Reservoir Media Q4 2023 Earnings Call Transcript

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May 31, 2023

There are 6 speakers on the call.

Operator

Good morning, everyone, and thank you for participating in today's conference call to discuss Reservoir Media's Financial Results for the 4th Quarter and Fiscal Year 2023 Ended March 31, 2023. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. You will then hear an automated message advising your hand is raised. Please be advised that today's conference is being recorded.

Operator

I'd now like to turn the call over to Ms. Jackie Marcus with the Alpha IR Group, who will review our agenda today and the company's forward looking statements. Jackie?

Speaker 1

Thank you, Shannon. Good morning, everyone, and thank you for participating in today's earnings conference call. Reservoir Media issued a press release with results for its Q4 fiscal year 2023 ended March 31, 2023 earlier this morning. If you did not receive a copy of our earnings press release, you may access it from our Investor Relations section of our website at investors. Atreservoirmedia.com.

Speaker 1

With me on today's call are Golnar Khosrowshahi, Founder and Chief Executive Officer and Jim Heidelmeyer, Chief Financial Officer. As a reminder, this call is being simultaneously webcast and will be recorded and archived on the Investor Relations section of our website. Before I turn the call over to Golnar and Jim, I'd like to note that today's discussion will contain forward looking statements that reflect the current views of Reservoir Media about our business, financial performance and future events and as such involve certain risks and uncertainties. Our expectations, beliefs and projections are expressed in good faith and we believe there is a reasonable basis for them. However, there can be no assurance that our expectations, beliefs and projections will result or be achieved.

Speaker 1

Please refer to our earnings press release and our filings with the Securities and Exchange Commission for more information on the specific risks, uncertainties and other factors that could cause our actual results to differ materially from our expectations, beliefs and projections described in today's discussion. Any forward looking statements that we make on this call or in our earnings press release are as of today, and we undertake no obligation to update these statements as a result of new information or future events, except to the extent required by applicable law. In addition to financial results presented in accordance with generally accepted accounting principles, we plan to present during this call certain financial measures that do not conform to U. S. GAAP if we believe they are useful to investors or if we believe they will help investors to better understand our performance or business trends.

Speaker 1

Reconciliations of these non GAAP financial measures to the nearest comparable GAAP measures are included in our earnings press release. I would now like to turn the call over to Golnar. Golnar?

Speaker 2

Thank you, Jackie. Good morning, everyone, and thank you for joining us today to review our Q4 fiscal year 2023 results. I'm pleased with the progress our company made over the course of fiscal year 2023 as we continued to strategically deploy capital for future growth while enhancing value for our robust roster of talented artists and creators. Fiscal 2023 marked another year of momentum for Reservoir and the entire music industry with consistent secular tailwinds and organic industry growth against an uncertain macroeconomic environment. As a result of the healthy industry momentum and our consistent execution, we were able to surpass the high end of our revenue guidance range and finish within our guided adjusted EBITDA range for the fiscal year.

Speaker 2

We are encouraged by the top line growth that our business continues to achieve, and we expect this trend to continue as we work to ensure that our artists' music is widely consumed and successfully monetized. To that end, we saw another quarter of healthy organic growth from our best in class value enhancement initiatives to finish the fiscal year with an organic revenue growth rate of 8%. A portion of our growth in the 4th quarter can be attributed to the landmark achievement of bringing Grammy winning hip hop trio, Della Sol's iconic catalog to streaming platforms everywhere for the first time. This was a highly anticipated event, and we were thrilled to partner with the group and bring their music to the masses. Our Recorded Music segment continued to perform well, reporting another quarter of double digit growth, while our Music Publishing segment was down 8% for the quarter due to the segment's exceptional performance in the Q4 of fiscal 2022.

Speaker 2

Before Jim goes into further detail regarding the financial drivers for the Q4 and the fiscal year, I'd like to spend a few minutes on the trends we are seeing across the music industry. Over the past 12 months, the industry remained decoupled from broader economic headwinds and achieved overall organic growth. According to recent IFPI data, revenues grew across both physical and digital formats in 2021 2022. The continued rise of digital consumption across streaming platforms demonstrates the vitality of music in our everyday lives. This trend is also evidenced by Spotify's recently released subscriber growth, which exceeded the leading streaming services expectations.

Speaker 2

As digital streaming paid subscriptions increase and retentions rates grow, Reservoir is positioned favorably to benefit from the continued demand for digital consumption of music. One area we are looking at closely is the impact and opportunities around generative AI. There are a range of issues around copyright, likeness and other regulatory considerations that arise from its progress and the legal implications of this kind of machine learning are already knocking on our door. From our perspective, we want to make sure all those issues are addressed, but we don't believe AI poses a direct challenge to our business of monetizing musical artistry. We are already living in a world where authenticity drives value.

Speaker 2

It is clear that people love music and the relationship between music and the consumer is deeply personal. That relationship can consist of an experience, a moment in time, the love for a favorite artist, a live performance or a memory. It extends beyond notes and words. That said, auto generated music facsimiles and composites will have a place in the market, and it will be exciting to see what forms that takes and how creators incorporate AI to inform and enhance their work. Further, machine learning has the potential to be used as a tool in the industry in novel ways, improving upon our processes and creating greater efficiencies, particularly in microlicensing and metadata management.

Speaker 2

Our team is working to understand the potential opportunities for AI as well as ensuring our artists are properly compensated for their work by this new technology. Turning to our performance. Despite strong industry trends, we took the necessary steps over the past year to effectively navigate a challenging macroeconomic environment with the levers provided by our efficient operating model and strong financial profile. Our business consistently produces predictable cash and cash flow that we can opportunistically deploy to drive future growth. During the fiscal year, we allocated capital to several margin accretive deals across genres.

Speaker 2

As I previously mentioned, we brought De La Soul's iconic catalog to all streaming platforms for the first time ever. We also broadened our emerging market portfolio with the signing of Arab superstar Mohammed Ramadan, Egyptian label 100 Copies, Lebanese music company Voice of Beirut, Indian rappers MCL, Taf and Deivo and producer Stunna Beats. Expanding our portfolio in these important emerging markets, but especially within the Middle East, is highly important to our overall strategy and a key differentiator for us. With our network and ability to purchase content at attractive multiples, This region presents significant opportunity as we work to become the largest holder of Arabic music copyrights. We also continue to bolster our catalog with the additions of jazz legend, Sonny Rollins swing icon, Louis Prima and Rock and Roll Hall of Famers Matt Sorum, Phil Manzanera and Dion.

Speaker 2

As it relates to hip hop, we signed deals with multi platinum producers Marley Marle and Many Fresh. We've not only grown our catalog in fiscal 2023, but I'm really pleased about how we've added diversity across eras and genres, which further insulates our business from broader market swings. Overall, we have not slowed down in our plans to build upon our robust roster of talented artists and creators. I'd like to take a moment to discuss some of our more significant recent signings and acquisitions. We recently announced a deal with Miami Sound Machine Co Founder and Lead Songwriter, Tiki Garcia.

Speaker 2

This deal includes rights to Kiki's entire catalog, including the international hit song Conga performed by Gloria Estefan and the Miami Sound Machine, which he solely penned. This marks a notable expansion of our rights into Latin American music, and we are proud to do so with such a key figure like Kiki and his evergreen titles in this genre. We expanded our portfolio with Grammy nominated writer and producer, Dennis Lambert. This deal includes his entire catalog featuring hits such as We Built This City by Starship and Night Shift by the Commodores. Dennis' work have impacted music charts for decades, and we are honored to be the stewards of his catalog.

Speaker 2

This deal bolsters our existing copyright interest in Night Shift, which we originally came to own through our acquisition of the catalog of The Commodores Walter Orange. We are proud to now represent a greater share of this incredible song. We signed rapper Armani White to his first publishing deal. Armani had a meteoric rise to popularity last year with his global viral Billie Eilish. The song exploded on TikTok with over 40,000,000,000 views and more than 250,000,000 Spotify streams.

Speaker 2

We believe this only scratches the surface of his enormous potential and look forward to supporting him as he continues to grow. We added to our active songwriter roster by signing Grammy nominated writer producer Christian Stalneker to a publishing deal, which includes his number one hit co write, Thank God by Kane Brown and Caitlin Brown. The track held the top spot at country airplay for 2 weeks and also charted on the Hot 100, Top 40 Radio and American Top 40 Hot AC charts, demonstrating its success across genres. We appreciate Christian trusting us with his catalog, and we are excited about what the future holds. To further diversify our business, we recently announced to joint venture with American Idol producer 19 Entertainment, in which we will sign publishing deals with the talented contestants from American Idol.

Speaker 2

We are delighted to be working with the incredible people at 19 Entertainment and are excited about the synergies and opportunities that this partnership can bring. We have not slowed down in our plans to build upon our robust roster of talented artists and creators. The progress we made in fiscal 2023 will strengthen our portfolio and support growth prospects in fiscal 2024 and beyond. Looking ahead, our deal pipeline is solid and includes more than 250 potential targets across genres with a current value of over $1,900,000,000 As we look forward, we remain well positioned to benefit from industry tailwinds, and we are excited about the strength of our business going into fiscal 2024. We are issuing fiscal 2024 guidance today for revenue and adjusted EBITDA, which represents growth of 6% for revenue and 9% for adjusted EBITDA at the midpoint compared to fiscal 2023.

Speaker 2

We remain confident in our ability to grow the company through strategic business development opportunities and in our capital deployment for future top line growth and margin expansion opportunities. With that, I'd like to turn the call over to Jim to discuss our Q4 fiscal year results as well as our fiscal 2024 guidance in greater detail. Jim?

Speaker 3

Thank you, Golnar, and good morning, everyone. As Golnar stated, we're pleased to report another strong year of financial and operational results. We delivered on our guidance metrics and significantly enhanced and diversified the business, while positioning the company for long term stability and growth. Now let's talk in greater detail about financial results for the Q4 fiscal year and our expectations for the next fiscal year. Revenue for the 4th fiscal quarter was $34,800,000 which was relatively in line with the Q4 of fiscal 2022.

Speaker 3

As a reminder, last quarter we called out the fact that our international revenues were weighted more heavily towards the September March quarters in the past, but we have been able to smooth that collection somewhat in fiscal 2023. We also had significant revenue in Q4 of last year related to the Dubai Expo event that did not exist in the current fiscal year. Both of these factors impacted our year to year Q4 comparisons, but again the results are in line with our expectations. In terms of the components, our top line results in the 4th quarter were driven by the decline in the music publishing segment, which was largely due to the lower performance, sync and other revenue. Lower revenue in the Music Publishing segment was almost completely offset by higher revenue and the Recorded Music segment, which was driven by strength in digital and physical sales.

Speaker 3

Looking at our operating expenses for the quarter, Our overall cost of revenue decreased 5% versus the prior year quarter. Our depreciation and amortization costs increased year over year due to our continued catalog acquisitions. Company administration expenses saw a 1% decline from the prior year. From an operational performance perspective, in the 4th quarter, OIBDA increased 3% year over year to $14,400,000 while adjusted EBITDA decreased slightly to $15,200,000 The decrease in adjusted EBITDA in the 4th quarter was largely driven by lower revenue versus a strong Q4 in fiscal 2022. Interest expense was $4,200,000 for the quarter compared to $2,900,000 in the same period last year.

Speaker 3

Net income for the Q4 of fiscal 2023 came in of $2,300,000 versus $8,900,000 in the Q4 of fiscal 2022. This resulted in diluted earnings per share For the quarter of $0.04 compared to $0.14 per share in the prior year period. Lastly, our weighted average diluted outstanding share count is 65,000,000. Moving to our full fiscal year 2023 results, revenue came in at 122,300,000 a 13% increase year over year and above the top end of our previously stated guidance range. Our top line growth for the year was largely attributed growth in both the Music Publishing and Recorded Music segments, which posted growth of 9% 18% respectively.

Speaker 3

Looking at our operating expenses for fiscal 2023, our overall cost of revenue saw a 9% increase from fiscal 2022. Administration expenses for fiscal 2023 increased 23% from the prior year due to the ongoing cost of being a public company as well as marketing costs related to relaunching the De La Sol catalog on fiscal formats and bringing it to streaming services for the first time ever. OIBDA in fiscal 2023 increased 12% year over year to $43,100,000 while adjusted EBITDA also grew 12% to $46,300,000 These year over year increases were primarily driven by higher revenues across the business and effectively managing operating expenses. Our interest expense was $14,800,000 for the full year, which was an increase of 35.7% compared to $10,900,000 last year. Net income for fiscal 2023 came in at $2,800,000 versus $13,100,000 last year.

Speaker 3

The decline for the year was due to a decrease and the gain on fair value of swaps, a one time tax expense related to a change in the U. K. Tax rate, higher interest expense and a loss on the early extinguishment of debt, all of which were partially offset by higher operating income. This resulted in diluted earnings per share for the year of 0 point compared to $0.22 per share for fiscal 2022. Lastly, our weighted average diluted outstanding share count for the full year is 64,800,000.

Speaker 3

The full year results are a testament to our ability to execute on our acquisition strategy, capitalize on our value enhancement opportunities and ultimately show the margin expansion opportunity embedded in the business. Turning to our segment breakdown for the quarter, let's look at Music Publishing first. Music Publishing generated revenue of $23,200,000 in the 4th quarter, which represents an 8% decline from the same period last year due to lower revenues in Performance, Sync and other revenue streams. The Other Revenues segment accounted for the most significant drop with Amusa Publishing due to the non recurring revenues recognized in the prior year period from Dubai Expo. Synchronization revenue in the Publishing segment totaled $4,200,000 resulting in a 10% decrease from the Q4 of last year.

Speaker 3

Mechanical revenue within the Music Publishing segment posted a 28% increase year over year to $1,400,000 This was driven by an increase across many catalogs inclusive of collections for back periods. Our Recorded Music segment continued to deliver strong results in the 4th quarter, generating $10,800,000 in revenue, representing an increase of 10% versus the prior year quarter. All revenue types within our Recorded Music segment, excluding synchronization, delivered year over year increase. Growth in the recorded music segment in the 4th quarter was led by digital revenue growth of 7% largely due to the continued growing consumption of music through streaming services. Physical revenue experienced rapid growth on the recorded side with a 69% top line increase driven by the release of De La Soul's 3 Feet High and Rising.

Speaker 3

The decline in synchronization within Recorded Music is really a timing issue as sync licenses are not uniform from 1 quarter to the next. The overall increase within the Recorded Music segment was primarily driven by the strong results within digital revenue as streaming across platforms globally continues to ramp. Our full year segment results are much more aligned with the broader music industry trends as we generated top line growth of 9% within our music publishing segment through our digital and synchronization revenue streams. Both of these pieces posted 18% year over year growth. Recorded music also saw significant growth on the top line as revenues increased 18% compared to fiscal 2022.

Speaker 3

This was driven by the digital revenue streams, which saw year over year revenue growth of 25%. Neighboring rights also saw significant growth in the year, up 45% from fiscal 2022. This exemplifies the efforts of our value enhancement team and the financial benefits of having a proprietary system to monetize our assets. Let's move on to our balance sheet. At the quarter end, our credit facility was at roughly $317,800,000 We closed the quarter with total liquidity of $147,100,000 comprised of $14,900,000 of cash on hand and $132,200,000 available under our revolver, which gives us the capital to fund our strategic objectives.

Speaker 3

In terms of total debt, we ended the quarter at $311,500,000 which was net of $6,300,000 of deferred financing costs and thus we maintained $296,600,000 of net debt. That compares to net debt of $252,200,000 as of last fiscal year end. Lastly, I'll note that almost half of our outstanding debt is hedged at a very attractive interest rate, which will limit our exposure to rising interest rates in the coming year. Let's shift gears to our outlook for fiscal 2024. As we anticipate continued growth for our business and expect fiscal 2024 revenue to be in the range of $127,000,000 to $132,000,000 which represents a 6% increase versus fiscal 2023 at the midpoint.

Speaker 3

We also expect adjusted EBITDA to be in the range of $49,000,000 to 52,000,000 which at the midpoint implies 9% growth. In terms of cadence for the year, we expect phasing in fiscal 2024 to be similar to fiscal 2023. We are continuing to work to smooth the impact from the cyclicality of our earnings results driven by the timing of semi annual payments and we'll continue to mitigate the cyclicality and fiscal 2024. I would also note that our quarterly spread of revenue may be affected by the CRB III accrual that we made in Q2 of fiscal 2023, whereas we don't expect to make any true up for the final resolution of that retroactive adjustment until Q4 of fiscal 2024 at the earliest. I also want to note that we've shifted our approach to guidance somewhat for fiscal 2024 and have primarily focused on expected results inclusive of organic M and A.

Speaker 3

We believe this is more prudent moving forward and should we complete any larger deals as the year progresses, we will update our guidance accordingly. As we look forward to what's in store for fiscal 2024, we expect to close several accretive deals that will expand and diversify our portfolio of assets. We are also focused on effectively managing our operating expenses to further improve margins throughout the year. With our solid financial profile and strong balance sheet, we have a business that delivers highly predictable cash flows that we will deploy to create value for our stakeholders. Despite continued macro volatility, we're confident in our ability to achieve our guided ranges for the coming year and look forward to updating you all on our progress later this summer.

Speaker 3

With that, I'll now pass the call back to Goldar.

Speaker 2

Thank you, Jim. The diversity of our roster and solid financial profile will allow us to navigate any macroeconomic backdrop. Music continues is to touch the lives of millions around the world. And with an increase in digital streaming consumption of our artists' work, our company is well positioned for fiscal 2024. The consistent cash flow produced by our business provides financial stability amidst what could be uncertain times in the broader economy in the coming quarters.

Speaker 2

Our pipeline remains robust and with the significant cash generated by our business, we will be rigorously analyzing deals and selectively deploying capital to achieve the highest return possible for our company and our stakeholders. With that, we will now open the line for questions.

Operator

Thank you. Our first question comes from the line of Richard Baldry with ROTH MKM. Your line is now open.

Speaker 4

Thanks. Can you maybe talk about the M and A pipeline given the changing macro backdrop? I feel Like I ask the same question every quarter, but it always changes a little bit each quarter. There are changes in who you're seeing at the table, changes in the expectations of the targets that give you some confidence in the ROIs that you need to hurdle to get to your targets? Thanks.

Speaker 2

Hi, Rich, it's Golnar. As far as the M and A pipeline goes, I think that As we look at it, feedback that I would give you is somewhat anecdotal. I think we're seeing all the same parties at the table. One would expect there to be some sort of significant shift in pricing and we're not really seeing a significant shift in pricing. I think that there is a category of The finite high quality assets that will continue to command a premium multiple as a result of their scarcity.

Speaker 2

The deal flow remains robust. People continue to be interested in monetizing their catalogs. But beyond that, I mean, volume and pricing, do not seem to have moved with any sort of significance. Okay.

Speaker 4

And when you think about your guidance for the year ahead in terms of organic growth, Is there a way to piece apart the increases in royalty rates as a backdrop and usage or The demand pull side through on pricing and or overall adoption, it feels like if you take all those three pieces, your guidance might look a little bit conservative. Thanks.

Speaker 3

Yes. One of the hey, Rich, it's Jim. One of the things that we always want to be careful about With guidances is not being too aggressive or double counting the effect of some of the tailwinds that we see. So Oftentimes, when we're looking at guidance and we're looking at industry growth, let's say that that's targeted at 7%, 8%, whatever some of the different outlets might put that at. We are typically taking the view that Many of those factors that you just touched in or touched on are baked into that number.

Speaker 3

Do we think that there is upside to that number? I certainly do, but we're not going to be overly aggressive with how we look at that.

Speaker 4

Okay. And last for me, you talked a lot about international expansion and maybe higher available ROIs there. You talked about how you feel about the depth and breadth of the team you have to address those types of markets. You think you'll be adding in additional resources as you increase your focus in those markets? That's it for me.

Speaker 4

Thanks.

Speaker 2

So we have an existing team there that is well staffed and as we have done in all parts of our business As the demand is there and the workflow is there and the infrastructure that we need warrants it, then we will add to that. But It has been one of the reasons we have been able to execute on transactions and deploy capital is that we have boots on the ground, people who are extremely knowledgeable about the region and are able to source deals and manage them through that sourcing process and to close on those transactions. And we firmly believe that that is the way to expand into these emerging markets.

Speaker 4

Maybe last for me. When you think about those markets, is the attraction based more on sort of the pricing of the assets you can get today? Or do you think it's based more on maybe an under penetration of digital and under assertion of rights, things that can improve over time that would make those the ROIs on those assets even better? Thanks.

Speaker 2

I think it's a bit of both. We are constantly looking at How we deploy capital most efficiently and if we can do so at more attractive pricing for quality assets, then that's certainly a preference. But I do think we are looking at a market that has some pretty great underlying growth potential as a result of streaming penetration, subscriber growth and a number of other factors. And it's both our interest is those in the attractive pricing we can get now and the future growth and value possibilities.

Speaker 4

Great. Thanks.

Operator

Thank you. Our next question comes from the line of Alex Fuhrman with Craig Hallum Capital Group. Your line is now open.

Speaker 5

Hey guys, thanks for taking my question and congratulations on a really strong year. Wanted to also ask about The guidance, you guys have done a really good job over the past 3 or 4 years of growing organically above and beyond The industry growth rate, it seems like what you're guiding to for this year is a little bit closer to that Industry growth rate, is that in any way a function of just simply the catalog getting larger and it's harder to find Those really unique under monetized opportunities. And so inevitably growth will kind of converge with the industry growth rate or is there anything that you're maybe seeing out there in the broader industry that suggests that the growth rate over the last couple of years might slow down a point

Speaker 3

Hey, Alex, it's Jim. Certainly, I think when we think of guidance, We want to be realistic in what we guide to, but we always strive to do better than where we set that bar. I think with respect to some of the opportunities over the past couple of years, when we have An acquisition like a Tommy Boy where maybe we saw an opportunity for significant value enhancement, that's certainly going to allow us to as we execute on that to show results that have really good organic growth. And we're always looking for those types of opportunities. But as we are maybe being a little bit more conservative in our M and A Within our guidance where we talk about just building in organic M and A opportunities, I think that you're naturally going to see that anticipated growth rate come down a little bit.

Speaker 3

But again, it's our goal to always do better than where we set the bar.

Speaker 5

Okay. That's really helpful, Jim. Thank you. And then you mentioned the big Tommy Boy Acquisition, as we think about the 250 targets that I think, Golnar, you mentioned that you have in the pipeline, Are there any that are really significant of that size? I imagine the bulk of those 250 would be smaller kind of tuck ins, but are there any kind of noteworthy, really significant targets that you're looking at that could be similar in size to Tommy Boy?

Speaker 2

There are a couple sprinkled in there, but for the most part, we're looking at more of those deals that have historically been in our We thought that's around the sort of $40,000,000 to $60,000,000 range, but there are a couple of more sizable transactions in there.

Speaker 5

Okay. That's really helpful. Thank you both.

Operator

Thank you. And I'm currently showing no further questions at this time. I'd like to hand the call back over to Golar Khosrow Sahi for closing remarks.

Speaker 2

Thank you, operator. Our performance in the Q4 fiscal year is indicative of both the strength of our team at Reservoir and the quality of assets we've assembled. I thank you for joining us this morning and we look forward to updating you on our progress on our next call.

Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.

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