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Kobalt Leans Into Its ‘Third Act’ After Profitable 2021: Inside the Earnings

Kobalt swung to profitability for the first time following a sale of assets to Sony and 40% revenue growth for AMRA, its fast-growing digital collections society.

Kobalt Music Group posted $5.8 million in net income from continuing operations on revenues of $519.4 million in the year ended June 30, 2021. That represents a turnaround from a nearly $66 million net loss in the prior year, while also showing an 11.5% increase in revenue from nearly $466 million produced by those operations in 2020.

CEO Laurent Hubert pointed out in a written note in the financials that the company’s continuing operations enjoyed a nearly $72 million swing. “With our sale of AWAL and Neighbouring Rights divisions in May 2021 [to Sony Music Group], our business has catapulted into the next generation, both financially and strategically,” Hubert said in a statement.

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Moreover, this year’s results represent the first profitable year in the company’s 20-year history, after the first 19 years of Kobalt had produced negative $318.49 million in retained earnings.

Finally, thanks to the sale of its indie distribution and neighboring rights operations, Kobalt turned in overall income of $341.3 million for its fiscal 2021 year. That deal received provisional clearance in February from the U.K. regulatory agency Competition and Markets Authority, which sent the process into comment period, with a final report to be published by March 17.

Furthermore, that $430 million sale to Sony catapulted Kobalt’s retained earnings from red ink into black at $22.8 million.

Another operation, Kobalt Capital sold two investment funds that owned music assets on behalf of institutional investors for about $1.4 billion and one of those deals closed in the fiscal 2021. As a result of that sale of Fund 1 to Hipgnosis Songs Fund for $323 million, Kobalt Music Group realized a $20 million gain. The other fund was sold for about $1.1 billion in October 2021 to an investment group comprised of KKR and Dundee Partners; and that likely will impact the results of the current fiscal year in some way.

In order to accommodate for the sale of AWAL and its neighboring rights operations to Sony, the company restated its 2020 financials to reflect a comparison between the continuing operations of its music publishing arm and AMRA, its global performance rights collections operations.

With that, Kobalt reported adjusted earnings before interest, taxes, depreciation and amortization of $44 million, but the company says in a press release accompanying its financial statement that its EBITDA, before adjustments, was $48.5 million. That compares with a prior year EBITDA loss of $53.85 million. In other words, the company’s turnaround into profitability produced another big swing of $102.4 million. Moreover, the company expects that in its current fiscal year ended June 30, 2022, its EBITDA will improve to $65 million while it says revenue will hit $625 million.

Meanwhile, fiscal 2021’s operating profit came in at $12.79 million, and after taxes, the aforementioned $5.8 million in net income for continuing operations. But if it hadn’t been for a nearly $14 million gain from foreign currency exchanges, the company’s continuing operations would have wound up slightly in the red for both operating income and net income.

Breaking out revenue by territory, North America generated $235.84 million, or 45.4% of overall revenue; the U.K. $70.2 million, or 13.5%; the rest of Europe, $135.7 million, or 26.1%, and the rest of the world $77.7 million, or 15%.

Looking at individual operations, the publishing group generated $478.4 million in revenue, or a 9.7% increase over the prior year’s revenue of $436.1 million; while AMRA enjoyed explosive growth of 40.3% to $109.8 million from 2020’s $78.3 million.

That transformation of the company into a profitable entity that is well capitalized will enable Kobalt “to fully concentrate on doubling-down on our award-winning publishing and digital society businesses,” Kobalt founder and chairman Willard Ahdritz said in an opening statement to the company’s financial results.

As a further statement on the company’s improved financial health, the sale to Sony allowed the company to pay down all debt and it finished the year debt free and with $315 million in cash. While it’s unclear if the company has a revolving credit facility—the financial results make no reference to any arrangements—a report by the Bloomberg news agency says the company has negotiated a deal to arrange for $550 million in debt from J.P. Morgan and HPS Investment Partners in order to acquire music assets. Kobalt declined to comment on this report and the Bloomberg report didn’t specify what form the debt facility would take.

However, with the $315 million in cash being a cash flow-positive company — Kobalt produced $35.2 million in operating cash flow in fiscal 2021 — plus access to hundreds of millions of dollars in debt, it looks like the Kobalt Music Group can finally start buying music publishing assets for its own account. While such acquisitions would deplete its cash somewhat — it would have to complement the debt with equity in order to make acquisitions — such acquisitions would work toward improving profitability margins in the long run, although in the near term that profitability would be dependent on how much debt is used and how much in interest payments that debt requires.

The financial results noted that during the year Kobalt was awarded ASCAP’s Latin Independent Publisher of the Year, BMI’s Gospel Publisher of the Year and BMI’s Hip-Hop/R&B Publisher of the Year. Also, Kobalt consistently ranks in the top four music publishers in the Billboard Music Publishers Quarterly, which measures publisher’s market share by their share of the top 100 radio airplay songs and the Hot 100 for the quarter.

With its impact on the marketplace and the strong financial health achieved during the year, Ahdritz said in the opening statement that he is optimistic about the company’s future. In that statement, Ahdritz posited that Kobalt had been a change agent by innovating with transparency, fairness and technology in its first two decades of existence.

“These milestones have paved the way for our third act: removing the frictions and spillage in the last mile of paying songwriters and rights holders with AMRA, our global digital society,” Ahdritz continued in his written statement. “With the strong growth in multi-territorial music services like Spotify and Apple as well as new segments in health and fitness, I believe AMRA is much needed in the industry, and it will be our biggest innovation to date. As we embark on this next act, I’m proud of our leadership team and our entire staff as we are well-positioned for future success.”

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