Reservoir Media, Inc. (RSVR) Q2 2022 Earnings Report, Transcript and Summary

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. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] 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 reflects the current use 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 expectation, belief, and projection 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 question. 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 a 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 artists 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, has 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 welcome 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 artists 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 deliver 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 a 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 topline 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 decrease 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, a window and adjusted EBITDA. Both of these metrics remove the impact of amortization from our operating results. So, these metrics do not reflect periodic costs of certain capitalized tangible and intangible assets used in generating revenues. 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 have 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 at $1.8 million in actual revenue for fiscal 2021 or 25% growth at the midpoint of our range. For adjusted EBIT da, 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 topline 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 topline 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 to 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 close with a few strategic thoughts and touch on a few aspects of the business that underscore our competitive advantage, our edge and our positioning for leadership within the evolving landscape of the industry. We recognize the growth that has and will likely continue to come from the emerging markets and this was the original impetus behind our January 2020 acquisition of PopArabia, which is based in Abu Dhabi. Building upon that acquisition and an entirely new development this quarter was the launch of ESMAA, a rights management entity and subsidiary of PopArabia dedicated to facilitating licensing in the UAE, and more broadly in the Middle East. ESMAA is a first of its kind entity in the region, addressing the need in the market for legitimate music licensing processes. I look forward to watching PopArabia and ESMAA set local standards in music licensing. Furthermore, we continue to build on our emerging market strategy by adding new artists and music to the roster in these regions. This included a direct investment in China's leading music rights and marketing services company, Outdustry. As part of this investment, we also formed a joint venture to sign and develop Chinese artists and songwriters, plus acquire local music catalogs. In a few years, we will bear witness to Outdustry and PopArabia, bringing homegrown stars to the global stage and playing a part in encouraging the movement of culture from east to west. Another exciting recent investment is in the award-winning podcast and audio entertainment development team at Audio Up. We sincerely believe that beyond music, we are more broadly in the business of listenership and are focused on strategies that enable us to have exposure to content -- all types of content that is occupying share of yours. We are already working with Audio Up to develop content that minds Reservoir's deep catalogue of music and the history and stories behind the music. In the years to come, I personally foresee a virtual library of podcasts that shares the stories of the likes of Billy Strayhorn, Hoagy Carmichael, John Denver, and Joni Mitchell with the next generation of music lovers, both through the narrative and the notes. We continue to enhance value by pitching and licensing music for use in films, television shows, video games, and merchandise. As I mentioned earlier, this quarter's organic growth rate of 15% is right in line with our three-year historical organic growth rate CAGR of 16% and has significantly outpaced the industry growth of 7%. Along these lines, I wanted to call out a particularly innovative license that arose this quarter, which converges merchandise and advertising. In this case, we partnered with General Mills on a limited edition serial called, Monster Mash, featuring pieces of all five of its monster serials together for the first time. This was scored by our classic Halloween song of the same name and illustrates the limitless value of our great copyrights. Digital licensing and alternative revenue continue to lead the charge on accretive avenues through which people are consuming music. Revenue from these sources covering gaming, social media, fitness platforms, and more has grown at 44% year-over-year, and it's not just the names, Peloton and TikTok, Roblox and Twitch, but also the future leaders in these spaces. A great example is a recent license issued for our entire catalog to a platform called Supernatural, a virtual reality fitness platform that Time Magazine named as One of the Best Inventions of 2020. I would highlight that recognizing the value of music as a product differentiator amongst the fitness category is now front and center. In fact, Supernatural says they have the best music in VR fitness. And there's much more to come as this new and exciting landscape for music engagement continues to flourish. The IFPI notes that this year study paints a rich and diverse picture of music engagement with the rapid emergence of short form video and in-game experiences, all driven by people's love of music. As we look toward the end of calendar 2021 and into next year, we are keenly focused on the following key areas, which we believe will position us to compete effectively and build long-term value. First, we are poised to benefit from strong secular tailwinds as more people listen to more music, more often, and in more places. Second, we will strive to further outpace industry growth and demonstrate substantial organic growth rates driven by value enhancement initiatives. Third, we will continue to build scale through a proven track record of M&A, leveraging our reputation as a caretaker of legacy assets, and the agility of our size affords us. At present, we are evaluating over $1.5 billion in transactions with leading artists and creators. Finally, as Jim mentioned, we are working to drive operating leverage and further our cash flow generation to fund those deals in the future. We're focused on managing our overall operating expenses and extracting as much value as possible from our assets. I would be remiss to not acknowledge the ongoing discussions in the United States between creators, advocates for creators, and the distribution channels. We stand with our clients and with songwriters and artists everywhere. We believe in a future where legislative action results not in contraction, but in continued expansion of earning power by those individuals who write and sing the soundtrack of our lives. And I will leave you with this final song. The IFPI reported that 80% of people surveyed said that music helps with their emotional well-being during the pandemic. Evidence that music and its enduring ability to captivate listeners has never been more powerful. We will now open the line for questions.

[Operator Instructions] 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 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, 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, and 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. And we will -- we'll get back to a level where performance is where we expect it to be, which is really around 20% of our overall revenue.

Okay. And when we think about international, maybe it's obviously a few buckets, but what is the -- are there ways to think about revenue per large scale population or something that that tells us the potential of areas that are more new to this like the Middle East or maybe parts of Asia versus Europe, that's probably closer to the U.S. metrics, and sort of, how big a driver can that be for a few years to come?

I'd say that there's a lot of 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. And this really touches on one of the things that Golnar on are 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 oftentimes 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, et cetera?

Its 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, et cetera. 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. Then if we think about the factors that drive the capacity on the revolver. So, when -- I assume they understand that you're buying highly visible recurring high margin revenue streams. So, as you buy those sort of integrate them into the business, is that revolver have a some flex to grow over time. Will that be one of the key tools to keep up the M&A effort?

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 -- 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. And 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 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 come in in the in the March timeframe.

Thanks. And last one from me. The -- more broad picture, but you've been public for about a quarter now. You touched lightly on it, but maybe a little more color on how do you think that transforms your ability to source deals, have pipelines come to you, your visibility in the market, et cetera, just so we kind of get a gauge for the early impact and how that could build going forward? Thanks.

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 insofar as how we can structure deals and the potential we have there because we do now have a currency and that was one of our interest insofar as going public, but we are seeing that that has traction within the seller market as well. So, those two things come together and it has given us greater visibility within the marketplace. And 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.

[Operator Instructions] 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, 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 et cetera. 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 -- as far as being in sort of confirmatory due diligence or an exclusivity, we 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 market. 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 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.