Reservoir Media, Inc. ($RSVR)

Greetings, and welcome to Reservoir Media's Fourth Quarter and Fiscal Year 2026 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the call over to your host, Jackie Marcus. Thank you. You may begin.

Thank you, operator. Good morning, everyone, and thank you for participating in today's earnings conference call. Reservoir Media issued a press release with its results for its fourth quarter and fiscal year 2026 and ended March 31, 2026, earlier this morning. If you did not relieve a copy of our earnings press release, you may access it from the Investor Relations section of our website at investors.reservoir mia.com. With me on today's call are Golnar Khosrowshahi, Founder and Chief Executive Officer; and Jim Heindlmeyer, Chief Financial Officer. 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 Golnar 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 Golnar.

Thank you, Jackie. Good morning, everyone, and thank you for joining us today. Reservoir delivered another strong year, generating 11% in revenue growth with 6% organic growth and 12% adjusted EBITDA growth in fiscal 2026. These results reflect the continued success of our disciplined acquisition strategy, the strength of our catalog and the performance of our growing team around the world. Fiscal 2026 was a milestone year as we deployed approximately $120 million across acquisitions and advances for both publishing and recorded rights. This enabled us to retain exceptional creators, sign leading contemporary hitmakers and further expand and diversify our catalog by genre, by era and geographic representation. In September, we acquired the catalog of music and culture icon Miles Davis. As we officially marketed [ Centennial ] this week, we have launched a global campaign with countless activations and press moments. Highlights from this week alone included the Voice of miles, a symponic celebration by Park Avenue Artist, a billboard in Times Square on the Nasdaq Tower, and an event with the New York public library for the Performing Arts and [ Simon Schuster ] for the Centennial Edition of Miliatobiography. With more to come this year, we look forward to continuing to celebrate Miles as legacy, and it is an honor to steward his extraordinary body of work and bring it to new audiences. We also continue to invest today's hitmakers signing talent, including Disco [indiscernible] country Pop songwriters, Allison VelsCruise and Samtani, U.K. Singer songwriter, Benjamin Frances Leitch and multi-genesong writer, Britain Newbuild, to name a few. At the same time, we reinforced our long-standing relationships extending deals with legendary singer-songwriter, Jody Mitchell; Grammy-winning writer-producer ChriseTeimes and the estate of seminal Artist [indiscernible], as well as entering into a new deal with long-term client Academy Award winning Composer, Hans Zimmer. Our relationship with Zimmer extends as investors in [ Palam ] music, an innovative Piano school with a novel methodology for teaching. This past Sunday, Paon music and Zimmer were featured on CBS 60 minutes, highlighting the school's successful approach to Piano Education and Zimmer's involvement in advancing its mission. We are proud to support Paion music to help nurture the next generation of P&S through technical training while fostering a lifelong love of music. During this fiscal year, we also continued to expand Reservoir's Recorded Music division, including a multifaceted deal with independent record label fools gold records. The transaction included the acquisition of Catalog master rights of several of the labels artists and an exclusive partnership to market and distribute all their recordings on Tools gold via the reservoir label platform. Internationally, we expanded our presence in key growth markets. We launched our Mumbai-based subsidiary, Pop India and signed a publishing deal with [indiscernible] while also extending our publishing agreement with multi-platinum Indian hip-hop artists design. Pop India also executed its first catalog deal, acquiring the publishing and master rights to the entire music craft entertainment catalog. The establishment of Pop India marks an important step in building a meaningful on-the-ground presence in India, one of the fastest-growing music markets globally with the streaming market alone projected to reach over $4.8 billion by 2030 with a compound annual growth rate of over 17%. This April, together with Papa Arabia, our partner in MENA region, we completed the acquisition of label and digital distribution company, Viral Wave. A transformational transaction that significantly expands both the scale and capabilities of the Pop Arabia platform. Beyond increasing Pop Rabia's team to over 30 employees across Egypt, Morocco and the UAE -- the acquisition establishes a fully integrated distribution infrastructure alongside the company's existing publishing and label services creating one of the region's most comprehensive independent music platforms. Importantly, this move deepens reservoirs operational footprint and strategic positioning across MENA and creates additional opportunities for cross-border collaboration and global reach for regional artists. In addition, in fiscal year 2026, we acquired the publishing and recorded music catalog of Iraqi production house HFM production and Kuwaiti Singer-Songwriter Essa [indiscernible] and executed a publishing deal with Moroccan Artists producer, 88 Young. MENA continues to be one of the fastest-growing regions with recorded revenues increasing by 15.2% in 2025 and with growth projections reaching $8.5 billion by 2030, driven by streaming and digital adoption. We believe the proven success and expertise of our team and platform in MENA will continue to provide us a competitive advantage in securing top talent and capitalizing on the momentum across the region. Our ability to attract high-caliber talent globally is due in large part to the quality and performance of our existing portfolio, unlocking value for our assets and identifying opportunities to introduce our music to the next generation of fans are key factors of that growth. In the last fiscal year, we partnered with leading global brands, including Anthoropic, Volkswagen, Netflix, Lexus and Amazon and had placements in major feature films and television shows such as hoppers, Happy Gilmore 2, Marvel's Fantastic 4 and Stranger Things. This drove continued strength in our Sync business with growth of 5% in Music Publishing and 39% in recorded music year-over-year. As we have previously noted, the music industry continues to demonstrate resilience within overall market fluctuations. The recorded music industry grew 6% globally in 2025, according to the IFPI, while music publishing global revenues grew 9.5% globally, according to music and copyright 2026 report. Against this backdrop, Reservoir also continued our growth trajectory. Digital revenue increased 7% in Music Publishing and 18% in recorded music. We were also proud to be included in Billboard's full year top 10 market share ranking with Sabrina Carpenter, espresso co-written by Steph Jones contributing to the company's position. In addition to market share, Reservoirs music boasted commercial and charting successes as well as countless awards throughout fiscal 2026, demonstrating the widely recognized value of the assets and the creators. We curate not only catalogs but also relationships with the creators behind them and are honored to be the partner of choice for so many talented songwriters. Before turning to our financial performance, I would like to briefly address the previously disclosed nonbinding and unsolicited acquisition proposals received by the company. In March 2026, the Board formed a special committee of independent and disinterested directors to evaluate the proposals, and the special committee engaged Morgan Stanley & Company LLC as its financial adviser and Walktell Lipton, Rosen and Cat as its legal counsel. Beyond that, we have no additional updates to share today, and we'll provide further information as appropriate. I will now turn the call over to Jim to discuss our fourth quarter and full fiscal year financial results as well as our fiscal 2027 guidance in greater detail. Jim?

Thank you, Golnar, and good morning, everyone. As Golnar highlighted, we executed at a very high level in fiscal 2026, drove strong growth across all our key performance metrics and expect that to continue into fiscal 2027. These results affirm the effectiveness of our strategy, the quality of our portfolio of assets and our ability to acquire new assets for Reservoir's platform while unlocking the fullest potential of their value. Let's start with a review of the fourth quarter. Revenue for the fourth fiscal quarter was $47.5 million, which was a 15% increase compared to the fourth quarter of fiscal 2025. Strong growth across both segments was led by 27% growth in recorded music and 11% growth in our Music Publishing segment, inclusive of the acquisition of various catalogs. With respect to our operating expenses for the quarter, our overall cost of revenue increased 13% versus the prior year quarter. Our depreciation and amortization costs increased 20% year-over-year due to our continued catalog acquisitions, Company administration expenses saw a 16% increase year-over-year, partially due to costs incurred with our acquisition of viral wave. Turning to operating performance. fourth quarter OIBDA increased 16% year-over-year to $19.9 million. Adjusted EBITDA increased 16% to $21.2 million, which was largely driven by strong top line growth particularly in our digital category across both segments, partially offset by higher administration expenses. Interest expense was $6.8 million for the quarter compared to $6.1 million in the same period last year. Net income for the fourth quarter of fiscal 2026 was $4.1 million versus $2.7 million in the fourth quarter of fiscal 2025. This resulted in diluted earnings per share for the quarter of $0.07 compared to $0.04 per share in the prior year period. Moving to our full fiscal year 2026 results. Revenue was $175.7 million above the top end of our previously stated guidance range. This beat was the result of growth in both the Music Publishing and Recorded Music segments, which posted annual growth of 9% and 16%, respectively. Turning to our operating expenses for fiscal 2026. Our overall cost of revenue saw an 8% increase from fiscal 2025. This increase was attributed to a higher revenue base resulting from acquisitions and value enhancement efforts. The lower increase in cost of revenue as compared to the increase in revenue resulted in a higher gross margin in fiscal year 2026. Administration expenses for fiscal 2026 rose 12% from the prior year to $44.7 million, primarily due to higher administrative expenses in both the Music Publishing and Recorded Music segments, and, to a lesser extent, increase in other administrative expenses. We also incurred costs in fiscal 2026 associated with our acquisition of Iowa. OIBDA in fiscal 2026 increased 12% year-over-year to $69 million, while adjusted EBITDA grew 12% to $73.6 million. These increases were mostly attributable to increased revenues and higher gross margin. As a reminder, we have reconciliations for these metrics in our earnings press release and 10-K filing. Our interest expense was $26.5 million for the full year compared to $21.9 million last year. The higher interest expense was due to an increase in debt resulting from acquisitions of music catalogs and rider signings. Net income for fiscal 2026 was $7.8 million versus $7.7 million last year. The increase in net income was primarily the result of increased operating income as well as a decrease in the loss on fair value of interest rate swaps, partially offset by higher interest expense and income tax expense. This resulted in diluted earnings per share for the year of $0.13 compared to $0.12 per share for fiscal 2025. Our weighted average diluted outstanding share count for the full year is 66 million. Turning to our segment breakdown for the fourth quarter. Music Publishing generated revenue of $30.9 million in the quarter, which represents an 11% increase when including acquisitions versus the same period last year. Our digital revenue increased $3.2 million or 24% to $16.9 million and performance revenue decreased by 16% to $5.5 million. Synchronization revenue in the Publishing segment totaled $5.8 million, a 6% increase from the fourth quarter of last year. This is primarily due to the timing of licenses. Mechanical revenue within the Publishing segment posted a 16% increase year-over-year to $1.3 million. Other revenue within the Publishing segment was $1.4 million, an increase of 20% year-over-year. Our Recorded Music segment generated $15.2 million in revenue, representing an increase of 27% versus the prior year quarter. Digital revenue within the reported segment increased 17% and primarily due to subscriber growth and price increases at DSPs, while physical revenue increased 35%. Our synchronization revenue increased 161% as a result of the timing of licenses, while neighboring rights increased 18% to $1.4 million, in part due to additional direct affiliations with collection societies. For the full year, our Music Publishing segment revenue rose 9% compared to the prior year. Our improvement is largely a result of price increases at multiple music streaming services as well as the expansion of our catalog through M&A. Additionally, synchronization revenue increased because of the timing of licenses and performance revenue grew 14% as a result of hit songs. Recorded music revenues increased 16% compared to fiscal 2025. The growth is attributable to the acquisition of additional music catalogs and continued user growth and price increases at multiple streaming services. This was partially offset by the nonrecurrence of royalty recoveries in the prior year related to underreported usage for music catalogs. Additionally, the increase in revenue was aided by an increase in synchronization revenue driven by the timing of licenses. Let's move on to our balance sheet. As of March 31, cash flows from operating activities increased by $4.9 million year-over-year to $50.1 million due to an increase in earnings as well as an increase in cash provided by working capital. We closed the year with total liquidity of $117.1 million comprised of $25.9 million of cash on hand and $91.2 million available under our revolver, which gives us the capital to fund our strategic objectives. We ended the year with $455.7 million of total debt which was net of $3.1 million of deferred financing costs, and thus, we maintained $429.8 million of net debt. That compares to net debt of $366.7 million as of last fiscal year-end. Turning to the 2027 fiscal year. We expect revenue to be in the range of $186 million to $191 million and adjusted EBITDA to be in the range of $75 million to $79 million. After our strong results in fiscal year 2026, we believe we are well positioned to continue our track record of growth. Remaining true to our proven capital deployment strategy and value enhancement efforts combined with disciplined cost management and consistent operating cash flows should enable us to deliver on our initiated fiscal year 2027 guidance ranges. With that, I'll now pass the call back to Golnar.

Thank you, Jim. At Reservoir, we take a long-term view, focused on protecting our creators, growing the value of their work and running the business with discipline. That approach has driven strong growth and consistent cash flow since our debut as a public company and positions us well for sustained long-term growth. With that, we will now open the line for questions.

[Operator Instructions] Our first question comes from Griffin Boss with B. Riley Securities.

Apologize for a background noise here. I just want to start off on viral wave. Golnar, you mentioned the over 30 employees that come with that acquisition, cross-border collaboration activities. But is there any more context you could give us as to the size or scale of the catalog that viral wave brings? Is that more early days and there's opportunity for expansion? Just curious if there's anything on the financial side there. You could elaborate on?

Not specifically. I will say that it is a business that comes with a stable of existing clients and existing relationships and existing product, hence the headcount. and we plan on expanding on that, but it's an investment in an entity that is already an established business.

Yes. And I would just add to that Griffin that, as Golnar said, it's an established business. It's a distribution business. So a little different than some of the other businesses that we've been in, a little bit lower margin, but we are excited about the way it will expand our opportunities in the region.

Okay. I appreciate that color. And then -- so next for me on the guidance Jim, if you take the midpoint there, it looks like it's implying a slight step down in EBITDA margin for '27. Is the expectation there just higher administrative expenses going forward? Or is it something else?

Yes. There's a couple of things there. I would say, one, not that viral wave is the most significant piece certainly of our consolidated financials, but it is a lower-margin business. So that slightly impacts that, and we are continuing to make some investments on the frontline side of the recorded business, and that is certainly an area where we are very cautious about the revenue and conservative with respect to the cost associated with it. So that's why you're seeing a little bit of that step down in guided EBITDA margin.

Okay. Got it. That's helpful. And then just one more if I could squeeze it in. I'm just curious if I could get any insights from Golnar into the CRB proceedings Obviously, we're relatively early days there, but I would love to hear kind of what your expectation is, generally speaking, if you have one in terms of kind of what you're looking for to get negotiated there over the next couple of years?

Yes. There isn't any material update at this point, still sort of in discussion phase. I think we remain optimistic, but that's not optimism that we bake into our own forecast. We do, however, remain optimistic [ Insofar ] as getting to an agreement and having a positive impact of the share of income for songwriters and publishers.

[Operator Instructions] Our next question comes from Richard Baldry with Roth Capital.

I want to see if you dig a little deeper into the gross margins. On a blended basis, they set a record high. So I'm sort of curious -- are they trending behind that sustainable? Or do you view it sort of as an outlier and understanding that there is some headwind from the viral wave acquisition. Just curious about the underlying trends to that.

Yes. Certainly, I think the gross margin ticking up a little bit this year. It's a result of some of the acquisitions that we did to the extent that we are acquiring assets where we may retain 100% of the revenue. That's obviously going to have a positive impact on our overall gross margin. And I think you saw a couple of deals this past year that had that type of impact for us. So we don't expect that our gross margin is going to change significantly on a percentage basis, but we may have opportunities for that to tick up slightly, depending on the types of acquisitions that we do. But certainly, as you noted, with respect to the go forward, forecast, we will have the impact of lower-margin deals such as viral wave impacting the gross margins as we move to fiscal '27.

And on an overall sort of adjusted EBITDA basis, is international a headwind at this point because it has yet to get sort of the scale of the rest of the business? Or is it sort of curious that impact and where that heads to.

Yes. I think if you were to isolate just our kind of international operations, certainly, it would be a lower EBITDA margin than our core business. But again, even though we are excited about these regions, and we see a lot of growth opportunity there. It's a very small part of our overall business. So just keep that in mind as you think about it.

Got it. And maybe last for me. You look at the revenue and earnings for fiscal '27. If you talk about seasonality, the business is sort of changing and evolving over time. So curious how seasonal you expect the top and the bottom lines to be next year? And whether that's similar to prior years or is sort of changing

Well, I'd like to think that it's pretty flat quarter-to-quarter. We do sometimes have -- have things that impact and cost spikes in our revenue. It's less about seasonality, though, more about it could be -- in the prior year, we had the royalty recovery wasn't anything to do with seasonality. I just happened to be when we resolve that issue. So we'll continue to have some things that cause our revenue to spike from time to time. But on a baseline view, I expect us to be pretty consistent quarter-to-quarter.

Maybe last for maybe when you look out to the fiscal '27 guide, how much of that do you think is sort of assuming a steady organic growth or any tailwinds from streaming pricing versus acquisitions you know or acquisitions you expect to do?

Yes. I think that from an organic growth standpoint, we expect things to be pretty steady, kind of mid-single digits. We are always tough looking at our catalog at a pretty granular level. So to the extent that we have frontline successes in 1 year, we don't necessarily project those frontline successes going into the next year. We will project the decay that's expected on those new or young copyrights. So you have that impacting our overall view of revenue that's baked into our guidance. Having said that, we have a pretty good track record of having new frontline successes every year. So as we move through the year, we will continue to evaluate where we are.

We have reached the end of the question-and-answer session. I'd now like to turn the call back over to Golnar Khosrowshahi, for the closing comments.

Thank you, operator. The strength of our portfolio and our proven ability to attract award-winning and legendary talent across genres and geographies continues to distinguish our business. We are excited about fiscal year 2027 and look forward to updating you on our progress in a few months. Thank you.

This concludes today's conference. You may disconnect your lines at this time. And we thank you for your participation.