper for information, and shares may be discounted to account for this. In addition to these larger-scale projects, we continue to pursue growth opportunities specific to our market data licensing business and to push for enhancements to the interface that companies use to publish disclosure and interact with our markets. In a broader sense, we believe that sustainable success requires we continuously add value to all our product lines.

This philosophy of continuous improvement throughout our organization is one of our core themes for this year and beyond. Turning to the regulatory landscape, I am excited to see regulators and legislators placing a renewed focus on working with the industry to improve the capital markets. Capital formation is now in the conversation. Staff from FINRA, the SEC, and other government agencies have been welcoming ideas and engaging in productive discussions regarding small company capital formation and market structure. We look forward to continuing those discussions and pursuing regulatory priorities that serve our broker-dealer, company, and investor communities. In closing, I am pleased to announce that on March 11th, our board of directors declared a quarterly dividend of $0.18 per share payable later this month. This dividend reflects our ongoing commitment to providing secure shareholder returns. With that, I will turn the call over to Antonia.

Antonia Georgieva (CFO)

Thank you, Cromwell, and thank you, everyone, for joining us today. I would like to start by thanking our entire OTC Markets team for their continued commitment to our subscribers and for driving our business forward. I will now review our results for the fourth quarter and year ended December 31, 2024. Any references made to prior period comparatives refer to the fourth quarter or the year ended December 31, 2023. A review of our fourth quarter results is included on page seven. We generated $28.5 million in gross revenues, up 3% as compared to the prior year period. Revenues less transaction-based expenses were flat. OTC Link's gross revenues increased 33%, driven by higher revenues from OTC Link ECN and OTC Link NQB, which in aggregate increased 56%, consistent with a higher volume of trading activity on our market compared to the fourth quarter of 2023.

As an offset, transaction-based expenses increased 62%. Additionally, revenues from OTC Link ATS messages increased 22%, reflecting a higher number of messages and fee increases. 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 fourth quarter with 114 subscribers on OTC Link ECN and 82 subscribers on OTC Link ATS, compared to 108 and 86, respectively, at the end of the prior year. OTC Link had 141 unique subscribers to our ATSs at the end of 2024, up 5 from the end of 2023. Trading volumes remain highly unpredictable and could decline in the future.

Revenues from our market data licensing business were flat to the prior year quarter, reflecting the offsetting trends in redistributor-based revenues, which declined 4%, and in revenues from direct sold licenses, which increased 5%, and revenues from data and compliance solutions, which increased 4%. Within distributor-based revenues, pro-user revenues declined 5%, along with lower pro-user counts, down 3%, while non-pro-user revenues increased slightly, at 1%, due to the addition of a new redistributor relationship at the end of the third quarter of 2024, resulting in a 12% increase in period-end non-pro-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 in the U.S. equity markets fluctuate, and we may experience a decline in the future. Broker-dealer enterprise licenses drove the growth in direct sold licenses.

Within data and compliance solutions, revenues from data services and the Blue Sky Data product increased due to price increases for certain licenses and additional fees and were partially offset by a decline in revenues from EDGAR Online due to subscriber cancellations. Corporate services revenues decreased 6% in the fourth quarter. OTCQX and OTCQB revenues each decreased 4%, while DNS revenues decreased 6%. In the fourth quarter, we added 22 OTCQX companies compared to 24 new sales in the prior year quarter and finished the period with 567 OTCQX companies, down 6%. On OTCQB, we added 61 new companies in the fourth quarter compared to 41 in the prior year period and had 1,050 OTCQB companies at the end of the quarter, down 8%. We had 1,338 Pink companies subscribing to DNS and other products at the end of the fourth quarter, down 8%.

These engaged Pink companies, which have a relationship with OTC Markets Group through our disclosure offerings, represented approximately 13% of all Pink securities traded on our platforms at the end of 2024, compared to approximately 14% 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 to page eight for our full-year results, in 2024, we generated gross revenues of $111.1 million, up 1%. OTC Link revenues increased 14%, with a 21% increase in revenues from OTC Link ECN and OTC Link NQB, and a 16% increase in revenues from OTC Link ATS messages as the main drivers. Contributing to the overall increase in OTC Link revenues was also an increase in certain connectivity revenue due to the introduction of additional fees in 2024. Transaction-based expenses increased 20%.

Our market data licensing business saw a modest 1% growth year-over-year, largely driven by the same factors as previously mentioned, partially offset by the impact of 10% lower non-pro-user revenue. Corporate services revenues decreased 4%, with flat revenue from OTCQX, mostly due to pricing adjustments, and a 5% and 7% decrease in OTCQB and DNS revenues, respectively, driving the decline. Corporate services saw a lower average in period-end number of companies across OTCQX, OTCQB, and DNS. During 2024, we added 83 new companies to OTCQX, compared to 90 in the prior year, and 119 new companies to OTCQB, compared to 184 in the prior year. The retention rate for the annual OTCQX subscription period that began on January 1st, 2024, was 93%, compared to 95% for the prior year.

For the annual OTCQX subscription period beginning January 1st, 2025, we achieved a 96% retention rate. Turning now to expenses on page nine, on a quarter-over-quarter basis, operating expenses increased by 1%. The primary drivers were a 7% increase in compensation and benefits and a 16% increase in IT infrastructure and information services costs, partially offset by a 42% reduction in professional and consulting fees as one-time costs in the prior year quarter did not recur. Compensation and benefits comprised 61% of our total operating expenses during the fourth quarter, compared to 57% in the prior year period. In the fourth quarter, income from operations was flat, while net income and diluted earnings per share each increased 3%. Operating profit margin contracted to 31.6%, compared to 32.8% in the prior year quarter. On a year-over-year basis, on page 10, operating expenses were also up 1%, driven by similar factors.

During 2023, we incurred approximately $2.5 million in non-recurring expenses related to an SEC matter and EDGAR Online, which did not recur in 2024. Compensation and benefits comprised 64% of our total expense base in 2024, compared to 62% in the prior year. Turning to page 11, for the full year, income from operations and net income each declined 1%, and operating margin contracted to 29.9%, compared to 30.6% in the prior year. Our diluted earnings per share decreased commensurately to $2.26 per share, compared to $2.28 per share. 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 $41.3 million for the full year 2024, and our adjusted diluted earnings were $3.41 per share, each up 1% compared to the prior year.

Cash flows from operating activities for 2024 amounted to $32.9 million, and free cash flows were $31.6 million, compared to $33 million and $31.5 million in the prior year, respectively. Turning to page 12, during 2024, we returned a total of $29.5 million to investors in the form of dividends and through our stock buyback program. A slight decrease of 1% from the prior year, primarily related to a lower amount of stock repurchases. We remain focused on growing our business and delivering long-term value to our stockholders. With that, I would like to thank everyone for your time and pass it back to the operator to open the line for questions.

Operator (participant)

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

Steve Silver (Senior Equity Research Analyst)

Good morning, and thanks for taking the questions. I was curious about the technology investments that have been made over the past couple of years with the heavy lifting seemingly done now on the new projects for 2025 after an investment year in EDGAR, maybe the year before. Curious as to whether there's anything directionally we should be thinking about in terms of the rate of IT spending over the next couple of years.

Cromwell Coulson (President and CEO)

Steve, thank you for the question. If you look at our IT spending, it's people. That is, and there's a mix of different amounts of work, which is what's on new, what's supporting, keeping the lights on, what's upgrading, what's driven by regulatory compliance and security. Where we would like to become better is more operational, better with our resources, better with our performance, better with our productivity, and by empowering our people and focusing on improving different areas. That part of we're not a company that has a huge project to go buy to bring in a consultant and go build something outside. We try to always be incrementally improving our technology platforms. Our human capital resources, we work to align with our revenues over time.

Antonia Georgieva (CFO)

Steve, in the appendix to the earnings slides, we include our cash flow summary, and you can see that the capital expenditures have been between $1 million and $1.5 million per year for the last five years. These investments are necessary to maintain the high availability and reliability of our trading systems. We do not expect that requirement to go away. We will continue to invest in our primary and disaster recovery data centers and upgrades to our servers as we go along. As Cromwell correctly pointed out, a lot of our investment is actually flowing through the P&L rather than the cash flow statement, and it's reflected in our human capital and our IT infrastructure and information services costs.

Steve Silver (Senior Equity Research Analyst)

That makes sense. Great for the color. Thanks. One more, if I may. With the July launch of OTCID, will there be any information that might be available maybe before the Q2 call over the summer just in terms of initial penetration of subscriptions for the OTCID program, or will that more likely be available after the program formally launches?

Cromwell Coulson (President and CEO)

Steve, it will be after. I think it's going to be interesting to see the number both by number of securities and by dollar volume of engaged issuers. You really have to look at OTCID fills in to provide just a disclosure-based market. Companies putting their information into our system so we can digitalize it, whatever reporting standard they use. This is good for investors. It's good for brokers because they can automate compliance and appropriately remove or apply risk controls.

However, the Pink Limited market has a long history of us supporting brokers who in the United States are the only businesses that are allowed to legally trade securities that when brokers have a client shows up and says, "I want to sell this piece of property I have," or, "I want to buy this stock or ADR," we provide a fantastic technology platform. We are going to continue to do that. If you read the biography of Warren Buffett, Snowball, in his early days when he was building his super returns with the Buffett Partners, every time a new copy of either one of the daily sheets or the monthly books published by our predecessor, National Quotation Bureau, came out, he would go through looking around for interesting stocks to research.

They talk about not only was he great about digging around for information, however, he also was really good at negotiating with all the brokers in this opaque phone-based market. The firm I came from dealt with lots of those types of investors. These securities would trade at discounts because management was not engaged. There are different reasons for the discounts. There are smaller companies. There are large European companies with great consumer brand names who, for various reasons, their investor relations department has an extremely different viewpoint of streaming information into the U.S. than their marketing and advertising department. Those companies will still trade. They will trade on consumer brand recognition. However, we will not have the relationship and the data, and investors will be adequately warned. I think that is super important.

Antonia Georgieva (CFO)

Steve, from a revenue and reporting point of view, OTCID is going to succeed DNS. It is essentially monetized through our DNS product. Following the launch on July 1st, 2025, in the following quarters, we expect to report metrics for the OTCID market in a similar fashion to which we now report Pink tier subscribers, those who subscribe to our corporate services product suite. The change in our reporting and revenue will be minimal, more likely connotation and naming changes rather than anything else. In terms of the product, however, we did revise our fee schedule, and you would see on our website a different price for DNS for this year, which is an increase to what we had for the product in last year and in prior years.

It reflects what we believe is an improved value proposition to the subscriber base with the OTCID product.

Steve Silver (Senior Equity Research Analyst)

Great. Thanks, Antonia. I appreciate the color. Thanks, Cromwell, for the perspective. I appreciate that. Best of luck in the beginning of the new year.

Cromwell Coulson (President and CEO)

Thanks, Steve.

Steve Silver (Senior Equity Research Analyst)

Thank you.

Operator (participant)

Just a reminder to ask a question, please press star one one on your telephone. Our next question comes from Brendan McCarthy with Sidoti. He may proceed.

Brendan McCarthy (Equity Research Analyst)

Great. Good morning, everyone, and thanks for taking my questions. Cromwell, I want to start off, I believe you mentioned there's been renewed focus from regulators to improve small company capital formation. Just wondering if you can expand on your outlook on this topic and maybe also tie in how the expectation for more broadly deregulation, I guess just how that might impact your business looking forward.

Cromwell Coulson (President and CEO)

Thank you, Brendan. One is just the tone and questions of the conversations when we go down to Washington, D.C. and the interest in how can we help the better players succeed. We've always had a conversation with regulators, and there's a natural tension because the commercial side of the business wants more good things to happen, and the regulators want no bad things to happen. I think it's going to be a more balanced conversation. If you look at how our market works, we're a fantastic market for secondary trading of already issued securities. The place where it's harder is for the companies that are public to raise capital. This is just not our problem. This problem is endemic to smaller public companies that put in all the cost and complexity to be listed on NASDAQ or New York Stock Exchange because there's a two-tier capital raising market.

It's completely wrong. If you're a large, well-known seasoned issuer, you can do ATM shelf offerings with ATMs directly into the market at extremely low costs and efficiently. If you are a smaller public company, if you haven't been public for a while, if you've got a small float, if you're OTC, that highly efficient way to raise capital is not available to you. That's completely wrong because these are the stocks that are often the most volatile. The ability, if a company IPOs and the stock goes up, the company should be able to supply demand if investors want more to raise more capital. We've limited these companies out. What happens to smaller companies?

We've written about it a lot because it takes place in the exchange space in a very large amount. Smaller public companies have to do private placements at a discount to the public market that are highly dilutive. It breaks the public market pricing process if a company is raising capital and there's a big spread between what the company's raising capital at and where the public is buying the securities. There's no transparency of these private offerings until it's too late. We really believe there's an opportunity to make it easier for public companies to raise capital in the public markets, as well as there's a whole bunch of other rules and regulations that a pragmatic regulator can streamline to continue America's success as the world's leading financial market.

Brendan McCarthy (Equity Research Analyst)

Great. That's very interesting. I guess just as a follow-up, what does that opportunity look like? I guess how can OTC Markets maybe bridge that gap?

Daniel Zinn (General Counsel and Chief of Staff)

Brendan, there are so many ways. I think Cromwell was starting to reference a lot of that. Further to his point, where regulators have been willing to listen to us and talk to us in the past and hear proposals, they are now soliciting that kind of information from us and want to hear what small companies need. Cromwell gave the example of easier offerings and at-the-market offerings for smaller public companies. Being able to get some momentum on issues like that, being able to get recognition of companies that are meeting, let's say, some of our OTCQX or OTCQB standards to put them on par with exchange-listed peers in a number of different ways. All of those issues, they're not new to us.

They're not new to the discussions that we have in Washington, but there does seem to be more of an open and, like I said, solicitous sort of attitude in Washington towards seeing these things really happen and finding out what the nuts and bolts would look like. I think success for us includes continuing those conversations and making sure we're taking advantage of the questions being asked of us, and then really focusing in and pushing some of those initiatives across the line.

Brendan McCarthy (Equity Research Analyst)

Understood. Thanks, Cromwell. Thanks, Dan. One more question for me. I think we've been reading in the past few months about some of the compliance changes to or some of the changes to the NASDAQ rules regarding their compliance framework. I guess just the framework around how companies can execute reverse stock splits to maintain their listing standards. I guess do you see some of these changes having a material impact on your business in the sense that it might feed some of these NASDAQ companies that are downgraded for compliance reasons? It might kind of feed them as an opportunity for OTC Markets?

Cromwell Coulson (President and CEO)

Brendan, the way I would frame it is I believe NASDAQ and the New York Stock Exchange are fantastic markets for companies of a certain size, the blue chip investable securities with strong financing and balance sheets. I also believe that our market works better for smaller companies, for different types of companies, and because we simply label these securities. NASDAQ has gotten all the press, but it's because they've been most aggressive in the smaller public company space because we see the data. Their standards have been played. The reverse split world is really a signal of toxic financing having destroyed the investor cap table. These repeatedly have taken place.

One side is, "Let's fix financing because we shouldn't be sending public companies, whether they're on exchanges or traded OTC, to payday lenders or pawn shops where the public investors lose out." On the flip side, it also changes the conversation with regulators because there was a former belief that exchange-listing standards somehow could get rid of risk. We have a very different viewpoint. We don't think risk is good or bad. We think risk needs to be identified and priced by the market. That's with our data-driven markets. My belief was always when NASDAQ became a national securities exchange, there opened up a door to use better transparency and technology to do what NASDAQ used to do, to be a market for smaller public companies, a market for international companies, and broaden the base of the public market ecosystem. That's an opportunity.

We want to see all public markets succeed, but we don't want to see companies getting stuck doing bad financing because of regulatory barriers or investors blinded by blue brands and not doing the diligence to have securities efficiently analyzed, valued, and traded.

Brendan McCarthy (Equity Research Analyst)

That's helpful. Thanks, Cromwell. One more question from me just on the market data licensing segment. Just curious as to your outlook there for how you kind of resume organic growth in that segment looking at the next couple of years.

Cromwell Coulson (President and CEO)

Brendan, it's about some new products from the data set, and it's also about stuffing more value into the existing products. It's empowering the people on the production line who are closest to the data or the client service to be making continual incremental improvement so every subscriber who receives an invoice from us feels they're getting increasing value. My view of the data business, if you're not putting more into a data product, it's going to zero slowly. We always need to not be looking at what's in the product today, but what are the problems we're solving for the customer now, tomorrow, and in the future? We have a fantastic group of subscribers, and they're sophisticated. They're very good at using data. We want to help serve their success, and we'll be fine.

Antonia Georgieva (CFO)

Brendan, just a reminder, a portion of our market data revenue is user-based. That component, as we've seen in the past and have indicated may happen in the future, will have some volatility based on the number of users that our redistributors reach with our market data on a monthly basis. We're focused, to Cromwell's point, on growing the subscription-based revenue, improving the quality of the product. One of our key strategic focuses for this year is usage and user growth. Obviously, all of this is targeted at the market data segment first and foremost.

Brendan McCarthy (Equity Research Analyst)

Got it. That's helpful. Thanks, everybody. That's all from me.

Operator (participant)

Thank you. I would now like to turn the call back over to Cromwell Coulson for any closing remarks.

Cromwell Coulson (President and CEO)

Thank you, operator. I want to thank each of you for joining us today. I would encourage you to read our full 2024 annual report and the 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.

Daniel Zinn (General Counsel and Chief of Staff)

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