Reservoir Media, Inc. Q2 FY2022 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 2022 ended September 30th, 2021. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would 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?

Thank you, operator. Good morning everyone and thank you for participating in today's earnings conference call. Reservoir Media issued an earnings press release with results for its second fiscal quarter of 2022 ended September 30th, 2021 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.reservoir-media.com. With me on today's call are Golnar Khosrowshahi, Founder and Chief Executive Officer, and Jim Heindlmeyer, 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 Golnar and Jim, I'd like to note that today's discussion will contain forward-looking statements that reflect the current view of Reservoir Media about our business, financial performance, and future events and as such, involves 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 track. Reconciliations of these non-GAAP financial measures to the nearest comparable GAAP measures are included in our earnings press release. In terms of the structure of our call today, Golnar will start with a review of our business operations and the progress we are making as we execute against our key strategic priorities. Jim will then walk through a financial review of the quarter, and then Golnar will come back to wrap up our remarks with a few closing comments before we open the line for your questions. And with that, I'd like to turn the call over to Golnar. Golnar?

Thank you, Jackie. Good morning everyone and thank you so much for taking the time to join us on the call today. The past few months at Reservoir have been filled with many important milestones for our organization. The most noteworthy was the late July completion of our process to become the first publicly-traded independent music company to list on any U.S. stock exchange. The additional access to capital and more visible profile we have as a public company allows us to expand and accelerate our growth strategy. I am tremendously grateful to our unparalleled roster and team for their endless contributions to building our next chapter and look forward to all that we will achieve together. For today's agenda, I'd like to speak to shifts in the landscape and our place within it, plus walk you through a high-level recap of our execution and performance over the last few months. Following that, our CFO, Jim Heindlmeyer, will share some of the quarter's financial results in detail, and we will conclude by answering your questions. Since our July listing, you have likely read about the billions of dollars that are on the move in the music industry. This includes numerous iterations of financial investors backing both people and platforms that are dedicated to investing in music. This boom reflects a relatively recent reality and one based on a long-standing core belief of our business ethos. The music industry is undergoing constant evolution, where it is perpetually identifying novel access points, securing new listeners, and generating unprecedented growth. Data from the IFPI released mid-October backs this claim, revealing that listening hours have increased to 18.4 hours per week and there was 51% growth in time spent listening to music on subscription audio streaming services. But beyond these statistics, what is even more appealing to us is the consistent expansion and proliferation of these novel access points. Music is being monetized at an accelerating rate on these new platforms, all of which are accretive to our revenue streams. For example, in-home fitness was an immaterial category for our business until February 2020. Then we came to an agreement with Peloton and set the precedent for music licensing with other platforms. The start of the pandemic a month later drove explosive sales growth and soaring usage of in-home fitness equipment and apps. And we believe the change in consumer behavior in this area is here for the long-term. Shifting forward to today, we see even more opportunities for value enhancement for our artist partners in video gaming and social media. Roblox is leading the charge in the online gaming category and boasts over 40 million daily active users on their platform where music-enabled content thrives. Social media platforms like TikTok and Twitch continue to captivate audiences with licensed content powered by music. And looking ahead, we recognize the implications of Wi-Fi-enabled cars rolling off assembly lines, the smart speaker industry doubling in size by 2025, and how tokens will reshape how we own, buy, and sell music and musical experiences. We understand what all of this means for music and that is more people listening to more music, more often, and in more places. Let's turn to our quarterly performance. In the second fiscal quarter, we saw double-digit growth across all our key performance metrics. Our $30.4 million total revenue represented a 45% improvement over last year, which included 15% organic growth. From a segment perspective, 73% of our revenue came from music publishing, 26% from recorded music, and 1% from other sources. We saw revenue growth from multiple types with 207% annual growth from physical sales due to increased demand for vinyl, and 170% annual growth from digital recorded sales. And despite the addition of costs related to being a public company and other transaction costs, we posted strong operating performance metrics as well with 49% growth in operating income and a 40% improvement in our adjusted EBITDA. We remain steadfast in our commitment to grow the business and become the leader in the independent segment. The tailwinds in the sector, coupled with our disciplined execution against our growth initiatives, have put us in a strong position to meet this objective. In support of this growth, we continue to invest in our people and expand our team, which will ensure that our operations remain well-positioned to identify, integrate, and service strategic M&A. Over the past few months, we made significant investments to build our portfolio of assets across genres and geographies in addition to continuing to support our roster in all of their accomplishments. And for us, it all starts with the music and our roster of incredible songwriters and artists. Reservoir welcomed the legendary and iconic Joni Mitchell, a career-defining moment for me, and continued evidence that Reservoir is the trusted partner to and steward of legacy assets and artists. Longtime client Jamie Hartman won the coveted Ivor Novello Songwriter of the Year award, recognizing his incredible achievements alongside the artist Celeste. We continue to capture top 10 market share in the United States according to Billboard and celebrated a nomination for Publisher of the Year at Music Business Worldwide A&R Awards, along with a slew of awards and recognitions. We also completed deals with the most awarded country music band of all time, Alabama, and signed newcomer Rufio Hooks to the roster, one of the writers behind BTS' record-breaking single 'Butter', officially dubbed the song of the summer by Billboard. With that, I'd like to ask Jim to walk us through a few more specific details around our financial performance during the quarter. Jim?

Thank you, Golnar, and good morning everyone. I want to echo Golnar's comments as I'm incredibly pleased with our second quarter results, which came in line with our expectations. We executed on our strategic initiatives and delivered double-digit year-over-year growth in revenue, operating profit, and adjusted EBITDA. Now, let's look at our results in greater detail. As a reminder, all percentage change references that I make, unless explicitly stated otherwise, will offer comparisons between Q2 fiscal 2022 and Q2 fiscal 2021. As Golnar mentioned, our revenue in the second fiscal quarter exemplifies today's strong and growing demand for music and audio content. Revenue in the second fiscal quarter was $30.4 million, an increase of 45% from the second quarter of fiscal 2021. That included 15% organic revenue growth driven by our value enhancement efforts. Our teams continue to leverage alternative revenue streams and new streaming opportunities that drive organic expansion and greater value for the artists and creators who trust us with their life's work. Additionally, those great top-line performance numbers can be attributed to continued catalog acquisitions, a 67% increase in digital revenues across both business segments, and the growing presence in the international markets. Now, let's drill down into our segments starting with music publishing. Music Publishing generated revenue of $22.1 million in the quarter, which was a 26% improvement from this time last year. This increase was driven by strong performance in both our digital and synchronization sources. Digital revenue refers to revenue from musical compositions from bodies and recordings distributed through streaming services, download services, and other digital music services, including new platforms such as Peloton or Roblox. Digital revenue in the Music Publishing segment totaled $11.6 million for the quarter, a 44% gain year-over-year. Synchronization revenue refers to the right to use an artist's musical compositions in combination with visual images, such as in films or television programs or commercials. During the quarter, synchronization generated revenue of $4.1 million in the segment, an increase of 48% from the second quarter fiscal 2021. Our strong results from these two revenue sources helped offset some COVID-related challenges specifically seen with our performance revenue source. Our recorded music segment also delivered very strong results during the quarter, producing $8.1 million in revenue. This was an uptick of 149% from the second quarter of fiscal 2021 and it was partly driven by the acquisition of Tommy Boy in June. Tommy Boy contributed $3.6 million to the segment during Q2, which again shows that our team drove $1.3 million in organic growth in this segment. In aggregate, organic growth and Tommy Boy led to triple-digit revenue growth in both recorded music, digital and physical sources. Digital posted revenue of $4.8 million for the quarter, a 170% improvement year-over-year. Physical refers to revenue generated from sales of physical products such as vinyl and CDs. Within physical, we were able to take advantage of a strong global demand for vinyl products, which increased revenue to $2.5 million, a staggering 207% increase from the second quarter of fiscal 2021. This increase in physical from the prior year can be attributed to COVID recovery as Chrysalis had a very robust release schedule compared to a very light release schedule during the second quarter in the prior year. Looking at our operating expenses for the quarter, our cost of revenues saw a 47% increase from the second quarter of fiscal 2021. This was largely driven by the increased revenue, which led to higher writer royalties and other publishing costs as well as artists' royalties and other recorded music costs due to the acquisition of Tommy Boy as well as expenses associated with increased physical revenue. Amortization and depreciation expenses increased 24% in the aggregate, from the second fiscal quarter of 2021. Depreciation decreased due to the full depreciation of prior capital expenditures, while amortization grew due to the acquisition of additional music catalogs. Amortization expense is expected to grow as we execute our strategic initiatives and continue making catalog acquisitions. Administration expenses of 58% spike year-over-year with costs related to acquisitions and costs associated with being a public company representing most of the increase. As we continue to grow, we expect these expenses as a percentage of revenue to continue to come down in the coming quarters. We evaluate our operating performance based on two metrics, OIBDA and adjusted EBITDA. Both of these metrics remove the impact of amortization from our operating results. Adjusted EBITDA removes the impact of certain other non-cash or non-recurring expenses such as stock-based comp. For the quarter, OIBDA increased 38% year-over-year to $12.7 million, while adjusted EBITDA grew 40% to $12.9 million from the second fiscal quarter of 2021. These increases were primarily driven by higher revenues in both segments, which were partially offset by higher cost of revenues, costs associated with the Tommy Boy acquisition, as well as costs associated with being a public company. Our interest expense was $2.7 million for the second quarter compared to $2.2 million for the same period last year. Net income for the second quarter of fiscal 2022 was $4.5 million, which was an increase of 61% from the prior year period. This resulted in diluted earnings per share for the quarter of $0.08 compared to $0.06 per share for the second quarter of fiscal 2021. Lastly, our weighted average diluted outstanding share count is 58.99 million. In terms of our balance sheet, notwithstanding, the redemptions remain strong and supported by the cash generating power of our business. That strong organic operating cash flow combined with the prudent use of some additional leverage has allowed us to remain roughly on track with our original cadence of investments for the year. With total liquidity of nearly $52 million comprised of $12.8 million of cash on hand and $39.1 million available under our revolver, we have the flexibility we need to fund our strategic objectives. In terms of total debt, we ended the quarter at $203.9 million, which was net a $5.7 million of deferred financing costs, and thus we maintain $191.1 million of net debt. That compares to net debt of $203.3 million as of last fiscal year end. I'd like to end my prepared remarks with our outlook for fiscal 2022. Today, we're providing our initial financial outlook range for fiscal 2022 for two of our most important KPIs; revenue and adjusted EBITDA. For the full 2022 fiscal year, which will end March 31st, 2022, we currently forecast $100 million to $104 million of revenue. This compares to $81.8 million in actual revenue for fiscal 2021 or 25% growth at the midpoint of our range. For adjusted EBITDA, we're projecting $37 million to $40 million this year, which compares to $33.9 million in the prior fiscal year. Again, looking at the midpoint that equates to 14% growth even with the additional costs related to being a public company included in fiscal 2022. Organic growth and complimentary acquisitions support our top-line forecasts and again, our balance sheet and cash generating power should provide the fuel we need to execute on near-term opportunities in our M&A pipeline. We will make sure any capital activities we consider are those that will maximize value as we move forward. In terms of the range we provided for adjusted EBITDA, that will be supported by our top-line efforts, strong cost controls, and may be slightly offset by higher wages, as the cost of talent has certainly become more expensive as we've progressed through the last few quarters. That said, I'll remind our investors that we maintain a healthy operating leverage model and when we acquire catalogs, we often don't need to add significant overhead to service those new revenue streams. Generally speaking, we may only need to add one additional royalty administrator for every 30,000 copyrights we acquire. Over the long term, we expect that this will lead to expanding margins at the adjusted EBITDA level. With that, I'll now pass the call back to Golnar.

Thank you, Jim. Before we take your questions, I'd like to share some strategic insights and highlight a few aspects of our business that emphasize our competitive advantage and positioning for leadership in the evolving industry landscape. We understand the significant growth opportunities from emerging markets, which motivated our January 2020 acquisition of PopArabia in Abu Dhabi. Building on that acquisition, we launched ESMAA this quarter, a rights management entity and subsidiary of PopArabia focused on licensing in the UAE and the broader Middle East. ESMAA is the first of its kind in the region, meeting the market's need for legitimate music licensing. I'm eager to see PopArabia and ESMAA establish local standards in music licensing. We are also continuing to enhance our emerging market strategy by adding new artists and music in these regions, including a direct investment in Outdustry, China's leading music rights and marketing services company. This investment has allowed us to form a joint venture for signing and developing Chinese artists and acquiring local music catalogs. In a few years, we expect to see Outdustry and PopArabia showcase homegrown talent on the global stage while promoting cultural exchange from east to west. Additionally, we recently invested in the award-winning podcast and audio entertainment development team at Audio Up. We believe our business extends beyond music to encompass all types of content that engage listeners. We are collaborating with Audio Up to create content that explores Reservoir's rich music catalog and the stories behind it. In the coming years, I envision a collection of podcasts sharing the narratives of artists like Billy Strayhorn, Hoagy Carmichael, John Denver, and Joni Mitchell with future music lovers. We are enhancing value by pitching and licensing music for films, TV shows, video games, and merchandise. This quarter's organic growth rate of 15% aligns with our three-year historical organic growth rate CAGR of 16% and significantly outpaces the industry growth of 7%. I want to highlight an innovative license this quarter that merges merchandise with advertising. We collaborated with General Mills on a limited-edition cereal called Monster Mash, featuring all five of its monster cereals for the first time, accompanied by our classic Halloween song. This showcases the immense value of our copyrights. Digital licensing and alternative revenue streams are key drivers of how people consume music. Revenue from these sources, including gaming, social media, and fitness platforms, has grown by 44% year-over-year, with established names like Peloton and TikTok, as well as future leaders in these spaces. A notable example is a recent license for our entire catalog to Supernatural, a virtual reality fitness platform recognized by Time Magazine as one of the Best Inventions of 2020. It’s clear that music is becoming a product differentiator in the fitness sector, and Supernatural claims they offer the best music in VR fitness. The evolving landscape for music engagement is thriving. The IFPI this year highlighted the dynamic nature of music engagement, driven by the rapid rise of short-form video and in-game experiences fueled by a love for music. As we approach the end of 2021 and look ahead, we are focused on key areas that will position us for effective competition and long-term value creation. First, we anticipate benefiting from strong trends as more people listen to music more frequently and in more places. Second, we aim to exceed industry growth and achieve substantial organic growth rates through value enhancement initiatives. Third, we plan to scale through a proven M&A strategy, leveraging our reputation for preserving legacy assets and the agility our size provides. Currently, we are assessing over $1.5 billion in potential transactions with leading artists and creators. Lastly, we are working to improve our operating leverage and cash flow generation to support future deals. We are focused on managing overall operating expenses and maximizing the value of our assets. I must also mention the ongoing discussions in the U.S. involving creators, advocates, and distribution channels. We stand alongside our clients, songwriters, and artists. We envision a future where legislative efforts lead to the expansion of earning power for those who create the soundtracks of our lives. I’ll conclude with this thought: the IFPI reported that 80% of surveyed individuals said music contributed to their emotional well-being during the pandemic, highlighting music's enduring power to captivate listeners. We will now open the line for questions.

Our first question comes from a line of Richard Baldry of ROTH Capital. Your line is open.

Thanks. So, start on sort of the only thing that gets dragged then that's obvious why but the performance categories, people in COVID shutdowns not performing as well as is down a bit. What is the long-term sort of normalized level that could be contributing if we got back to sort of a full concert seasons and regular sort of movements outside of our lockdowns?

Hey, Rich, how are you? This is Jim. Well, I think with the performance revenue, in particular, what we're really seeing here is still the lagging effect, primarily of the international markets. Those markets report on a three to six-month lag. So really, when we're comparing Q2 of this year to Q2 of last year, where we're seeing last year's numbers that include really pre-pandemic levels, this year's numbers, while some of us think that we are on the way out, and there's certainly a lot of good progress, the international numbers are still reflective of being in the midst of the pandemic. So we think that as we move forward over the next two to three quarters, the international side will really start to come back. We will get back to a level where performance is where we expect it to be, which is really around 20% of our overall revenue.

Okay. When considering international markets, could we look at revenue in relation to large-scale populations to assess the potential in emerging regions like the Middle East or parts of Asia compared to Europe, which may align more closely with U.S. metrics? How significant of a driver could this be for the coming years?

I'd say that there's a lot of factors that go into that and it's not just population size, a lot of it has to do with the copyright laws in different regions. This really touches on one of the things that Golnar mentioned with ESMAA, we think that there's a lot of potential in the Middle East. But historically, you have not seen much in the way of performance revenue coming out of a market like that, because there hasn't been an entity to license music. Those markets have often used music without properly licensing and monetizing it. And now we're able to do that through ESMAA. I think that the subscription growth in a lot of those emerging markets will also contribute to the growth of performance revenue.

Then the organic growth obviously been almost 2x or over 2x the industry, can you talk about how sustainable you see that for some period of time are extensible? And sort of what are the incremental costs you need to support that organic growth? Not when you're adding wholesale new libraries, but simply growing organically through your synchronizations, etc.?

It's Golnar, Rich, how are you?

Good.

As far as organic growth goes, we don't have any indicator that it's not sustainable. Our organic growth is obviously driven by a lot of the initiatives that we undertake here and those are ones that we continue to staff and continue to power and continue to execute on through our sync team, etc. So we have a pretty good track record of that organic growth being consistent and we don't have an indication that that could change.

Okay. If we consider the factors that influence the capacity on the revolver, I assume they recognize that you are acquiring highly visible, recurring, high-margin revenue streams. As you integrate these into the business, does the revolver have the flexibility to grow over time? Will it be an important tool to support the M&A efforts?

Yes, I mean, we are fortunate to be in a position where we have a very long and strong relationship with our lenders. They've always been supportive of us. And it's a group of lenders who really do understand the predictive and recurring nature of our revenues, and they're very supportive of us. So, we don't foresee any issues with capacity around our revolver or looking at options with our revolver as we move forward.

And sorry for running down, but can you maybe because you still are very new in the public markets, walk us through the overall seasonality on the revenue side. Now as you've given a topline number, but there is a distinct seasonality. So just remind us of that, so that everyone sort of calibrates it together.

Yes. I like to make the distinction between cyclicality versus seasonality of our revenue. The reality is that the September and March periods have been historically our larger quarters because we have a number of revenue sources, primarily on the international side, who pay us semi-annually, 90 days after the end of the June and December periods. We're in the process of working with some of those international sub-publishers to try and move them to more of a quarterly accounting. We're likely to have some success there, but we won't be moving everyone to that schedule. So you can think about our second half of the year and the guidance that we provided in the context of certainly the fourth quarter being more significant than the third quarter because of that cyclicality and the semi-annual accounting that comes in the March timeframe.

Thank you. I have one last question. Considering the broader picture, you have been public for about a quarter now. You mentioned it briefly, but could you provide more detail on how this affects your ability to source deals, attract pipelines, and increase your visibility in the market? This would help us understand the early impact and how it may develop going forward. Thank you.

Sure. I mean, it's certainly a milestone to be the first independent publicly-traded vehicle in the United States and we recognize that, and that we have seen other people are recognizing, so there's certainly greater visibility that comes hand-in-hand with that. And we are seeing interest in how we can structure deals and the potential we have there because we now have a currency and that was one of our interests in going public, but we are seeing that it has traction within the seller market as well. So those two things come together and it has given us greater visibility within the marketplace. We hope to continue to build on that, as you said, it's only been a quarter. So hopefully, that will continue to track and have momentum behind it.

Thanks. And congrats on the quarter.

Thank you very much, Rich.

Thanks, Rich.

Our next question comes from the line of Alex Furman of Craig-Hallum Capital Group. Your line is open.

Great. Thanks very much for taking my question. Congratulations on a really strong quarter. I wanted to ask about the M&A that you're seeing, it looks like you guys have actually executed on a lot of M&A over the past year, but the Tommy Boy acquisition stands out, having been a particularly large deal. Can you talk about how that integration is going? And as you look at your pipeline, are there any other very large deals that you're seriously considering?

Sure. Thanks, Alex. How are you? As far as the Tommy Boy integration goes, that's obviously been going on for a few months now, and it is very much on track, I would say it's probably ahead of schedule, and so far as staffing and services and just ingesting those copyrights, etc. There is an ingestion team in charge of that and we are very pleased with those results. As I said, we are evaluating over $1.5 billion of transactions right now, but there are not in exclusivity on a deal of a similar size presently. But there are a few large-size deals in that deal pipeline that I mentioned.

Okay, that's really helpful. Thanks, Golnar. And then I think you and Jim touched a little bit in the call about emerging markets. Can you talk a little bit about how much of a part of your business today are emerging markets? And then in the context of that M&A pipeline and the level of deals that you're looking at, how much could emerging markets factor into that over the next few years?

So, presently, the emerging markets are contributing about 1% to our revenue and obviously, that is not a significant number. But we do see substantive pipeline in our deal flow coming from the emerging markets and we are executing on those and we do see some great potential there, obviously growing from that 1% that it currently is over the course of the next few years.

Okay, that's really helpful. Thank you very much.

Thank you. At this time, I would like to turn the call back over to Golnar Khosrowshahi for closing remarks.

Thank you so much. Thanks to everyone for joining us today and we look forward to continuing to keep you updated and thanks again.

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