OTC Markets Group Inc.
Q4 2020 Earnings Call Transcript

Published: 18 Mar 2021

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to the OTC Markets Group Fourth Quarter and Full Year 2020 Earnings Conference Call and Webcast. I would now like to hand the conference over to your speaker today, Dan Zinn, General Counsel. Thank you. Please go ahead, sir.

[Dan Zinn:]

Thank you, Operator. Good morning and welcome to the OTC Markets Group fourth quarter and year-end 2020 earnings conference call. With me today are Cromwell Coulson, our President and Chief Executive Officer; and Antonia Georgieva, our Chief Financial Officer, whom I am very happy to welcome to our earnings call team. 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 expectation, 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 2020 Annual Report, which was published yesterday and is available on our website. For more information, please refer to the Safe Harbor Statement on Slide 3 of the earnings presentation.

[Cromwell Coulson:]

Thank you, Dan, and good morning everyone. Thank you for joining us today. We hope all of you and your loved ones are healthy and safe. We are looking forward to the end of what has been a long winter and hope there are many sunny days ahead for all of us. The global pandemic has profoundly impacted our lives and brought unforeseen challenges to our communities over the past year. We are thankful for our healthcare workers and first responders who bravely serve the people that suffered the worst of the COVID-19 crisis. They and all those who helped our communities through the crisis are our heroes. As I reflect on this past year, I'm struck by the achievements of our incredible team. The commitment and hard work of our colleagues at OTC Markets was above and beyond. Through it all, our people remain connected and risen to the challenge of operating remotely. While experiencing unprecedented market volatility and trading volumes, our team delivered excellent results, served our clients and stayed connected. To the entire OTC Markets Group team thank you for your dedication and performance. I look forward to bringing more of our team together in the near-term as conditions allow. We are fortunate that our industry and our company could safely work in a distributed manner, while keeping our markets open and trading systems up and running. Access to capital across all markets has helped investors and companies meet their immediate challenges and adapt to a fast changing future. In 2020 we delivered strong performance for shareholders with gross revenues growing 13% and net income growing 22%. This contributed to significant earnings per share growth and an increase in our operating profit margin. The more our clients find value in our services, the more earnings power we will deliver to shareholders in the years to come. I would like to formally welcome our new CFO Antonio to our team. Antonio will cover our financial results in more detail in a few moments. Over the course of the year volatility in the U.S. equities markets led to record trade volumes on our OTC led ATS and OTC led ETN particularly in the second half of the year as we readily broke daily records. The sharp uptick in trading volume drove much of the growth for the ECM transactional business. We understand that system reliability remains paramount. Our markets must remain open and available and I am pleased to report that we fulfilled that responsibility yet again in 2020. It is a collaborative team effort that we focus on delivering every trading day whether we are together in the office or connecting virtually.

[Antonia Georgieva:]

Thank you, Cromwell and thank you all for joining the call today. I want to start by thanking our entire OTC Markets team for their continued commitment to supporting our clients and subscribers and delivering an uninterrupted service. I will now review our results for the fourth quarter and year ended December 31, 2020. Any reference made to prior period comparatives refers to the fourth quarter of 2019 or the year ended December 31, 2019.

[Operator:]

Our first question comes from Chris McGinnis with Sidoti. Your line is open.

[Chris McGinnis:]

Good morning, thanks for taking my questions. Nice quarter and Antonio congratulations on joining the team. I just wanted to start with OTC Link - we obviously really great in the quarter. We talked in the past about kind of you got a certain amount or a finite amount of growth to go after there? I guess can you just talk about where you're at in terms of the market share, the gains on market share where that can go from here? And then also, I think you announced also the NQB how does that change. Does that open up additional market share opportunities with Link you could just help me with that a little bit? Thanks.

[Dan Zinn:]

Sure, thanks Chris. This is Dan and maybe Cromwell you want to answer the first part of that question.

[Cromwell Coulson:]

Yes, so Chris, thank you for that question. I look at it is the impressive part volumes are something we don't fully control in the market. But what's been more impressive is the continuing subscriber, the subscriber growth for OTC Link ECN. And that is something that the team did a fantastic job throughout 2020 and has continued to do that. And then, you can take a look at a limited functionality for a certain type of trade. But going into the space of the anonymous matching engine model which is a tool to access liquidity and deliver best execution the broker-dealer desire, is what the other tools for us to add on top of that. And this skill set in this space is and the ability to on-board new clients is a skill set that if we have a strong P, and we can deliver. And this is really important technology to broker dealers at a competitive cost, because both in the exchange phase and some other ATS’ in non-equity assets. The things are pretty expensive. So if we're good at being a cost effective, very useful client focused vendor, we'll find opportunities. On NCB, it’s - there is restrictions on how we can distribute our quote data if we're anonymous ECN, OTC Link. So it's a third business model which is electronic match, electronic of orders, but fully disclosed. And that creates a data feed for us which makes our models better because we're putting the data out further and wider the depth of book not just the inside. And it creates some system reliability resilience. And it gives a third model for broker-dealers who want to be fully disclosed, but don't want to put more liquidity on top of the execution. And what you really need to understand is, different broker dealers have different needs based on their business model. And we want to provide the tools and infrastructure across our platform to fit and make successful all different models of brokerage. And whether you're a dealer or an agency broker, and be able to bring them together and connect them in an efficient and cost-effective manner.

[Chris McGinnis:]

I appreciate that, that's very helpful. And I guess just turning to 15c2-11, and it's like - to support initiatives, you’re going to have to invest a little bit. Is that correct in kind of reading what you've put in the annual report that - do you need to make a bigger investment this year to support changes around 15c2-11? And then, I guess just what are the opportunities, are you excited about on-boarding newer companies coming onto your markets or has this made you think about maybe investing in other areas of the business to maybe support growth if some of it hit. Can you just walk me through that a little bit?

[Cromwell Coulson:]

Well, 15c2-11 is the big transformation in 2021. And it takes us from offering a regulated trading platform business under Reg ATS. And having market data, which investors and brokers use to analyze value and trade securities and our corporate services business, which has been market-driven. We built that whole business based on companies wanting to step-up and really own their trading to provide the information out there. So, investors are informed and brokers can best most efficiently trade securities. However, the markets move forward in 15c2-11 has recognized that we are the ones in the OTC market who set the standard for monitoring what level of disclosure and compliance and governance companies put out there. And this has been recognized, has been continually recognized by the states as they recognized just for Blue Sky. So there's one part that's really important is, we are moving to be seen as the entity that broker dealers can rely on for monitoring ongoing disclosure by issuers that there's current information as publicly available and ongoing and that's important. The second side is that it is because for the monitoring piece, the ongoing disclosure we're about halfway there. The market recognized it and then the regulators are catching up is that the onboarding is - exciting. It is really painful and complicated to bring a company onto our markets because you had a broker dealer filing a 211 and with FINRA, the FINRA information was hidden - in FINRA investors didn't see it. And it's a change to what really should be done today is making sure that there's adequate current information publicly available when a security industry is trading. So it's a big piece for us to one, create the regulatory compliance infrastructure. But on the other side is, where's the commercial value, because today when a company would become trade at OTC. There wasn't a great ability for other broker dealers to see the information or understand the level of compliance, the financial strength, what - the securities issuance history, all - these pieces of information that brokers need to trade a security and put it out into the market. And so, what we look at is 15c2-11 is providing the regulatory foundation for changing how companies can go public on our markets. But we're going to build a commercial structure that gives value both to companies and broker dealers to make, going public on our markets much more valuable and efficient.

[Chris McGinnis:]

Thanks, thank you for that, that's helpful. And just one last thing, I'll jump back in queue and open up for other people. But just on the M&A opportunity to talk, you know in the annual report, you see 2021 as - maybe a bigger year. I think it is the last acquisition in 1980s and if I remember right around - the conference if I remember right?

[Cromwell Coulson:]

So Chris, I think this year is a year where you know we have - the markets have been doing fantastic and that said entities in our space that we could purchase are pricey. And so, and we have a big internal project with 15c2-11. So we want to for the long-term and I think hiring of Antonia demonstrates where we want to go for the longer term. But in the short-term we want to focus on our organic opportunities is, and but we will. We are looking and if - and we will be opportunistic and strategic to if anything shows up that we think really can add value for shareholders over the long-term. And increase the - our per share earnings power, which is as I think about it over the long-term, we want to grow, the pre-tax earnings or EBITDA of just the ability to earn per share. And both of the current amount, but then the potential ongoing forward by having a strong platform that delivers value to our client base.

[Operator:]

And our next question comes from Andrew Mitchell with Edison. Your line is open.

[Andrew Mitchell:]

Thank you very much. And can I just follow-up again on a couple of those regulations, like regulatory points. I was wondering if you have any indication of potential timing for approval of the expert market given the September compliance date? And then on the consolidated audit trail, that I think next phase, that becomes effective in April. And on both those fronts, I mean can you give any sort of indication in terms of the cost side for the GCM for implementation yet?

[Cromwell Coulson:]

Sure, thanks, Andrew. So, I'll, I’ll start with experts. You may have seen the SEC put out a proposed conditional exemption towards the end of 2020 to the expert market with a comment period attached to it. We and several others commented on it and all of, everything in the comment file very positive. That comment file closed about a month ago. And so, we continue to talk to the SEC about it. We are anxious to see it get approved. But it’s - we understand as a commission is in flux a little bit right now, with again they’re still going through the confirmation proceedings in order to potentially the SEC chair. And so, we'd love to see it happen any day now, but do understand that there are other considerations within the commission. The best thing I can say is we have a really good open line of communication with the staff there. And so, we're constantly getting feedback and providing as much information as we can. And we're hopeful that it gets approved sooner rather than later. But we'll certainly be the ones shouting from the mountaintops when it comes out, so we won't be shy about it at all. With respect to CAT, the next phase is to see if CAT becomes effective in April. But CAT has been around for a while and it's only been talked about for a decade, if not longer. And so, the implementation that we focus on is really about supporting our subscribers and their ability to meet their CAT reporting requirements that's something we continue to do. We're meeting with and talking to our subscribers pretty regularly. So it's not about sudden costs, so much as the longer-term plan that we've had in place and the industry has had in place. And similarly it's the same refrain there where we continue to talk to FINRA and the other SROs and the SEC about the ways to right-size how CAT works for our market like ours. We know that we have a unique market model, and that people haven't necessarily considered it in developing things like CAT that started so many years ago. And so, just working to make sure that they are considering all the unique aspect of our market structure, is really the core and the key sort of initiative we have with respect to CAT.

[Andrew Mitchell:]

Okay great. Thanks very much. And then on the question on the elevated trading volumes you've referenced. I wonder if you are able to or there is an estimate of how important retail investors are within that. Obviously, you’ve seen a big increase in terms of the market data size, but just wondering on the trading size, how much the high trading volume levels would you say are arising from the retail market?

[Cromwell Coulson:]

So Andrew, the way I look at trading volume is it's something we don't control. We have a diverse group of securities. I mean people pay OTC with low price securities. A lot of the retail speculation has actually been on NYSE and NASDAQ Securities, GameStop, AMC, Hertz. So, and this isn't to say that we don't have those same forces going through. And the debate within the industry is really not is this, a peak volume, but has the floor gone up. And has there been more interest in stocks over time and will - and how will, that stay and how will that transform that as investors get smarter. Investors that make mistakes will then be smarter and then they'll seek out other opportunities. They'll do more research. They'll learn like every investors coming to the market. The most successful investors I've ever met have, they talk about their history as early investors of not great, making great investments and then using that to learn and get better. So, we look at it as - the volumes are fantastic. However, and then however, we want to last through both the good market cycles and the bad market cycles. And we built our business around it and we have transaction on subscription business. But our goal is to really keep improving the platform and keep increasing the capabilities for clients, and fulfilling our mission to create more efficient and better informed financial markets.

[Andrew Mitchell:]

Okay - and following on from that neatly - is the point about the system's reliability and - that's one of your key points for the current year. But just wondering if that - does that involve higher CapEx than one might have expected prior to the exceptional volumes that have been going on or is that something which - you’re still behaving as a more normal level of investment in the current year?

[Cromwell Coulson:]

Well Andrew, I mean we're going to invest where we need to provide the quality of service that our clients demand of us. And we've got - it is with volumes coming through the business doing well - is a time - to invest is. That said, we're careful and thoughtful - about when we make our capital spending and when we make our add costs to the business. So it's - we don't try to manage quarter-to-quarter or year-to-year. I mean I think you saw that in 2019, we took our expenses up to invest in areas and in 2020, we were more careful and we really focused on having the team and the platform that we had you know is running the business. And so that cycle is, we're going to try and be very thoughtful to think about how do, we have a platform and a company and a level of service that has the right amount of investment to come out of every year better than where it started.

[Antonia Georgieva:]

And maybe to add to that...

[Andrew Mitchell:]

Sorry, go ahead.

[Antonia Georgieva:]

Maybe to add briefly, in general we expect our capital expenditures this year to be on par with 2020 and to elaborate on Cromwell’s point, system reliability has been a focus of ours - - core focus of ours for a long time. So, we continued to invest at the levels that ensure achievement of high throughput and high reliability every year, Andrew.

[Andrew Mitchell:]

Great, thanks. And if I may, just one final - question just on the M&A point. Am I still right to think that your focus really is on incremental rather than again - realize your focus is more organic this year. But looking further out, you could be looking for more incremental acquisitions rather than seeking a larger transformational acquisition?

[Cromwell Coulson:]

Well Andrew, I mean I think in the lifecycle of our business is that we haven't - we’ve been incremental, we've been an organic growth story. And we've been very focused on improving the areas, where our core capabilities are. And that said is we would like to acquire assets at attractive prices that are accretive per share for shareholders over the long-term. And we very much - I'm a large shareholder. And I would like to, over the years, make the shares worth more throughout market cycles. So, that's what we will always be looking at, but we get to play a longer term game.

[Operator:]

And at this time, I'm currently showing no further questions. I'd like to turn the call back over to Mr. Cromwell Coulson for closing remarks.

[Cromwell Coulson:]

Thank you, Operator. I want to thank all of you for joining us today. As always, we remain committed to supporting our clients in this challenging time. As we acquire new responsibilities, we will continue to advocate for the thousands of smaller and international companies that rely on our markets, as well as the broker dealers that provide liquidity and keep capital flowing. This work is core to our mission to create better informed and more efficient financial markets. On behalf of the entire team, I'd like to wish you and your family's continued health and safety and we look forward to connecting with you at our Investor Day on Monday, April 12.

[Operator:]

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day.