Reservoir Media, Inc. (NASDAQ:RSVR) Q4 2023 Earnings Call Transcript May 31, 2023

Reservoir Media, Inc. misses on earnings expectations. Reported EPS is $0.04 EPS, expectations were $0.06.

Operator: Good morning, everyone, and thank you for participating in today’s conference call to discuss Reservoir Media’s Financial Results for the Fourth 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. Please be advised that today’s conference is being recorded. 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?

Jackie Marcus: Thank you, Shannon. Good morning, everyone, and thank you for participating in today’s earnings conference call. Reservoir Media issued a press release with the results for its fourth quarter and 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.reservoir-media.com. With me on today’s call are Golnar Khosrowshahi, Founder and Chief Executive Officer; and Jim Heindlmeyer, 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. 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. 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?

Golnar Khosrowshahi: Thank you, Jackie. Good morning, everyone, and thank you for joining us today to review our fourth quarter and 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 a 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 finished within our guided adjusted EBITDA range for the fiscal year.

We are encouraged by the topline 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 fourth quarter can be attributed to the landmark achievement of bringing Grammy-winning hip-hop trio De La Soul’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 fourth quarter of fiscal 2022.

Before Jim goes into further detail regarding the financial drivers for the fourth quarter 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 and 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. 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. 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 micro licensing and metadata management. 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 flow that we can opportunistically deploy to drive future growth. During the fiscal year, we allocated capital to several margin accretive deals across genres. 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 Mohamed Ramadan, Egyptian label 100COPIES, Lebanese music company Voice of Beirut, Indian rappers MC Altaf and D’Evil, and producer Stunnah Beatz. 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. As it relates to hip-hop, we signed deals with multi-Platinum producers, Marley Marl and Mannie Fresh. We’ve not only grown our catalog in fiscal 2023, but I’m really pleased about how we’ve added diversity across heroes 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 & Lead Songwriter, Kiki Garcia.

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 Nightshift by the Commodores. Dennis’ works have impacted music charts for decades and we are honored to be the stewards of his catalog. This deal bolsters our existing copyright interest in Nightshift, 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 billion views and more than 250 million Spotify streams. 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 Stalnecker, to a publishing deal, which includes his number one hit co-write, Thank God by Kane Brown and Katelyn Brown. The track held the top spot at Country AirPlay for two weeks and also chartered on the Hot 100 Top 40 radio and American Top 40 Hot AC chart, 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 a joint venture with American Idol Producer, 19 Entertainment, in which we will sign publishing deals with the talented contestants from American Idol. 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 1.9 billion.

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

Jim Heindlmeyer: Thank you, Golnar, and good morning, everyone. As Golnar stated, we are 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 fourth quarter fiscal year and our expectations for the next fiscal year. Revenue for the fourth fiscal quarter was $34.8 million, which was relatively in line with the fourth quarter of fiscal 2022. As a reminder, last quarter, we called out the fact that our international revenues were weighted more heavily towards the September and March quarters in the past, but that 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 topline results in the fourth quarter were driven by the decline in the Music Publishing segment, which was largely due to the lower Performance, Synch, and Other Revenue. Lower revenue in the Music Publishing segment was almost completely offset by higher revenue in the Recorded Music segment, which was driven by strength in digital and physical sales. 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 fourth quarter, OIBDA increased 3% year-over-year to $14.4 million, while adjusted EBITDA decreased slightly to $15.2 million. The decrease in adjusted EBITDA in the fourth quarter was largely driven by lower revenue versus a strong fourth quarter in fiscal 2022. This expense was $4.2 million for the quarter compared to $2.9 million in the same period last year. Net income for the fourth quarter of fiscal 2023 came in at $2.3 million versus $8.9 million in the fourth quarter 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 million. Moving to our full fiscal year 2023 results, revenue came in at $122.3 million, up 13% increase year-over-year and above the top end of our previously stated guidance range. Our topline growth for the year was largely attributed to growth in both the Music Publishing and Recorded Music segments, which posted growth of 9% and 18%, respectively. 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 costs of being a public company as well as marketing costs related to reaunching the De La Soul 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 $43.1 million, while adjusted EBITDA also grew 12% to $46.3. These year-over-year increases were primarily driven by higher revenues across the business and effectively managing operating expenses. Our interest expense was $14.8 million for the full-year, which was an increase of 35.7% compared to $10.9 million last year. Net income for fiscal 2023 came in at $2.8 million versus $13.1 million last year. The decline for the year was due to a decrease in the gain on fair value of swaps, a one-time tax expense related to a change in the UK 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 diluting earnings per share for the year of $0.04 compared to $0.22 per share for fiscal 2022.

Lastly, our weighted average diluted outstanding share count for the full-year is $64.8 million. 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 $23.2 million in the fourth quarter, which represents an 8% decline from the same period last year due to lower revenues in Performance, Synch, and Other Revenue streams. The Other Revenue segment accounted for the most significant drop within Music Publishing due to the non-recurring revenues recognized in the prior year period from Dubai Expo.

Synchronization revenue in the Publishing segment totaled $4.2 million, resulting in a 10% decrease from the fourth quarter of last year. Mechanical revenue within the Music Publishing segment posted a 28% increase year-over-year to $1.4 million. 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 fourth quarter, generating $10.8 million 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 Recorded Music segment in the fourth 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% topline increase driven by the release of De La Soul’s 3 Feet High and Rising. The decline in Synchronization within Recorded Music is really a timing issue as Synch licenses are not uniform from one quarter to the next. The overall increase within the Recording 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 topline 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 topline as revenues increased 18% compared to fiscal 2022. 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 $317.8 million. We closed the quarter with total liquidity of $147.1 million comprised of $14.9 million of cash on hand and $132.2 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 $311.5 million, which was net of $6.3 million of deferred financing costs and thus we maintained $296.6 million of net debt. That compares to net debt of $252.2 million 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 million to $132 million, which represents a 6% increase versus fiscal 2023 at the midpoint. We also expect adjusted EBITDA to be in the range of $49 million to $52 million, 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 semiannual payments and will continue to mitigate the cyclicality in fiscal 2024. I would also note that our quarterly spread of revenue maybe 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&A. 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 are 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. With that, I’ll now pass the call back to Golnar.

Golnar Khosrowshahi: Thank you, Jim. The diversity of our roster and solid financial profile will allow us to navigate any macroeconomic backdrop. Music continues 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 amid what could be uncertain times in the broader economy in the coming quarters. 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.

Q&A Session

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

Richard Baldry: Thanks. Can you maybe talk about the M&A pipeline given the changing macro backdrop? I feel like asking question every quarter, but it always changes a little bit each quarter. There are changes in who you are seeing at the table, changes in expectations of the target that give you some confidence in the ROIs that you need to hurdle to get to your targets? Thanks.

Golnar Khosrowshahi: Hi, Rich, it’s Golnar. As far as the M&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 finite high-quality assets that will continue to command a premium multiple as a result of their scarcity. 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.

Richard Baldry: Okay. And when you think about your guidance for the year ahead in terms of organic growth, is there a way to piece apart that increases in royalty rates as a backdrop and usage or the demand pull side throughout pricing and our overall adoption? It feels like if you take all those three pieces, your guidance might look a little bit conservative. Thanks.

Jim Heindlmeyer: Yes. One of the – hey, Rich, it’s Jim. One of the things that we always want to be careful about with guidance is, 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 out. We are typically taking the view that many of those factors that you just touched in are baked into that number. 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.

Richard Baldry: Okay. And last for me, you’re talking 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. Thanks.

Golnar Khosrowshahi: 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, we will add to that. But that 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 close on those transactions. And we firmly believe that that is the way to expand into these emerging markets.

Richard Baldry: 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 underpenetration of digital and under assertion of rights things that can improve over time that would make those ROIs on those assets even better? Thanks.

Golnar Khosrowshahi: 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 our interest is both in the attractive pricing we can get now and the future growth in value possibilities.

Richard Baldry: 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.

Alex Fuhrman: 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 three or four 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 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 or two?

Jim Heindlmeyer: 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&A within our guidance where we talk about just building in organic M&A opportunities, I think that you’re naturally going to see that anticipated growth rate come down a little bit. But again, it’s our goal to always do better than where we set the bar.

Alex Fuhrman: 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?

Golnar Khosrowshahi: There are a couple sprinkled in there, but for the most part, we are looking at more of those deals that have historically been in our sweet spot that’s around the sort of $40 million to $60 million range, but there are a couple of more sizable transactions in there.

Alex Fuhrman: 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 Golnar Khosrowshahi for closing remarks.

Golnar Khosrowshahi: Thank you, operator. Our performance in the fourth quarter and 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.