The mission of the OTC Markets Group (OTCM 1.54%) is to create better-informed and more-efficient markets by providing exchanges for domestic investors to buy and sell shares of companies. These exchanges give their listed businesses opportunities to access much-needed capital. Most of these companies are too small to meet the standards (or to pay the fees) of nationally recognized stock exchanges, such as the New York Stock Exchange (NYSE) or Nasdaq.
The company reported its second-quarter earnings this week, and with shares up more than 25% year to date going into the release, investors were anxious to see how the company fared. Let's take a closer look.
OTC Markets: The raw numbers
| Metric | Q2 2019 | Q2 2018 | Change (Decline) |
|---|---|---|---|
| Gross revenue | $15.7 million | $14.8 million | 6% |
| Net income | $3.6 million | $4.0 million | (11%) |
| Adjusted EPS | $0.46 | $0.49 | (6%) |
| Operating margin | 29.4% | 35.3% | (5.9 percentage points) |
Data source: OTC Markets.
What happened with OTC Markets this quarter?
- It launched the OTCQX Cannabis Index, a performance benchmark for the cannabis-related companies trading on its exchanges.
- Last quarter, the company acquired and integrated Qaravan, an analytical platform that evaluates banks on metrics such as risk and performance. This quarter, it followed up the acquisition with the launch of Qaravan CECL, a tool to help financial institutions conform to CECL (current expected credit losses) standards and analyze their credit exposure risks.
- In Q2, its Virtual Investor Conferences hosted seven events with 79 companies, reaching upward of 6,000 unique investors.
- The OTC Link ECN (electronic communications network) now has 47 subscribers, allowing them to automate transactions.
- OTC Markets continued to focus on international sales via its new office in London. In Q2, 53 combined issuers joined one of its exchanges.
- The company now has Blue Sky exemptions in 36 states for at least one of its exchanges, with Kentucky and North Dakota the newest states to recognize OTC's exchanges. Blue Sky laws allow financial analysts and brokers to recommend the companies listed on OTC Markets' exchanges as worthy investments.
- Operating expenses rose to $10.4 million, a 15% increase year over year, primarily driven by increases in compensation and IT infrastructure spending.
- Through the first six months of the year, the company has now returned $4.88 million to shareholders via dividends and share repurchases.
What management had to say
In the company's earnings release, CEO R. Cromwell Coulson stated:
The first half of 2019 was a period of investment -- in our facilities, in our technology platform and in our people. We are making these investments in order to increase the value of our products for our clients. We continue to focus on creating cost-effective public markets and on efficiently delivering data and technology solutions that solve the challenges faced by brokers, banks and companies.
CFO Bea Ordonez emphasized the growth the company was seeing in all its segments, adding, "We were pleased to report our 10th consecutive quarter of top-line revenue growth, with all three of our business lines contributing."
Looking forward
The company has made a series of investments in the first half of 2019, from opening new international offices and increasing its head count to launching new tools and platforms for customers. These new efforts are driving revenue growth but contracting the company's operating margin, which shrunk to 29.4% this quarter, a decrease of 5.9 percentage points. Investors will want to see if these margins rise as these investments begin to materialize or whether they will stay at these lower levels.
