OTC Markets Group Inc. ($OTCM)

Hello, and welcome to OTC Markets Group First Quarter 2026 Earnings Conference Call and Webcast. [Operator Instructions] I would now like to hand the conference over to Dan Zinn, General Counsel. You may begin.

Thank you, operator. Good morning, and welcome to the OTC Markets Group First Quarter 2026 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. Information concerning risks and uncertainties that may impact our actual results is contained in the Risk Factors section of our 2025 annual report, which is also available on our website. For more information, please refer to the safe harbor statement on Slide 3 of the earnings presentation. Before I turn the call over to Cromwell, I want to take a moment to remember our friend and colleague, Elik Topolosky, whom we tragically lost in March. Elik was an exceptional person. He was smart, reliable and deeply trusted. But what made Elik truly special was the way in which he connected to and cared for the people around him. He made our team better simply by being part of it. Those who worked alongside him will always remember his kindness, positivity and a smile that could light up a room. We continue to extend our deepest condolences to Elik's family and to all of those like us who loved him. With that, I'd like to turn the call over to Cromwell Coulson.

Thank you, Dan. We all share your sadness in Elik's passing. We deeply respected him as a colleague and appreciate all that he contributed to each of our lives. Elik was a true culture carrier of the core OTC Markets values. Thank you all for joining us. I will begin by reviewing our first quarter 2026 results at a high level and will then turn to a discussion of our priorities for the year. For the first quarter, gross revenues grew 14% and net revenues grew by 15%. This was a record quarter for OTC Markets Group with each business line contributing to our strong results. OTC Link showed the sharpest growth, up 31% over the first quarter of 2025. Market Data increased 2% and Corporate Services was up 19%. OTC Link's performance primarily resulted from robust trading volume across our markets, $230 billion in dollar volume of shares traded, a nearly 30% increase from the same quarter last year. Trading volume on our Overnight, MOON and ATS also grew significantly as we gained market share. Our Link team also increased the number of unique broker-dealer subscribers across our multiple ATSs. Market Data's more modest growth resulted from a combination of growth in the number of enterprise and professional users of our data sets and targeted price increases for certain products. While pricing power is critical, especially in inflationary environments, growing users and usage is more important. Our enduring success comes from consistently adding product functionality and valuable new features, improving services, continuously expanding our distribution network. These are the incremental improvements that compound like interest. The Corporate Services business carried its momentum from the end of 2025 into the first quarter. The growth was largely due to the continued impact of the OTCID Basic Market, which launched on July 1 of last year. Notably, we saw subscriber growth on both the OTCQX Best and OTCQB Venture Markets as well as growth in the overall number of corporate clients using our services. The engagement of our issuers is a key metric. The more successful we are at educating and connecting companies to be transparent and compliant, the stronger our markets will become. Over the long term, we remain strategically focused on client success and retention by helping connected companies close the investor and broker information experience, trading and compliance gap with exchange-listed securities. While I am always pleased to report revenue growth, we also continue to focus on operating efficiency and thoughtfully aligning our costs. Our operating expenses rose 10% during the first quarter, driven largely by our investment in our people who build our platform. As our business grows, I remain thankful for the dedication, skill and focus our colleagues bring every day. On a personal note, last week, we announced the departure of Jason Paltrowitz, who had been our Head of Corporate Services for the past 12 years. Jason played an important role in building the business we have today, and we're grateful for the foundation he helped create. I want to thank him for all of his contributions, express our deep appreciation for what was built together and wish him every success in the future. We have a strong senior sales and client service team in place, and we are confident in their ability to propel the business going forward. We are conducting a search for his replacement, and we'll report on our progress in future earnings calls. Our results reflect strong trading [ markets ], the execution of our strategic plans during 2025 with respect to overnight trading and the OTCID market launch as well as a focus on our mission, vision and strategy as we begin 2026. Specifically, we saw the continued growth of MOON ATS, our Overnight ATS for NMS securities. The team has built a dedicated group of subscribers, increased market share and experienced significant growth in the number of transactions. The industry is preparing for exchanges to enter the Overnight NMS trading markets, which should both grow the pie and shift the competitive landscape. We also, of course, remain focused on onboarding subscribers to our OTC Overnight market. Providing seamless access to top-traded OTC securities that global investors want to trade during hours more convenient for non-U.S. time zones remains a key part of our vision for overnight trading. Our first quarter results also benefited from the tailwinds of our successful OTCID Basic Market launch. It enhances our offerings for corporate clients, filling a gap below our premium OTCQX Best and OTCQB Venture Markets. We had over 1,000 companies traded on OTCID at the end of the first quarter, and the momentum from this market led to increased interest in our higher standard markets as well. OTCID is well aligned with our strategy of connecting more companies to their U.S. trading market to improve market quality and compliance with U.S. securities regulations. As I have said, our primary focus is to increase the percentage of connected companies and related dollar volume on our markets. The connected companies trading on OTCQX, OTCQB and OTCID contributed roughly 29% of the dollar volume traded on our markets during the first quarter compared to 20% during the first quarter of 2025. As we strive to move these metrics higher and better inform investors, we will improve overall market quality, trading efficiency and further separate companies on our premium markets from the imperfections and inefficiencies of orphan securities traded by brokers on our Pink Limited market. In addition to driving execution and improving utility in our products, we launched last year, we have also been preparing our trading systems for the introduction of tokenized and digital asset securities into our markets. The SEC and Congress have begun to provide more regulatory clarity in these areas, and we are devoting resources to prepare to support our FINRA member broker-dealers, Market Data customers and other market participants as they innovate around these new technologies. As Washington grapples with these complicated issues, we continue to push for modernizing digital asset regulation without undermining market integrity. We believe a technology-neutral approach rooted in existing regulatory principles will foster responsible growth, prevent regulatory arbitrage and continue to reinforce confidence in U.S. market structure. As a component of our regulatory priorities, we remain intent on achieving state Blue Sky law compliance for our own security and across our OTCQX Best market. Throughout this year, we plan to introduce initiatives that highlight the value of Blue Sky compliance to companies, investors, brokers and advisers. As of today, we have achieved Blue Sky compliance for our own OTCM shares in all 50 states, the District of Columbia and 2 out of the 3 U.S. territories, nearly completing our goal. We will leverage our experience to efficiently map the path to national compliance for our corporate clients. We expect to see 100% Blue Sky compliance as a metric that our blue-chip OTCQX companies can achieve and display proudly. International trading growth has been a hallmark of our markets in recent years, and the trend continues into 2026. As part of our objective to capitalize on global interest in our markets, I am pleased to announce that earlier this week, we officially opened our Hong Kong office. This international outpost will help further our mission to educate non-U.S. companies in APAC about how best to use our market structure, data and disclosure tools to connect with more investors, be compliant with U.S. securities laws and build their brands in the U.S. I look forward to continuing to update you on our progress throughout the year. As I discussed in our last earnings call, we have made a strategic determination to increase our quarterly dividends to better balance the ratio between quarterly and special dividends. We have also begun opportunistically buying back shares in the market. I'm pleased to announce that on May 5, our Board of Directors declared a quarterly dividend of $0.30 per share payable in June. This dividend reflects our ongoing commitment to providing superior shareholder returns. With that, I will turn the call over to Antonia.

Thank you, Cromwell, and thank you all for joining us today. I would like to begin by thanking our entire OTC Markets team for delivering a strong first quarter and executing effectively on key initiatives that position the company well as we enter 2026. I will now review our results for the first quarter ended March 31, 2026. Unless otherwise noted, all comparisons are to the first quarter of 2025. Turning to Page 7. For the first quarter, we generated gross revenues of $34.8 million, an increase of 14%. Revenue, less transaction-based expenses, increased 12% to $30.4 million. OTC Link experienced the strongest revenue growth across our business lines in the quarter with a 31% increase, driven by significantly higher trading activity on OTC Link ECN and OTC Link NQB as well as a meaningful ramp-up of trading on MOON ATS. As a result, transaction-based revenue generated by these platforms increased 52%, while transaction-based expenses paid to liquidity providers increased 45%. During the quarter, average daily trade on OTC Link ECN and OTC Link NQB reached approximately 96,000, a 70% increase year-over-year, while MOON ATS saw approximately 71,000 average trades and 7.2 million average shares traded per session. Growth was also supported by an 11% increase in usage-based revenues from OTC Link ATS, primarily related to a higher volume of messages. Trading volumes remain highly unpredictable and could decline in the future. OTC Link also saw growth in broker-dealer subscribers with 147 unique subscribers across our ATSs at quarter end, up from 141 a year ago. This reflects the value of our open platform that offers a range of ATSs with different market microstructure models designed to support the diverse business, operational and compliance requirements of our broker-dealer subscribers. Revenues from Market Data Licensing increased 2%, reflecting a modest 1% increase in redistributor-based revenues and a 3% increase each in revenues from direct sold licenses and data and compliance solutions. Within redistributor-based revenues, professional user revenues increased 3% due to a commensurate increase in professional user count, partially offset by a 32% decline in nonprofessional user revenues as a result of a 14% reduction in reported nonprofessional users. Historically, and in the normal course of business, the number of nonprofessional users has fluctuated with market activity and may continue to fluctuate in the future. Revenues from direct sold licenses increased 3%, driven by price increases for certain licenses and growth in subscribers, partially offset by the elimination of certain onetime revenue recognized during the prior year quarter. Increased revenues from data services and the Blue Sky data products contributed to overall growth in data and compliance solutions revenue, partially offset by lower revenue from EDGAR Online. Corporate Services revenues increased 19% in the first quarter, reflecting improved sales and higher average company counts across our markets. OTCQX revenues increased 7% and OTCQB revenues increased 16%, supported by growth drivers and pricing adjustments effective January 1, 2026. In the first quarter, we added 37 OTCQX companies compared to 22 in the prior year quarter and finished the period with 575 OTCQX companies, up 5%. On OTCQB, we added 89 new companies in the first quarter compared to 60 in the prior year period and had 1,131 OTCQB companies at quarter end, up 8%. Revenues from our OTCID market and from Pink Limited subscribers to the disclosure and news service increased 51%, reflecting the continued impact of the OTCID Basic Market launch in July 2025. We ended the quarter with 1,074 OTCID companies compared to 1,035 companies at launch. Overall, we had a combined 1,456 OTCID companies and Pink Limited subscribers to DNS and other products at the end of the first quarter, representing a 12% increase from 1,303 companies at the end of the prior year period. Month-to-month variability in our Corporate Services subscribers is driven by new sales, offset by nonrenewal corporate events and compliance downgrades. Turning now to expenses on Page 8. Operating expenses increased 10% year-over-year with a 9% increase in compensation and benefits, 16% increase in IT infrastructure and information services costs and 29% increase in professional and consulting fees, driving the overall expense growth. Compensation and benefits comprised 64% of our total operating expenses in the first quarter compared to 65% in the prior year period. Turning to Page 9. Operating income increased 19% to $8.6 million and operating margin expanded to 25.5% compared to 24.7% in the prior year period. Net income was $7.1 million, up 17% and diluted GAAP earnings were $0.59 per share, up 18% year-over-year. In addition to certain GAAP and other measures, management utilizes adjusted EBITDA, a non-GAAP measure, which excludes noncash stock-based compensation expenses. Our adjusted EBITDA was $11.2 million in the first quarter, up 14%, and our adjusted diluted earnings were $0.93 per share, up 15%. Cash used in operating activities amounted to $231,000 and free cash flows were a negative $746,000 compared to cash used in operating activities of $818,000 and free cash flows of negative $934,000 in the prior year, respectively. Turning to Page 10. During the first quarter, we returned a total of $6.8 million to shareholders, including $3.6 million in dividends and $3.1 million in share repurchases, representing a 33% increase from the prior year. Overall, the first quarter reflected a strong start to 2026 with revenue growth in each business line, expanding margins and continued progress on initiatives across OTC Link, Corporate Services and Market Data Licensing. We remain focused on disciplined execution, investing selectively to support growth and returning capital to shareholders while maintaining financial flexibility. With that, I'll turn the call back to the operator to open the line for questions.

[Operator Instructions] Our first question comes from the line of Steve Silver with Argus Research Corp.

Congratulations on the quarter and my condolences on the team's loss. So earlier this week, the SEC proposed a rule that would allow public companies to switch from quarterly to semiannual reporting. I'm just curious as to your initial thoughts on what the potential impact of such a rule might be on investor transparency and market integrity and maybe even corporate disclosure trends.

Steve, thanks for the question. It's something we were expecting to see for a while. So the release of the proposed rule is not a surprise. I think we'll learn a lot from seeing how the comments come in. Already in the past 48 hours, we've seen fairly strong commentary on both sides of the debate. From our perspective, we're excited to see the SEC focus on disclosure and how investors have access to information. We obviously track it very closely as we think about our OTCQX and OTCQB rules and the way in which investors interact with the companies that trade on our markets. We think there is a lot of potential in the rule and the ability to give companies more control over the way in which they communicate to investors. We are a disclosure-based market and feel strongly about that topic. But we're going to wait and participate in the comment process and watch the comment process unfold as we consider how to make changes and inform the companies on our market.

As Dan said, the comment process is going to be really important because we're all for reducing the burdens on public company and also expanding the benefits of being a public company. There will be lots of points to consider because there's so much more compliance scaffolding around the quarterly release cycle: what happens to blackout periods, what happens to continuous offerings in shelf and ATMs, how can the quarterly earnings press release fill in part of the information gaps. And we're excited that the SEC is looking at how we can make Americas markets more competitive. And there are many markets around the world, which have the semiannual reporting. A concern would be that we move from a quarterly report of 3 quarterly reports a year and a big annual report to that the semiannual reports look like an annual report. And we have to balance all of these things. So we're very positive that the SEC is opening up the conversation, and we think it will really drive efficiency of what information is material for investors, for the market to do its pricing process.

Great. And one more, if I may. So in data licensing, even though the year-over-year declines in nonprofessional users was pretty significant, since the middle of last year, the sequential trend has been positive, I think, about 20% growth in nonprofessional users. And I know that nonprofessional tends to be a proxy for retail participation in the market. I'm just curious, your thoughts, as to the trends that you're seeing in the growth of nonprofessional as the number of daily transactions has been extremely strong over the last couple of quarters.

If I'll take you back to our disclosure in Q1 of 2025 and actually in Q2 of 2025, when we mentioned that we had a loss of a customer -- of a broker-dealer customer who accounted for the majority of the decline in nonprofessional users, so that is why the quarter-on-quarter comparison shows a 14% decline in those numbers, but the sequential is a lot different.

And Steve, you have to understand because we offer extremely competitive enterprise licenses to broker-dealers, the nonprofessional licenses are a way to bring broker-dealers into our markets. However, when they have enough demand, they will move to enterprise licenses often.

Our next question comes from the line of Aashi Alpesh Shah with Sidoti & Company.

I'm here on behalf of Brendan McCarthy at Sidoti. And I would just like to ask a couple of questions. It looks like the transaction-based expenses rose 45% year-over-year to $3.4 million, well ahead of the recent quarterly readings. I understand higher volume drove this up, but are there any one-off items included in this?

Aashi, that expense is directly correlated to the volume of trading activity as is the transaction-based revenue. Again, to reference back the numbers, the transaction-based revenue was up 52%. Transaction-based expenses were up 45%. The difference here is the way MOON ATS generates revenues, but does not pay the liquidity rebate. And as we've seen a ramp-up in the MOON trading activity and the MOON-related revenue, we have not seen the commensurate increase in transaction-based expenses, which again are related to OTC Link ECN and NQB, but not MOON.

Right. That brings me to my next question. How much of the year-over-year volume increase was driven by the MOON ATS? Also, how much of the transactional revenue increase on OTC Link was driven by MOON?

As we mentioned, the increase in average daily trades on OTC Link ECN and NQB was approximately 70% to 96,000, up from 56,000 approximately in the last year first quarter. MOON ATS really began to ramp up towards the end of 2025. So there isn't volume to speak of last first quarter, while this first quarter, we have been reporting the MOON statistics publicly every week. And as I mentioned, average trades per trading session were approximately 71,000 in the first quarter or alternatively, you can think of it as approximately 7.2 million shares traded per session.

Right. And the subscribers to the OTCID market grew very nicely. How much of that was new adoption versus migration from the existing tiers?

So for OTCID, it's similar to what Antonia described earlier, where this is a market that started in July of last year. So the year-over-year comparison doesn't work quite as well. What we saw in OTCID was a lot of -- well, some degree of migration from companies that had just purchased our disclosure news service product moving into this market and then some new companies joining as well. There hasn't been migration from OTCQX or OTCQB to speak of, right? It exists and it's possible for companies to move into that market. But for the most part, the movement has been the other direction, moving from OTCID up the chain.

Aashi, we have explained in the past as well that we do see movements between tiers as our companies choose to upgrade to a higher tier or when companies fail to meet the continuous requirements for QX and QB, they could move to a lower tier. And we see that movement on a regular basis. So you should expect for that trend to continue in the future.

And at baseline, you've got OTCID, you have disclosure and management certification of compliance with U.S. securities law. To move up, there are financial standards, [ law] and governance requirements. So it is a system that encourages companies along their journey as a public company to maximize the level of market that they can achieve.

[Operator Instructions] Our next question comes from the line of Walter Hopkins with 18th Square LLC.

Congrats on the great quarter. I'd love to hear more about the Asia strategy and what opportunities you're seeing over there across both Corporate Services and Overnight trading. Do you have any sense on whether it will be a big office? Or are you sort of more in a wait-and-see mode with that? And will the folks over there be working on Overnight trading initiatives alongside the Corporate Services?

Thank you, Walter, for the question. I'm hoping that the people we're hiring are not wait-and-see people. You're giving me a nightmare of the old Maytag repairman ads. What we want is to be active in the Asian markets and targeting both sides, using Market Data to talk to the local trading and broker-dealer communities, both selling our Market Data wider to expand our network and building understanding of the opportunities to trade, both overnight and during the regular U.S. session and educating companies, engaging companies. We can all look at the numbers of companies going public on their local markets in Asia and the volumes and the improvement in disclosure and corporate governance. And the real advantage, the exchanges in Asia are closer to the corporate clients and better understanding of local regulations. So the trend should be that compliance can improve and there will be more public companies. And so we want to be understood and part of that and actively building a business there.

I noticed the mention of IT infrastructure and info services associated with product testing. Can you share any additional details regarding the product testing?

We continuously innovate across our business lines, and we have for many years now, moving data sets and other capabilities to the cloud. So that is what this is mostly related to.

Understood. Could you talk a little bit about the IT expenses and the professional services expenses and to what degree they're onetime versus ongoing? I know you have the disclosure in the back of the filing that identifies the -- some of the regulatory and clearing costs or something like that. But just anything beyond that disclosure?

So there is a significant variable component in professional and consulting expenses, which is due to regulatory and clearing costs, which in turn are correlated with the volume of trading activity. And that was the primary driver of the increase in professional and consulting expenses this quarter. Similarly, in IT infrastructure and information services costs, there are some variable components related to trading activity. And in addition, we also mentioned that some of the information services expenses increase was related to the Overnight initiatives as we acquired additional data sets to drive the Overnight business in particular. And I'll turn it over to Dan for additional -- and Cromwell for additional discussion on regulatory and clearing.

Walter there are many more successful CEOs and investors who've spoken about the fallacy and fibs around onetime expenses. We have expenses. We run a business, and we have expenses, which show up and they can be chunky. And there's a part for every management team when expense shows up and it isn't a regular bill they've been paying like rent and they go, "Oh, this is terrible," and they start to manage numbers. That's -- having come from an investor focus, that never creates a good culture. So there's going to be chunky expenses around. I don't really like the idea of onetime expenses in general because it's an expense that you had to pay to run your company. But I will leave people more eloquent from Warren Buffett to Charlie Munger, all the way to Seth Klarman to talk about onetime expenses, which are -- I think, will share our perspective strongly.

This is more of a high-level question. The market appears to be valuing OTC Markets as a high quality but low to no growth company. Historically, however, you've successfully run OTC Markets as a growth company with the growth investment coming through the income statement rather than CapEx. So I can kind of see how uninitiated investors might assume from the financials, namely the lack of CapEx and full distribution of free cash flow via dividends and now potentially opportunistic repurchases. I can see how those uninitiated investors might see a company that's not aiming for growth. But over the long run, OTC Markets has served its customers well and been rewarded with very solid, albeit lumpy organic growth. How would you explain -- and I don't love this term, but how would you explain the so-called growth algorithm to investors who are looking at the financials of OTC Markets?

Opportunities, just like costs, are chunky. And some opportunities, when it looks really good -- we didn't invent trading after COVID. It looked really good. But then we get ourselves back up to a plateau. And often, when it's looking really good, you're having to backfill expenses and -- because you're really focused on supporting the client demand and then you're strengthening the platform and the scaffolding. And the changes we've been making into our markets, which is how do we connect broker-dealers, how do we put better information onto screens and into machines and how do we improve compliance. All of those things, because we've had this great opportunity as markets have moved from analog to digital, make our markets better, which allows them to become bigger. And we get to participate along with our clients. So we've had a consistent strategy. I would say, our biggest counter positioning to understand is the large exchange groups. Their goal is to take 2/3 of every dollar their customers pay them and put it in their operating profits. There are lots of other businesses where the margins we've traditionally operated at are considered fantastic businesses. And yes, people build our platform, improve our products, expand our networks. And it's a collaborative approach. We cannot be successful without the broker-dealer community, and that's both the market makers, the online brokers, the larger banks. We cannot be successful without a collaborative relationship to work with regulators. Often, the regulatory relationship has been 99% discussing investor protection and market efficiency and capital formation are afterthoughts. That has changed with this administration, so we're excited, and working with issuers. You cannot have an efficient market process without engaged, transparent and compliant companies focusing on supporting their investors and good governance. Those are all works that take time. And you look at what we're achieving in Blue Sky. When we launched the OTCQX market, it wasn't recognized anywhere. There was no path to 100% Blue Sky compliance across 50 states, the District of Columbia and the 3 territories. We are like Lewis and Clark. And our legal team, our compliance team, our Blue Sky team has been speaking to the securities -- state securities departments in every state, and they will continue because even when we get there, we will find ways to be more efficient, and work with regulators. But once we can do that, we're using our markets to close the functionality gap with the NMS exchanges. And that takes time.

Are you willing to share -- sorry, just moving back to a prior question. Are you willing to share the revenue contribution of MOON during Q1? I think it kind of -- the question or response kind of morphed into a quarter-over-quarter response, but I was just curious. And if you're not willing to share, it's totally fine.

It has become, as we were hoping, a nice contributor to transaction-based revenue in the first quarter, but we're not breaking it out at this moment. And remember, we are all expecting the entry into this market at year-end by the exchanges, which will change the competitive landscape quite significantly. So we'll continue to run it and invest in it.

And learn from it.

And learn from it.

I mean this is a great learning experience. It's -- there's lots of little events that are taking place, which are opportunities for us to sharpen our skills internally and the services we offer broker-dealer subscribers to serve their clients and succeed on a commercial basis and expand their product offering. As I said, exchanges are entering the space. The pie will grow. The competitive stance will shift. During the daytime, half of trading takes place off exchange. So there is an opportunity. That said, the competitive positioning and offering with exchanges is going to be different. And for us, we are going to learn a lot, and we're going to have productive conversations with clients on how we can support their success with our platform and our product offering and our pricing strategy that delivers everyday value to broker-dealers.

Makes a lot of sense. This is my last one. Finally, under what circumstance would you consider a tender offer? Maybe that can make sense, given the liquidity of the stock and could benefit long-term shareholders.

My concern of a tender offer is it turns you into a [ liquidity-rich model ]. And so we're back in the market buying, however, not trying to put our thumb on the scale on the pricing. And the market will trade our shares where they are. I'll go back to Warren Buffett. We don't run our company for people who are selling their shares. We run our company for shareholders who want to hold our shares as we grow the value over the long term through different economic cycles. And that is our hope.

Ladies and gentlemen, I'm showing no further questions in the queue. I would now like to turn the call back over to Cromwell for closing remarks.

Thank you, operator. And thank you to our investors, and thank you to the investors and the analysts who asked questions. I want to thank each of you for joining us today. I would encourage you to read our full quarterly 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.

Ladies and gentlemen, that concludes today's conference call. Thank you for your participation. You may now disconnect.