Q3 2022 Reservoir Media Inc Earnings Call
Okay.
Good morning, everyone and thank you for participating in today's conference call to discuss reservoir Media's financial results for the third quarter of fiscal 2022 ended December 31 2021 at this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer.
Session to ask a question during that session. Please press star one on your telephone.
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 statement Jackie.
Thank you operator, good morning, everyone and thank you for participating in todays earnings Conference call Reservoir Media issued an earnings press release with the.
Our results for its third fiscal quarter of 2022 ended December 31, 2021 earlier this morning.
You did not receive a copy of our earnings press release, you may access it from the Investor Relations section of our website at investors Dot reservoir Dash media Dot com.
With me on today's call are Goldmark Cobra.
<unk> founder and Chief Executive Officer, and Jim <unk>, Chief Financial Officer of Reservoir media.
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 Golar and Jim I would 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.
There can be no assurance that our expectations beliefs, and projections will result or be achieved.
Please refer to our earnings press release, and our filings with the Securities and Exchange Commission for more information on the specific risks.
Certain fees and other factors that could cause our actual results to differ materially from our expectations.
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.
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.
<unk> 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 Golar Golar.
Thank you Jackie and good morning, everyone and thank you for joining us today I'm extremely excited to be here today to discuss our third fiscal quarter. During the period, we continued to execute on our strategy of building a strong portfolio of award winning music, bringing new song writers artists and catalog.
<unk> into the fold.
This helped us build significant momentum and deliver strong financial performance and our second quarter as a public company.
Before I turn the call over to our CFO , Jim <unk> for a deeper dive on our third quarter financial results, let's discuss the significant process progress we made in the quarter and our excitement around the overall vibrancy of the music industry.
The broader music industry is off to a strong start in 2022 building off a record setting year in 2021, where global on demand song streams were up over 26% compared to the prior year.
This has been driven by continued streaming growth across emerging markets. The ongoing proliferation of new novel access points like video gaming and social media as well as the resurgence and impressive growth in vinyl album sales and the ongoing strength of digital music consumption through various streaming platforms.
We have and will continue to benefit from these industry trends, especially as our portfolio continues to grow both in size and diversity.
As you will cover in more detail the healthy industry performance, coupled with strong execution by our team the momentum of our business and the opportunities. We see ahead has allowed us to increase guidance on both revenue and adjusted EBITDA.
As we've said previously we believe we can exceed the industry healthy organic growth based on our operating philosophy and the platform we have built.
But we are also seeing attractive opportunities to grow our portfolio, even amidst a backdrop of some high profile high priced catalog sales.
Since our last earnings call. We have made several strategic investments in assets. We believe have significant potential for greater value enhancement and we are honored to work with a growing list of very challenge at creators.
The diversification of our roster across artists genres, and musical eras represents an important component of the uniqueness and differentiation that we bring to the market.
For example in mid December we announced a publishing deal with four time Grammy winner. Michael League is instrumental band Snarky Puppy and his company Roundup music, which represents just collaborators.
We also expanded our foothold across a variety of genres, including RMB two up hip hop pop at ADM. We have with the addition of songs by Hall of Fame songwriter Dallas Austin the.
The founder and lead singer or the <unk> the late <unk>, Paris, <unk>, the Grammy and BMI Award winning song writer and producer whose credits include songs with John Legend at Demi Lovato, including Levada five time platinum hit sorry, not sorry, and the late Grammy winning DJ.
A songwriter and producer Fred richer, who alongside his longtime creative partner, David Guetta contributed to the most downloaded song of all time in the United States I got a feeling by the black Ip's.
Lastly, our presence in Nashville continues to exceed our expectations as we announced earlier this year the acquisition of country Music Star Travis trends publishing and recorded music catalogs as well as the producer catalog of Nashville Hall of Famer Buddy Kennon, which brings his 25 years of.
Kenny Chesney hit collaborations to reservoir we.
We welcome all of these artists into the reservoir family.
We remain steadfast in our commitment to scale the business through accretive M&A with the objective of welcoming high quality music and talent to the company, while driving operating leverage.
Let's turn to our quarterly performance.
In the third fiscal quarter, we saw growth across all our key performance metrics.
We posted $27 1 million in total revenue, which represented a 26% gain over the year ago period, and also included 15% organic growth.
Within the segments, 68% of our revenue came from music publishing 30% from recorded music and 2% from other sources.
Consistent with broader industry trends I noted earlier, we saw 9% annual growth from physical sales due to increased demand for vinyl and 217% annual growth from recorded digital revenue.
We are continuing to manage our cash flow to support additional acquisitions, while also prudently managing our costs. These actions resulted in a 26% improvement in our adjusted EBITDA.
With that I will turn the call over to Jim to discuss our financial performance during the quarter in more detail Jim.
Thank you Omar and good morning, everyone with our second quarter as a public company in the books I cannot be prouder of what we've accomplished and we're excited for what the future reservoir holds we continued to execute against our strategy, which drove double digit growth.
Top and bottom line basis in the quarter.
Let's talk in greater detail about financial results for the third quarter and how we see the rest of our fiscal year playing out.
As a reminder, all percentage change references that I make unless explicitly stated otherwise we'll offer comparisons between Q3 fiscal 2022 and Q3 fiscal 2021.
Revenue for the third fiscal quarter was $27 1 million, which represented a 26% increase from the third quarter of fiscal 2021.
Our team continues to utilize value enhancing opportunities for our creators while our portfolio of assets continues to grow through acquisition strategy.
Our top line growth was largely attributed to digital revenue in our recorded music business, which delivered a 217% increase year over year.
Digging deeper into our segments lets look at music publishing for the third quarter.
Music publishing generated revenue of $18 4 billion in the quarter, which was a 4% improvement from this time last year adjusting for the impact of a onetime settlement with a previously licensed platform from a prior year quarter music publishing revenue grew by 22% year over year.
The primary driver for the increase within the publishing segment was our zinc and other revenue streams synchronization revenue in the publishing segment totaled $2 4 million, representing a 79% increase from the third quarter last year, largely due to the recovery of the film and television industry from the impacts of the COVID-19 pandemic.
Other revenue within the publishing segment showed a 500 <unk>, 2% increase year over year to $2 7 million. This was primarily due to the launch of our rights management subsidiary in the Middle East.
A recorded music segment had another quarter of strong results generating $8 $1 million in revenue in the third quarter, which is up 147% from the prior year quarter.
All revenue types within our recorded music segment delivered solid results led by digital revenue, which as mentioned so 217% increase and that was driven by the continued growth in consumption of music streaming services.
Synchronization was also a top performer on recorded side as it posted a 220% increased to $1 2 million in the third quarter. The overall increase within the recorded music segment was also driven by the Tommy Boy acquisition earlier in the year.
Looking at our operating expenses for the quarter. Our overall cost of revenue saw an 18% increase from the third quarter of fiscal 2021.
This increase was driven by our revenue growth with some margin expansion given the mix of revenue by type.
Last quarter, we saw depreciation and amortization cost increase year over year due to our continued catalog acquisitions.
Company Administration expenses saw an increase of 76% from the prior year due to noncash stock based compensation related to our public listing on the ongoing costs of being a public company that we did not have in Q3 last year over time, we expect operating margins to improve based on the operating leverage inherent in the business.
As I mentioned last quarter, we evaluate our operating performance based on two metrics of wisdom and adjusted EBITDA. We believe these skip the cleanest view of our progress as a business both of these metrics the impact of the amortization from our operating results. So as a reminder, these metrics do not reflect periodic costs of certain capitalized tangible and intangible assets.
Generating revenues adjusted EBITDA removes the impact of other noncash or nonrecurring expenses, such as stock based comp for.
For the quarter OIBDA increased 11% year over year to $9 million, while adjusted EBITDA grew 26% to $10 2 million from.
From the third quarter of fiscal 2021.
These increases were primarily driven by the improvement in revenues across both publishing and recorded music and were partially offset by transactional and administration costs related to being a public company.
Our interest expense was $2 5 million for the quarter, which was an increase of 11% compared to $2 3 million in the same period last year.
Net income in the third quarter of fiscal 2000 $22 million to $4 million, which was essentially flat from the same period last year. This resulted in diluted earnings per share for the quarter of <unk> compared to <unk> <unk> per share for the third quarter of fiscal 2021, lastly, our weighted average diluted outstanding share count to $64 7 billion.
Let's move onto our balance sheet.
During the quarter, we expanded our credit facility to raise the overall capacity of $350 million. This is a testament to the strong relationship that we have with our lenders and their continued support of our business. We closed the quarter with total liquidity of nearly 133 billion comprised of $14 6 million of cash on hand, and $118 4 million available.
Under our revolver, which gives us the capital to fund our strategic objectives.
In terms of total debt, we ended the quarter at $225 3 million, which was net of $6 4 million of deferred financing costs and thus we maintained $210 6 million of net debt.
That compares to net debt of $203 3 million as of last fiscal year and.
Our leverage ratio at December 31, 2021 was $5 one using a trailing 12 month pro forma adjusted EBITDA of $45 4 million, which includes the pro forma impact of recent acquisitions.
Flex measurement per our credit agreement.
Before I turn the call back to Golar I'd like to close with some thoughts on our full fiscal year guidance.
For the full 2022 fiscal year, which as a reminder in March 31.
We revised our guidance to better reflect our strong momentum and financial performance over the past three quarters. As a result, we are raising our revenue guidance to be between $103 million and $105 million. We are also raising our adjusted EBITDA guidance for the full year to be between $40 million $41 billion.
We are continuing to evaluate potential acquisitions to expand our portfolio of assets, which is considered in our full year guidance.
As I mentioned, we're being diligent about controlling our costs both on revenue and overall operating costs and I believe we have a solid balance sheet that provides us with the flexibility to invest in our business and our growing roster of talent.
With that I'll now pass the call back to Golar.
Thank you Jim as I mentioned in the opening of this call we have executed on our strategy and our competitive position remains strong and a vastly growing industry.
We have been able to drive organic growth through our value enhancement initiatives as shown through the hard and innovative work of our sales team across the globe for.
For example, their efforts led our cig segment generating 13% of our total revenue and we don't expect this growth to slow down as we integrate our recently acquired assets into our process.
With this growth we can ultimately drive the operating leverage of the business, while constantly evaluating opportunities across genres musical eras and geographies to ensure we are building an exceptional portfolio of award winning assets. We believe we are still in the early stages of what we are.
Capable of achieving.
I'd like to close my commentary by returning to the strength and opportunity of our M&A activities. Today I'm proud to say that we are on track to deploy over $200 million this fiscal year into unique global and diversified M&A deals.
And we have a $3 billion pipeline of potential deals that we are actively exploring we're proud to be delivering on our promises and are even more proud that these incredibly talented artists and creators have entrusted us to be the stewards of their life's work.
We also believe that our M&A success shows the power of relationship driven targeting which helps us identify off radar deals will bring long term value to the organization.
As we look forward our pipeline remains robust and the cash generating power of our business will continue to fuel these high growth high operating leverage opportunities.
We are executing on our strategy through a steady cadence of acquisitions, coupled with an intense focus on execution. We are taking advantage of broader trends in the music industry to drive greater value for our roster of artists across new platforms to drive organic growth the secular trends around music.
<unk> are in our favor and finally, we're working to manage our overall operating expenses and improve our cost of revenue.
The team at reservoir works tirelessly to bring the life's work of our roster of talent to new audiences and platforms and I couldnt be prouder of their efforts in the third quarter or more excited about the future.
We will now open the line for questions.
Thank you as a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound key.
Question comes from Richard Baldry with Roth capital.
Your line is open.
Thanks.
Talk a bit about the organic growth maybe break it down.
Qualitatively or quantitatively, maybe by how much is your own internal business development driven versus sort of strength in end market more screening platforms available or things like that.
Thanks, Rich its Jim.
I think when you look at it it's really a combination of both of those things. We're obviously benefiting from the tailwind in the industry, but we also benefit from the value enhancement and operational execution of the team here.
And driving that value, we put a real focus on the assets that we acquire.
Improving.
Over the course of 12 to 24 months once we bring those assets into the fold really improving the performance of those assets.
Maybe thinking about the upside you've had in terms of the earnings.
How much do you feel like you're fully staffed in those business development synchronization areas do you feel like it.
It makes more sense could use some of that upside profitability back in those areas or is it more prior prioritize faster M&A cycles.
I think we're well staffed sorry, IRA just golar I think we're well staffed in that area.
Yes.
In so far as the value enhancement initiatives go on the securitization side digital licensing administration et cetera.
That is a part of our business that we.
Sort of grow from a head count standpoint.
<unk> has the need arises.
And we will continue to do that.
Again, a number of copyrights, we add to the stable once that addition.
And can you talk a bit about the M&A pipeline, maybe in a couple of different ways, but one.
Call it seeming to either people may be getting used to the new whatever normal is do you feel like the M&A side of the table is changing easier harder.
How does that.
Backdrop kind of change your thought processes.
I'm not sure that I see a correlation between the two I would say that we are seeing our most robust deal flow.
Right now and I have been doing so for the past.
18 to 24 months.
And I expect that to continue.
Maybe the backdrop being just a.
The fact that these assets are just about more valuable than they used to be.
And the outlook is positive on music on the music industry more generally.
And last for me would be when you look into that pipeline, obviously, it's pretty large.
How do you prioritize what to go after I mean are there ways that internally you can understand.
<unk> of certain assets did better than others.
Their organic growth potential is different than others or is it very much come down to opportunistic one.
Good assets are available they sort of take them in sequence.
It is very opportunistic.
And so far as how that pipeline comes in and we're obviously unable to predict what our deal flow will look like.
At a general level, we are always looking at high quality music that is accretive to the portfolio.
In general.
When we do our due diligence we are able to forecast how.
Value enhancement will play into.
The future and what perhaps we could do that would be additive on that front.
And our purchase price is always reflect those assumptions within our model.
Maybe one last one if you looked into that pipeline are there any sort of distinct.
Currencies in the D.
Number of deals you'd look at that would be either in the music publishing side versus the recorded music side.
That ebbs and flows and I think I would say right now.
It's not skewing heavily either way.
But that certainly does ebb and flow tying back to the idea that we really can't predict what happens in deal flow.
But we are seeing very healthy deal flow on both sides of the business.
Great Congrats on the quarter.
Thank you so much.
Thank you. Our next question comes from Alex Fuhrman with Craig Hallum. Your line is open.
Great. Thanks, guys for taking my question wanted to ask about the higher guidance can you give us a sense of how much of that increase to the guidance is related to hitting your M&A targets ahead of schedule are being on track to do so just compared to all of the other tailwind that you talked about that are benefiting the music industry right now.
<unk>.
Yes, I think that our increased guidance as really occur.
A testament to a couple of things.
First our execution on managing the assets that we have and the value that we've been able to drive throughout the year certainly we benefited from the continued positivity in the industry.
But it also comes down to execution from our team here at reservoir.
And then relatedly like you've touched on we are on track with our <unk>.
M&A assumptions for the year.
We expect to really hit right about the number that we expected potentially slightly higher but.
Obviously that theres timing factors and on that front as well so it's really both of those things.
That factor into it.
Great that's helpful.
And then it looks like your EBITDA guidance was raised a little bit more than your revenue guidance or at least in percentage terms quite a quite a bit more I mean can you talk a little bit about that is that is that just kind of suggest that your incremental margins are very high or have you been able to control expenses better than expected.
Yes, I mean, it always comes down to the mix of assets that we acquire in.
The margins that are associated with those assets. So that's part of what's going into this.
With respect to the deals that we've closed recently or or will be closing.
That certainly factors into.
The margin that those that that revenue will contribute I think thats, probably the driving factor here of course, we always have a focus on controlling our costs.
Making sure that we're staying on target there, but it's really the mix of revenue coming in that's contributing to that margin expansion.
Okay. That's helpful. Jim and then lastly from me can you guys just talk a little bit about <unk>.
How the business is going to kind of evolve as the year moves on and the economy continues to recover from Covid I imagine the return of live performances is going to be a big tailwind from the industry are there any signs that maybe streaming growth could slow down or are there any kind of offsets to the to the reopening tailwind that you would expect to see.
Over the course of the year.
I don't think so I think as you mentioned live performances and to any.
Layover Lockdowns is certainly going to be helpful.
I think this trend we're seeing in vinyl will continue.
Social media trends that we're seeing online gaming et cetera. Those will continue so I think that.
As far as the trends that we are looking at it.
At a high level.
We are focused on the general one within social media within online gaming proliferation of smart devices, Wifi enabled cars et cetera, and emerging markets.
<unk> being the overall theme to the growth that lies ahead.
That's great. Thank you very much golar.
Thank you.
Thank you as a reminder, if you would like to ask a question press. The Star then the one key on your Touchtone telephone. Our next question comes from Chris Mcginnis with Sidoti <unk> Company. Your line is open.
Good morning, Thanks for taking my questions and congratulations on a nice quarter.
Just a follow up on that in that realm of when you look at traditional I guess media and where youre seeing the growth versus maybe some of the newer you talked about gaming.
What's the growth rate are you seeing higher growth rates coming from the newer formats versus abroad.
The more legacy formats.
Well I think that when we look at the.
Newer platforms on a percentage basis.
We may be seeing a higher percentage growth just because of the newness of it the developing nature of those those newer platforms, but.
Obviously from a overall dollar perspective, it's still the traditional services that are driving the lion's share of the revenue in those streams.
Okay. Thanks, and then just.
One last one on the you mentioned $3 billion.
And potential M&A opportunities, that's up from one and a half from the last call can you just talk about what's changed so dramatically that more people coming out.
To offer their businesses are there.
You use it or.
What's driving that huge increase.
Again as I said.
It's hard for us to always predict what happens in our deal flow and it certainly does ebb and flow.
And as you noted it's just the volume of deals that are currently.
Before us to consider and people.
Interest in monetizing catalogs and assets in this class.
And just maybe talking about the competitive landscape for those assets.
Sure.
We see a lot of big names.
And a lot of.
Financing in this business.
Competitive landscape.
<unk> has been pretty consistent over the past say sort of 12 to 24 months.
And we are able to execute on our strategy in the face of that competition based on relationship driven deal sourcing and a lot of off market closing.
Great. Thanks for taking my questions. Good luck in Q4.
Thank you very much.
Yes.
Thank you and Thats all the questions, but I'll go ahead and turn it back to <unk> for closing remarks.
Thank you so much operator, our performance in the third quarter is indicative of both the strength of our team at reservoir and the quality of assets that we have assembled.
Thank you so much for joining us this morning, and Jim and I look forward to updating you on our progress later this spring have a great day.
Okay.
This concludes today's conference call. Thank you for participating you may now disconnect everyone have a great day.
Okay.
[music].