Q3 2017 OTC Markets Group Inc Earnings Call

Nov 09, 2017 AM EST
OTCM - OTC Markets Group Inc
Q3 2017 OTC Markets Group Inc Earnings Call
Nov 09, 2017 / 01:00PM GMT 

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Corporate Participants
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   *  Beatrice Ordonez
      OTC Markets Group Inc - CFO
   *  Daniel Zinn
      OTC Markets Group Inc - General Counsel and Corporate Secretary
   *  Robert Cromwell Coulson
      OTC Markets Group Inc - CEO, President and Director

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Conference Call Participants
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   *  Andrew Mitchell
      Edison Investment Research Limited - Associate Director
   *  Christopher Paul McGinnis
      Sidoti & Company, LLC - Special Situations Equity Analyst

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Presentation
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Operator   [1]
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 Good day, ladies and gentlemen, and welcome to the OTC Markets Group Third Quarter 2017 Earnings Conference Call. (Operator Instructions) At this time, it is my pleasure to turn the floor over to your host, Dan Zinn. Sir, the floor is yours.

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 Daniel Zinn,  OTC Markets Group Inc - General Counsel and Corporate Secretary   [2]
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 Thank you, operator. Good morning, and welcome to the OTC Markets Group third 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, concerning, 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 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 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.

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 Robert Cromwell Coulson,  OTC Markets Group Inc - CEO, President and Director   [3]
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 Thank you, Dan. Good morning, and thank you, everyone, for joining the call. I'm going to give some insight into our performance for the third quarter and how our activities during the quarter reflect our long- and short-term priorities. We continue to be guided by our mission and our strategy. 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, strategy and 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 value for our shareholders. We achieved solid growth in top line revenue and more modest growth in operating income this quarter. Our operating margin contracted slightly due to increased operating expenses. Bea will cover our results in more detail.

 I am excited to report that we added Hawaii and Pennsylvania to our Blue Sky map, making 27 states in which secondary transactions on our OTCQX market are exempt under state Blue Sky laws, matching the number of states that recognize the NASDAQ market back when Apple IPO-ed. During the third quarter, NASAA, the national organization of state securities regulators, announced their plan to propose a model rule recognizing the OTCQX and OTCQB markets. This positions us to achieve our goal of national Blue Sky recognition for the OTCQX market. As I've noted before, our OTCQX and OTCQB market were recognized as established public markets by the SEC in 2013. And with each new state and each new regulatory recognition, we enhance our reputation for offering efficient public markets that work for companies, investors and brokers. Regulatory recognition of companies that are providing good disclosure into the market through our OTCQX and OTCQB markets demonstrates that our data-driven standards provide a strong baseline of transparency for investors, while making it less painful for companies to be public.

 Enhancing the services we offer to our broker-dealer subscribers remains a core strategic goal. The OTC Link ATS is the leading interdealer quotation system in OTC equity securities, and supports a diverse community of broker-dealers providing liquidity and execution services in a wide range of securities. We continue to offer choice and innovation for our clients. And with that in mind, during the third quarter, we filed a form ATS with the SEC to create a new OTC Link ECN in our FINRA-regulated broker-dealer. Our plan is for OTC Link ECN to offer our broker-dealer subscribers greater choice in electronic execution strategies with an anonymous matching engine and liquidity ladder. This offering, in addition to the deep market maker liquidity on our OTC Link ATS will provide our subscribers with new trading functionality to support their business models. We intend to launch the OTC Link ECN before the end of the year.

 Even as we develop for the future, we remain focused on the liability. We continued our record of 100% uptime of our core OTC Link ATS systems during trading hours in the third quarter. We call out this achievement every quarter because it exemplifies the ongoing commitment of our IT, compliance and business teams. This focus is in keeping with our status as an operator of an ATS covered by the SEC's Regulation SCI. Within our Corporate Services business line, we recently announced strategic alliances with the Canadian Securities Exchange and issue a direct Corporation. working with the CSE will allow us to be part of a North American capital and visibility solution for companies looking to gain cost-effective access to U.S. investors on our OTCQX and OTCQB markets. For international exchanges, such as the CSE, our markets offer a way to plug into global investors with a U.S. footprint. With Issuer Direct, we'll offer our company direct easy access to a suite of news, communication, compliance and investor relation services. As we have discussed all year, another key priority for us is supporting industry-wide initiatives relating to small company capital formation. While there is a lot of discussion of market structure, the 2 most important things to bringing small companies back is efficient access to capital and making being public less painful and less resource-intensive.

 We have closely followed the progress of the improving access to capital act, a bill based on our SEC petition for rule-making and support from the small business community. In September, the bill passed the full house by an overwhelming 403 to 3 vote. This bipartisan act would extend Regulation A+ to SEC reporting companies, providing a much needed, less painful capital-raising option for many small emerging companies that are currently needing the complex and costly obligations of being SEC reporting and enhance the profile of Regulation A. We look forward to seeing the bill progress through the legislative process. We are excited about the prospects for this and other practical proposals that provide opportunities for smaller companies to use more transparent, less costly, public, capital-raising tools and leverage innovative, technology-driven online platforms. Supporting these initiatives will lead to less red tape and more efficient capital raising, which are good for all public markets.

 Finally, I'm pleased to announce that on November 8, our Board of Directors declared a special dividend of $0.60 per share and a quarterly dividend of $0.14 per share, each payable in December. These dividends reflect our ongoing commitment to providing superior shareholder returns. This is the fourth consecutive year which we've declared a special dividend and the third year in a row with a $0.60 special dividend. The quarterly dividend is our 36th consecutive quarterly dividend and our 10th consecutive $0.14 quarterly dividend. With that, I will turn the call over to Bea.

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 Beatrice Ordonez,  OTC Markets Group Inc - CFO   [4]
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 Thank you, Cromwell, and thank you all for joining the call. I will now spend a few minutes reviewing our results for the third quarter of 2017. Any reference made to prior-period comparatives refers to the third quarter of 2016. For the quarter, we generated gross revenues of $13.6 million, up 8% versus the prior period. Corporate Services revenues were up $895,000 or 19%. In relation to our OTCQX market, we saw revenues increase by $284,000 or 18%, a result of the price increases effective for the 2017 subscription period, partially offset by a decrease in the number of companies on the market. As of September 30, 2017, there were 355 companies on the OTCQX market compared to 387 companies as of the prior-year quarter-end.

 For the quarter, we added 18 companies to the QX market compared to 16 added in the third quarter of 2016. Year-to-date, we have added 58 companies compared to 40 for the same period in 2016. However, we have seen a significant increase in the number of companies downgraded due to noncompliance with the increased financial qualifications and other standards, which were introduced and effective for all companies for the 2017 annual subscription period. For the year-to-date, we saw 54 companies downgraded from the market as a result of noncompliance with its financial and other standards. This compares to 24 such downgrades for the same period in 2016. Of the 54 issuers downgraded year-to-date, 38 elected to have their securities traded on the OTCQB market. We have also seen an increase in the number of removals related to corporate action and in nonrenewals, which include a number of companies graduating to a national exchange listing.

 Overall, on a year-to-date basis, we have seen a rates of rate churn on the OTCQX market of approximately 28% versus 19% for the prior-year period. Revenues from our OTCQB market were up $458,000 or 21%, a result of the full-period impact of companies added in 2016, strong sales year-to-date, improved customer retention and a decrease in the number of compliance-related downgrades.

 During the quarter, we added 53 companies compared to 54 added during the prior-year period. For the year-to-date, we have added 192 companies compared to 155 companies for the same period in 2016. For that same year-to-date period, our rates of churn on the OTCQB market from nonrenewals and compliance-related downgrades has dropped from 30% to 24%.

 Trading services generated revenues of $2.4 million for the quarter, a decline of $117,000 or 5%. The environments for broker-dealers remains challenging, and we expect to see continued contraction and consolidation in the space. During the third quarter, we saw the loss of 3 broker-dealer participants. We ended the third quarter with 94 broker-dealer participants, down significantly from the 108 on our platform as of September 30, 2016. That contraction in our broker-dealer subscriber base contributed in the third quarter to a decrease of $115,000 or a 10% decline in combined subscription revenue from OTC dealer, licenses and fixed connection.

 Market data licensing revenues were $5.5 million for the quarter, up $231,000 or 4%. Increased uptake of our data license products, including our Compliance Analytics products, coupled with price increases effective for 2017 to over $174,000 or a 44% increase in related quarter-over-quarter revenue.

 Revenues from non-pro users were up $84,000 or 27%, corresponding to the significant growth we have seen in the number of non-pro users consuming our data. These increases were partially offset by a 7.2% decline in the number of professional users consuming our data, which contributed to a $154,000 or 5% decline in associated revenues. We had approximately 20,500 professional users as of the quarter-end, down from some 22,000 users as of September 30, 2016. It is not uncommon to see fluctuations in the number of professional users consuming our data, which can result from the conclusion of market data audits as well as from variances in numbers reported by redistributors and in the timing of same.

 For the same period, the number of professional subscribers that will take CSIP for exchange traded securities increased by 1.5%. We continue to have a relatively modest share of those total SIP users, with 7.3% as of September 30, 2017 versus 8% as of the prior-period quarter.

 During the third quarter, operating expenses increased $791,000 or 10% to $8.4 million. Compensation expenses were the largest contributor to this increase, increasing $585,000 or 13% over the prior-year quarter. This was a result of increased headcount, the impact of annual salary increases and in line with increased sales and increase in sales commissions pay.

 IT and infrastructure costs were up $121,000 or 9%, while professional and consulting fees were up $121,000 or 28%, primarily a result of fees associated with nonrecurring tax consulting services as well as legal and regulatory fees associated with the launch of our ECM. While operating income was up 4% versus the prior-year quarter, net income for the quarter increased $482,000 or 16% over the prior-year period. In the third quarter, the company recognized federal and state tax benefits for fiscal years 2013 through 2016, relating primarily to deductions claimed against qualifying income pursuant to the domestic production activities deduction. In respect to the New York source income in both 2015 and 2016, the company claimed the benefit of the lower rates of corporate income tax available to entities who are deemed qualifying emerging technology company. The impact of these discrete items was to decrease the company's effective tax rate for the quarter from 33% to 24%.

 In addition to certain GAAP and other measures, management utilizes a non-GAAP measure, adjusted EBITDA, which excludes noncash, stock-based compensation. Adjusted EBITDA for the third quarter increased 2% to $5.3 million or $0.45 per diluted share, up from $5.2 million and $0.45 per diluted share for the prior period. We continue to produce solid operating cash flows, with $7.6 million in operating cash flows year-to-date versus $7.2 million for the prior-year period. We ended the quarter with $24.6 million of cash on hand and no debt. We operate an investor-focused capital allocation policy, which returns cash to our investors in the form of dividends, and through our stock buyback program. Year-to-date, we have returned $7 million to shareholders, an increase of $620,000 or 10%.

 In closing, the third quarter delivered 8% top line revenue growth, a 16% quarter-over-quarter increase in net income and a 12% increase in our fully diluted earnings per share. We continue to make significant investments in the people and technologies that will deliver innovative solutions to our subscribers and drive long-term value creation for our shareholders. With that, I would like to thank everyone for their time, and pass it back to the operator to open up the line for questions.

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Questions and Answers
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Operator   [1]
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 (Operator Instructions) Our first question comes from Chris McGinnis with Sidoti & Company.

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 Christopher Paul McGinnis,  Sidoti & Company, LLC - Special Situations Equity Analyst   [2]
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 Just quickly, I guess, a lot of announcements this morning in terms of seemingly positive news in terms of Blue Sky's alliances. What's the -- I guess, what are one of the key drivers -- when you look at all the announcements this morning, what are the bigger things that helped you grow over time in terms of whether that's Blue Sky? What best positions you out of all the announcements this morning?

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 Robert Cromwell Coulson,  OTC Markets Group Inc - CEO, President and Director   [3]
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 All of them. So Chris, we don't give forward guidance in -- to put there in -- I think all of them, the most important long-term trend is regulatory recognitions of companies that are meeting standards and providing adequate current information and through the standards we've created. I think that as a trend takes place, the more our markets become recognized, the more our model of being data and disclosure-driven. I mean, it's well-known that when Justice Brandeis said "Disclosure is the best disinfectant." But the second part of the quote is I actually think is more important, which is, "Electric light is the best policeman." So by building our model and having regulatory recognitions, we can really make it less resource-intensive for companies to be public. And if you look at some announcements, which are small wins, is 3 banks this quarter have announced they are leaving NASDAQ for OTCQX. And that's a really great place where we're doing -- we're creating unique value that gives community banks more resources, both from capital, from regulatory resources and from management time, the ability to focus on their business rather than being overwhelmed with complexity that just doesn't really fit them. So that part is, I think -- but that's a long trend. It takes a long time for us to work through, and then as we get regulatory recognitions for people -- for the reputation to build out. That's -- I'd say. And then if you put in other places, the other announcements that we've been doing is, how do we remove frictions? How do we build connectivity? How do we get information shared better? And all of these will be learning areas for us, and -- but we don't -- as is our practice, we don't make any forward projections. And -- but we're building a market that can work for certain public companies. And I think that's the important long-term trend, is -- and it gets a little bit better every year.

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 Christopher Paul McGinnis,  Sidoti & Company, LLC - Special Situations Equity Analyst   [4]
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 Sure. And I apologize. I didn't mean it to come off of as a guidance question. That was more of just bigger picture. Just in terms of the success in Blue Sky, I guess, at what rate do you think would the number...

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 Robert Cromwell Coulson,  OTC Markets Group Inc - CEO, President and Director   [5]
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 We call it progress. Success is a big progress. We still have a few states to go. When we get Massachusetts, that's when we have a big part.

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 Christopher Paul McGinnis,  Sidoti & Company, LLC - Special Situations Equity Analyst   [6]
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 Okay. I guess, just moving to the ECN announcement. And how does that change the way you operate versus maybe today if it's not already in place?

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 Robert Cromwell Coulson,  OTC Markets Group Inc - CEO, President and Director   [7]
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 So I mean, I think it gives additional utility functionality to our broker-dealer community. I would say the first group is, it lets -- within our dealer quotation systems, disclosing, knowing who your trading counter-party is really important. Because what we've done, if you think about what OTC Link ATS is about, it's about helping broker-dealers do more trades on their platforms, and then connect directly with liquidity sources when they have half the trade. So -- and it's a great platform for that. And it's used by some great firms, because if you look at the quality of executions that broker-dealers are giving their clients, whether it's the large market makers, the large electronic market makers serving the online brokers, the smaller higher-tech touch institutional brokers serving the type of institutional flow in the space and the liquidity providers in ADRs and foreign ordinary shares. It is a platform that works well and lets them build their brand as liquidity and execution providers. But there are different types of functionality and offering a matching engine and offering an anonymous matching engine is helpful, and will not only attract -- help our current subscribers, attract -- execute some of their trades, because we believe the bulk, the vast majority of their trade is going to stay on their platforms and stay in the OTC Link ATS, but also attract some other types of subscribers, who want kind of set-and-forget functionality. And where the OTC market is not as big a part of their business, they can just use the ECN and connect in. And it's pretty easy and consolidating that together. So where I would say is, we should be agnostic of different market structures, in general, with securities that trade less than a million times a year, and especially with the bulk of securities that all trade less than 100,000x a year, is you need market makers. So that's going to be really important, but we should also be agnostic in offering different solutions as long as they're cost-effective and they integrate well.

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 Christopher Paul McGinnis,  Sidoti & Company, LLC - Special Situations Equity Analyst   [8]
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 Okay. Maybe can you just touch on the alliance with CSE and what the expectation from that alliance will be over time?

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 Robert Cromwell Coulson,  OTC Markets Group Inc - CEO, President and Director   [9]
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 Well, Canada, in general and CSE has high -- clearly recognized the usefulness of having a U.S. cross-listing. And OTCQX and OTCQB has very competitive and cost-effective choices. So there, we're looking to see how we can, a, market the unified North American profile; but b, remove frictions for each works. How do we take out some duplicate processes? And as we learn through that and work to have information flows, so the disclosure -- so in the background, you've got technology that's making disclosure flow seamlessly, is I think we can learn a lot, and I think we can deliver a less resource-intensive process for clients of both of our markets. And then hopefully becomes a model, which we can take around the world.

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 Christopher Paul McGinnis,  Sidoti & Company, LLC - Special Situations Equity Analyst   [10]
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 And just one question on Reg A+, can you just maybe give an update on how that market's trending and maybe adoption rates?

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 Robert Cromwell Coulson,  OTC Markets Group Inc - CEO, President and Director   [11]
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 I mean, it's still in early stages. So -- and I've put it into the greater -- I put online capital raising kind of into like the ETF space. I think they're the first ETF that came out, and it was 8 years until they're offering. 7 or 8 years. So I'm not exact on that number, but it's -- so it takes a while, and then things get traction. But I cannot see that eventually capital raising will not be taking place in the same way that Amazon sell things of new capital raising. I just don't know when. I don't know who's going to be the winners. I don't know how they're going to do it exactly, but we know what's going to happen. And Congress seems pretty focused on removing some of the regulatory blockers because a lot of the JOBS Act capital raising. While starting some power online capital raising, it only made it about 2/3 legal. And it was cumbersome, and it had a lot of pain points. So our expectation, and if there is going to be more capital raising, and there's going to be a good chunk of that equity capital raising, and of that capital raising into these shares that have value, and they need to be traded some place within the regulated broker-dealer system. And that's really what we -- once an asset becomes seasoned. And Reg A is great because it can trade day 1. For all the other private placements, they can become traded month -- after month 13. So -- and all of these kind of offerings are not -- a lot of the crowdfunding, which is a little bit of an inversion, people have to understand this. There's a fair amount of crowdfunding, which is if you do a good job of having an investor base, who wants to be part of your cause, you're not going to have that many who want to sell the next day. So these are securities that are not going to be as high volume. They're not going to be as transactional, but they're still going to want the value of a less resource-intensive public market. And I think that's where we're really building into. And that part is we have discussions, is if you're a small company, it may sound great to have lots of trading volume. But if you have a really strong shareholder base, you don't need to have 50% of your shares turnover in a year. In fact, let's say a 5% or 10% turns over, it means that your shareholder base is pretty long term.

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 Christopher Paul McGinnis,  Sidoti & Company, LLC - Special Situations Equity Analyst   [12]
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 Bea, just a couple of questions on some numbers. Maybe the easiest one, just on the tax rate for the quarter, obviously a little bit lower than expected. You highlighted there are a couple of things. One sounded like maybe it was just a onetime benefit. But can you just talk a little bit where you think your tax rate should be going forward?

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 Robert Cromwell Coulson,  OTC Markets Group Inc - CEO, President and Director   [13]
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 20%. 20% is really where I'm anchoring. So this is Cromwell, I'm sorry.

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 Christopher Paul McGinnis,  Sidoti & Company, LLC - Special Situations Equity Analyst   [14]
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 I'll model it.

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 Beatrice Ordonez,  OTC Markets Group Inc - CFO   [15]
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 Sure, Chris. So it's -- and I realized it's early. We only put it out at 5:00 yesterday, but we give a little more disclosure in our quarterly report. But as we point out, there was the drop in the effective tax rate down to 24% in the quarter, with discrete items that recognize benefits for prior years, where we took benefits of something called the DPAD, the Domestic Production Activities Production, and the benefit of a lower rate to New York source income. We will also do that going forward. I'm not going to sort of tease out the prior year versus current year, but we'll see a slightly lower effective tax rate than we have historically. As a result of those 2 things, which will be ongoing, the significant drop was a result of the prior-period impact. So what you're seeing is in respect to one of those full year's worth of recognized benefit, if you like, in respect of the New York one, you're seeing 2. So you can probably sort of tease out a reasonable estimate. And I don't like to make predictions about where tax rates are going to land on a go-forward basis. Everything's sort of in flux.

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 Christopher Paul McGinnis,  Sidoti & Company, LLC - Special Situations Equity Analyst   [16]
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 And I appreciate that, and I think that's enough now, I guess.

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 Robert Cromwell Coulson,  OTC Markets Group Inc - CEO, President and Director   [17]
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 I mean, I think, overall, our tax strategy is, we did change this year our tax accountants, which gives us ability to go through. And number two is -- but we're always going to be on the more conservative viewpoint. So we're not -- and we don't have the global operations to be putting things through Ireland. So -- but there are some things going through, which are of -- it's always great when you have a switch-through, is to put some fresh eyes on things. And historically, and most -- and going forward is, we're not going to be super aggressive on tax wise. So...

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 Beatrice Ordonez,  OTC Markets Group Inc - CFO   [18]
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 We're firmly in the middle lane.

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 Robert Cromwell Coulson,  OTC Markets Group Inc - CEO, President and Director   [19]
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 In the middle lane, yes.

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 Beatrice Ordonez,  OTC Markets Group Inc - CFO   [20]
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 And we're fine with it.

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 Christopher Paul McGinnis,  Sidoti & Company, LLC - Special Situations Equity Analyst   [21]
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 Just 2 more. One, just on the conversation versus many of the prior years. When you look at, maybe it's up 200 basis points roughly. Do you expect that will kind of level off your -- or continue to build for growth over time, just that investment in your conversation?

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 Beatrice Ordonez,  OTC Markets Group Inc - CFO   [22]
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 I mean, you've seen these trends historically with OTC, where we see opportunity. We certainly invest both in infrastructure when we saw that big uptick in 2015, when we invested in our platform. And you've seen a little more intensive compensation. We're adding headcount where we think we're needed to support growth, and obviously looking at our compensation, vis-a-vis competitors, the landscape, et cetera. So look, again, hard to predict where we'll go over the next 18 months. We have a sense internally. And as I said, I would expect that we will continue to invest in both people and technologies on a go-forward basis. 10% on a quarter-over-quarter is somewhat anomalous. I might expect that to level out, but I wouldn't preclude increases on a go-forward basis around those costs.

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 Christopher Paul McGinnis,  Sidoti & Company, LLC - Special Situations Equity Analyst   [23]
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 Sure. That was good. And just a last question. Just on the downgrades that you talked about, 54 downgrades, can you just talk a little bit -- is it -- the companies just don't want to maybe spend the extra dollars to stay within the QX. And can you maybe just -- a little bit of your downgrades and...

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 Beatrice Ordonez,  OTC Markets Group Inc - CFO   [24]
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 Sure. So let me clarify. When I say downgrades due to noncompliance on our OTCQX market, which is where we saw that spike to 54 companies year-to-date from 24 last year, that downgrade's due to noncompliance with the enhanced standards that we introduced, and which became effective for this year. So this was an expected trend. We elevated the standards of the market for the regions we've discussed on other calls and set out in our Q. We thought it was important to differentiate the OTCQX market from the venture market and to really set a higher standard, and that was in part at least what propelled us to some of the regulatory recognitions that we're talking about, et cetera. So we sort of see this as a rightsizing, if you like, somewhat of the market and those companies who probably find a better fit, a better product fit within the OTCQB venture market. And what you're seeing is that a good proportion of the 54 did indeed elect when they were downgraded for compliance reasons, did elect to go down into that venture market, which is probably a better home for most of those companies.

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 Christopher Paul McGinnis,  Sidoti & Company, LLC - Special Situations Equity Analyst   [25]
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 Bea. I appreciate that. That's very helpful.

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 Robert Cromwell Coulson,  OTC Markets Group Inc - CEO, President and Director   [26]
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 And I think with OTCQX, if you look at the state Blue Sky framework, there's 2 types of states. There's ones that are merit review, and then there's ones that are more disclosure-based. And so from merit review states, the financial standards, the requirements that you can't be a penny stock and the corporate governance of OTCQX are very important. And so we see OTCQX as a solution, which we can have a thoughtful discussion with states whether they are a merit or a disclosure-based state. QB is disclosure-based. So really, the merit-based states are not going to be interested in recognizing QB companies, is -- and they're still -- and many of the disclosure-based states have financial standards, which we were on top. So not every QB company will get those. But it's really important to have standards. And I think you're noticing 2 other pieces or announcements is, we've been publishing monthly companies we remove from QX and QB, because people understand the standard-wise. And we also put out promotion standards, which are, a, you've got data feed product coming out in the first quarter, which is going to show when securities are being promoted, and to put more transparency around promotion in general, both good and bad. Is -- and b, a requirement that companies take ownership for if promotion's occurring in the market, and either confirm the information out there or correct it and identify any information that might be missed information. And finally, if there is a shell company on OTCQB as being promoted, it will be removed from OTCQB. Because shells have an economic use. But in the capital formation process, I think 2/3 of the companies that go public in Canada, even with they're lighter weight regulatory framework. And for IPOs and their CPC structure, 2/3 still reverse margin to shells. So it's a key capital formation component tool, but it means we want to put a framework to help separate the shelves that are quietly waiting for a partner and the ones that may be -- being used for mischief.

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Operator   [27]
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 Our next question comes from Andrew Mitchell with Edison.

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 Andrew Mitchell,  Edison Investment Research Limited - Associate Director   [28]
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 It's Andrew Mitchell from Edison. Let's start on OTCQB, where you talked about the standard change with -- you mentioned a float requirement. And also, I think it's a 20% fee increase from the beginning of next year. I was wondering, on the standard change, is that something which makes it easier? Or is it a bigger challenge. So would there likely be drop-downs from that? And then on the fee increases, assuming that goes ahead as proposed, is there anything that would offset, factoring that into numbers for next year?

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 Daniel Zinn,  OTC Markets Group Inc - General Counsel and Corporate Secretary   [29]
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 So -- sure, Andrew. This is Dan, and I'll try to go one at a time, Dan. So in terms of the standard exchange, it's really more of a clarification of some of the policies and things that are internal compliance folks have been looking at anyway with respect to public growth. And so we just want to get out there and make sure that it's as clear as can be. So it's not that I would expect to have any great impact one way or the other, it's just trying to give everybody a better experience and a much upfront information as we can. In terms of the fee increase, there are going to be some additional benefits that you see from OTCQB going forward. Some of that is related to the recent announcements with ISDR, with Issuer Direct and what we're going to be able to offer there. There's going to be some additional news release, capability and some kind of promotions around that. And so as the market grows, and as we enhance the services that it encompasses and kind of the quality of companies there and as well as the information about those companies, this is kind of a natural growth.

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 Robert Cromwell Coulson,  OTC Markets Group Inc - CEO, President and Director   [30]
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 Just to be clear, is we -- when we're doing our standards, we don't like secret standards that people only find out about when they bump into them in the night. So when we're running into things that we -- as we learn things, we like to make it much more transparent, is out to company because that makes it more efficient for everyone.

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 Andrew Mitchell,  Edison Investment Research Limited - Associate Director   [31]
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 That's okay. And then on OTCQX, the change in the number of companies. And I think in the release, you mentioned that there was a 12% decline, I think it is, in the international companies. So I don't know if there's anything thematic there? Or was that's just the way the number's split?

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 Robert Cromwell Coulson,  OTC Markets Group Inc - CEO, President and Director   [32]
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 My expectation is, it was probably pretty heavily weighted in the Canadian names that -- as part of the standards. So you had -- in Canada, I mean, if you look at -- the demographics of the TSX Venture and 90% of the securities trade below $1. 1/3 trades below $0.10. So that's what a venture market is. And so some of them like being on OTCQX, but really -- and that's where we went through the standard process and really to separate out -- on the aim, 2/3 of the companies trade below GBP 1. 1/3 trades below $0.10. So that type of profile side is, as we put in the continuing penny stock standards, would grab text.

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 Andrew Mitchell,  Edison Investment Research Limited - Associate Director   [33]
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 And then a quick question again on the Blue Sky progress you're making, just wondering if this is not something you know a great deal about. The NASAA model, I was just wondering, I'm sure that's a benefit, but I'm not sure if it's -- we should sort of think of it is an incremental aid in the process of getting states to sort of move on this. Or it's a bit more of a catalyst?

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 Robert Cromwell Coulson,  OTC Markets Group Inc - CEO, President and Director   [34]
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 Sure. So model rules, NASAA will put out these kinds of model rules from time-to-time, basically providing a roadmap for November stakes to accept and adopt based on the language that NASAA's worked through and have gone through, kind of an internal process there. And so you don't expect to see full adoption of any model rule. But there are a number of states who look to NASAA, as they should, for guidance on these kinds of issues. And so, a, this shows NASAA's support and belief that this is kind of the right thing to do. And b, then you expect some of the states that might not have the capacity or might not have been willing to develop an exemption on their own should be able to pick this up and run with it. So it will be, I think, a bit of a catalyst for a group of states that generally think this is a good idea and think that we've been working with that will now have that impetus to just enact a model rule as soon as it becomes available. When that happens, we'll wait and see. I think in the short term, you've seen states hold off on giving the exemption, while waiting for the model rules to come out. And so that's -- there's a process that NASAA and the states have to go through to finish that. But once that's out, I think you'll see an uptick in bids.

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 Andrew Mitchell,  Edison Investment Research Limited - Associate Director   [35]
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 Great. And then on the ECN launch, I was just wondering -- 2 aspects of that. I was wondering whether there was any significant costs that would start being amortized now once that launches? And then in terms of thinking of how it might work, obviously, we don't know the, well, actually adoption of it. But would I be right in thinking that it would be perhaps most likely used by broker-dealers in the more traded stocks? And therefore, from your revenue point of view, it wouldn't be cannibalizing because of the point you make in your statement about where you have more frequently traded stocks?

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 Robert Cromwell Coulson,  OTC Markets Group Inc - CEO, President and Director   [36]
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 Yes. I mean, so for us, it is -- we don't make any forward estimates. We have a feature set in the ECN, which we believe will be attractive for some of our existing subscribers' trades and for some firms that are not subscribers of it today. So -- but I think that is a -- when you launch a new product, adoption rate, connectivity, technology flows, we don't fully control as firms go turn this on. So what is going to be a process is it's a product that we have interest in from subscribers. And we will -- as that moves along, we'll learn more and develop more interest. And we're always going to be competitively pricing all of our trading services to be cost-effective and reliable for our client base and help them in their business. So that side of it is -- but you can look at -- I think the biggest part for the trading world is seeing we've had markets going up, but we haven't had a lot of good volume in volatility for the market -- for across all business lines of that side. So -- and that pieces -- but those are trends. Volume in volatility has always come back over time. And so -- and that is good or bad for this side. So for us is, in fact, let's introduce -- let's try and do it in the least resource-intensive way first, and then start having it out there and learn what people want, what works, what doesn't work and what's the right amount of value being created for the clients.

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 Andrew Mitchell,  Edison Investment Research Limited - Associate Director   [37]
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 Sure. And you referenced the lease resources. I was just wondering whether next quarter, because it's launched, you then have to start recognizing some costs that went in?

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 Beatrice Ordonez,  OTC Markets Group Inc - CFO   [38]
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 So I'll speak to that. We haven't. As you've probably seen from following us historically, we don't typically capitalize. Instead, we develop software. As Cromwell said, we did this in a cost-effective way because we like to somewhat test the waters. And it's a new offering for us, and you shouldn't expect significant amortization of costs incurred in building this.

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Operator   [39]
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 And there appears to be no further questions. I'll turn the call right back over to management.

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 Robert Cromwell Coulson,  OTC Markets Group Inc - CEO, President and Director   [40]
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 Great. Well, thank you, everyone, for calling in this morning, and I look forward to seeing you at our annual meeting in December. Bye.

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 Beatrice Ordonez,  OTC Markets Group Inc - CFO   [41]
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 Thank you.

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Operator   [42]
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 Thank you. This does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time, and have a great day.




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