Dan Zinn - IR Cromwell Coulson - President & CEO Bea Ordonez - CFO

Chris McGinnis - Sidoti and Company

Thank you, operator. Good morning and welcome to the OTC Market’s Group First Quarter 2017 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, including but not limited to the company’s expected financial results for 2017. 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 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, 2016.

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 operation, 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 the company’s earnings press release.

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. 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.

In 2017, we will continue to be guided by our mission and our strategy and I want to begin by addressing them here. Our mission is to create better informed and more efficient financial markets.

We fulfill that mission by executing our strategy which is operating world-leading securities markets. We share information widely through open networks that foster greater transparency.

We connect broker dealers, organize markets and inform investors. We deliver elegant, reliable and cost-effective subscription-based solutions for a future that is online, data driven and social.

Our mission and strategy, along with our company values, provide us with a roadmap as we focus on initiatives that will improve our technology platform and data driven products, provide value to our subscribers, create growth opportunities for our people, and continue to deliver long-term returns to our shareholders. Our Corporate Services business showed double-digit growth during the quarter and continues to be the driver of our overall revenue growth.

The data driven standards of our OTCQX and OTCQB markets are now recognized by 21 states as securities manuals under their Blue Sky laws. State recognition demonstrates that our standards provide a strong baseline of transparency for investors.

Our ability to attract and retain companies on those markets shows that we are helping to make being public less painful. Blue Sky recognition from the remaining states and continued enhancements to our markets remains a major strategic focus for the remainder of 2017.

We want to use our information first model to build the most business-friendly public markets for global and U.S. companies.

The competitive landscape has changed for our interview and quotation system. With global OTC ATS’s, operated by a subsidiary of the New York Stock Exchange and formerly an OTC Link ATS quoting subscriber, breaking off to start competing directly with OTC Link ATS using a matching engine model as an interdealer quotation system.

They will continue to be a trade messaging subscriber on OTC Link ATS as the majority of trading that they do takes place with OTC Link ATS liquidity providers. Earlier this week, our technology team delivered enhancements to our system to allow OTC Link ATS subscribers to view an aggregated market data feed and to provide seamless connectivity to global OTC.

This allows our subscribers to continue operating in the OTC market with as little disruption as possible despite the changing landscape resulting from global OTC’s move. We welcome competition in the interdealer quotation system space.

We believe in choice and competition forces us to raise our game. We will continue innovating for the benefit of our subscribers.

We strive to provide superior service to our subscriber community and to help broker dealers execute more trades on their systems in a cost-effective manner. As we help our broker dealer subscriber support their unique business models, we will continue to be successful.

A core initiative for 2017 is to continue to enhance our trading services offerings to allow our broker dealer subscribers to thrive. Our OTC Link ATS is designed to support a diverse community of broker dealers providing liquidity and trade executions in a wide range of securities.

We believe that our continuing focus on delivering a better information and trading experience to broker dealers and investors will make us stronger when facing competition and adapting to changes. The reliability of OTC Link ATS remains a top priority and we continued our record of 100% uptime of our core OTC Link ATS systems during trading hours in the first quarter.

That makes more than two years of 100% uptime. As an ATS covered by the SEC’s regulation FCI, overall system security, resiliency and compliance goes hand-in-hand with our reliability initiative.

Looking forward, we believe that capital raising will be technology driven and that our markets will be the natural destination for the next generation of securities created via online capital raising and crowd funding. We understand the reality of certain aspects of our business.

There are shrinking numbers of broker dealers, community banks and public companies more generally. While the new administration has made a commitment to reducing regulatory burdens, the promised changes have not yet been implemented.

We are pushing forward with the SEC and with lawmakers on our petition for rule-making to extend Regulation A+ to SEC reporting companies. Experts from across the industry are on record in support of these proposals and we are excited about the prospects for this and other practical proposals that will provide opportunity for smaller companies to raise capital in a more efficient manner and to be able to go public with less regulatory red tape.

Less red tape and more efficient capital raising are good for all public markets. Finally, I’m pleased to announce that on May 2nd, our board of directors declared a quarterly dividend of $0.14 per share payable in June.

The dividend reflects our consistent commitment to providing superior shareholder returns. This marks our 34th consecutive quarterly dividend and our eighth consecutive $0.14 quarterly dividend.

With that, I will turn the call over to Bea.

Thank you, Cromwell and thank you all for joining the call. I will now spend a few minutes reviewing the results of our operations for the first quarter of 2017.

Any reference made to prior period comparatives refers to the first quarter of 2016. For the quarter, we generated gross revenues of $13.4 million, up 5% versus the prior period.

Corporate Services revenues were up $600,000 or 14% versus the prior period. We saw growth in all of the main components of our Corporate Services business line.

In relation to our OTCQX market, we saw 14% revenue growth. This is primarily from price increases affected for the 2017 subscription period, as well as from the full period impact of new companies added over the past 12 months and an improved retention rate.

For the 2017 subscription period, we saw a retention rate of 93%, up from 89% for the prior year. Revenues from our OTCQB market were up 8%, a result of the full period impact of the 227 companies added to the market in 2016 and strong new sales in the first quarter.

Revenues from our disclosure in new service we're up 30%, a result of the full period impact of price increases introduced in February 2016. We are encouraged by the level of new sales in relation to our premier markets.

Nineteen new companies we're added to the OTCQX market during the first quarter versus 13 added in the first quarter of 2016. Our OTCQB market welcomed 82 new companies in the first quarter, up from 56 for the prior year period.

Our impressive 2017 retention rate, coupled with improving sales, and the impact of price increases, positions our Corporate Services business line to continue to deliver on its consistent track record of growth. Trading Services recorded revenues of $2.6 million for the quarter.

This represented a decline of 5% versus the prior year period. Our Trading Services revenues continue to be negatively impacted by declines in the number of active market participants, with 99 broker dealer subscribers as of the end of the current quarter versus 116 subscribers as of the end of the prior year period.

This decline includes the loss during 2016 of Citigroup’s automated trading desk, a significant subscriber who exited the business. Our Trading Services business line continues to face challenging conditions and strong headwinds, including a low volatility, low volume trading environment, and continued contraction and consolidation in the broker dealer industry.

Market data licensing revenues were $5.5 million for the quarter, up 2%. This is primarily a result of significant growth in the number of non-professional users of our data, with approximately 16,000 non-professional users as of March 31, 2017, up from 11,000 as of the prior period end.

This reflects both increased retail investor participation in the equity markets and the increased reach of our market data distribution network. We continue to see reasonably strong sales of our data licensed products, especially of our compliance data products.

On a quarter-over-quarter basis, we saw a 1.1% decline in the number of professional users of our market data, with approximately 20,700 professional users as of March 31, 2017 versus approximately 20,900 users as of the end of the prior year period. During the first quarter, operating expenses increased 2% to $8.5 million, a result of increases in compensation and IT and infrastructure costs, partially offset by decreases in professional fees and marketing expenses.

For the first quarter, income from operations increased $441,000 or 12% to $4.2 million. Net income for the quarter increased $735,000 or 32% over the prior year period.

This significant increase was partially related to the increase in operating income and was also impacted by the adoption of new accounting guidance related to stock-based compensation. The adoption of this new guidance effective January 1, 2017 resulted in excess tax benefits of $454,000 being reflected in the income statement as a component of the provision for income taxes.

This tax windfall would previously have been reflected in additional paid in capital. In addition to certain GAAP and other measures, management utilizes a non-GAAP measure adjusted EBITDA, which excludes non-cash stock based compensation.

Adjusted EBITDA for the first quarter increased 11% to $5.2 million or $0.44 per adjusted diluted share, up from $4.7 million and $0.40 for the prior period. You can find a reconciliation of our GAAP and non-GAAP results in our press release, which is available on our website.

We continue to produce solid operating cash flows. Cash flows from operating activity for the first quarter amounted to $1.7 million, up from $812,000 in the prior year period.

We ended the quarter with $23.5 million of cash on hand. We have a strong balance sheet with no debt and benefit from a subscription-based recurring revenue model, which produces consistent and predictable cash flows.

We continue to operate and invest focus capital allocation policy which returns cash to our investors in the form of dividends and through our stock buyback program. During the first quarter, we purchased $1.4 million worth of stock by our stock buyback program; a significant increase over the $748,000 invested on stock purchases during the prior year period.

As Cromwell already noted, we were pleased to announce yesterday a Q2 2017 dividend of $0.14 per share. In closing, our first quarter delivered 5% topline revenue growth, a 200-basis point improvement in our operating profit margin, which resulted in an impressive 12% quarter-over-quarter increase in our operating income.

We operate and support a critical aspect of the US equities market and serve diverse sectors of the financial community. We will continue to invest in enhancements to our product suite that will allow us to better serve our clients.

It is through this investment that we will position ourselves to deliver consistent revenue growth and strong returns for our investors. With that, I would like to thank everyone for their time and pass it back to the operator to open up the lines for questions.

Good morning. Thanks for taking my questions.

Maybe just to start on the Blue Sky. It looked like more than one was added.

Can you just talk about how you think that progresses throughout the year? And are you in negotiations now with more states?

Dan has been working on this project with the Corporate Services team, so Dan Zinn is going to give the answer.

Hi, Chris. So yes, we’re in process with a number of other states.

Right now, Maine has an announced rule proposal out there. I think initially we got a lot of activity when it was a new idea and when states that were very comfortable doing it through administrative procedures, whether it’s a no action letter or an order, and go through some faster processes, and now more of the states that are going through a rule making sort of process, it takes a little bit longer just because of the nature of the kind of change they’re trying to make.

But we anticipate continuing this push and continuing to see results. I think the one add is most likely an anomaly and you’ll see continued adds throughout the year.

Okay. Great.

So, no real change? Still feel a strong growth?

I guess last year was just a little bit easier just due to the states that you were dealing with?

Yes, last year I think we did 16 from May when we started the initiative through the end of the year, and then we had a quick adjustment in the first quarter or prior to the first earnings call of a few extra states, then just one in the past couple of months. But again, I think it’s just timing of when these changes are actually being pushed through.

Great. I guess just looking out, obviously strong growth out of the Corporate Services.

How much of that was driven by new clients and can you maybe just talk about the outlook for – I know you don’t give guidance, but maybe the outlook for the year or touch on strength of continued sales since the end of the quarter?

Sure. We’re very encouraged, as I said, during the call by new sales in our premiere markets, and we’re continuing to see a strong pipeline.

Obviously, we’ve often referenced in the past the macroeconomic conditions that potentially make it a tougher terrain for companies to go to public market. We’ve seen somewhat of an uptick.

It’s always cyclical and can be cyclical, but for now we’re seeing a very encouraging pipeline and we saw very strong sales, as I noted, for Q1 and April we’ve seen strong sales again. So, without wanting to try and predict the future, I think we see positive signs.

And Chris, this is Cromwell Coulson. It goes back to we have a new administration, but the SEC Chairman was just approved by the full Senate.

So, a lot of the changes that have been making being public painful there’s talk but there hasn’t been any change yet. My expectation is, with a focus on this, it’s going to lift all ships in the space and really bring back the value quotient of being public because the benefits, the cost benefit ratio has gotten out of whack and that’s pretty we'll recognized.

So, for us, we don’t give projections, but we are hopeful that the changes take place that the current government has promised.

That’s surely positive for you, I would think.

Because crowd funding isn’t yet at traction, but we think we are building a model which works really well for the middle of those companies. The largest crowd funding companies will go to exchanges, the smallest ones won’t have the activity to trade, but there’s going to be a middle point that we want to build the best offering for using our information first model and to have a business friendly public market.

Would you mind, since you guys are so intimate it with, maybe how the infrastructure for crowd sourcing is setting up right now and maybe the state, I know it’s still early, but if you could maybe just give an update on where it is now versus a year ago?

It’s hard to say where the infrastructure is. There’s lots of crowd funding types that have started that are failing.

There are people who have tried to do crowd funded offerings that are not achieved. There are some successes.

But the industry does not have the network of investors, does not have the track record yet. But there are very few products that are information-based that are sold to a distributed group of consumers that technology has not been successful.

Now, there are some bills going through called the Fix Crowd Funding Act in various places. I don’t know if they will fix it.

But I can assure you, we will see more and more bills to make it work. Before the Jobs Act, it was almost 100% illegal to sell securities online.

The Jobs Act made it about 2/3 legal. But this is not going to be an overnight sensation.

No, I understand. I appreciate that.

Lastly, just on the lower tax rate for the quarter, should that be a benefit for the full year or is that just a one-time kind of recognition?

What you’ll see over the course of the year, the nature of how we structure, our stock compensation plan is that you would see the bulk of that benefit in the first quarter because of our vesting schedule. But you will see, and of course it’s all dependent on stock performance, but you will see potentially smaller benefit over the rest of the year in relation to vesting schedules on options, which don’t vest on a calendar year basis in January, they vest on the anniversary of hire date.

So, if you were to look back over 2016, you would see that same pattern. Through the equity, you would see a large excess tax benefit in the first quarter and then additional over time but smaller components for the remaining quarters.

Okay. Great.

Well nice quarter and thanks for taking my questions.

Thanks Chris.

Great. Thank you, everybody, for taking the time to hear our first quarter earnings call.

Feel free to reach out to Bea if you have any further questions. Thank you very much.