Reservoir Media, Inc. — Form 10-Q Summary
Business context and period: Reservoir is an independent music company with Music Publishing and Recorded Music segments, owning or controlling more than 150,000 compositions and over 36,000 sound recordings. This report covers the three and six months ended September 30, 2023 (the fiscal second quarter and first half), compared with the same periods in 2022. Amounts are U.S. dollars.
Key financial results
| Metric | Three months ended Sep. 30, 2023 | Year-over-year | Six months ended Sep. 30, 2023 | Year-over-year |
|---|---|---|---|---|
| Revenue | $38.40 million | +15% | $70.23 million | +22% |
| Operating income | $6.15 million | −6% | $9.29 million | +18% |
| Net income attributable to Reservoir | $0.54 million | −88% | $0.81 million | −82% |
| Diluted EPS | $0.01 | vs. $0.07 | $0.01 | vs. $0.07 |
| OIBDA (non-GAAP) | $12.36 million | +3%; 32% margin vs. 36% | $21.56 million | +16%; 31% margin vs. 32% |
| Adjusted EBITDA (non-GAAP) | $15.87 million | +24%; 41% margin vs. 38% | $25.98 million | +28%; 37% margin vs. 35% |
| Cash from operating activities | Not presented for quarter | — | $18.86 million | vs. $11.63 million |
Quarterly net income was $0.68 million, compared with $4.49 million a year earlier. The decline reflected higher interest expense, a smaller fair-value gain on interest-rate swaps, and lower operating income; lower income tax expense partly offset these effects. Operating income margin was approximately 16% for the quarter and 13% for the half year.
Revenue, segments, liquidity and debt
- Quarterly Music Publishing revenue rose 8% to $25.91 million; Recorded Music revenue rose 22% to $10.83 million. For the half year, the segments rose 15% to $46.70 million and 29% to $21.21 million, respectively.
- Recorded Music growth was supported by streaming and physical sales, particularly De La Soul releases and Chrysalis release timing. Publishing growth reflected catalog acquisitions and catalog performance. Other revenue also increased.
- Quarterly total digital revenue rose 2%; first-half digital revenue rose 15%. The quarter’s Publishing digital revenue was affected by the absence of approximately $2.1 million of estimated retroactive U.S. mechanical royalties recognized in the prior-year quarter following the 2022 Copyright Royalty Board ruling.
- Higher physical sales increased Recorded Music costs: artist royalties and other recorded costs rose 52% in the quarter and 66% in the half year. Quarterly company cost of revenue was 38% of revenue versus 42% a year earlier; first-half cost of revenue was 40% versus 42%.
- Cash and cash equivalents were $20.56 million at September 30, 2023. Current assets were $69.15 million and current liabilities $60.69 million.
- Secured credit-facility borrowings were $337.83 million gross ($332.13 million net of debt issuance costs), with $112.17 million of remaining availability under the $450 million facility. The facility matures December 16, 2027. The company reported compliance with its fixed-charge coverage and senior-debt-to-library-value covenants.
- First-half investing cash outflow was $32.52 million, primarily reflecting music-catalog purchases; financing cash inflow was $19.57 million, mainly reflecting borrowings. Catalog acquisitions totaled $31.30 million, inclusive of deferred acquisition payments, versus $6.95 million a year earlier.
Material changes, outlook and risks
- Royalty dispute settlement: Following mediation, Reservoir agreed to pay previously accrued unpaid royalties plus interest and waive recovery of historical legal fees. It recorded approximately $2.70 million of administration expense to write off recoupable legal fees and $0.62 million of interest expense. A final settlement agreement was reached October 3, 2023; payment was made in October.
- Interest expense and hedging: Interest expense rose 64% in the quarter and 62% in the half year, primarily because of higher borrowings for acquisitions and writer signings and higher SOFR, in addition to settlement-related interest. Interest-rate swaps partly hedge floating-rate exposure; swap fair-value gains were lower than in the prior-year periods.
- Management outlook: Management expects cash from operations, available cash and credit-facility availability to support operations and obligations over the next 12 months and foreseeable future. It expects to pursue opportunistic refinancing or maturity extensions, subject to market conditions. The filing provides no specific earnings or revenue guidance.
- Risks and contingencies: The company cites interest-rate and foreign-exchange exposure, music piracy, industry format changes, and dependence on music-related revenue. Synchronization revenue was affected by timing and the writers’ and actors’ strikes in Hollywood. Credit-facility covenant noncompliance could permit lenders to accelerate repayment, subject to cure rights; substantially all tangible and intangible assets are pledged as collateral. The filing reports no material changes to previously disclosed risk factors and no known legal proceeding expected to have a material adverse effect.
- Controls: Management concluded disclosure controls were not effective as of September 30, 2023 because of previously reported material weaknesses in internal control over financial reporting. Remediation efforts are ongoing; management nevertheless stated the interim financial statements are fairly stated in all material respects under U.S. GAAP.
Important facts for investors to verify
- Whether revenue growth and Adjusted EBITDA gains persist after accounting for acquisition spending, physical-release timing, and the $2.70 million legal-fee add-back used in Adjusted EBITDA.
- How higher debt and interest costs, SOFR movements, and swap expirations affect future earnings and cash available for acquisitions or debt service.
- Progress in remediating material weaknesses and whether redesigned controls become effective in operation.
- Final cash and royalty effects of the October 2023 settlement, and continued compliance with credit-facility covenants.
- The filing’s non-GAAP OIBDA and Adjusted EBITDA measures alongside GAAP operating income, net income, and cash flows; these measures are not substitutes for GAAP results.