Reservoir Media, Inc. Q1 FY2025 Earnings Call

Good day, everyone, and welcome to today's Reservoir Media Q1 Fiscal Year 2025 Earnings Conference Call. Please note, this call is being recorded. It is now my pleasure to turn the program over to Jackie Marcus, with Investor Relations.

Thank you, operator. Good morning, everyone, and thank you for participating in today's earnings conference call. Reservoir Media issued a press release with results for its first quarter of fiscal 2025 ended June 30, 2024, 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. 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.

Thank you, Jackie. Good morning, everyone, and thank you for joining us today to review our results for the first quarter of fiscal year 2025. Just a few days ago, we marked Reservoir's third anniversary of our listing on the NASDAQ. During this time, we have attracted an increasingly high caliber of talent and assets to the company, while also maintaining our reputation as a partner of choice for those creators who already call Reservoir home. We continue to represent music in all corners of the world and have grown our team into an ever more global, diverse and experienced group. We have accomplished these foundations in concert with exceeding full year revenue and adjusted EBITDA guidance and posting year-over-year organic growth every quarter since our listing. These last three years are evidence that we not only set goals for ourselves, but we also consistently achieve them. Reservoir has only just started our journey as a public company, and we believe we have significant future value to drive for all of our stakeholders as we move forward. We're off to a good start in fiscal 2025 and remain on track to again hit our annual targets. For the first quarter, we posted total revenue of $34.3 million, which was up 8% when including our acquisition and up 6% on an organic basis when compared to the year ago period. At a segment level, we saw strength in our Music Publishing business, which helped us drive a 25% increase in our adjusted EBITDA. Music Publishing generated healthy top line growth particularly from digital and performance-based revenues, which benefited from price increases at multiple music streaming services, despite the reclassification of Spotify's primary subscription tier as a bundled service. We also saw a 17% gain in digital revenues for our Recorded Music business, driven by the continued growth of the DSPs. Synchronization revenue in Recorded Music grew 87%, with some standout placements, including Sinéad O'Connor's 'Never Get Old' in a trailer for 'The Watchers' and Generation X's 'Dancing with Myself' in a Comcast ad. One of Reservoir's unique strengths is our ability to not only build a diverse and high-quality catalog of assets, but also identify and partner with active songwriters and producers who are shaping the music landscape with chart-topping collaborations across genres. Reservoir writer Steph Jones continues to reach meteoric heights with her co-write on Sabrina Carpenter's 'Espresso', which many media outlets have deemed the song of the summer. 'Espresso' held the #1 position on the U.K. Singles Chart for 6 weeks and also topped several U.S. charts. Even more impressive, 'Espresso' reached #1 on Billboard's Global, excluding U.S. Chart, which tied for the longest run at that spot this year, and it also sits at #6 on the Top 10 Global Songs for the first half of 2024 as calculated by Luminate. We also celebrate the success of Dua Lipa's third studio album 'Radical Optimism', which featured Ali Tamposi's co-write, 'Whatcha Doing' and 'Falling Forever'. The album debuted at #1 on the U.K. Album Charts and #2 on the Billboard 200. Reservoir songwriter Kings of Leon's ninth studio album, 'Can We Please Have Fun', reached #2 on the U.K. Album Charts and #7 on the U.S. Top Rock & Alternative Albums charts. In addition to those I just mentioned, the work of multiple other Reservoir-affiliated writers landed in the top 10 on the Billboard 200 this past quarter, including music by Shaboozey, Luke Combs, Gunna, Ariana Grande and Zeza. Our early investment in emerging markets, particularly in the Middle East and North Africa, gave us the opportunity to sign some of the most popular regional acts who are proving to be cross-border commercial successes. For example, Champion, the latest album for Moroccan rap star 7liwa, included 2 singles that reached the #1 and #2 positions on Spotify's Top 50 Morocco chart. Both tracks also landed in the top 10 on the IFPI's Official MENA Chart North Africa and made appearances on Billboard's Arabic Top 100. This past month, we also published the official anthem for the International Cricket Council's T20 World Cup 2024, 'Out of This World' by Sean Paul and Kes, with several remixes including one featuring Indian mega rap star, DIVINE. The increasing global demand for music from emerging markets around the world reiterates our commitment to this growing market and to further expanding our reputation as the partner of choice by today's leading artists in the region. Turning our attention to new Reservoir signings, we recently announced 3 publishing deals I'd like to highlight. We added the award-winning singer and songwriter Wrabel to our roster, with the Huffington Post calling him one of pop's unsung talents. Wrabel has co-written for P!nk, Kesha, Backstreet Boys and Pentatonix, among others. Earlier this month, we announced the addition of Platinum selling songwriter and producer, Aaron Zuckerman, to our roster. The deal includes Aaron's recent co-write 'White Claw' by Yung Gravy and Shania Twain. He has also partnered with today's top artists across genres, such as Lil Wayne, Bebe Rexha, MGK, Hunter Hayes and Travis Barker. And third, songwriter producer, Lewis Thompson joined our roster. With 4 billion streams and 9 Top 10 U.K. hits to his name, Lewis has collaborated with some of the biggest names in pop, and his works have been nominated for the BRIT Awards Song of the Year and Ivor Novello PRS For Music Most Performed Work. The strength of our portfolio of assets is reflected in our first quarter financial results and is a product of the robust due diligence process we undertake prior to making an offer. As Jim will discuss, our business generates a healthy predictable cash flow that allows us to continue to invest in our operations, people and creators. With that, I'd like to turn the call over to Jim to discuss our first quarter numbers in greater detail. Jim?

Thank you, Golnar, and good morning, everyone. Our results this quarter were in line with our internal expectations and are a testament to the strong portfolio of assets we have at Reservoir. Revenue for the first fiscal quarter was $34.3 million, a 6% year-over-year improvement on an organic basis and an 8% increase when including acquisitions. This was led by the 15% growth in our Music Publishing segment, which offset the 7% decrease we had in Recorded Music. Turning to our operating expenses, the total cost of revenue decreased 1% compared to the prior year quarter, while our administration expenses and amortization and depreciation costs grew 6% and 5%, respectively, versus the prior year. Looking at operating performance for the first quarter, OIBDA was $11.3 million, an increase of 23% year-over-year, and adjusted EBITDA was up 25% to $12.6 million compared to Q1 of fiscal 2024. The increase in OIBDA and adjusted EBITDA were due to effective cost management and efficiencies achieved on higher revenues for the quarter. Interest expense was $5.1 million for the quarter versus $4.7 million in the prior year, driven primarily by an increase in SOFR from the prior year quarter to the current year quarter. Net loss for the first quarter was approximately $500,000 compared to net income of $200,000 in the first quarter of fiscal 2024. The decrease was primarily due to a quarterly loss on the fair value of our interest rate hedges, which resulted in a diluted loss per share for the quarter of $0.01 compared to zero in the prior year quarter. Lastly, our weighted average diluted outstanding share count during the quarter was 65 million. Now let's dive into our segment review for the quarter. Music Publishing had a 15% increase in revenue versus the prior year quarter at $24 million and was driven by acquisitions of catalogs and revenue from existing catalogs, which benefited from price increases at multiple music streaming services and led to increases in digital revenue, performance revenue and mechanical revenue. Moving to our Recorded Music segment, we had a 7% decline to $9.6 million in revenue compared to Q1 last year. Last spring, in addition to bringing De La Soul's catalog to digital platforms for the first time ever, we also released their music to fans on vinyl, CD and cassette formats, which caused a significant shift in physical revenue in the prior year quarter. The resulting decrease in physical revenue in this quarter was offset by an 87% increase in synchronization revenue, a remarkable metric in the face of lingering impacts of the actor and writer strikes from last year. We also saw 17% growth in digital revenue due in part to price increases at multiple music streaming services as well as an increase in neighboring rights revenue. Turning to our balance sheet, as of June 30, 2024, cash provided by operating activities was $8.6 million, which was an improvement of $9.4 million compared to the year ago quarter. We had total available liquidity of $137.6 million, consisting of $16.4 million of cash on hand and $121.2 million available under our revolver. We ended the quarter with total debt of $324.1 million, which was net of $4.7 million of deferred financing costs. Thus, we maintained $307.8 million of net debt, which compares to net debt of $312.7 million as of March 31, 2024. Consistent with our prior first quarter calls, we are maintaining our full year revenue guidance range, which stands at $148 million to $152 million and, at the midpoint, implies growth of 4% versus fiscal 2024. We similarly reiterate our adjusted EBITDA guidance range of $58 million to $61 million, which signals growth of 7% over the prior year at the midpoint of the range. We continually review our forecast for the full year and will provide updates when appropriate to do so. For the remainder of fiscal 2025, we're focused on executing our strategy to continue delivering consistent and predictable cash flows that will allow us to achieve our forecasted top line and adjusted EBITDA guidance for the year. I'll now pass the call back to Golnar for closing remarks.

Thank you, Jim. We are confident in the value of Reservoir's assets and the portfolio we have built. As the music industry continues to grow and build momentum, the M&A marketplace has remained strong, as evidenced by recent large-scale transactions ranging between approximately 16x to 18x multiples on NPS, NLS. We believe our track record and the quality of our portfolio reflects our long-term growth potential. We remain focused on building upon our momentum and increasing visibility to capture more value over the long term. We appreciate your continued support and look forward to sharing our progress with you. We will now open the line for questions.

We'll take our first question from Griffin Boss with B. Riley Securities.

So I don't see the Q posted yet, so can you just give some more color, Jim, maybe on the magnitude of catalog purchases and addition to royalty advances in the quarter?

Yes, sure. Thanks for the question, Griffin. This was a relatively quiet quarter for us with respect to both catalog acquisitions and advances. Having said that, it's not indicative of our run rate for the year. We have a really robust pipeline, and we have a number of deals that we're very excited about that we'll be closing in the coming quarters.

Griffin, I would also add that there is a certain cyclicality to deal flow. And the cadence at which we deploy capital isn't always going to spread out evenly quarter-over-quarter or year-over-year.

Okay, I understand. That's very helpful. Just to confirm, the pipeline is still considered to be $1 billion, with more than 120 opportunities currently under consideration.

Yes, it's slightly over $1 billion. And as Jim said, there are a few opportunities that we are extremely excited about in the sort of near term.

Okay. Great. And then so jumping over. Obviously, you talked about the really strong growth in publishing, particularly in digital. And you mentioned the price increases from DSPs. Were there any other onetime items that contributed to the first quarter outperformance in digital? Or was that basically all attributable to the price increases?

Yes. There weren't any particular onetime things that we felt needed to be called out for this quarter. It was really business as usual. We benefited from those price increases and kind of nothing in particular to add beyond that with respect to onetime items.

Okay. Got it. And then last one for me, and I'll jump back in the queue. Can you just talk a bit more broadly about the growth characteristics you're seeing internationally versus the U.S. today and how you look at those going forward?

Can you explain what you mean by growth characteristics?

Yes, could you provide an overview of how you observed growth internationally compared to the United States during the quarter? Additionally, how do you expect growth to evolve internationally and domestically for the rest of the year?

Yes. I think that we are – while we remain very optimistic about the opportunities internationally, but when we say internationally, that’s – it’s a pretty big territory that we’re covering, right? There are certainly mature markets in there where we continue to perform well, whether it’s in the U.K., Europe, those types of markets, but we also see a lot of opportunities, whether it’s with our sub-publishing partners throughout Southeast Asia and South Asia or the work that we’re doing through PopArabia to take advantage of opportunities in the Middle East and India, where, like I said, we remain very optimistic about where that’s heading. As we’ve said on prior calls, it remains a part of our business that is not the biggest part of our business, but the growth that we are anticipating there in the coming years, we think, will really ramp up.

We'll take our next question from Rich Baldry with ROTH Capital.

Can you provide an overview of the impact of the Spotify bundling issue and where it stands regarding any legal controversies or resolutions, so we can understand how significant that challenge has been?

Sure. With respect to the magnitude or the impact of this, we've talked on the last call about Billboard estimating it to be about $150 million annually to the industry. And I think we also mentioned on the last call that we estimated it somewhere between $1.2 million and $1.5 million to Reservoir on an annual basis, and that's something that we have built into our forecast. And while we are very opposed to what Spotify is doing, that's the situation right now, and that's what we have built into our forecast. And maybe I'll turn it over to Golnar for a little bit more color around it.

Yes, Rich, so I would add a couple of things. First of all, we can't really predict where this litigation will go and how long it will take, but we will fight the good fight, and we will advocate for our songwriters. But as Jim said, our forecasts and our budgets reflect the reality that we're living today. The other thing that we also haven't put in our forecast is the numbers around Spotify's Premium to your service, which is estimated to be somewhere in the ballpark of $5 more than the current service, with their estimates being pretty significant as far as how many people will convert to that product. So that's another thing we haven't forecast for. But I think today, we have a very good handle of what the future looks like here as far as the impact goes. And the advocacy work and the litigation will continue. What we are managing for on this end is that we don't want any surprises on this front nor do we want to make assumptions around litigation outcome, and that's something that I think that we are prepared for.

Okay. And when we look at specifically at the Recorded Music line, while the revenues were down, the profitability contribution was up pretty meaningfully. So can you talk about how often do you run or do you think you'll see one-off events? Like with De La Soul were, arguably, it actually might have been at least breakeven or maybe even cost a little bit of money as a sort of, I guess, a onetime promotional effort.

I think it's difficult to predict how often these events will occur. The frontline recorded business is a smaller segment of our overall operations. I would consider the De La Soul launch to be an exceptional case. I don't anticipate us implementing a plan of similar scale and significance in the next one or two quarters. Therefore, for a frontline recorded business of our size and roster, such occurrences are not common.

Great. And then as we look forward, you maintain guidance. But in terms of seasonality, is there anything that's changing there? You obviously had an unusual comparison because of De La Soul in one part of Q1. But if we look at the rest of the year, maybe our international trends changing any of the typical season, now we see either on the revenue or the OpEx. And on the OpEx side, I just note that it was obviously very flat from Q4 to Q1. How much do you think that, that trend continues? Or is there some meaningful investments you kind of see on the horizon?

Yes. I believe that regarding operating expenses, we are currently well-aligned with our infrastructure. The current run rate is where I expect us to be. Like other businesses, we are facing inflationary pressures, which will continue to have an impact. However, I do not anticipate any significant changes in the quarter-over-quarter pattern of operating expenses. In terms of revenue cyclicality, we have made progress in enhancing our accrual process over the past few years, helping to smooth out the fluctuations we experience quarterly due to payment timing. There is still some variation, with our September and March quarters generally being a bit stronger than our June and December quarters. However, the fluctuations are less pronounced compared to three years ago.

Right. And last for me. I've sort of asked this every quarter, but when you think about the external environment, can you just talk a little broadly about the M&A pipeline? Not necessarily absolute sizing, but bigger, smaller expectations changing at all with the macro kind of trending a bit sideways, it looks like, based on interest rates.

Sure. We’re very excited about the pipeline. I think, at least, the immediate or the short-term deal pipeline, there are characteristics of deals that we are attracted to in off-market settings that we are able to execute on at good multiples, and attractive returns, diversified assets – set of assets that we’re looking at, ranging from recorded to publishing to film score. Again, that’s in the short term. I think – as far as sizing goes, there are certainly a few larger deals there. That’s not our sweet spot. So the short-term pipeline is looking at a number of transactions that are in the 7 to 8 figures. And then a few interesting opportunities on the publishing frontline roster as well that we are entertaining. But a pretty solid mix of assets. We don’t continue to see any material contraction on pricing, and we have found some opportunities that allow us to purchase at good entry multiples.

We will take our next question from Alex Fuhrman with Craig-Hallum Capital Group.

Congratulations on another quarter of really solid, consistent results. I wanted to ask about the cost of revenue. That was actually down, it looks like, in dollars year-over-year, despite pretty healthy revenue growth, both organically and on the top line. Can you talk about what's been driving that? And then bigger picture, it looks like at least as a percentage of sales, cost of revenue has been coming down for a couple of years. Is that due to the mix of the type of assets you're managing? Can you just give us a little bit more color on what's been driving those trends and what we should expect to see the rest of the year?

Sure. Thanks, Alex. So on the cost of revenue, the biggest driver there is going to be the shift away from physical revenue on the recorded side. Obviously, that revenue carries a much higher cost of revenue than digital does. So that was the biggest driver of a 1% decrease in cost of revenue, while we had an 8% increase in overall revenue. I think if you look at the segments, which you’ll be able to do more when the Q is filed aftermarket today, but you’ll see it in the earnings release as well, we probably had, I think, a 2-point improvement on our publishing gross margin. Some of that does come down to the mix of the assets that we own. Potentially, we acquired assets that carry a higher margin, and that type – those types of acquisitions will improve our overall gross margin. But it was really pretty minor on the publishing side. And on the recorded side, it’s being driven by that shift in the physical revenue for the quarter.

I will now turn the program back over to Golnar Khosrowshahi for any additional closing remarks.

Thank you, operator. We finished the first fiscal quarter in a strong position and look forward to continuing that momentum over the course of the fiscal year. Thank you very much for joining us this morning.

This does conclude today's program. Thank you for your participation. You may disconnect at any time, and have a wonderful day.