Dan Zinn - General Counsel Cromwell Coulson - President & CEO Bea Ordonez - CFO

Thank you, Operator. Good morning and welcome to the OTC Markets Group first quarter 2016 Conference Call.

With me today are Cromwell Coulson, our President and Chief Executive Officer, and Bea Ordonez, our Chief Financial Officer. Before we begin today's call, I would like to review the Safe Harbor statement.

This conference call 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 2016. Words such as may, will, expect, intend, anticipate, plan, believe, could, and 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, 2015.

The Company does not intend and undertakes no obligation to update its forward-looking statements to reflect future events or circumstances. With that, I'd like to turn the call over to Cromwell Coulson.

Thank you, Dan. Good morning and thank you everyone for joining the call.

I'll cover our business and operational developments that occurred during the first quarter as well as share some of our views on the role our markets can and do plan in the context with smaller company public trading and the broader public trading landscape. Our CFO, Bea Ordonez, will discuss the details of our financial results.

Throughout the first quarter we continued to drive towards our mission, trading better informed and more efficient financial markets. We fulfilled that mission by executing our strategy to operate world leading securities markets.

We do that by sharing information widely through open networks that foster greater transparency, connecting broker dealers, organizing markets and informing investors. We deliver elegant, reliable and cost effective subscription based solutions.

For a future, that is online data driven and social. Achieving our mission is a long-term goal that requires continued investment in our platform and people to deliver new functionality and improved services that will create more value for our subscribers.

To effectively develop the solutions our markets and subscribers require, we must continually take a broad look at how broker-dealers and public companies trade on our markets and use technology and transparency to increase efficiency and remove any blockers, impacting the accessibility of our markets. In the first quarter, we continued our record of 100% uptime of our core OTC Link ATS system during trading hours.

This achievement requires ongoing investment in technology solutions that promote the resilience and reliability of our core systems as well as diligence, hard work and collaboration across our technology and business teams. I would like to thank all of our teams who have worked so hard to really make a dramatic turnaround in uptime and reliability of our operations.

This is something that we had strong success in, in 2015 after struggling in the previous years to deliver the level that our customers, our regulators and investors require, but we have made great achievements by improving the process and the way our people focused. We also continue to focus on our responsibilities under the SEC's Regulation SCI, SCI, Systems, Compliance and Integrity.

So, ongoing investments made in our systems and people allow us to maintain reliability, while developing elegant, reliable and cost effective new features and functionality for our broker-dealer subscribers. Following the success of our first full year of our OTCQB Venture Market in 2015, we are learning about our community of OTCQB companies and developing the processes necessary to support improve and grow this exciting market going forward.

We are building America's venture market with OTCQB, as well as the leadership role, -- is -- and it is a leadership role for SMEs in the U.S. or across other countries, and we are doing that by giving innovative and entrepreneurial companies the public market they need today.

So they can grow for tomorrow. During the first quarter we saw a decline in the number of OTCQB companies based on lower new sales, offset by higher retention rates.

These markets have been a big part of our recent growth and we're continuing to devote resource to developing the pipeline of potential QB companies. It is OTCQB in a relatively new product as a premium market, there will be a process of getting product market fit right, fine tuning the value and the standards but we really think in our first pass of version 1.0 of OTCQB.

We hit a sweet spot to be able to be able to have OTCQB price securities of companies that have various risk because the definition of a venture market is to give companies a chance to succeed. And that's really important because if you look at the definition of giving companies a chance to succeed, means that you have companies that have not yet fully succeeded in their vision.

You also will have companies that are still figuring things out, you will also have companies who been failed, and that is really important because with that business risk you need a market to just focus primarily on transparency, so that the risk can be priced sufficiently. And that's really what we try to use is use today's technology and transparency to drive information into the markets, so OTCQB companies can be effectively priced and deliver the value of being a public company, without creating too much pain that kills public companies with cost and complexity.

Also during the first quarter, we implemented the enhanced OTC to actual strength in financial standards at a continuing penny stock probation and introduce common sense corporate governance standards already followed by the majority of OTCQX U.S. companies.

The new roles are in affect from new companies joining OTCQX in 2016 and will apply to all OTCQX companies beginning next years. These changes helped further solidify OTCQX as a best market for investor focused companies that can meet well established, regulatory financial standards and corporate governance practices.

OTCQX is a higher standard than OTCQB, no penny stocks meeting its financial standards, a minimum of the Uniform State Securities Act these are for companies that have operations that are at initial level. OCTQX looks a lot like NASDAQ in the 90s but it's got today’s technology and transparency and in a world where investors instead of having to call someone on the phone to trade, or to get information about a company on the phone or through the mail.

There is incredible dynamic of the online information to the individual investor. And the individual investor is who owns the vast majority of smaller companies.

And we're building our market to fit that. We also had 11 companies graduating from our markets to a NYSE or NASDAQ listing during the third quarter, maintaining our position as the global leader in exchange graduates.

As Congress and the SEC continue to discuss the role of venture markets in the U.S., we are actively participating in the discussion and educating law makers about the kind of changes that would benefit companies in our markets. Specifically access to Reg A plus and Reg Crowdfunding for SEC reporting companies and with both the SEC and the state regulators more efficient blue sky preemption for both Federal registered of the securities offerings and secondary trading through broker-dealers.

For our future, we're working through a core belief that we can make being public on our markets not be painful for their companies and management teams. One of our subsets of OTCQX is OTCQX for banks.

And on OTCQX for banks we're seeing banks move from the high cost NASDAQ listing process to come to OTCQX banks and retaining the same liquidity and valuation but with much lower complexity and cost to management teams, so they can focus their capital and their management time on serving their community, their local community as better banks, that's really important. So, with that in mind, we are focusing on our market, how could we remove unnecessary cost and complexity, while still providing trust, reliability and competitive choice to market participants.

We have a particular opportunity to the smaller company space, small public companies no longer have the efficient path to public capital raising that existed in the 1990s. Individual investors have been shut out of the IPO process.

The equity capital markets’ business at large firms is institutional only. This is tough because small companies, their investor base, the vast majority is individual investors and smaller institutions.

Smaller companies have turned to the pipes and complicated equity line financing to make up the difference and at the low end of the pipes market, while many companies have successfully used pipes and equity line financing in the private market at the low end there are sharks with toxic term sheets which are awful for small companies. They just try and buy their shares at a discount from the companies and dilute the public investors.

Basically small companies today by being only available to go into the private market for capital raising rather than being able to raise capital publicly are forced to sacrifice their futures in order to raise the capital they need to survive in the short term. We think online capital raising through Reg-A and Crowdfunding can completely transform this and really fits the secondary markets.

The online capital raising opportunities being created by the jobs act are a great step in the right direction, allowing small companies to access individuals, investors directly through the Internet. As I say, companies should be able to raise capital across the Internet in online securities offerings and sell their shares the same way Amazon sells books and toasters.

Electronically targeted efficient, transparently that’s at the heart of online capital raising Crowdfunding. Also what we need to do because if this industry forums it's how our OTCQX best market and OTCQB venture market reduce complexity of being public while providing the benefit, the many benefits of public trading including visibility, liquidity, valuation, capital and trust.

Our markets are tailor made for the next generation of smaller company, Crowdfunded online offerings. Our data driven listing standards focus on publicly available company information so market participants can easily analyze and value and trade these securities through online and institutional brokers.

As Elio Motors the first online Reg A+ offering showed our OTCQX best market is a strong competitive and cost effective choice for this next generation of Internet-enabled online IPOs that are bringing the self directive investor back into the capital formation process. Within OTC Link as I shift to our OTC Link business, we saw decline in revenues from continued industry contraction as well as a slow market environment to start the year.

Two things affected revenue, contraction in the number of broker dealers and also contraction in the market activity. So, you have a smaller -- and since our subscription based model is broadly based in a slow market it contracts.

That’s good for our brokerage clients because they’re not doing as well. Now we’re hopeful that the market environment exiting the first quarter is better than the market environment as we entered.

But we can’t make any predictions on market environments such as the IPO window staying open, the volumes and interest in smaller companies coming back. But that is a part of which to be cognizant through this quarter.

Is more importantly because we have a subscription based revenue, we keep investing in our systems. We are able to use the first quarter to largely complete the systems work required to allow subscribers to quote Tier 2 and the mass securities on OTC Link ATS in the coming months.

This functionality will be rolled out slowly and carefully, but we believe many Tier 2 and the mass securities trade much like OTC securities and can use the value of our broker dealer market with competing liquidity providers who can add supplemental liquidity into the market. Our broker dealer network allows a broker dealer subscribers to provide liquidity in execution services for companies ranging from smaller U.S.

companies to the largest cross border trade in ADRs efficiently and at low cost and with a quality and consistency. It is very attractive to the online broker community.

So we believe expanding our offering up to the underserved Tier 2 of exchange listed securities will be an attractive option for brokers seeking liquidity and brokers providing liquidity. And advantage of our dealer based model is it allows broker dealer subscribers to compete directly with one another on execution quality.

It also gives control to liquidity consumers, so they can chose who they wish to interact with. And again the dealer model creates a superior investor information trading experience via online and institutional brokers.

While many large cap stocks already have natural liquidity of standing order books, small companies need the liquidity provided by competing broker dealers in the market, as do global securities need cross border electronic armored shares, competing market makers provide liquidity as a service are a key component to the landscape. Our market data business lines rebounded slightly in the first quarter as we look to build the momentum generated by the introduction of exciting new securities into our markets and on the success of our compliance data file which is a product which allows broker-dealers to use data points around securities to figure out which securities such as OTCQX securities are lower risk and they can remove restrictions on trading and which ones are the higher risk, ones they should add restrictions or put more focus on.

We will continue to work with and for our community broker-dealers company is a market participant to support smaller and global company public trading to build the next new network market is, now before Bea discusses the details of our financials, I'm pleased to announce that on May 3rd, our Board of Directors declared a quarterly dividend of $0.14 per share payable in June. This is our 38th consecutive quarterly dividend and our fourth consecutive $0.14 quarterly dividend.

With that, I'll turn the call over to Bea.

Thank you, Cromwell and thank you everyone for joining the call. I'll now spend a few minutes reviewing the results of our operations for the first quarter of 2016.

On a quarter-over-quarter basis, OTC Markets Group saw an 11% increase in growth revenue to $12.8 million for this quarter over $11.5 million in revenues for the same period last year. The increase was driven largely by growth in our corporate services business line which saw 1.4 million or 44% increase in revenues quarter-over-quarter.

This growth in corporate services was largely a result of the growth in companies verified to trade on the OTCQB venture market. We ended the first quarter of 2016 with 929 companies on the OTCQB as compared to 661 companies at the end of the same period last year.

We've seen the closed IPO market since 2009 despite these unfavorable market conditions we added 68 new companies to the QB venture market during the first quarter. We saw 81 companies drop from the market in the quarter, a result of non renewals are downgrades due to non compliance with our market standards.

Relative to the OTCQX spot market, we should expect to see a higher rate of turnovers of that companies on OTCQB. On a quarter over prior year quarter basis, we also continue to see growth in revenues from our OTCQX Best market.

This growth was the result from an increase in the number of companies on OTCQX as well as price increases introducing 2016, for new companies joining the market. We ended the first quarter with 388 companies on our OTCQX Best market as compared to 383 companies at the end of the first quarter of 2016.

Included in that numbers of 388 companies are 143 U.S. companies which includes 76 banks and 245 international companies, during the quarter, we added 13 new companies to our Best Market.

Companies on the OTCQX market renew their subscription annually on a calendar year basis. For 2016, we saw a renewal rate of 89%, this compared well to the renewal rate in 2015 which was 86%.

In fact, OTCQX Best market welcomed the first company to successfully complete a Crowdfunded capital raise under SEC Regulation A plus, we expect to see more companies taking advantage of the new regulatory framework for online capital raising and we expect many of those companies will choose to trade on our OTCQX on our OTCQB markets over the coming years. In our trading services business line revenues of 2.8 million for the first quarter of 2016 was down 10% quarter-over-quarter.

This decline was a result of the retirement of otcquote.com last year as well as a decline in the number of OTC dealer users at our broker-dealer subscribers. The decline in users reflects the continuing trend towards consolidation and contraction in the equity's trading space.

Further contributing to the decrease in quarter-over-quarter revenues was a reduction in quote revenues this has affected both the reduced volume as well as pricing changes which we made back in July of 2015 which had the effect of eliminating quote fees with securities traded on our premium markets. In tandem with the elimination of quoting fees for OTCQB and OTCQX securities, we increased our fees for trade messaging.

This price increase droves in increased in message revenues for the quarter despite declines in trade message volumes on a quarter-over-quarter basis. Market data revenues were up 2% to 5.3 million when compared to 5.2 million for the same period last year.

Much of this increase was the result of the introduction of the new fee for subscribers accessing our data by our third-party portals. The increase was partially offset by small decreases in the number of non-professional users as well as declines in advertising revenues.

Worth noting is at the end of the quarter we had almost 21,000 professional users of our market data and 11,400 non-professional users. Moving on to expenses now, for the quarter our operating expenses were up about 8% to $8.4 million.

As in previous quarters, the increase was primarily due to an increase in compensation and benefit costs, which were up 6% to 5.2 million versus 5 million for the prior year quarter. This increase was the result of higher headcount as well as increases in base salaries.

Our compensation costs amounted to 41% of our gross revenues for the quarter, which compared to 43% for the prior year quarter. IT and infrastructure cost was 1.3 million up 16% over the prior year period and reflecting the run rate impact of the very significant investments made in our core trading systems and applications during 2015.

Our income from operations for the first quarter was 3.8 million, an increase of 20% over the prior year quarter. Our operating income margin also saw improvement increasing to 31% from 29% for the same period last year.

Net income for the quarter increased 25% to 2.3 million primarily due to the increase in operating income. Also a factor was that we saw a decrease in our effective tax rate for the quarter from 41% to 39%, which was caused by changes in estimates related to state and local apportionment rates.

In addition to certain GAAP and other metrics, management tracks the non-GAAP measure adjusted EBITDA. Adjusted EBITDA excludes non-cash stock based compensation expenses.

For the quarter, adjusted EBITDA increased 17% over last year to 4.7 million or $0.40 per adjusted diluted shares. This was up from 4 million and $0.34 per adjusted diluted share for the first quarter of 2015.

You can find a reconciliation of our non-GAAP to GAAP results in our press release which is available on our Web site. In concluding we continue to produce solid cash flows from operating activities.

For the three months ended March 31st we generated cash flows from operations of $800,000. This was down 1.5 million over the same period last year, primarily because we saw a very significant influx of cash in the first quarter of last year, resulting from companies joining our OTCQB market.

We have a unique position in the market with complementary business lines generating strong revenue performance and a subscription based recurring revenue model with outstanding operating leverage. We will continue to utilize our cash flows to grow our business organically through strategic investments in our people and technologies.

As appropriate we will continue to return cash to our investors in the form of dividends and through our stock buyback program. In that context, as Cromwell already noted, we were pleased to announce yesterday a quarterly cash dividend of $0.14 per share of our Class A common stock.

This will mark our 30th consecutive quarterly cash dividend. With that, I’d like to thank everyone for their time and pass it back to the operator to open up the line for questions.

Thank you. This is Cromwell Coulson again to wrap up.

It is -- I would say the two -- the biggest point of the quarter to focus on was with Elio doing their Reg, their online Reg A+ IPO to our markets, it has changed OTCQX into a viable market for IPOs. So the monopoly or duopoly of NYSE and NASDAQ for IPOs is being broken for this next generation of Internet enabled capital raising and that is a very exciting transformation for us.

The second part is which is you’re going to hear a lot more from us, is about the importance of dealer markets. Not every company trades a million times a day and has deep limit order books.

These companies and some of them are large global companies, many are smaller companies, they need additional liquidity, supplemental liquidity provided as a service by dealers, by proprietary trades, even by short term speculators, who are helping drive price efficiency of the market. And those are the things that we are going to work on fostering and helping consistent dealers provide more, because we’ve spent a lot of time for the past year and a half focusing on upping our reliability game.

And we put in the processes, we’ve also rolled out a lot of improvements to our platform, but now we’re going to start driving new functionality to really create the best broker dealer market of competing liquidity and execution providers. An open market that’s open to market makers, agency brokers and ECNs but one that is primarily focused not on how quickly within a millisecond or microsecond you can match a deep book of standing orders but on creating a market where more liquidity is provided than exist today.

And that’s a real unique opportunity. NASDAQ lost that when they became a stock exchange in 2006.

So, if you put together these few things and they are not changes that are going to instantly transform our business but they’re going to the places where we make movement and progress and are going to take us to the next generation of where we want to be to be successful, two, three and five years from now, which is a future which is online, data driven and social. Thank you very much.