otc markets group inc. 2019 earnings call slides_final.pdfreconciliation table of gaap to non -gaap...
TRANSCRIPT
OTCQX: OTCM
OTC Markets Group Inc.Fourth Quarter and
Full Year 2019 Results
March 5, 2020
Earnings Call Agenda
I. Strategic OverviewII. Financial Review: Fourth
Quarter and FY 2019 ResultsIII. Q&A
Bea OrdonezChief Financial Officer
Cromwell CoulsonPresident, Chief Executive Officer
Dan ZinnGeneral Counsel
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS
This conference call and presentation materials may contain forward-looking statements about the Company's future plans, expectations, and
objectives concerning, but not limited to, the Company's expected financial results for 2020. Words such as may, will, expect, intend, anticipate,
plan, believe, could, estimate, and variations of these words and similar expressions are intended to identify as forward-looking statements.
These forward-looking statements are not historical facts and are subject to risks and uncertainties that could cause the actual results to differ
materially from those predicted in these forward-looking statements. These risks and uncertainties could include, but are not limited to, the risk
factors described in the Risk Factors section of the Company's Annual Report for the year ended December 31, 2019. The Company does not
intend and undertakes no obligation to update its forward-looking statements to reflect future events or circumstances.
In addition to disclosing results prepared in accordance with GAAP, the Company also discloses certain non-GAAP results of operations,
including adjusted EBITDA and adjusted diluted earnings per share that either exclude or include amounts that are described in the
reconciliation table of GAAP to non-GAAP information provided at the end of our fourth quarter 2019 earnings press release. The Non-GAAP
financial measures do not replace and are not superior to the presentation of GAAP financial results, but are provided to improve overall
understanding of the Company's current financial performance. Management believes that this non-GAAP information is useful to both
management and investors regarding certain additional financial and business trends related to the operating results. Management uses this
non-GAAP information, along with GAAP information, in evaluating its historical operating performance.
Connecting Brokers
Organizing Markets
Informing Investors
MissionTo create better informed and more efficient financial markets
StrategyWe share information widely through open networks that foster transparency
Connect broker-dealers, organize markets and inform investors; and
Deliver elegant, reliable and cost-effective subscription-based technology solutions
• Following our February acquisition of QaravanSM Inc, in May 2019, launched our Qaravan CECLsolution, in October 2019, made Quarterly Call Report data on U.S. banks available via our corporate website and in February 2020, made corporate structure data for US bank holding companies available on our website.
• In October 2019, announced our strategic alliance with North Capital Investment Technology Inc. to provide companies on our markets with access to a technology platform that will enable them to cost effectively raise capital online.
• Following our 2018 acquisition of the Virtual Investor ConferencesSM business, in 2019, hosted 18 events, with 213 companies participating and reaching more than 14,000 investors.
• Driving enhanced market transparency and data availability through initiatives related to stock promotion, our small cap compliance file, Canari®, a web-based tool designed to provide subscribers with a comprehensive view of quantitative compliance data points in the OTC space.
• Growing the number of international issuers on our markets via our strategic alliance with the Canadian Securities Exchange, our London office and enhanced marketing efforts overseas, with 69 and 108 international issuers joining our OTCQX and OTCQB markets during 2019, respectively.
• As at March 1, 2020, 42 custodians, banks and broker-dealers use our compliance analytics products to enhance and automate their compliance processes, including many of the largest custodians, banks and broker-dealers in the U.S. equities markets.
• Continuing to win market share with our OTC Link® ECN, with 59 subscribers connected to the ECN as at March 1, 2020 and year over year revenues from our ECN up 71%.
Q4 and Full Year 2019 Highlights
Regulatory & Legislative DevelopmentsBlue Sky Exemptions in 36 States
The OTCQX Market is exempt under Blue Sky laws regarding secondary trading in 36 states and the OTCQB market is exempt in 33 states (with the Virginia legislature recently passing legislation). We continue to work with the North American Securities Administrators Association (NASAA) and individual state regulators towards national recognition of the OTCQX and OTCQB markets.
SEC Rule Proposal and Concept Release on Rule 15c2-11 (September 2019)
In November and December 2019, we published comments to the SEC’s proposed amendments to Rule 15c2-11, the rule that governs the publication and submission of quotes in systems such as our OTC Link ATS. We recommended changes to the proposal in the following areas: • Modernize the current information review
standard• Streamline FINRA’s role in the 211 process• Recognize an “Expert” marketplace for
professional investors to achieve best execution• Focus on insider and affiliate trading in shell and
“No Information” companies• Adopt additional technical amendments
SEC Concept Release on Harmonization of Securities Offering Exemptions (June 2019)
SEC Statement on Market Structure Innovation for Thinly Traded Securities (October 2019)
CAT OTC Equity Reporting Obligations (April 2020)
# of OTCQX Companies
442
Net # Companies Added FY 2019
33 (vs 43 in the PY)
Driving 14% increase in YoY QX Revenues
92% Renewal Rate for 2020 (vs 94%)
53 Subscribers Connected to our
OTC Link ECN
1.5M in ECN Revenues+71% YoY
12 subscribers addedin 2019
Versus 869Kfor 2018
# Pro Users22,426+4% YoY
41 users of our Compliance
Products
# Non-Pro Users12,882
-13% YoY+20% in YoY
Related Revenues
Q4 and FY 2019 Revenues
Compensation as % of Gross Revenues
43%
Increase in Average FY Headcount
9%
Versus 40% for the PY
~6% Annual Base Salary Increase
Operating Expenses (ex depreciation) as % of Gross Revenue
64%
Operating Margin
29.6%
Versus 60%for the PY
Versus 34.6%for the PY
Q4 and FY 2019 Expenses
FY 2019 Highlights
Cash Flow from Operations
21.4M-5% YoY
Cash used in investing activities
of 5.5M
Operating Income 17.9M-9% YoY
Net Income14.9M-8% YoY
Operating Margin29.6%
Fully Diluted GAAP EPS
$1.25
Cash Returned to
Shareholders16.0M
+5%
FY Effective Tax Rate of 16.9%
Adjusted EBITDA22.1M
-4% YoY
Versus 17.8% for the PY
$1.84 per Diluted Share
Gross Revenues62.8M
+6% YoY
12th consecutive Quarter of
Revenue Growth
Operating Expenses41.7M
+13% YoY(including 0.7M in non-recurring costs)
Compensation Expenses+13% YoY
IT Costs +15% YoY(including 0.3M in non-recurring costs)
Cash Flows And Capital Allocation Strategy
Invest in the infrastructure, products and technology that will deliver long term sustainable growth in earnings and free cash flow per share
Grow shareholder returns and utilize buybacks to reduce the dilutive impact
of our equity compensation program
12.9 14.8 15.4 15.2 16.0
FY 2015 FY 2016 FY 2017 FY 2018 FY2019
Dividends
Share Buybacks
Total Cash Returned to Shareholders
Questions & Answers
Appendix
Income Statement Summary
(in thousands) 2019 2018 2019 2018OTC Link 2,946$ 2,918$ 11,676$ 11,175$ Market data licensing 6,214 5,949 24,447 23,383 Corporate services 6,898 6,538 26,716 24,720 Gross revenues 16,058 15,405 62,839 59,278
Redistribution fees and rebates (625) (608) (2,489) (2,448) Net revenues 15,433 14,797 60,350 56,830 Transaction-based expenses (214) (147) (746) (375)
Revenues less transaction-based expenses 15,219 14,650 59,604 56,455 Operating expenses
Compensation and benefits 6,711 6,075 26,994 23,820 IT Infrastructure and information services 1,591 1,478 6,383 5,554 Professional and consulting fees 559 530 1,982 2,110 Marketing and advertising 368 402 1,117 1,148 Occupancy costs 541 750 2,548 2,107 Depreciation and amortization 448 260 1,492 1,042 General, administrative and other 292 347 1,206 1,029
Total operating expenses 10,510 9,842 41,722 36,810 Income from operations 4,709 4,808 17,882 19,645
Other incomeOther income 17 37 103 116
Income before provision for income taxes 4,726 4,845 17,985 19,761 Provision for income taxes 918 727 3,043 3,524
Net Income 3,808$ 4,118$ 14,942$ 16,237$
Earnings per share Basic 0.33$ 0.36$ 1.28$ 1.41$ Diluted 0.32$ 0.34$ 1.25$ 1.36$
Basic w eighted average shares outstanding 11,380,397 11,268,305 11,364,217 11,250,984 Diluted w eighted average shares outstanding 11,725,557 11,660,075 11,702,863 11,622,770
Three Months Ended December 31, Year Ended December 31,
Balance Sheet Summary
(in thousands) 2019 2018 Net Change
Assets
Cash and cash equivalents 28,217$ 28,813$ (596)$
Accounts receivable, net of allow ance for doubtful accounts of $168 and $169 5,157 4,942 215
Other Current Assets 1,656 2,998 (1,342)
Total current assets 35,030 36,753 (1,723)
Property and equipment, net 6,418 1,980 4,438
Other Assets 18,907 2,916 15,991
Total Assets 60,355$ 41,649$ 18,706$
Liabilities and stockholders' equity
Current liabilities 25,389$ 22,781$ 2,608$
Other Liabilities 17,293 2,459 14,834
Total Liabilities 42,682 25,240 17,442
Total Stockholders' Equity 17,673 16,409 1,264
Total Liabilities and Stockholders' Equity 60,355$ 41,649$ 18,706$
December 31,
Cash Flow Summary
(in thousands) 2019 2018 2017 2016 2015
Cash Flow from Operations 21,413 22,590 16,483 15,740 17,107
Capital Expenditure (5,516) (549) (1,165) (415) (940)
Free Cash Flow 15,897$ 22,041$ 15,318$ 15,325$ 16,167$
Dividends Paid (14,560) (14,195) (13,262) (13,059) (12,094)
Share Buybacks (1,390) (1,047) (2,176) (1,714) (817)
Other (703) (640) (749) 557 397
Uses of free cash flow (16,653) (15,882) (16,187) (14,216) (12,514)
Net change in cash, cash equivalents, and restricted cash (756) 6,159 (869) 1,109 3,653
Reconciliation of GAAP to Non-GAAP Results
(in thousands) 2019 2018 2019 2018Net Income 3,808$ 4,118$ 14,942$ 16,237$ Excluding:
Interest Income (24) (37) (109) (76) Provision for income taxes 918 727 3,043 3,524 Depreciation and amortization 448 260 1,492 1,042 Stock-based compensation expense 641 533 2,703 2,263
Adjusted EBITDA 5,791$ 5,601$ 22,071$ 22,990$
Adjusted diluted earnings per share 0.48$ 0.47$ 1.84$ 1.93$
Three Months Ended December 31, Year Ended December 31,
Note: We use non-GAAP financial measures of operating performance. Non-GAAP measures do not replace and are not superior to the presentation of our GAAP financial results, but are provided to improve overall understanding of the Company's current f inancial performance.