REG - Hipgnosis Songs Fund - Half-year Report
08/12/2022 07:00
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RNS Number : 9998I Hipgnosis Songs Fund Limited 08 December 2022
8 December 2022
Hipgnosis Songs Fund Limited ("Hipgnosis" or the "Company")
Interim Results for the six months to 30 September 2022
The Board of Hipgnosis Songs Fund Limited, the first UK listed investment
company offering investors a pure-play exposure to songs and associated
intellectual property rights, and its Investment Adviser, Hipgnosis Song
Management Limited, are pleased to announce the Company's results for the
six-months ended 30 September 2022.
Financial Highlights
· Operative NAV per share remains stable at $1.8312 (31 March 2022:
$1.8491)
o As at 30 September 2022, Operative NAV presented in Sterling would be
164.06p per share (GBP:USD 1.1162); and
o As at 6 December 2022, Operative NAV presented in Sterling would be
149.82p per share (GBP:USD 1.2223); and
o This includes both the dividend paid and the dividend declared not yet
paid in the period
· Total NAV $ Return to Shareholders at period end, including 19.0
pence per share of dividends, has been 60.0% since the IPO on 11 July 2018
· Gross revenue increased 7.5% year-on-year to $91.7 million (six
months to 30 September 2021: $85.3 million).
· Stripping out adjustments such as RTI and the retroactive CRB III
accrual, underlying net revenue grew 5.8% year on year to $65.1 million
· Pro-forma Annual Revenue (PFAR), which shows royalty revenue
earned during a 12 month period, grew 4.2% to $120.8 million for the year to
30 June 2022 (12 months to 30 June 2021: $115.9 million) despite currency
headwinds as a result of dollar strength impacting the value of non-US dollar
denominated source income, reflecting:
o >10 year catalogue PFAR up 7.7% to $69.9 million (12 months to June
2021: $64.9 million);
o <10 year catalogue PFAR flat at $50.9 million (12 months to June 2021:
$51.0 million) evidencing the end of the decay curve and positioning for
future growth; and
o Strong growth in streaming proforma revenue in H1 2022 (+16% year-on-year)
and synch (+32% year-on-year)
· EBITDA increased 16.9% year-on-year to $63.8 million (six months
to 30 September 2021: $54.6 million) due to growth in revenue and reduced
operating costs
· New Revolving Credit Facility and Interest Rate Swaps agreed. These
will deliver a reduction in, and greater certainty over, interest costs
· Foreign Exchange risk hedged in relation to the cost of the
Company's Sterling dividends
· Net debt as a percentage of Operative NAV stable at 25.7% (31
March 2022: 25.4%)
· Annual target dividend maintained of 5.25p per share
Operational Highlights
· Portfolio comprises of 146 Catalogues, 65,413 songs, with an
aggregate fair value of $2.67 billion, and includes some of the most
successful and culturally important songs of all time
· Blink-182's All the Small Things soundtracks the John Lewis
Christmas Advert
· Nicki Minaj's Super Freaky Girl interpolating Rick James' Super
Freak was a Number 1 US single and Top 5 in the UK and rest of the world.
· Administration partnership for reverted catalogues put in place
with Sacem and peermusic to materially reduce third party administration and
collection costs as well as reducing delays in payments
· Successful trials of multi-territory live performance direct
revenue collection services completed, to secure faster payment and lower
costs
· Hipgnosis's advocacy for fairness for songwriters has contributed
to securing improved terms in the US. US Copyright Royalty Board rejected
appeal against CRB III, confirming original increases which will result in a
44% uplift in the headline payments on US streaming. Joint industry proposal
for CRB IV sees additional increases and most importantly stability over the
2023-27 period
Commenting on the results, Merck Mercuriadis, CEO and Founder of Hipgnosis
Song Management and Founder of Hipgnosis Songs Fund said:
"These results demonstrate Hipgnosis' investment thesis remains robust with
continued growth in a challenging environment. Our pro forma revenues show
strong growth from streaming and Synch, proving our acquisition strategy and
demonstrating our ability to maximize our Portfolio's value with our Song
Management. This performance has ensured that our portfolio valuation, and
therefore our NAV, have remained stable in US $ terms, and grown in GBP. We
have also taken an important step with our new RCF, agreed at the end of the
period. This reduces our interest costs and equally importantly gives us
control over these costs going forward irrespective of macro-economic
conditions.
"In the wider music market, people continue to listen to and pay for music
irrespective of today's cost of living challenges with annual audio streams in
the US passing the one trillion mark for the first time despite a full month
of the year remaining. Paid for streaming continues to grow, there are now
more than 523 million premium paid subscribers globally. Apple Music has
moved beyond the 9.99 price point in major markets and in 2022 we saw a full
return to live music. These are all exciting indicators for the further growth
that we will experience as income flows through the collection process into
Hipgnosis.
"Despite all of this positive news, I share the disappointment of shareholders
that the true value of our iconic songs is not being reflected in today's
share price. Hipgnosis is an asset based company with a catalogue unrivalled
for its extraordinary success and cultural importance. The current share price
implies that our Company is valued using a 12% discount rate, presenting an
incredible investment opportunity considering this is a deep discount compared
to multiples currently being paid in the market.
"All that's left is to wish you all a Merry Christmas, just as Mariah Carey's
All I Want for Christmas Is You has gone to Number 1, again, on the Billboard
Global chart and is also Number 1 on the UK Official Midweek Chart and Michael
Bublé's Christmas album is heading for the Top 5 all over the world."
Results Presentation and Capital Markets Day
The Investment Adviser will be hosting a meeting for analysts and investors at
The Maxwell Library, IET London: Savoy Place, 2 Savoy Place, London, WC2R 0BL
at 1030GMT today.
Registration for the live webcast is available at:
https://www.lsegissuerservices.com/spark/HipgnosisSongsFundLtd/events/522395c4-b376-45c8-a2c4-d1701fc2447c
(https://www.lsegissuerservices.com/spark/HipgnosisSongsFundLtd/events/522395c4-b376-45c8-a2c4-d1701fc2447c)
A video recording of the event will be made available on the Company's website
at www.hipgnosissongs.com (http://www.hipgnosissongs.com/) after the event.
(Please note if you are joining via the live stream, you will not be able to
ask questions.)
For further information please contact:
Hipgnosis Song Management
Merck Mercuriadis
Chris Helm
Giles Croot (Media) +44 (0)20 4542 1511
Rufina Pavry (Investors) +44 (0)20 4542 1530
Singer Capital Markets - Joint Corporate Broker +44 (0)20 7496 3000
James Moat / James Maxwell / Alex Emslie (Corporate Finance)
Alan Geeves / James Waterlow / Sam Greatrex (Sales)
J.P. Morgan Cazenove - Joint Corporate Broker +44 (0)20 7742 4000
William Simmonds / Jérémie Birnbaum (Corporate Finance)
James Bouverat (Sales)
RBC Capital Markets - Joint Corporate Broker +44 (0)20 7635 4000
Elliot Thomas / Max Avison (Corporate Finance)
Lisa Tugwell / Anastasia Mikhailova (Sales)
Ocorian - Company Secretary & Administrator +44 (0) 28 9693 0222
Lorna Zimny
The Outside Organisation +44 (0)7711 081 843
Alan Edwards / Nick Caley
FTI Consulting +44 (0)7771 978220; +44 (0)7809 411882; +44 (0)7761 332646
Neil Doyle / Paul Harris / Laura Ewart
All US music publicity enquiries +1 917 767 5255
Fran Defeo
About Hipgnosis Songs Fund
Hipgnosis, which was founded by Merck Mercuriadis, is a Guernsey registered
investment company established to offer investors a pure-play exposure to
songs and associated musical intellectual property rights. The Company has
raised a total of almost £1.3 billion (gross equity capital) through its
Initial Public Offering on 11 July 2018, and subsequent issues in April
2019, August 2019, October 2019, July 2020, September 2020, February
2021 and July 2021. In September 2019, Hipgnosis transferred its entire
issued share capital to the Premium listing segment of the Official List of
the FCA and to the London Stock Exchange's Premium segment of the Main
Market, and in March 2020 became a constituent of the FTSE 250
Index. Since April 2021, the Company has been resident in the UK for tax
purposes and is recognised as an investment trust under applicable HMRC
regulations.
About Hipgnosis Song Management Limited
The Hipgnosis Songs Fund's Investment Adviser is Hipgnosis Song Management
Limited, which was founded by Merck Mercuriadis, former manager of globally
successful recording artists, such as Elton John, Guns N' Roses, Morrissey,
Iron Maiden and Beyoncé, and hit songwriters such as Diane Warren, Justin
Tranter and The-Dream, and former CEO of The Sanctuary Group plc. The
Investment Adviser has assembled an Advisory Board of highly successful
music industry experts which include award winning members of the artist,
songwriter, publishing, legal, financial, recorded music and music management
communities, all with in-depth knowledge of music publishing. Members
of Hipgnosis Song Management Limited Advisory Board include Nile Rodgers,
The-Dream, Giorgio Tuinfort, Starrah, David A. Stewart, Poo Bear, Bill
Leibowitz, Ian Montone and Rodney Jerkins.
Introduction from Merck Mercuriadis
In a very challenging environment, I'm proud that in our work to establish
Songs as an asset class, everything we have told our investors from IPO has
either become reality as stated or been exceeded. That includes the growth of
streaming, our ability to establish Song Management as a new paradigm and
manage the Songs better to add value, bringing efficiencies to revenue
collection, advocating on behalf of songwriters to get a bigger slice of the
pie and making Hipgnosis the preferred buyer of the songwriting community,
enabling us to acquire well.
This strategy has delivered a Total $ NAV Return to Shareholders as at 30
September 2022 of 11.8% per year, 60.0% in aggregate since the IPO on 11 July
2018 (including 19.0p per share of dividends).
Our thesis has always been that Songs of extraordinary success and cultural
importance produce long term and reliable income streams, making them highly
investable assets.
We built Hipgnosis Songs Fund as an asset backed investment vehicle with
iconic Songs at its heart to deliver value for our Shareholders off the back
of this thesis.
We therefore assembled a Portfolio of Songs that is unrivalled for its
extraordinary success and cultural importance and which are in high demand. It
is a generally accepted theory that most music companies make their money on
10% of their Songs. I'm confident that our Catalogue would represent the top
10% of any music company's portfolio.
We demonstrate this by co-owning nearly a quarter of the Songs in the "Spotify
Billions Club" (Songs streamed over a billion times on Spotify) and over 10%
of Rolling Stone's The 500 Greatest Songs Of All Time.
Only last month, the Official Chart Company, on behalf of the BBC, identified
the most streamed Songs released in each of the last 70 years. Hipgnosis
co-owns rights to nine of these. Songs like Don't Stop Believin' (Journey,
1981); Sweet Dreams (Are Made Of This) (Eurythmics, 1983); Livin' On A Prayer
(Bon Jovi, 1986); and Everywhere (Fleetwood Mac, 1988). You are likely humming
at least one of those Songs as you read this paragraph.
Some of you will hopefully go onto Spotify, Apple Music or YouTube today to
hear these Songs. Others will be prompted to add them to a playlist. Many,
many more will have done so when the BBC played them all to celebrate its
100(th) anniversary. Each time this happens a payment is earned by Hipgnosis
Songs Fund.
Importantly, people continue to listen to and pay for music irrespective of
the challenges of today's macro-economic conditions. We often say that when
people are living their best lives they are doing so to a soundtrack of great
Songs. Equally, when they are experiencing life's challenges, they are taking
comfort and escaping with great Songs. Either way, our iconic Songs are being
consumed and are generating revenue.
Indeed, recently published research from the IFPI, who represent the global
record industry, shows that people around the world are engaging with music in
2022 more than ever, with average listening up to 20.1 hours each week - an
increase of 1.7 hours since 2021.
According to Luminate, as of 26 November, music audio streams in the United
States are now over the one trillion mark for the first time ever in a single
year. That's already an increase of 11.9 billion compared to the previous
year. It is also seven times higher than in 2015. This report also included
the Top 5 most streamed Songs of the year so far; At No.2, Glass Animals'
Heat Waves generated 493 million on-demand US audio streams. This is
administered by Hipgnosis Song Group (HSG) in the US. That's the second most
streamed Song of the year in the world's biggest paying market.
In a high inflation environment, it is arguable that there is no better value
than c.£/$10 per month for a premium music streaming subscription service.
Paid for streaming - and its utility-like revenues - continues to grow with
more than 523 million premium paid subscribers globally. In recent months, we
have seen Spotify Premium Subscribers reach 195 million, a 13% increase
year-on-year despite the macro-economic environment. Looking at the wider
music market, the RIAA reported US revenues for recorded music in the first
half of 2022 rising 9.1% year-on-year. Apple Music has recently increased
prices beyond the 9.99 per month price point in the US, UK and continental
Europe. This emphasises the incredible value that music streaming represents
and shows that one of the most commercially successful businesses in the world
recognises the pricing power that great music gives their platform. We expect
other streaming platforms will follow Apple's move. Increased revenue to the
Digital Service Providers means increased revenues for Hipgnosis.
We promised investors that we would deliver a new, responsible approach to
Song Management, one where we have the resource and bandwidth to manage our
great Songs to their full potential - and in doing so add significant value.
All the Small Things performed by Blink-182 reached Number six in the
Billboard Hot 100 and Number two in the UK on release in 2000. This Christmas,
it's almost impossible for anyone in the UK not to be familiar with a new
version which is the soundtrack to the seasonal ritual that is the John Lewis
Christmas advert. This is a great example of our approach in action - our
Synch team saw the potential of the Song and took it to John Lewis, then did
everything they could to make it as efficient as possible for them to choose
and use our Song.
Along with the Superbowl, the John Lewis Christmas advert is arguably the most
coveted synch in the world. In our early days of meeting potential investors
we promised we would procure this and we have delivered as we said we would.
The results we publish today show the strength of our Portfolio.
Gross revenue in the period increased by 7.5% year-on-year to $91.7 million
(six months to 30 September 2021: $85.3 million), while our Operative Net
Asset Value per share remained steady at $1.8312 (31 March 2022: $1.8491).
When translated into GBP, at a Sterling to Dollar exchange rate of $1.2223,
our Shareholders benefitted from the strong dollar, with an equivalent GBP NAV
of 149.82p as at 6 December 2022 (31 March 2022: 140.79p).
Like-for-like pro forma (PFAR) revenues in the first half of the calendar year
were $58.5 million, a 7.8% increase on the comparative period in 2021.
Our PFAR shows that our Streaming performance is strong, up 15.8% to $23.6
million (H1 2021: $20.4 million) - while the tireless efforts of the Synch
team to get Songs placed into adverts, television shows, films and video games
alongside new revenues from emerging platforms such as TikTok, have resulted
in Synch revenue growing by some 32.0% year-on-year to $9.78 million (H1 2021:
$7.41 million) year-on-year.
Our younger Catalogues continue to demonstrate that they are reaching the
end of their forecasted decay curves and we have particularly focused on Synch
opportunities where the expected life cycle of a Catalogue means that it moves
on from "new music" radio stations, but is not yet mature enough for "Gold"
stations.
Data from the US, shows that vintage music is an ever increasing proportion of
consumed music - now making up three quarters of Songs enjoyed, up from a
little over a half in 2017. In part, this is due to the consumer being able
to choose what they want to listen to on demand. We are also seeing the
positive impact of older demographics adopting paid streaming and Songs
boosted through strategic Synch and Playlist placements. This reminds people
of great Songs they can now listen to at will. Last year, we had four Songs
that were released prior to 2010 in the Spotify Billions Club; this year we
have 11!
The Song is the currency of our business; without the Song we simply have no
music industry. Yet for too long the songwriter - who delivers the most
important component to the success of a record company, digital service
provider, music merchandiser or live promoter - is the lowest paid person in
the economic equation.
I have always been clear that our motive is to establish Songs as an asset
class and to provide a great return for our investors. Concurrently our
"ulterior" motive is to use our success to help take the songwriter from the
bottom to the top of the economic equation. We advocated for, and welcome the
moves by the US Copyright Royalty Board (CRB) and the wider music industry in
the US to increase the rates paid to songwriters and publishers. CRB III
provided for a 44% increase in the headline rate of DSP revenues paid to
songwriters and Publishers, reaching 15.1% in 2022. The joint industry
proposals for CRB IV would see that proportion rising incrementally to 15.35%
in 2027, while the royalty payable on a physical sale or download would rise
from 9.1 cents to 12 cents with additional inflationary increases.
There is still a long way to go before songwriters are fairly remunerated, but
these are important steps in the right direction. The joint CRB IV proposals
show there is increasing acceptance - as a result of our work - across the
music industry that songwriters should be fairly rewarded for their work.
Whilst the increase is more modest than the CRB III rises, we support it as it
will provide a background of stability at the highest streaming rates ever
paid in the context of which we can continue our advocacy efforts. Our
ultimate goal is for songwriters' pay to be determined by the free market, not
legislation.
When a Catalogue is acquired, our Shareholders sit directly in the shoes of
the songwriter so there is complete alignment between the songwriting
community and our Shareholders. What is in the best interest of the songwriter
is also in the best interest of the Company.
Despite our successes, I share the disappointment of Shareholders that the
true value of our iconic Songs is not reflected in today's share price. As
Songs are a new asset class, we understand that the market has concerns about
both valuation and discount rate, particularly when our NAV is stable in a
macroeconomic environment in which the value of many other assets are
declining.
It's important to remember that the music industry went through a prolonged
period of decline for 15 years, between 2001 and 2016, when technological
disruption in the form of illegal downloading almost killed it off. The
only good thing to come out of that era is that it left these great Song
assets at attractive prices, just as the technology evolved into streaming,
which made it more convenient for consumers to once again listen to and pay
for music legally.
We started buying assets in 2018 when paid US music streaming subscribers were
less than 10% of the 523 million global subscribers there are today. YouTube
had barely paid $2 billion to rights holders in 2018 compared to the $6
billion it has paid in 2022. Whereas previously, almost all consumption of
music was unpaid for, today, almost all consumption of music is paid for and
music has changed from a discretionary purchase to a utility.
These are all positive factors in our NAV.
As a result of our success in establishing Songs as an asset class, we are
flattered that many other investors have come into the market.
While Hipgnosis Songs Fund is currently fully invested, Hipgnosis Song
Management (HSM) remains active in the market, which gives us access to
incredible amounts of transactional data and first-hand knowledge of this
growing marketplace. This information is shared with the Hipgnosis Songs
Fund Board who, as a result of the robust co-investment policy between
Hipgnosis Song Management and its clients, sees everything that HSM sees.
Many Private Equity funds, some of the most successful long-term investors in
the world, are today making high-profile Catalogue purchases at multiples that
reinforce the Fair Value of our Portfolio and reassure us that we have bought
well.
The Fair Value of the Portfolio was calculated by the Portfolio Independent
Valuer, Citrin Cooperman, at $2.67 billion, in line with the prior year. They
have a team of leading experts in music valuation who have been involved in
many recent high profile music catalogue purchases. For the current NAV, they
have continued to use a discount rate of 8.5%. This Fair Value enables us
to calculate the Operative NAV which remained stable at $2.2 billion. To
provide investors reassurance, the Board also appointed Kroll Advisory
Limited ("Kroll"), an independent valuation firm, to consider and advise on
the reasonableness of certain assumptions commonly employed in the valuation
of music Catalogues based on data provided by the Company. The results of the
analyses by Kroll provide, in the Board's view, additional support as to the
reasonableness of assumptions employed in arriving at the Fair Value of the
investments. This gives us, and should give investors, great comfort over the
Fair Value of our Songs and therefore the incredible investment opportunity
the current share price represents.
An increase in the discount rate from 8.5% to 9.0% would reduce the Operative
NAV by $212 million. Our current share price is trading at a discount to the
Operative NAV of over 45%, which implies a discount rate of nearly 12%. There
is considerable upside.
We go into the second half of the year positioned strongly. Our re-financed
Revolving Credit Facility, interest rate hedges and currency hedges for our
Sterling dividend payments, finalised post period end, give increased
certainty on costs, while the recent confirmation from CRB that it will
enforce the increase in revenues from US streaming, as proposed in its CRB III
settlement, is further boosting revenue. Additionally, the return of
Performance revenues to pre-COVID-19 levels is yet to be seen in our revenues.
The statistics continually demonstrate the importance of Music in all of our
lives as a great and affordable source of comfort, nourishment, sustenance
and joy. I'm delighted that it is Songs owned by Hipgnosis that people are
listening to and that are amongst the most consumed Songs throughout the
world.
You are pioneers in establishing an exciting new asset class and we do not
take your belief in the Company lightly. We therefore take our responsibility
to you, our Shareholders, very seriously. I therefore hope that the
information we are sharing in these results will give you belief in our Fair
Value and we are firmly committed to ensuring that the Company's incredible
value is recognised in the market.
I would like to pay tribute to the incomparable Christine McVie who passed
away last week at the age of 79. She wrote iconic songs that propelled
Fleetwood Mac into one of the biggest artists of all time. She was our
Songbird and it's one of Hipgnosis' greatest privileges to forever be the
custodians of her special songs. It is clear from the live chart data that
millions of people are streaming her hits with Fleetwood Mac's Rumours having
already returned to the Top 10.
This week Mariah Carey's All I Want For Christmas Is You is heading for the UK
Number One slot and is already Number One on the Billboard Global 200 chart.
Meanwhile, Michael Buble's Christmas Album is set to be back in to the Top 10,
Hipgnosis Songs Fund has an interest in both and there's another three weeks
to go before the big day. The Company has co-owned All I Want For Christmas Is
You since 2020, one of the seasonal greats. In our first full year of
ownership we saw a 78% increase in revenues compared to the average of
previous three years - buying well, proactive Song Management and strong
market growth delivering once again. Further to this Fleetwood Mac's Rumours
is back in the Top 10 UK album chart and Heat Waves by Glass Animals has just
been named Billboard's Number 1 Hot 100 song of the year.
It remains only for me to thank you for your support as well as that of the
incredible songwriters that have entrusted us with their iconic work.
Wishing you, and your loved ones, all the best for a Merry Christmas,
wonderful holidays and a happy, healthy and prosperous 2023!
Merck Mercuriadis
Founder, Hipgnosis Songs Fund Ltd and Founder/CEO, Hipgnosis Song Management
Ltd.
7 December 2022
The Chair's Statement
Introduction
The results we report today show the robustness and potential of your Company.
Both Gross revenue and pro-forma revenues show healthy growth against the
comparative period, operating costs have been reduced and we have refinanced
and fixed the interest cost on most of the Company's debt.
The total return on our Operative NAV since our launch in July 2018 to 30
September 2022 has been 60.0% (with dividends added back). Total Shareholder
Return, being the change in our share price over the same period, again with
dividends added back, has been 8.10%. The Board shares the disappointment of
Shareholders at the share price performance during 2022.
As at 6 December 2022, the shares were trading at a discount to NAV of 46%.
Whilst there have undoubtedly been macro factors (the war in Ukraine,
inflation and increases in interest rates) which have impacted the Company's
share price, the Board is continually assessing all options to ensure that the
Company delivers superior Shareholder value over the medium term.
Our investment case has always been based on three core pillars:
First, the acquisition of a high-quality Portfolio of culturally important
songs with a proven track record of success, which provides the strongest
possible foundation for the Company. Our Portfolio is built on quality, with
an unrivalled concentration of evergreen Songs released in every decade since
the 1960s. The Catalogue now includes:
• 78 out of 324 Songs (24%) in Spotify's Billions Club, being songs
which have been played on the platform over one billion times;
• 52 of Rolling Stone's The 500 Greatest Songs of All Time; and
• 13 out of the 30 YouTube's Most Viewed music videos
of all time.
Second, our Investment Adviser actively manages the Songs in the Company's
Portfolio, with the object of increasing revenues and maximising the Songs'
value. Active song management activities include:
• Delivering efficient administration of Catalogues by ensuring that all
due payments are coming through and the collection system is as efficient and
effective as possible;
• Creating additional revenues by placing Synchs across traditional and
new media outlets; and
• Identifying opportunities to promote our Songs, enabling and creating
new versions and building partnerships which monetise our Catalogue.
Third, we believe that the music industry will continue to experience
significant structural growth as the adoption of paid-for streaming increases,
pricing increases lead to more royalties flowing through to rights holders and
technology drives new income streams. We continue to see strong evidence for
this in the market. Since our Annual Report was published in July:
• Spotify's third quarter results showed premium subscribers up 13.3%
year on year;
• Apple Music announced its intention to increase its pricing for its
standard music tier from 9.99 to 10.99 per month
(in the relevant currency) in the US, UK and Eurozone; and
• The RIAA (Recording Industry Association of America) reported that
revenues for recorded music in the first half of 2022 rose 9% compared to the
same period in the prior year to $7.7 billion in the US. Streaming represented
84% of this, an unchanged share, up 10% in revenue terms.
The Board and the Investment Adviser believe that music streaming represents
extremely good value for consumers and that the Digital Service Providers
(DSPs) have pricing power. Many market commentators expect Spotify to follow
Apple's example and move beyond the 9.99 monthly subscription price point (in
the relevant currency).
In addition to market growth and pricing rises, a number of regulatory
industry developments will further boost the Company's revenue. These include
decisions by the US Copyright Royalty Board (CRB) with respect to the CRB III
settlement, which is now in the process of being implemented and has been
accrued for in these results, and the joint industry proposal for CRB IV,
which will see further rises in the share of Streaming revenues paid to
Songwriters in the period from 2023-27.
Financial performance
The IFRS NAV per share as at 30 September 2022 was $1.2590, which is a small
decrease from $1.3065 as at 31 March 2022, largely driven by the amortisation
of Catalogues.
The Board considers that the most relevant NAV for Shareholders is the
Operative NAV which reflects the fair value of the Company's Catalogues as
valued by the Independent Portfolio Valuer and adds back the material
accumulated amortisation and impairment charges.
The Operative NAV per Share remained stable at $1.8312 during the period (31
March 2022: $1.8491) primarily due to adverse currency movements relating to
non-US denominated Catalogues accounting for c.12% of revenue receipts. When
including dividends paid to date, the Total $ NAV Return was 0.7% over the
prior six-months' period and 60.0% since IPO on 11 July 2018.
Earnings per share for the six months ended 30 September 2022 were -1.66¢
(broadly unchanged on the EPS for the
six months ended 30 September 2021 of -1.69¢). This figure now reflects all
Catalogues being amortised for the full
six month period. The Group amortises Catalogues of Songs with a limited
useful life using a straight-line method over 20 years.
Based on the Sterling to Dollar exchange rate as at 30 September 2022 of
1.116, the Operative NAV presented in Sterling would be 164.06p per share as
at that date (compared with 140.79p as at 31 March 2022, based on the then
Sterling to Dollar exchange rate of 1.3134).
Adjusted EPS, as defined within the Alternative Performance Measures for the
six months ended 30 September 2022, is 3.76¢ (six months ended 30 September
2021: 3.85¢).
The structure of the music industry means that revenues can take some time to
flow into Hipgnosis Songs Fund. However, we are encouraged by the numbers
reported recently by the Company's administration partners and other
organisations at the entry point for music revenues at source, as an indicator
of the Company's future income prospects.
Further issuance
The Board does not anticipate raising additional equity until its share price
again trades at a sustained premium
to its Net Asset Value.
Dividend
In the Annual Report the Board restated its intention to maintain the target
dividend at 5.25p per Ordinary Share for the financial year 2022-23 and
announced that, in order to better align dividend payments with revenue
receipts, dividends would be paid on or around the last working day of
January, April, July and October with dividends declared around a month prior
to the payment date. The Board currently expects that dividends paid in
respect of the current financial year will be covered from Distributable
Revenues recognised in the period under review.
Valuation
The Board is ultimately and solely responsible for overseeing the valuation of
the Company's investments in music catalogues and has appointed the Portfolio
Independent Valuer to perform this specialist work.
The Board also appointed Kroll Advisory Limited ("Kroll"), an independent
valuation firm, to consider and advise on the reasonableness of certain
assumptions commonly employed in the valuation of music catalogues based on
data provided by the Company. The results of the analyses by Kroll provide, in
the Board's view, additional support as to the reasonableness of assumptions
employed in arriving at the Fair Value of the investments.
As a result of the co-investment policy which the Company enjoys alongside the
Investment Adviser's other client, the Board has exceptional visibility into
the current market for music rights purchases, providing the Board with
additional confidence in the independent valuation.
Revolving Credit Facility
On 30 September 2022, the Company entered into a new Revolving Credit Facility
(RCF) with a commitment of $700 million which runs for five years until 30
September 2027. The facility has been used to refinance, in full, the
Company's pre-existing RCF and provide flexibility for additional working
capital where necessary. In accordance with the Investment Policy, any
borrowings by the Company will not exceed 30% of the value of the net assets
of the Company.
In the Annual Report, the Board set out that the purpose of the refinancing
was to reduce interest rate risk and control costs. To deliver on these
objectives, the Company entered into interest rate swap agreements, as
disclosed on 5 October 2022. As a result, until 2 January 2023, interest on
all the drawn debt is fixed at 5.71% (including debt margin). From 3 January
2023, $340 million is hedged for the duration of the RCF (until 30 September
2027) at a fixed rate of 5.67% (including debt margin); a further $200 million
is hedged until 3 January 2026 at a fixed rate of 5.89% (including debt
margin). The balance remains unhedged to provide flexibility in the operation
of the RCF.
Annual General Meeting
The Annual General Meeting for the Company took place on 21 September 2022. I
am pleased to announce that all ordinary and special resolutions were passed
by the requisite majority.
Share buy backs
The Board believes that the most effective means of minimising any discount at
which the Ordinary Shares may trade is for the Company to deliver strong,
consistent, long-term performance from the investment Portfolio. However,
wider market conditions and other considerations inevitably affect the
rating of the Ordinary Shares from time to time.
Following the period end, the Board announced a share buy-back programme
funded out of free cash flow. During the initial period of its operation an
aggregate number of 2 million shares have been purchased with an aggregate
value of £1.7 million. The Board will continue to repurchase Ordinary Shares
when they believe it to be in the interests of Shareholders to do so.
Ordinary Shares held in treasury may only be reissued by the Company at prices
representing a premium to the NAV per Ordinary Share as at the date of
re-issue.
Outlook
Despite inflationary pressures, interest rate rises and the impact of
central banks' actions to control inflation, the leading economic music
indicators continue to point to Hipgnosis' investment thesis being valid. We
anticipate continued strong growth in the global music market.
In addition, the Company expects to benefit from increasing revenues from
social media, gaming and lifestyle channels. This market growth, coupled with
the Investment Adviser's Song Management capabilities and our Portfolio of
high quality, iconic and culturally important Songs gives the Board confidence
that the Company is capable of delivering superior Shareholder returns over
the medium term.
Andrew Sutch
Chair
7 December 2022
Investment Adviser's Report
Introduction
This year we've seen a positive impact on revenue from our active Song
Management of the Company's Portfolio.
During the period the Company's Operative Net Asset Value per share remained
stable at $1.8312. The strong Dollar boosted the Sterling value of the
Operative NAV of the Company which, on 6 December 2022, was 149.82p per share,
converted using a Sterling to Dollar exchange rate of $1.2223.
Like-for-like pro forma (PFAR) revenues in the first half of the calendar year
were $58.5 million, a 7.8% increase on the comparative period in 2021.
Pro forma revenues from Synch during the first half of the calendar year have
been strong, up 32% to $9.78 million (H1 2021: $7.41 million), illustrating
the value we deliver for shareholders through our active Song Management. This
growth is a result of placing Songs in movies, tv shows and advertisements,
video games and from existing and emerging platforms, such as YouTube and
TikTok. The quality of our Songs, our strategy of building close relationships
with producers and ensuring that working with Hipgnosis is as smooth and
efficient as possible are paying dividends.
We also continued to see strong growth in pro forma streaming revenues, up
15.8% year-on-year to $23.56 million in H1 2022 (H1 2021: $20.35 million).
This reflects the Company's extraordinary concentration of Songs with high
streaming consumption, as shows by Hipgnosis's share of Songs in Spotify's
Billions Club which has remained unchanged at 24%, despite the list growing
from 190 Songs 12 months ago to 324 today.
The context for Hipgnosis' investments has always been the massive opportunity
afforded by the adoption of and exponential/long term growth in streaming. The
continued rapid adoption of paid-for streaming not only increases revenues,
but also continues to transform income from being driven by consumers'
discretionary decisions into a utility. In our view, this will drive a
re-rating in the value of our Songs as the perceived risk profile of the
income falls.
2022 saw the full and welcome return of live music after the hiatus caused by
the COVID-19 lockdowns. With record numbers of people attending concerts, we
saw our Songs played at sell-out shows around the world including performances
by Red Hot Chili Peppers, Nile Rodgers and CHIC, Journey, Lindsey Buckingham
and Blondie.
These performance revenues will be reflected in future reporting periods as a
result of the significant time lag in
collections by Performing Rights Societies and Administrators. This means that
we are still experiencing the impact in earnings caused by retail and
entertainment venues being closed by COVID-19 restrictions during 2020 and
2021. We continue to see evidence that performance revenue across the music
industry is recovering steeply and we remain confident that, when the time lag
in payments to Hipgnosis works through, this will be a further strong pillar
for revenue growth.
The Portfolio
The Portfolio as at 30 September 2022 is comprised of 146 Catalogues, 65,413
Songs. The overall Fair Value of the Portfolio of the Catalogues, as
determined by the Portfolio Independent Valuer, remains stable at $2.67
billion
(31 March 2022: $2.69 billion).
This valuation reflects a multiple of 19.93x historical annual net Publisher
Share income, compared to the blended acquisition multiple of 15.93x.
Hipgnosis' Portfolio of Songs, we believe, is unrivalled in its concentration
of quality. In addition to our standing in Spotify's Billions Club, this is
demonstrated by our Songs being:
• Over 10% of Rolling Stone's The 500 Greatest Songs
of All Time (52/500);
• 9 out 70 of the BBC's Most Streamed Chart;
• 20 out of the Top 100 most streamed songs on Spotify; and
• Almost half of YouTube's Most Viewed music videos
of all time (13/30).
Portfolio at 30 September 2022
Catalogue Acquisition Interest Ownership Total
Date
Songs
The-Dream 13 Jul 2018 75% 302
Poo Bear 21 Nov 2018 100% 214
Bernard Edwards 28 Nov 2018 38% 290
TMS 17 Dec 2018 100% 121
Tricky Stewart 17 Dec 2018 100% 121
Giorgio Tuinfort 21 Dec 2018 100% 182
Rainbow 15 Jan 2019 100% 15
Itaal Shur 31 Jan 2019 100% 209
Rico Love 26 Feb 2019 100% 245
Sean Garrett 21 Mar 2019 100% 588
Johnta Austin 22 Mar 2019 100% 249
Sam Hollander 31 Mar 2019 100% 499
Ari Levine 31 Mar 2019 100% 76
Teddy Geiger 12 Apr 2019 100% 6
Starrah 25 Apr 2019 100% 73
Dave Stewart 7 May 2019 100% 1,068
Al Jackson Jr 8 May 2019 100% 185
Jamie Scott 15 May 2019 100% 144
Michael Knox 28 May 2019 100% 110
Brian Kennedy 14 Jun 2019 100% 101
John Bellion 14 Jun 2019 100% 180
Lyric Catalogue 17 Jun 2019 100% 571
Neal Schon 20 Jun 2019 100% 357
Jason Ingram 10 Jul 2019 100% 462
Eric Bellinger 12 Jul 2019 100% 242
Andy Marvel 23 Jul 2019 100% 740
Benny Blanco 2 Aug 2019 100% 93
The Chainsmokers 22 Aug 2019 100% 42
Timbaland 10 Oct 2019 100% 108
10cc 17 Oct 2019 100% 29
Journey (Publishing) 21 Oct 2019 100% 103
John Newman 5 Nov 2019 100% 47
Jaron Boyer 5 Nov 2019 100% 109
Arthouse 15 Nov 2019 100% 44
Fraser T Smith 5 Dec 2019 100% 298
Jack Antonoff 5 Dec 2019 99% 188
Ammar Malik 5 Dec 2019 100% 90
Ed Drewett 9 Dec 2019 100% 109
Kaiser Chiefs (Masters) 9 Dec 2019 100% 48
Jeff Bhasker 11 Dec 2019 100% 436
Johnny McDaid 11 Dec 2019 100% 164
Emile Haynie 13 Dec 2019 100% 122
Brendan O'Brien 13 Dec 2019 100% 1,855
Savan Kotecha 18 Dec 2019 100% 49
Tom Delonge 23 Dec 2019 100% 157
Journey (Masters) 10 Jan 2020 65% 389
Rebel One 10 Jan 2020 100% 157
Scott Harris 10 Jan 2020 100% 129
Brian Higgins 22 Jan 2020 100% 362
Gregg Wells 10 Feb 2020 100% 11
Jonathan Cain 28 Feb 2020 100% 216
Jonny Coffer 28 Feb 2020 100% 85
Mark Ronson 28 Feb 2020 100% 315
Richie Sambora 4 Mar 2020 100% 186
Rodney Jerkins 16 Jul 2020 100% 982
Barry Manilow 16 Jul 2020 100% 917
RedOne 16 Jul 2020 100% 334
Eliot Kennedy 16 Jul 2020 100% 217
Closer (J King & I Slade) 27 Jul 2020 100% 2
NO I.D. 24 Jul 2020 100% 273
Pusha T 24 Jul 2020 100% 238
Ian Kirkpatrick 29 Jul 2020 100% 137
Blondie 30 Jul 2020 100% 197
Chris Cornell 10 Aug 2020 100% 241
Robert Diggs "RZA" 12 Aug 2020 50% 814
Ivor Raymonde 13 Aug 2020 100% 505
Nikki Sixx 3 Sep 2020 100% 305
Big Deal Music "BDM" 10 Sep 2020 100% 4,212
Julian Bunetta 10 Sep 2020 50% 188
Chrissie Hynde 10 Sep 2020 100% 162
Steve Robson 17 Sep 2020 100% 1,034
Rick James 18 Sep 2020 50% 97
Kevin Godley 23 Sep 2020 100% 358
Scott Cutler 24 Sep 2020 100% 111
Nate Ruess 30 Sep 2020 100% 59
LA Reid 30 Sep 2020 100% 162
50 Cent 30 Sep 2020 100% 388
Aristotracks 30 Sep 2020 100% 152
B-52's 30 Sep 2020 100% 96
Bonnie McKee 30 Sep 2020 100% 78
Brill Building 30 Sep 2020 100% 234
Christina Perri 30 Sep 2020 100% 68
Dierks Bentley 30 Sep 2020 100% 113
Editors 30 Sep 2020 100% 64
Eman 30 Sep 2020 100% 97
Enrique Iglesias 30 Sep 2020 100% 157
Evan Bogart 30 Sep 2020 100% 229
George Benson 30 Sep 2020 100% 107
George Thorogood 30 Sep 2020 100% 40
Good Soldier 30 Sep 2020 100% 760
Holy Ghost 30 Sep 2020 100% 62
J-Kash 30 Sep 2020 100% 90
John Rich 30 Sep 2020 100% 7
Kojak 30 Sep 2020 100% 148
Lateral 30 Sep 2020 100% 248
Lindsey Buckingham (Kobalt) 30 Sep 2020 100% 174
LunchMoney Lewis 30 Sep 2020 100% 116
Lyrica Anderson 30 Sep 2020 100% 96
Madcon 30 Sep 2020 100% 173
Mark Batson 30 Sep 2020 100% 210
Mobens 30 Sep 2020 100% 1,034
Nelly (Kobalt) 30 Sep 2020 100% 145
Nettwerk 30 Sep 2020 100% 25,259
PRMD 30 Sep 2020 100% 335
Rob Hatch 30 Sep 2020 100% 167
Rock Mafia 30 Sep 2020 100% 393
Savan Kotecha (Kobalt) 30 Sep 2020 100% 354
SK Music 30 Sep 2020 100% 23
Skrillex 30 Sep 2020 100% 153
Stereoscope 30 Sep 2020 100% 456
Steve Winwood 30 Sep 2020 100% 215
Tequila 30 Sep 2020 100% 1
Third Day 30 Sep 2020 100% 212
TImeflies (Masters) 30 Sep 2020 100% 80
Walter Afanasieff 30 Sep 2020 100% 213
Wayne Wilkins 30 Sep 2020 100% 113
Yaslina 30 Sep 2020 100% 73
Sacha Skarbek 20 Nov 2020 100% 303
Tricky Stewart (Masters) 27 Nov 2020 100% 95
Eric Stewart 2 Dec 2020 100% 255
Bob Rock 4 Dec 2020 100% 43
Caroline Ailin ("New Rules") 10 Dec 2020 100% 2
Nelly 15 Dec 2020 100% 240
Lindsey Buckingham 24 Dec 2020 100% 161
Joel Little 24 Dec 2020 100% 178
Jimmy Iovine 24 Dec 2020 100% 259
Neil Young 31 Dec 2020 50% 590
Shakira 31 Dec 2020 100% 145
Brian Kennedy (Writer Share) 31 Dec 2020 100% 139
Andrew Watt 17 Feb 2021 100% 105
Christian Karlsson 2 Mar 2021 100% 255
Carole Bayer Sager 17 Mar 2021 100% 983
Paul Barry 18 Mar 2021 100% 510
Espionage 26 Mar 2021 100% 151
Martin Bresso 31 Mar 2021 100% 51
Andy Wallace 31 Mar 2021 100% 1,242
David Sitek 31 Mar 2021 100% 230
Happy Perez 31 Mar 2021 100% 192
Red Hot Chili Peppers 14 Jul 2021 100% 220
Kaiser Chiefs 15 Jul 2021 100% 136
Christine McVie 21 Jul 2021 100% 115
Jordan Johnson 22 Jul 2021 100% 58
Stefan Johnson* 22 Jul 2021 100% 58
Rhett Akins 23 Jul 2021 100% 564
Ann Wilson 29 Jul 2021 50% 152
Elliot Lurie 24 Aug 2021 100% 70
Total Songs 65,413
More people paying more for music streaming services
Reported data from the music industry continues to show growth despite the
wider economic challenges. Furthermore, there are regulatory and commercial
developments which will directly result in additional revenues for Hipgnosis.
For example:
• The market leading global streaming service, Spotify, beat
expectations with year-on-year premium subscriber growth of 13% to 195 million
and Monthly Active Users up 20% to 456 million, according to their recent Q3
2022 results. Revenues also increased 21% to €3.0 billion.
• Apple Music announced that it would be increasing the monthly price of
its individual and family subscriptions by $/£/€1 to $/£/€10.99 and
$/£/€2 to $/£/€16.99 respectively in the US, UK and continental Europe.
• Spotify and other DSP's have indicated they will also increase prices.
• The mid-year revenue statistics disclosed by the RIAA (Recording
Industry Association of America) gives us an insight into the recorded music
revenues in the US, our largest market. Revenues from streaming music, a broad
category including formats such as paid subscription services, ad-supported
services, digital and customized radio, grew 10% to $6.5 billion in the first
half of 2022. The share of revenues that came from streaming was virtually
flat at 84% and paid subscriptions account for 78% of streaming revenue.
We have long believed that music streaming represents exceptional value for
money and, as such, believe that the DSPs have significant pricing power
despite the current macro-economic conditions. Consequently, in line with many
industry commentators, we expect Spotify will follow Apple's lead and
similarly increase its 9.99 individual price point in major markets. Price
increases leads to more royalties flowing through to rights holders.
Copyright Royalty Board
During the period there were a number of significant regulatory developments
from the Copyright Royalty Board (CRB), which sets royalty rates for the
United States, the Company's biggest single market.
After a lengthy appeals process, the CRB rejected the appeal of CRB III
brought by some streaming companies. As a result, CRB III, which proposed to
incrementally increase mechanical streaming royalty rates for songwriters and
publishers was confirmed with the "all in" (mechanical and performance)
statutory minimum rates for streaming paid in the US was confirmed with the
headline rate rising from 10.5% of streaming revenues prior to 2018 to 15.1%
in 2022, an overall 44% increase and paid retroactively. As detailed in the
Copyright section, this has led to a $16.1 million accrual for retroactive
revenue due to the Company for the years 2018-2021 and a $6.2 million
accrual to monies expected to be earned in 2022, of which $3.1 million were
taken in this financial period.
The next CRB IV settlement period begins in 2023. A joint proposal from The
National Music Publishers' Association (NMPA) and Nashville Songwriters
Association International (NSAI) and the Digital Media Association (DiMA) has
been submitted to the CRB. Should this be ratified, as is almost certain, this
would see the headline royalty rate for mechanical streaming in the US rise
further from 15.1% to 15.35%, phased in over the five-year term from 2023-27.
While we believe more significant increases are warranted and will come, this
agreement will provide the highest royalty rates ever for songwriters in the
streaming economy and five years of stability from which to build from.
Additionally, the deal also includes a number of changes to other components
of the rate, including increases to the per subscriber minimums and the "Total
Content Costs (TCC)" calculations which reflect the rates that services pay to
record labels and modernizes the treatment of "bundles"
of products or services that include music streaming.
The agreement is supported by DiMA member companies, Amazon, Apple, Google,
Pandora and Spotify, as well as NSAI's Board of Directors and the NMPA Board,
which is comprised of leading independent and major music publishers.
Separately, we support a 32% uplift in the mechanical rate paid to publishers
and songwriters for music purchased as a physical sale from 9.1¢ per track to
12¢ per track from 2023-27 with further annual increases in line with the
Consumer Price Index. This is a significant upside for our iconic songwriters
and artists such as Red Hot Chili Peppers, Fleetwood Mac, Soundgarden,
Journey and many others that derive significant revenue from the sale of
physical product.
The joint proposals for CRB IV are significant as they demonstrate growing
acceptance across the industry that artists and songwriters should be fairly
remunerated for their work. Hipgnosis will continue to be at the forefront of
the campaign to move songwriters (and the owners of songwriting royalties)
from the bottom of the economic equation to the top, recognizing their vital
role within the music industry. At Hipgnosis, our investors stand in the shoes
of Songwriters so there is complete alignment with the best interest of
Songwriters and Shareholders.
Return of Performance Revenues
CISAC - the International Confederation of Societies of Authors and Composers
- is the leading network of authors' societies with 229 member societies in
119 countries. In their recently published 2022 global collections report,
which reports data from 2021, CISAC note global collections returned to growth
in 2021, increasing by +5.8% to reach €9.58 billion and reversing the
previous year's decline due to the pandemic. Digital collections grew +27.9%
to €3.1 billion driven by organic growth in streaming, rising music and
video on demand subscriptions (SVOD), and deals with digital platforms.
Royalties from live and public performance in 2021 were still 45.8% below 2019
pre-pandemic levels due to lockdown restrictions on concerts, exhibitions and
live entertainment, highlighting the long lag in the industry.
This strongly suggests there is considerable opportunity for upside in
collections for 2022 and beyond as normal levels of activity resume and the
collections agencies distribute revenue to rights holders including Hipgnosis.
This thesis is supported by statements from Live Nation Entertainment, the
world's leading live entertainment company, which reported in November 2022
that it had delivered the biggest summer concert season in history, with 44
million attendees across 11,000 concerts in 50 countries. As a result, Live
Nation Entertainment has said it now expects to transfer over $550 million of
additional payments to artists this year and has stated that ticket sales for
shows in 2023 are "pacing even stronger than they were heading into 2022, up
double-digits year-over-year".
Active Song Management
Hipgnosis' Portfolio of iconic and culturally important Songs are naturally in
high and constant demand from producers to feature in their movies, TV shows
and advertisements, video games and online marketing endeavours. Alongside
this, our global in-house '24/7' Synch licensing operation actively manages
our Songs with responsibility. The Hipgnosis Song Management team focuses on
creating opportunities which add value to both the song and the songwriter's
legacy, while also responding to incoming enquiries within a matter of
minutes. The success of our approach is demonstrated by the 32% increase in
synch PFAR revenue in calendar H1 2022 compared to H1 2021. Overleaf we have
identified a selection of our recent Synchs.
We promised investors that we would deliver a new, responsible approach to
Song Management, one where we have the resource and bandwidth to manage great
Songs to their full potential - and in doing so add significant value. We
share some examples here:
Firstly, we begin to better utilise alternative interpretations of our
repertoire. All the Small Things was a Song created by Blink-182, co-written
by Tom Delonge, whose Catalogue we bought in December 2019. The Song reached
Number six in the Billboard Hot 100 and Number two in the UK on release in
2000. Our Synch team saw the potential of a slowed down version of this track
by Scott Bradlee Post Modern Jukebox and presented it to John Lewis, who chose
it to be their seasonal Christmas advert. By really putting the spotlight on
alternative representations of our Songs we deliver new ways to gain exposure
for our Songs.
Secondly, we have created new master recordings of selected Songs within the
Catalogue. These new interpretations are designed to be attractive for synch
opportunities. In addition to our existing ownership in the Song, Hipgnosis
owns 100% of these master recordings.
This approach has already proved successful, with a new version of Bon Jovi's
Wanted Dead Or Alive. We utilised the musical skill sets of a Channel Island
based artist Empara Mi and the team created a whole new rendition of this
Song, which we released in May 2022. In this case, Hipgnosis owns 50% of the
Publishing copyright and 100% of the master recording. We released the Song on
Streaming services to establish a base for the record and it has already
achieved over a million streams. However, more importantly, and financially
far more successful, we have also secured the placement of the Song with a
major gaming studio, earning a six-figure synch fee.
Thirdly, we focus on contemporary artists proving new interpolations of Songs.
For example, in 2022 Nicki Minaj has delivered another enormous global hit
based on Rick James's hit Super Freak. We have always known the hidden value
of Rick's catalogue. This year Nicki's Song Super Freaky Girl went to Number 1
on the Billboard Hot 100 in the US as well as being a top five hit in the UK.
The original Song was released in 1981, superbly capturing Rick's raw funk
beauty and this has been a seminal track ever since. Almost 10 years later MC
Hammer utilized this track for the enormous global Grammy award winning hit U
Can't Touch This. Nicki Minaj's new recording helps to again revive the
original Catalogue. Rick James saw a 59% increase in people listening to his
music on Spotify alone last month and an 26% increase in US consumption of the
original Super Freak version. Hipgnosis has 55% of the new work. Hipgnosis
also has over 20 major tracks and another 14 features with Nicki Minaj with
other writers including Redone, Starrah and Lunchmoney Lewis.
We also continue to work to promote our Songs for use on social media and
lifestyle platforms. For example, Hipgnosis' main TikTok channel now has 2.1
million followers, one of the highest performing music company channels on the
platform. This allows us at no cost to reach this very active audience with
our music, our Songs, and with contemporary uses of the track to help magnify
their attractiveness and levels of consumption. We have several additional
splinter channels which focus on particular music moods and genres (Rock,
Gaming and Country) and these are all at over 100,000 followers. As discussed
in detail in the Annual Report, TikTok, as a platform, has demonstrated the
capacity to expose Songs, extend their life for new generations to come and to
make them hits all over again by introducing them to a new audience.
Grammy
Hipgnosis writers were included in 16 Grammy nominations for 2022, as follows:
• Album Of The Year: Beyonce's RENAISSANCE (Travis Garland) and Lizzo's,
Special (The Monsters & Strangerz; Phoelix; Thomas Brenneck)
• Best Alternative Performance and Best Alternative Album: Yeah Yeah
Yeahs (Dave Sitek)
• Best Compilation Soundtrack for Visual Media: The soundtrack to
'Stranger Things': Separate Ways (Journey/Cain/Schon)
• Best Dance/Electronic Album: Beyonce's RENAISSANCE (Travis Garland)
and Diplo's Diplo, (Phil Scully/David Karbal)
• Best Folk Album: Revealer by Madison Cunningham
(Dan Wilson)
• Best Historical Album: Against the Odds: 1974-1982 by Blondie (Debbie
Harry and Chris Stein)
• Best Immersive Audio Album: Aguilera by Christina Aguilera (Tobias
Wincorn)
• Best Latin Pop Album: De Adentro Pa Afuer by Camilo (production by
Juan Ariza) and Aguilera by Christina Aguilera (Tobias Wincorn)
• Best Music Film: Neil Young & Crazy Horse, Barn (Neil Young)
• Best Pop Vocal Album: Lizzo's Special (The Monsters & Strangerz;
Phoelix; Thomas Brenneck)
• Best Progressive R&B Album: Terrace Martin's, DRONES (Kamasi
Washington)
• Best Rap Album: Come Home The Kids Miss You by Jack Harlow (Tobias
Wincorn)
• Best Rock Performance: Beck's Old Man (Neil Young).
Song Administration
Hipgnosis has continued to implement its strategy to reduce administration
costs and ensure that payments are received as quickly as possible by
reverting (i.e. moving) Catalogues and renegotiating administration rates at
the earliest possible opportunity (except where there are compelling reasons
to maintain the current administration relationships).
During the period we announced that Hipgnosis had entered into a direct
licensing and administration partnership with Sacem, a world-leading
Collective Management Organisation (CMO), to collect digital rights for the
Writers' Share and Hipgnosis' own Publisher Share, primarily in the UK and the
European Union. Initially 36 full-or part Catalogues were transferred to Sacem
on 1 July 2022, accounting for c.6.5% of our publisher's share of revenue.
Additionally, Hipgnosis entered into a sub-publishing partnership with
peermusic to collect publishing rights and other royalties in the rest of the
world, excluding the US. These arrangements are expected to result in relevant
revenues being uplifted by over 7% starting in 2023, as underlying rights
revert into these partnerships and we will start to receive those statements.
Further administration arrangements are due for reversion to Sacem and
peermusic in the second half of this financial year.
Hipgnosis will continue to use Hipgnosis Songs Group (HSG) for royalty
collection in the United States and will revert Catalogues when possible, for
the collection of US income. During the period under review, a further eight
administration arrangements have been reverted to HSG.
In addition to administering Songs for the Company, HSG is a third-party
administrator. In this capacity, HSG administers Catalogues such as Glass
Animals (Beggars), who claimed the longest run in Billboard 100 history with
Heat Waves. The Song has gone 5x Platinum and amassed 9.5 billion global
streams. It was the second most streamed Song in 2022 in the US, generating
493 million on-demand US audio streams alone, and is ranked among the Top 20
"most streamed Songs of all-time on Spotify". Additionally, the Song took home
the honour of "Song of the Year" at the 2022 SESAC Music Awards.
Alongside our HSG, Sacem and peermusic structures, we continue to have
significant administration business at Kobalt as well as at Sony Music
Publishing, Warner Chappell and Universal Publishing.
Song Copyright Management
The recent focus of Song Copyright team has been on the CRB settlements,
described above.
In July 2022, after a lengthy process, the 2018-22 rate increases on the
songwriter's and publisher's mechanical portion of US Streaming income, known
as CRB III, were finally agreed. This culminated in the "all in" headline
(mechanical and performance) statutory minimum rates for Streaming paid in the
US to increase by a total of 44%, from 10.5% to 15.1% over the course of the
CRB III period.
The headline rates agreed by the CRB were as follows:
2018 2019 2020 2021 2022
11.4% 12.3% 13.3% 14.2% 15.1%
In August 2019, certain DSPs (including Spotify, Google and Amazon) filed
their appeal of this ruling in the US Court of Appeal for the DC Circuit,
arguing that the US Copyright Royalty Board made numerous legal errors while
adopting a rate structure that was not justified by explanation or evidence
and that, in any event, the rates should not have been applied retrospectively
to 1 January 2018. This appeal was disallowed on 1 July 2022, although the
Total Content Cost (TCC) and bundle definitions were returned to the CRBII
levels. During much of the time the remand was pending and, from October 2020,
the headline rate paid out by the DSPs to the Publishers dropped back to the
lower rate of 10.5%.
As a result of the above appeal, a portion of DSP revenue for the CRB III
period has not been paid to songwriters and publishers at the newly set rates.
As detailed in the financial review, we have accrued income for the
retroactive fiscal periods for a total of $16.1 million. We are also accruing
a $6.2 million annualized accrual for 2022, to account for the higher headline
rate of 15.1%, recognising half of this amount in these financial results.
Both the CRB III retroactive and uplift accruals are based off historical
earnings paid through to the Company by Publishers. In order to calculate the
accrual, the US mechanical portion of those earnings were analysed and
uplifted accordingly based on the CRB III rates over the five year period from
2018 to 2022.
Whilst some Publishers had different policies on whether they paid out any
higher rates received from DSPs up to when the CRB III ruling was appealed,
the Company has taken a blanket approach and has not considered any Publisher
specific policies given the lack of clarity from the various payors.
In order to provide additional rigour on the calculation, the CRB III
retroactive and uplift accrual estimates were compared and benchmarked against
the estimates provided by the Portfolio Independent Valuer and the Fair Value
appraiser for the CNB-led Revolving Credit Facility.
For the period 2018-20 responsibility to adjust payments as necessary to these
new rates rests with the DSPs or their historic agents. For the period post
January 2021, the responsibility to collect and distribute these uplift
adjustments falls to the Mechanical Licensing Collective (MLC).
The transition to the MLC results from the designation by the U.S. Copyright
Office for the MLC to begin administering blanket mechanical licenses to
digital service providers in the United States and paying out the royalties
collected. As a newly formed entity, the MLC has launched several initiatives
to ensure that their databases correctly reflect who should receive royalties
for each Song. Since the summer, Copyright teams across the industry have
focused on working collaboratively to improve the accuracy of this
registration data. Ensuring the quality of this data will not only help to
ensure that we maximize the collection of CRB III adjustment payments but will
also maximize collection of future streaming royalties.
To this end, our Copyright Team has continued its efforts to identify
incorrect or missing registrations in the MLC's database and to ensure
revenues are correctly linked between original and samples, remixes and cover
versions. The team has also trialled a number of external services to support
this process to further improve data quality and have now chosen a preferred
partner.
The DSPs have been given time to deliver revised data to the MLC for usages
post 2021. Assuming there are no delays, the earliest possible payment to
publishers of historic adjustments is expected to be end 2023, with
settlements due to Hipgnosis following after that.
Separately, the return of live music concerts allowed Hipgnosis to trial the
PRS Major Concert Service and PACE Rights Management to collect rights for the
Red Hot Chili Peppers and Blondie concert tours respectively. Both trials were
successful, with reduced fees and payments being processed more quickly than
the traditional solutions. As a result, we are in the process of identifying
additional tours to be signed up to these, or similar, services.
Song Creation
Song Creation delivers dynamic Catalogue growth via a stable of active,
front-line writers and artists. Building future assets at a relatively low
cost, providing contemporary context and synergistic opportunities throughout
the industry is the strength and ongoing mission of HSG's Song Creation team.
Highlights from the period include the phenomenal success of Stefan and Jordan
Johnson - The Monsters & Strangerz - and the extension of HSG's deals with
Sharon Van Etten, Amber Mark and signing Latin Grammy nominated songwriter
Albert Hype and artist Bruses. The Song Creation team also has strategically
focused on recent signings and further development of its roster in the
marketplace including Normani and joint ventures with
NO I.D. and other major songwriters and producers.
Highlights from Song Creation
Jordan and Stefan Johnson (of The Monsters & Strangerz): On the heels of
Hipgnosis Songs Fund (in 2021) acquiring Jordan and Stefan's Catalogue and
concurrently agreeing a new moving forward deal via HSG Jordan and Stefan hit
the ground running in 2022. They kicked off the year celebrating their 4(th)
Top 40 Number 1 with Justin Bieber's Ghost and earned 3 Grammy nominations for
their work on Bieber's album Justice, including one for the single Anyone.
Further success has been achieved with Selena Gomez's My Mind & Me,
Lizzo's Birthday Girl, whose album reached Number 2 on the Billboard 200 and
Burna Boy's Wild Dreams which drove his album to Number 2 in the UK and Number
14 in the US.
Albert Hype - has been in the Billboard Top 10 Latin producers' list every
month for the past 24 months. He has recently collaborated on various Songs on
Bad Bunny's Un Verano Sin Ti, including Tarot, La Corriente and Party. The
album was voted the most streamed album of 2022 by both Apple Music and
Spotify. He has also collaborated on Shakira's Te Felicito, featuring Rau
Alejandro and Monotonia, featuring Ozuna.
Steph Jones: A prolific year of output across multiple genres for Steph which
culminated in her making the short list for the inaugural Grammy category
'Songwriter Of The Year - Non Classical'.
Jake Sinclair: co-wrote all the Songs on Panic! At The Disco's Viva Las
Vengeance album. The first single, eponymously titled, spent three weeks at
Number 1 beginning 30 June 2022 on the US Alternative radio daily chart.
Amber Mark: Has enjoyed a stellar run of placements across the TV landscape.
These include 'Euphoria', 'Insecure', 'Empire', 'And Just Like That', 'Grays
Anatomy', 'Ballers', 'Bel Air', across a selection of her Songs.
Bruses (Amalia Ramirez) a Latin Grammy-nominated artist/songwriter from
Tijuana currently based in Mexico City. Her Song Dueles Tan Bien went viral on
TikTok earning her more than 3 million followers. Her debut album Monstruos
was recently nominated for Best Album Pop/Rock at the Latin Grammys 2022.
Sharon Van Etten: Sharon's majestic 5th full-length included new radio
high-water mark, Mistake, while further boosting her into a major concert draw
and fueling a truly remarkable rise in the film & television communities,
both as composer and creator of licensed work spanning her entire
Hipgnosis-controlled catalogue.
Songwriter Advocacy
Songwriters deliver the most important component of a Song but continue to be
paid inequitably. Through our platform and influence, Hipgnosis continues to
campaign for that to change. We aim to take the songwriter from the bottom to
the top of the economic equation with our advocacy on this issue. When a
Catalogue is acquired, our Shareholders sit directly in the shoes of the
songwriter so there is complete alignment between the song writing community
and our Shareholders. What is in the best interest of the songwriter is also
in the best interest of the Company.
In the US our leadership, tone and advocacy on behalf of the song writing
community has resulted in a change of tone and messaging from both the
recorded music labels and DSPs. This is best demonstrated in the proposed CRB
IV settlement which will provide 5 years of stability between 2023 and 2027 at
the highest rates ever paid to Songwriters. This stability will provide the
platform to advocate further and take Songwriters to a far more fair and
equitable share of the income going forward.
In the UK we were disappointed that, whilst the Competition and Markets
Authority (CMA) recognised the market failures, they have, as yet, declined to
take the steps which would have addressed these problems, despite the original
report from the DCMS Select Committee which ultimately prompted their market
study. Nevertheless, we continue to work with the DCMS, regulators and
legislators to seek solutions and a fair outcome for songwriters.
Financial Review
NAV
The Company reports two net asset values: an IFRS NAV which is prepared in
accordance with IFRS under which the Company's investments in Catalogues are
held at cost less amortisation and impairment, and an Operative NAV which
adjusts the IFRS NAV to reflect the fair value of the Company's Catalogues, as
determined by the Portfolio Independent Valuer. The Board and the Investment
Adviser consider that the most relevant NAV for Shareholders is the Operative
NAV.
The Operative NAV per share reduced by 1.0% to $1.8312 during the six-month
period (31 March 2022: $1.8491). This, together with the dividends, of 19p,
takes Total $ NAV Return to Shareholders to 60.0% since the IPO on 11 July
2018.
Based on the Sterling to Dollar exchange rate at 30 September 2022 of 1.116,
the Operative NAV presented in Sterling is 164.06p per share (31 March 2022:
140.79p based on Sterling to Dollar exchange rate of 1.3134). As at 6 December
2022, the Operative NAV presented in Sterling would be 149.82p per Share (GBP:
USD 1.2223).
The strength of the Dollar, and in particular the Sterling to Dollar exchange
rate, has been beneficial to the Sterling NAV and the dividend.
The fall in the Operative NAV in Dollar terms over the six-month period was
driven by a small reduction in the Fair Value
of the Portfolio to $2.67 billion (31 March 2022: $2.69 billion). This is
driven by the strength of the Dollar reducing the value of non-Dollar
denominated royalty statements.
The vast majority of the Company's cash receipts are received in Dollars, with
c.12% received in other currencies, primarily Sterling and Euros.
The Portfolio Independent Valuer calculated the Catalogue Fair Value as of 30
September 2022 maintaining a discount rate of 8.5% (31 March 2022: 8.5%).
The Portfolio Independent Valuer has consistently taken a long-term view on
expected interest rates since Hipgnosis's IPO in July 2018. They therefore
reduced the discount rate by just 50bp since the IPO despite the substantial
fall in US treasury yields we have experienced until this year.
Additionally, the proportion of utility-like revenue from Streaming has
increased since Hipgnosis was launched and justifies a substantially lower
risk premium applied to music as an asset. These factors provide a cushion
within the discount rate against the global interest rates rises over the last
12-months.
The Portfolio Independent Valuer reviews the discount rate regularly and will
adjust the discount rate if it considers it appropriate. A 0.5% increase in
the discount rate to 9.0% would result in a decline to the Fair Value of the
Catalogue of 7.9% ($212.2 million); conversely a reduction to 8.0% would
result in an increase of 9.4% ($251.5 million).
Operative NAV per Ordinary Share Bridge ($) from 1 April 2022 to 30 September
2022
Opening Operative NAV per Ordinary Share 1.8491
Profit After Tax excluding amortisation and impairment of Catalogues 0.0309
Decrease in Fair Value of Catalogues (0.0182)
Dividends Paid (0.0159)
Dividends Declared not yet Paid (0.0147)
Closing Operative NAV per Ordinary Share 1.8312
Revenue
Gross revenue increased by 7.5% year-on-year to $91.7 million (six months
ended 30 September 2021: $85.3 million).
The Company has reflected accruals of $19.2 million, as a result of the
confirmation of the CRB III rate increases for the Songwriters' mechanical
portion of US Streaming income. Of this, $3.1 million is the impact of the
higher 15.1% rate on
the revenue earned by the Company during this six-month period and $16.1
million has been recognised as an estimate of the retroactive payment due as a
result of revenues historically not having been recognised at the full CRB III
rates.
Furthermore, this gross revenue increase occurred despite no Right To Income
(RTI), due to no acquisitions in the period (30 September 2021: $14.1
million).
Net revenue of $78.4 million increased by 5.8% year-on-year (six months ended
30 September 2021: $74.1 million), after royalty cost deductions of $13.3
million (six months ended 30 September 2021: $11.2 million) which relate to
contractual royalties due to writers in HSG and Kobalt Fund One.
After stripping out exceptional adjustments including RTI in the prior period,
the CRB III retro-active payment and accrual adjustments, the Company has
shown strong underlying net revenue growth of 5.8% year-on-year, to $65.1
million.
Pro-Forma Annual Revenue (PFAR)
To provide its Shareholders with an understanding of the like-for-like
performance of the Company's revenues, by removing the impact of new Catalogue
acquisitions and the Usage Accrual, the Company presents the Pro-Forma Annual
Revenue (PFAR) performance measure. This shows the royalty revenue earned by
Catalogues in a calendar year largely based on royalty statements received,
irrespective of whether the Songs were owned by the Company over the period
analysed. The Company believes this provides a relevant like-for-like full
year income comparison of the Group's Catalogues of Songs held as at the
period end.
The table below shows PFAR for Catalogues owned as at 30 September 2022 over
time.
Pro Forma Annual Revenue for Catalogues owned
12 months to
Jun 2020 Dec 2020 Jun 2021 Dec 2021* Jun 2022
$m $m $m $m $m
Total PFAR for Catalogues owned as at 30 Sep 2022 131.7 121.3 115.9 116.6 120.8
<10 years 65.9 57.2 51.0 49.9 50.9
>10 years 65.8 64.1 64.9 66.7 69.9
* Restated to reflect actual receipts
Note: Greater or Less than 10 years of a Catalogue is calculated as the
average release year of a Catalogue as at January 2022 weighted on earnings at
time of acquisition.
PFAR does not include NPS revenues from HSG.
The PFAR for the 12 months to December 2021, has been restated from $114.9
million to $116.6 million to reflect royalty statements relating to the period
that were received after the publication of the Annual Report.
PFAR for the 12 months to June 2022 increased by 4.2% year-on-year to $120.8
million, despite headwinds on income from non-US Dollar denominated sources
described below. Indeed, not only has there been continued growth in our
>10 year catalogues by 7.7% year-on-year to $69.9 million, the data also
shows that the PFAR of our <10 year catalogues is broadly flat year-on-year
at $50.9 million supporting the statement made in our Annual Report, that
overall we are approaching the end of the decay curve in the younger
catalogues.
Whilst the majority of our cash receipts are received in Dollars (88%), it is
worth noting that the original source of our revenues is in multiple different
currencies. Approximately 54% of the Company's income is generated in the US,
14% in the UK and 21% in the EU and there are exchange rate differences at all
points along the value chain, which are not directly seen in our receipts.
Notably these results do not include any revenue due to the Company as a
result of CRB III, which would have been equal to approximately $6.2 million
in the most recent PFAR, providing a strong tailwind for further PFAR growth.
We have set out below the PFAR by income type for the first half of calendar
2022 compared against the comparative period in 2021.
H1 2022 vs H1 2021 PFAR split by income type
Income Type H1 H1
2021 2022 Change
$m $m %
Streaming Income 20.35 23.56 +15.8
Synchronisation Income 7.41 9.78 +32.0
Performance Income 13.73 13.12 -4.5
Mechanical Income 2.55 2.47 -3.2
Digital Downloads Income 1.83 1.28 -29.9
Other Publishing Income 0.91 1.05 +15.4
Producer Royalties 3.76 3.83 +1.9
Masters Income 3.75 3.45 -8.1
54.29 58.54 +7.8
Note: Writer's Share of Performance has been allocated to Streaming and
Performance income
Streaming revenues increased by 15.8% year-on-year, comparing favourably with
the +10% year-on-year growth in US streaming revenue as reported by the RIAA.
This is a testament to the strategy of acquiring Catalogues with high levels
of streaming consumption.
Synchronisation has seen the largest increase in growth across all income
types, growing 32% year-on-year. This is partly driven by a marked increase in
procured direct synchronisation deals. An increasing number of these licenses
have been procured via the collaboration between the Synch teams of the
Investment Adviser and Hipgnosis Songs Group (HSG) on the Catalogues that have
reverted to HSG.
Synch revenues include both fees for the use of Songs on traditional media
outlets and digital licences for social media, gaming and fitness platforms.
In line with our expectations at the full year, we can now see meaningful
revenues from these emerging platforms for the first time.
Performance income declined by 4.5% year-on-year to $13.1 million. This is
largely driven by a decline in US radio airplay in line with the natural
ageing of some our younger Catalogues, which resulted in some of those
Catalogues no longer qualifying for radio bonus payments. Adverse foreign
exchange movements from source revenue would also have had a negative impact.
The Company expected to see partial bounce-back in general performance
revenues during the period as a result of the post-COVID-19 recovery, but
these were not seen during the period. With continued strong performance
income recovery reported by the major publishers, who sit ahead of Hipgnosis
in the music payment chain, this provides confidence of a healthy bounce-back
in general Performance revenues.
Within Performance income, revenues from Live performance have remained
subdued as live concerts were impacted by COVID-19 restrictions with a full
resurgence not being seen until Summer 2022. However, a number of our
Songwriters have been on tour this summer, including the Red Hot Chili
Peppers, Nile Rodgers & CHIC, 50 Cent, Blondie, Journey and Lindsey
Buckingham.
Mechanical revenues of $2.5 million declined less than expected (-3.2%
year-on-year) as a result of an improvement in physical revenues driven by the
continued resurgence of vinyl.
While the majority of revenue is derived from our Publishing rights, the
Company receives revenue from Sound Recording Rights, which includes both
Masters and Producers. These combined revenues declined by 3.1% year-on-year,
from $7.5 million to $7.3 million. This is largely a result of the timing of
settlement statements.
Costs
Adjusted operating costs, excluding interest costs, decreased to $14.5 million
(six months ended 30 September 2021: $18.6 million). This is driven by a
reduction in Advisory fees as a function of the Company's lower share price
during the six-month period and reduced administration, legal and professional
fees as a result of no acquisition activity during the six-month period.
Annualised Ongoing Charges as a percentage of the average Operative NAV
decreased to 1.23% for the six months ended 30 September 2022 (six months
ended 30 September 2021: 1.77%), reflecting the Board's commitment to reduce
operating costs and maximise returns to Shareholders.
As a result of strong performance on certain Catalogues, the Company has
recognised an additional contingent bonus provision of $3.7 million (prior
period nil) relating to bonuses to Songwriters, based on certain defined
performance hurdles defined in the catalogue acquisition agreement.
Included within Operating expenses during the six-month period is a one-off
provision of $0.9 million relating to a restructuring of HSG's Song Creation
division.
EBITDA
EBITDA for the six months ended 30 September 2022 increased by 16.9% to $63.8
million (six months ended 30 September 2021: $54.6 million), reflecting the
growth in net revenue and reduced operating costs.
Leverage
Loan interest has increased to $14.5 million (six months ended 30 September
2021: $10.0 million) due to the rise in interest rates. In order to address
the interest rate risk and to control costs, on 30 September 2022 the Company
entered into a new Revolving Credit Facility (RCF) with a commitment of $700
million which runs for five years until 30 September 2027. This RCF materially
reduces the margin from 3.25% to an initial margin of 2.00%.
In addition, on 5 October 2022, the Company completed interest rate swap
agreements to hedge a total of $540 million at a blended rate of 5.75%,
including debt margin, for a weighted average life of 4.26 years, starting
from 3 January 2023.
As at 30 September 2022, gross debt was $607.0 million (31 March 2022: $600.0
million) and net debt was $570.6 million (31 March 2022: $569.9 million). Net
debt as a percentage of Operative NAV has remained stable at 25.7% as at 30
September 2022 (31 March 2022: 25.4%).
Foreign Exchange Hedge
On 12 October 2022, the Company entered into a series of US Dollar to Sterling
foreign exchange forward contracts to limit its exposure to foreign exchange
rate risk relating to future Sterling dividend payments until April 2024 as
part of a rolling hedge strategy.
Dividends
In line with the Company's target of 5.25p in interim dividends per Ordinary
Share in relation to the current financial year, two dividends have been
declared in the period totalling 2.625p per Share.
The dividends declared in the financial year to date amount to $37.1 million,
which was covered 1.2x by Distributable Revenues recognised during the period.
In addition, the Company had 1.6x the leveraged free cash flow, necessary to
meet those dividend payments paid in the period.
EPS
EPS for the six months ended 30 September 2022 is -1.66¢ (six months ended 30
September 2021: -1.69¢); this marginal improvement reflects the growth in net
revenue and reduced operating costs, offsetting the increased interest costs.
Adjusted EPS, as defined within the Alternative Performance Measures,
primarily removes the impact of Catalogues amortisation and other
non-operating costs. The Group amortises Catalogues over a useful life, using
a straight-line method of 20 years, which is in line with industry standard.
Adjusted EPS for the six months ended 30 September 2022 is 3.76¢ (six months
ended 30 September 2021: 3.85¢); the decrease in adjusted EPS is driven
primarily by the increased interest expense for the period.
Accruals and Receivables
Royalty receivables at 30 September 2022 were $5.0 million, representing
royalty statements received by September 2022 with payment received subsequent
to period end.
Accrued income as at 30 September 2022 was $125.1 million (on a gross basis),
a breakdown of which is set out below:
• $51.9 million for earnings where, due to the time lag in royalty
reporting, statements are not expected to be received until calendar Q4 2022
onwards.
• $8.3 million income accrual relating to time-lagged international
reporting on PRO earnings. International PRO reporting has a significant time
lag due to the additional collection time taken for PROs to distribute income
from territories. The lag is due to the nature of processing royalties
locally, then distributing them to the domestic PRO, which will in turn
process and distribute these royalties to the Group. Six months of
international PRO earnings are accrued, although PRO processing delays can
typically result in an earnings lag of up to
24 months;
• $16.1 million relating to retro-active payment of the CRB III
ruling;
• $3.1 million for the CRB III ruling rate uplift due for the six-month
period ending 30 September 2022;
• $37.5 million Usage Accrual, which recognises revenues that have
triggered a contractual payment but have not been paid to, and processed by,
collection societies, publishers and administrators.;
• $8.2 million HSG gross revenue accrual, which includes the accrued PRO
lag.
Right to Income (RTI)
On acquisition of a Catalogue, the accounting policy of the Company is to
allocate the full purchase consideration to the cost of the Catalogues asset.
Income is recognised on acquisition via two separate mechanisms as follows:
1. Income derived from cash receipts from the Vendor, representing royalties
collected by the Vendor starting from the date determined by the purchase
agreement, which precedes the date of acquisition; and
2. Accrued receivables are recognised for any revenues generated by ownership
of the IP to the extent that these are not yet collected.
If the income due under these mechanisms is for a period that precedes the
start of the financial year that the Catalogue is acquired within, that income
is booked within the financial year in which the Catalogue is acquired.
RTI shows both revenue recognised in 'Pre-Financial Year RTI' and 'Within
Financial Year RTI.' Within Financial Year RTI is considered as recurring as
it relates to a revenue period that will be collected and received by the
Company in the following financial year.
There is no combined RTI recognised in the period (30 September 2021: $17.97
million, of which the Pre-Financial Year RTI was $14.09 million and the Within
Financial Year RTI was $3.88 million).
Recurring Revenue vs. Pre-Financial Year RTI for each financial year to date
Financial year revenue ($m)
Recurring revenue
Financial year (FY) Description No. of Catalogues Prior year Pre-FY (RTI) Within FY, Within FY, Total
(over) / under pre-acq (RTI) post-acq revenue
accrual
FY19 New acquisitions in year 13 - 2.52 - 6.88 9.39
- 27% - 73% 100%
FY19 Pre-existing Catalogues 0 - - - - -
- - - - -
FY19 Total 13 - 2.52 - 6.88 9.39
- 27% - 73% 100%
FY20 New acquisitions in year 41 - 13.40 27.57 23.56 64.53
- 16% 34% 29% 79%
FY20 Pre-existing Catalogues 13 1.66 - - 15.88 17.55
2% - - 19% 21%
FY20 Total 54 1.66 13.4 27.57 39.45 82.08
2% 16% 34% 48% 100%
FY21 New acquisitions in year 84 - 28.94 37.66 26.16 92.75
- 21% 27% 19% 67%
FY21 Pre-existing Catalogues 54 (4.90) - - 50.54 45.64
(4%) - - 37% 33%
FY21 Total 138 (4.90) 28.94 37.66 76.70 138.39
(4%) 21% 27% 55% 100%
FY22 New acquisitions in year 8 - 14.09 3.88 3.34 21.31
- 19% 5% 5% 29%
FY22 Pre-existing Catalogues 138 (1.53) - - 54.26 52.73
(2%) - - 73% 71%
FY22 Total 146 (1.53) 14.09 3.88 57.60 74.04
(2%) 19% 5% 78% 100%
FY23 Half Year New acquisitions in year 0 - - - - -
- - - - -
FY23 Half Year Pre-existing Catalogues 146 (2.83) - - 81.18 78.35
(4%) - - 104% 100%
FY23 Total 146 (2.83) - - 81.18 78.35
(2%) - - 48% 47%
Outlook
These results demonstrate our focus on efforts that maximize the value of our
portfolio. Our pro forma revenues show strong growth from streaming and Synch,
despite currency headwinds from the exceptional strength of the US Dollar.
While the lag in collections before we receive performance payments means that
the upside following the world reopening from COVID-19 lockdowns is not yet
included in our revenues, our refinancing and hedging of interest and exchange
rates provides greater certainty on the Company's costs.
All the leading indicators demonstrate Hipgnosis' investment thesis and
establishing Songs as an asset class as being valid and strong with further
continued revenue growth in the global music market. Nevertheless, I share the
disappointment of shareholders that the true value of our iconic songs is not
reflected in today's share price and I am firmly committed to do whatever is
necessary to ensure the Company's value is recognised.
With Apple Music moving beyond the 9.99 price point in major markets and the
most recently available public data showing strong on-going growth in
streaming subscribers; positive regulatory moves in the US to increase
payments to holders of Songwriters rights; increasing revenues from social
media, gaming and lifestyle channels all coupled to strong market growth,
Hipgnosis' Song Management capabilities and a portfolio packed with high
quality, iconic and culturally important Songs.
Merck Mercuriadis
Founder, Hipgnosis Songs Fund Ltd and
Founder/CEO, Hipgnosis Song Management Ltd.
7 December 2022
Condensed Consolidated Statement of Comprehensive Income
For the six months ended 30 September 2022 (unaudited)
Notes 1 April 2022 to 1 April 2021 to
30 September 2022 30 September 2021
$'000 $'000
Income
Total revenue 11 91,678 85,320
Interest income 40 2
Royalty costs (13,368) (11,232)
Net revenue 78,350 74,090
Expenses
Advisory and performance fees 14 (6,760) (8,173)
Administration fees (300) (663)
Legal and professional fees (1,728) (2,955)
Audit fees (189) (499)
Brokers' fees (147) (156)
Directors' remuneration 14 (324) (268)
Listing fees (41) (249)
Subscriptions and licences (383) (248)
Public relations fees (326) (505)
Contingent bonuses (3,689) -
Other operating expenses 12 (4,847) (5,736)
Amortisation of Catalogues of Songs 5 (55,871) (52,124)
Impairment of Catalogues of Songs 5 (2,007) -
Amortisation of borrowing expenses (1,001) (1,622)
Fixed asset depreciation (30) (331)
Loan interest (14,473) (10,002)
Finance charges for deferred consideration (378) (672)
Net loss from joint ventures (48) (49)
Foreign exchange losses (2,083) (7,841)
Operating expenses (94,625) (92,093)
Operating loss for the period before taxation (16,275) (18,003)
Taxation 4 (3,815) (1,240)
Loss for the period after tax (20,090) (19,243)
Total comprehensive income for the period (20,090) (19,243)
Basic Earnings per Share (cents) 15 (1.66) (1.69)
Diluted Earnings per Share (cents) 15 (1.66) (1.69)
All activities derive from continuing operations.
The accompanying notes form an integral part of these Condensed Consolidated
Financial Statements.
Condensed Consolidated Statement of Comprehensive Income
For the six months ended 30 September 2022 (unaudited)
Notes 1 April 2022 to 1 April 2021 to
30 September 2022 30 September 2021
$'000 $'000
Loss for the period after tax (20,090) (19,243)
Other comprehensive income:
Movement in foreign currency translation reserve (307) -
(307) -
Total comprehensive income for the year (20,397) (19,243)
The accompanying notes form an integral part of these Condensed Consolidated
Financial Statements.
Condensed Consolidated Statement of Financial Position
For the six months ended 30 September 2022 (unaudited)
Notes 30 September 2022 31 March 2022
(Unaudited) (Audited)
$'000 $'000
Assets
Catalogues of Songs 5 1,978,854 2,036,732
Other assets 1,143 568
Goodwill 272 272
Non-current receivables 6 19,197 640
Non-current assets 1,999,466 2,038,212
Trade and other receivables 6 136,384 144,450
Cash and cash equivalents 7 36,392 30,067
Current assets 172,776 174,517
Total assets 2,172,242 2,212,729
Liabilities
Loans and borrowings 8 595,823 593,992
Deferred investment payables 9 100 925
Non-current liabilities 595,923 594,917
Other payables and accrued expenses 9 51,374 35,413
Current liabilities 51,374 35,413
Total liabilities 647,297 630,330
Net assets 1,524,945 1,582,399
Equity
Share capital 10 1,692,198 1,692,198
Foreign currency translation reserve (2,542) (2,235)
Retained earnings (164,711) (107,564)
Total equity attributable to the owners of the Company 1,524,945 1,582,399
Number of Ordinary Shares in issue at period end 1,211,214,286 1,211,214,286
IFRS Net Asset Value per Ordinary Share (cent) 125.90 130.65
Operative Net Asset Value per Ordinary Share (cent) 183.12 184.91
Approved and authorised for issue by the Board of Directors on 7 December 2022
and signed on their behalf by:
Andrew Sutch Chair Andrew Wilkinson Director
The accompanying notes form an integral part of these Condensed Consolidated
Financial Statements.
Condensed Consolidated Statement of Changes in Equity
For the six months ended 30 September 2022 (unaudited)
Notes Number of Share Other Foreign currency Retained Total equity
Ordinary Shares capital reserves translation earnings* $'000
$'000 $'000 reserve $'000
$'000
As at 1 April 2022 1,211,214,286 1,692,198 - (2,235) (107,564) 1,582,399
Dividends paid 13 - - - - (19,313) (19,313)
Dividends declared 9 - - - - (17,744) (17,744)
Loss for the year - - - - (20,090) (20,090)
Foreign currency translation reserve movement - - - (307) - (307)
As at 30 September 2022 1,211,214,286 1,692,198 - (2,542) (164,711) 1,524,945
* Distributable Revenues arising during the period were $45.5 million which,
taken together with the $18.7 million of Distributable Revenue Reserves
carried forward from the previous financial year ended 31 March 2022, result
in available Distributable Revenues of $64.2 million.
For the six months ended 30 September 2021 (unaudited)
Notes Number of Share Other Foreign currency Retained Total equity
Ordinary Shares capital reserves translation earnings $'000
$'000 $'000 reserve $'000
$'000
As at 1 April 2021 1,073,440,268 1,466,851 234 (419) (3,821) 1,462,845
Shares issued 10 137,774,018 229,702 (234) - - 229,468
Share issue costs 10 - (4,102) - - - (4,102)
Dividends paid 13 - - - - (41,900) (41,900)
Loss for the year - - - - (19,243) (19,243)
Foreign currency translation reserve movement - - - (1,826) - (1,826)
As at 30 September 2021 1,211,214,286 1,692,451 - (2,245) (64,964) 1,625,242
The accompanying notes form an integral part of these Condensed Consolidated
Financial Statements.
Condensed Consolidated Statement of Cash Flows
For the six months ended 30 September 2022 (unaudited)
Notes 1 April 2022 to 1 April 2021 to
30 September 2022 30 September 2021
$'000 $'000
Cash flows generated from operating activities
Operating loss for the period before taxation (16,275) (18,003)
Adjustments for non-cash items:
Loan interest 14,473 10,002
Provision for writer advances - 916
Movement in trade and other receivables (18,368) 2,608
Movement in other payables and accrued expenses 5,219 (3,387)
Depreciation of fixed assets 30 -
Amortisation of Catalogues of Songs and borrowing costs 56,872 54,749
Impairment of Catalogues of Songs 5 2,007 -
Foreign exchange losses 2,083 443
Lease interest paid (378) -
Taxation paid (200) (4,798)
Net cash generated from operating activities 45,463 42,530
Cash flows used in investing activities
Purchase of Catalogues of Songs - (294,374)
Purchase of other assets (48) -
Movement in writer advances (1,915) (6,560)
Deferred acquisition payments (2,500) -
Net cash used in investing activities (4,463) (300,934)
Cash flows generated from financing activities
Proceeds from issue of shares - 229,468
Issue costs paid - (4,102)
Dividends paid 13 (19,313) (41,900)
Interest paid (14,973) (10,660)
Borrowing costs 8 (6,170) (594)
Bank loan repaid 8 (600,000) -
Bank loan drawn down 8 607,000 22,708
Net cash (used in)/generated from financing activities (33,456) 194,920
Net movement in cash and cash equivalents 7,544 (63,484)
Cash and cash equivalents at the start of the period 30,067 112,634
Effect of foreign exchange rate changes on cash and cash equivalents (1,219) (42)
Cash and cash equivalents at the end of the period 7 36,392 49,108
The accompanying notes form an integral part of these Condensed Consolidated
Financial Statements.
Notes to the Consolidated Financial Statements
For the six months ended 30 September 2022 (unaudited)
1. General information
Hipgnosis Songs Fund Limited was incorporated and registered in Guernsey on 8
June 2018 with registered number 65158 and is governed in accordance with the
provisions of the Companies Law. The registered office address is Floor 2,
Trafalgar Court, Les Banques, St Peter Port, Guernsey, GY1 4LY.
The Company's Ordinary Shares were admitted to trading on the Specialist Fund
Segment of the London Stock Exchange on 11 July 2018 and migrated to a Premium
Listing on the Main Market of the London Stock Exchange on 25 September 2019.
The Company was added as a constituent of the FTSE 250 Index effective from
after the market close on 20 March 2020.
The Company makes its investments through its subsidiaries, which are
registered in the UK and US as limited companies.
The Condensed Consolidated Financial Statements present the results of the
Group for the six months ended 30 September 2022 and are unaudited. The
Condensed Consolidated Financial Statements are rounded to the nearest US
Dollar. The Group is principally engaged in investing in and managing music
copyrights and associated musical intellectual property.
2. Accounting policies
a) Basis of preparation
The Condensed Consolidated Financial Statements included in this Interim
Report have been prepared in accordance with IAS 34 'Interim Financial
Reporting' and the Disclosure and Transparency Rules of the FCA.
The Condensed Consolidated Financial Statements do not include all the
information and disclosures required in the Annual Report and should be read
in conjunction with the Company's Annual Report for the year ended 31 March
2022, which are available on the Company's website (www.hipgnosissongs.com).
The Annual Report has been prepared in accordance with IFRS.
The same accounting policies and methods of computation have been followed for
the preparation of these Condensed Consolidated Financial Statements as in the
Annual Report for the year ended 31 March 2022.
b) Group information
As at 30 September 2022, the details of the Company's subsidiaries are as
follows:
Name of the subsidiary Place of % of voting % Interest Consolidation Functional
incorporation rights method Currency
and operation
Hipgnosis Holdings UK Limited UK 100 100 Full USD
Hipgnosis SFH I Limited UK 100 100 Full USD
Hipgnosis SFH XIII Limited UK 100 100 Full USD
Hipgnosis SFH XIX Limited UK 100 100 Full USD
Hipgnosis SFH XX Limited UK 100 100 Full GBP
RubyRuby (London) Limited (1) UK 100 100 Full GBP
Hipgnosis Songs Group LLC US 100 100 Full USD
Hipgnosis Acquisition Corp US 100 100 Full USD
Kennedy Publishing & Productions Limited (1) UK 100 100 Full GBP
Robot of the Century Music Publishing Inc US 100 100 Full USD
Deamon Limited (1) UK 100 100 Full GBP
PB Songs Ltd (1) UK 100 100 Full GBP
1 This is a subsidiary of Hipgnosis SFH XX Limited and therefore an indirect
subsidiary of Hipgnosis Songs Fund Limited. The majority of subsidiaries of
the Company are considered tax resident in the UK and are subject to UK
corporation tax. Robot of the Century Music Publishing Inc is registered in
New York. Hipgnosis Songs Group LLC and Hipgnosis Acquisition Corp. are
registered in Delaware and are subject to applicable State and Federal Taxes.
c) Going concern
The Directors monitor the capital and liquidity requirements of the Company on
a regular basis. They have also reviewed cash flow forecasts prepared by the
Investment Adviser which are based in part on assumptions about the future
purchase and returns from existing Catalogues of Songs and the annual
operating cost.
Based on these sources of information and their judgement, the Directors
believe it is appropriate to prepare the Condensed Consolidated Financial
Statements of the Group on a going concern basis.
d) Segmental reporting
The chief operating decision maker is the Board of Directors. All of the
Company's income is global but received from sources within US, Europe, UK and
Guernsey. While the Company's income is derived internationally, the Directors
are of the opinion that the Group is engaged in a single segment of business,
being the investment of the Company's capital in a Portfolio of Song
copyrights, together with the potential for capital growth.
3. Significant accounting judgments, estimates and assumptions
The preparation of the Group's Condensed Consolidated Financial Statements
requires the application of estimates and assumptions which may affect the
results reported in the Condensed Consolidated Financial Statements.
Uncertainty about these estimates and assumptions could result in outcomes
that require a material adjustment to the carrying amount of the asset or
liability affected in future periods. Estimates and underlying assumptions are
reviewed on an ongoing basis. Revisions to accounting estimates are recognised
in the period in which the estimates are revised and in any future periods
affected.
The key assumptions concerning the future and other key sources of estimation
uncertainty at the reporting date, that have a significant risk of resulting
in a material adjustment to the carrying amounts of assets and liabilities
within the next financial year,
are discussed below. The Group based its assumptions and made estimates based
on the information available when the Condensed Consolidated Financial
Statements were prepared. However, these assumptions and estimates may change
based on market changes or circumstances beyond the control of the Group.
Critical estimates in applying the Group's accounting policies - revenue
recognition and royalty costs
In calculating accruals, the Investment Adviser makes judgments around
seasonality, over or under performance, and commercial factors based on
historical performance, and its knowledge of each Catalogue through its
regular correspondence with the various administrators, record labels and
international societies.
Estimated royalty revenue receivable is accrued for on the basis of historical
earnings for each Catalogue, which incorporates an element of uncertainty. The
estimated revenue accrual may not therefore directly equal the actual cash
received in respect of each accounting period and adjustments may therefore be
required throughout the financial period when the actual revenue received is
known, and these adjustments may be material.
Net revenues also include an accrual for performance income, to account for
the writer's share of Performance royalties which are subject to a significant
time lag in reporting in the industry, but which the Group is entitled to
receive in due course. In recommending the estimate of this accrual to the
Board of Directors the Investment Adviser used its analysis of each
Catalogue's revenue history as well its knowledge of the respective Catalogue
performance trends to recommend the estimated accruals.
The Group has reflected accruals of $19.2 million, as a result of the
confirmation of the CRB III rate increases for the Songwriters' mechanical
portion of US Streaming income. Of this, $3.1 million is the impact of the
higher 15.1% rate on the income earned by the Company during this six-month
period and $16.1 million has been recognised for the retro-active payment due
as a result of revenues historically not having been recognised at the full
CRB III rates.
Both the CRB III retroactive and uplift accruals are based off historical
earnings paid through to the Company by Publishers. In order to calculate the
accrual, the US mechanical portion of those earnings were analysed and
uplifted accordingly based on the CRB III rates over the five year period from
2018 to 2022.
Whilst some Publishers had different policies on whether they paid out any
higher rates received from DSPs up to when the CRB III ruling was appealed,
the Company has taken a blanket approach and has not considered any Publisher
specific policies given the lack of clarity from the various payors.
In order to provide additional rigour on the calculation, the CRB III
retroactive and uplift accrual estimates were compared and benchmarked against
the estimates provided by the Portfolio Independent Valuer and the Fair Value
appraiser for the CNB-led Revolving Credit Facility. Net revenue is subject to
a royalty cost accrual applied to gross revenue receipts primarily within the
Hipgnosis Songs Group ("HSG") subsidiaries. Royalty cost accruals represent
contractual royalties due to songwriters and other rights holders that are
payable on a 6-monthly basis for writers under publishing contracts and
quarterly for clients under administration contracts. Royalty rates vary by
writer (negotiated by contract) and by revenue stream.
Expected Credit Loss (ECL) in relation to revenue receivables
Royalty earnings for accruals and receivables recognised in the period ending
30 September 2022 are distributed by PROs, Publishers and Record Labels who
collect royalties at the source of usage and distribute those earnings
directly to Hipgnosis.
The probability of future default has been deemed close to nil, due to the
long-standing history of PROs, Publishers and Record Labels within the music
industry and the existing framework of cash collection amongst the Company's
stakeholders. Whilst there are smaller/newer organisations that have
relatively unproven credit resilience these account for a small minority of
our receivables.
The Company's current risk assessment includes analysis of the exposure to
commercial risk by PROs, Publishers and Record Labels, and the likely impact
of their credit risk on Hipgnosis' revenue streams.
Expected Credit Loss (ECL) in relation to HSG advances
Hipgnosis Songs Group LLC advance royalty payments to songwriters. Management
are required to assess the recoverability of these advances bi-annually in
accordance with IFRS 9 Financial Instruments. Management will consider market
conditions and historic trading patterns affecting the relevant assets.
Management have analysed their historical loss ratio data and apply this using
the risk based methodology as there are no defined terms of repayment related
to advances. The risk categories against which the historical loss ratios are
assessed and expected credit losses are calculated are:
• low risk advances where the advance is expected to be recouped in full
under the terms of the writer's agreement (because of the writer's reputation,
previous success etc);
• medium risk advances where there is reasonable expectation that a
level of the advances will be recouped; and
• high risk advances, where management believe that either because of
the writer's unknown potential or other factors, a large level of
recoverability may not be achieved.
At 30 September 2022 HSG gross recoupable advances are $30.6 million (31 March
2022: $31.6 million) with an expected credit loss provision of $12.6 million
(31 March 2022: $13.0 million) recognised against the advances. The movement
in the provision for expected credit losses is included under Other Operating
Expense in the Condensed Consolidated Statement of Comprehensive Income.
Assessment of useful life of intangible assets
In order to calculate the amortised cost of the intangible assets it is
necessary to assess the useful economic life of the copyright interests in
Songs. This requires forecasts of the expected future revenue from the
copyright interests, which contains significant uncertainties as the ongoing
popularity of a song can fluctuate unexpectedly. An assessment of the useful
life of Catalogues is considered at each reporting period, which is 20 years,
in line with industry standard.
Assessment of impairment and the calculation of Operative NAV
Intangible assets are subject to a bi-annual impairment review which relies on
assumptions made by the Board. Assumptions are updated bi-annually,
specifically those relating to future cash flows and discount rates.
The fair value estimates that are prepared in order to calculate the Operative
NAV and Operative NAV per Share are also used to assess whether there is
evidence that the intangible assets may be impaired. Management's impairment
review as at 30 September 2022 concluded that $2.0 million (31 March 2022:
$1.5 million) impairment was required to the Group's Catalogues.
Valuations of music publishing rights typically adopt the DCF valuation
approach which measures the present value of anticipated future revenues from
acquiring the Catalogues, which are discounted at a 'market cost of capital'
of 8.5% (31 March 2022: 8.5%) and a terminal value in 16 years. This method is
accepted as an objective way of measuring future benefits; taking into account
income projections from various music industry sources across various revenue
flows whilst also factoring in the associated cost of capital.
It is the intention of the Board that Catalogues of Songs will be valued on an
ongoing basis using a consistent DCF valuation methodology, and that this be
used as an initial indicator of impairment for each Catalogue of Songs.
When considering whether a Catalogue of Songs should be impaired, the Board
considers a co-efficient analysis that incorporates various factors, including
the time remaining of when the carrying value equals the fair value based on
the rate of amortisation, the ability for the Company to renegotiate
administration rates and the active management that is undertaken.
Future revenue derived from active song management by the Investment Adviser
is not reflected in the fair value of each Catalogue of Songs as determined in
accordance with IFRS 13.
4. Taxes
Whilst the Company is incorporated in Guernsey, the majority of the Company's
subsidiaries are incorporated and tax resident in the UK and the majority of
the Group's income and expenditure is incurred in these UK entities.
Therefore, it is considered appropriate to use the standard UK tax rate for
the year of 19% (2021: 19%). On 14 October 2022 the UK government confirmed an
increase to the main rate of UK corporation tax to 25% from April 2023,
however the impact of this proposed change is not included within these
Condensed Consolidated Financial Statements.
The Group currently has no exposure to US Corporation Tax as the US based
subsidiaries are currently not making a taxable profit. Aside from the US, the
Group has no other foreign subsidiaries.
The taxation charge of $3.8 million (six months ended 30 September 2021: $1.2
million) is based on adjustments in respect of the prior year.
5. Catalogues of Songs
$'000
Cost
At 1 April 2022 2,237,284
Additions -
Impairment -
At 30 September 2022 2,237,284
Amortisation and impairment
At 1 April 2022 200,552
Amortisation 55,871
Impairment 2,007
At 30 September 2022 258,430
Net book value
At 1 April 2022 2,036,732
At 30 September 2022 1,978,854
Fair value as at 30 September 2022 2,671,881
Cost
At 1 April 2021 1,972,199
Additions 265,085
At 31 March 2022 2,237,284
Amortisation and impairment
At 1 April 2021 93,275
Amortisation 105,787
Impairment 1,490
At 31 March 2022 200,552
Net book value
At 1 April 2021 1,878,924
At 31 March 2022 2,036,732
Fair value as at 31 March 2022 2,693,974
The Group amortises Catalogues of Songs with a limited useful life using the
straight-line method of 20 years (other than in exceptional circumstances for
specific Catalogues of Songs). An assessment of the useful life of Catalogues
is considered at each reporting period, which is 20 years, in line with
industry standard. At 30 September 2022 accumulated amortisation for
Catalogues of Songs is $254.9 million (31 March 2022: $199.1 million) and the
accumulated impairment to date is $3.5 million (31 March 2022: $1.5 million).
The Board engaged Portfolio Independent Valuer, Citrin Cooperman Advisors LLC,
to value the Catalogues as at 30 September 2022. Each income type from each
Catalogue was analysed and forecast to derive the fair value of the Catalogues
by adopting a DCF valuation methodology using a discount rate of 8.5% (31
March 2022: 8.5%) that would be categorised under Level 3 within the fair
value hierarchy of IFRS 13 "Fair Value Measurement". Income was analysed and
forecast at the level of each individual Catalogue and by income type with the
exception of Kobalt, which was evaluated as a whole. The Board are comfortable
that Kobalt is valued on this basis as the Kobalt Catalogue was purchased as a
whole. Future revenues of Catalogues are also estimated and incorporated into
their valuation. Citrin Cooperman has also taken into consideration macro
factors including the growth of Streaming revenue and the global growth of the
recorded music industry in their analysis. The Board has approved and adopted
the valuations prepared by the Portfolio Independent Valuer which are used as
an input into the impairment review process and for the Operative NAV.
The sensitivity to the discount rate and foreign exchange rate to the fair
value of the Portfolio is as follows:
Foreign Exchange Rate
EUR:USD 1.02 1.12 1.22
GBP:USD 1.18 1.28 1.38
Discount Rate
8.0% 2,894,449 2,923,377 2,952,306
Variance to Fair Value 8.3% 9.4% 10.5%
8.50% 2,645,485 2,671,881 2,698,278
Variance to Fair Value -1.0% - 1.0%
9.0% 2,435,411 2,459,673 2,483,936
Variance to Fair Value -8.9% -7.9% -7.0%
6. Trade and other receivables
30 September 2022 31 March 2022
$'000 $'000
Non-current receivables
Non-current accrued income 19,197 640
19,197 640
Current receivables
Accrued income 105,930 104,658
Royalties receivable 4,952 6,605
HSG net recoupable advances 17,985 18,604
Prepayments and other debtors 7,517 7,274
VAT receivable - 7,309
136,384 144,450
In the current year, an accrual for $19.2 million has been recognised as a
result of the confirmation of the CRB III rate increases for the Songwriters'
mechanical portion of US Streaming income. Of this, $3.1 million is the impact
of the higher 15.1% rate on the income earned by the Company during this
six-month period and $16.1 million has been recognised for the retro-active
payment due as a result of revenues historically not having been recognised at
the full CRB III rates. This is presented as a non-current receivable and
calculated as described in Note 3.
7. Cash and cash equivalents
30 September 2022 31 March 2022
$'000 $'000
Cash available on demand 36,392 30,067
36,392 30,067
8. Loans and borrowings
On 30 September 2022 the Company entered into a new Revolving Credit Facility
(RCF) with a commitment of $700 million which runs for five years until 30
September 2027. City National Bank is lead arranger and sole bookrunner for
the new debt facility with Truist Securities, Inc., MUFG Union Bank, N.A. and
Fifth Third Bank as co-leads. On the same day the Company drew down $607
million to repay in full the Company's pre-existing JP Morgan RCF ($600
million). $93 million remains available under the new RCF which provides the
Company with flexibility to fund investments and provide additional working
capital. During the year $6.2 million of costs relating to the set-up of the
new RCF were capitalised, to be amortised over the five year length of the
agreement.
The RCF's key covenants include a total debt to Catalogue value test, a total
debt leverage test and a fixed charge coverage test reviewed quarterly and is
secured by, inter alia, a charge over the shares in all the subsidiaries of
the Company, a charge over all of their assets including all Catalogues of
Songs of the Company held through these subsidiaries and a charge over the
bank accounts of the Company and its subsidiaries. The Company has also
provided a parent company guarantee. In accordance with the Investment Policy,
any borrowings by the Company will not exceed 30% of the Operative NAV.
Interest on the new facility charged is based on the Secured Overnight
Financing Rate (SOFR), published by the New York Federal Reserve, plus a
margin of either 2.00% or 2.25% depending on the gross drawn debt. The initial
margin will be 2.00%. As disclosed in Note 18, the Company has entered into an
interest rate swap agreement post period end to manage its exposure to
interest rate risk.
30 September 2022 31 March 2022
$'000 $'000
Opening balance - loan drawn down 600,000 577,292
Amounts drawn down during the period 607,000 72,708
Amounts repaid during the year (600,000) (50,000)
Total loan drawn down 607,000 600,000
Cumulative borrowing costs (11,177) (6,008)
Closing balance 595,823 593,992
During the period ended 30 September 2022 $14.5 million (30 September 2021:
$10.0 million) was charged as interest on the amounts drawn down.
9. Liabilities and accrued expenses
30 September 2022 31 March 2022
$'000 $'000
Non-current liabilities
Deferred investment payables 100 925
100 925
Current liabilities
Dividend declared 17,744 -
Amounts owed to songwriters 15,773 16,957
Deferred investment payables 4,912 11,197
Trade creditors and accruals 5,473 4,106
Corporation tax 6,184 2,570
VAT payable 1,243 -
Directors fees payable 45 83
Loan interest payable - 500
51,374 35,413
10. Share capital and capital management
The share capital of the Company may consist of an unlimited number of:
i) Ordinary Shares of no par value which upon issue the Directors may
classify as Ordinary Shares; and
ii) C Shares denominated in such currencies as the Directors may determine.
Ordinary Shares of no par value No. of Units
Issued and fully paid:
Shares as at 1 April 2022 1,211,214,286
Shares as at 30 September 2022 1,211,214,286
$'000
Issued and fully paid:
Shares as at 1 April 2022 1,692,198
Shares as at 30 September 2022 1,692,198
No. of Units
Issued and fully paid:
Shares as at 1 April 2021 1,073,440,268
Shares issued on 29 April 2021 9,000,000
Shares issued on 9 July 2021 128,774,018
Shares as at 31 March 2022 1,211,214,286
$'000
Issued and fully paid:
Shares as at 1 April 2021 1,466,851
Shares issued on 29 April 2021 14,938
Shares issued on 9 July 2021 214,764
Share issue costs (4,355)
Shares as at 31 March 2022 1,692,198
On 29 April 2021 the Company issued 9,000,000 new Ordinary Shares at a price
of 119.5p per Ordinary Share and on 9 July 2021 the Company issued 128,774,018
new Ordinary Shares at a price of 121p per Ordinary Share. These shares rank
pari passu with the existing Ordinary Shares in issue. The net proceeds were
used to fund an investment in accordance with the Company's Investment Policy.
Under the Company's Articles of Incorporation, each Shareholder present in
person or by proxy has the right to one vote at general meetings. On a poll,
each Shareholder is entitled to one vote for every Ordinary Share held.
Shareholders are entitled to all dividends paid by the Company and, on a
winding up, provided the Company has satisfied all of its liabilities, the
Shareholders are entitled to all of the residual assets of the Company.
11. Total revenue
1 April 2022 to 1 April 2021 to
30 September 2022 30 September 2021
$'000 $'000
Mechanical income 2,893 5,530
Performance income 4,729 11,194
Digital downloads income 2,736 1,999
Streaming income 50,028 19,858
Synchronization income 12,546 14,921
Publishing admin income 154 108
Masters income 2,184 3,939
Writer share income 12,817 21,393
Neighbouring rights income 663 0
Other income (628) 2,414
Producer royalties 3,556 3,964
Total revenue 91,678 85,320
All revenue streams disclosed in this note are in scope of IFRS 15 and include
all revenue related accruals, unlike PFAR which provides like-for-like
analysis.
There is an inherent time lag with royalties between the time a song is
performed, and the revenue being received by the copyright owner. The revenue
accruals are disclosed in Note 6 Trade and other receivables.
12. Other operating expenses
1 April 2022 to 1 April 2021 to
30 September 2022 30 September 2021
$'000 $'000
Aborted deal expenses 332 367
Bank charges 26 23
Charitable donations 28 20
Directors' and officers' insurance 160 163
Disbursements and sundry 73 629
Postage, stationery and printing 79 28
Movement in ECL provision for HSG advances (375) 916
HSG staff payroll and expenses 3,154 3,335
HSG restructuring provision 925 -
Travel and accommodation fees 187 110
HSG travel and accommodation fees 258 145
4,847 5,736
13. Dividends paid
A summary of the dividends paid are set out below:
Dividend per share Total Dividend
Pence $'000
1 April 2022 to 30 September 2022
Interim dividend in respect of quarter ended 31 March 2022 1.3125 19,313
1.313 19,313
1 April 2021 to 30 September 2021
Interim dividend in respect of quarter ended 31 March 2021 1.3125 20,093
Interim dividend in respect of quarter ended 30 June 2021 1.3125 21,807
2.625 41,900
14. Related Party Transactions and Directors' Remuneration
Parties are considered to be related if one party has the ability to control
the other party or exercise significant influence over the party in making
financial or operational decisions.
Directors
The Company Directors' fees for the period to 30 September 2022 amounted to
$323,763 (30 September 2021: $314,811). Outstanding fees amounted to $nil at
the reporting date (30 September 2021: $nil).
Directors' transactions in or holdings in shares of the Company are not
disclosed as related party transactions as they do not receive shares as part
of their remuneration. Any shares held or transacted are acquired or disposed
of in their own right as Shareholders and as result, it is management's
assessment that the Company has not transacted with the Directors as related
parties in this regard.
Investment Adviser
Merck Mercuriadis is the founder of the Investment Adviser.
The Company has entered into an Investment Advisory Agreement with the
Investment Adviser pursuant to which the Investment Adviser will source Songs
and provide recommendations to the Board on acquisition and disposal
strategies, manage and monitor royalty and/or fee income due to the Company
from its copyrights and collection agents, maintain financial records and a
system of internal controls for the financial reporting for the Company, and
develop strategies to maximise the earning potential of the Songs in the
portfolio through improved placement and coverage of Songs.
Investment Adviser fees for the period to 30 September 2022 amounted to $6.8
million (30 September 2021: $8.2 million) of which $nil was outstanding at the
reporting date (31 March 2022: $nil).
15. Earnings per share
30 September 2022 30 September 2022
Basic Diluted
Loss for the period ($'000) (20,090) (20,090)
Weighted average number of Ordinary Shares in issue 1,211,214,286 1,211,214,286
Earnings per share (cents) (1.66) (1.66)
30 September 2021 30 September 2021
Basic Diluted
Loss for the period ($'000) (19,243) (19,243)
Weighted average number of Ordinary Shares in issue 1,140,172,604 1,140,172,604
Earnings per share (cents) (1.69) (1.69)
The earnings per share is based on the loss of the Group for the period year
and on the weighted average number of Ordinary Shares for the period ended 30
September 2022.
There are no diluted shares at 30 September 2022.
16. Net Asset Value per share and Operative Net Asset Value per share
30 September 2022 31 March 2022
Number of Ordinary Shares in issue 1,211,214,286 1,211,214,286
IFRS NAV per share (cents) 125.90 130.65
Operative NAV per share (cents) 183.12 184.91
The IFRS NAV per share and the Operative NAV per share are arrived at by
dividing the IFRS Net Assets and Operative Net Assets (respectively) by the
number of Ordinary Shares in issue.
Catalogues of Songs are classified as intangible assets and measured at
amortised cost or cost less impairment in accordance with IFRS.
The Directors are of the opinion that an Operative NAV provides a meaningful
alternative performance measure and the values of Catalogues of Songs are
based on fair values produced by the Portfolio Independent Valuer.
Reconciliation of IFRS NAV to Operative NAV 30 September 2022 31 March 2022
$'000 $'000
IFRS NAV 1,524,945 1,582,399
Adjustments for revaluations of Catalogues of Songs to fair value 434,597 457,441
Reversal of accumulated amortisation and impairment 258,430 199,800
Operative NAV 2,217,972 2,239,640
17. Presentation change
The Company has made immaterial changes to the presentation of the
Consolidated Statement of Profit and Loss and accompanying notes during the
period. This has resulted in the following changes of the comparative figures.
Consolidated Statement of Profit and Loss As reported in Presentation As reported in
30 September 2021 change 30 September 2022
Interim Report $'000 Interim Report
1 April 2021 to 1 April 2021 to
30 September 2021 30 September 2021
$'000 $'000
Income
Total revenue 85,271 49 85,320
Interest income 2 - 2
Royalty costs (11,232) - (11,232)
Net revenue 74,041 49 74,090
Expenses
Advisory and performance fees (8,220) 47 (8,173)
Administration fees (639) (24) (663)
Legal and professional fees (2,955) - (2,955)
Audit fees (499) - (499)
Brokers' fees (1) (155) (156)
Directors' remuneration (315) 47 (268)
Listing fees - (249) (249)
Subscriptions and licences (249) 1 (248)
Public relations fees - (505) (505)
Charitable donations (20) 20 -
Other operating expenses (6,885) 1,149 (5,736)
Amortisation of Catalogues of Songs (52,124) - (52,124)
Amortisation of borrowing expenses (1,622) - (1,622)
Fixed asset depreciation - (331) (331)
Loan interest (10,002) - (10,002)
Finance charges for deferred consideration (672) - (672)
Net loss from joint ventures - (49) (49)
Foreign exchange losses (7,841) - (7,841)
Operating expenses (92,044) (49) (92,093)
Operating loss for the period before taxation (18,003) - (18,003)
Taxation (1,240) - (1,240)
Loss for the period after tax (19,243) - (19,243)
18. Subsequent events
As announced on 5 October 2022, the Company entered into interest rate swap
agreements as detailed below:
• From 3 October 2022 until 2 January 2023, interest on all the drawn
debt is based on a three-month fixed SOFR of 5.71% (including debt margin);
and
• From 3 January 2023, the company has agreed to enter into interest
rate swaps to hedge $540 million. Of this, $340 million is hedged for the
duration of the RCF (until 30 September 2027) at a fixed rate of 5.67%
(including debt margin); a further $200 million is hedged until 3 January 2026
at a fixed rate of 5.89% (including debt margin). The balance remains unhedged
to provide flexibility in the operation of the RCF facility.
The interest rate hedging contracts are not subject to margin calls in the
event of movements in underlying interest rates. Accordingly, the Company now
has certainty as to the quantum of its fixed interest payment obligations over
the term of those contracts.
On 12 October 2022, the Company entered into US Dollar to Sterling foreign
exchange forward contracts to manage its exposure to foreign exchange rate
risk relating to future Sterling dividend payments.
Both the interest rate swap and the foreign exchange hedge will be designated
as Held for Trading Financial Assets.
On 14 October 2022 the Company announced an irrevocable share repurchase
programme to buy back Ordinary Shares within certain pre-set parameters. The
Share Purchase Programme will run until 8 December 2022. Any shares purchased
pursuant to the Share Repurchase Programme will count towards Hipgnosis'
general buy back authority of 14.99% of the Company's issued share capital, as
approved at the Company's 2022 AGM.
On 28 October 2022 the Company's interim dividend of 1.3125p per Ordinary
Share in respect of the period from 1 April to 30 June 2022 was paid.
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. END IR GGBDDXXGDGDIRecent news on Hipgnosis Songs Fund
See all newsREG - Hipgnosis Songs Fund - Holding(s) in Company
AnnouncementREG - BNP Paribas London Hipgnosis Songs Fund - Form 8.3 - Hipgnosis Songs Fund Limited
AnnouncementREG - Almitas Capital LLC Hipgnosis Songs Fund - Form 8.3 - Hipgnosis Songs Fund Limited
AnnouncementREG - BlackRock Group Hipgnosis Songs-SONC - Form 8.3 - Hipgnosis Songs Fund Limited
AnnouncementREG - Hipgnosis Songs Fund - Form 8 (OPD) - Hipgnosis Songs Fund Limited
Announcement