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The Intrinsic Value Podcast - The Investor’s Podcast Network
TIVP069 (Video): OTC Markets (OTCM): A Picks and Shovels Play in Modern Capital Markets w/ Kyle Grieve & Shawn O'Malley
01:22:15
Kyle and Shawn analyze OTC Markets Group, a hidden infrastructure company that collects tolls on over 12,000 securities.
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- [00:00]
Kyle Grieve
Every time you buy a stock that doesn't trade on the New York Stock Exchange or nasdaq, a foreign company, a small cap, a pink sheet name, there's a company in the background collecting a toll. You've probably never thought about them, and they've never thought about making you think about them.
- [00:14]
Sean O'Malley
That company is OTC Markets, and here's a wild fact. The platform they run covers over 12,000 securities, more than both major exchanges combined. Yet the whole operation runs on fewer than 130 people.
- [00:26]
Kyle Grieve
Today we find out how a business that most investors have never even heard of has quietly compounded free cash FL at 14% annually over a decade, and whether it can continue doing it.
- [00:40]
Podcast Host/Announcer
You're listening to the Intrinsic Value Podcast by the Investors podcast network. Since 2014, with over 180 million downloads, we've learned directly from the world's best investors. Now we're applying those lessons to analyze businesses and investment opportunities every week, helping you uncover intrinsic value. This show is not investment advice. It's intended for informational and entertainment purposes only. All opinions expressed by hosts and guests are solely their own, and they may have investments in the securities discussed. And now, here are your hosts, Sean o' Malley and Kyle Grieve.
- [01:24]
Sean O'Malley
Before we get started, a quick heads up for our listeners. The Intrinsic Value Podcast is now being jointly published on the Investors Podcast Feed, formerly known as We Study Billionaires. If you are hearing this on the Intrinsic Value Podcast Feed, nothing changes for you. You will keep getting every episode right here. But if you want early access to our episodes and company coverage alongside the full lineup of content from the Investors Podcast Network, you can find us on the new feed as well. So we've included a direct link in the episode description or or you can simply search the Investors Podcast in your podcast app and hit subscribe. Same deep dives, same stock breakdowns, just a bigger home. Thank you for listening and let's get into today's episode. Hey folks, today we will continue our hunt for intrinsic value by going deep into the infrastructure and operations that underpin financial markets with a company called OTC Markets Group. And if you've ever invested in the US and companies not listed on the New York Stock Exchange or nasdaq, there's a pretty good chance, whether you realize it or not, that you've come across OTC markets before. Where OTC stands for over the counter and in market cap terms, it is a small company. I think it's fair to say it is a hugely important role in the financial system and that has enabled the company to generate some really eye popping financial results.
- [02:56]
Kyle Grieve
That's right. So I remember listening to one of Mohnish Pabrai's chats a number of years ago where he said that one of his favorite ways of finding a new investment idea was to simply just find a wide mo business in one country that was being applied to yet another country. Now, OTC Markets doesn't quite fit this bill as it's operational in the us but it's among a very small number of capital market infrastructure plays that are available and it has very, very unique competitive advantages. Now OTCM also has a very rich history. So its current CEO, Cromwell Colson bought Pink Sheets with an investor group way back in 1997 to bring the business into the digital age. And as he developed the business, they went through a number of rebrandings, going from the National Quotation Bureau to Pink Sheets, to Pink Sheets OTC and finally to OTC Markets Group. And as they've evolved, they've shown just terrific sustainable growth. The numbers really just speak for themselves. So OTCM boasts a 10 year kegger in revenue of 11%, profits 13% and free cash flow 14%. And more impressively, they've done this while the share count has gone from only 11.1 million a decade ago to just 11.8 million today. And if you think that they've scaled as a result of debt, that would also be wrong as they've carried zero debt since 2016.
- [04:02]
Sean O'Malley
Anytime you have a business compounding revenue and profits annually at double digit rates for a decade, that's extremely impressive. And even more so when, as you said, basically no debt funding was needed either. Which just makes sense when you see that the company has nearly 60% gross margins and 34% operating profit margins, which I'll say is actually higher than Alphabet's operating margins. So we will of course get into all that and what has driven that growth and the impressive profitability of this company. But let's start with discussing what it is they exactly do as a company. Because it's a number of different things, isn't it?
- [04:39]
Kyle Grieve
That's right, Sean. Yeah. So they have three primary segments. So the first one here is called OTC Link. So this is the trading infrastructure part of the business. So let's kind of look at this through the lens of an actual investor. Let's say that I want to buy shares in a business that's trading in the OTC over the counter markets in the us so I'm obviously in Canada, but let's say I'm in The US I would log into, let's say my Schwab account, I'd buy some shares and you know, to me this is as easy as that, right? But there's actually a number of things going on in the background that I'm completely unaware of. So first I have to get a quote on the price of the stock. If I make a bid, OTC Link will then message other market makers that I'm willing to buy at the quoted price. The market makers will then accept, counter or decline that offer. But let's say the buy is accepted, then the trade is then executed. After the trades executed, it has to be reported to regulatory bodies like the Financial Industry Regulatory Authority or finra. So essentially every time I make a trade on the OTC through any brokerage, OTC Link is collecting a toll fee as part of the transaction due to its existing infrastructure. And this is based a lot on trading volume and can therefore be quite volatile depending on market conditions. Now the second segment is called Corporate Services. This part of the business serves individual corporations that want to list on US markets. But maybe you don't want to bother with the time and cost of a primary listing on the New York Stock Exchange or the nasdaq. In that case, OTCM is a great alternative. You basically are going to pay a one time application fee and an annual fee to OTC to be on a specific tier that OTC offers. Now once you go public, you have to keep your investors informed with disclosure statements and new services. You also need to know whether your stock is legal to trade in all 50 states. And since these fees are largely fixed, OTC is paid regardless of what's happening in the market. So it's a little bit less cyclical. The third part here is the market data licensing aspect. So this is obviously a data angle. Since they are able to capture so much data as they cover 12,000 plus securities, they've basically monetized that data for a number of potential users. So broker dealers and trading firms require real time data on OTC stocks to price them correctly. They might subscribe to OTC real time or delayed data feeds. They're paying for this kind of live market intelligence on securities that just aren't going to be trading on other exchanges like you know, NASDAQ or NYSE. They also get redistributors like Bloomberg to license OTCM's data to use on their own customers, Bloomberg terminals. And then finally OTCM will help deal with compliance specific data and help flag businesses to compliance officers for any potential investigations.
- [07:14]
Sean O'Malley
I think it's really important to mention here that even though the New York Stock Exchange and Nasdaq get all of the attention, There are over 10,000 companies that trade OTC in the US which is more than the New York Stock Exchange and NASDAQ combined. And as such, it is a very important place to help companies access US Capital markets without needing to spend as much time and energy on compliance as would be needed on the major stock exchanges. So these businesses are definitely not as sexy as the S&P 500 or the NASDAQ 100, but there is nevertheless a substantial number of companies that rely on OTC markets for financing and for liquidity in their shares. And as you outlined, it looks like there's three core business segments here. So why don't we just zoom in more on how they generate revenue within each of those groups?
- [08:04]
Kyle Grieve
Yeah, so as I'd expect with a business with multiple segments, I'm just not really that surprised to see that there's certain segments that outperform others in the short term. So going into analyzing this business, my an original assumption was that OTC Link segment would probably be the most cyclical and I think it is. But to be honest, all the segments have grown very, very nicely. And you know, over a long enough time period, they've all gone up at a nice clip. So in the last decade, OTC Link has keggered revenue at about 11%. Corporate services and market data licensing of each keggert revenue at about 10% as well. So let's get into how each of these segments make revenue for otcm. So the first one OTC Link earns money in two ways. So the first is simple subscriptions. So as I mentioned a little earlier, broker dealers pay a monthly fee to access OTC Link's alternative trading system or ats. So the included connectivity fees as well as per usage fees for use of each of their applications. Second, there are usage based fees and transaction fees. For instance, when using an ats, broker dealers will pay a per security fee to publish stock quotes and send trade messages to other people who can execute those trades. OTC Link currently accounts for about 21% of revenue at about $26 million. Second is the market data licensing segment. So this is a lot more straightforward in my opinion than OTC Link. Like most data providers, they sell a recurring license on either a monthly, quarterly or annual basis. This is packaged on either a per enterprise or per user basis. This segment has kind of two types of delivery channels. The first being direct sales and third party redistributors. Such as Bloomberg or Refinitiv, this segment accounts for about 40% of revenue at about $40 million. The third segment is corporate Services. So if a company wants to be in one of OTC's markets, they pay a subscription fee to have their security designated on one of OTC's markets. And importantly, these fees don't scale with market cap, share price or volume. They're flat. So it's a lot less cyclical. Corporate services makes up about 39% of revenue at about $49 million.
- [10:03]
Sean O'Malley
So I think the way to think about it is that there's different tiers of compliance that come with various costs. And so based on the size of your company and where you're based in the world, and really just what you're willing to invest in being audited, disclosing everything that needs to be disclosed, there's almost like a self select of which tier of OTC market groups, exchanges or markets that you want to participate in. And I think it would be fair to say that OTC Markets Group is very much a quasi monopoly, right? So you have the New York Stock Exchange and you have the Nasdaq as competitors, but OTCM is really the only alternative if you want to access US Markets without the very strict listing restrictions and fees that come with those primary exchanges. And beyond that, if you're too small of a business, the New York Stock Exchange and NASDAQ just simply won't serve you. And that leaves OTC Markets as your only option. And so I think it's a really worn out analogy, but people always talk about selling picks and shovels during a gold rush and how that's a better business than actually trying to find gold in a gold rush. And to me, OTC Markets is very much a picks and shovels company for investing in the growth of equity markets and in aggregate. And so what's interesting though is that the New York Stock Exchange as a company is also publicly traded via Intercontinental Exchange Group Ticker ice. And when you compare its valuation to OTC Markets, OTCM trades at about 15 times operating profits per share, which I think is a very reasonable valuation for the quality of the business versus almost 23 times operating profits for the New York Stock Exchange's parent company. And so, point being, they are both excellent businesses, but one gets much more attention and therefore trades at a more premium valuation than the other, despite OTCM actually serving a broader swath of the market. But just generally and maybe compared to these other stock exchange businesses too, I'm wondering how you think about what kind of pricing power OTCM Group has.
- [12:03]
Kyle Grieve
Yeah. So if you're a small emerging market company, chances are pretty slim that you're going to be able to get listed on the New York Stock Exchange or nasdaq even if you really wanted to. And if you're looking for more capital to grow as a business, then your next best option is simply just going to be the otcm. So this gives OTCM the ability to really just set its own prices for these services as there's just not that many other options. So one potential other option is just to list in Canada. So in Canada we have the TSX Venture Exchange and that allows small companies that are very small to raise capital. And we actually have a very long history of American companies actually just listing on the TSX Venture Exchange just because they for whatever reason can't access capital in the us but really outside of that, there's just not that many options. And then that creates some really, really good advantages. So OTCM has a very sticky customer base. Historically, about 90% of companies on the OTC QB renew their services and OTC QX has a retention rates around 95%.
- [12:58]
Sean O'Malley
It's funny because I kind of dipped my toe into researching this business about a year ago when I was thinking about pitching it to our colleague Daniel Manka. But I just found all the jargon around the business and really the industry they operate in, it's just, it's head spinning. And I don't know, I think I get more excited about just covering a company like Uber and then that just led me in a completely different direction probably over the next six months. But this is an episode, just to be clear, that will be heavy on jargon. So just to make sure everyone is on the same page, let's go over the difference between OTC QB and otcqx, because these are two different tiers of markets that OTCM Group operate. So what do those terms actually mean?
- [13:40]
Kyle Grieve
I'll start this off by saying I completely agree with you, Sean. When you're just looking at the three segments on their financials, it's literally just full of different acronyms and it was, it takes time. I literally had to just go through every single one of them, write them all out and be like, okay, this is that, that's this. So yes, I agree completely, head spinning. But you know, I still think it's a really interesting business. So let me answer your question here. So for OTCM's corporate services, they have these separate segments for international and US companies. So that segment is called the otcqx, these tend to be larger businesses and they're usually on foreign exchanges. For businesses that are smaller or more venture type businesses, OTCM has the otcqb. Now businesses with a baseline level of engagement that do not meet the full requirements of OTCQX or OTCQB can then list on the OTC id. And if a company wants as few requirements as possible, they can then list on the pink limited market or the expert restricted market. So you can see here there's just so many different options and that's where things get a little bit convoluted. But I want to get back here to OTCM's pricing power that you mentioned a few questions ago. So they have a pretty rich history of actually raising freeze across the board for their corporate services segment. So pre 2017 OTC QX. So this is again it's a segment for the larger companies they had annual fees of around $15,000. In 2021 filing they disclosed that that fee was around 23,000. And after that they disclosed that they would continue increasing that fee at about 3 to 5% annually. So today they don't actually tell you what that fee is, but we can infer that it's probably somewhere around $26,000 a year. Now on top of that market data licensing fees have also increased, but it's a lot harder to find data going back more than just a few years. But we can see a few things from just doing that experiment. So in 2023-2024, redistribution fees and rebates went down as a share of the market data licensing revenue, which technically isn't good for OTCM. So it's gone down from about 11% to 8% today. Now in 2025, OTCM announced a price increase for professional and non professional user licenses. And this created a 15% increase in revenue in that segment in just a year.
- [15:47]
Sean O'Malley
You know when I was prepping for this episode with you today, Kyle, I was asking myself this question of like why are there these different tiers? And we've kind of tried to explain it a few different ways, but why are there the pink sheets? Why is there OTC QB and QX and you know, why not just have one market for all of these over the counter companies? And so that was like the question I was trying to wrap my head around. And as I have come to understand it, the reason this is is like I said one, there's a self selection dynamic for the companies where they decide there's almost different tiers of disclosure requirements that they have to go through. So it's almost how much does a company want to put into, you know, how much work do they want to put into being a public company? And then that determines where they can trade. And then from the investor perspective, you kind of know what to expect on each market. And so when you go into the pink sheets, it's a little bit of the wild west, whereas you might expect some of these other markets to be a higher level of, I don't want to say integrity, but definitely better clarity and definitely quality of information. And so anyways, when I step back and look at the business at a very high level, it reminds me of a company that we've covered on this podcast before called Verisign. And this is a company that basically owns the domain rights to using dot com. And so every website in the world ending with dot com has to pay them a few dollars a year for Verisign to basically host their domain and make their domain active so that people can visit their website all around the world. And so correspondingly, the number of active websites in the world doesn't really vary all that dramatically from year to year. So most of the business's growth really can only come from price hikes. There's not a lot that they can reinvest into to expand the business organically. And so in their case though, the company's monopoly is like, it's so clear and so obvious that regulators have set very explicit guidelines for how much Verisign can raise pricing over multi year periods. And to me, that's a really long way of saying OTC markets does have a degree of competition which actually works in their favor because their pricing power isn't strictly regulated in the way that like a very, very blatant monopoly would be. And to me, that's a great thing to see that they've been able to use pricing power as a sustainable way to drive earnings growth. You can't do that forever, but it clearly shows that their services are very valuable. Otherwise companies would not pay these listing fees to have access to the OTC market. So I want to just go back though, and focus on something you said earlier, which is the difference in the company's free cash flow and revenue growth over the last decade. Because it's a really subtle point, but it is an important one to ask, how can free cash flows grow faster than revenue? Right. So there's a 3 percentage point difference between free cash flow compounding per year and revenue compounding per year at 14% versus 11%. And the takeaway to me is that this signals operating leverage that's embedded into the business model. And that's something we always love to see. But I'm curious to hear how you think about it.
- [18:48]
Kyle Grieve
Yeah, you absolutely nailed it there, Sean. So OTCM has displayed some very nice operating leverage throughout the years. So there's a couple different ways of looking at it. So first you can simply just look at the headcount. So OTCM currently has just 130 employees, and in 2020 that was just 102. That was also a period where revenue nearly doubled. So that went from about $68 million in 2020 to, you know, $125 million today. So that's an average revenue for employee of 666,000 up to now to 961,000 today. Next you can look at margins. So while the business clearly has had margins that are very deeply tied to the cyclical nature of markets, you can see that they're making higher lows, which I just love to see. So OPEX makes up about 63% of expenses and it's gradually increased over time. Now, during the times that the markets are euphoric, margins will rise based on increase in activity with minimal increases in fixed costs, which is excellent to see. Now my assumption going forward here though is that we're probably going to see more of the same. I mean, obviously when you're looking at a business that's cyclical, it's nice to have that thought in your head that maybe it's kind of being able to get uncoupled from the cyclical nature of the business. But I just don't see that happening. I think that we're going to continue seeing that at least OTCM has some of these less cyclical segments that are continuing to grow. So the beautiful part about that is that even in the low parts of the cycle, unlike most traditional cyclical commodity businesses, OTCM still is profitable and continues to grow. And then on top of that, when you get to the top of the cycle, you're going to have some really, really good staying power. As more companies are going to look to list and you, while not all of them are going to exist probably down the road a few years in advance, there's definitely going to be some really, really good businesses that stick around. And those are the types of businesses that OTCM will continue to collect fees from.
- [20:35]
Sean O'Malley
And that OTC link business in particular, where they're getting trading volume based transaction fees that really does look like one of those very rare tollbridge businesses, that's sort of like the holy grail of investing that as investors we always want to find. And so they've got essential infrastructure effectively that the customers must pay to use with really no other viable alternatives. And that's what the Tolberge metaphor means. And from a business and shareholder perspective, obviously, that is a great position to be in, which is why I want to talk to you more about OTCM's competitive advantages. How do you think about that for this company?
- [21:12]
Kyle Grieve
Yeah, so you've already brought up that OTCM is essentially in kind of this quasi monopoly, which I completely agree with. And being in that position obviously makes a business really, really strong and makes that business even more likely to exist for many more years down the road. But let's look beyond that advantage, because that's not actually the only one that OTCM has. So first I want to look at cornered resources. So OTCM doesn't have a single person as a corner resource. And just for viewers or for listeners that are unfamiliar with the corner resource, this is a basically a power from Hamilton Helmer that was highlighted in his book seven Powers. And so you could think of corner resources, honestly is like kind of ip. When I was speaking to him, that's basically how he explained it to me. But the interesting thing about IP is it doesn't necessarily just have to be a drug, it can actually be a person. Right. So in his book he used Steve Jobs when he was a member of Pixar. And basically being like Steve Jobs as Pixar was an incredible person to have. But if you put him into something like Disney, it probably would have been equally incredible to have him as part of Disney. So getting back to OTCM here, the part that I think is kind of the corner resource is specifically has to do with regulations. So it has very, very significant regulatory and compliance acceptance. That would be very, very valuable if a potential competitor could get the exact same advantage. But OTCM has done a lot of work over a lot of years to integrate with things like FINRA and the sec, and they've created this massive barrier to entry for potential competitors. Second are network effects. While OTCM isn't really your traditional platform business, you know, that can just run ad to its user base and then just increase its revenue from there, it still definitely has network effects, I think, that are driven by its data. So as OTCM gathers more and more proprietary data, that data set just becomes increasingly valuable. This attracts more users who want to use that data, which further improves the quality for future users. But this doesn't only affect the market data licensing part of the business, it also greatly affects the corporate services aspect. So OTCM collects a lot of data from its list of issuers and as those issuers become more and more transparent, obviously that creates more data and that data is then licensed to brokers, institutions and platforms like Bloomberg. Now, once it's clear that the data set is improving, sure it's going to attract more broker dealer subscribers and that in turn will attract more issuers who want a larger set of eyes to potentially analyze their company. The business also carries some switching costs and benefits as well. For instance, broker dealers will build parts of their workflows into the OTC link ats and switching requires recertification and rebuilding certain compliance processes, which is just a headache. So for corporate issuers, leaving the OTC QX or the OTC QB means losing substantial market visibility, investor relations infrastructure, and just a reputational loss of leaving a well known exchange Sean and I cover
- [23:59]
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- [26:06]
Sean O'Malley
That all makes good sense to me. And so just to say, before I was at the Investors podcast, started working here, I actually worked at S and P Global on their Capital IQ platform, which is this alternative to Bloomberg. And I very much got to see a lot of this data firsthand. Right? I mean, this is a company speaking about S and p global with $125 billion market cap that's built almost entirely on financial data. That is what underpins that entire market valuation. And so they have multiple different business segments, one of them being the credit ratings business. And that's based on how they're able to uniquely provide this authority and analyzing credit quality based on underlying financial statements of these companies. Whereas the index business then is about, you know, the s and P500. This is about packaging securities in a way that provides some sort of informational insights. You know, what are the 500 biggest, most profitable companies in America doing? And then with Cap iq, that platform is really about providing as much relevant data as possible and making it as accessible as possible. So S and P has built a bunch of these different verticals on various types of raw data that to an extent, OTC Markets is a critical supplier of. And that's actually why I'm a bit surprised that OTC Markets Group is not a bigger company in market cap terms, honestly, because I would have thought that they would capture much more of that value and probably be a multibillion dollar company at least. But it's market cap at that time of recording is in the hundreds of millions. And so before I get lost on a tangent about OTCM's value capture and market cap, I think we should look more deeply into the regulatory advantages that you mentioned favoring OTC market groups. So regulatory modes can cut both ways for businesses. They can be incredibly valuable, but they also leave you vulnerable to external forces that you can't control. And so, for instance, FICO is a very popular name in quality investing circles, and it has long benefited from regulators requiring FICO scores to be used in the underwriting process for mortgages sold to Freddie Mac and Fannie Mae. But now with the new administration, regulators have effectively opened the door to competition against fico, and that has arguably acted like a brake on their pricing power. So that's a rambling way to ask, what is your take on the durability of OTCM Group's competitive advantages?
- [28:30]
Kyle Grieve
Yeah, that's A great observation in regarding FICO there, Sean. I really like that. So, like a lot of public companies, OTC markets is very good at acknowledging potential risks. And I really agree with you there. You know, regulation is certainly one of them. It's probably the biggest possible risk to the business, as a matter of fact. So the business has a very solid relationship right now with the sec. But there really is nothing stopping the SEC from altering regulations to just make them a lot less favorable for OTCM if they wanted to. So one potential change the SEC could implement would be allowing for national exchanges such as the New York Stock Exchange or Nasdaq to actually allow non SEC registered companies to list on their exchanges. Or they could create a separate venture exchange framework, kind of like we have here up in Canada with the TSX venture. This would obviously be very, very bad for OTC markets as I think it would heavily impair revenue from basically every single segment of the business. And their data set also would become less attractive because they just have fewer data points to draw from. But regulation aside, I think the moat on their data appears to be quite durable. You know, with market data licensing, OTCM has done just an exceptional job of improving the quality of one of its more stable revenue sources. Now, while I don't see OTCM ever moving away from the more transaction based and commoditizable revenue from areas like OTC Link, the fact that they have this growing, you know, stickier subscription based revenue from market data licensing is a pretty strong indicator of lasting pricing power.
- [29:54]
Sean O'Malley
It's interesting because one of the things that stuck out to me when I was doing some homework on this company was that they've set up a new exchange or alternative trading system called Moon, and that is basically giving them the ability to do overnight trading and offer that right that you have this huge need for, especially in across Asia. Folks want to be able to trade US companies, but there's this time difference where it's usually nighttime or you know, daytime in Asia is nighttime in the US Et cetera, et cetera. And so point being, they have launched this and filled this void in the market where there was really no overnight trading that was being offered. And firstly, I'm kind of surprised that NASDAQ and the New York Stock Exchange haven't filled that gap sooner. It's almost like an innovator's dilemma kind of setup. But apparently now Nasdaq is applying to extend their trading hours as well. So it does seem like there's an industry wide push to eventually get it. So we have 24, five trading. Right. 24 hours a day, five days a week. And my question for you is how you think about that opportunity and then also the impact that this shift in when trading hours occur, what that does to OTC competitive advantages.
- [31:12]
Kyle Grieve
Yeah, so you already mentioned that it's called the OTC Link Moon ats. So this was launched just, it's very recent development was just launched in 2024. And like you, I was pretty surprised too that NASDAQ and the New York Stock Exchange didn't have overnight trading. And one little detail that I did found is they actually do have extended hour trading. So you know, it usually ends at I think 1:00pm Eastern time or somewhere around that. So they do allow to extend the hours, I think both before the market opens and after it closes, but not overnight. So that's kind of this void that OTC Link Moon ATS fills. So the problem though obviously is that NASDAQ has applied for this SEC approval and that application, it's been around for a few years. So you know, the fact that it's taken so long to get approved makes it so that I'm a little less worried. And really I think even if it were to get approved, I don't actually think that that specifically would be an existential threat to otcm. So like I said, Moon ATS was launched only in 2024. And while it's continuing to grow, it really probably is only making it like low single digit percentage points of revenue for otcm. So it's impossible to know exactly what that revenue share is because they don't break it out. So it's an educated guess. But the point being there, even if the NASDAQ is approved on that regulatory issue, I obviously it wouldn't be good for otcm. But it also is not something that's going to completely break the thesis on them. And then on top of that, even if NASDAQ is approved to do overnight trading, there's still nothing that I've read about that the New York Stock Exchange has applied for it. Meaning they could still help serve some of those New York Stock Exchange businesses in the overnight tradings well.
- [32:50]
Sean O'Malley
So before we move away from competitive advantages, I did want to Note something regarding OTCM's returns on invested capital that stood out to me.
- [32:57]
Kyle Grieve
Right.
- [32:58]
Sean O'Malley
It looks very lumpy over the years. And so they have this pretty stable baseline. It's Never dipped below 36% returns on capital. But still you have these big jumps like 80% in 2018, 64% in 2021. So I just want to know, I mean, what explains all this bouncing around in the returns on capital?
- [33:18]
Kyle Grieve
Yeah, this is very, very important to understand. So thanks for pointing that out. So I briefly mentioned today that OTCM has some embedded cyclicality, which I think is why ROIC has shifted so much. So if you overlay ROIC and margins, you're going to see the same trends, increased margins and ROIC in 2018 and in 2021. Now, I just want to note this is because it's important. I don't actually think ROIC is the best capital efficiency metric to use to analyze otcm. And I'll detail why that is a little bit later in this episode. But let's go back to why we had these big bumps. Anyways, so in 2018 there was actually a confluence of different factors. So during that year, OTCM's effective tax rate was nearly cut in half, which affected net margins, which therefore increased net operating profits after tax, which obviously improved the ROIC. Also in 2018 we had the cannabis mania. And in that year there was a huge flood of cannabis businesses that were listing on the OTC QB and OTC qx. This obviously bolstered corporate services revenue and even the pink market had elevated trading volumes. But by 2019 that trend reversed after the cannabis industry fell through. So you know, if you strip out the tax break, the year doesn't look nearly as good as the numbers would suggest. Now looking at 2021, the spike was much more cyclical in nature with free money just pouring into people's bank accounts. Buying stocks was one way to just use that money and trade people did. So OTC Link electronics communication networks exploded from an average of 11,500 transactions daily in 2020 to an average of 48,000 by 2021. And this caused OTC Link revenue to surge by an astronomical 87% on just that one year. Now additionally, market data licensing grew a lot quicker than historical averages. With just so many new non professional investors entering the market, they ended up growing 36% in just one year, which added meaningfully to their more stable professional investor base. And then on top of all that, there was an amendment to an SEC rule which created this unexpected surge in subscriptions. So companies that wanted to remain publicly quoted had to subscribe to OTCM's disclosure services just to maintain eligibility. Now this was a completely regulatory driven tailwind, but you also have to remember that when markets are euphoric, there also tends to be a lot more IPOs. So both factors helped improve OTC M's numbers in the corporate service segments as well as revenue grew 45% in 2021 while operating expenses grew only 20%. So overall, you can see how this business can scale very well when times are very good.
- [35:42]
Sean O'Malley
Yeah, well, I mean, when you see revenues expand so much more quickly than costs, there's two thoughts that come to mind. Either this is a capital light business model with, you know, superb operating leverage, or the company is under investing in opportunities before it and being too conservative. In this case, I think it's pretty clearly the former. But to what extent do you view this as a capital light business and think about their reinvestment opportunities?
- [36:08]
Kyle Grieve
Yeah, you're completely correct on that. So I just mentioned how OTCM has done a great job at growing the top line while keeping their operating expenses growing at a much lower number. And obviously that's been a really, really good way to optimize margins and increase the intrinsic value of the business. But I agree with you. There's just not a lot of places to reinvest. And we'll get into why that is and we'll get into capital allocation in a little bit. But I want to go and just talk a little bit more about their current expenses. So operating expenses are mostly made up of just two line items. First are compensation and benefits, which accounts for about 63% of opex. And then you have IT infrastructure and information services, which together account for about 15% of opex. Now, salaries haven't gone up very much simply because this isn't a business that requires a large headcount to generate more revenue as I've gone through. So this is obviously more of a fixed cost. You know, it's just unlikely to really go down in the future. But I also don't think we're going to see massive spikes in that number either. So in 2025 it only grew 5%, but historical growth is around 11%. Now, as for IT infrastructure and information services, this is also somewhat of a fixed cost. It includes things like data center costs, IT software licenses, and software maintenance. Now, I did say it's a fixed one, but there are a little more variable costs involved in this line item. So let's say that we do get increased trading activity. That's going to mean that cloud services probably are going to increase. So if you look at the growth in this line, it's much more volatile, but on average it's growing at about 9%. Now, if you look at some of the other OpEx, you know, it's occupancy costs. Again, this kind of plays Very well into what you just mentioned about it being a capital light business. The occupancy cost is just $2.6 million, very, very small. And then when in terms of their balance sheet, OTCM is also clearly a very capital light business. So purchase of property, plant and equipment over the last three years have been less than $1.5 million per year since 2023. The current depreciation and amortization is only running at $2.6 million. So OTCM, you know, it's a business that doesn't require factories, it doesn't require warehouses, and it doesn't really require any significant physical infrastructure at all to run the business. You know, obviously with salaries making up most of its opex, it just runs off of people. Software and data infrastructure.
- [38:19]
Sean O'Malley
That makes sense, right? There's not many physical assets to invest in here. You almost couldn't imagine what physical assets they would need to own beyond what they already have. And like you said, it's mostly a people cost business. So I think that makes good sense. But I am still curious about these acquisitions that they've done. Right. So they have deployed capital into acquiring a company called EDGAR Online Assets and then also another company called Blue Sky Data Corp. So how do you think about those allocations that they've made?
- [38:51]
Kyle Grieve
Yeah, so those were kind of two bolt on acquisitions. I think they're pretty low risk given the nature of their purchase price being quite low. But they're also businesses that are very light in physical assets. So they were done primarily to improve the market data licensing segment of otcm. So EDGAR Online is something many investors are probably familiar with. If you've done any due diligence, it's basically a depository of disclosures and compliance documents. Blue sky increased OTCM's existing data offering from about 40,000 securities to over 100,000 equity and fixed income securities. But when you look at both, I think EDGAR has been probably a pretty big drag, whereas Blue sky has been a nice tailwind. So integrations I would say have been mostly mixed, but luckily both have been relatively light on hard assets. But I want to touch here a little bit more on OTCM's variable costs. So they're quite low, making up by my estimate somewhere around just 20% of expenses. So, so these include things like transaction based expenses. So these are mostly direct the variable costs for otcm. These are liquidity rebates paid to broker dealer subscribers on OTC link who provide liquidity to the platform. So here's how that works. So you have these liquidity Providers who receive a rebate which is a transaction based expense. So what a liquidity provider is, is basically a broker dealer who posts quotes and then just sits around waiting for someone to trade against them. Now opposed to the liquidity providers you have liquidity removers. So liquidity removers pay a fixed fee once a share exchange is executed. Liquidity removers are also broker dealers that place active orders that execute against posted quotes and they remove liquidity from the books. And then third here you have the messaging system which basically helps route orders from the alternative trading system which incurs another fee. And then included in this are regulatory fees. So I know lots of different things going on here, but you can see that it's very, very tied to market volatility. Obviously if you have a lot of trading volum, they're going to be collecting fees from all of these at a much higher pace versus you know, if you're in a bear market. No one's trading, shares aren't moving around, fees are going to be less. So obviously this is very, very tied to the volatility of markets. So in 2021 transaction based fees tripled from 2020. In 2025 these fees grew nearly 40%. Transaction based expenses have their own line item and aren't included in OPEX. So in 2025 these expenses were just a little less than 9% of net revenue. But as I've noted, when these variable expenses go up, it has historically been good for the business simply because it generates more and more revenues on improved margins. So some of the other variable costs include things like redistribution fees and rebates which are fees paid to market data redistributors who resell OTCM's market data to their own subscribers. Then you have IT infrastructure and information services. I already mentioned that there's this cloud and data center angle and that's going to increase with more trading activity. And lastly is just professional and consulting fees which are mostly fixed but in the case of maybe a large regulatory event or a lawsuit, they can obviously spike in those short term.
- [41:56]
Sean O'Malley
The thing that scares me with a company like this where there is this dense regulation around their operation, it feels like from an investor's perspective there's just a lot of room for. I don't know, I have a better way to put this and just saying not knowing what you don't know. Right. I just don't have the context to anticipate all of the risks. But maybe you can help with that Kyle. And so I mean clearly there are regulatory barriers limiting new Entrants and helping shield the business. So that's a good thing. But how do you think about the competitive and risk dynamics overall for otcm?
- [42:30]
Kyle Grieve
Yeah, so when looking at this, I look at a number of different things. So first off is product varieties. So does OTCM have a concentrated or diverse product line? I think it's quite obvious today from talking about these three product lines, they obviously have those three segments but then each segment can be further divided into sub segments. So with that said, they have a very, very good variety of products that are all firmly centered on the trading infrastructure. And the business is also very highly recurring with 81% of gross revenue from subscription based arrangements. Secondly, I like to focus on their customers. Is the buyer an end user or intermediary? In OTC Link they are selling to intermediaries which are the broker dealers who tend to be, you know, financial institutions and those are the customers. Now when it comes to the market data licensing, they have a mixture of intermediaries. You have people such as redistributors like Bloomberg, but then you also have non professional investors as part of their customers who are also the end user. Then when it comes to corporate services, they're servicing the direct end user who is a public company. So they can either be a domestic company or an international company. Third, I like to look at distribution channels. With OTC Link they are using more direct channels. They receive fees on a regular basis from their broker dealer subscribers. Now market data licensing is also mostly indirect through its redistributors like Bloomberg and Refinitiv. Corporate services are direct through OTCM's own sales teams. And then lastly here I like to look at the geographies that OTCM operates in. So the business has this kind of global reach attracting issuers from literally all over the world. So physical proximity to issuers is mostly irrelevant to the trading network. OTCM has built these international offices to target European, Middle East, African and Asian and Pacific markets.
- [44:15]
Sean O'Malley
I mean it's a pretty well oiled machine, right? It goes without saying. And they do have a diverse set of products and customers it seems like as well as multiple channels to reach potential customers through. But in terms of competitors, and obviously it's a little messy here because there's multiple segments, but I mean what are the relative strengths and weaknesses of these businesses compared with otcm?
- [44:37]
Kyle Grieve
Yeah, so even though OTCM seems to be a modi business due to the large amounts of regulation around financing and trading, there's obviously still competitors out there. We've already mentioned a few of them. So the first two I'll discuss are the bigger ones that we've already mentioned, New York Stock Exchange and nasdaq. These compete with OTC Link and Corporate Services as they monetize transaction volume and offer businesses the option to list if they're willing to do the necessary backend work and pay the appropriate fees to be listed on those exchanges. Now their strength that they have very, very large marketing budgets. They have global brands, deep liquidity pools and heavy advertising. Weaknesses though would start off with the fact they're legally barred from listing non SEC registered foreign companies, which is OTCM's largest growth segment. Additionally, they should have a very difficult time replicating OTCM's low cost and light touch model for small and venture issuers. Next would be businesses like Bloomberg and Refinitiv. They have very, very large amounts of cash backing them and even broader data sets. And they have these very, very entrenched corporate relationships, but they're actually a client of OTCM and they do not offer a replacement product. So OTCM's equity data is taken from its own alternative trading system and simply it's not replicable by either of these businesses because they don't have access to that data set. Now another advantage OTC Link has is in overnight trading. So we talked about this a little bit earlier. So there's a couple competitors. You got Blue Ocean ATS and Bruce ats, which also compete in extended hours and overnight National Market Systems which OTCM offers as part of its Moon ats. So national Market systems essentially means that you can trade stocks on any market, not just over the counter markets, just to get that out of the way. Now the weakness of these two businesses is that they're focused once again on those national market systems market, which again focuses on primary listings and not on OTC market, which OTCM is obviously primarily concerned with, which is why those businesses aren't, you know, the biggest threats to otcm.
- [46:35]
Sean O'Malley
I think at this point listeners will have a good appreciation for why I said this was a jargon dense episode and why I felt like this can make your head spin a little bit. So it's probably worth, you know, hitting back on your podcast app a couple times to listen through to these things a few more times. But basically what I would want to add to that is Warren Buffett has this saying that I know you've heard and it's that rule number one of investing is to never lose money and rule number two is to never forget rule number one. And so the way I take that, to me in this context is to not buy shares in a company where you can't get your money back, either because you paid such a ridiculous premium relative to the company's earnings, or because the business just fundamentally declines in some way. And so you can generally control the former. But to the latter point, sometimes there are these asymmetric risks that are just uncontrollable. Covid, for example. So with otcm, are there any existential black swan risks that you think this business model is particularly predisposed to?
- [47:41]
Kyle Grieve
Yeah, it's pretty ironic that one of OTCM's biggest strengths is that they have to rely on these regulatory hurdles. However, if certain regulations were to change, that would obviously open up the ability for other businesses to completely destroy or at least impair OTCM's business model, which I view as a potential existential threat for otcm. So as I mentioned, part of what makes OTCM so good is that it has this quasi monopoly position in the over the counter market. The big players simply are barred from listing non SEC listed securities. And this allows OTCM to operate in its small niche of the market, relatively untouched by competitors. This means, you know, the OTC QX and the OTC QB are just really, really hard to disrupt. But there are a couple other scenarios that could play out that investors would definitely have to monitor in terms of risk if you were to own a part of this business. So the first one is a venture exchange framework. So like I already mentioned, Canada has this with the TSX Venture Exchange. Could the US have something like a New York Stock Exchange or NASDAQ Venture Exchange? That has already actually been proposed in the past. So back in 2019, the SEC issued a statement asking for proposals on how to handle the thinly traded markets. The NASDAQ made their proposal, but nothing really ever came of it. But you know, if the SEC decided that the NASDAQ could list non SEC listed equities, this would certainly degrade both OTC Link and its corporate services segment. Now, the SEC said in the proposal that the reason for doing this was to ensure that they maintained some competition in the industry. The second one here is mandatory re registration rules. So I mentioned that in 2021 there was a regulatory tailwind for OTCM. If the SEC reversed this decision and required businesses to register with the SEC rather than with OTCQB or otcqx, that would obviously create a regulatory headwind for otcm.
- [49:26]
Sean O'Malley
And so there's another risk to consider that might not necessarily be as existential as changing regulations, but could still pose a risk to OTCM'S business model. And if we look at the market data licensing segment customer concentration, there is increasing meaning. If you have a customer who accounts for a larger percentage of your revenue or a growing percentage of your revenues, their departure would obviously be a very meaningful risk to your business. So with the data licensing segment, is that something you're worried about, this increasing concentration for otcm?
- [50:00]
Kyle Grieve
Yeah, concentration risk is really scary. And I think it's a good idea to look at this when analyzing pretty much any business, because if there's a key relationship between a customer and a business and it comes down to, say, a relationship with, you know, one person in the company and that person maybe gets fired or quits or goes to a different job, and if they decide that they want to screw that original company over, they can take that customer with them. And obviously that's a horrible, horrible potential event in terms of risk management. But here's the thing with otcm, so when you look at OTC link ats, the subscriber count is shrinking like you just said. And it's been a pretty steady trend here over the last decade, going from 116 down to just 77 today. Luckily, this is still, you know, pretty diverse. It's not like it's 10 customers. So I think it seems that the number of broker dealers is maybe contracting due to a number of reasons such as acquisitions, mergers, restructuring and dissolutions. Now, fewer players in the industry may mean a smaller pool of professional subscribers for market data licensing. So back in 2016, they lost Citigroup's automated trading desk and this actually caused a 10% drop in OTC links year over year revenue. The 2025 filings note something equally instructive for the market data licensing aspect. One retail focused broker dealer changed its internal policy, resulting in a material 18% reduction in reported non professional users for just the year. Unfortunately, though, it's really hard to get concentration data from OTCM's disclosures. In their latest earnings release, they only really report customer concentration for the market data licensing segment. And in that they noted that their top customer is about 9% of revenue in that segment. But really, you know, I think when you put all this together, I think it's a little less scary than you'd imagine. If we assume that OTC link's ATS subscriber counts continuing to shrink has actually harmed the market data licensing aspect of the business in terms of its professional users. That's actually the incorrect assumption. So professional users have actually increased by 35% over the last decade. So even though the broker dealer subscriptions on OTC link ATS are shrinking. It's actually not affecting the MDL segment as I initially assumed.
- [52:05]
Sean O'Malley
So what's the deal with this non professional segment? Right, because I'm looking at a chart here of their customer base here on the market data licensing and there's a chunk of these non professional users and it's actually very volatile. It's got this big jump and then this big decline. And so I mean, is this something that can be smoothed out? I mean, who are these customers or otcm?
- [52:27]
Kyle Grieve
Yeah, I agree it's pretty shocking to see how much that segment can grow in the right environment, but then also decrease in the wrong environment. But I think it's really important, like I mentioned before is that market euphoria really has a big impact on this business. I'm looking as well at that chart that you just discussed and the trading volumes were huge in 2020 and 2021. And because of that you had many retail investors that got interested in the Data sets that OTCM's market data licensing offered. Now the biggest use case I can see of this data is simply just getting level one and level two order book data. So if you want to see, you know, who's buying or selling a specific stock that maybe you're interested or maybe something that you already own, this is a great way to get the data to do just that. So I personally have never really bothered with that. But from some of the investing circles that I'm in, I know that there's a lot of investors that absolutely love getting this data and you know, they like finding which fund is buying what stock and in what kind of volumes as well. But to be honest, getting back to your point about whether they can ever smooth this out, I think the best way to think about it is probably to assume that non professional users kind of hugs that 10,000 person line might gradually grow in the single digits annually over a long enough time period. But you can expect whenever we have a next massive euphoria in the market, we're probably going to get some very cyclical short term tailwinds that will improve this part of the business at a very high level. But you know, again, as that chart shows, after that euphoria wears off, it's going to end up regressing back to the mean once sentiment kind of, you know, normalizes.
- [54:00]
Sean O'Malley
It's funny to me because if you're a retail investor paying for order book data from otcm, that seems like a really sophisticated thing to be doing. Like who is actually doing that. I mean, the fact that any non professional market data licensing business at all exists in any material way is kind of a big surprise to me. But as we're putting all the puzzle pieces together here, I'm still not sure I have a strong grasp of their unit economics. So I think that's something we should dig into more. And this is clearly a bit tougher to understand holistically because you do have these three very different segments. They can be broken down further into subsidiary business lines. But in terms of just unit economics overall, I mean, can you expand on what you were able to find for this company?
- [54:44]
Kyle Grieve
Yeah, it was not easy to find just based on the disclosures. You know, looking at them, they kind of give some KPIs in terms of like, you know, subscriber counts, etc, they'll give some things like revenues, but then after that that's kind of it. So it's really hard to get the unit economics of each of the segments. And you know, even if they did every single segment, that would, you know, I don't know how many that would be 20, 30, 40 plus different segments. It would just be a bit of a headache for them to even do on their own company. But what I can tell you is that the business has the ability to scale up without much cost. I think that seems quite obvious given the fact that they've ramped up revenue during these euphoric times in the market. On top of that, I didn't really mention the fact that OTCM doesn't really need to pay any money to acquire new customers. Now keep in mind that this isn't a traditional SaaS business. I could just turn up advertising spend to attract new customers. So OTCM gets new customers because their customers are essentially forced their way due to regulation in ways that I've already discussed. So you know, if we look at the corporate services segment here, in 2025 they added over 430 new corporate service subscriptions. Now OTCM doesn't disclose their marketing and advertising spend per segment either. They only list it as a single line item in opex. So in 2025 they spent a paltry 1.6 million in marketing and advertising. So if we assume that 100 of that spend was on corporate services, which I assume is actually even a lower number, then they acquired new issuers at a cost of only 3, $700 each. Now their annual fee is around $26,000, meaning that they're getting a reduced, ridiculously high return on investment on other advertising spend. But again, it's probably not the best way of looking at this business simply because they can't just go out there and spend, you know, 10, $20 million on advertising and expect to get the same return. Whereas you know, a business like Uber, they have a ton of good returns on their advertising and their ability to continue to scale up is largely just the factor of them making more money that they can then pump into advertising. Unfortunately, with OTCM there's only so many issuers that are out there that exist. Even if OTCM wanted to spend more money, it just wouldn't make any sense simply because there's only certain amount of companies that are going to end up going public. So there's not really any more reason to spend more money on advertising.
- [56:57]
Sean O'Malley
And I'd also assume that the lifetime value of these customers is super high given the just very low churn of this business segment.
- [57:04]
Kyle Grieve
That's correct, yeah. So the corporate service segment has a churn rate of just 5 to 7%. And this applies an average tenure of about 14 to 20 years for their issuers. So OTCM is making between 350k and 500k over the lifetime of a corporate services customer. And this doesn't even account for the 3% annual price increase. So the unit economics of this business are quite extraordinary. But again, the ability to scale is just not in their control.
- [57:30]
Sean O'Malley
And when you put it that way, it's very hard to argue against this being an incredibly high quality business. And so I want to go back to discussing the company's returns on capital because I think this is such an important piece point for us to make sure we understand. Well, a business that is capital like this does tend to have high capital efficiency numbers, but if they have few options to reinvest capital back into to grow the business, and this is what I was alluding to earlier, then that just doesn't mean much. Right. You need to have investment opportunities and be able to generate high returns on those opportunities. And so I get the feeling that kind of like Verisign, as I mentioned earlier, they have a wonderful business, but if they don't have growth opportunities beyond raising prices that they can sustainably invest in every single year, then it's just very difficult to be the type of compounder that can turn into a five or ten bagger over time. And so is that about right in terms of how you think about the company's returns on capital and think about this business as, as being a compounder or not?
- [58:29]
Kyle Grieve
Yeah, that's a great point, Sean. So I mentioned earlier that ROIC actually isn't the best way to analyze OTCM's capital efficiency. So let me just get into that and then we'll get into the reinvestment part. So the reason that OTCM is in the rare category where ROIC just doesn't really work unless you make a lot of very heavy adjustments. And the reason for this is because the denominator part of ROIC or invested capital is actually zero or negative. So in 2025, OTCM had 33.6 million of customer prepayments sitting as non interest bearing current liabilities on the balance sheet. Now this essentially makes OTCM a negative working capital business, which is actually highly favorable because it means that OTCM's customers provide zero cost financing annually and persist. Now, another way of looking at capital efficiency specifically for OTCM is to look at returns on equity. But even this number isn't the most helpful as their 2025 gap net income was higher than their total shareholder equity, so their ROE comes in at a ridiculous 102%. Now obviously with capital efficiency, it's great to have high numbers, but like you mentioned, we have to circle back and connect that to actual value creation. A company with an ROE in triple digits is usually in a few situations. So the first is that it's in its infancy and it could rapidly create shareholder value, but just for a shorter duration of time. Second, it can reinvest into the business, but it lacks the ability to generate returns anywhere close to that ROE number if they decide to reinvest into the business. And third, they can just keep the ROE high, but they have to distribute the majority of profits to shareholders. Now, in OTCM's case, number three is probably the most descriptive answer. So if we look at their net operating profits after tax for 2025, I have a number in the range about $30 million. But when we look at dividends, they distributed $29.6 million and share repurchases at $2.9 million. So distributions are 100% of no PAT, meaning they basically aren't reinvesting back into the business. And that makes sense given their light track record of M and A. They've only invested 14.9 million on acquisitions that I mentioned earlier in Blue sky and EDGAR online.
- [60:32]
Sean O'Malley
It's such a great point because I think there are these details that can even trip up experienced investors. Right? ROE is this very solid metric, but it doesn't tell you much if the business can't compound its retained earnings. And yet OTCM has increased shareholders equity at about a 16% CAGR since 2020 actually. So despite paying out nearly all of their profits as dividends, how is it even possible that they actually have managed to compound their equity?
- [61:00]
Kyle Grieve
Yeah, so the answer here is in the details. I was very confused by this at first as well. So most of the increase in equity has actually come from additional paid in capital that's resulted from stock based compensation. And this ironically suppresses OTCM's true ROE. So net income is depressed by share based compensations, non cash charges and equity is simultaneously inflated by share based compensation. Now I won't tell you what the ROE number is because I think it just over complicates things. Just know that it's higher than that 102 numbers. But the important thing is that ROE has been really stable, never falling below 80% since 2017 and the 10 year average is 94%. So you know, this business is probably going to continue to have very, very high capital efficiency, but it's just not going to be reinvesting much back into the business as I just don't have a place to reinvest. And therefore I would expect the lion's share of its profits to be distributed back to shareholders in terms of dividends mostly and a little bit in share buybacks.
- [61:55]
Sean O'Malley
Let's shift gears here and discuss management. Now, because I know you're similar to me in that you place a large emphasis on management and look at management through a number of different lenses. So let's start with the CEO, Cromwell Colson. How would you evaluate his performance leading the company so far?
- [62:12]
Kyle Grieve
Yeah, so Cromwell Coulson has been a long tenured CEO, having been in that position with OTCM now for 29 years. Now given that tenure, you may be thinking he's the founder of the business, but interestingly, OTCM has been around since 1913 and was formerly known as a national quotation bureau. Now the one thing that I really admire about Coulson is his ability to maintain a long term focus. For instance, in their latest presentation, building long term shareholder value is one of their strategic priorities. And I think he's done a really good job on that front in his time as the leader of the business. So using fiscal AI, I can look back from 2016 until now and capital gains returns have improved at a 12% KER. Very nice. I can also see since 2016 they've averaged about a 4% dividend yield. So shareholder return has been around 16%, beating the S&P 500 over the same time period. Now if I use Buffett's rule number One to see how much shareholder value Cromwell has created. It's also quite good. So since 2016, OTCM has retained about $18.2 million. And over the same time period, he's created about $342 million in market cap value, along with $129 million in dividends. So the value creation has been very, very good. And this is all while shareholders have been basically minimally diluted and not having to be laden with debt. So total shares, As I mentioned, 2016 they were 11.1 million and today they're 11.8 million.
- [63:29]
Sean O'Malley
Incentives and transparency are so important to consider when looking at a management team and their ability to oversee your money as a shareholder. Right. You're trusting them to custody your financial resources. So with Colson being such a long tenured CEO, is that something you feel pretty good about? Is he a good steward of capital?
- [63:49]
Kyle Grieve
I would say yes in short answer, but let me expand on that. So I like to look a few years in the past at management to see just how they've done with the hand that they were dealt. So in Cromwell's case, he's been around for such a long time that, you know, the hand that he was dealt with in Buffett's terms are more of a question of how he's dealt with the cyclicality of the business model and whether he's candid on things like losses. So let's go over that. So in 2021, he told investors to evaluate management, quote, not on a quarter to quarter, not year to year, but every five to ten year basis. So I think Colson does a really good job signaling to investors that he's very long term oriented. Now in terms of transparency, a great place to look at this is through one of OTCM's acquisitions in Edgar. So they purchased it in 2022. And Colson in the same year admitted that Edgar Online wasn't instantly profitable. He said he would have looked smarter in the short term if they pay up 8 times revenue to 10 times revenue for an information business, but simply that that price just wasn't right for the long term benefit of shareholders. While Edgar weighed on margins over the next few years, Cromwell has repeatedly said that it's a long term project. Now if we look at the other acquisition that worked out a lot better, that was Blue Sky Data Corp. This was an acquisition that was most definitely a much quicker victory than Edgar. So after only 18 months, Cromwell said Blue sky was a fantastic acquisition. I wish we could do five more of them a year. It was 18 months to a wind where we got the technology consolidation, we switched people over to receiving the data from us. We re paper all the contracts, we stuffed much more value into the product. Now, since many of OTCM's business units have been around for just so long, it makes me think that he probably defaults to thinking pretty long term as many of these divisions and subsidiaries have been around for 10 plus years. He's also discussed another loss in OTC overnight and how it had nearly zero trading in its early days. So I'm pretty confident that he's transparent about both wins and losses. And I really appreciate that because at least you know, you have someone that you feel you can trust who's running your business.
- [65:44]
Sean O'Malley
It's refreshing, right? A lot of people love to openly discuss their wins, but being able to honestly discuss your losses is very appealing. And so I am glad to hear OTCM has what seems to be almost a superstar CEO leading it. But in terms of how well his compensation is aligned with incentives and managing capital for shareholders, is value creation for shareholders a primary goal behind management's bonuses?
- [66:12]
Kyle Grieve
Yeah, so as of 2026, Cromwell Coulson directly owns over 27% of the shares outstanding. So he has tons of skin in the game and he's been a very long term shareholder. So he's only had a modest decline from about 30% ownership back in 2017. And this wasn't even really the result of open market selling, but rather vested RSUs and a private sale to an institutional investor investor. But the ownership doesn't actually end there. So the Colson family holds an additional 1.3 million shares. So put together with Cromwell, the entire colson family owns roughly 35 of the company. Now when Cromwell became CEO, he took OTCM from a penny stock clearinghouse to what it is today. And he's held those shares through multiple market cycles including the tech boom, the GFC and COVID 19. Now other officers and directors combined own about 750000 shares. So if we remove the Coulson family and just keep Cromwell, they all together own about 35% of the company.
- [67:04]
Sean O'Malley
For a non founder CEO to be able to accrue that kind of stake in a company, I mean he's clearly been very aggressive about using his pay to purchase and hold on to shares. Or it could tell you on the flip side that the company has played very fast and loose with stock based compensation. But that doesn't really seem to be the case here since as you've outlined, the company has managed to prevent share count growth so they can't be too crazily aggressive with the stock based comp if they're managing that so well. But how about the rest of the management team? Do you like the way they're incentivized?
- [67:39]
Kyle Grieve
Yeah. So let me first quickly mention what the management team is making because I think that's a really, really important data point as I prefer to see management that hopefully, you know, isn't making multiples of what other comps in their industry are making. So president and C suite executives, including Cromwell Coulson, have total compensation ranging between about 550,000 to a million dollars. Cromwell is making about 800,000 in compensation, but let's compare that to industry comps. So NASDAQ has disclosed that Adina Friedman has a total comp package worth about 21 and a half million in 2024. And ICE's CEO has a comp package of about 19.8 million in 2024 as well. The CEO of the CBOE has a much more modest comp package in relation at just 3.3 million in 2024. So from what I could find, other executives at the three companies were all making well above what OTCM's comp is. But let's get back to one of my favorite parts of looking at compensation, which is how managers earn their bonuses. So in the 2023 shareholder letter Cromwell wrote, we believe multi year performance and long term value creation requires aligning decision makers, cash incentives, compensation with operating earnings and their restricted stock awards with sustainable revenue growth. Now, as far as I can tell, these two KPIs are still the two hurdles that management is incentivized on time. The revenue part isn't my favorite simply because if a business uses revenue alone to incentivize their management, they could just throw cost into the wind and spend as much as possible to just increase revenue while destroying shareholder value. But since they have this diluted EPS part of the equation, I think it does a great job in ensuring that value creation actually has to benefit shareholders as well. And because of that they can't just go around overspending, which as I've discussed isn't really an option anyways to earn their revenue based bonus. Now, RSA grants are aligned with revenue growth and cash bonus appears to be aligned with the EPS target. Now I couldn't find what exactly those hurdles specifically were, but from what I can tell it's about 50% in stock and 50% in cash. Now, it's very, very rare to see a business having a EPS KPI so I'm really, really glad to see it here. I think this is a pretty solid incentive program and it's clearly working quite well as revenue and diluted EPS have compounded at 11 and 12% annually over the last decade. But one final note that's really important is that in their 2025 annual report they said that performance hurdles for 2025 and 2024 had actually not been met.
- [70:01]
Sean O'Malley
You know, whenever I think about looking into the future to try and model a business's value, it's not something you want to put too much stock in, literally. Right. It's a flawed process that really by definition you can't do it perfectly and consistently. But still, I do think it is a worthwhile exercise to, to think about what can this business plausibly look like over the next three to five years. And given that this is a company with very monopoly like characteristics, it probably lends itself to having pretty good visibility into the future. That's what I've found with other monopoly like companies. So how do you see the next three to five years going for this business?
- [70:41]
Kyle Grieve
Yeah, I would agree with you there, Sean. I think the chances of this business existing in five years is very, very good and probably thriving as well. After all, you know, if you look at the National Quotation Bureau, the business that they eventually acquire has been around since 1913. So what I want to do right now though is look at whether this business specifically is going to be thriving, let's say five years from now. And I think it's pretty clear this business is going to exist. They carry negligible debt. The chance of them going bankrupt is very, very low. The fact that it's just one of the very few ways for non SEC registered issuers to list on US markets is a huge advantage that I think can continue to endure for a very long time, which helps protect otc, Link and corporate services. And since they're just one of these businesses that can continue gathering data from this cohort of the market, it's also vital in protecting the business's market data licensing segment. Now, like you mentioned, I think I completely agree with you. The business does have a lot of embedded predictability. So things like innovation and AI are just very, very unlikely to disrupt this business simply because much of its strong competitive advantage stems from regulatory bodies that protect competitors from entering its niche and not necessarily from having some sort of technology that's just super far ahead than its competitors, which is something that as we're seeing now is being eroded. Now in order for OTCM to continue to thrive. I see kind of three parts of the business that must continue developing. So the first one is to continue flexing its pricing power. You've already mentioned that for a business that can't reinvest in order to have organic growth, a lot of times you have to rely on pricing power in order to continue growing. So corporate services has this fee escalator and it's grown cumulatively about 67% since 2016. If they continue increasing prices at about 5% per year without triggering churn above their historical 5% rate, this will meaningfully add to their profits. And second is that given their M and A activity into Edgar Online and Blue Sky Data, they'll need to continue to add professional users to their market data licensing segment. So this is an area of emphasis as professional users are a lot more sticky and cycle resistant versus retail users. But again, given the kind of sketchy work on the M and A, I would rather they figure that out in kind of a more internal way. And third here is to maintain good relationships with regulators. If they get on the wrong side of regulators and they want to punish otcm, they could do so by just opening up the Nasdaq or New York Stock Exchange to non SEC regulated issuers. And this would obviously be very, very bad for otcm.
- [73:11]
Sean O'Malley
Well, I know you're the big Charlie Munger fan, even though I've got poor Charlie's Almanac sitting behind me at my desk. And one of his favorite analysis tools was something called the cinch test. And so the cinch test is this like thinking tool to help decide the ease in which a business will have stuff in succeeding. And so would you say OTCM is a cinch?
- [73:35]
Kyle Grieve
Yeah. So the cinch test is interesting and it's kind of hard, right? Because I mean, it relies on you having a lot of conviction. And from what I've learned, I can have a lot of conviction and I can be completely wrong. But when I look at otcm, I think that compared to a lot of other businesses that I've looked at, I would say it's definitely it scores higher on that cinch test compared to some of the other businesses. So if I look at each segment differently, I think the corporate services and market data licensing businesses are probably pretty close to cinch territory. So OTCM is still out there winning new business, but since they're one of the only options out there, they really don't have to work super hard on that part of the business and they're going to continue to get new issuers and new subscribers, the fact that they have these 95% renewal rates shows that customers are mostly happy. And even if they are unhappy, there just aren't that many viable alternatives. But if we look at the OTC link part of the business, I don't really think that's a cinch. For instance, while they added Blue sky and Edgar online, these both required a lot of work and active management to ensure that it worked out well. And as I've already shown the OTC link, ATS subscriber count has been declining over the decades. So this could be some sort of melting ice cube. But the beautiful part about this business is that since it's been exposed to a lot of cyclicality, investors can look at its history and be pretty confident that it's probably going to continue to generate profits in both up to and down cycles. Now this is just an extremely rare attribute for businesses that are exposed to cyclicality. But for patient investors that are willing to patiently wait through cycles, owning the business can be very well worth it.
- [75:06]
Sean O'Malley
So I think we're finally at that part, and it's one of our favorite parts of these episodes and that is where we try and determine what the business is worth. So, putting everything together, how do you think about OTCM's intrinsic value?
- [75:19]
Kyle Grieve
Yeah. So put it simply, I think in the future OTCM is probably going to be worth more than what it is today. But let's go over some of my assumptions and figure out just how much more it'll be worth in the future. So I'm basing my numbers on current profits. So for the full year 2025, profits were 31 million. Now, as for growth, I think we can continue to see low double digit growth around say 12 annually. Now keep in mind, there's 100 going to be years where growth accelerates rapidly. If the market is euphoric and trading volume increases. Now, this is obviously going to bring in additional issuers, higher trading activity, and more retail investors interested in market data licensing. But as we've seen, as that euphoria fades, margins and profits tend to compress. So 12% to me feels like a pretty reasonable long term assumption. But I will say the path to get there is probably going to be very uneven. So even with this growth in some of the less cyclical areas of the business, I still expect periodic spikes and pullbacks over time. Now, there are a few drivers embedded in the net income growth. First is organic growth from new subscribers and product offerings. So OTCM has done a great job expanding its product suite over the years. And there will always be demand from companies seeking access to US Capital markets. Second is in margin expansion. Margins have gradually improved, demonstrating the business's scalability. We can continue to eke out incremental gains, potentially reaching around maybe 29% over time. So with these assumptions, we estimate net income in 2030 at roughly $55 million. So the multiple has only dipped on this business below 20 once in 2020. So for most of the past decade, it's hovered around kind of an average of around 25 times, which I think is probably a pretty fair multiple for a very high quality monopolistic business, which also has a high amount of recurring revenue, such as OTCM. So if we apply a 25 times multiple to $55 million, that gets us to a market cap of about $1.3 billion. Enterprise value should be similar, given OTCM's minimal net cash and minimal debt position. So if we divide that up by projected shares outstanding in 2030, and we factor in a modest dilution from SBC, this yields a per share value of roughly 113. Now, based on today's price of 54, that implies an IRR of about 16 plus. You're getting about a 4% dividend yield on top of that. Now, I will mention that I looked at this business back in a lot of more detail back in 2023, and I took a pass. And the reason for taking that pass had literally nothing to do with the quality of the business. You know, I think given the margins, the capital efficiency, the competitive advantages, and the alignment with management, it's very, very obvious that this is a high quality business. But my issue back then was simply that it was unlikely to grow earnings above my 15 threshold. But with a threshold for the intrinsic value portfolio being 12%, this is actually a business that maybe we should give more consideration to. I will say, I think with a business like this, I'd love to try and catch it when the PE drops below 20 times. That way you get growth not only from earnings and dividends, but a nice little multiple expansion tailwind as well, to give you an extra margin of safety.
- [78:15]
Sean O'Malley
Why, it's a pretty compelling picture that you're painting here. And just for context for listeners at home, our colleague Daniel Monk and I have spent the last 16 months building out a portfolio of stocks that we call the intrinsic value portfolio. And in that time, we have turned over a lot of rocks. We've covered almost 70 different companies. And out of all those ideas, we have 15 of them in our portfolio today. And so if you Want weekly updates on the portfolio. I would definitely encourage you to subscribe to our free Intrinsic Value newsletter in the show notes for this episode. But yeah, when I think about how OTCM could fit into the portfolio, it would be one of our smallest holdings in market cap terms. But I don't think that bothers me because the business itself is so stable and it's been around, you know, after a hundred years, it's clearly not going anywhere from the way things look today. And still though, I can't shake the feeling, especially around regulations, that again, there's just a lot of unknown unknowns for me. And so if we are going to add it to the portfolio, I think I'd want to make it a tracker position for now, maybe only 2% to just get some skin in the game and build conviction in the investment. And if we get a market panic that sends it well below 20 times earnings, that would be a great chance to make a much bigger bet on this company. But that's how I'm thinking about it for now. And again, if you want more updates on the decisions that we make around the portfolio, you just go ahead and subscribe to our Intrinsic Value newsletter.
- [79:37]
Kyle Grieve
Yeah, I pretty much have no disagreements at all with that, Sean. I tend to stay away from businesses that are heavily propped up by regulation for the exact reason that you just gave. So I feel it's very difficult to truly wrap my head around the odds that these regulations will change. And if regulations were to change, it's obviously going to impact OTCM on a very, very large scale. But, you know, I can see taking comfort in the fact that they've been doing this for a long time. But it's still a risk that I feel relatively uneasy about. And to your point on position sizing, if we were to add this to the intrinsic value portfolio, I think a 1 to 2% position just to get some skin in the game and make sure we maybe even follow it closer and maybe get a better understanding of those regulations is a good way to at least expand our circle of competence inside of that business. But again, we'll see how that plays out.
- [80:22]
Sean O'Malley
Okay. All right, folks. Well, on that note, I think we'll close off today's episode. But before we do that, I will leave you with a quote that I think it does a pretty good job explaining some of the strengths of OTCM's business model. And it comes from Peter Thiel. He says, when you have a monopoly, you can raise prices. It's as simple as that. So OTCM has clearly shown an ability to raise prices over the years while keeping a large percent of its customer base. And if you can find businesses that have these characteristics, chances are you're looking at a pretty wide moat business. So with that, we'll see you all next time.
- [80:57]
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