Reservoir aims to become the ‘largest holder of Arabic music copyrights…’ and 3 other things we learned on the company’s latest earnings call

Music rights company Reservoir Media has posted double-digit revenue and EBITDA growth for its 2023 fiscal year, a success that can be chalked up to strategically sound M&A activity, and a commitment to diversity in its investment strategy.

The New York-headquartered company announced Wednesday (May 31) that it had clocked revenue of USD $122.3 million for fiscal 2023, which for Reservoir ended on March 31, 2023.

That’s a slight beat over the top end of the range it forecast in its fiscal Q2 2023 call, when it expected revenue to come in at $118 million to $122 million for the fiscal year. It marks a 13% increase over fiscal 2022. On an organic basis (i.e., stripping out M&A activity), it marked an 8% increase.

Operating income came in at $21.1 million, up 9% YoY.

Reservoir reports both OIBDA (operating income before depreciation and amortization), which came in at $43.1 million, up 12% YoY, and EBITDA, which came in at $46.3 million, also up 12% YoY.

Net income for the fiscal year took a hit, coming in at $2.8 million, compared to $13.1 million in fiscal 2022. Reservoir CFO Jim Heindlmeyer attributed this to a decrease in the gain on fair value of swaps, a one-time tax expense related to a change in the UK tax rate, higher interest expenses and a $914,000 loss on the early extinguishment of debt.

Earnings per share came in at $0.04 for fiscal 2023, compared to $0.22 in fiscal 2022.

Reservoir’s music publishing segment clocked $83.8 million in revenue for the fiscal year, a 9% YoY increase, led by 18% growth in both digital and synch.

Its recorded music segment generated $34.8 million in revenue, an 18% YoY increase, driven primarily by digital (up 25% YoY) and neighboring rights (a small part of overall revenue, but still up 45% YoY).

Numbers for fiscal Q4 were somewhat weaker than the FY numbers, which Reservoir Founder and CEO Golnar Khosrowshahi attributed to “a difficult year-over-year comparable due to an exceptional fourth quarter in fiscal 2022.”

Total revenue came in at $34.8 million in fiscal Q4, a 1% decline from $35.1 million in fiscal Q4 2022. Music publishing revenue came in at $23.2 million, down 8% YoY, while recorded music revenue came in at $10.8 million, up 10% YoY.

OIBDA for the fiscal quarter rose 3% YoY to $14.4 million, while adjusted EBITDA fell 2% YoY to $15.2 million. Net income fell to $2.2 million, compared to $8.9 million in fiscal Q4 2022.

“We continue to deliver on our goals and are encouraged by the momentum in our business and the broader music industry over the past fiscal year. We remained steadfast in our disciplined approach to capital deployment with strategic investments to drive our future growth as well as creating value for our roster of artists,” Khosrowshahi said in a statement.

“Bringing Grammy-winning hip-hop trio De La Soul’s iconic catalog to all streaming platforms for the first time ever showcased our effective value enhancement initiatives, as we deployed our team and resources to drive value through multiple avenues.”

Khosrowshahi added: “We continue to be the preferred partner of outstanding legacy artists, including recently announced deals with jazz legend Sonny Rollins, Rock and Roll and Grammy Hall of Fame inductee Dion, and multi-Platinum hip-hop producer Mannie Fresh, which will bring significant growth opportunities for their catalogs and create new listeners and fans. Our team’s ability to partner with both legacy and emerging artists to drive value-additive deals is fundamental to our success and reputation as a caretaker of our artists’ bodies of work.”

On the company’s earnings call Wednesday, Heindlmeyer presented Reservoir’s outlook for fiscal 2024, calling for revenue of between $127 million and $132 million, the mid-point of which would mean a 6% YoY increase. He predicted adjusted EBITDA in the $49 million-$52 million range, which at the mid-point would mean a 9% YoY increase.

“Our team’s ability to partner with both legacy and emerging artists to drive value-additive deals is fundamental to our success and reputation as a caretaker of our artists’ bodies of work.”

Golnar Khosrowshahi, Reservoir Media

“As we look forward to what’s in store for fiscal 2024, we expect to close several accretive deals that will expand and diversify our portfolio of assets. We are also focused on effectively managing our operating expenses to further improve margins throughout the year,” Heindlmeyer said on the call.

Reservoir conducted a call with analysts on Wednesday (May 31) following the publication of its results. MBW listened in, and here are some of the highlights:

1. Reservoir wants to be ‘the largest holder of Arabic music copyrights’

Reservoir’s Founder and CEO devoted time on the earnings call to the company’s acquisitions in the Middle East and South Asia.

“We… broadened our emerging market portfolio with the signing of Arab superstar Mohamed Ramadan, Egyptian label 100COPIES, Lebanese music company Voice of Beirut, Indian rappers MC Altaf and D’Evil, and producer Stunnah Beatz,” said Khosrowshahi.

“Expanding our portfolio in these important emerging markets, but especially within the Middle East, is highly important to our overall strategy and a key differentiator for us,” she added.

“With our network and ability to purchase content at attractive multiples, this region presents significant opportunity as we work to become the largest holder of Arabic music copyrights.”

Reservoir,  in conjunction with MENA-based music publisher and music company PopArabia acquired Lebanese label and music publisher, Voice of Beirut in September.

Reservoir said at the time that the acquisition builds on its emerging markets strategy, “further diversifying the company’s music rights in the fast-growing MENA region”.

Reservoir and PopArabia acquired Egyptian label 100COPIES in May last year, and also formed a joint venture with the company to sign and develop Egyptian talent.

2. Diversity is a key driver of the company’s success

In recent years, we’ve heard many businesses extol the benefits of diversity – be it demographic, or geographic, or in terms of an investment portfolio.

But Reservoir Media is living proof of this adage, as the firm’s execs note its capacity to invest in different markets around the world, and in vastly different genres, as a key way to maintain the business’s strength in potential future economic upheavals.

“We’ve not only grown our catalog in fiscal 2023, but I’m really pleased about how we’ve added diversity across heroes and genres, which further insulates our business from broader market swings. Overall, we have not slowed down in our plans to build upon our robust roster of talented artists and creators,” Khosrowshahi said on the call.

That catalog is something to behold: According to an investor factsheet the company published earlier this year, Reservoir had spent $695 million on music catalog M&A as of the end of 2022.

Aside from the acquisition of De La Soul’s catalog, which brought the hip-hop group’s music to streaming platforms for the first time, Khosrowshahi stressed Reservoir’s deal with hip-hop producers Marley Marl and Mannie Fresh.

“We’ve not only grown our catalog in fiscal 2023, but I’m really pleased about how we’ve added diversity across heroes and genres, which further insulates our business from broader market swings.”

Golnar Khosrowshahi, Reservoir Media

Reservoir also expanded its portfolio of songwriter and producer Dennis Lambert’s work, giving the company rights to such hits as Jefferson Starship’s We Built This City and Nightshift by the Commodores.

Plus, the company expanded its country music roster with a publishing deal with Christian Stalnecker, who co-wrote the hit Thank God by Kane Brown and Katelyn Brown.

“We also continue to bolster our catalog with the additions of jazz legend Sonny Rollins; swing icon Louis Prima; and Rock and Roll Hall of Famers, Matt Sorum, Phil Manzanera and Dion,” Khosrowshahi noted.

But it’s not just genre diversity that matters to Reservoir; geographic diversity is a major part of the company’s strategy.

Besides the ambitious target Reservoir has set for its MENA acquisitions, Khosrowshahi emphasized “a notable expansion of our rights into Latin American music” with the recent conclusion of a deal with Miami Sound Machine co-founder and lead songwriter Kiki Garcia, who wrote the band’s hit song Conga.

3. AI isn’t a threat to Reservoir’s business model – it’s an opportunity

While some music industry insiders have raised concerns about the impact of AI on the industry – especially on the topics of unauthorized AI-generated tracks that steal artists’ voices, and the use of copyrighted material to train AI to create music – Reservoir Media sees the technology as an opportunity.

While she stresses that he wants to “make sure all those issues are addressed,” Khosrowshahi says she doesn’t believe that AI “poses a direct challenge to our business of monetizing musical artistry.”

“Machine learning has the potential to be used as a tool in the industry in novel ways, improving upon our processes and creating greater efficiencies, particularly in micro-licensing and metadata management.”

Golnar Khosrowshahi, Reservoir Media

“Auto-generated music facsimiles and composites will have a place in the market and it will be exciting to see what forms that takes and how creators incorporate AI to inform and enhance their work,” Khosrowshahi said.

“Further, machine learning has the potential to be used as a tool in the industry in novel ways, improving upon our processes and creating greater efficiencies, particularly in micro-licensing and metadata management.

“Our team is working to understand the potential opportunities for AI as well as ensuring our artists are properly compensated for their work by this new technology.”

4. Reservoir expects slower revenue growth for 2024… or are they just managing expectations?

Reservoir’s call for slower revenue growth in fiscal 2024 – the predicted 6% increase in its top line is less than half the 13% growth it saw in fiscal 2023 – surprised at least one analyst on the earnings call.

Asked by Alex Fuhrman of Craig-Hallum Capital Group about the reasons for the conservative forecast, Heindlmeyer responded with a comment that suggests the company may just be managing expectations.

“We want to be realistic in what we guide to, but we always strive to do better than where we set that bar,” he said.

Heindlmeyer suggested that Reservoir may be more focused on organic growth going forward, despite a still-ambitious M&A agenda.

Referring to Reservoir’s $100 million purchase of Tommy Boy Records in 2021 – the company that helped launch the careers of Queen Latifah, Coolio, De La Soul and Naughty By Nature, among others – Heindlmeyer said: “With respect to some of the opportunities over the past couple of years, when we have an acquisition like a Tommy Boy, where maybe we saw an opportunity for significant value enhancement, that’s certainly going to allow us to … show results that have really good organic growth.”

But that doesn’t mean Reservoir is done with M&A. “We’re always looking for those types of [M&A] opportunities,” Heindlmeyere said.

According to Khosrowshahi, Reservoir is looking at 250 potential targets for deals, with a current value of over $1.9 billion.

Commenting on the size of the individual deals, Khosrowshahi added: “For the most part, we are looking at more of those deals that have historically been in our sweet spot that’s around the sort of $40 million to $60 million range, but there are a couple of more sizable transactions in there.”Music Business Worldwide

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