OTC Markets Group — Q421 was another beat, 2022 is more uncertain

OTC Markets Group (US: OTCM)

Last close As at 24/05/2024

55.78

0.74 (1.34%)

Market capitalisation

661m

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Research: Financials

OTC Markets Group — Q421 was another beat, 2022 is more uncertain

Q421 was another good quarter for OTC Markets Group (OTCM), with revenue up 32% y-o-y to $26.2m and earnings up 58% y-o-y to $9.1m. Revenue was relatively flat on the previous quarters in FY21, but there was an underlying change in the revenue mix as the Corporate Services and Market Data Licensing divisions, which are more resilient in turbulent market conditions, grew to offset OTC Link, which peaked in Q121 in line with the trading volumes on OTCM trading platforms. We expect markets to remain choppy in 2022 due to concerns about inflation and rising interest rates. For FY22, we have cut our EPS estimate by 3% and forecast a 9% decline in revenue and earnings, but expect growth to resume in FY23. We assume OTCM will maintain its FY21 dividend (up 73% from FY20, with a current year yield of 3.4%) due to its strong balance sheet, cash flow generation and track record of a generous dividend payout.

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Financials

OTC Markets Group

Q421 was another beat, 2022 is more uncertain

Q421 and FY22 outlook

Financial services

23 March 2022

Price

US$63.00

Market cap

US$742m

Net cash ($m) at end FY21 including restricted cash

52.0

Shares in issue

11.8m

Free float

64.8%

Code

OTCM

Primary exchange

OTCQX

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

5.4

8.6

57.5

Rel (local)

0.6

13.1

37.6

52-week high/low

US$65.89

US$38.50

Business description

OTC Markets operates regulated markets for trading 12,000 US and global securities. Data-driven disclosure standards form the foundation of its three public markets: OTCQX Best Market, OTCQB Venture Market and Pink Open Market. The company’s three SEC-regulated alternative trading systems (ATSs): OTC Link ATS, OTC Link ECN and OTC Link NQB provide critical market infrastructure on which broker-dealers rely to facilitate trading and offer companies more efficient access to the US financial markets.

Next events

Q1 results

May 2022

Analysts

Pedro Fonseca

+44 (0)20 3077 5700

Andrew Mitchell

+44 (0)20 3681 2500

OTC Markets Group is a research client of Edison Investment Research Limited

Q421 was another good quarter for OTC Markets Group (OTCM), with revenue up 32% y-o-y to $26.2m and earnings up 58% y-o-y to $9.1m. Revenue was relatively flat on the previous quarters in FY21, but there was an underlying change in the revenue mix as the Corporate Services and Market Data Licensing divisions, which are more resilient in turbulent market conditions, grew to offset OTC Link, which peaked in Q121 in line with the trading volumes on OTCM trading platforms. We expect markets to remain choppy in 2022 due to concerns about inflation and rising interest rates. For FY22, we have cut our EPS estimate by 3% and forecast a 9% decline in revenue and earnings, but expect growth to resume in FY23. We assume OTCM will maintain its FY21 dividend (up 73% from FY20, with a current year yield of 3.4%) due to its strong balance sheet, cash flow generation and track record of a generous dividend payout.

Year end

Gross revenue ($m)

PBT
($m)

EPS*
($)

DPS**
($)

P/E
(x)

Yield
(%)

12/20

71.2

21.4

1.53

1.25

41.1

2.0

12/21

102.9

38.0

2.52

2.16

25.0

3.4

12/22e

93.6

35.6

2.29

2.16

27.5

3.4

12/23e

97.6

36.9

2.36

2.16

26.7

3.4

Note: *Fully diluted and calculated after restricted stock award allocation. **Including special dividends of 65c in FY20 and $1.50 in FY21, FY22e and FY23e.

Q421: Corporate services drives beat

The 61% y-o-y increase in Corporate Services revenue to $11.8m beat our estimates. OTCM continues to successfully attract new companies to its platforms; the number grew by 56% in 2021 (26% if we exclude the Pink segment). Corporate Services was boosted by the Securities and Exchange Commission (SEC) Rule 15c2–11, which increases disclosure requirements for companies to trade on broker-dealer networks, and by OTCM becoming a qualified interdealer quotation system (IDQS) operator. Q421 OTC Link revenue was affected by lower trading volumes and came in at $5.6m (+10% y-o-y, -8% q-o-q), better than we forecast. FY21 net earnings were $30.5m vs our $27.9m forecast.

Recurring revenue helps in weaker markets

The Corporate Services (45% of revenue in Q421 versus 30% in Q121) and Market Data Licensing (34% of Q421 revenue) businesses are mostly subscription-based recurring revenue. We estimate that only c 15% of OTCM’s Q421 revenue was directly linked to trading volumes, providing some resilience in OTCM’s financial performance in the event trading volumes drop significantly this year.

Valuation: $42.4–66.3 per share

We have increased our FY22 PBT forecast by 2%, but a higher tax assumption has resulted in a 3% reduction in EPS. OTCM is trading on FY22e and FY23e P/E multiples of 27.5x and 26.7x respectively, the latter representing a small premium to our sample of peers. Our DCF-based valuation range is $42.4–66.3 per share, where we flex the cost of equity (7–11%) and the annual growth rate for 2026–2032e (3–6%).

Cost-effective transparent markets

The purchase of the National Quotation Bureau (NQB) by current CEO R Cromwell Coulson and a group of investors in 1997 began the process that led to the creation of OTCM in its current form. With a history dating back to 1913, NQB published the ‘Pink Sheets’, a printed list of broker-dealer quotes for securities traded off-exchange. Following the purchase of NQB, the new management team progressively applied technology to the task of aggregating liquidity and increasing transparency in this over-the-counter market.

Three complementary platforms

A platform providing real-time quotes was launched in 2003 and evolved into the current SEC-regulated alternative trading system, OTC Link ATS. Another platform, OTC Link ECN, was launched in 2017, providing dealers with complementary features including an anonymous order-matching engine with an order routing capability – as opposed to OTC Link ATS, where attributable quotes are displayed and messages delivered, enabling direct trades between dealers. OTC Link ATS carries quotes in more than 12,000 securities and has 86 active broker-dealer participants, while OTC Link ECN has expanded its subscriber base and trading volumes rapidly since launch. At end 2021, it had 93 subscribers, compared to 53 in 2019 and 41 in 2018.

These two existing platforms are complementary. OTC Link ATS provides a network to publish quotes and facilitate trades between subscribers and OTC Link ECN operates an anonymous matching engine and acts as an order router, functioning as the execution party on an agency basis.

OTCM launched its third alternative trading system in Q321, OTC Link NBQ. It operates in the same way as OTC Link ECN but with full disclosure rather than anonymity and allowing distribution of the full depth of book data rather than top of book alone. Management has stated that it is unable to gauge the financial impact or how successful this new IDQS will be. However, we believe the launch of NBQ will be an attractive proposition to clients and thus should be a positive for OTC Link’s revenue in the medium term.

Three-tiered market

To help investors assess risk exposure, OTCM organises the companies on its markets into tiers, with membership of each subject to the adequacy and timeliness of disclosure, financial criteria and adherence to governance standards:

OTCQX Best Market companies must meet high financial standards, have recognised corporate governance standards and provide timely public disclosure.

OTCQB Venture Market is intended to provide a public trading facility for developing companies that meet standards promoting price transparency and public disclosure. OTCQB companies must maintain current disclosure standards and provide additional information for investors.

The Pink Open Market comprises those companies quoted on the OTC Link ATS that do not meet the standards of, or choose not to apply for, the premium markets. To differentiate further within this market, companies are further categorised into Pink Current Information and Pink Limited Information.

For corporates, OTCM’s premium markets, OTCQX and OTCQB, provide access to public trading in the United States at a cost-effective price, compared with a listing on a registered national securities exchange such as Nasdaq. As shown in Exhibits 1 and 2 below, both OTCQX and OTCQB have a substantial number of international corporate clients, notably from Canada.

Exhibit 1: OTCQX Composite Index constituents

Exhibit 2: OTCQB Venture Index constituents

Source: OTCM. Note: Percentage of 621 constituents, 7 March 2022.

Source: OTCM. Note: Percentage of 1,251 constituents, 7 March 2022.

Exhibit 1: OTCQX Composite Index constituents

Source: OTCM. Note: Percentage of 621 constituents, 7 March 2022.

Exhibit 2: OTCQB Venture Index constituents

Source: OTCM. Note: Percentage of 1,251 constituents, 7 March 2022.

The group’s activities are organised in three divisions: OTC Link (trading services), Market Data Licensing and Corporate Services (OTCQX, OTCQB and other services), which in FY21 accounted for 29%, 33% and 38% of gross revenues respectively. Exhibit 3 gives examples of how revenues are generated in each division.

While OTC Link revenues are largely transaction-related, subscription-based revenues feature in many activities and in Q421 accounted for about 80% of the group total, providing a measure of revenue resilience against the background of equity market volume fluctuations.

Exhibit 3: Revenue generation, examples by division

Segment

Comments

OTC Link

OTC Link ATS

Broker-dealers pay subscriptions and usage fees related to the number of quotes and messaging volume.

OTC Link ECN

Fees are transaction-based with rebates for liquidity provision (maker-taker structure).

OTC Link NQB

Also uses maker-taker revenue structure

Market Data Licensing

Users subscribe to licences for market data, compliance data, company data, and security information collected by OTC Link and Corporate Services. Users include investors, traders, institutions, accountants and regulators. Most market data are sold through distributors such as Bloomberg, to which rebates (c 10%) are paid.

Corporate Services

OTCQX, OTCQB

Corporates pay application and annual or semi-annual subscription fees.

Other

The OTC Disclosure & News Service and Virtual Investor Conferences revenues are usage dependent.

Segment

OTC Link

OTC Link ATS

OTC Link ECN

OTC Link NQB

Market Data Licensing

Corporate Services

OTCQX, OTCQB

Other

Comments

Broker-dealers pay subscriptions and usage fees related to the number of quotes and messaging volume.

Fees are transaction-based with rebates for liquidity provision (maker-taker structure).

Also uses maker-taker revenue structure

Users subscribe to licences for market data, compliance data, company data, and security information collected by OTC Link and Corporate Services. Users include investors, traders, institutions, accountants and regulators. Most market data are sold through distributors such as Bloomberg, to which rebates (c 10%) are paid.

Corporates pay application and annual or semi-annual subscription fees.

The OTC Disclosure & News Service and Virtual Investor Conferences revenues are usage dependent.

Source: OTCM, Edison Investment Research

Exhibit 4 shows the long-term development of OTCM’s gross revenue by division and its operating margin. Total gross revenue grew at a compound annual rate of 13% between 2009 and 2021. Within this, Corporate Services has contributed the fastest growth at 25%, mainly due to the development of the premium OTCQX and OTCQB markets, both in terms of the number of corporate clients subscribing and the level of fees charged. Market Data Licensing’s and OTC Link’s CAGRs were 10% and 9%, respectively.

The operating margin increased significantly between 2013 and 2015 as the scale of the business grew but was then flat between 2015 and 2018 as investment was made in people and systems to support the sustainable growth in the business. In 2019, the company further invested in staff and IT infrastructure and moved to a new office in New York, resulting in a reduction in margin. The operating margin has risen in the last two years, especially in 2021 when it reached a record 38% (versus 31.3% in FY20), due to business growth and an increase in service prices.

Exhibit 4: Gross revenue and operating margin since 2009

Source: OTCM

Strategy: Consistent focus on better informed and more efficient markets

OTCM’s management takes a long-term view of the development of the business and has a consistent mission statement, which is to create better informed and more efficient markets. Flowing from this is a threefold strategy, set out as follows:

Share information widely through open networks that foster transparency.

Connect broker-dealers, organise markets and inform investors.

Deliver elegant, reliable and cost-effective, subscription-based technology solutions.

This focus has contributed to the long-term growth in the group set out above and the goals appear to fit well with the requirements of corporates, investors, broker-dealers and regulators involved in the OTC market.

SEC Rule 15c2-11 came into effect on 28 September 2021. The rule sets minimum disclosure standards for companies to be quoted on broker-dealer networks such as the ones OTC operates. It also recognises OTCM as a qualified IDQS operator, which increases transparency in these markets and increases the number of quoted companies. The rule allows OTCM to carry out initial reviews that streamline the new securities onboarding process. The increase in Corporate Services business during the second half of 2021 was boosted by companies seeking to comply with the rule.

With regard to potential acquisitions, OTCM has been clear that it is not seeking a high-risk transformative transaction but continues to monitor opportunities for purchases that will provide complementary capabilities.

OTCM continues to work towards further regulatory recognition for its two premium markets, including extending the list of states that grant exemptions under state Blue Sky laws governing secondary trading. The list currently includes 37 states for OTCQX and 33 for OTCQB, providing population coverage of nearly 58% and more than 53% respectively. Blue Sky recognition is not directly linked to revenue generation but progress towards 100% coverage should be increasingly positive reputationally, helping to attract a broader range of corporate clients to OTCM’s premium markets. OTCM is also seeking recognition for OTC securities on its OTCQX and OTCQB markets for the purposes of federal regulations dealing with margin eligibility and employee stock ownership plans.


Q421 analysis

A summary of the quarterly progress in OTCM’s profit and loss figures is given in Exhibit 5. We highlight the key points below (the comparisons are year-on-year unless stated):

Gross revenue was a record $26.2m, up 32%. Corporate services grew an impressive 61% y-o-y to $11.8m. This was driven by a significant increase in listed companies on the OTCQX and OTCQB as well as price increases introduced in January 2021. Exhibit 6 shows how the corporate client base for the OTCQX and OTCQB markets has evolved from Q419 and shows steady, strong growth from Q320. OTC Link and Market Data Licensing rose y-o-y by +10% and 19% respectively. Market Data Licensing revenue was driven by strong growth in both professional and non-professional (retail) user licences, as well as internal system licences.

Redistribution fees (relating to Market Data Licensing) and transaction-based expenses (liquidity provider rebate payments) relating to the OTC Link ECN business, rose by 11% and 16%, respectively.

Operating expenses (before depreciation and amortisation) increased by 19%, mainly reflecting salary and headcount increases (see Exhibit 6 and discussion below for further details), as well as the expansion of ECN trading.

Profit before tax rose by 61% to $10.7m and EPS by 54%. The effective tax rate of 15.5% in Q421 was higher than 14% of a year ago but below trend level. As we discuss later, we assume a 22% rate going forward. The operating margin of 42.4% was also a record high and compares to 33.2–39.5% in recent quarters.

A quarterly dividend of $0.18 was maintained and a special dividend of $1.50 was declared, substantially higher than the $0.65 special dividend in the last two years. The full year dividend was $2.16, equivalent to an 83% payout ratio (80% in FY20).

Exhibit 5: Q421 results summary

$000s unless stated

Q420

Q121

Q221

Q321

Q421

% change y-o-y

% change q-o-q

OTC Link

5,095

10,282

7,682

6,110

5,591

10

(8)

Market Data Licensing

7,358

7,899

8,586

8,489

8,777

19

3

Corporate Services

7,325

7,895

9,182

10,621

11,818

61

11

Gross revenues

19,778

26,076

25,450

25,220

26,186

32

4

Redistribution fees and rebates

(714)

(741)

(746)

(744)

(790)

11

6

Net revenue

19,064

25,335

24,704

24,476

25,396

33

4

Transaction-based expenses

(1,362)

(3,539)

(2,487)

(1,668)

(1,579)

16

(5)

Revenues less transaction-based expenses

17,702

21,796

22,217

22,808

23,817

35

4

Operating expenses (excluding depreciation & amort.)

(10,530)

(12,933)

(12,633)

(12,686)

(12,574)

19

(1)

Depreciation and amortisation

(491)

(444)

(441)

(446)

(465)

(5)

4

Income from operations

6,681

8,419

9,143

9,676

10,778

61

11

Other income/net interest

(19)

5

0

12

(68)

Profit before tax

6,662

8,424

9,143

9,688

10,710

61

11

Taxes

(934)

(1,586)

(2,071)

(2,176)

(1,656)

77

(24)

Net income

5,728

6,838

7,072

7,512

9,054

58

21

Diluted EPS ($)

0.48

0.57

0.59

0.62

0.74

54

21

Operating margin on net revenue (%)

35.0

33.2

37.0

39.5

42.4

Tax rate (%)

14.0

18.8

22.7

22.5

15.5

Source: OTCM, Edison Investment Research

Exhibit 6: Evolution of OTCQX and OTCQB corporate client base

Q419

Q120

Q220

Q320

Q420

Q121

Q221

Q321

Q421

OTCQX

Start

436

442

414

415

441

461

482

530

561

Additions

32

9

19

44

34

52

70

55

35

Other (cancellations, downgrades)

(26)

(37)

(18)

(18)

(14)

(31)

(22)

(24)

(26)

End

442

414

415

441

461

482

530

561

570

Net change

6

(28)

1

26

20

21

48

31

9

OTCQB

Start

915

907

893

885

874

902

962

1,020

1,067

Additions

43

28

45

62

94

83

112

115

141

Other (cancellations, downgrades)

(51)

(42)

(53)

(73)

(66)

(23)

(54)

(68)

(58)

End

907

893

885

874

902

962

1020

1067

1150

Net change

(8)

(14)

(8)

(11)

28

60

58

47

83

Source: OTCM. Note: Start, end and additions (new sales) figures are reported, while the other figures (cancellations and compliance and other downgrades) are residual.

Our next table summarises the change in operating expenses with commentary on year-on-year changes. Compensation and benefits remain the most significant driver of costs and the increase was driven mainly by cash awards. IT costs grew substantially to support the growth of the OTC Link ECN business. There were also cost increases driven by implementation of Rule 15c2-11, as well as system security and workstation updates relating to the Virtual Investor Conferences (VIC) business.

Exhibit 7: Analysis of operating expenses

$000s unless stated

Q420

Q421

Absolute chg y-o-y

% chg
y-o-y

Comments on y-o-y change

Compensation and benefits

6,977

8,135

1,158

16.6

Driven by cash awards, FY21 base salaries only increased 5%

IT Infrastructure and information services

1,717

2,057

340

19.8

Incremental data centre and network costs to support ECN growth

Professional and consulting fees

903

1,169

266

29.5

Higher ECN clearing/regulatory costs with volume, support costs for VIC business and Rule 15c2-11

Marketing and advertising

260

325

65

25.0

Public relations spending

Occupancy costs

335

595

260

77.6

Affected by Q420 one-off, FY21 costs only grew 2% y-o-y

Depreciation and amortisation

491

465

(26)

(5.3)

IT infrastructure enhancements in 2020 and 2021

General, administration and other

338

293

(45)

(13.3)

Higher payment processing fees and bad debt expenses

Total

11,021

13,039

2,018

18.3

Source: OTC Markets Group, Edison Investment Research

Exhibit 8 shows changes in operating data and related revenue data. In OTC Link, trading volumes in US$ terms in the OTCQX and Pink segments was sharply up year-on-year in Q421 at 51% at 27%, respectively. Both were off the peaks of Q121, but volumes remain at elevated levels. Conversely, OTCQB volume was down 47% year-on-year, although flat on the previous quarter.

The number of OTC Link ATS participants (86, +2% y-o-y) and ECN subscribers (93, +27% y-o-y) continued to increase and ended the year on a record high.

Corporate Services also showed very strong year on-year increases across the three segments: OTCQX (24%), OTCQB (27%) and Pink (111%). Revenue per client grew 3%.

Market Data Licensing saw a 24% year-on-year increase in total users. This included a 36% y-o-y jump in non-professional subscribers, although these numbers fell 3% on the previous quarter. These subscriber numbers are typically more volatile than the number of professional subscribers, so may decline if the market proves choppy in 2022. Professional users grew 13% year-on-year. Revenue per terminal fell by 4%, presumably affected by a higher number of non-professional users, which are typically lower revenue.

Exhibit 8: Operating and related revenue data

$000s unless stated

Q420

Q121

Q221

Q321

Q421

% change y-o-y

% change q-o-q

OTC Link

Dollar volume traded (millions)

OTCQX

34,082

77,599

60,030

41,802

51,331

51

22.8

OTCQB

9,468

17,062

8,796

5,008

4,986

(47)

(0.4)

Pink

82,828

134,063

100,644

107,295

105,231

27

(1.9)

Number of securities quoted

11,758

12,091

12,725

11,604

12,011

2

3.5

Number of active ATS participants

84

82

83

85

86

2

1.2

Number of ECN subscribers

73

82

84

90

93

27

3.3

New Form 211 filings

154

197

200

151

96

(38)

(36.4)

Revenue per security quoted ($)

433

850

604

527

465

7

(11.6)

Corporate Services

Number of corporate clients (period end)

OTCQX

461

482

530

561

570

24

1.6

OTCQB

902

962

1,020

1,067

1,150

27

7.8

Pink

742

789

999

1,556

1,563

111

0.4

Total

2,105

2,233

2,549

3,184

3,283

56

3.1

Revenue per client ($)

3,537

3,640

3,840

3,705

3,655

3

(1.4)

Graduates to a national securities exchange

22

29

46

45

35

59

(22)

Market Data Licensing

Market data professional users

23,463

24,404

25,647

25,870

26,563

13

2.7

Market data non-professional users

20,673

27,814

28,977

29,156

28,206

36

(3.3)

Revenue per terminal (total - $)

167

151

157

154

157

(4)

3.9

Market data compliance file users

45

46

47

47

49

9

4.3

Source: OTCM, Edison Investment Research

Regulatory developments

The most significant regulatory development highlighted by OTCM in 2021 was the amendment to the SEC’s Rule 15c2-11, which came into effect on 28 September 2021. The rule deals with information requirements before quotes may be published on interdealer quotation systems such as OTC Link ATS. On a positive note, the amended rule recognises OTCM’s disclosure standards and OTC Link ATS will be permitted to act as a qualified IDQS, reviewing disclosure to determine whether a security is eligible to be quoted publicly. This will enable it to streamline the onboarding of securities to its markets, removing the risk and administrative burden of certifying the suitability of securities for quotation from broker-dealers, which in turn will allow them to focus on their financial advisory role. For companies that do not meet the information requirements, there is the potential for an expert market exemption allowing sophisticated or professional investors to continue to trade in the securities. OTCM has already established an Expert Market and is continuing to engage with the SEC with the aim of refining implementation of the amended rule to provide well-informed markets for its corporate clients, broker-dealers and investors.

Background and outlook

Economic and financial markets have clearly become more uncertain. Inflationary pressures have been building up and inflation has exceeding expectations (Exhibit 1). This in turn had led to rising interest rate expectations, which is often a headwind for equity markets. At the beginning of December 2021, the market was pricing in just under two rate hikes (of 25bp each) by the end of 2022. Just two and a half months later, the market is now forecasting seven hikes (we include the 17 March hike in this number) and a US Fed Funds Rate of 1.8% at that time. The current war in Ukraine has aggravated the inflation problem, mainly through higher energy prices due to sanctions against Russia.

It is encouraging that COVID-19 fears and risks have receded for now and the market is forecasting strong economic growth this year (US consensus is 3.6%, Europe 4.4% according to Bloomberg-collected consensus). However, higher rates and inflation could reduce economic growth and earnings estimates and affect the markets.

The cryptocurrency boom has been a major factor in rising volumes in OTC (since crypto-related stocks are among the most traded stocks on OTC markets) and this may continue, but it may also be volatile.

Exhibit 9: US Fed Funds Rate expectations rising

Exhibit 10: Citi Inflation Surprise Index – US

Source: Refinitiv. Note: Each Fed Fund rate hike is assumed to be 25bp. Expectations based on the overnight swaps.

Source: Refinitiv

Exhibit 9: US Fed Funds Rate expectations rising

Source: Refinitiv. Note: Each Fed Fund rate hike is assumed to be 25bp. Expectations based on the overnight swaps.

Exhibit 10: Citi Inflation Surprise Index – US

Source: Refinitiv

These macroeconomic concerns and uncertainty have contributed to relatively weak equity markets over the last six months. Smaller stocks, usually riskier and more volatile, have fared worse. This is reflected in the performance of OTCQB and S&P TSX Venture Index.

Exhibit 11: Recent market index performance (total return %)

Period

S&P 500

Nasdaq
Composite

OTCQX
Composite

OTCQB
Venture

S&P TSX
Venture

US$

US$

US$

US$

C$

Three months

-6.3

-11.3

-4.1

-6.6

-6.6

Six months

-1.9

-11.2

-10.7

-15.1

-7.4

One year

11.4

0.5

-1.3

-26.7

-16.7

Source: Refinitiv. Note: Priced on 17 March 2022.

The State Street Investor Confidence Index tracks changes in institutional investor holdings in risky versus safer investments. Exhibit 12 shows that confidence is higher than during the pandemic in 2019–20 as well as in 2018. The confidence level rose after Omicron proved to be less dangerous than first feared. However, the index does not yet reflect the impact of the war against Ukraine or concerns about rising inflation.

Exhibit 12: State Street Investor Confidence Index

Source: Refinitiv, State Street Corporation

Another indicator of the environment surrounding corporate decision-making is the Economic Policy Uncertainty Index shown below. The index component selected here reflects daily newspaper coverage related to economic uncertainty and clearly shows a spike in recent weeks.

Exhibit 13: Economic Policy Uncertainty Index (newspaper-based, 7-day rolling average)

Source: Refinitiv

2021 was a record year for IPOs on the Nasdaq, TSX Ventures and TSX exchanges, rising by 138% and 159% on Nasdaq and TSX Ventures respectively and by 12% on TSX.

Exhibit 14: number of IPOs, Nasdaq

Exhibit 15: Number of IPOs, TSX and TSX Venture

Source: Nasdaq

Source: TMX

Exhibit 14: number of IPOs, Nasdaq

Source: Nasdaq

Exhibit 15: Number of IPOs, TSX and TSX Venture

Source: TMX

Financials

We estimate that OTCM’s gross revenue will fall by 9% in FY22 on the basis that weaker financial markets and elevated macroeconomic and political uncertainty will lead to lower trading volumes. We forecast a 5% increase in FY23 revenue on the assumption that trading levels normalise and resume an upward trend. However, despite our continued caution, we have increased our revenue estimates by 6% to reflect the strong growth in the Corporate Services business.

Exhibit 16 shows details of our revenue assumptions. We forecast a 40% decline in revenue from the OTC Link business as this segment accounted for 29% of OTCM’s revenue in FY21 and is most exposed to a drop in trading volumes.

Trading volumes in OTC Link ECN (the key driver in OTC Link’s variable revenue component) are not reported monthly and the pricing structure is complex (variables include which investors are trading, lot sizes, securities trading and even the fact that different share prices have different trading costs). This complicates forecasts beyond the usual challenge in that trading volumes can be quite volatile.

We forecast a 6% decline in revenue from Market Data Licensing. While this segment is more resilient to weaker markets, but we would expect to see a decline as some users step back from trading in less favourable market conditions, especially non-professional users which had been the fastest growing segment.

Corporate Services is the most resilient of the three segments as it correlates more with economic activity than trading volume or market performance. Nevertheless, we cautiously forecast 12% growth in 2022 to allow some room for the possibility that an unfavourable economic growth shock later this year might lead to an increased number of companies ceasing to trade on the trading platforms and fewer new ones joining them.

12% year-on-year growth might be considered conservative given the assumed significant pullback from FY21 growth of 61%. The FY22 growth number is affected by the basis effect from significant client additions in 2021 and the subscription-based, recurring nature of revenue in this segment.

Exhibit 16: Selected revenue and cost assumptions

$000s unless stated

2018

2019

2020

2021

2022e

2023e

Gross revenue

OTC Link

11,175

11,676

15,890

29,665

17,755

18,643

Market Data Licensing

23,384

24,447

28,133

33,751

31,744

33,014

Corporate Services

24,719

26,716

27,206

39,516

44,148

45,914

Gross revenues

59,278

62,839

71,229

102,932

93,647

97,571

% year-on-year

OTC Link

11%

4%

36%

87%

-40%

5%

Market Data Licensing

7%

5%

15%

20%

-6%

4%

Corporate Services

9%

8%

2%

45%

12%

4%

Gross revenues

8%

6%

13%

45%

-9%

4%

Operating expenses (incl. depreciation & amort.)

Compensation and benefits

23,820

26,994

28,896

34,049

31,302

32,867

IT Infrastructure and information services

5,554

6,382

6,452

7,633

8,058

8,299

Professional and consulting fees

2,110

1,982

2,704

4,495

4,379

4,642

Marketing and advertising

1,148

1,117

807

1,028

982

1,041

Occupancy costs

2,107

2,548

2,303

2,348

2,436

2,485

Depreciation and amortisation

1,042

1,492

1,761

1,796

1,841

1,877

General, administration and other

1,029

1,207

1,040

1,273

1,204

1,241

Total

36,810

41,722

43,963

52,622

50,202

52,452

% year-on-year

Compensation and benefits

11%

13%

7%

18%

-8%

5%

IT Infrastructure and information services

-6%

15%

1%

18%

5%

3%

Professional and consulting fees

22%

-6%

36%

66%

-3%

6%

Marketing and advertising

27%

-3%

-28%

27%

-5%

6%

Occupancy costs

19%

21%

-10%

2%

4%

2%

Depreciation and amortization

-23%

43%

18%

2%

2%

2%

General, administration and other

42%

17%

-14%

22%

-5%

3%

Total

9%

13%

5%

20%

-5%

4%

Source: OTCM, Edison Investment Research

We expect OTCM to be able to control some of its costs to counter the forecast revenue decline. As a result, we estimate an 8% decline in compensation and benefits in FY22 from a smaller variable component in pay. Furthermore, management sees scope to reduce costs in some areas such as professional and consulting fees as well as marketing costs. Conversely, expenses in areas like IT and occupancy are less likely to be pared back. We estimate a 5% decline in total operating expenditure in FY22 followed by a 4% increase in FY23.

Exhibit 17 summarises the changes to our forecasts. We now forecast PBT of $35.6m in FY22. This is 2% higher than our previous estimate (which already assumed sharply lower trading volumes for FY22) and represents a 6% drop from FY21. We have upped the assumed tax rate from 19% to 22% following management guidance, and as a result our new FY22 EPS forecast is down 3% on our previous forecast and 9% below FY21.

Exhibit 17: FY22 estimate revision and FY23 new estimates

Gross revenue ($m)

PBT ($m)

Diluted EPS ($)

Dividend ($)

Old

Actual/
new

Change (%)

Old

Actual/
new

Change (%)

Old

Actual/
new

Change (%)

Old

Actual/
new

Change (%)

2021

97.9

102.9

5.1

35.6

38.0

6.6

2.33

2.52

8.2

2.19

2.16

-1.4

2022e

88.5

93.6

5.8

34.8

35.6

2.3

2.35

2.29

-2.5

2.22

2.16

-2.7

2023e

97.6

36.9

2.36

2.16

Source: Edison Investment Research

OTCM’s balance sheet remains strong with no debt and a record level of cash at $50.4m, or $52.0m including restricted cash at the end of FY21. We assume that OTCM maintains its $2.16 dividend per share despite the decline in earnings. This would take the estimated dividend payout ratio for FY22 to 92%, which is easily covered by operating cash flow. We note that OTCM has a strong record of dividend distribution, with the 2019 payout ratio at 97%.

Valuation

Exhibit 18 compares OTCM’s P/E ratios to a range of market information providers and global exchanges. OTCM is trading at a 12% discount on trailing earnings, about in line with 2022e and then a relatively small (16%) premium on 2023e. The premium is deserved due to OTCM’s strong growth track record, balance sheet and relatively high proportion of subscription-based revenues.

Exhibit 18: OTCM comparative multiples

P/E ratios (x)

2021

2022e

2023e

OTCM

25.0

27.5

26.7

MSCI

32.4

30.3

25.0

S&P Global

58.3

44.4

38.2

Euronext

20.0

16.9

15.7

Hellenic Exchange

26.1

33.2

26.1

London Stock Exchange

27.6

24.6

21.9

BMF (Brasil)

18.0

16.3

14.4

Intercontinental Exchange

18.9

24.3

22.2

NASDAQ

25.2

22.6

20.9

Average

28.3

26.6

23.1

OTCM vs average

(12%)

3%

16%

Source: Refinitiv, Edison Investment Research. Note: Prices as at 21 March 2022.

The sensitivity of our discounted cash flow valuation to different discount rates and long-term growth assumptions is shown in Exhibit 19 below. The model factors in our increased explicit forecasts for FY22–23, together with an assumption of FY24–25 cash flow growth of 10% and a terminal cash flow multiple of 16x. we obtain the valuation range of $42.4–66.3 per share by flexing the discount rate from 7% to 11% and assuming long-term growth (2026–32e) of 3–6%.

Exhibit 19: Discounted cash flow valuation sensitivity ($ per share)

Discount rate (right)
2026–32e growth

7%

8%

9%

10%

11%

3%

57.9

53.4

49.3

45.7

42.4

4%

60.6

55.8

51.5

47.6

44.2

5%

63.4

58.3

53.8

49.7

46.0

6%

66.3

61.0

56.1

51.8

47.9

Source: Edison Investment Research


Sensitivities: Macro, regulatory and IT resilience

From a macro perspective, the economic background will have a positive or negative influence on equity market trends, including investor sentiment towards international and venture equities, the flow of venture company IPOs, corporate interest in accessing liquidity in the US market, and volatility and trading volumes.

Regulation can have a positive or negative influence.

The reliability of the group’s IT systems is also important from a reputational perspective and OTC Link ATS has established a strong record of uptime in its core systems.

Competition for corporate clients comes from national securities exchanges and could increase if they were allowed to become specialised venture exchanges. For trading, competition includes OTC Global (a subsidiary of the Intercontinental Exchange, ICE) and direct trading between dealers.

Exhibit 20: Financial summary

$000s

2020

2021

2022e

2023e

Year end 31 December

PROFIT & LOSS

OTC Link

15,890

29,665

17,755

18,643

Market Data Licensing

28,133

33,751

31,744

33,014

Corporate Services

27,206

39,516

44,148

45,914

Revenue

71,229

102,932

93,647

97,571

Re-distribution fees and rebates

(2,810)

(3,021)

(2,857)

(2,971)

Net revenue

68,419

99,911

90,790

94,600

Transaction-based expenses

(3,022)

(9,273)

(4,972)

(5,220)

Revenues less transaction-based expenses

65,397

90,638

85,819

89,379

Operating expenses

(42,202)

(50,826)

(48,361)

(50,575)

EBITDA

23,195

39,812

37,458

38,805

Depreciation

(1,761)

(1,796)

(1,841)

(1,877)

Operating profit

21,434

38,016

35,617

36,927

Net interest

(27)

(51)

(20)

(30)

Profit Before Tax

21,407

37,965

35,597

36,897

Tax

(3,133)

(7,489)

(7,831)

(8,117)

Profit after tax

18,274

30,476

27,766

28,780

Profit after tax and allocation to RSAs

17,839

29,766

27,166

28,180

Average Number of Shares Outstanding (m)

11.6

11.8

11.9

11.9

EPS - basic (c)

156.4

258.7

234.8

242.3

Fully diluted EPS (c)

153.4

252.0

228.8

236.0

Dividend per share (c)

125.0

216.0

216.0

216.0

EBITDA Margin (%)

34

40

41

41

Operating profit margin (%)

31

38

39

39

BALANCE SHEET

Cash & cash investments

33,733

50,394

49,139

55,631

Debtors

6,609

7,404

7,404

7,404

Other current assets

1,763

2,153

3,717

3,717

Long term restricted cash

1,532

1,564

1,564

1,564

Intangible assets

291

291

291

292

Property and other long-term assets

22,414

20,449

22,080

21,142

Total assets

64,810

82,255

84,195

89,750

Deferred revenues

18,765

28,432

26,157

27,204

Other current liabilities

11,232

13,332

13,332

13,332

Tax, rent and other long-term liabilities

15,267

15,537

14,117

13,762

Total Liabilities

45,264

57,301

53,606

54,298

Net assets

19,546

24,954

30,589

35,452

NAV per share ($)

1.67

2.11

2.59

3.00

CASH FLOW

Net cash flow from operating activities

26,013

46,456

29,732

34,114

Capital expenditure, intangible investment

(1,034)

(1,395)

(4,800)

(1,300)

Dividends

(14,610)

(25,459)

(24,987)

(25,121)

Purchase of treasury stock

(3,520)

(1,522)

0

0

Financing / investments

(1,333)

(1,419)

(1,200)

(1,200)

Net cash flow

5,516

16,661

(1,255)

6,493

Opening net (debt)/cash

28,217

33,733

50,394

49,139

Closing net (debt)/cash

33,733

50,394

49,139

55,631

Cash and restricted cash

35,297

51,958

50,703

57,195

Source: OTCM, Edison Investment Research

Contact details

Revenue by geography

300 Vesey Street
12th Floor
New York, NY 10282
US
+1 (212) 896-4400
www.otcmarkets.com

Contact details

300 Vesey Street
12th Floor
New York, NY 10282
US
+1 (212) 896-4400
www.otcmarkets.com

Revenue by geography

Management team

Chairman: Neal Wolkoff

CEO, president, director: R Cromwell Coulson

Neal Wolkoff is a former executive of three exchanges (including being former chairman and CEO of AMEX and an executive officer at NYMEX). He is a consultant and attorney focusing on futures and securities markets, exchanges, market regulation, operations and clearing houses.

In 1997, Cromwell led a group of investors in acquiring OTCM’s predecessor business, the National Quotation Bureau (NQB). He is responsible for the group’s overall growth and strategic direction. Prior to OTCM, Cromwell was an institutional trader and portfolio manager in distressed and value-oriented investments.

EVP market data: Matthew Fuchs

EVP issuer and information services: Lisabeth Heese

Matthew Fuchs is responsible for product development, distribution and sales of market data. Prior to OTC Markets he held a number of financial technology roles at National Research Exchange, Bearing Point and Arthur Anderson.

Lisabeth Heese joined OTC Markets in 2004 as director of Issuer and Information Services subsequently building a team responsible for collecting and maintaining corporate and securities data for over 10,000 companies. Prior to OTCM she spent 11 years at Nasdaq as a product manager.

President OTC Link LLC: Michael Modeski

Chief financial officer: Antonia Georgieva

Michael Modeski joined OTCM in 2011. He has over 15 years’ experience in the financial markets with a focus on OTC markets. Previous roles include director of broker-dealer execution services and sales at Citigroup, director of execution services at Lava Technology (Citigroup), director of OTC equities at FINRA and several management positions at Pershing.

Antonia Georgieva joined OTCM as CFO in 2021. She has more than 17 years of M&A and capital markets experience in fintech and financial services. Previously she led the Drake Star fintech practice in the US and was a managing director at BMO Capital Markets, where she co-led the firm’s fintech and informational services coverage.

Chief technology officer: Bruce Ostrover

Director, OTCM Intl and EVP corporate services: Jason Paltrowitz

Bruce Ostrover joined OTCM in 2017 as CTO. He has over 30 years’ experience in the financial services industry with a focus on software development and project management. Before OTCM he served as managing director at Convergex, was a founding partner in a consulting firm and held senior IT roles in the financial services sector.

Jason Paltrowitz joined OTCM in 2013 and manages the group’s international and domestic Corporate Services business, supporting companies that trade on the OTCQX and OTCQB markets. His previous experience includes a range of senior management roles at JP Morgan Chase and BNY Mellon.

General counsel: Dan Zinn

Dan Zinn joined OTCM in 2010 and is the group’s general counsel and corporate secretary. He leads the company’s regulatory and policy making efforts. Prior to joining OTCM, he was a partner at The Nelson Law Firm, LLC, and was outside counsel to the company. Dan previously worked in the corporate office of the American International Group (AIG).

Management team

Chairman: Neal Wolkoff

Neal Wolkoff is a former executive of three exchanges (including being former chairman and CEO of AMEX and an executive officer at NYMEX). He is a consultant and attorney focusing on futures and securities markets, exchanges, market regulation, operations and clearing houses.

CEO, president, director: R Cromwell Coulson

In 1997, Cromwell led a group of investors in acquiring OTCM’s predecessor business, the National Quotation Bureau (NQB). He is responsible for the group’s overall growth and strategic direction. Prior to OTCM, Cromwell was an institutional trader and portfolio manager in distressed and value-oriented investments.

EVP market data: Matthew Fuchs

Matthew Fuchs is responsible for product development, distribution and sales of market data. Prior to OTC Markets he held a number of financial technology roles at National Research Exchange, Bearing Point and Arthur Anderson.

EVP issuer and information services: Lisabeth Heese

Lisabeth Heese joined OTC Markets in 2004 as director of Issuer and Information Services subsequently building a team responsible for collecting and maintaining corporate and securities data for over 10,000 companies. Prior to OTCM she spent 11 years at Nasdaq as a product manager.

Chief technology officer: Bruce Ostrover

Director, OTCM Intl and EVP corporate services: Jason Paltrowitz

Principal shareholders

(%)

Officers and directors

36.8

Including R Cromwell Coulson

30.0

Cromwell Coulson Family 2012 DE Trust

5.9

T Rowe Price

4.2

ODIN Forvaltning

1.3

Horizon Kinetics

1.0


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280 High Holborn

London, WC1V 7EE

United Kingdom

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1185 Avenue of the Americas

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United States of America

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Level 4, Office 1205

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NSW 2000, Australia

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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The Merchants Trust (MRCH) is managed by Allianz Global Investors’ chief investment officer, UK equities, Simon Gergel. He is very pleased by how the trust’s income has recovered as companies have returned to paying dividends. With an uncertain economic and investment backdrop, which has been exacerbated by the Russian invasion of Ukraine, the manager stresses the importance of focusing on companies’ long-term prospects. Gergel considers MRCH’s balanced portfolio of attractively valued cyclical and defensive stocks, with both domestic and international businesses, is relatively well positioned for the current environment. The trust has a commendable performance track record, having outperformed its UK benchmark over the last one, three, five and 10 years, while its NAV total return now ranks first or second versus its 16 largest peers in the AIC UK Equity income sector over the last one, three and five years.

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