OTC Markets’ second-quarter figures showed lower pre-tax profit year-on-year, but this should be seen in the context of the company’s successful long-term development of its cost-effective, transparent markets, OTCQX and OTCQB. This is a year in which it is investing in technology, acquisitions and staff, as well as moving into new headquarters. While we have trimmed our estimates, we look for a return to profit growth in FY20 and for long-term cash flows to benefit from the investments being made.
Revenues increased 6% y-o-y with the most rapid growth in Corporate Services, where a combination of healthy net client gains for OTCQX and implementation of a price increase for OTCQB last year delivered a 9% advance. Operating expenses (+15%) outpaced this growth with staff costs accounting for most of the change followed by IT, infrastructure and information services. Acquisitions contributed to both, while recruitment and investment in IT to sustain development of the business also played a part. Pre-tax profits and diluted EPS fell by 11%. Other operational highlights included further growth in the number of OTC Link ECN subscribers and, within Market Data Licensing, in the number of compliance file professional market data users. Two further states have granted OTCM’s premium markets Blue Sky recognition, taking the total to 36 for OTCQX,covering 55% of the US population.
While the main North American equity markets have made progress in the year to date, venture markets have been relatively weak and, with geopolitical uncertainty a feature globally, the near-term outlook for business confidence is unclear. Nevertheless, OTCM remains consistent in its commitment to developing its markets and enhancing its offering to corporate clients and market users through new products, technology investments and acquisitions. The long-term outlook for its cost-effective secondary markets still appears promising, particularly as online capital raising gains momentum.
We have reduced our EPS estimates for this year and next by 6% and 3% respectively, reflecting a higher run rate of costs than we previously allowed. However, longer-term cash flows are likely to benefit from new products and services and the net impact on cash flow estimates is modest. On balance, our fair value is unchanged at $37.00 per share (see page 6).