Kobalt Reports Higher Revenue Gains, Widening Losses for 2016

Courtesy of Kobalt
Willard Ahdritz

Kobalt Music Group Ltd. widened its net loss to $30 million in 2016 on revenues of $260 million for the year ended June 30, 2016. That's both a wider loss and higher revenue than the prior year when, when the company lost $23.4 million on revenues of $226 million.

However, of that loss $10.5 million was related to unfavorable foreign currency conversions due to a strengthening dollar (against the Euro and pound) in Europe where Kobalt generates nearly 42 percent of its overall business. Additionally, in the prior year, Kobalt enjoyed a $3.64 million benefit from currency trades. Without the foreign currency loss and benefit, Kobalt narrowed its loss from operations to $19.5 million in fiscal 2016 from the $27 million loss in the prior year.

Citing its successes during fiscal 2016, Kobalt CEO Willard Ahdritz wrote in his CEO report to the Companies House (the U.K.’s equivalent of the SEC’s EDGAR) that the company had signed Danger Mouse and Carlos Vives during the year and that its client retention rate stands at 98 percent. The company also launched its Kobalt iOS app, which gives creators real-time access to all their account data.

Overall, revenue increased 15 percent, with a caveat. Company income for 2015 was re-stated due to switching from UK GAAP (Generally Accepted Accounting Practices) standards to IFRS (International Financial Reporting Standards). The main difference is that only retained revenue collected from its neighboring rights business is counted as Kobalt revenue, versus the prior year when total collections of the neighboring rights business was included.

This change in accounting marks the second year in a row Kobalt has re-stated its financial results. In its 2015 report, it re-stated results to reflect the change in reporting in U.S. dollars versus the British pound, which it previously used as its reporting currency.

Kobalt has always valued growth over profits. Since Kobalt Music Group Ltd. began filing its results in Companies House in 2002 it has never reported black ink, but has enjoyed explosive growth. For example, by 2008 it had revenue of about $41 million; that had nearly tripled by 2012 to $121 million and now its more than doubled again in 2016 to $260 million.

But Kobalt’s growth so far is not improving the overall profit picture -- at least not lately. For example, in 2015 Kobalt had a gross margin of 12.5 percent based on gross profit of $10.27 million against revenues of $226 million. But even though the company grew revenue by nearly $34 million to $260 million in 2016 and gross profit increased $1.3 million to $30.65 million from 2015’s $28.3 million, its margin fell to 11.8 percent in 2016

Looking at the company another way, its earnings before interest, taxes, depreciation and amortization (EBITDA) resulted in a $15.94 million loss in fiscal 2016, which is an 11.7 percent increase from the prior year’s adjusted-EBITDA loss of $14.27 million.

Breaking out the company by segments, its music publishing and administration operation produced adjusted EBITDA of $6.4 million on almost $229 million in revenues; its label services business lost $8.5 million in EBITDA on $19.1 million in revenue; its neighboring rights business had EBITDA of $625,000 on retained revenue of $2 million; while its AMRA digital collections organization lost $3.3 million in EBITDA on revenues of $21.7 million.

That compares with its 2015 performance of $7.12 million in EBITDA on revenues of $194 million for its publishing operation; its label services operation lost $8.17 million on revenues of $29.4 million; its neighboring rights operation produced EBITDA of $540,000 on retained revenue of $1.8 million; and its AMRA operation lost $3.5 million on revenues of $967,000.

Over those two years, Kobalt's digital collection society produced explosive growth to nearly $22 million from less than $1 million in the prior year. In the company report, Ahdritz wrote that AMRA "is now a proven success,” having considerably increased earnings from Spotify and YouTube in Europe and having recently signed olĂ©, the Canadian publisher, as a client.

But its label services business shrank in revenue by $10 million in 2016, to $19 million.

Looking more closely at its publishing operation, while that segment’s adjusted EBITDA fell 10 percent from $7.12 million in fiscal 2015 to $6.4 million in 2016, none of the EBIDTA results for the separate operations include Kobalt's corporate overhead, which is put at $11.16 million, according to the filing. If the company’s overhead was allocated to each operation by a percentage of revenue, music publishing -- which accounts for 88 percent of revenue -- would assume $9.8 million of the corporate overhead. On that basis, that means the Kobalt's music publishing operation would have had adjusted EBITDA loss of $3.4 million.

Looking at balance sheet items, at the end of the fiscal 2016 year, the company had a negative net worth of $1.6 million versus net shareholder equity of $25.4 million at the end of the prior year. Also at year end, its cash and cash equivalents totaled $35.15 million, which is down from the prior year’s total of $46 million. The company also owed $17.5 million on its short-term credit facility at the end of the year, but in a note the company said it repaid the credit facility one month after the year ended on June 30, 2016.

Finally, the company said that employees grew to 315 as of the end of fiscal 2016 from 264 staffers at the end of 2015, while wages and salaries increased only slightly to $32.1 million from almost $32 million. Breaking out employees by staffing, synchronization and creative staff numbered 54; copyright administration staff was 55; other administration was done by 132 employees; 40 people worked for label services and 16 were on client services, while senior management numbered 18.