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spk04: Good morning, everyone, and thank you for participating in today's conference call to discuss Reservoir Media's financial results for the third quarter of fiscal 2022, ended December 31, 2021. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during that session, please press star 1 on your telephone. 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 statement. Jackie?
spk02: 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 the results for its third fiscal quarter of 2022, ended December 31st, 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 Goldmar Kozroshahi, Founder and Chief Executive Officer, and Jim Heindelmeyer, 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 Gulnar 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 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 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 Gulnar. Gulnar?
spk03: Thank you, Jackie. Good morning, everyone, and thank you for joining us today. I'm extremely excited to be here today to discuss our third fiscal quarter. During the period, we continued to execute on our strategy of building a strong portfolio of award-winning music, bringing new songwriters, artists, and catalogs into the fold. This helped us build significant momentum and deliver strong financial performance in our second quarter as a public company. Before I turn the call over to our CFO, Jim Heindelmeyer, for a deeper dive on our third quarter financial results, let's discuss the significant progress we made in the quarter and our excitement around the overall vibrancy of the music industry. The broader music industry is off to a strong start in 2022, building off a record-setting year in 2021. where global on-demand song streams were up over 26% compared to the prior year. This has been driven by continued streaming growth across emerging markets, the ongoing proliferation of new novel access points like video gaming and social media, as well as a resurgence and impressive growth in vinyl album sales and the ongoing strength of digital music consumption through various streaming platforms. We have and will continue to benefit from these industry trends, especially as our portfolio continues to grow both in size and diversity. As Jim will cover in more detail, the healthy industry performance coupled with strong execution by our team, the momentum of our business, and the opportunities we see ahead has allowed us to increase guidance on both revenue and adjusted EBITDA. As we've said previously, We believe we can exceed the industry's healthy organic growth based on our operating philosophy and the platform we have built. But we are also seeing attractive opportunities to grow our portfolio even amidst a backdrop of some high-profile, high-priced catalog sales. Since our last earnings call, we have made several strategic investments in assets we believe have significant potential for greater value enhancement, and we are honored to work with a growing list of very talented creators. The diversification of our roster across artists, genres, and musical eras represents an important component of the uniqueness and differentiation that we bring to the market. For example, in mid-December, we announced a publishing deal with four-time Grammy winner Michael Leake, his instrumental band Snarky Puppy, and his company, Ground Up Music, which represents his collaborators. We also expanded our foothold across a variety of genres, including R&B, doo-wop, hip-hop, pop, and EDM, with the addition of songs by Hall of Fame songwriter Dallas Austin, the founder and lead singer of the Five Satins, the late Fred Parris, Oak Felder, the Grammy and BMI award-winning songwriter and producer, whose credits include songs with John Legend and Demi Lovato, including Lovato's five-time platinum hit, Sorry Not Sorry. And the late Grammy-winning DJ, songwriter and producer Fred Rister, who, alongside his longtime creative partner David Guetta, contributed to the most downloaded song of all time in the United States, I Got a Feeling by the Black Eyed Peas. Lastly, our presence in Nashville continues to exceed our expectations, as we announced earlier this year the acquisition of country music star Travis Tritt's publishing and recorded music catalogs, as well as the producer catalog of Nashville Hall of Famer Buddy Cannon, which brings his 25 years of Kenny Chesney hit collaborations to Reservoir. We welcome all of these artists into the Reservoir family. We remain steadfast in our commitment to scale the business through a creative M&A with the objective of welcoming high quality music and talent to the company while driving operating leverage. Let's turn to our quarterly performance. In the third fiscal quarter, we saw growth across all our key performance metrics. We posted $27.1 million in total revenue, which represented a 26% gain over the year-ago period and also included 15% organic growth. Within the segments, 68% of our revenue came from music publishing, 30% from recorded music, and 2% from other sources. Consistent with broader industry trends I noted earlier, we saw 9% annual growth from physical sales due to increased demand for vinyl, and 217% annual growth from recorded digital revenue. We are continuing to manage our cash flow to support additional acquisitions while also prudently managing our costs. These actions resulted in a 26% improvement in our adjusted EBITDA. With that, I will turn the call over to Jim to discuss our financial performance during the quarter in more detail. Jim?
spk01: Thank you, Goldner, and good morning, everyone. With our second quarter as a public company in the books, I cannot be prouder of what we've accomplished and more excited for what the future at Reservoir holds. We continue to execute against our strategy, which drove double-digit growth at both a top and bottom-line basis in the quarter. Let's talk in greater detail about financial results for the third quarter and how we see the rest of our fiscal year playing out. As a reminder, all percentage change references that I make, unless explicitly stated otherwise, We'll offer comparisons between Q3 fiscal 2022 and Q3 fiscal 2021. Revenue for the third fiscal quarter was $27.1 million, which represented a 26% increase from the third quarter of fiscal 2021. Our team continues to utilize value-enhancing opportunities for our creators, while our portfolio of assets continues to grow through our acquisition strategies. Our top line growth was largely attributed to digital revenue in our recorded music business, which delivered a 217% increase year over year. Digging deeper into our segments, let's look at music publishing for the third quarter. Music publishing generated revenue of $18.4 million in the quarter, which was a 4% improvement from this time last year. Adjusting for the impact of a one-time settlement with a previously unlicensed platform in the prior year quarter, music publishing revenue grew by 22% year over year. The primary driver for the increase within the publishing segment was our sync and other revenue streams. Synchronization revenue in the publishing segment totaled $2.4 million, representing a 79% increase from the third quarter last year, largely due to the recovery in the film and television industry from the impacts of the COVID-19 pandemic. Other revenue within the publishing segment showed a 502% increase year over year to $2.7 million. This was primarily due to the launch of our rights management subsidiary in the Middle East. Our recorded music segment had another quarter of strong results, generating $8.1 million in revenue in the third quarter, which is up 147% from the prior year quarter. All revenue types within our recorded music segment delivered solid results, led by digital revenue, which, as mentioned, saw a 217% increase, and that was driven by the continued growth and consumption of music streaming services. Synchronization... was also a top performer on the recorded side as it posted a 1,220% increase to $1.2 million in the third quarter. The overall increase within the recorded music segment was also driven by the Tommy Boy acquisition earlier in the year. Looking at our operating expenses for the quarter, our overall cost of revenue saw an 18% increase from the third quarter of fiscal 2021. This increase was driven by our revenue growth with some margin expansion given the mix of revenue by type. As noted last quarter, we saw our depreciation and amortization costs increase year over year due to our continued catalog acquisitions. Company administration expenses saw an increase of 76% from the prior year due to non-cash stock-based compensation related to our public listing and the ongoing cost of being a public company that we did not have in Q3 last year. Over time, we expect operating margins to improve based on the operating leverage inherent in the business. As I mentioned last quarter, we evaluate our operating performance based on two metrics, a WIDDA and adjusted EBITDA. We believe these give the cleanest view of our progress as a business. Both of these metrics remove the impact of amortization from our operating results. So as a reminder, these metrics do not reflect periodic costs of certain capitalized tangible and intangible assets used in generating revenues. Adjusted EBITDA removes the impact of other non-cash or non-recurring expenses such as stock-based comp. For the quarter, OIDDA increased 11% year-over-year to $9 million, while adjusted EBITDA grew 26% to $10.2 million from the third quarter of fiscal 2021. These increases were primarily driven by the improvement in revenues across both publishing and recorded music and were partially offset by transactional and administration costs related to being a public company. Our interest expense was $2.5 million for the quarter, which was an increase of 11% compared to $2.3 million in the same period last year. Net income in the third quarter of fiscal 2022 came in at $2.4 million, which was essentially flat from the same period last year. This resulted in diluted earnings per share for the quarter of $0.03 compared to $0.05 per share for the third quarter of fiscal 2021. Lastly, our weighted average diluted outstanding share count is $64.7 million. Let's move on to our balance sheet. During the quarter, we expanded our credit facility to raise the overall capacity of 350 million. This is a testament to the strong relationship that we have with our lenders and their continued support of our business. We closed the quarter with total liquidity of nearly 133 million, comprised of 14.6 million of cash on hand and 118.4 million available under our revolver, which gives us the capital to fund our strategic objectives. In terms of total debt, we ended the quarter at $225.3 million, which was net of $6.4 million of deferred financing costs, and thus we maintained $210.6 million of net debt. That compares to net debt of $203.3 million as of last fiscal year end. Our leverage ratio at December 31, 2021, was 5.1, using the trailing 12-month pro forma adjusted EBITDA of $45.4 million, which includes the pro forma impact of recent acquisitions and reflects the measurement per our credit agreement. Before I turn the call back to Goldmar, I'd like to close with some thoughts on our full fiscal year guidance. For the full 2022 fiscal year, which as a reminder ends on March 31st, We revised our guidance to better reflect our strong momentum and financial performance over the past three quarters. As a result, we are raising our revenue guidance to be between $103 million and $105 million. We are also raising our adjusted EBITDA guidance for the full year to be between $40 million and $41 million. We are continuing to evaluate potential acquisitions to expand our portfolio of assets, which is considered in our full year guidance. As I mentioned, we're being diligent about controlling our costs, both on revenue and overall operating costs, and I believe we have a solid balance sheet that provides us with the flexibility to invest in our business and our growing roster of talent. With that, I'll now pass the call back to Gomer.
spk03: Thank you, Jim. As I mentioned in the opening of this call, we have executed on our strategy and our competitive position remains strong in a vastly growing industry. We have been able to drive organic growth through our value enhancement initiatives, as shown through the hard and innovative work of our sales team across the globe. For example, their efforts led our sync segment generating 13% of our total revenue, and we don't expect this growth to slow down as we integrate our recently acquired assets into our process. With this growth, we can ultimately drive the operating leverage of the business while constantly evaluating opportunities across genres, musical eras, and geographies to ensure we are building an exceptional portfolio of award-winning assets. We believe we are still in the early stages of what we are capable of achieving. I'd like to close my commentary by returning to the strength and opportunity of our M&A activities. I'm proud to say that we are on track to deploy over $200 million this fiscal year into unique, global, and diversified M&A deals. And we have a $3 billion pipeline of potential deals that we are actively exploring. We're proud to be delivering on our promises and are even more proud that these incredibly talented artists and creators have entrusted us to be the stewards of their life's work. We also believe that our M&A success shows the power of relationship-driven targeting, which helps us identify off-radar deals, will bring long-term value to the organization. As we look forward, our pipeline remains robust, and the cash-generating power of our business will continue to fuel these high-growth, high-operating leverage opportunities. We are executing on our strategy through a steady cadence of acquisitions coupled with an intense focus on execution. We're taking advantage of broader trends in the music industry to drive greater value for our roster of artists across new platforms to drive organic growth. The secular trends around music consumption are in our favor, and finally, we're working to manage our overall operating expenses and improve our cost of revenue. The team at Reservoir works tirelessly to bring the life's work of our roster of talent to new audiences and platforms, and I couldn't be prouder of their efforts in the third quarter or more excited about the future. We will now open the line for questions.
spk04: Thank you. As a reminder, to ask a question, you'll need to press star 1 on your telephone. To withdraw your question, press the pound key. Our first question comes from Richard Baldry with Roth Capital. Your line is open.
spk06: Thanks. Can you talk a bit about the organic growth, maybe break it down like qualitatively or quantitatively maybe by how much is your own internal business development driven versus sort of strength and market, you know, more streaming platforms available, things like that?
spk01: Thanks, Richard, Jim. I think when you look at it, it's really a combination of both of those things. We're obviously benefiting from the tailwinds in the industry, but we also benefit from the value enhancement and operational execution of the team here and driving that value. We put a real focus on the assets that we acquire and improving over the course of 12 to 24 months once we bring those assets into the fold. really improving the performance of those assets.
spk06: Maybe think about the upside you've had in terms of the earnings. How much do you feel like you're fully staffed in those business development synchronization areas? Do you feel like it makes more sense to use some of that upside profitability back in those areas, or is it more prioritized faster M&A cycles?
spk03: I think we're well staffed in that area that's in so far as the value enhancement initiatives go on the synchronization side, digital licensing, administration, et cetera. That is a part of our business that we sort of grow from a headcount standpoint organically as the need arises, and we will continue to do that. again, as a number of copyrights we add to the stable warrants that edition.
spk06: And you talk a bit about the M&A pipeline maybe in a couple different ways, but one, you know, with COVID seeming to ease or people maybe getting used to the new whatever normal is, do you feel like the M&A side of the table is changing, you know, easier, harder? How does that, you know, backdrop kind of change your thought processes?
spk03: I'm not sure that I see a correlation between the two. I would say that we are seeing our most robust deal flow right now and have been doing so for the past 18 to 24 months. And I expect that to continue maybe the backdrop of being just that the fact that these assets are just more valuable than they used to be and the outlook is positive on the music industry more generally.
spk06: And last for me, when you look into that pipeline, obviously it's pretty large. How do you prioritize what to go after? I mean, are there ways that internally you can understand the sync potential of certain assets is better than others? or their organic growth potential is different than others, or does it very much come down to opportunistic, when good assets are available, you sort of take them in sequence?
spk03: It is very opportunistic insofar as how that pipeline comes in, and we're obviously unable to predict what our deal flow will look like. At a general level, we are always looking at high-quality music that is, accretive to the portfolio in general. When we do our due diligence, we are able to forecast how value enhancement will play into the future and what perhaps we could do that would be additive on that front. And our purchase prices always reflect those assumptions within our models.
spk06: Maybe one last one. If you looked into that pipeline, are there any sort of distinct differences in the number of deals you'd look at that would be either in the music publishing side versus the recorded music side?
spk03: That ebbs and flows, and I think I would say right now it's not skewing heavily either way. But that certainly does ebb and flow, tying back to the idea that we really can't predict what happens in deal flow. But we are seeing very healthy deal flow on both sides of the business.
spk06: Great. Congrats on the quarter.
spk03: Thank you so much.
spk04: Thank you. Our next question comes from Alec Furman with Craig Hallam. Your line is open.
spk05: Great, thanks guys for taking my question. Wanted to ask about the higher guidance. Can you give us a sense of how much of that increase to the guidance is related to hitting your M&A targets ahead of schedule or being on track to do so, just compared to all of the other tailwinds that you talked about that are benefiting the music industry right now?
spk01: Yeah, I think that our increased guidance is really a testament to a couple things. First, our execution on managing the assets that we have and the value that we've been able to drive throughout the year. Certainly, we've benefited from the continued positivity in the industry, but it also comes down to execution from our team here at Reservoir. And then relatedly, like you touched on, we are on track with our M&A assumptions for the year. we expect to really hit right about the number that we expected, potentially slightly higher. But obviously there's timing that factors in on that front as well. So it's really both of those things that factor into it.
spk05: Great. That's helpful. And then, you know, it looks like your EBITDA guidance was raised, you know, a little bit more than your revenue guidance or at least in percentage terms quite a bit more. I mean, can you talk a little bit about that? Does that just kind of suggest that your incremental margins are very high or, you know, have you been able to control expenses better than expected?
spk01: Yeah, I mean, it always comes down to the mix of assets that we acquire and the margins that are associated with those assets. So that's part of what's going into this with respect to the deals that we've closed recently or will be closing. You know, that certainly factors into the margin that that revenue will contribute. And I think that's probably the driving factor here. Of course, we always have a focus on controlling our costs and making sure that we're staying on target there, but it's really the mix of revenue coming in that's contributing to that margin expansion.
spk05: Okay, that's helpful, Jim. And then lastly for me, can you guys just talk a little bit about how the business is going to kind of evolve as the year moves on and the economy continues to recover and from COVID? I imagine the return of live performances is going to be a big tailwind from the industry. Are there any signs that maybe streaming growth could slow down? Are there any kind of offsets to the reopening tailwinds that you'd expect to see over the course of the year?
spk03: I don't think so. I think, as you mentioned, live performances and to any layover lockdowns is certainly going to be helpful. I think this trend we're seeing in vinyl will continue. Social media trends that we're seeing, online gaming, et cetera, those will continue. So I think that as far as the trends that we are looking at, it's at a high level. We are focused on... the general ones within social media, within online gaming, proliferation of smart devices, Wi-Fi-enabled cars, et cetera, and emerging markets being the overall themes to the growth that lies ahead.
spk05: That's great. Thank you very much, Golnar.
spk04: Thank you. Thank you. As a reminder, if you would like to ask a question, press the star, then the one key on your touchtone telephone. Our next question comes from Chris McGinnis with Sidoti and Company. Your line is open.
spk00: Good morning. Thanks for taking my questions, and congratulations on the nice quarter. Just to follow up on that, in that realm of when you look at traditional, I guess, media and where you're seeing the growth versus maybe some of the newer, you know, you talked about gaming, what's the growth rate? Are you seeing higher growth rates coming from the newer formats versus maybe the more legacy formats?
spk01: Well, I think that when we look at the newer platforms on a percentage basis, we may be seeing a higher percentage growth just because of the newness of it, the developing nature of those newer platforms. But obviously, from an overall dollar perspective, it's still the traditional services that are driving the lion's share of the revenue in those streams.
spk00: Okay, thanks. And then just one last one on the You mentioned $3 billion in potential M&A opportunities. That's up from one and a half from the last call. Can you just talk about what's changed so dramatically? Is it more people coming out to offer their music? What's driving that huge increase?
spk03: Again, as I said, it's hard for us to always predict what happens in our deal flow, and it certainly does ebb and flow. And as you noted, it's just a volume of deals that are currently before us to consider and people's interest in monetizing catalogs and assets in this class.
spk00: Just maybe talking about the competitive landscape for those assets.
spk03: Sure. I mean, you know, we see a lot of big names and a lot of financing in this business. The competitive landscape has been pretty consistent over the past, say, sort of 12 to 24 months. And we are able to execute on our strategy in the face of that competition based on relationship-driven deal sourcing and a lot of off-market closings.
spk00: Great. Thanks for taking my questions. Good luck with Q4.
spk04: Thank you very much. Thank you, and that's all the questions I see. I'll go ahead and turn it back to Goldnar Kozroshahi for closing remarks.
spk03: Thank you so much, Operator. Our performance in the third quarter is indicative of both the strength of our team at Reservoir and the quality of assets that we have assembled. I thank you so much for joining us this morning, and Jim and I look forward to updating you on our progress later this spring. Have a great day.
spk04: This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.
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