CMA Awards 2018

Kobalt's Revenue Grows 23.5 Percent, While Net Losses Continue to Widen

Courtesy of Kobalt

The rise in income represents the company's largest annual percentage increase in three years.

As usual, Kobalt enjoyed explosive revenue growth while widening annual losses in its most recent fiscal year filings with Companies House, the U.K. equivalent of the U.S. SEC's EDGAR system.

For the year ended June 30, 2017, Kobalt lost $34.8 million over nearly $321 million in total revenue, according to its filings which were filed April 9 and became available for viewing earlier this month. That performance compares with a $30.04 million net loss in the prior year, when revenues were nearly $260 million.

With revenue growing 23.5 percent, that represents its largest annual percentage increase in three years. The statistic is even more impressive considering Kobalt no longer counts total collections of its neighboring rights business as part of its revenue. Last year, the company switched from counting total collections for its neighboring rights business to just counting its retained revenue, after paying out artists royalties. That switch was made after determining its neighboring rights operation acted as an agent on behalf of its clients and not as the principal. If Kobalt had not made that change, collections would have totaled $385 million -- putting it on track to potentially become a $500 million company for the current fiscal year that ends June 30, 2018.

Meanwhile, Kobalt continues to generate red ink. The company's $34.8 million net loss included a $1.64 million negative impact from translations of currency from foreign operations versus a $10.53 million loss for the same reason in the prior year. 

Before taking into consideration losses on foreign currency translations, Kobalt lost $33.13 million, versus $19.51 million in 2016, marking a 69.8 percent increase year-over-year. 

Working backwards, the company posted an operating loss of $24.33 million -- a 45.7 percent increase over the $16.7 million operating loss generated in the prior year. 

On a positive note for Kobalt's road to potential profitability, after subtracting out non-cash charges and before paying taxes and interest, its earnings before interest, taxes depreciation and amortization (EBITDA) was a loss of $14.15 million -- down 11 percent from the prior year's $15.94 million EBITDA loss.

In Kobalt's filings, the company's directors say that "the current and prior year losses are reflective of the strategic decision to invest in the future over short-term profitability."

Another improving sign is that the gross profit of $42.47 million this year increased to 13.2 percent of revenue, after falling to 11.8 percent the year before from 12.6 percent of revenue in 2015.

Looking at the company by segment, music publishing remains the Kobalt's centerpiece garnering $241.3 million in revenue, a 10.8 percent increase in revenue year-over-year. The company said its publishing unit posted adjusted EBITDA of $15.4 million, more than double the $6.4 million it produced in 2016.

However, Kobalt doesn't assign any corporate overhead to its operating units in its financials. If that overhead was allocated on a percentage of revenue pro-rata basis, the music publishing company's EBITDA was closer to $4.7 million, not including its pro-rata share of taxes and finance cost which would have resulted in losses. Nevertheless, the publishing company shows it is making strides in helping the company to eventually attain profitability.

The other bright spot is the company's neighboring rights operation, which -- after acquiring Fintage in late 2016 -- had total revenue collections of about $60 million in the most recent year. But the company only posted $6.67 million as revenue, with $3.675 million in EBITDA, or black ink.

Moving over to the red ink operations, the company's AMRA operation -- which acts as a global collection agent for Kobalt clients -- posted an EBITDA loss of $3.535 million on $34.6 million in revenue. That represents a slight increase from the $3.3 million loss in EBITDA in 2016 when revenues were $21.65 million. On the positive side of things, AMRA's revenue grew nearly 60 percent in 2017.

The biggest generator of red ink at Kobalt is its recorded masters operation, which mainly operates under the name of AWAL and provides label services and distribution to recording artists. That operation doubled its revenue to $38.4 million from $18.6 million in 2016, but the earlier year was down from 2015's $29 million in revenue. Meanwhile, the red ink is piling up for its record label services as that operation produced a $11.15 million loss in EBITDA last year.

Kobalt said its key releases were from Lauv, Nick Cave & the Bad Seeds, De La Soul and Frank Carter & the Rattlesnakes.

The company also broke out revenue by geography, with $137 million coming from North America, $101.6 million from Europe, $46 million in the U.K. and $35.5 million in the rest of the world.

Kobalt employed 448 employees by the close of the year, but reported that the average monthly number of employees was 376 -- of which 18 were management, 62 were in copyright administration, 173 were in other administration, 43 were in music recordings, 17 in client services and 63 in synchronization and creative services. It said the company's overall salary expense was $34.753 million, versus $27.854 million the year prior when the average monthly number of employees was 315. That means that the average salary at the company last year was $92,000 before pension and social security contributions or share-based payments, up slightly from the prior year when staffers had an average annual pay of almost $89,000.

During the year, the company brought in $75 million in equity from existing investors Balderton Capital and MSD Capital and new investor Hearst Entertainment; and subsequent to the end of the year, it raised an additional $14 million in capital from Bill Maris, the founder and CEO of Google Ventures. The company finished the year with $48 million in cash, not including the Maris infusion. The company's revolving credit facility wasn't drawn down at the end of the year and it was subsequently expanded to a $50 million revolver, which means the company has plenty of cash.

Also, Kobalt returned to having a positive net worth during the year, thanks to the $75 million cash infusion, closing out the year with $29.6 million in equity.

Meanwhile, Kobalt Capital, its investment management arm, said it had received $600 million in funding commitments, of which 57.5 percent was in equity and the remainder debt. That investment pool made its first acquisition when it acquired SONGS Music Publishing for about $135 million.

That represents a new round as an earlier fund raised about $350 million and acquired acquired the catalogs of Steve Winwood, Lindsey Buckingham, the B-52s and a significant portion of Nettwerk's music publishing assets