Q3 2024 Reservoir Media Inc Earnings Call

Participants

Jackie Marcus; MD; Alpha IR Group LLC

Golnar Khosrowshahi; Founder, CEO, Director; Reservoir Media, Inc.

Jim Heindlmeyer; CFO; Reservoir Media, Inc.

Richard Baldry; Analyst; ROTH MKM Partners, LLC

Alex Fuhrman; Analyst; Craig-Hallum Capital Group LLC

Dan Day; Analyst; B. Riley Securities, Inc.

Presentation

Operator

Good morning, everyone, and thank you for participating in today's conference call. Reservoir Media's financial results for the third quarter of fiscal year 2024 and at December 31, 2023. (Operator Instructions) I would now like to turn the call over to Ms. Jackie Marcus with the Alpha IR Group, we'll review our agenda today and the Company's forward-looking statements.

Jackie Marcus

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 third quarter of fiscal 2024 ended December 31, 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.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 take note that today's discussion will contain forward-looking statements that reflect 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 are the 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 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 US 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 Khosrowshahi

Thank you, Jackie, and good morning, everyone, and thank you for joining us today. Before diving into our performance in the third fiscal quarter, I want to take a moment to recognize our songwriters and artists who brought home Grammy awards this past Sunday, our roster earned an impressive 39 Grammy nominations across 28 categories and contributed to 10 wins, including Joanie Mitchell's best photo album, a suite by killer, Mike, across the three wrap categories and best R&B song for Chris Riddick, Chinese collaborations news bases up their nominations and wins are a testament to the caliber of talent. We represent it reservoir beyond these accolades.
Another marker of success for our roster is seen by consumption and activity on the charts as reported by billboards publishers. Quarterly reservoir earned a Hot top100 10 market share for the three quarters reported so far for calendar 2023, one of our top consumer songs, snooze vices code written and coproduced by Chris Riddick times was a hot 100 chart staple over the last year, generating over half a billion on-demand audio streams alone. These achievements validate the talent and consistency of our roster and confirm the effectiveness of our team's strategy in signing and developing today's top hit makers.
Moving to our operational and financial performance in the third fiscal quarter, we continue to report strong growth numbers, underpinned by healthy organic growth, mirroring that of the wider music industry, eliminate the industry standard measurement platform for tracking music sales streams downloads and airplay issued its year end music report, which highlighted 34% year-over-year volume growth for total on-demand song streams globally in 2023.
This includes over 13% year-over-year volume growth in U.S. catalog total album consumption as well as an 11% growth in current total album consumption as hip-hop celebrated its 50th anniversary. This genre continued to lead all others in the US consumption contributing to over a quarter of all streaming consumption.
Additionally, Illuminate reported more than 20% annual growth in the on-demand audio streams of both Latin and country genres in the US. These figures are another strong endorsement of our efforts to further invest in these genres in the calendar year 2023.
Included in these investments were the additions of wrapper Armani, white Hip Hop producer, many fresh and songwriter producer. Willie will units’ country music producers and songwriters, Brent Mar, Roper, Augusta, Christian Stalnaker and Paul Carlson and influential Latin songwriter and producer, Rudy Perez and Miami sound machine co-founder, key Garcia. Moreover, Luminent's report also suggests the potential for India to overtake the US as the country with the highest overall streaming volume globally.
While India's streaming volume is currently just shy of the US's, the country saw the biggest year-over-year increase in total on-demand music streams of any nation with an increase of nearly 0.5 trillion streams, while the US volume increased by 184 billion at that rate, we could see India surpass the U.S. in 2024.
What's more luminary reported that the Hindi language music market share has more than doubled from 2021 to 2023, up to nearly 8% and also noted over 60% of both Gen Z and millennial Lister groups. Listen to new music to experience new cultures and perspective, we are excited by the implications of this data. And as we enter 2024, we remain committed to investing accordingly in opportunities in this market and continuing to build relationships on the ground to support regional music and its exportation to consumers across the world.
On the financial side, for the fiscal third quarter, we delivered top line growth of 19%, 14% of which was organic. We also expanded our margins in the quarter, resulting in adjusted EBITDA growth of 25% over the prior year. These financial results allowed us to once again beat our guidance for the quarter, and as Jim will discuss shortly, raised guidance for the remainder of the fiscal year. In addition, they demonstrate our ability to manage the business and deploy capital to further grow our portfolio along those lines.
During the quarter, we continued to invest in our business with an emphasis on further diversifying our portfolio across various music genres. Some of our recent deals include a new publishing deal with songwriter producer singer and multi instrumental SDO. Chadstone, best known as a founding member of American fund band Wolf pack. Theo has released for solo albums and collaborated with a wide range of artists across genres, including cash, currently, Rae Jepsen, Teddy Geiger and more.
We also announced the code signing of Australian singer songwriter grant press to a worldwide publishing deal for his entire catalog and future work. This collaborative project with our Australian sub publisher, mushroom music sees our two companies come together on all creative and administrative aspects of Greg for his career to take his music to new heights in the U.S., Australia and beyond.
Lastly, in conjunction with proper idea, we expanded our presence in the Middle East with a deal with into Musica, the label publisher and production house of Lebanese superstar Nancy Ultra. The deal includes her entire catalog and future works with a combined total of 90 million followers across social media. She was the most streamed female Arab artist on Spotify in 2022, achieving more than 100 million plays of her songs solidifying her moniker as the queen of Aeroplan.
With respect to our pipeline of opportunities, we are actively evaluating multiple potential deals that will support our growth aspirations. Our pipeline sits roughly at $2 billion in total value for prospective deals, which I'd like to note does not include off-market opportunities that also remains strong. We remain a highly respected and regarded partner and our proven reputation for being a strong steward for catalogs through our value enhancement initiatives allows us to acquire some of the best assets on the market.
We look forward to closing out the fiscal fourth quarter in a position of strength with new artists joining our roster and achieving our full year financial guidance, which Jim will address shortly.
With that, I'd like to turn the call over to Jim to discuss our third quarter numbers in greater detail. Jim?

Jim Heindlmeyer

Thank you, Golnar, and good morning, everyone. We're pleased to report another quarter of strong financial results, headlined by meaningful revenue growth in both of our business segments and our fifth consecutive quarter of double-digit adjusted EBITDA improvement. Our accomplishments in the quarter represent reservoir's commitment to consistent growth on both top and bottom lines.
Turning to our fiscal third quarter results. Revenue for the quarter was $35.5 million, which was a 19% increase versus the prior year quarter when including acquisitions. This was driven by growth in both business segments, highlighted by a 32% year-over-year increase in recorded music.
Turning to our operating expenses for the quarter, our overall cost of revenue increased 13% versus the prior year quarter, driven by higher revenue for the quarter. Amortization and depreciation costs increased 14% year over year, driven by our continued catalog acquisitions.
Company administration expenses increased 17% versus the prior year period, primarily due to higher compensation costs, increased marketing spend for recorded music and higher fees for artist managers associated with the higher revenue in that segment in the third quarter, EBITDA increased 27% year over year to $12.9 million for those of you who are newer to our business model with a common non-GAAP KPI. used in the music industry that stands for operating income before depreciation and amortization, adjusted EBITDA increased 25% compared to the prior year to $13.7 million. Increases in both our EBITDA and adjusted EBITDA were driven by strong revenue growth or partially offset by higher administrative expenses.
Interest expense was $5.4 million for the third quarter compared to $4.1 million in the same period last year. Net loss for the third quarter of fiscal 2024 was $2.9 million versus $4.1 million in the prior year quarter. This resulted in a net loss per share of $0.05.
The decrease in net loss was driven by the higher revenue and improved gross margins, both partially offset by a higher loss on the fair value of our interest rate swaps as well as higher administration expense, amortization expense and interest expense.
Our weighted average diluted outstanding share count during the quarter was $64.8 million. Let's turn to our performance by segment for the quarter, starting with music publishing, music publishing generated revenue of $23.1 million in the third quarter, an increase of 15% compared to the same period last year. This was driven by a 30% year-over-year gain in digital revenue and a 9% improvement in synchronization revenue, but was partially offset by a 3% decline in performance revenue in our recorded music segment, third quarter revenue was $10 million, representing an increase of 32% compared to the third quarter of fiscal 2023.
All revenue types within our recorded music segment delivered double digit percentage year-over-year increases, most notably led by synchronization revenue, which increased 101% versus the prior year quarter, physical and digital revenue increased by 51% and 26% respectively, and neighboring rights revenue increased 16%.
I want to highlight the notable sequential improvement in our sync revenue for both segments. While we did see lumpiness in our performance due to the writer and actor strikes in calendar 2023, which caused delays in production schedules, we saw significant improvement in demand for our catalog within the advertising market.
The current ad market is very promising. And although we have yet to work through the full impact of the strikes, we feel well positioned to capture ship synchronization growth opportunities across both our segments as production schedules return to normal.
Now turning to our balance sheet, we closed the quarter with total available liquidity of $121.7 million, comprised of $19.5 million of cash on hand and $102.2 million available under our revolver. This gives us ample capital to continue to fund our strategic growth objectives.
We ended the quarter with total debt of $342.5 million, which was net of $5.4 million of deferred financing costs, bringing net debt to $323 million. That compares to net debt of $296.6 million as of March 31, 2023, we've hedged nearly half of our debt at attractive interest rates, which reduced some of our exposure to higher interest rates in the calendar year. While more recently interest rate increases have begun to level off, we expect our hedging strategy to continue to mitigate our interest expense in the 2024 calendar year.
Finally, I'd like to touch on our outlook for the remainder of the 2024 fiscal year. We are raising our guidance for both revenue and adjusted EBITDA for the year to incorporate our strong third quarter results for revenue, we're raising our guidance from our prior range of $133 million to $137 million to a range of $140 million to $142 million. This represents 15% growth at the midpoint of our range. We now expect adjusted EBITDA for the year to be between $53 million and $55 million, which represents 16.5% year over year growth at the midpoint.
Looking ahead, we remain focused on our strategy of prioritizing organic growth while making accretive acquisitions and we'll maintain a responsible capital deployment approach. We look forward to closing out the year within our updated guidance expectations for fiscal 2024.
With that, I'll now pass the call back to Golnar for closing remarks.

Golnar Khosrowshahi

Thank you, Jim. As we look ahead, we remain committed to operating the business with rigor as we navigate a dynamic economic backdrop. And as the music industry continues to grow, we are confident in our ability to achieve our financial targets, which have been raised and narrowed on both revenue and adjusted EBITDA. Our pipeline remains very active globally and across both business segments, with the support of consistent and predictable cash flows. We anticipate continuing to execute deals well within our expected return profile.
With that, we will now open the line for questions.

Question and Answer Session

Operator

(Operator Instructions) Richard Baldry, ROTH MKM.

Richard Baldry

Thanks. Given the focus on international, can maybe talk about what you're seeing there that that's attractive. The greater growth opportunities are there the pace of their organic growth or and deal terms themselves on initiation are it's really a blend of both and then maybe you could talk about whether there's a bias internationally toward either recording or publishing again.

Golnar Khosrowshahi

Good morning, Rich. I think it's a combination of all of the factors that you mentioned, we are able to execute in those markets at very attractive pricing and which makes for attractive returns. There is the promise of future growth that we are intrigued by as subscription numbers grow as access our two platforms develops. So that makes it significantly attractive to us from the thesis being that we would like to be in a position to be content owners in the international markets on the cost spend ahead of how these markets grow and consumption grows and streaming grows, which will then translate into associated revenues. And that's what makes it captivating for us.

Richard Baldry

And can you talk about sort of the go-to market model in all those countries yet on feet on the ground? Is it something that can be done remotely. Do you feel like you have adequate resources in the right regions? Or do you need to sort of add to that as you get better with more reps and more and more deals in those regions.

Golnar Khosrowshahi

We generally subscribe to the idea that you have to have feet on the ground and develop relationships with people and move those relationships forward. I'm not really a big fan of doing business by proxy in those markets, hence, our operation at pop Arabia, which allows us to really extend that reach in the metro region as well as in India, where we do represent talent and have already begun developing that business. And so it's because this is very much a relationship-driven business with orders and catalog sellers, et cetera. It's important to have feet on the ground, and we have had those feet on the ground for several years now. So we are very well positioned to execute there.

Richard Baldry

And maybe looking at the organic growth side of the table, the estimates are qualitatively even how far into recognizing royalty rate increase and from the various therapies?
Yes, settlements, et cetera.
And do you feel like you have a rolling sort of recognitions managed? You feel like you're halfway into that? Is that still a pretty good tailwind for '24 '25. How do we think about that as a driver?

Jim Heindlmeyer

Yeah. I think this is Jim, Rich. So I think when we think about those rate increases, we're still comparing the current quarter of December 23 against December 22, December 22, we were still in a position of really estimating and accruing what we thought that final quarter of CRB. three would be we obviously have much more visibility and real data in the current year where we're being accounted under the CRB four rates.
So there's still a little bit of that of those tailwinds are helping in our organic growth in the current quarter. And I think that we will continue to come to potentially see that going into let's say, Q1 of next year, our June quarter as we look forward to full resolution of the CRB three rate increase where the DSPs will within the next couple of days be remitting that money to the MLC, and that will flow through to rights holders a few months after that. So once we see those true ups and my expectation is that as we work through that, that will kind of be the end of some of that lumpiness, if you will, related to the rate increase there.

Richard Baldry

And then last one for me at Q4 has typically been very seasonally strong. Your guidance sort of implies it's more sideways this year there any unusual one-time impacts in Q3 that we should think about taking out it would explain that or do you think just typical conservatism? Thanks.

Jim Heindlmeyer

Yeah, I think the you know, I've mentioned this on some of our previous calls, but one of our ongoing focuses is improving how we handle accruals. You're obviously aware that in this business there can be some significant lags in how revenue is accounted to us, and we have an ongoing goal of improving the accuracy of our accruals.
And as we go through that, that will naturally lead to some flattening of our quarter-over-quarter fluctuations. And I think that that's partly what we are seeing is if you go back a couple of years, you will see much higher, much higher spikes in the September and March quarter and lower valleys in the in the June and December quarters.
And now we're seeing a little bit of a smoother quarter-over-quarter cadence with our revenue. There's nothing in particular in the third quarter that that I think needs to be called out. And that's also part of the reason why when you see our adjusted guidance, you really see that the third quarter performance reflected in our increases for the full year guidance.

Richard Baldry

Great. Thanks and congrats on a good quarter.

Jim Heindlmeyer

Thank you.

Golnar Khosrowshahi

Thank you.

Operator

(Operator Instructions) Alex Fuhrman, Craig-Hallum.

Alex Fuhrman

Great. Thanks very much for taking my question here on Jim, it's cross my mind here that that since reservoir has been a public company, you've often reported a very strong Q1 or Q3 and then gone on to caution investors that you really view your business into halves and that to some extent, the strong quarter may have pulled some revenue and earnings out of the upcoming quarter. Can you talk a little bit about what makes this quarter different and what really gives you the confidence to be pretty significantly raising your full year guidance here?

Jim Heindlmeyer

Well, we are we're only one quarter until the end of the year. So obviously, as we get closer to the end of the year. We have more confidence in where we will end the year. And I think that that's, you know, that's something that will that we will continue as we get close to the end of the year, we will always have better visibility and higher confidence in where we will end the year.
I think that with respect to Q3, we really just saw very strong performance, whether it's in the digital revenue type or in synchronization where we had a very strong revenue related to advertising. And that's not something that we look at as being pulled forward from Q4. And so we remain confident in how we will do in Q4, and we were able to raise our guidance to reflect the outperformance in Q3.

Alex Fuhrman

Okay that's really helpful. Thank you. And then on Ghana, there's been a lot of headlines recently about the use of music on social media and TikTok in particular, has there been any change to how your music is used or paid for on social media? And do you see maybe opportunities for the industry to better monetize that channel over time?

Golnar Khosrowshahi

Good morning. Alex. I think social media fill in the blank as far as the platform goes, has been an area where we have historically partnered with the NMPA and ensured the use that the use of music is legally license and fairly compensated for we stand with the NMPA. And in this latest action with the ticked weather, Universal's latest action with TikTok and we sent with our songwriters obviously, and rights holders.
It's the it's always going to be.
And the issue in the sense that these are platforms where the content is being distributed some a lot of times many times before the legal licensing actually is put in place. And that is a battle that we will continue to fight from such that we can get to a place where we're actually compensated and the music is legally licensed. And we have quite a bit of history showing that that can happen and that these platforms can continue to thrive using the music that is both through user-generated content as well as other kinds of content. And that results in additional.

Alex Fuhrman

Okay. That's really helpful. Go and I appreciate that insight.

Golnar Khosrowshahi

Thank you, Alex..

Operator

(Operator Instructions) Dan Day, B. Riley Securities.

Dan Day

Yes, morning, guys. Thanks for taking the questions. Just a couple for me. The bigger DSPs, Spotify, a couple of others. They put through a lot of rate hikes throughout 2023. I appreciate the color on the CRB tailwinds, just whether you think these were fully reflected in the December quarter, the rate hikes I'm referring to or do you think there's still some tailwinds as these price hikes get pushed out to more and more subscribers?

Jim Heindlmeyer

Are you doing? Dan, it's Jim here.
So I think with respect to the there's kind of two parts to your question on the price increases, we're obviously very happy with what's happened over the past year with those price increases, and we are looking forward to maybe a more regular cadence of price increases, you know, having gone as, 10, 12 years with no price increase. We are certainly looking forward to more regular improvements there. But with the rates.
As I mentioned earlier, I think that we are still seeing some tailwinds in the quarter as we are currently being accounted under the CRB for rates and comparing that to the prior year where we were really estimating under the CRB three rates. And so while there's a little bit of tailwind there in this quarter, we think that those tailwinds will be fully reflected when we get the final CRB three true ups, which we are looking forward to in the coming months as the DSPs work with the MLC. two to push that money through.

Dan Day

Okay, great. Another question for me. Kind of higher level one. I'm just wondering how you're either currently using or thinking about using any of these generative AI tools, maybe to enhance the productivity of your roster of songwriters, anything you're investing behind there? And just really anything else you think worth mentioning about generative AI, current or potential future impact on the San rating industry would be would be great.

Golnar Khosrowshahi

Sure. I think come there are a lot of tools that enhance efficiencies in so far as production goes and we are seeing these develop in the studio and we have songwriters who are already using these tools are not in a way that is threatening to the existence of the Songwriter of themselves.
And I think there's a little bit of noise and misinterpretation around that side of things and that there are a lot of positive outcomes that are that we are seeing as a result of these tools, we are obviously very well informed about the developments, legal developments in so far as how these tools are using existing IP and that is an area that we will champion the rights of our songwriters as well as ourselves to ensure that IP is not being used to develop and new IP that is based on that existing and product and compensation for that. And recognition of that is obviously very important for us. And then internally in the business, we are using all kinds of AI tools in through our marketing department through our deals team, et cetera. And we are seeing some greater efficiencies there.

Dan Day

All right. Great appreciated, and I'll turn it over.

Golnar Khosrowshahi

Thank you.

Operator

Thank you. I'm not showing any further questions in the queue at this time. I will now turn the call back over to Golnar Khosrowshahi for any closing remarks.

Golnar Khosrowshahi

Thank you, operator. And to everyone who joined us today. We are proud of and honor to work with some of music's most important song writers, producers and artists across genres and areas. And we look forward to updating you on our full fiscal year performance.

Operator

Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.