Reservoir Media, Inc. — Form 10-Q Summary
Reporting period: Three months ended June 30, 2023, compared with the three months ended June 30, 2022. This is the company’s fiscal first quarter of fiscal 2024. Reservoir operates Music Publishing and Recorded Music businesses, managing rights to more than 150,000 compositions and over 36,000 sound recordings.
Financial performance
| Metric | Q1 FY2024 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $31.84 million | $24.28 million | Up 31% |
| Operating income | $3.14 million | $1.32 million | Up 138% |
| Net income | $164,553 | $16,821 | Higher |
| Net income attributable to Reservoir | $277,333 | $76,039 | Up 265% |
| Operating cash flow | $(861,337) | $1.80 million | Decreased |
| Investing cash flow | $(15.23) million | $(12.77) million | Greater use of cash |
| Financing cash flow | $13.29 million | $6.52 million | Higher borrowings |
Operating margin was approximately 9.9%, versus 5.4%. Company-reported non-GAAP OIBDA was $9.20 million, up 38%, with a 29% margin versus 28%. Adjusted EBITDA was $10.12 million, up 36%, with a 32% margin versus 31%. These non-GAAP measures should be considered alongside GAAP results.
Music Publishing revenue rose 26% to $20.79 million; Recorded Music revenue rose 37% to $10.38 million. Growth included digital revenue, publishing performance revenue, and Recorded Music physical sales. Physical Recorded Music revenue increased substantially, partly reflecting De La Soul releases and release timing. Total digital revenue increased 35%.
Liquidity, debt and cash flow
- Cash and cash equivalents were $12.25 million at June 30, down from $14.90 million at March 31, 2023.
- Debt under the secured revolving facility was $331.83 million gross, or $325.81 million net of unamortized debt issuance costs. Remaining facility availability was $118.17 million under a $450 million commitment.
- Interest expense increased 59% to $4.73 million, primarily due to higher debt balances and SOFR. The company reported a $1.85 million non-cash gain on interest-rate swaps.
- Operating cash use reflected working-capital movements, including royalty advances and the timing of receivable and payable activity. Cash purchases of music catalogs were $15.13 million; acquisitions completed, including deferred acquisition payments, totaled $15.62 million.
- The company said available cash, operating cash flows and facility availability should support existing operations and funding needs for the next 12 months. It was in compliance with its credit-facility financial covenants at quarter-end.
Material changes and management commentary
- Revenue growth and improved operating leverage lifted operating income and OIBDA. Publishing OIBDA margin increased to 27% from 22%; Recorded Music OIBDA margin declined to 34% from 39%, as physical sales carry higher costs.
- Cost of revenue rose 35%, faster than revenue, reflecting increased writer and artist royalties and the greater share of physical Recorded Music sales. Administration expense increased 20%, while declining as a percentage of revenue.
- Publishing synchronization revenue and Recorded Music synchronization revenue declined; management cited license timing and the Hollywood writers’ strike as contributing factors.
- The credit facility matures December 16, 2027 and bears a base-rate or SOFR-based rate with applicable margins. Substantially all relevant group tangible and intangible assets secure the facility. Covenants include a minimum fixed-charge coverage ratio and a senior-debt-to-library-value limit.
- No specific revenue or earnings guidance was provided. Management said it may pursue acquisitions, additional borrowing, refinancing, debt repayment or other capital actions depending on market conditions and liquidity.
Risks, contingencies and unusual items
- Interest-rate exposure remains relevant despite swaps; the company also identifies foreign-exchange and credit risks. Higher rates contributed to increased interest expense.
- Music revenue is exposed to industry changes, including piracy and the shift between physical and digital formats. Physical releases can lift revenue but may also reduce margins.
- The company reported no material change in risk factors from its fiscal 2023 annual report. It said it was not involved in legal proceedings expected to have a material adverse effect; ordinary-course claims remain possible.
- Disclosure controls and procedures were not effective as of June 30, 2023 because previously disclosed material weaknesses in internal control remained. Management described remediation efforts, including hiring accounting staff and using outside experts, but said remediation requires sufficient operating time and testing.
- Adoption of the expected-credit-loss accounting standard had no material impact. No off-balance-sheet arrangements were reported.
Key facts investors should verify
- Whether revenue growth, especially digital and catalog-driven growth, persists beyond a quarter that included notable physical releases.
- How debt balances, SOFR and cash interest affect earnings and cash generation, and whether covenant headroom remains adequate.
- Whether operating cash flow improves as royalty advances, receivables and payment timing fluctuate.
- Whether Recorded Music physical-sales costs and synchronization weakness continue to pressure segment margins.
- Progress and testing results for remediation of the material weaknesses in internal controls.