Kobalt Reports Revenue Gains, Widening Losses for 2015

Willard Ahdritz, Founder/CEO, Kobalt

The Kobalt Music Group, a collection of service companies that hails itself as the future of revenue collection for rights holders, has continued to value growth over profits. The company posted a loss of $27.3 million (up from $18.5 million in 2014) on revenues of $245.05 million (up 25.6 percent, from $195.06 million) for the year ended June 30, 2015, according to a filing with Companies House in the U.K. Kobalt’s diversification into neighboring rights and the record label side of the business appears to be aimed at producing greater gross profits than its mainstay publishing business produces.

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Kobalt Music Publishing Ltd., which appears to include its publishing operations in Europe only but not its whole publishing operation -- has made a separate filing. (At press time, the company hadn't responded to a request to confirm what territories the Kobalt Music Publishing filing includes.) Kobalt Music Publishing produced a gross profit of £2.822 million ($4.44 million) on revenues of £53.043 million ($83.37 million). That means Kobalt’s music publishing operation has an administration fee which averages out to 5.3 percent for the year ended June 30, 2015 -- well below the industry standard of 10 to 15 percent.

But when all of its operations, not just music publishing, are taken into consideration, Kobalt Music Group generated a gross profit of $28.748 million, 11.73 percent of its total revenue, for the year ended June 30, 2015. That’s an improvement from the year prior, when it finished with a gross profit margin of 11.44 percent.

Kobalt’s expenses -- $53.263 million in 2015, or 21.74 percent of revenue -- are almost double those gross profits, however, which is why the company continues to produce red ink. Adding to that, the company's overhead isn’t decreasing as a percentage of revenue. In the prior year, its $38.41 million in expenses equaled 19.7 percent of revenue, which means the company’s cost structure increased by slightly more than 2 percentage points during 2015.

Consequently, the company produced an operating loss of $24.53 million which, when $2.5 million in depreciation and amortization are backed out, that means the Kobalt Music Group's earnings before interest, taxes, depreciation and amortization, (EBITDA) were negative by $22 million.

Typically, growth companies can reduce overhead as a percentage of revenues as economies of scale kick in against the growing revenue base. But that’s not happening at Kobalt yet, which implies the company is still valuing investments for the future as opposed to trying to achieve profits now.

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Breaking out revenue by business operations, publishing -- with $194.2 million in revenue -- remains by far the largest component of the Kobalt Music Group at 79.2 percent of volume. Label services grew to $29.05 million in 2015 from $19.15 million in 2014, a 51.7 percent increase and 11.85 percent of the Group’s total business.

U.S. operations grew to $121.7 million from $83.1 million, an increase of 46.5 percent and nearly half (49.7 percent) of the group’s revenue overall. The U.K and the rest of Europe posted slight increases to $93.7 million from $90 million, and in total comprise 38.2 percent of total revenue. Revenue from the rest of the world grew to $30.3 million from $21.9 million, a 38.4 percent increase year-over-year.

Meanwhile neighboring rights, which signed Sam Smith, Bruno Mars and Lil Wayne, even beat the record label services operation’s growth by jumping 127.2 percent to $20.86 million from $9.2 million in 2014, and compromises 8.5 percent of the group’s overall revenue. 

Likewise, AMRA, Kobalt’s collection society, is also expected to experience rapid growth, but it only posted $967,000 in revenue in 2015, due to only being a part of the company for a short while in the time period covered by the financial statements. According to the documents, Kobalt paid $500,000 in cash for AMRA, but the documents do not indicate if any other considerations, like Kobalt stock options, were a part of the deal.

While the publishing operation shows operating profit at $5.8 million, and Neighboring Rights got out of the red to post $935,000 in black ink, the label division posted an $8.38 million loss and AMRA lost $5.6 million, probably due to start-up costs involved in reconfiguring the company for Kobalt’s strategy. But all of the profits and losses stated for the Kobalt operating divisions are before corporate overhead of $17.3 million, which likely means that if each segment had its share of common expenses applied to them, they would all produce losses.

Going wide to look at the overall Kobalt Music Group, the company finished the year with 259 employees, while serving 500 publishing companies with 8,000 songwriters and more than 6,000 recording clients with 20,000 artists on their roster, according to the Kobalt document.

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Kobalt continues to show it can attract investors as Google Ventures invested in the company while already existing investor MSD Capital L.P. expanded its ownership stake. Combined, they put $60 million into the company of which $41.265 million appears to be in equity from buying stock in the company during 2015. The company says it has no debt on its balance sheet but didn't respond to a query as to what form the other $18.735 million came in the door.

Finally, founder and CEO Willard Ahdritz is on the record as saying that the company will double its size by 2017, which if it occurs would give the company a revenue base of nearly $500 million. If it can obtain a 12 percent gross margin by then, and if the company begins to focus on expense containment, the company's estimated $60 million in gross profit would offset the company's overhead, allowing it to break even.

“We are fixated more than ever on insuring our clients are getting the very best service," Ahdritz said in a statement. "We will continue to invest in our technology to make sure they get paid what they should be paid in a transparent and efficient way."


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