Q2 2024 Reservoir Media Inc Earnings Call
Good morning, everyone and thank you for participating in today's conference call to discuss reservoir Media's financial results for the second quarter of fiscal year 2024, and at September 30 of 2023.
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I'd now like to turn the call over to MS. Jackie Marcus with the Alpha IR Group, who will review our agenda today in the company's forward looking statements Jackie.
Thank you operator, good morning, everyone and thank you for participating in todays earnings Conference call Reservoir Media issued a press release with the results for its second quarter of fiscal 'twenty 'twenty. Four ended September 30th 2023 earlier this morning.
If 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 don't reservoir Dash media dotcom.
With me on today's call are Golden our clubs Michel He founder and Chief Executive Officer, and Jim handle Mayer 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 call margin 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 that.
However, 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 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 the 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.
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 Omar.
Thank you Jackie and good morning, and.
And thank you for joining us today.
Our second fiscal quarter was highlighted by top line growth of 15% with strong performances from both our music publishing and recorded music businesses.
We reported healthy organic growth in the period, driven by our value enhancement capabilities and we executed numerous high quality deals that further diversified and expanded our portfolio.
In addition to continuing our revenue growth in Q2, we also thoughtfully managed our business. That's what he does enhanced our margin profile and grew adjusted EBITDA by 24% over the prior year.
Our financial results in the first half of fiscal 'twenty to 'twenty four demonstrate the benefits of our disciplined approach to capital allocation and our ability to drive growth and close deals within any market backdrop.
The music industry is resiliency across all market cycles, combined with our cost management and capital allocation continues to fortify us against a complicated economic backdrop recently, the National Music Publishers Association or an MTA estimated double digit year over year growth for the entire U S.
Music publishing market in calendar year 2023.
This marks the eighth consecutive year, where U S music publishing revenues experienced double digit growth.
Further there have been no signs of a slowdown in subscriber growth from streaming services and the subscription price increases.
Spotify announced a 16% growth year over year in premium subscribers. Despite its price increase these are raised subscription pricing for the second time in 12 months and Apple increase the price of several of its bundled subscription services.
This activity suggests not only that we should expect price increases to occur with some regularity moving forward, but also demonstrates the stickiness of consumers and the market opportunity for digital music consumption for what continues to be one of the most under monetized forms of entertainment content.
We are confident in the growth trajectory for the industry and we are particularly pleased with how reservoir will continue to benefit from this growth as well as the growing recognition that artists work has been undervalued in the ecosystem.
Before we get into our new deals in financial performance I want to take a moment to call out some of our rosters recent achievements.
Last week, we celebrated Sheryl Crow and spinners induction into the rock and roll Hall of Fame Blue Raincoat management client as a collective became the first ever jobs Act to take home. The Mercury Prize. This quarter saw chart topping hits across genres from David get on BB Rhexis hit song I'm, Good Blue spending 55.
Five weeks at number one on Billboard's Hot Dance Electronic song chart to jelly rolls need a favor co written by Robert Gotcha climbing to number one on both country airplane and mainstream rock airplay, making it the first song to do so Additionally, so those singles news a collaboration by a writer producer Chris Riddick times.
Top several Billboard charts and helps propel the album Sos to become the longest running number one on Billboard's RMB Albums chart spending 45 weeks at the top.
Over the past few months, we made several accretive strategic investments diversifying our portfolio across genres and eras.
Some of the deals we recently announced include legendary guitarist songwriter and vocalist Joe Walsh. The deal includes hits from his catalog as a solo artist and is a member of groups like the Eagles and the James Gang Busters future works Jochen.
Joe contributed to a hotel, California, one of the best selling albums of all time, and we are honored to be as publishing hub and to support his high quality catalog.
We also welcomed genre defining Latin writer producer Rudy Perez to the roster. The deal includes the acquisition of his catalog, including hits performed by Christina Aguilera, Julio Iglesias, and more as well as a publishing deal for his future works leveraging his impressive legacy Rudy is also the cofounder of the Latin reporting.
<unk>, the Latin Grammys and the Latin song Writers Hall of Fame, we are proud to be in business with such an important stewart for the genre and its creators.
We expanded our international roster with the additions of content production and distribution company re media and Egyptian wrapped it all salary.
These deals were executed in conjunction with proper Arabia, and we're pleased to further grow our presence in the region as we see an untapped opportunity for music in these regions to grow both locally and globally.
We bolstered our country music roster and catalog with the additions of the Jets collaborator Brent Mar decorated writer producer carry Kurt Philips emerging Hitmaker cab Becker and history, making cross genre writer producer Robert Ulster were thrilled to build on our catalog of established country titles, while also developing the new <unk>.
Class of hit country creators.
We also signed a publishing deal for the future works of platinum selling song writers desk. Joe's death has contributed to number one albums by Selena Gomez, Celine Dion Pink, Keith urban and panic at the disco and collectively garnered billions of streams throughout her discography.
Looking ahead, we are working through a robust pipeline of deals with the objective of continuing to complete transactions that exceed our return expectations.
Business rooted in acquisitions, we have a rigorous underwriting process and we have a strong track record of deploying capital that ultimately becomes accretive to our margin profile. We have a pipeline of roughly $2 billion in total value for prospective deals and we've seen no slowdown in our off market opportunities. We also believe that with each.
Quarter, as we build our roster and catalog a reputation as trusted stewardship music with a differentiated approach to value enhancement continues to grow we see that reflected in the artist's estates, who come to us as we explore opportunities.
With that I'd like to turn the call over to Jim to discuss our second quarter numbers in greater detail Jim.
Thank you Donna and good morning, everyone.
Today, we're announcing another quarter of strong financial results, our ability to consistently grow revenue and improve operating leverage from quarter to quarter is a testament to the durability of our business model, coupled with the reservoir teams expertise and core competencies.
Turning to our fiscal second quarter results revenue for the second fiscal quarter was $38 4, million% to 15% increase versus the prior year quarter. This was driven by growth in both business segments, most notably led by a 22% increase.
<unk> music compared to the prior year quarter.
Looking at our operating expenses for the quarter, our overall cost of revenue increased 4% versus the prior year quarter.
Amortization and depreciation costs increased 15% year over year due to our continued catalog acquisitions.
Administration expenses saw a 57% increase versus the prior year largely due to a $2 7 million.
Noncash write off of recoverable legal expenses.
I'd like to add a bit more color of that write off of Recoupable legal expenses that occurred during the quarter.
This nonrecurring item relates to the resolution of a matter, which began in 2017 that we settled through mediation, requiring us to expense legal fees from prior years that we had previously expected to recoup resulted in a one time write off of $2 7 million.
As a result, we are excluding it from adjusted EBITDA for the quarter, but it does impact operating income and OIBDA.
In the second quarter, notwithstanding the write off I just mentioned.
The increased 3% year over year to $12 4 million, while adjusted EBITDA of $15 9 million increased 24% versus the prior year.
The increase in OIBDA and adjusted EBITDA was primarily driven by strong revenue growth, partially offset by higher administrative expenses.
Interest expense was $5 8 million for the second quarter compared to $3 5 million in the same period last year.
Net income for the second quarter of fiscal 2024 was approximately 700000 versus $4 5 million in the prior year quarter. This resulted in diluted earnings per share of one cent.
The decrease in net income was driven by higher administrative expenses, including the write off I discussed as well as higher amortization and interest expense, partially offset by higher revenue and improved gross margins.
Lastly, our weighted average diluted outstanding share count during the quarter was $65 1 million.
Now I'll review, our segment breakdown for the quarter, starting with music publishing.
Music publishing generated revenue of $25 9 million in the second quarter, which represents an 8% increase from the same period last year due to strong growth and performance in mechanical revenue, partially offset by a decrease in digital revenue.
Mechanical revenue within the publishing segment increased 25% year over year to $1 3 million.
Lastly, synchronization revenue was up 1% compared to the prior year period, while other revenue was down 5%.
The decrease in digital revenue was driven by the non recurrence of the one time $2 1 million copyright royalty board retroactive adjustment booked in the prior year period as we shared on the last call the year over year revenue comparison in Q2 as muted as a result of a retroactive adjustment for the affirmed CRB III.
<unk>.
We recorded in Q2 of last year.
We worked to adjust that out of last year's figures publishing revenue would have grown 18% and total revenue would be up 23%.
A recorded music segment delivered strong results in the second quarter with revenue of $10 8 million, representing an increase of 22% compared to the second quarter of fiscal 2023.
Excluding synchronization all revenue types within our recorded music segment delivered year over year increases growth in the recorded music segment was primarily driven by physical revenue, which increased 122% versus the prior year digital in neighbouring rights revenue increased 15% and 8% respectively.
Synchronization revenue in the recorded music segment came in at 900000, resulting in a 12% decrease from the second quarter of fiscal 2023.
This was driven by the timing of the writers Guild, and Sag strikes, which created a pause in television and film production based zinc opportunities.
Moving onto our balance sheet, we closed the quarter with total liquidity of $132 8 million comprised of $2 6 million of cash on hand, and $112 2 million available under our revolver, which gives us the capital to fund our strategic objectives. We ended the quarter with total debt of $332 1 million.
Which was net of $5 7 million of deferred financing costs.
Bringing net debt to $311 6 million that compares to net debt of $311 5 million as of March 31 2023.
Finally, as interest rates remain elevated I would like to remind you that we have managed to hedge nearly half of our debt highly attractive interest rates, which will help limit our exposure to interest rate expense in coming months should rates continue to rise.
Before I turn the call back over to Golar I'd like to spend a few minutes discussing our outlook for fiscal 2024.
Following our second consecutive quarter of strong results, we're raising our revenue guidance from a previous range of $127 million to $132 million to a range of $133 million to 137 million, which represents a 10% increase versus fiscal 2023 at the midpoint.
We're also raising our adjusted EBITDA guidance range.
From 49 to 52 million to $50 million to $52 million, which implies 10% growth at the midpoint.
A strong release schedule, most notably driven by the successful release of <unk> back catalog led to better than expected results in the first half of the year.
In the second half of the year, we expect revenue to be down slightly versus the first half as we work through the impact of the Sag After and writers Guild strikes and returned to a normalized release cadence on physical product.
While our revenue will be more heavily weighted to the first half of the fiscal year, we are well positioned to capture growth opportunities across categories and geographies.
As we progress against our growth plan, we will continue to make accretive strategic acquisitions, while prioritizing organic growth. We will continue to follow our responsible capital deployment strategy to maintain our strong financial profile and we are confident in our line of sight to meet our new guidance ranges for both revenue and adjusted EBITDA.
With that I'll now pass the call back to Golar.
Thank you Jim as Jim mentioned, we are raising our fiscal year guidance on both revenue and adjusted EBITDA. We will continue to focus on optimizing the operations of our existing business, while executing on our inorganic growth strategy by pursuing high quality deals regarding the broader music industry, we anticipate no slow down to <unk>.
And we are confident in our competitive positioning all of this along with our business model that supports highly predictable cash flows positions reservoir to execute against our targets and start the second half of the fiscal year strong.
With that we will now open the line for questions.
Thank you.
As a reminder to ask a question. Please press star, one one or intestine telephone and wait for your name to be announced.
To withdraw your question. Please press star one again.
Please standby, we compile the Q&A roster.
Okay.
Our first question comes from the line of Dan Day with B Riley Securities. Your line is now open.
Yes. Good morning, guys I appreciate you taking the questions.
So you haven't dropped 10-Q, yet so haven't seen exactly what the catalog acquisition number is but just given the growth that didn't move much in the press release was a little more concentrated on publishing deals maybe if you could just give us an update on the market for music copyrights acquisition, right now whether or not we're finally seeing a.
A long awaited decline in transaction multiples just given what you've seen out there and just what your acquisition pipeline looks like right now thanks.
Hi, Dan.
I wish I could tell you that we have conclusive evidence of.
Contraction in pricing, but we're still seeing a lot of demand for assets and continued infusion of new capital.
The competitive set.
And that is certainly fueling the demand the pipeline is robust and it ranges in size from.
Large too to a lot of smaller deals it's equally balanced between recorded and publishing assets.
And as much as one would think that the environment would drive.
Some pricing contraction.
Not really seeing it within a subset of high quality assets.
Scarce assets.
Understood. Thanks.
The other question just.
There's been a there's been a lot of headlines lately around the handful of music royalty songs that formed over in the UK over the last couple of years for better or worse, I think sometimes people associate your business with them just because of the publishing exposure. Some of them have seen results come in maybe disappointing relative to expectations running up against debt covenants it doesn't seem like.
<unk> had any similar challenges at.
So maybe just talk about like why you are different.
Just kind of the AG catalogue, maybe youre not.
As to the decay curve.
Anything else to point to why they might be struggling a bit more than you had been.
Sure I mean, we've taken a very.
Diligent approach to our underwriting and how we value. These assets, we've always approached it quite conservatively.
Until we have really compelling data around the future growth.
And so we have.
We have been benefited today from having purchased assets over the course of the past 16 years anywhere.
In those early days from a two times multiple.
Two is certainly higher than that more recently.
So.
Very simply we.
We bought very well and we continue to apply that same rigor today.
I think a lot of the noise that.
It has come up and that you are referring to specifically had to do with accruals and how those were treated as they relate to CRB three.
And those are those new royalty rates.
That was again a disciplined approach.
It is conservative.
A pretty linear calculation for us as far as what that impact was going to have and we started accruing that at the end of <unk>.
September of last year.
And then added to that for the our fiscal third quarter.
And so we don't really have any surprises happening there.
Alright, great. Thanks for taking the questions.
Thank you Dan.
Thank you.
Our next question comes from the line of Richard Baldry with Roth Capital. Your line is now open.
Thanks.
Sort of curious we've seen in some other industries people willing to start taking either all or half of their hedges off the table with a view that rates could ear, peaking here.
Yes, do you have any thoughts around that per your own sort of hedging plans, our outlooks or do you just feel it simpler to leave it on for the duration.
Capture risk at that.
Yes.
You're doing rich.
I think for us we.
Look at our hedges.
We have about $150 million hedged through the end of next September and.
While we have certainly had discussions about taking those off the table for us I think that we look at it.
Leaving them in place through the maturity of those hedges is likely what we're going to do we've also added another future start $100 million to our hedge because where we.
We want to be in a position of managing our interest rate risk.
Always taken that type of approach with our hedges and I think that we will continue to.
Okay.
<unk>.
The Opex if you back out the one time.
Recoupable fee kind of hit.
Went down a little bit sequentially. So how do we think about opex, you're talking about second half because of the headwinds would be possibly down on the revenue side, how do we think about the trends on the opex side the second half.
Yes, I think we're always.
Trying our best to manage our overhead I think we've typically done a pretty good job of that of course, we are.
We're in the same environment that everyone else is right now with the macro forces that are that are affecting us.
Having said that I think that backing out that $2 7 million from our current quarter, probably gets us to a pretty good run rate at this point.
Okay.
If you think about the recent royalty increases the price increases.
I'll drop the second that they happen onto your P&L right. So is there a way to think about how far into recognizing those sort of run rate step ups.
How much of a tailwind that could be.
Either six months 12 months whatever timeframe. Thanks.
Yes, there is certainly a little bit of a delay there, but it's not it's not.
A very significant delay dsp's in the U S anyway typically are reporting.
Those royalties on a monthly basis to the MLC, we see that that money three months after that.
And we accrue for that so so we have our estimates of.
The streaming activity.
We make our estimates of.
What's.
Whats in the pipeline then we recognize that revenue so it's not a significant delay in the U S. Now as things happen internationally. There is certainly more of a delay there.
And there will be some tailwind that lag a little bit as a result of that.
Last for me, it's sort of.
More high level, but in September.
Watched round he'll get acquired.
It looked like the take out price of somewhere around 15 times gross profit or 21 times EBITDA.
Yes.
<unk> to your business is that I'm trying to figure out like is that an outlier because they had some sort of a quality asset that people are paying a dramatic premium for or how bread and butter was it and thats simply a fair take out price in the space in your view. Thanks.
Okay.
I don't think.
So much of an outlier.
Asset value basis.
These assets are.
That's about the right valuation and.
That asset certainly had some good.
Good scale around it.
So I don't I don't really think there was anything outlier of up about that it was a high quality catalog and so it traded at that multiple.
Great. Thanks very helpful.
Thank you Richard.
As a reminder to ask a question at this time. Please press star one one on a touchtone telephone.
Our next question comes from the line of Alex Fuhrman with Craig Hallum Capital Group. Your line is now open.
Hey, guys. Thanks, very much for taking my question and congratulations on another really strong quarter here.
Mark can you talk about some of the investments that you've made recently in emerging markets and just more broadly.
You look at acquiring content and partnerships and companies overseas are you seeing multiples that are maybe more attractive in emerging markets than in the U S and just any color there would be helpful.
Sure highlights.
<unk>.
The investments that we make in the deals that we do in the middle East via pop Arabia.
Certainly cover different kinds of transactions, where we are acquiring.
Record labels, where we are adding artists to the roster. So a lot of diversity happening there in so far as how the deals are structured and what we're doing and how we're expanding the business.
We certainly I mean youre absolutely right to ask this question. It is a market where we are able to execute on these transactions today at a lower multiple.
And so that's one of the reasons, it's attractive coupled with the growth trajectory.
Makes the future at least the next five to 10 years in that region.
Including the diaspora of highly attractive for us to invest in content.
Is it relevant.
That demographic.
So the business line there is to continue to execute and if we're looking at a market here that is somewhat saturated with a lot of capital in the marketplace and.
And we're able to execute at these lower multiples. It makes it just that much more attractive to us.
That's terrific. Thanks, Thanks, very much for that Golden Alright, and then just as quickly.
Looking at your revenue.
Our revenue by by channel here, it looks like zinc revenue for both recorded music and music publishing.
Growth was less than the overall business lines is does that say something about demand for streaming relative to demand for advertising or is there maybe something about the way the CRB true up fell into your numbers last year, we'd love to just get a little bit more color on that.
Yes, Hi, Alex.
Take away and think should really be that.
The overall industry I would say has been affected by the writer and actor strike.
When when film and television production shuts down.
Those opportunities are paused until production resumes. So we're certainly we're certainly affected by the strike and we likely will continue to be affected by the strike for the next couple of quarters. The writer's strike has been resolved.
And hopefully the <unk> strike is close to being resolved, but it hasn't been yet so once that's resolved and everyone gets back to work. We'll then start to see those those opportunities come back.
It could be could be a few months after production resume so we certainly think that there is.
Theres another quarter or two to be impacted by the strike and Thats why youre seeing what youre seeing in the historic.
<unk> for this quarter and the first half of the year.
Certainly what we're looking at for the second half of the year.
Okay. That's really helpful. Thanks, Tim.
Thank you and I'm currently showing no further questions at this time I'd like to turn the call back over to <unk> Shah for closing remarks.
Thank you operator and to everyone who joined US today, we believe we have a bright future with considerable opportunities to both expand our roster of talented creators while also generating significant returns with our pursuit of value enhancing initiatives and we look forward to updating you next quarter. Thank you.
This concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
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