Reservoir Media, Inc. (NASDAQ:RSVR) Q2 2024 Earnings Call Transcript
Reservoir Media, Inc. (NASDAQ:RSVR) Q2 2024 Earnings Call Transcript November 11, 2023
Operator: 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 year 2024 ended September 30, 2023. [Operator Instructions] Please be advised that today's conference is being recorded. I'd now like to turn the call over to Ms. Jackie Marcus with the Alpha IR Group, who will review our agenda today and the company's forward-looking statements. Jackie?
Jackie Marcus: Thank you, 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 second quarter of fiscal 2024, ended September 30, 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 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 risk, 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 U.S. GAAP if we believe they are useful to investors or if we believe they will help investors to better understand our performance or business trends. Reconciliations of these non-GAAP financial measures to the nearest comparable GAAP measures are included in our earnings press release. I would now like to turn the call over to Golnar.
Golnar Khosrowshahi: Thank you, Jackie. Good morning, and thank you for joining us today. Our second fiscal quarter was highlighted by topline growth of 15% with strong performances from both our Music Publishing and Recorded Music businesses. We reported healthy organic growth in the period driven by our value enhancement capabilities, and we executed numerous high-quality deals that further diversified and expanded our portfolio. In addition to continuing our revenue growth in Q2, we also thoughtfully managed our business as we both enhanced our margin profile and grew adjusted EBITDA by 24% over the prior year. Our financial results in the first half of fiscal 2024 demonstrate the benefits of our disciplined approach to capital allocation and our ability to drive growth and close deals within any market backdrop.
The music industry's resiliency across all market cycles, combined with our cost management and capital allocation, continues to fortify us against a complicated economic backdrop. Recently, the National Music Publishers Association, or NMPA, estimated double-digit year-over-year growth for the entire U.S. music publishing market in calendar year 2023. This marks the eighth consecutive year where U.S. Music Publishing revenues experienced double-digit growth. Further, there have been no signs of a slowdown in subscriber growth from streaming services amid subscription price increases. Spotify announced a 16% growth year-over-year in premium subscribers despite its price increase. These are raised subscription pricing for the second time in 12 months and Apple increased the price of several of its bundled subscription services.
This activity suggests not only that we should expect price increases to occur with some regularity moving forward, but also demonstrates the stickiness of consumers and the market opportunity for digital music consumption for what continues to be one of the most under-monetized forms of entertainment content. We are confident in the growth trajectory for the industry, and we are particularly pleased with how Reservoir will continue to benefit from this growth as well as the growing recognition that artists work has been undervalued in the ecosystem. Before we get into our new deals and financial performance, I want to take a moment to call out some of our rosters recent achievements. Last week, we celebrated Sheryl Crow and The Spinners inductions into the Rock & Roll Hall of Fame.
Blue Raincoat management client, Ezra Collective, became the first ever Jazz act to take home the Mercury prize. This quarter saw chart-topping hits across genres from David Guetta and Bebe Rexha's hit song, I'm Good (Blue), spending 55 weeks at #1 on Billboard's Hot Dance electronic song chart to Jelly Roll, Need A Favor, co-written by Rob Ragosta, climbing to #1 on both Country Airplay and Mainstream Rock Airplay, making it the first song to do so. Additionally, SZA single, Snooze, a collaboration by our writer/producer, Khris Riddick-Tynes, topped several billboard charts and helped propel the album SOS to become the longest-running #1 on billboards R&B albums chart spending 45 weeks at the top. Over the past few months, we made several accretive strategic investments, diversifying our portfolio across genres and eras.
Some of the deals we recently announced include legendary guitarist, songwriter and vocalist, Joe Walsh. The deal includes hits from his catalog as a solo artist and as a member of groups like the Eagles and the James Gang plus his future works. Joe contributed to Hotel California, one of the best-selling albums of all time, and we are honored to be his publishing home and to support his high-quality catalog. We also welcomed genre defining Latin writer producer, Rudy Perez to the roster. The deal includes the acquisition of his catalog, including hits performed by Christina Aguilera, Julio Iglesias and more as well as a publishing deal for his future works, leveraging his impressive legacy. Rudy is also the co-founder of the Latin Reporting Academy, the Latin Grammys and the Latin Songwriters Hall of Fame.
We are proud to be in business with such an important steward for the genre and its creators. We expanded our international roster with the additions of content production and distribution company, RE media and Egyptian rap duo El Sawareekh. These deals were executed in conjunction with PopArabia, and we're pleased to further grow our presence in the region as we see an untapped opportunity for music in these regions to grow both locally and globally. We bolstered our country music roster and catalog with the additions of The Judds collaborator, Brent Maher; decorated writer/producer, Kerry Kurt Phillips; emerging hitmaker, Cam Becker; and history making cross genre, writer-producer, Rob Ragosta. We're thrilled to build on our catalog of established country titles while also developing the new class of hit country creators.
We also signed a publishing deal for the future works of platinum selling songwriter Steph Jones. Steph has contributed to #1 albums by Selena Gomez, Celine Dion, P!nk, Keith Urban and Panic! At The Disco and collectively garnered billions of streams throughout her discography. Looking ahead, we are working through a robust pipeline of deals with the objective of continuing to complete transactions that exceed our return expectations. As a business rooted in acquisitions, we have a rigorous underwriting process, and we have a strong track record of deploying capital that ultimately becomes accretive to our margin profile. We have a pipeline of roughly $2 billion in total value for prospective deals, and we see no slowdown in our off-market opportunities.
We also believe that with each quarter, as we build our roster and catalog, our reputation as trusted stewards of music with a differentiated approach to value enhancement continues to grow. We see that reflected in the artists [indiscernible] who come to us as we explore opportunities. With that, I'd like to turn the call over to Jim to discuss our second quarter numbers in greater detail. Jim?
Jim Heindlmeyer: Thank you, Golnar, and good morning, everyone. Today, we're announcing another quarter of strong financial results. Our ability to consistently grow revenue and improve operating leverage from quarter-to-quarter is a testament to the durability of our business model coupled with the Reservoir team's expertise and core competencies. Turning to our fiscal second quarter results. Revenue for the second fiscal quarter was $38.4 million, a 15% increase versus the prior year quarter. This was driven by growth in both business segments, most notably led by a 22% increase in recorded music compared to the prior year quarter. Looking at our operating expenses for the quarter. Our overall cost of revenue increased 4% versus the prior year quarter.
Amortization and depreciation costs increased 15% year-over-year due to our continued catalog acquisitions. Company administration expenses saw a 57% increase versus the prior year, largely due to a $2.7 million noncash write-off of recoupable legal expenses. I'd like to add a bit more color on that write-off of recoupable legal expenses that occurred during the quarter. This nonrecurring item relates to the resolution of a matter, which began in 2017 that we settled through mediation, requiring us to expense legal fees from prior years that we had previously expected to recoup, resulting in a onetime write-off of $2.7 million. As a result, we are excluding it from adjusted EBITDA for the quarter, but it does impact operating income and OIBDA.
In the second quarter, notwithstanding the write-off I just mentioned, OIBDA increased 3% year-over-year to $12.4 million, while adjusted EBITDA of $15.9 million increased 24% versus the prior year. The increase in OIBDA and adjusted EBITDA was primarily driven by strong revenue growth, partially offset by higher administrative expenses. Interest expense was $5.8 million for the second quarter compared to $3.5 million in the same period last year. Net income for the second quarter of fiscal 2024 was approximately $700,000 versus $4.5 million in the prior year quarter. This resulted in diluted earnings per share of $0.01. The decrease in net income was driven by higher administrative expenses, including the write-off I discussed as well as higher amortization and interest expense, partially offset by higher revenue and improved gross margins.
Lastly, our weighted average diluted outstanding share count during the quarter was $65.1 million. Now I'll review our segment breakdown for the quarter, starting with Music Publishing. Music Publishing generated revenue of $25.9 million in the second quarter, which represents an 8% increase from the same period last year due to strong growth in performance and mechanical revenue, partially offset by a decrease in digital revenue. Mechanical revenue within the Publishing segment increased 25% year-over-year to $1.3 million. Lastly, synchronization revenue was up 1% compared to the prior year period, while other revenue was down 5%. The decrease in digital revenue was driven by the nonrecurrence of the onetime $2.1 million Copyright Royalty Board retroactive adjustment booked in the prior year period.
As we shared on the last call, the year-over-year revenue comparison in Q2 is muted as a result of the retroactive adjustment for the affirmed CRB 3 rates that we recorded in Q2 of last year. If we were to adjust that out of last year's figures, publishing revenue would have grown 18% and total revenue would be up 23%. Our Recorded Music segment delivered strong results in the second quarter with revenue of $10.8 million, representing an increase of 22% compared to the second quarter of fiscal 2023. Excluding synchronization, all revenue types within our Recorded Music segment delivered year-over-year increases. Growth in the Recorded Music segment was primarily driven by physical revenue, which increased 122% versus the prior year. Digital and neighboring rights revenue increased 15% and 8%, respectively.
Synchronization revenue in the Recorded Music segment came in at $900,000, resulting in a 12% decrease from the second quarter of fiscal 2023. This was driven by the timing of the writer skilled and SAG strikes which created a pause in television and film production-based sync opportunities. Moving on to our balance sheet. We closed the quarter with total liquidity of $132.8 million, comprised of $20.6 million of cash on hand and $112.2 million available under our revolver, which gives us the capital to fund our strategic objectives. We ended the quarter with total debt of $332.1 million, which was net of $5.7 million of deferred financing costs bringing net debt to $311.6 million. That compares to net debt of $311.5 million as of March 31, 2023.
Finally, as interest rates remain elevated, I'd like to remind you that we have managed to hedge nearly half of our debt at highly attractive interest rates, which will help limit our exposure to interest rate expense in coming months should rates continue to rise. Before I turn the call back over to Golnar, I'd like to spend a few minutes discussing our outlook for fiscal 2024. Following the second consecutive quarter of strong results, we're raising our revenue guidance from a previous range of $127 million to $132 million to a range of $133 million to $137 million, which represents a 10% increase versus fiscal 2023 at the midpoint. We're also raising our adjusted EBITDA guidance range from $49 million to $52 million, to $50 million to $52 million, which implies 10% growth at the midpoint.
A strong release schedule, most notably driven by the successful release of [indiscernible] back catalog led to better-than-expected results in the first half of the year. In the second half of the year, we expect revenue to be down slightly versus the first half as we work through the impact of the SAG-AFTRA and Writers Guild strikes and return to a normalized release cadence on physical product. While our revenue will be more heavily weighted to the first half of the fiscal year, we are well positioned to capture growth opportunities across categories and genres. As we progress against our growth plan, we will continue to make accretive strategic acquisitions while prioritizing organic growth. We will continue to follow our responsible capital deployment strategy to maintain our strong financial profile, and we are confident in our line of sight to meet our new guidance ranges for both revenue and adjusted EBITDA.
With that, I'll now pass the call back to Golnar.
Golnar Khosrowshahi: Thank you, Jim. As Jim mentioned, we are raising our fiscal year guidance on both revenue and adjusted EBITDA. We will continue to focus on optimizing the operations of our existing business while executing on our inorganic growth strategy by pursuing high-quality deals. Regarding the broader music industry, we anticipate no slowdown to growth, and we are confident in our competitive positioning. All of this, along with our business model that supports highly predictable cash flows, positions Reservoir to execute against our targets and start the second half of the fiscal year strong. With that, we will now open the line for questions.
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