Hipgnosis Songs Fund like-for-like revenue up 14.0% YoY in 6 months to end of September; company’s portfolio now valued at $2.62 billion by Citrin Cooperman

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The Red Hot Chili Peppers' catalog was HSF's biggest revenue generator in the six months to end of September

They’re a couple of days later than expected… but now Hipgnosis Songs Fund‘s latest HY financial results have landed. Putting aside some ongoing governance drama at the UK-listed company for a moment, the numbers actually reflect a strong underlying performance from the firm’s catalog.

In the six months to end of September 2023, HSF confirmed today (December 21), the company’s underlying/like-for-like net revenue grew by 14.0% YoY to USD $65.8 million, up from $57.6 million in the equivalent prior-year period.

That’s ‘like-for-like’ as it omits any impact from ‘CRB III’: i.e. retrospective payments received by HSF from streaming services due to the US Copyright Royalty Board’s decision to raise royalty rates for music publishers in the US across the years 2018-2022.

In October, as previously reported, HSF’s independent valuer, Citrin Cooperman, significantly reduced its estimate of the sum HSF was expected to receive from CRB III.

This has unsurprisingly impacted HSF’s latest financials: In the six months to end of September, HSF’s net revenue from continuing operations fell to $54.0 million, down from $76.8 million in the prior-year period.

HSF said that this fall was primarily driven by the $11.9 million reversal of its CRB III accrual due to lower anticipated payments.

Perhaps the most important financial metric with which to judge HSF’s catalog performance is its pro-forma revenue (PFAR) – i.e. the gross royalty statements received/receivable in the period, excluding any revenue accruals under IFRS.

HSF’s report stated today that it believes PFAR “provides a relevant like-for-like… income comparison of the Group’s Catalogues of Songs held as at the period end.”

HSF’s PFAR in the six months to end of September stood at $64.9 million, up 10.0% YoY (versus $59.0 million in the equivalent year-ago period).

HSF’s PFAR in the 12 months to end of September stood at $132.6 million, up 10.2% YoY (versus $120.3 million in the equivalent year-ago period).

Of particular interest here: PFAR specifically generated by streaming rose 14.7% YoY in the six-month period (again, to end of September 2023), up to $26.6 million.

HSF said today that this YoY rise (14.7%) tracked ahead of recorded music streaming market growth in the US in the relevant period (+11%).

Hipgnosis Songs Fund’s biggest-earning catalog in the six month period (to end of September 2023) was its portfolio of Red Hot Chili Peppers songs.

These songs generated $4.69 million in pro-forma revenue in the period, according to HSF’s latest report, up from $3.24 million in the equivalent period in the prior year (six months to end of September 2022).

HSF’s PFAR breakdown in its latest financial report

As expected, there was less sunny news in HSF’s results today when it came to the independent ‘fair valuation’ of the company from its exclusive independent valuer, Citrin Cooperman (CC).

Citrin Cooperman valued HSF’s portfolio (as of the end of September 2023) at $2.622 billion, down 6.4% versus its valuation at the end of March ($2.803 billion).

HSF said today that the main drivers of the change in CC’s latest valuation of the portfolio were:

  • A $155.0 million reduction as a result of Citrin Cooperman’s lower estimate of CRB III retroactive payments (2018-2022) and future CRB IV (2023-2027) cash flows;
  • A $47.5 million reduction, reflecting potentially reduced future cash flows as a result of the US “35-year rule”, where artists can request reversion of their US creative copyrights (composition or sound recording) 35 years after a contractual grant of rights. (This primarily impacts catalogs bought by HSF as part of the Kobalt Fund 1 acquisition, said HSF’s board);
  • A $4.1 million impact due to reduced cash flow expectations from alternative platform licensing (licensing on social media, gaming and other emerging platforms including TikTok); and
  • A $24.3 million increase in value due to changes in subscription pricing of the DSPs, improved baselines and changes to applied future growth rates.

Citrin Cooperman continues to apply an 8.5% discount rate in its valuation methodology of Hipgnosis Songs Fund.

HSF’s EBITDA from continuing operations for the six months ended 30 September 2023 decreased by 36.2% YoY to $39.7 million (six-month period ended 30 September, 2022: $62.3 million).

Again, HSF said today that this decline primarily reflected the reduction of the CRB III retroactive active accrual in net revenue.

Citrin Cooperman’s latest HSF valuation calculation

Rob Naylor, Chairman of HSF, confirmed today that a strategic review of the UK-listed company is now well underway, following company shareholders in October voting against continuing HSF’s business as a closed-ended investment company.

Said Naylor today: “I am pleased with the progress made on the ongoing strategic review. The Board, through its advisers, has begun due diligence on the Company’s assets with Shot Tower LLC, a specialist music rights practice, acting as lead adviser. This process will help the new Board bring forward proposals for delivering value to shareholders.”

Added Naylor: “Notwithstanding this progress, since I joined the Board there has been a regular occurrence of issues raised as a result of ongoing failures in the financial reporting and control process. Whilst we consider substantial progress has been made in identifying and rectifying these issues, we have had to suspend the dividend for at least the remainder of the year in order to ensure compliance with our banking covenants.

“The newly constructed Board are aware of multiple valuation data points. The Board, made up entirely of non-executive directors, has sought advice from the Investment Adviser [Hipgnosis Song Management], as the Company’s delegated executive function, for their opinion as to the fair value of the Company’s assets.”

Naylor claims that in response to this request for “advice”, HSM recently provided HSF’s board with an opinion on Citrin Cooperman’s latest valuation that was “heavily caveated”.

Added Naylor: “We note the announcement from Hipgnosis Song Management [earlier this week] stating that they will ‘continue to work in a constructive manner to support the interests of the Company and its shareholders’.

“On behalf of the Board, I therefore urge the Investment Adviser to provide the Board with their opinion as to the fair value of the Company assets, without caveats, such that we can provide greater certainty and transparency to our shareholders.”

Earlier this month, Hipgnosis Songs Fund announced that it had sold 20,000 ‘non-core’ songs to a third party for $23.1 million.

These songs represented approximately 1% by value of HSF’s investment portfolio, which meant that were sold at a 14.2% discount to Citrin Cooperman’s valuation of HSF’s assets as of September 30, 2023.Music Business Worldwide

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