TIDMSONG
RNS Number : 4154S
Hipgnosis Songs Fund Limited
14 July 2022
14 July 2022
Hipgnosis Songs Fund Limited ("Hipgnosis" or the "Company")
Final Results for the year ended 31 March 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 final results for the year ended 31 March 2022.
Financial Highlights
-- Operative NAV increased by 9.9% to $1.8491 per Share (31 March 2021: $1.6829)
o As at 31 March 2022, the Operative NAV presented in Sterling
would be 140.79p per Share (GBP:USD 1.3134)
o As at 13 July 2022, the Operative NAV presented in Sterling
would be 154.76p per Share (GBP:USD 1.1949)
-- Including dividends paid, Total Operative Dollar NAV Return
of 14.2% for the year, taking Total NAV Return since IPO to
59.1%
-- NAV growth driven by a 9.5% like-for-like value uplift across
the Portfolio to $2.7 billion, as determined by Portfolio
Independent Valuer, as a result of:
o Strong like for like Streaming growth of 19.4% in the second
half of 2021, compared to the first half of 2021, in excess of the
Valuer's expectations, resulting in an increase in expected future
Streaming revenues
o Increase in expected revenues due from emerging technology
platforms as material revenues start to be paid into publishers and
record companies
-- Gross Revenue increased by 24.7% to $200.4 million (31 March
2021: $160.7 million) partly due to the Catalogue acquisitions
during the period
-- Pro-Forma Annual Revenue (PFAR), which shows royalty earnings
during a 12-month period, irrespective of ownership, grew strongly
in H2 2021. Whilst for the full calendar year 2021, PFAR fell 5.3%
to $114.9 million (2020: $121.26 million) largely due to the impact
of COVID-19 restrictions, there was an 11.6% pro forma revenue
increase in H2, compared to H1, driven by Streaming revenue growth
and the re-opening of performance venues
-- EBITDA increased by 21.8% to $129.9 million (31 March 2021: $106.7 million)
-- Total dividends of 5.25p per ordinary share paid were fully
covered (1.01x) by leveraged free cash flow
-- Net debt of $569.9 million as at 31 March 2022, reflecting 25.4% of Operative NAV
Operational Highlights
-- Portfolio now comprises of 146 Catalogues, 65,413 songs, with
an aggregate value of $2.69 billion, and includes some of the most
successful and culturally important songs of all time
-- Acquired 8 Catalogues, including Red Hot Chili Peppers,
Christine McVie of Fleetwood Mac, Ann Wilson of Heart, Rhett Akins,
and Stefan and Jordan Johnson - The Monsters & Strangerz, using
the proceeds of an oversubscribed placing which raised over GBP156
million ($215 million) in July 2021
-- Significant investment in Investment Adviser's capabilities,
particularly in Song Management, finance, investment teams and data
analytic functions
-- A 20% increase of formal synch licences approved in the 6
months to 31 March 2022 vs the first half of the financial year
-- Post period end, in July 2022, signed a ground-breaking
direct administration agreement with Sacem, the French CMO,
materially reducing third party administration and collection fees,
middlemen and the length of time it takes to collect digital
revenues
-- Our advocacy for fairness for songwriters has helped to
secure Competition and Markets Authority market study into Music
and Streaming
Commenting on the results, Merck Mercuriadis, CEO and Founder of
Hipgnosis Song Management and Founder of Hipgnosis Songs Fund
said:
"Over the last four years we have acquired an incomparable
portfolio of some of the most successful and culturally important
Songs of all time, now valued at $2.7 billion. The unique strength
of our Catalogue is demonstrated by the 9.9% increase in the
Operative NAV to $1.8491 per share, as reported by our Independent
Portfolio Valuer, and a Total NAV Return of 14.2%. This is largely
driven by our iconic Songs outstripping the general market growth
in Streaming, particularly in the second half of 2021, providing
validation for our investment strategy.
"As we look forward, we continue to expect strong global revenue
growth driven by the continued adoption of paid-for Streaming.
Despite the macro-economic environment, the attractiveness of the
music Streaming proposition continues to grow. It is the lowest
cost entertainment subscription service and, with its offering of a
near complete repertoire of global music, provides the most
comprehensive offering of the on-demand, entertainment subscription
services. This view is shared by the leading voices in the sector,
including Goldman Sachs, who recently upgraded their double-digit
annual growth forecast through to 2030 in their gold standard Music
In The Air: Music still sounds good in a macro downturn; raising
global industry forecasts report.
"With clear evidence of a strong recovery in global Performance
income, the recent CRB III determination to increase Streaming
royalty rates for songwriters, and potential for further
improvements in the upcoming CRB IV determination, all in addition
to the extremely strong growth in Streaming, I believe we are
looking forward to very attractive market conditions. Given our
incomparable collection of iconic Songs, I believe Hipgnosis is
perfectly placed and will continue to deliver excellent returns for
our Shareholders.
"Thank you to our Shareholders for your incredible support, our
Board, brokers and the incredible songwriters who have entrusted us
with their incomparable Songs."
Analyst Presentation
The Investment Adviser will be hosting a webinar for analysts at
12:00pm BST today. To register to participate, please contact
rufina@hipgnosissongs.com.
For further information please contact:
Hipgnosis Song Management
Merck Mercuriadis
Giles Croot (Media) +44 (0)20 4542 1511
Rufina Pavry (Investors ) +44 (0)20 4542 1530
Singer Capital Markets - Joint Corporate
Broker
James Maxwell / James Moat / Amanda Gray
(Corporate Finance)
Alan Geeves / James Waterlow / Sam Greatrex
(Sales) +44 (0)20 7496 3000
J.P. Morgan Cazenove - Joint Corporate Broker
William Simmonds / Jérémie Birnbaum
(Corporate Finance)
James Bouverat (Sales) +44 (0)20 7742 4000
RBC Capital Markets - Joint Corporate Broker
Elliot Thomas / Max Avison (Corporate Finance)
Lisa Tugwell / Anastasia Mikhailova (Sales) +44 (0)20 7635 4000
Ocorian - Company Secretary & Administrator
Lorna Zimny +44 (0) 28 9693 0222
The Outside Organisation
Alan Edwards / Nick Caley +44 (0)7711 081 843
+44 (0)7771 978220;
FTI Consulting +44 (0)7809 411882;
Neil Doyle/ Paul Harris/ Laura Ewart +44 (0)7761 332646
All US music publicity enquiries
Fran Defeo +1 917 767 5255
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 GBP1.3
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
Introduction and overview
When I started Hipgnosis four years ago, no one could have
predicted where we would be today.
Despite the challenges the world has faced due to the COVID-19
pandemic and macroeconomic conditions that have ensued, Hipgnosis,
and our investment thesis, has not only been proven by these
challenges, but after an incredible 2021/2022 is in its most
exciting position yet.
With proven Songs firmly established as an asset class, no
investment portfolio is truly complete without at least some
exposure to the predictable, reliable and uncorrelated revenues
they generate.
In 2021/2022, the music industry has gone from strength to
strength. We have seen a continued acceleration of the adoption of
paid for Streaming. Global Streaming revenue growth rates of 24.3%
in 2021 exceeded all expectations (IFPI). This led Goldman Sachs to
further increase their forecast Streaming revenue growth rates to
12% per annum for the rest of the decade in their updated 2022 gold
standard Music In The Air report. There are now 523 million users
of paid music subscription services globally and the market is well
on its way towards 2 billion in the coming decade.
Technological innovation has also continued to create new ways
of consuming and monetising music. Emerging technologies such as
TikTok, Roblox, Social Media and Peloton not only have provided
additional revenue streams to copyright owners such as Hipgnosis,
but have also created a platform where we can introduce great hit
songs from the past to new generations of listeners.
Music Performance income recovered strongly from the impact of
various global COVID-19 lockdowns in 2021. Live music venues are
full, and booked into 2024, whilst bars, pubs and restaurants have
reopened and are playing music again. As a result, industry experts
are expecting a near complete recovery in Performance income in
2022.
During COVID-19, Hipgnosis' resilience against the challenging
market proved the reliability of our income. In the second half of
our fiscal year 2021/2022, as most global restrictions have eased
and market growth has returned, we have now also shown that our
acquisition strategy and disruptive Song Management approach leaves
us well positioned to outperform. Our strategy to acquire only the
most successful and culturally important Songs, including 67 of the
271 Songs that have been played over 1 billion times on Spotify,
has delivered like-for-like Streaming growth of 19% in the second
half of our fiscal year alone.
This Streaming growth outperformed our Independent Valuer's
expectations, and together with the first time recognition of the
value of revenue generated from the now established digital
lifestyle platforms that have emerged, led to an annual increase in
our Operative NAV of 9.9% to $1.8491 per share.
Providing uncorrelated income has always been an important part
of our thesis. However, from inception, we have emphasised that
even more significantly, the opportunity for value growth would
deliver an exceptional total shareholder return. This period's
Operative NAV growth is an important step on that journey, which
will be fully delivered as paid-for subscriptions continue to grow
and the utility-like income this produces becomes recognised and
valued by investors globally.
Together with our fully cash-covered dividends of
5.25p per share, we have delivered a Total NAV Return for the
12-months ending 31 March 2022 of 14.2% to our Shareholders. This
takes our Total NAV Return since inception four years ago to
59.1%.
These returns would not have been possible without our
responsible approach to Song Management which has the resource and
bandwidth to manage great Songs to their full potential and add
significant value.
This year our Song Management team has had some great successes
placing our songs in films, television shows and adverts; we have
worked with our Songwriters, producers and artists to maximise the
impact of anniversaries and milestones of culturally important
releases; fixed copyright breakages to deliver new revenues to
Hipgnosis which were never built into our forecasts at the time of
acquisition; as well as negotiated and moved catalogue
administration deals, ensuring we get paid faster while being
charged lower administration fees. In July 2022, we have taken this
one-step further, announcing a ground breaking new direct
administration agreement with Sacem, the French PRO. Under this
first-of-its-kind deal, Sacem will directly collect and pay digital
rights for writers' share, primarily in the UK and the EU,
eliminating a link in the royalty collection process. This will
materially reduce third party administration and collection fees
and the length of time it takes to collect digital revenues.
Most notably however, our Song Management team has continued to
embrace new technologies to promote our incredible songs to new
audiences. TikTok has become an increasingly important channel,
with over 1 billion active users, and has the capacity to introduce
our iconic songs to a new younger audience, deepen the engagement
of a Song and bring hit Songs back into the mainstream all over
again, extending their life for generations to come. Our team has
believed in the potential of TikTok for a number of years and
focused on using this platform to promote our Songs. We now have
over 2.1 million followers across our TikTok accounts, well above
most traditional publishers, and have helped deliver huge viral
successes for our iconic Songs. Our early commitment to emerging
platforms such as TikTok positions Hipgnosis perfectly to benefit
from the expected rise in revenues from these emerging platforms,
which are predicted to be as much as 12% of global music revenues
by 2030 from 5% today.
I can't talk about 2021/2022 without discussing the progress
made in our ulterior motive: to use the influence of Hipgnosis and
our great Songs to be a catalyst to change where the Songwriter
sits in the economic equation, for the benefit of the Songwriting
community and our Shareholders. 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. This is unique, as what's in the best interest of the
Songwriters is also in the best interest of the Company.
The Song is the currency of our business; without the Song we
simply have no music business. Yet for too long the songwriter -
who delivers the most important component to the success of a
record company, digital service provider, music merchandiser, live
promoter etc. - is the lowest paid person. We aim to take the
Songwriter from the bottom to the top of the economic equation and
our advocacy on this issue, including with the UK Department for
Digital, Culture, Media and Sport (DCMS), the Competition and
Markets Authority (CMA) and the US Copyright Royalty Board (CRB),
is being felt at every level and is not only gaining support but
provoking real thought and change.
Most importantly, we have helped deliver the recent decision of
the US Copyright Royalty Board (CRB) to disallow the appeal by
various Streaming services against the CRB III determination to
increase mechanical Streaming royalty rates for songwriters and
publishers. We still have plenty of room for improvement before we
have a rate that's genuinely fair and equitable but this is an
important step on the road to finally, properly recognising the
value that Songwriters bring to the industry and the lives of the
billions of people all over the world who rely on great songs to
enrich their lives. The CRB delivered a strong message not only to
the digital service providers like Spotify but also to the recorded
music companies about the importance of the Songwriter in our
industry. We congratulate all of the incredible Songwriters that
have entrusted us with their incomparable Songs, as well as each
and every songwriter that goes to work each day to write great
songs and make the world a better place. This is a victory for all
of you. We are prepared for CRB IV and the challenges it will bring
and we will advocate and fight on behalf of the Songwriting
community and our investors until we have a fair and equitable
result.
In October 2021, the Investment Adviser (Hipgnosis Song
Management, formerly known as The Family (Music) Ltd),
was appointed to act for a second fund (Hipgnosis Songs Capital,
which invests funds managed by the global alternative investment
manager, Blackstone). Additionally, Blackstone has taken an
ownership stake in the Investment Adviser.
We see this investment as a major vote of confidence for
Hipgnosis Songs Fund, Hipgnosis Song Management, the asset class we
have established and our investment strategy. Additionally, the
investment that Blackstone has made has already enabled us to make
considerable additional investment in the Investment Adviser's most
important capabilities, including data analysis, investment
processes, Song Management and communications. Hipgnosis Songs Fund
Shareholders will benefit directly from these upgraded
capabilities.
Concurrently we worked closely with the Board to ensure that the
interests of the Company's Shareholders were fully protected and
agreed a comprehensive co-investment policy. All investment
opportunities identified by the Investment Adviser are offered to
both funds on identical terms with the Board of the Hipgnosis Songs
Fund having a co-investment right to participate in 20% of any
catalogue purchased. This reflects the expected investment capital
available to both funds.
With the Board, we believe that this will enable the fund to
participate in a wider range of purchases than would have been
possible on a standalone basis and is an arrangement which is
beneficial to Shareholders in Hipgnosis Songs Fund. The Board has
not exercised any co-investment rights to date as prior to the last
equity raise in the summer of 2021, a strategic decision was taken,
in consultation with our brokers and after discussion with our
major Shareholders, that the Company did not intend to offer
further shares for cash consideration until after publication of
the Net Asset Value per share as at 31 March 2022 which is outlined
in this report. We now hope that the current challenges facing the
markets will settle in due course so that we can raise new funds
and continue to give Hipgnosis Songs Fund Shareholders access to
the incredible pipeline of iconic songs we have assembled.
Despite the current challenging macro-economic environment, with
expectations of high inflation and a squeeze on consumer spending,
having built an incomparable portfolio of iconic songs that yield
uncorrelated income we go into 2022/2023 extremely confident of our
growth prospects. Great songs are not just entertainment; they are
the soundtrack of our lives and people turn to them for comfort and
escape equally in times of hardship as they celebrate with them in
times of prosperity. As a result, music revenues have been
historically uncorrelated to economic conditions,
and we strongly believe that Streaming growth will continue
uninterrupted over the coming years. Streaming remains the cheapest
form of entertainment, provides one of the highest quality
offerings of all entertainment subscription services, and has low
penetration rates with significant room for growth in both the
developed markets as well as emerging markets. This view is shared
by the leading voices in our industry including Goldman Sachs, who
are forecasting 9% annual global music revenue growth through to
2030.
Finally, in a period when both global recorded music and music
publishing grew at the fastest rate in history, it's important to
emphasise that for the first time ever almost all consumption of
Music is now paid consumption.
It remains only for me to thank you for your continued support
and to also thank our Board, led by Chair Andrew Sutch, and the
incredible Songwriters who have entrusted us with their
incomparable Songs.
Best wishes,
Merck Mercuriadis
Founder, Hipgnosis Songs Fund Ltd and
Founder/CEO, Hipgnosis Song Management Ltd.
13 July 2022
The Chair's Statement
Introduction
In our short history, Hipgnosis Songs Fund Limited has grown
rapidly, raised GBP1.3 billion of equity and invested in over
65,000 Songs and nearly 150 Catalogues. Since inception we have
cumulatively paid 17.69p per share to Shareholders in dividends and
led the campaign for songwriters to be rewarded fairly for the
crucial contribution they make not only to the music industry but
to our quality of life.
Many individuals and businesses have been impacted by the
COVID-19 pandemic over the last two years. Remembering those whose
lives ended prematurely or who are suffering the long-term impact
of catching the virus puts into context the challenges which have
been caused to businesses, including the Company, during that
period.
COVID-19 is the first time that the music royalties asset class
has been tested under a stressed situation and I believe that these
results continue to confirm the quality of earnings that music
royalties offer and the robustness of Hipgnosis's business model.
Today, with venues reopened, live music returned and concerts
resumed, Hipgnosis is benefitting from the impact of a sustained
recovery.
In October 2021 our Investment Adviser (Hipgnosis Song
Management, formerly known as The Family (Music) Ltd), was
appointed to act for a second fund (Hipgnosis Songs Capital, which
invests funds managed by the global alternative investment manager,
Blackstone). Additionally, Blackstone has taken an ownership stake
in the Investment Adviser.
Your Board sees this investment as a major vote of confidence in
Hipgnosis Song Management, our asset class and our investment
strategy. Additionally, the investment that Blackstone has made in
the Investment Adviser has already enabled it to make considerable
additional investment to its core capabilities, including data
analysis, investment processes, Song Management and communications.
Hipgnosis Songs Fund Shareholders will benefit directly from these
upgraded capabilities.
Whilst welcoming this investment, your Board and the Investment
Adviser were determined to ensure that the interests of Hipgnosis
Songs Fund Shareholders were fully protected and appropriate
governance practices put in place. All investment opportunities
identified by the Investment Adviser are offered to both funds with
Hipgnosis Songs Fund having a right to participate in any
transaction on identical financial terms to Hipgnosis Songs
Capital, with a right to invest in 20% of any catalogue
purchased.
Your Board believes that this will enable the Company to
participate in a wider range of purchases than would have been
possible on a standalone basis and is an arrangement which is
beneficial to Shareholders in Hipgnosis Songs Fund. The Board has
not exercised any co-investment rights to date.
Fundraising
In July 2021, Hipgnosis raised GBP156 million ($215 million) in
a placement. This takes the total amount raised by the Company in
investment to date to GBP1.3 billion in equity and $600 million in
debt. These recent funds were used to acquire eight more Catalogues
for a total consideration of c.$265 million, including Red Hot
Chili Peppers and Christine McVie of Fleetwood Mac.
Prior to the July 2021 equity raise, a strategic decision was
taken, in consultation with our brokers and after discussion with
our major Shareholders, that the Company did not intend to offer
further shares for cash consideration until after publication of
the Net Asset Value per share as at 31 March 2022 (in this
report).
During the year, the Company fully drew down on its $600 million
Revolving Credit Facility, taking Net
Debt as at 31 March 2022 to 25.4% of Operative NAV (31 March
2021: 25.7%). Since the year end, the Company has experienced an
increase in borrowing costs as a result of rising interest rates.
The Board, together with the Investment Adviser, is in the process
of a review of its leverage structure with a view to reducing
interest rate risk and control costs for the Company.
Performance
The IFRS Net Asset Value (NAV) per share as at 31 March 2022 was
$1.3065 which is a 4.1% decrease from $1.3628 as at 31 March
2021.
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 Portfolio Independent Valuer and adds
back the amortization charge.
The Operative NAV per share increased by 9.9% to $1.8491 during
the year (31 March 2021: $1.6829), which, when including dividends
paid, represents a Total $ NAV Return of 14.2% for the year and of
59.1% since IPO on 11 July 2018.
Dividends
During the 12-months ended 31 March 2022 the Company paid a
total of 5.25p in interim dividends per Ordinary Share. Despite the
challenges presented by COVID-19, the cost of these dividends was
covered from leveraged free cashflow.
Since the period end, on 12 May 2022, the Company declared a
further interim dividend of 1.3125p per share which was paid on 15
June 2022.
The Board's current intention is to continue to target a total
of 5.25p in interim dividends per Ordinary Share in relation to the
new financial year ending 31 March 2023.
Going forward, the Company intends to better align dividend
payment dates with revenue receipts and to pay interim quarterly
dividends to Ordinary Shareholders on or around the last working
day of October, January, April and July of each year, with the
dividends declared in the month prior to payment.
The Board
Vania Schlogel joined the Board as an additional non-executive
director on 11 June 2021. Based in the US, Vania has considerable
experience of private equity, media and entertainment
businesses.
I would, once again, like to place on record my thanks and
appreciation to my fellow Directors for their diligence and
dedication over the last year.
In addition, I would like to thank Merck Mercuriadis and the
whole Hipgnosis team for their hard work. When I visit the office,
I get a true sense of their passion for music and the effort they
put in on a daily basis to ensure that Hipgnosis Songs Fund Limited
performs at its full potential.
AGM
The Annual General Meeting (AGM) of the Company will be held at
10.00 BST on 21 September 2022 at United House, 9 Pembridge Road,
Notting Hill, London W11 3JY. Details of the resolutions to be
proposed at the AGM, together with explanations of the AGM
arrangements, are set out in a separate circular which is sent to
Shareholders with this Annual Report. Members of the Board and the
Investment Adviser will be in attendance at the AGM and will be
available to answer Shareholder questions.
Outlook
The outperformance of our Portfolio, particularly in the second
half of the year, gives us confidence despite the challenging
macro-economic and geo-political conditions. The unique quality and
cultural importance of the Songs in our Catalogue provide Hipgnosis
with an unparalleled collection of assets, which are uncorrelated
to the macro-economic environment.
The choice, quality and simplicity of Streaming makes it, we
believe, very attractive to a large number of music consumers and
the Board expects this market to continue growing despite the slow
down in global economic growth, the rise in inflation and the
geopolitical stresses exacerbated by Russia's invasion of
Ukraine.
Music Streaming represents extremely good value to the consumer;
as such we anticipate that it will continue to be resilient and
that the Streaming providers should retain pricing power for their
services, thus helping to sustain the Company's royalty income.
Together, this enables the Board to have good confidence for
your Company's future prospects.
Andrew Sutch
Chair
13 July 2022
Investment Adviser's Report
Over the last four years we have acquired an incomparable
portfolio of some of the most successful and culturally important
Songs of all time, now valued at $2.7 billion. The unique strength
of our Catalogue is demonstrated by the 9.9% increase in the
Operative NAV to $1.8491 per share, as reported by our Portfolio
Independent Valuer. This is largely driven as a result of our
iconic Songs outstripping the general market growth in Streaming,
particularly in the second half of 2021, providing validation for
our investment strategy.
This Operative NAV growth is an important initial step in our
thesis that the value of Catalogues would re-rate as Streaming
income grows and investors come to recognise the utility-like
income this produces. Since inception, we have emphasised that not
only would iconic Songs produce uncorrelated income, but that the
most significant element in delivering an exceptional Shareholder
return was the growth in the value of these Catalogues. We acquired
Catalogues coming off the back of 15 years of piracy that left them
as undervalued assets, being managed by traditional publishers
whose model to manage these Catalogues was strictly passive and not
suited for the incredible digital opportunities that allow Song
Management to add value in a post-Streaming world. We are now
seeing this growth start to come through as paid-for subscriptions
exceed 500 million globally.
Not only has this delivered consistent double digit music
revenue growth, it has transformed the quality of earnings that
Songs produce. Iconic Songs no longer generate a single physical
sale as a discretionary purchase, but a repeating utility income
stream as fans go back to these Songs of great importance to them
in good and bad times, over and over. You pay your tenner a month
and you can push play as often as you like and iconic Songs win
out. This is starting to be recognised by investors globally, with
some of the largest private equity investors starting their own
music funds in the last year, including the private fund Hipgnosis
Song Management has with Blackstone. This is not only a validation
of our thesis, but importantly increased competition for access to
a limited number of iconic Catalogues will re-rate prices and
deliver further NAV growth to our Shareholders.
On top of this, our disruptive Song Management is built around
the Streaming paradigm, focused on managing and promoting our great
hit Songs of the past which have high demand rather than focusing
on promoting continuous new releases with no track record. There
will never be another Good Times by Chic, Sweet Dreams (Are Made Of
This) by Eurythmics, Heart of Glass by Blondie, Shape Of You by Ed
Sheeran, Heart Of Gold by Neil Young, Under The Bridge by Red Hot
Chili Peppers, Let's Stay Together by Al Green or Don't Stop
Believin' by Journey. In a month when Kate Bush's 1985 hit Running
Up That Hill reached Number 1 in the UK singles chart, it is proven
that these vintage iconic Songs can be introduced to and will
resonate with new younger audiences. This increases their
consumption and lifespan to deliver further growth in their income
and value.
Market
2021/2022 has been another strong year for the music industry.
According to the IFPI, global recorded music revenues grew by an
impressive 18.5% year-on-year to $25.9 billion in 2021, driven in
large part by a continued acceleration in the adoption in paid for
Streaming. 523 million subscribers globally now pay for music, up
from 35 million in the US when we started four years ago. Streaming
now contributes about 65% of global industry revenues, firmly
establishing music as a utility income stream.
Whilst Streaming growth is not a new story, 2021/2022 saw some
Streaming providers increase certain subscription prices in test
markets. These price increases led to Spotify's first increase in
Average Revenue Per User (ARPU) for five years, supporting our view
that the DSPs have pricing power.
This strong Streaming market is reflected in these annual
results, with 19% like-for-like Streaming PFAR growth in the second
half of 2021 in our Portfolio compared with the first half of 2021,
as shown in the PFAR analysis within the Financial Review.
Streaming remains an extremely attractive consumer proposition:
it has the lowest pricing, provides the highest quality and depth
of content and the highest level of interaction of all
entertainment subscription offerings. With music revenues
historically proven to be uncorrelated to consumer spending, and
relatively low penetration rates in both developed and emerging
markets, we continue to believe that this affordability and
convenience of Streaming will continue to grow global subscriptions
and revenues strongly. This view is shared by leading industry
experts, who have in the last month upgraded global Streaming
revenue growth forecasts, despite the current macro-economic
conditions.
Emerging platforms, such as TikTok, Triller and Twitch, also
continue to be an increasingly important part of the music
industry. TikTok, which few of us had heard of when we launched
Hipgnosis in 2018, now has over 1 billion active users and is
delivering a new revenue stream to copyright owners. Record
companies and publishers, who have a shorter time lag on receiving
income than Hipgnosis, received material revenues from these
platforms in 2021. Due to this time lag, Hipgnosis received almost
no revenue from these platforms in 2021/22, despite them
contributing 5% of global music industry revenues in 2021. The
continued emergence and increasing popularity of these new
platforms is expected to drive strong growth, with revenues
predicted to hit 12% of industry revenues by 2030. We expect
material TikTok revenues to be paid through to us in this current
financial year.
Performance income for the market has shown a strong recovery,
driven by the re-opening of bars, shops and restaurants as well as
the return to live performances. Live Nation has said it
experienced its "best first quarter ever" for 2022. Based on what
we are seeing, we share the view of the industry experts, our
Portfolio Independent Valuer (Citrin Cooperman Advisors LLC,
formerly Massarsky Consulting Inc.) of a near complete recovery in
performance income in the next financial year.
Due to the time lag in collecting income as an IP owner, which
is the time between the consumption of Songs and the royalty
statements being processed, we have only just started to see the
effects of the recovery of performance income, with a 9%
like-for-like PFAR growth for the second half of 2021 and we expect
to see more growth in the next financial year.
Overall, we remain very positive, with the global music
Streaming market size expected to reach $103.07 billion by 2030, a
CAGR of 9%.
Finally, and possibly most importantly for Hipgnosis, there is a
continued shift in music consumption towards Catalogue music
(defined by the industry as older than 18 months). Catalogue music
reached 75% of all music consumption in the US in 2021, up from 55%
in 2016. With our Portfolio comprised almost entirely of songs
older than 18 months we are well placed to continue to benefit from
this shift, especially when almost all consumption of music is paid
consumption, a marked contrast to even five years ago when so much
music consumption was still illicit.
Our Portfolio
Proven hits and culturally important Songs are the heart of our
portfolio and the soundtrack of our lives. They enjoy high levels
of Streaming and are played on the radio, on TV, in adverts and
heard at so many moments in our everyday lives including our
commutes, exercise, video games, social media etc. We listen to
them in times of celebration and reach for them when we are seeking
comfort. As a result, they deliver high levels of reliable income
over their long life cycle, which historically has been shown to be
uncorrelated to macroeconomic conditions and consumer spending.
This was demonstrated during the COVID-19 pandemic where income has
been resilient, and able to support a fully cash covered
dividend.
We manage these great Songs to enhance their legacy, introduce
them to new audiences, which creates value for our Shareholders and
reinforces their cultural significance in a virtuous circle. We
also acquire a select group of the most important younger Songs
that are already culturally significant and show the highest levels
of success in the Streaming market. These Songs are able to deliver
exceptional Streaming growth as shown in their outperformance in
the second half of the year.
Hipgnosis has bought an incomparable portfolio of iconic Songs
demonstrated by co-owning:
-- 67 out of 271 Songs in Spotify's Billions Club,
-- 52 of Rolling Stone's The 500 Greatest Songs of All Time
-- 13 of the Top 30 YouTube's Most Viewed Music Videos of All
Time
-- 3,854 Songs that have held Number 1 positions in global
charts
-- 14,381 Songs that have held Top 10 positions in global
chart
-- 156 Grammy award winning Songs
Over the last year, Hipgnosis Songs Fund Ltd closed eight
acquisitions, including Red Hot Chili Peppers, Christine McVie of
Fleetwood Mac, Rhett Akins, The Monsters & Strangerz (Stefan
and Jordan Johnson), Elliot Lurie, Ann Wilson and Kaiser Chiefs,
for a total consideration of c.$265 million. These were bought with
the proceeds following a successful placing of
GBP156 million ($215 million) conducted in July 2021. As a
result of these acquisitions, the portfolio as at 31 March 2022 is
comprised of 146 Catalogues, 65,413 Songs, with an aggregate fair
value of $2.69 billion (as determined by the Portfolio Independent
Valuer), reflecting an average fair value multiple of 20.08x
historical annual net publisher share income, compared to the
blended acquisition multiple of 15.93x.
We have showcased a few superstar artists throughout this report
to show the breadth of our many Songwriters associated with them.
Songs performed by globally successful and culturally important
artists include:
2 Pac, 5 Seconds of Summer, 10cc, 21 Savage, 50 Cent, 10,000
Maniacs, A$AP Rocky, AC/DC, Adele, Al Green, Alan Jackson, Alicia
Keys, Aluna George, Amy Winehouse, Andrea Bocelli, Anitta, Anthony
Hamilton, Ariana Grande, Aretha Franklin, AudioSlave, Avicii,
B-52s, Baby Bash, Backstreet Boys,
Barbra Streisand, Barry Manilow, Bebe Rexha, Benny Blanco,
Beyoncé, Biffy Clyro, Big & Rich,
Big Freedia, Birdy, Blind Faith, Blink 182, Blondie, Bon Jovi,
Booker T & The MG's, Boyz II Men,
Britney Spears, Bruce Springsteen, Bruno Mars, Bryan Adams,
Camila Cabello, Carly Simon,
Celine Dion, Charli XCX, Cher, Chic, Chris Brown, Christina
Perri, Christopher Cross, Clipse,
Damian Marley, Dave Matthews Band, David Gray, David Guetta,
Demi Lovato,
Destiny's Child, Diana Ross, Dierks Bentley, Dionne Warwick,
Diplo, Dire Straits,
DJ Snake, Dua Lipa, Duran Duran, Dusty Springfield, Ed Sheeran,
Ellie Goulding, Eminem,
Enrique Iglesias, Erica Banks, Eric Prydz, Ernestine Anderson,
Eurythmics, Fantasia, FKA Twigs,
Fleetwood Mac, Florence And The Machine, Flo-Rida, Florida
Georgia Line, fun., Galantis,
George Benson, George Thorogood, Gladys Knight, Hailee
Steinfeld, Halsey, Harry Styles, Iggy Azalea, Imagine Dragons,
James Bay, James Morrison, Jason Aldean, Jason Derulo, Jay Z,
Jennifer Hudson, Jeff Buckley, Jennifer Lopez, Jess Glynne, Jimmy
Buffett, Jodie Harsh, John Legend, John Newman,
Josh Groban, Journey, Juicy J, Justin Bieber, Justin Timberlake,
Kaiser Chiefs, Kali Uchis, Kanye West,
Katy Perry, Keith Urban, Kelis, Kelly Clarkson, Kelly Rowland,
Khalid, Killswitch Engage,
Kylie Minogue, Lady Gaga, Lana Del Rey, Lara Fabian, Lauv, LeAnn
Rimes, Leo Sayer,
Lindsey Buckingham, Linkin Park, Lionel Richie, Little Mix,
Lizzo, Lorde, LunchMoney Lewis, M.I.A., Madonna, Marc Anthony,
Maren Morris, Mariah Carey, Mark Ronson, Maroon 5, Mary J
Blige,
Machine Gun Kelly, Massive Attack, Matchbox Twenty, Matt &
Kim, MC Hammer, Meatloaf, Meek Mill, Meghan Trainor, Melissa
Manchester, Metallica, Metro Boomin', MF Doom, Michael Bolton,
Michael Bublé, Michael Jackson, Mick Jagger, Miguel, Miike Snow,
Miley Cyrus, Molly Sanden,
Moses Sumney, Mötley Crüe, My Marianne, Natalie Merchant, Nelly,
Neil Young, New Kids
On The Block, Nicki Minaj, Nirvana, No Doubt, Ólafur Arnalds,
Olivia Rodrigo, One Direction, P!nk, Paloma Faith, Panic! At The
Disco, Papa Roach, Paris Boy, Patti Smith, Paul Anka, Paul
McCartney, Pearl Jam, Pell, Perfume Genius, Phoebe Bridgers,
Pitbull, Pop Smoke, Post Malone, Puff Daddy, Pusha T,
Rage Against The Machine, Rebecca Ferguson, Rejjie Snow, Rick
James, Rick Ross, Ricky Martin, Rihanna, Rita Ora, Robbie Williams,
Rod Stewart, Rudimental, RZA, Santana, Santigold, Sawyer Brown,
Seal, Selena Gomez, Shakira, Shawn Mendes, Sia, Sigala, Sigma, Silk
City, Simple Minds, Sinead O'Connor,
Sister Sledge, Skrillex, Sky Ferreira, Solange, Soundgarden,
Spencer Davis Group, Spice Girls,
Steve Aoki, Steve Winwood, Stevie Nicks, Stormzy, Sugarhill
Gang, Sum 41, Super Furry Animals, Swedish House Mafia, SZA, T.I.,
Taio Cruz, Take That, Taylor Swift, Tchami, Teddy Bears, Teenage
Fanclub,
The Chainsmokers, The Editors, The Outfield, The Pretenders, The
Wombats, Third Day, Tiesto, Tim McGraw, Timbaland, Tina Arena,
Tinie Tempah, TLC, Toby Keith, Tom Jones, Tom Petty & The
Heartbreakers,
The Kid Laroi, The Mindbenders, The Vamps, Theophilus London,
Tom Walker, Toto, T-Pain, Tracey Chapman, Traffic, Train, Trey
Songz, Trivium, Troye Sivan, TV On The Radio, Ty Dolla $ign, U2,
Usher,
Waka Flocka Flame, Weezer, Westlife, Whitney Houston, Will
Ferrell, Wu-Tang Clan, Young The Giant, Zara Larsson and Zedd.
Song Management
We continue our focus on proactively managing the iconic Songs
we have acquired.
Song Management is a new paradigm that we have created at
Hipgnosis Song Management, where we manage proven hit Songs with
responsibility and ensure that they're being put into movies, TV
commercials, video games, on playlists and on TikTok so that new
fans discover them, that new artists are covering them and that new
Songwriters are interpolating them. This adds significant value for
our Shareholders and enhances the legacies of the great Songwriters
that have entrusted us with their work. In addition to Streaming,
the beauty of today's environment is that almost all consumption of
music is being paid for.
Song Promotion
Given Hipgnosis acquires proven, timeless, globally iconic
Catalogues, the Song Management team is able to leverage off the
high concentration of platinum-level hits in our portfolio. We have
a relatively small Portfolio of Catalogues with a very high ratio
of extraordinarily successful hits within it, which is unparalled
in today's music business.
The team works with all the traditional outlets as well as
established and emerging areas of digital platforms, social media,
video games and life-style outlets creating and taking advantage of
natural opportunities to constantly refresh and increase the
profile of our Songs. All of which fuels consumption and Streaming
growth and increases the value and opportunity for licensing our
Songs to film, television, gaming and advertising.
As explained previously, an example of a new emerging
opportunity is TikTok, which has over a billion active
users. Hipgnosis has been proactive in building a presence to
promote our artists and Catalogues and our channel
@Hipgnosissongs has rapidly built a following of over 2.1
million users, considerably more than most traditional publishers.
Early in 2022, we launched three splinter TikTok channels focusing
on Rock (@Tok.Rok), Country (@Whiskey.Nation) and Gaming
(@Joy.Pad), each already have over 100K followers.
Activity on TikTok leads directly to YouTube views and
additional Streaming of Songs, making it an entirely connected
ecosystem. TikTok has the capacity to introduce our iconic Songs to
a new younger audience and deepen the engagement of a Song bringing
hit Songs back into the mainstream all over again and extending
their life for generations to come.
As a Short Video Clips content platform, TikTok's capacity to
amass interest in music of all vintages is seemingly limitless.
According to a recent study by Luminate, who provide the
information for the Billboard music charts, 66% of Gen Z TikTok
users discover new music via Short Video Clips, making it the
Number 1 music discovery source for this group. Creating a viral
hit on TikTok leads to users discovering songs on other Digital
Service Providers (DSPs) and this, in turn, drives Streaming
consumption for both Catalogue and frontline releases.
TikTok is a launch-pad for proven hits of yesterday both
organically and as an industry standard promotional tool.
It is also a platform that has been demonstrated to extend the
lifespan of a song or even reinvigorate songs which were not
successful when they were first launched. This is a similar trend
to the one seen for the Amazon-owned livestreaming platform Twitch.
According to a study by Luminate, one in three music listeners in
the US now discover new music through Twitch.
We explore in more detail the resurgence in the consumption of
one of our Songs: Talking to the Moon by Bruno Mars (Ari Levine and
Jeff Bhasker Catalogues) below.
Another classic example is Truth Hurts by Lizzo. The Song, which
Hipgnosis Songs Group administers, was released in September 2017.
It did not chart at the time and only rose in popularity in 2019
when TikTok users started using her lyrics (which include "I just
took a DNA test, turns out I'm 100% that b****") to create new
content in a DNA Test Challenge. Following this, the song reached
Number One on the Billboard Hot 100. It spent seven weeks at Number
One becoming the longest-running number one for a female solo
rapper, earning her a Guinness World Record. It was also nominated
for three Grammy awards in 2020 and certified 7x platinum by the
RIAA. In 2021 it was included in Rolling Stone's 500 Greatest Songs
of All Time.
The Song Management team actively promotes and showcases albums
by our Songwriters when they celebrate major anniversaries working
with industry partners to secure the re-release of classic albums,
helping to deliver on
the creative and drive supporting marketing activities. This is
proven to deliver significant uplifts in interest in an artist and
their songs, both by reconnecting to the fans and introducing their
music to a new audience. Vinyl re-releases we have helped to
promote in 2021 include Nirvana's Nevermind, Journey's Escape and
Shakira's Laundry Service.
Nirvana re-released Nevermind in November 2021, mixed by Andy
Wallace. Analysis of the US album sales (Luminate) shows that their
excess sales, i.e. sales over and above their baseline, jumped
ten-fold in the week of its release and have stayed at a high level
ever since. In fact, for the following 26 weeks, the excess sales
have been equivalent to an additional 12 months of normal level of
sales. The activity and interest around an album re-release can
also drive an uptick in Streaming for the artist's music, which is
not captured in this analysis.
Journey's re-release of their Escape album, in the form of a
coloured vinyl, saw strong demand resulting in the exclusive
retailer ordering additional pressings. A black vinyl release is
now planned for August 2022.
Both Nirvana and Journey have a solid baseline of on-going vinyl
sales. However, even where an artist's fanbase may be of a
demographic which is not traditionally made up of vinyl purchasers,
a high quality, proactive marketing campaign to promote an
anniversary vinyl can be very successful. This was the case with
Shakira's Laundry Service where sales surpassed our
expectations.
Additionally, when a strong Synch is placed in a TV show or
film, this can have an impact on all types of consumption with the
power to push a song up to the top of the charts and create
opportunities for more Synchs.
When Something in the Way, also from Nirvana's Nevermind album,
enjoyed a prominent feature in the latest Batman franchise film,
The Batman, the level of consumption via Streaming rose
significantly. To complete the circle, Hipgnosis further boosted
the Song using its TikTok channel. Something in the Way re-entered
the charts, entering the Billboard Hot 100 at number 46, and it
also made the Top 40 in several countries.
Following the excitement around the Journey album re-release,
their Song Separate Ways (World Apart) was selected for use in the
trailer to season 4 of the Netflix hit series Stranger Things, a
major Synch success.
Synch
With our vision of a global, in-house '24/7' Synch licensing
operation now a reality, our executives are able to respond to the
opportunities being generated within a matter of minutes, right
around the clock. For the vast majority of our repertoire -
regardless of who administers the Song - we are the sole approval
party for all Synch requests. This has allowed us to
comprehensively slash approval/response times on some of the
world's most iconic Songs. Music supervisors, studios and agencies
are no longer being made to wait weeks-on-end for an answer and as
a result favour working with us.
We have a dedicated, in-house sales function, tasked solely with
curating our Catalogue from a Synch perspective. By comprehensively
profiling our Catalogue, unearthing previously underused
repertoire, we are enabling our global Synch pitching teams to be
ahead of the game and chase down high-profile opportunities.
Our team have direct relationships with the world's biggest film
studios, advertising agencies, broadcasters and music supervisors.
These relationships and our efficiency in responding to
opportunities are effective in getting our Songs to the front of
the queue in the creative and commercial decision making process.
It also means that we are not reliant on the administrators of our
Songs to generate opportunities for our Catalogue.
During the year, we have invested in growing our global Synch
team, particularly in London and New York. Additionally, we have
built a comprehensive international network of Synch agents,
providing coverage across all major markets in Europe and Asia.
This has delivered a 20% increase of formal licensing requests
approved in the 6 months to 31 March 2022 vs the prior half year
period. We are starting to see our increasing Synch activity
deliver additional income, with a +7% increase in Synch PFAR in H2
2021 vs H1 2021.
Here are some of our recent Synch successes from across the
Catalogue:
TV and Streaming
-- The trailer for season 4 of Netflix's smash hit 'Stranger
Things' features Journey's song Separate Ways (Worlds Apart). The
trailer gained over 5.8 million views, in the first 24 hours.
-- Three of the 10 songs featured in Season Two of Netflix's
'Bridgerton' were written by Hipgnosis songwriters: P!nk What About
Us (co-written by Johnny McDaid), Miley Cyrus' Wrecking Ball
(co-written by Sacha Skarbek) and Harry Styles' Sign of the Times
(co-written by Jeff Bhasker).
-- Jill Andrews' recording of Neil Young's Only Love Can Break
Your Heart features in the latest season of NBC's 'This Is Us'. In
another episode, Lorde's Royals (co-written by Joel Little) was
also used.
-- Danny Boyle's Disney+ series 'Pistol' - about the story of
the Sex Pistols, featured The Pretenders' Kid and Brass In Pocket,
both of which were written by Chrissie Hynde.
-- Munich (written by Hipgnosis' Editors) was featured in
Showtime's breakout critically-acclaimed series,
'Yellowjackets'.
-- Here In Spirit by Jim James featured in Netflix's 'Ozark'
season 4. Following this, the song was on Shazam's biggest movers
around the launch of the season.
-- The first episode of CBS' 'The Equalizer' features an
on-screen performance of Neil Young's timeless song, Old Man.
-- Bad To The Bone by George Thorogood is the soundtrack to a
major promotion for Amazon's global Prime Video Streaming
platform.
-- Ciara's Girl Gang, written by Tricky Stewart, soundtracks the
trailer for Amazon Prime's forthcoming comedy, 'Harlem'.
-- ABC's brand-new musical drama series 'Queens' features Diana
Ross's I'm Coming Out, which was written by Nile Rodgers &
Bernard Edwards.
-- HBO Max's re-boot of 'Gossip Girl' features numerous
Hipgnosis songs, including Jessie Ware's Spotlight and B.O.M.B. by
St. Panther - and a cast performance of Lady Gaga's Shallow, which
was written with Mark Ronson.
-- Blondie's One Way Or Another was featured in the second
season of Jerry Bruckheimer's TV series, 'Hightown'.
-- BBC's 'Reclaiming Amy' documentary about Amy Winehouse
features Back To Black, which was written by Mark Ronson.
-- The trailer for season 3 of Netflix's 'Narcos' Mexico
featured Soundgarden's Black Hole Sun, written by Chris
Cornell.
-- AppleTV's 'WeCrashed' drama series (about the WeWork
organisation), features Katy Perry's Roar (co-written by Bonnie
McKee), on multiple occasions throughout the series. The show also
features St Vincent's New York (Annie Clark), Baauer's Harlem Shake
(Harry Rodrigues), Nicolar Jaar's Three Sides of Nazareth and
Odie's Utopia (Phil Scully).
-- HBO Max's new series 'Our Flag Means Death' features both
Heart's Crazy On You, co-written by
Ann Wilson and Blondie's Atomic, written by Debbie Harry and
Chris Stein.
-- The new season of ABC's 'Black-ish' features Dionne Warwick's
That's What Friends Are For (co-written by Carole Bayer Sager).
Film
-- Nirvana's Something In The Way, mixed by Andy Wallace,
enjoyed a prominent feature throughout the latest instalment of the
Batman franchise. Consumption of the song surged across all major
platforms following the release of the trailer for the film.
-- The Spencer Davis Group Gimme Some Lovin is the soundtrack to
the trailer of Warner Bros' hotly anticipated 'Father of The Bride'
- a 2022 re-make of the iconic Steve Martin film from 1991.
-- 'Sing 2' - which was the largest animated film of 2021,
featured no fewer than eight of Hipgnosis' songs. Shawn Mendes
There's Nothing Holdin' Me Back, co-written by Scott Harris &
Teddy Geiger, was the main song in the film and has gone on to
secure numerous ancillary usages relating to the film's global
marketing campaign.
-- Eurythmics' Sweet Dreams (Are Made of This), co-written by
Dave Stewart, featured in the main trailer for MGM's major
worldwide Q4 release 'House of Gucci', directed by Ridley Scott and
starring Lady Gaga and Adam Driver.
-- The initial trailer for the same movie was also soundtracked
by a Hipgnosis song, Heart Of Glass by Blondie, written by Debbie
Harry and Chris Stein.
-- The trailer for DC's hotly-anticipated 'Black Adam' was
soundtracked by a remix of the Soundgarden song Black Hole Sun,
which was written by Chris Cornell.
-- Love Shack by the B-52's is featured in Netflix's hugely
successful and critically acclaimed new musical, 'Tick, Tick...
Boom!'.
-- Oscar-winning Will Smith's film 'King Richard' featured
Journey's Only The Young, which was co-written by Hipgnosis' Neal
Schon & Jonathan Cain.
-- Livin' On A Prayer by Bon Jovi (co-written by Richie Sambora)
enjoys a key featured usage in the Oscar-nominated Olivia Coleman
movie, 'The Lost Daughter'.
Advertising
-- Amazon's 2022 Superbowl commercial featured Fleetwood Mac's
Little Lies (written by Hipgnosis' Christine McVie).
-- 7-Up has selected Bruno Mars' Uptown Funk, co-written by Mark
Ronson, as the soundtrack to their global 2022 re-launch
campaign.
-- Carolina Herrera's new global TV campaign for their 'Bad Boy'
fragrance, is soundtracked by Mark Ronson's Ooh Wee.
-- UK retailer Tesco selected Hero by Enrique Iglesias as the
soundtrack to their latest TV advertising campaign.
-- Mariah Carey's All I Want For Christmas Is You, co-written by
Walter Afanasieff, was the focus of McDonald's Christmas 2021
campaign.
-- Our classic Bond theme Nobody Does it Better by Carly Simon,
co-written by Carole Bayer Sager,
was the soundtrack for DHL's global advertising campaign, which
was launched in conjunction
with the long-awaited James Bond blockbuster film '007: No Time
To Die'.
-- It's My Life (written by Richie Sambora) was selected by
German supermarket chain Penny for their Christmas campaign 2021.
The commercial, which speaks about the difficult times especially
teenagers are going through during the pandemic, went viral
immediately, amassing close to 14 million views on YouTube alone in
the first four weeks after its launch.
-- Burberry's global campaign for their 'Hero' fragrance -
starring Adam Driver, featured Two Weeks by FKA Twigs (written by
Emile Haynie) as its soundtrack.
-- Hipgnosis songwriter Birdy re-recorded Ivor Raymonde's I Only
Want To Be With You (which is owned by Hipgnosis), for a major
Deutsche Telekom advertising campaign.
-- Michael Kors' Christmas commercial for 2021 was soundtracked
by Sister Sledge's We Are Family, which was written by Nile Rodgers
and Bernard Edwards.
-- Wells Fargo selected Fitz & The Tantrums' HandClap
(written by Sam Hollander) to soundtrack their North American brand
campaign.
-- Nelly's Hot In Here was chosen as the soundtrack for Burger
King's North American advertising campaign.
-- Global car brand Genesis used two of Hipgnosis' songs for
their GV70 and GV80 brand campaigns: FKA Twigs' Video Girl (written
by Emile Haynie) and Ólafur Arnalds' Particles.
-- BMW selected Get After It by The Cadillac Three as the
soundtrack for one of their key 2021 brand campaigns.
-- In Australia, McDonald's chose Bon Jovi's Livin' On A Prayer
(co-written by Richie Sambora) to soundtrack their nationwide
advertising campaign.
Video Game
-- The El-P remix of Supercut by Lorde (written by Jack
Antonoff) features in the soundtrack to EA's 'FIFA 22' video
game.
-- Hipgnosis has now approved the use of over 70 songs in the
mobile game 'Beatstar', which launched globally in August 2021.
-- A number of Hipgnosis songs are currently appearing in
Fortnite, including: Glass Animals' Heat Waves (David Bayley),
Zella Day's Dance For Love (Ryan Hahn), Bruno Mars' Treasure and
Locked Out of Heaven
(Ari Levine), Lennie Squire's Gold (Bede Kennedy), Mitski's The
Only Heartbreaker (Dan Wilson) and Normani's Motivation (Savan
Kotecha).
-- Hundreds of songs from across the Hipgnosis catalogue are
also being licensed for use in an array of other games, including:
Grand Theft Auto, Fortnite, The Sims, Call of Duty, Let's Sing, NHL
'22, Gran Turismo, WWE 2K22,
Roblox, Beat Saber, Rocket League, Dance Church, Riders
Republic, Rock Band and many more.
Song Administration
A key part of our strategy is to reduce administration costs and
ensure that these payments from Publishers are received as quickly
as possible. We continue to revert and renegotiate administration
rates on Catalogues at the earliest possible opportunity (unless
there are compelling reasons to partner with existing
administrators) and we continually look for the best solution.
Our acquisition in September 2020 of Hipgnosis Songs Group
(HSG), formerly Big Deal Music, has been instrumental in that
journey. HSG's administration capabilities allow the Fund to
benefit from its own efficient in-house administration function in
the US. HSG now administers a total of 32 of the Fund's Catalogues
across 60 specific agreements, representing 5,483 compositions.
These include the US sourced income from Catalogues by: Red Hot
Chili Peppers, Neil Young, Benny Blanco, Brian Higgins, Itaal Shur,
Johnta Austin, Sam Hollander, Tom DeLonge and Christine McVie. We
anticipate more catalogues to move across in the coming months.
Reverted Catalogues for
SONG
Number
of Number
As at 31 March 2022 agreements of Catalogues
-------------------- ------------ ---------------
To Kobalt 60 29
To HSG 39 32
To Peermusic 2 2
-------------------- ------------ ---------------
Overall Catalogues
Reverted 34*
-------------------- ------------ ---------------
*In most instances, Catalogues are reverted to more than one
Administrator.
We review all options to ensure the administration of our
Catalogues is carried out as efficiently and cost-effectively as
possible. Following the financial year end, we have agreed a
ground-breaking new deal whereby Sacem, the French CMO, will
collect the digital rights income for the writers' share, primarily
in the UK and the EU and pay them directly to Hipgnosis. This
direct collection model eliminates one link in the royalty
collection process, materially reducing third party administration
and collection fees and the length of time it takes to collect
digital revenues. Initially, we are transferring approximately 30
Catalogues where the Song Administration rights have fully reverted
to Hipgnosis i.e. where existing administration deals have lapsed.
We are thrilled to be partnering on this direct collection model
with Sacem.
Alongside this, we have also signed a sub publishing partnership
with Peermusic, the world's largest independent music publishing
and neighbouring rights administration company, for them to
administer specific Catalogues. Peermusic will collect royalties in
territories not administered by HSG or Sacem, primarily Latin
America and Asia. This deal allows us to help maximise local Synch
markets through their worldwide offices.
Whilst HSG is increasingly administrating the US portions of our
Catalogues, it continues to be a third-party administrator as well.
Noteworthy, this year HSG has administered Truth Hurts, by Lizzo,
as seen earlier, as well as Glass Animals' outstanding song Heat
Waves. The latter reached Number One on the US Top 40 Charts as
well as Number One on the Billboard Hot 100 and Billboard Global
200 Charts, and Number One on both the Spotify US and Global
charts. It also became part of Spotify's Billions Club in September
2021.
Song Copyright Management and uplift
Our multi-pronged initiatives within Copyright Management, which
centre on searching for missing revenues, continue unabated.
This has involved designing an in-house system gathering data
available on every Song that we own, to help us build a true
picture of our Catalogue. This aim serves various purposes: to make
sure our Synch and Copyright teams have immediate and accurate
access to all relevant information and to give us the ability to
search for missing revenue across some of our major platforms.
Delays in payments occur when the aggregate compositional shares
are greater than 100% within a song. We flag where this is the case
in order to unlock disputes, which leads to higher revenues for
Hipgnosis.
In order to increase monetisation, Hipgnosis has partnered with
a number of third-party providers across different revenue streams.
We set out in the following table the number of partners that
Hipgnosis is working with. The number depends on the complexities
and opportunities we have identified to seek extra revenues.
Currently all our partners are in a trial period and as the results
come through, we will roll-out successful partnerships across the
Catalogue.
Third-Party Partnerships
Number of partners
--------------------------- ------------------
Online Revenues 3 (in trial)
Synch Revenues 1 (in trial)
Mechanical Revenues 4 (in trial)
Neighbouring Rights 1 (in trial)
Writer Share of Performance 1 (in trial)
Live Performance 3 (in trial)
--------------------------- ------------------
We have partners that are focused on looking for missing YouTube
revenues; in other cases, we are trialling technology platforms
that scan US sports-related television channels for un-reported
Synchronisations. Preliminary results of the trials are impressive
and we are currently analysing the data in depth.
Our efforts are also centred on maximising revenues within the
payment processing chain. For example, a variety of services have
been commissioned to search and claim missing royalty streams via
The Mechanical Licensing Collective (The MLC). This involves
identifying registration issues and ensuring revenues are correctly
linked between original and samples, remixes and cover
versions.
The return to Live performances has given us the chance to trial
the PRS Major Concert Service. This eliminates the standard PRS
deductions on gross ticket sales and speeding up royalty
payments.
Song Creation
Song Creation additionally 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,
contacts and synergistic opportunities throughout the industry is
the strength and ongoing mission of HSG's Song Creation team.
The Song Creation team continues to invest in front line
contemporary writers and has invested $13.7 million in new
signings, options and renewals during the financial year.
Highlights from the period include the signings
of Monsters and Strangerz, Normani, as well as a NO ID Joint
Venture.
Highlights from Song Creation
Normani: Within the period, HSG
signed six-time BMI Award winning
songwriter Normani, who has also
taken home two iHeartRadio Music
Awards, an MTV VMA and a Soul Train
Music Award already.
Jordan and Stefan Johnson (part
of the Monsters & Strangerz) recently
had their 4th Top 40 Number 1 with
Justin Bieber's Ghost, and earned
a combined
3 Grammy nominations for their
work on Bieber's album Justice,
including one for the single Anyone.
As an example of the opportunities
that HSG provides, Hipgnosis Songs
Fund acquired the Catalogue of
Monsters & Strangerz in July 2021
and used the leverage of that deal
to sign the writers for administering
their new songs too. Stand out
songwriting involvement from Monsters
and Strangerz includes Dua Lipa's
Break My Heart which reached Top
Ten in 21 countries and Miley Cyrus
featuring Dua Lipa's Prisoner which
hit Number One slots across Europe.
Most recently, their songwriting
involvement with Wild Dreams feat.
Khalid, on Burna Boy's new album,
Love, Damini, is gaining global
traction. The album opened its
first week and is charting at Number
1 in 49 countries and 111 countries
overall on Apple Music.
Jake Sinclair , is one of our publishing
Songwriters and co-wrote all the
Songs on Panic! At The Disco's
forthcoming Viva Las Vengeance
album. Their first single, eponymously
titled, has just been released
and went to Number 1 on 30 June
2022 on the US Alternative radio
daily chart.
HSG writers were included in an impressive 18 Grammy nominations
for 2021, and won the following:
-- Jon Batiste - Album of the Year for We Are
(Vic Dimotsis/Zach Cooper aka King Garbage, composers)
-- St. Vincent - Best Alternative Music Album for Daddy's
Home
-- Angélique Kidjo - Best Global Music Album for Mother Nature
(Shungudzo, composer, guest artist)
-- Esperanza Spalding - Best Jazz Vocal Album for Songwrights
Apothecary Lab (Phoelix, producer, multi-instrumentalist).
Hipgnosis Song Management
During the period, the Investment Adviser, formerly The Family
(Music) Ltd., changed its name to Hipgnosis Song Management Ltd
(HSM). At the same time, it entered into an agreement with
Blackstone, the alternative investment manager, with Blackstone
taking an ownership stake in HSM. In addition, HSM is acting as
Investment Adviser for Hipgnosis Songs Capital, a fund investing on
behalf of funds managed by Blackstone.
This was made possible following several months of extensive
negotiations with the Board of Hipgnosis Songs Fund and discussions
with major Shareholders. This has ensured robust and well thought
out co-Investment and conflicts policies. Under the co-investment
policy, Hipgnosis Songs Fund has the right to participate in 20% of
any Catalogue purchased, alongside the Blackstone backed fund on
identical financial terms. This reflects the expected deployable
capital of the two funds over the medium term. Further, the new
arrangement will (when funds permit) enable Hipgnosis Songs Fund to
participate in more transactions than would have been the case on a
stand-alone basis.
Upgrading management/capabilities
The investment made by Blackstone into Hipgnosis Song Management
has enabled us to make considerable investment in people and
systems across our Song Management, finance, investment teams and
data analytic functions. This is enabling us to further improve the
sophistication of our approach to acquiring Catalogues and ensuring
that we maximise the earnings whilst respecting the artistic
integrity of the songs which we curate.
We believe that the combined benefits of these investments will
be demonstrated in future years by our ability to correctly price
new acquisitions, our ability to reduce costs by carrying out
additional functions in-house and by increased revenues as a result
of our ability to proactively manage our Catalogue.
Respecting our artists
The removal of Neil Young's Master Recordings from Spotify in
January 2022, at his request, in protest against misinformation on
the COVID-19 virus on the platform created much comment.
Hipgnosis' thesis has always been that the longevity of a song's
income is determined not only by the music, but equally by its
cultural and emotional importance to listeners. Neil Young is a
perfect example of this and as a result of always conducting
himself with integrity to ensure that the cultural importance of
his music is preserved, his songs are still popular and still have
meaning over 50 years after their release.
Neil Young asking for his music to be removed from Spotify not
only stands by the artistic integrity of his songs but further adds
to their cultural meaning.
The publicity around his decision led to an immediate jump in
consumption of Neil's music as established fans returned,
demonstrating their love for his music, and many new music lovers
who had not previously found Neil's music discovered it for the
first time, using one of the other platforms which still offered
Neil's music.
Writer 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 Songwriting
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, rates for royalty payments are set by the Copyright
Royalty Board (CRB), on a rolling five year period. We have worked
closely with both the National Music Publishers' Association (NMPA)
and the Nashville Songwriters Association International (NSAI). On
1 July 2022, the US Copyright Royalty Board (CRB) disallowed the
appeal by various Streaming services against the CRB III
determination to increase mechanical Streaming royalty rates for
songwriters and publishers.
The increase, which is incremental over the period covered by
CRB III (1 January 2018 until 31 December 2022) will culminate in a
44% uplift in the "all in" (mechanical and performance) statutory
minimum rates for Streaming paid in the US, rising from 10.5% of
Streaming revenues prior to 2018 to 15.1% in 2022.
Additionally, in April 2022, the NMPA and the NSAI representing
artists and Sony Music Entertainment, UMG Recordings, Inc. and
Warner Music Group Corp made a joint proposal to the CRB for a
settlement on mechanical royalties for the CRB IV period, running
from 2023-2027.
The proposed settlement, if confirmed by the CRB, would result
in a 32% uplift from 2023 in the mechanical rate paid to publishers
and Songwriters for music purchased as a physical sale from 9.1c
per track to 12c per track. Additionally, these royalty rates would
increase annually in line with the Consumer Price Index. This is
the first increase in the rate since 2006 and this is a step in the
right direction and has been heavily influenced by our
advocacy.
In the UK, an investigation by the Department for Digital,
Culture, Media and Sport Select Committee (DCMS), published in the
summer of 2021, prompted the Secretary of State for Digital,
Culture, Media and Sport to refer the dominance of the major music
groups to the Competition and Markets Authority (CMA) for a market
study. Hipgnosis has submitted evidence to the CMA and continues to
meet with them on a regular basis with the belief that the CMA will
launch a full market investigation. A decision is due by the end of
July 2022.
It is worth repeating: the Song is the currency of our business.
Yet the Songwriter - who delivers the most important component to
the success of a record company, publisher, promoter, manager,
agent, music venue, radio station, broadcaster etc. - is the lowest
paid person in the economic equation.
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 increased by 9.9% to $1.8491 during
the year (31 March 2021: $1.6829), which, when including dividends
paid of 5.25p per Share (7.26c per Share) represents a 12-Month
Total $ NAV Return of 14.2%. As a testament to the resilience of
the Hipgnosis Portfolio, despite the significant impact of COVID-19
during the period, the dividends paid of 5.25p per Share were fully
covered by Leveraged Free Cash Flow (1.01x). Total $ NAV Return to
Shareholders is 59.1% since the IPO on 11 July 2018.
Based on the Sterling to Dollar exchange rate at 31 March
2022 of 1.3134, the Operative NAV presented in Sterling would be
140.79p per Share (31 March 2021: 122.50p based on Sterling to
Dollar exchange rate of 1.3738).
The growth in the Operative NAV over the year was primarily
driven by a 9.5% like-for-like uplift in the Fair Value of
Catalogues as appraised by the Portfolio Independent Valuer, Citrin
Cooperman Advisors LLC (formerly Massarsky Consulting Inc.). The
strong growth across the portfolio, but in particular in the
contemporary Catalogues evidences the benefits of the Company's
acquisition strategy of purchasing incredibly successful and
culturally important songs that are at the heart of Streaming. This
growth in the value of the Catalogues resulted from:
-- Strong Streaming growth across the Portfolio particularly in
the second half of the year, in excess of the Portfolio Independent
Valuer expectations and market growth rates, resulting in an
increase in expected future Streaming revenues; and
-- An increase in expected revenues due from alternative
platform licensing, which refers to licensing on social media,
gaming and other emerging platforms including TikTok, Facebook and
Triller, as material revenues start to be paid by these sources to
publishers and recorded music companies.
The Portfolio Independent Valuer calculated the Catalogue Fair
Value as at 31 March 2022 using
a discount rate of 8.5% (31 March 2021: 8.5%).
The Portfolio Independent Valuer believes that a discount rate
of 8.5% is the correct rate within a rising interest rate
environment, and also reflects music's stability as an asset class,
given its decreased risk profile compared to other industry
sectors, such as predictability of earnings.
Operative NAV Bridge from 1 April 2021 to 31 March 2022:
Opening Operative NAV per Ordinary
Share 1.6829
-------------------------------------- --------------------------
Increase in Fair Value of Catalogues 0.1685
-------------------------------------- --------------------------
Net income* 0.0836
-------------------------------------- --------------------------
Dividends Paid (0.0696)
-------------------------------------- --------------------------
FX impact (0.0107)
-------------------------------------- --------------------------
Share issue costs** (0.0056)
-------------------------------------- --------------------------
Closing Operative NAV per Ordinary
Share 1.8491
-------------------------------------- --------------------------
*Net income reflects net revenue less operating expenses
(excluding foreign exchange loss and amortisation of catalogues)
less tax expense.
**Share issue costs reflect the costs of share issuances during
the period, which were fully borne out of the gross proceeds of the
respective issue and were fully recouped
through the issue price premium to the latest published
Operative NAV per Ordinary Share at that time.
Revenue
Gross revenue increased by 24.7% year-on-year to $200.4 million
(31 March 2021: $160.7 million). Net revenue of $168.3 million
increased by 21.7% year-on-year (31 March 2021: $138.3 million),
this is after royalty cost deductions of $32.0 million (31 March
2021: $22.5 million) which relate to contractual royalties due to
writers in HSG and Kobalt Fund One.
The increase in gross and net revenue were primarily a result of
an increase in the number of Catalogues owned during the period,
with the Company investing $265.1 million into 8 Catalogues in the
year, partly offset by a reduction in Right To Income (RTI) to
$17.97 million (31 March 2021: $66.6 million).
In addition, in order to present comparable accounts with listed
major music companies, the Company has optimised its accrual
process to also more accurately recognise earnings based on
expected usage (where appropriate), rather than when earnings were
paid to, and being processed by, collection societies, publishers
and administrators. This change in estimate has affected the timing
of the recognition of certain revenues, with a $36.0 million
additional estimate accrual for the current year, compared to the
prior year basis of estimation. This is not considered to be a
change in accounting policy but a refinement of the estimate
methodology. As this refinement was applied this year for the first
time, the like-for-like increase in the revenue accrual from this
year to that in the prior year is not expected to occur in future
periods. Further detail is provided in the Usage Accrual section
below.
In order to provide its Shareholders with an understanding of
the like-for-like performance of the Company's revenues, by
removing the impact of non-recurring items, including the impact of
new Catalogue acquisitions, RTI 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 year end.
There is a significant time lag for music royalties between the
time a song is performed and when the revenue is received by the
copyright owner. As a result, as set out in the interim report for
the period ended 30 September 2021, the reported Pro Forma Annual
Revenue (PFAR) figure for the 12-months to December 2020 that
includes statements received up to 31 March 2021, of $121.26
million was impacted by the restrictions put in place to combat the
COVID-19 pandemic in 2020.
Lockdowns had a material impact on performance income (which is
driven by songs performed in shops, bars, restaurants and live
music) and the income of younger Catalogues (<10 years old)
which are more reliant on promotional activities surrounding live
shows and new releases.
The table below shows PFAR at six monthly intervals for
Catalogues owned at 31 March 2022. In order to give investors
greater insight into the recovery from the impact of COVID-19, the
Company has also included the PFAR for the year to 31 December
2021.
Pro Forma Annual Revenue for Catalogues owned as at 31 March 2022
12 months 12 months 12 months 12 months
to Jun to Dec to Jun to Dec
20 20 21 21
$m $m $m $m
--------- --------- --------- ---------
PFAR for Catalogues owned as at 31
March 2022 131.68 121.26 115.91 114.86
--------- --------- --------- ---------
<10 years 65.84 57.14 50.99 49.32
--------- --------- --------- ---------
>10 years 65.84 64.12 64.92 65.54
--------- --------- --------- ---------
Note. Older or Younger than 10 years of a Catalogue is
calculated as the average release year of a Catalogue as at 1
January 2022 weighted on earnings, at time of acquisition.
In addition, the PFAR for the year to December 2021, has been
broken down into the first and second six months. Whilst the full
year PFAR to 31 December 2021 ($114.86 million) shows a COVID-19
impacted 5.3% decrease compared to the equivalent period in 2020
($121.26 million), the Company has seen strong like-for-like growth
11.6% in the second half of 2021. This growth has been driven by a
strong increase in Streaming income together with a partial
recovery in performance income as COVID-19 restrictions eased.
Historically the Company has provided analysis of its net
revenues split by income type however, due to the high level of RTI
in the prior year and the Usage Accrual in the current year, this
analysis does not provide comparable results in the current period.
As a result the Company has presented the income type split over
its six month pro forma revenues to provide like-for-like analysis
of its growth drivers.
12-month PFAR to December 2021, split by half year and by income
type
Six months Six months
to Jun to Dec
21 21 Change
$m $m %
------------------- ---------- ---------- ------
Mechanical Income 2.55 2.31 (9.4)
Performance Income 12.16 13.24 8.9
Digital Downloads
Income 1.83 1.68 (8.0)
Streaming Income 21.92 26.18 19.4
Synchronisation
Income 7.41 7.93 7.0
Producer Royalties 3.76 3.92 4.2
Masters Income 3.75 4.04 7.6
Other Income 0.91 1.27 38.6
------------------- ---------- ---------- ------
54.29 60.57 11.6
------------------- ---------- ---------- ------
This data shows strong Streaming growth, with 19.4% increase for
the half, which compares favourably against global Streaming annual
market growth of 24.3% as disclosed by IFPI. As a result, Streaming
income represented 43.2% of pro forma revenue between July and
December 2021 (Jan-June 2021: 40.4%). The Company is now seeing a
number of contemporary Catalogues delivering stabilised earnings
indicating the end of their decay cycle ahead of the Portfolio
Independent Valuer's original expectations.
This strong growth leaves the Company well positioned to benefit
from the continued expected growth in the Streaming market. In
addition, despite strong user levels, the Company is yet to receive
meaningful revenues from emerging platforms, such as TikTok, and
expects this to be a material source of revenue growth in future
periods. Record companies and publishers, who experience a shorter
time lag on income, are already recognising significant revenues
from these platforms.
Performance income, which is driven by songs performed in shops,
bars, restaurants and live music, and was therefore materially
impacted by various lockdowns during COVID-19 grew by 8.9% in the
second half of the year. This growth indicates that the Company is
now starting to see the recovery in performance income from the
impacts of various COVID-19 lockdowns. The major publishers, who
experience a shorter time lag on performance income than Hipgnosis,
have now reported a full recovery in performance income to
pre-COVID-19 levels. The Company therefore expects to see strong
growth and a full bounce back in performance income in the new
financial year. This view is shared by our Portfolio Independent
Valuer who is anticipating a full recovery in the Company's
performance income in the financial year ending 31 March 2023.
There has also been an increase in the Company's Synch PFAR in
the second half of 2021, growing by 7.0% partly driven by one-time
settlements from TikTok and Peloton.
Mechanical income, driven by physical sales of CDs and vinyl
relating to our Portfolio, and digital download income continued to
decline as music consumption continues to transition from
discretionary purchases of music towards Streaming.
Usage Accrual
As noted above, to bring the Group in line with other major
publishers, the Company has updated its revenue accrual estimates
also to reflect revenue at the point at which usage by the end
customer is expected to occur. Revenues were previously recognised
when earnings were paid to, and being processed by, collection
societies, publishers and administrators. The Group now also
includes an estimation of revenue to include the expected usage as
of the accrual date, which is expected to trigger a contractual
royalty payment to The Group. This element of the accrual estimate
royalty statement data to calculate the delay between usage and
subsequent payment to collection societies, publishers and
administrators and applies this factor to our best reliable
estimate of revenue for those periods.
This change in estimate has affected the timing of the
recognition of certain revenues, with a $36.0 million additional
estimate accrual for the current year, compared to the prior year
basis of estimation.
Costs
Adjusted operating costs less interest costs increased to $38.4
million (31 March 2021: $32.4 million). This is driven by an
increase in Investment Advisory fees due to the growth of the
Company since the prior period, aborted deal costs and the
recognition of a contingent bonus accrual in relation to specific
Catalogue acquisitions.
Ongoing Charges as a percentage of the average Operative NAV has
remained stable at 1.58% for the year ended 31 March 2022 (31 March
2021: 1.59%), reflecting the Board's commitment to control
operating costs and maximise returns to Shareholders. The ongoing
charges include a full year of Hipgnosis Songs Group's (HSG)
operating costs compared to approximately seven months in the prior
year. HSG has an internal administration function which enables the
Company to benefit from reduced administration fees and faster
royalty payment processing.
EBITDA
EBITDA for the year ended 31 March 2022 increased by 21.8% to
$129.9 million (31 March 2021: $106.7 million), reflecting the
growth in net revenue.
Leverage
Loan interest has increased to $20.4 million (31 March 2021:
$7.3 million). The rise in interest costs are due to the increase
in drawn debt as the Company has grown over the past two years. As
at 31 March 2022 gross debt was $600.0 million (31 March 2021:
$577.3 million) and net debt was $569.9 million (31 March 2021:
$464.7 million). Net debt as a percentage of Operative NAV at 31
March 2022 was 25.4% (31 March 2021: 25.7%).
Leveraged Free Cash Flow was $84.7 million as at 31 March 2022
(31 March 2021: $82.1 million), which covered dividends paid out
during the period by 1.01 times.
The Board, together with the Investment Adviser, is in the
process of a review of its leverage structure with a view to
reducing interest rate risk and control costs for the Company.
EPS
EPS for the year ended 31 March 2022 is -1.65c (31 March 2021:
4.72c), the year-on-year decrease is largely driven by the impact
of higher RTI in the prior year.
Adjusted EPS, as defined within the Alternative Performance
Measures, removes the impact of Catalogues amortisation. 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 year ended 31 March 2022 is 9.09c (31 March
2021: 12.41c).
Accruals and Receivables
Accrued Income and Receivables at 31 March 2022 were $111.9
million (on a gross basis), a breakdown of which is set out
below:
-- $7.2 million receivable representing royalty statements
received in March 2022 with payment received in April 2022 and May
2022;
-- $32.9 million for calendar Q1 2022 earnings where, due to the
time lag in royalty reporting, statements are not expected to be
received until calendar Q3 and Q4 2022;
-- $9.7 million for calendar Q4 2021 earnings which are not
reported to the Company until calendar Q2 2022;
-- $7.3 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 can
typically result in an earnings lag of up to 24 months;
-- $6.8 million HSG gross revenue accrual, which includes the
accrued PRO lag. Separately, a $5.6 million royalty creditor
representing contractual royalties due to writers has been
recognised;
-- $36.0 million income Usage Accrual, see Usage Accrual section
for more details; and
-- $12.0 million relating to calendar Q2 2021 to Q3 2021
earnings for Catalogues where royalty reporting is still in the
process of being redirected/switched over to the Company. These
accruals are based on royalty statements received with invoices due
to be raised on completion of the Letter of Direction.
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.
As discussed in the Interim Report, to provide further clarity
to investors on RTI, the Company is providing additional disclosure
of these revenues. In the prior Annual Report, RTI was solely
defined as including revenue that was recognised on the acquisition
of a Catalogue that preceded the financial year, so that investors
could clearly identify all revenues which were not from the
financial period being reported on. RTI has been re-defined to show
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 SONG in the following financial year.
The combined RTI recognised in the period was $17.97 million (31
March 2021: $66.6 million), of which the Pre-Financial Year RTI was
$14.09 million and the Within Financial Year RTI was $3.88
million.
The table below shows Recurring Revenue vs. Pre-Financial Year
RTI for each financial year to date.
Financial year revenue ($m)
-------------------------------------------------------------
Recurring revenue
Prior Within
year FY,
Financial No. of (over)/under Pre-FY pre-acq Within Total
Year Description Catalogues accrual (RTI) (RTI) FY, Post-acq revenue
---------- ------------------------- ----------- -------------- ------- --------- -------------- ---------
New acquisitions in
FY19 year 13 - 2.52 - 6.88 9.40
- 27% - 73% 100%
------------------------------------ ----------- -------------- ------- --------- -------------- ---------
FY19 Pre-existing Catalogues - - - - - -
- - - - -
---------- ------------------------- ----------- -------------- ------- --------- -------------- ---------
FY19 Total 13 - 2.52 - 6.88 9.40
- 27% - 73% 100%
------------------------------------ ----------- -------------- ------- --------- -------------- ---------
New acquisitions in
FY20 year 41 - 13.40 27.57 23.56 64.53
- 16% 34% 29% 79%
------------------------------------ ----------- -------------- ------- --------- -------------- ---------
FY20 Pre-existing Catalogues 13 1.66 - - 15.88 17.54
2% - - 19% 21%
------------------------------------ ----------- -------------- ------- --------- -------------- ---------
FY20 Total 54 1.66 13.40 27.57 39.44 82.07
2% 16% 34% 48% 100%
------------------------------------ ----------- -------------- ------- --------- -------------- ---------
New acquisitions in
FY21 year 84 - 28.94 37.66 26.16 92.76
- 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 76.70 138.40
(4%) 21% 27% 56% 100%
------------------------------------ ----------- -------------- ------- --------- -------------- ---------
New acquisitions in
FY22 year 8 - 14.09 3.88 9.32 27.29
- 8% 2% 6% 16%
------------------------------------ ----------- -------------- ------- --------- -------------- ---------
FY22 Pre-existing Catalogues 138 (5.21) - - 146.27 141.06
(3%) - - 87% 84%
------------------------------------ ----------- -------------- ------- --------- -------------- ---------
FY22 Total 146 (5.21) 14.09 3.88 155.59 168.35
(3%) 8% 2% 93% 100%
------------------------------------ ----------- -------------- ------- --------- -------------- ---------
-- Prior Year over/under accrual is the residual amount
recognised in each financial year for the unwinding
of estimates made for statements yet to come.
-- Pre-FY RTI is revenue recognised in the current financial
year where the entitlement to revenue arose prior to the
commencement of that financial year. The pre-FY RTI is recognised
on the date on closure of the deal.
-- Within FY, pre-acq RTI is revenue recognised in the financial
year for periods within the same financial year, but before the
date of acquisition and recognised on the date on closure of the
deal.
-- Within FY, post-acq is revenue recognised in the financial
year for periods after the date of acquisition.
Outlook
Despite the current challenging macro-economic environment, with
expectations of high inflation and a squeeze on consumer spending,
we believe in the uncorrelated nature and growth opportunities of
music and we therefore go into 2022/2023 extremely confident of our
future. Great Songs are not just entertainment. They are the
soundtrack of our lives and people turn to them for comfort and
escape equally in times of hardship as they celebrate with them in
times of prosperity. As a result, music revenues have been
historically uncorrelated to economic conditions, and we strongly
believe that Streaming growth will continue uninterrupted over the
coming years.
Music Streaming remains the most inexpensive form of
entertainment with the highest value return. It provides one of the
highest quality offerings of all entertainment subscription
services and has low penetration rates with significant room for
growth in both the developed markets as well as emerging markets.
The recent 2022 Goldman Sachs update to their Music in the Air
series, which is recognised as the gold standard since its first
iteration almost 5 years ago, concurs with our views.
Add into this the confirmed songwriter royalty rates uplift from
CRB III, the efficiencies that our own US administration and the
new agreements that Sacem and Peermusic bring to our collections,
combined with the value that's added as a result of our strong Song
Management focus and Songs as an asset class have a very bright
future.
We will continue to deliver on our promises to you in the years
to come that will leave you singing Sweet Dreams (Are Made Of This)
and Good Times.
Thank you once again to you, our Shareholders for your
tremendous support, to our Board for their tireless efforts and to
the incomparable Songwriters, artists and producers who have not
only entrusted us with their great Songs but have also helped us
make Hipgnosis the preferred choice of the Songwriting
community.
Best wishes,
Merck Mercuriadis
Founder, Hipgnosis Songs Fund Ltd and
Founder/CEO, Hipgnosis Song Management Ltd.
13 July 2022
Consolidated Statement of Profit and Loss
For the year ended 31 March 2022
1 April 2021 1 April 2020
to to
31 March 31 March
2022 2021
Notes $'000 $'000
-------------------------------------------- ----- ------------ ------------
Income
Total revenue 13 200,384 160,667
Interest income 5 88
Royalty costs (32,041) (22,450)
-------------------------------------------- ----- ------------ ------------
Net revenue 168,348 138,305
-------------------------------------------- ----- ------------ ------------
Expenses
Advisory and performance fees 19 (16,548) (12,050)
Administration fees (1,152) (1,186)
Legal and professional fees (5,999) (7,381)
Audit fees 21 (600) (732)
Brokers' fees (274) (128)
Directors' remuneration 18 (696) (680)
Listing fees (34) (625)
Subscriptions and licences (526) (236)
Public relations fees (702) (36)
Charitable donations (208) (307)
Other operating expenses 14 (12,403) (10,161)
Amortisation of catalogues of songs 6 (105,787) (67,875)
Impairment of catalogues of songs 6 (1,490) -
Amortisation of borrowing expenses (1,635) (2,600)
Fixed asset depreciation (712) (137)
Finance charges for deferred consideration (212) (339)
Loan interest 9 (20,377) (7,331)
HSG FV gain - 2,139
Net (loss)/profit from joint ventures (836) 85
Foreign exchange (losses)/gains 15 (14,857) 15,814
-------------------------------------------- ----- ------------ ------------
Operating expenses (185,048) (93,766)
-------------------------------------------- ----- ------------ ------------
Operating (loss)/profit for the year before
taxation (16,700) 44,539
Taxation 5 (2,743) (5,604)
-------------------------------------------- ----- ------------ ------------
(Loss)/profit for the year after tax (19,443) 38,935
Basic Earnings per Share (cents) 20 (1.65) 4.72
-------------------------------------------- ----- ------------ ------------
Diluted Earnings per Share (cents) 20 (1.65) 4.72
-------------------------------------------- ----- ------------ ------------
All activities derive from continuing operations.
The accompanying notes form an integral part of these
Consolidated Financial Statements.
Consolidated Statement of Comprehensive Income
For the year ended 31 March 2022
1 April 2021 1 April 2020
to to
31 March 31 March
2022 2021
Notes $'000 $'000
------------------------------------------ ------ ------------ ------------
(Loss)/profit for the year after tax (19,443) 38,935
Other comprehensive income:
Movement in foreign currency translation
reserve (1,816) (7)
-------------------------------------------------- ------------ ------------
(1,816) (7)
------------------------------------------------- ------------ ------------
Total comprehensive income for the year (21,259) 38,928
-------------------------------------------------- ------------ ------------
The accompanying notes form an integral part of these
Consolidated Financial Statements.
Consolidated Statement of Financial Position
As at 31
31 March 31 March
2022 2021
Notes $'000 $'000
------------------------------------------- ----- ------------- -------------
Assets
Catalogues of Songs 6 2,036,732 1,878,924
Other assets 568 3,740
Goodwill 3 272 272
Non-current receivables 8 640 3,298
------------------------------------------- ----- ------------- -------------
Non-current assets 2,038,212 1,886,234
Trade and other receivables 8 144,450 104,330
Cash and cash equivalents 7 30,067 112,634
------------------------------------------- ----- ------------- -------------
Current assets 174,517 216,964
Total assets 2,212,729 2,103,198
------------------------------------------- ----- ------------- -------------
Liabilities
Loans and borrowings 9 593,992 565,860
Non-current deferred investment payables 10 925 1,588
------------------------------------------- ----- ------------- -------------
Non-current liabilities 593,992 565,860
Other payables and accrued expenses 10 35,413 72,905
------------------------------------------- ----- ------------- -------------
Current liabilities 35,413 72,905
Total liabilities 630,330 640,353
------------------------------------------- ----- ------------- -------------
Net assets 1,582,399 1,462,845
------------------------------------------- ----- ------------- -------------
Equity
Share capital 11 1,692,198 1,466,851
Other reserves - 234
Foreign currency translation reserve (2,235) (419)
Retained earnings (107,564) (3,821)
------------------------------------------- ----- ------------- -------------
Total equity attributable to the owners
of the Company 1,582,399 1,462,845
------------------------------------------- ----- ------------- -------------
Number of Ordinary Shares in issue at year
end 1,211,214,286 1,073,440,268
------------------------------------------- ----- ------------- -------------
IFRS Net Asset Value per Ordinary Share
(cents) 12 130.65 136.28
Operative Net Asset Value per Ordinary
Share (cents) 12 184.91 168.29
------------------------------------------- ----- ------------- -------------
Approved and authorised for issue by the Board of Directors on
13 July 2022 and signed on their behalf by:
Andrew Sutch Chair Andrew Wilkinson Director
The accompanying notes form an integral part of these
Consolidated Financial Statements.
Consolidated Statement of Changes in Equity
For the year ended 31 March 2022
Foreign
currency
Number of Share translation Retained Other Total
Ordinary capital reserve earnings reserves equity
Note Shares $'000 $'000 $'000 $'000 $'000
--------------------- ---- ------------- --------- ------------ --------- --------- ---------
As at 1 April
2021 1,073,440,268 1,466,851 (419) (3,821) 234 1,462,845
Shares issued 11 137,774,018 229,702 - - (234) 229,468
Share issue costs 11 - (4,355) - - - (4,355)
Dividends paid 16 - - - (84,300) - (84,300)
Loss for the year - - - (19,443) - (19,443)
Foreign currency
translation reserve
movement - - (1,816) - - (1,816)
--------------------- ---- ------------- --------- ------------ --------- --------- ---------
As at 31 March
2022 1,211,214,286 1,692,198 (2,235) (107,564) - 1,582,399
--------------------- ---- ------------- --------- ------------ --------- --------- ---------
* The loss for the period ending 31 March 2022 of $19.4 million
is calculated net of total amortisation, foreign exchange losses,
finance charges for deferred consideration and impairment which
amount to $126.3 million. This results in net income of $106.8
million which represents 1.27x dividend cover on the dividends paid
of $84.3 million. Retained earnings as at 31 March 2022, when
adjusted for total amortisation, foreign exchange losses, finance
charges for deferred consideration and impairment is $18.7
million.
For the year ended 31 March 2021
Foreign
currency
Number of Share translation Retained Other Total
Ordinary capital reserve earnings reserves equity
Note Shares $'000 $'000 $'000 $'000 $'000
--------------------- ---- ------------- --------- ------------ --------- --------- ---------
As at 1 April
2020 615,851,887 801,844 (412) 9,253 - 810,685
Shares issued 11 457,588,381 677,056 - - - 677,056
Share issue costs 11 - (12,049) - - - (12,049)
Performance fees
to be paid in
shares 19 - - - - 234 234
Dividends paid 16 - - - (52,009) - (52,009)
Profit for the
year - - - 38,935 - 38,935
Foreign currency
translation reserve
movement - - (7) - - (7)
--------------------- ---- ------------- --------- ------------ --------- --------- ---------
As at 31 March
2021 1,073,440,268 1,466,851 (419) (3,821) 234 1,462,845
--------------------- ---- ------------- --------- ------------ --------- --------- ---------
* The underlying retained earnings figure has been shown to be
in a deficit position due to the foreign currency translation
therefore does not show the true nature of retained earnings. The
Sterling retained earnings position at 31 March 2021 is GBP6.3
million. This is entirely linked to the functional currency change,
and the strengthening of Sterling against the Dollar. Profit for
the Year of $38.9 million is calculated net of Amortisation of
Catalogues of Songs, which is $67.9 million. The Profit, when
adjusted for Amortisation, is therefore $106.8 million which
represents 2.05x dividend cover on the dividends paid of $52.0
million.
Consolidated Statement of Cash Flows
1 April 2021 1 April 2020
to to
31 March 31 March
2022 2021
Notes $'000 $'000
----------------------------------------------- ----- ------------ ------------
Cash flows generated from operating activities
Operating (loss)/profit for the year before
taxation (16,700) 44,539
Adjustments for non-cash items:
Loan interest 20,377 7,331
Movement in trade and other receivables 8 (35,704) (54,005)
Movement in other payables and accrued
expenses 10 (1,545) 38,712
Movement in equity for share-based payments 19 - 234
Depreciation of fixed assets 712 -
Amortisation of Catalogues of Songs and
borrowing costs 107,422 70,475
Impairment on catalogue of songs 1,490 -
Foreign exchange losses/(gains) 15 14,857 (15,814)
Taxation paid (6,040) (5,604)
----------------------------------------------- ----- ------------ ------------
Net cash generated from operating activities 84,869 85,868
----------------------------------------------- ----- ------------ ------------
Cash flows used in investing activities
Purchase of Catalogues of Songs 6 (300,455) (1,089,293)
Purchase of other assets (173) (3,740)
Movement in writer advances (8,509) -
Goodwill paid on acquisition - (272)
----------------------------------------------- ----- ------------ ------------
Net cash used in investing activities (309,137) (1,093,305)
----------------------------------------------- ----- ------------ ------------
Cash flows generated from financing activities
Proceeds from issue of shares 11 229,468 677,056
Issue costs paid 11 (4,355) (12,049)
Dividends paid 16 (84,300) (52,009)
Interest paid 9 (20,775) (8,942)
Borrowing costs 9 (1,274) (9,199)
Bank loan repaid 9 (50,000) -
Bank loan drawn down 9 72,708 503,278
----------------------------------------------- ----- ------------ ------------
Net cash generated from financing activities 141,472 1,098,135
----------------------------------------------- ----- ------------ ------------
Net movement in cash and cash equivalents (82,796) 90,698
----------------------------------------------- ----- ------------ ------------
Cash and cash equivalents at the start
of the year 112,635 17,391
Effect of foreign exchange rate changes
on cash and
cash equivalents 228 4,545
----------------------------------------------- ----- ------------ ------------
Cash and cash equivalents at the end of
the year 7 30,067 112,634
----------------------------------------------- ----- ------------ ------------
The accompanying notes form an Integral part of these
Consolidated Financial Statements.
Notes to the Consolidated Financial Statements
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 Consolidated Financial Statements present the results of the
Group for the year to 31 March 2022, rounded to the nearest US
Dollar. As disclosed in the prior year Annual Report, the
functional and presentation currency changed from Sterling to US
Dollars. The Group is principally engaged in investing in and
managing music copyrights and associated musical intellectual
property.
There has been a presentational change in the comparative period
in the Consolidated Statement of Profit and Loss, as set out in
Note 22.
2. Accounting policies
The principal accounting policies applied in the preparation of
these Consolidated Financial Statements are set out below. These
policies have been consistently applied, unless otherwise
stated.
New and amended standards and interpretations applied
On incorporation, the Company adopted all of the IFRS standards
and interpretations that were in effect at that date and are
applicable to the Group. No new standards during the year ended 31
March 2022 had a material impact on the Consolidated Financial
Statements.
Amended standards and interpretations not applied
The following are amended standards and interpretations in issue
effective from years beginning on or after 1 January 2022:
Amended standards and interpretations Effective date
------------------------------------------------------------------ --------------
IFRS Financial Instruments (Amendments regarding pre-replacement
9 issues in the context of the LIBOR reform) 1 January 2023
IFRS
17 Insurance Contracts 1 January 2023
Presentation of Financial Statements (Amendments
regarding financial statements' on classification
IAS 1 of liabilities) 1 January 2022
----- ----------------------------------------------------------- --------------
The Group has considered the IFRS standards and interpretations
that have been issued but are not yet effective. None of these
standards or interpretations are likely to have a material effect
on the Group, as it is the belief of the Board that the activities
of the Group are unlikely to be affected by the changes to these
standards, although any disclosures recommended by these standards,
where applicable, will be provided as required.
a) Group information
As at 31 March 2022, the details of the Company's subsidiaries
are as follows:
Place of
incorporation % of voting Consolidation Functional
Name of the subsidiary (3) and operation rights % Interest method Currency
-------------------------------------- --------------- ----------- ---------- ------------- ----------
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 2 US 100 100 Full USD
Hipgnosis Acquisition Corp 2 US 100 100 Full USD
Kennedy Publishing & Productions
Limited 1 UK 100 100 Full GBP
Robot of the Century Music Publishing
Company Inc US 100 100 Full USD
Deamon Limited 1 UK 100 100 Full GBP
PB Songs Ltd 1 UK 100 100 Full GBP
-------------------------------------- --------------- ----------- ---------- ------------- ----------
1 These companies are subsidiaries of Hipgnosis SFH XX Limited
and therefore an indirect subsidiary of Hipgnosis Songs Fund
Limited.
2 On 10 September 2020 the Company acquired the entire share
capital of Big Deal Music Group (rebranded to Hipgnosis Songs
Group) which includes BDM Acquisition Corp (rebranded to Hipgnosis
Acquisition Corp) and Big Deal Music LLC (rebranded to Hipgnosis
Songs Group LLC) both incorporated in the US. Big Deal Music LLC is
part of a joint venture with Big Family LLC, a publishing company
which was formed in June 2018 and is equity accounted for in the
Consolidated Financial Statements.
3 All subsidiaries undertake the same activities as the Group.
In addition, Hipgnosis Songs Group LLC undertakes publishing
administration.
During the year, the Company dissolved F.S. Music Limited and C
H Publishing Limited on 2 November 2021.
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.
b) 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 Consolidated
Financial Statements of the Group on a going concern basis.
c) Basis of preparation
Basis of accounting
The Consolidated Financial Statements have been prepared in
accordance with IFRS and applicable company law. The Consolidated
Financial Statements have been prepared on a historical cost basis
as amended from time to time by the fair valuing of certain
financial assets and liabilities where applicable.
Consolidation
In accordance with section 244 of the Companies Law, the
Directors have elected to prepare consolidated accounts for the
financial period for the Group. Therefore, there is no requirement
to present individual accounts for the Company within the
Consolidated Financial Statements.
The Company is not considered to be an Investment Entity, as
defined in IFRS 10. Whilst the Company evaluates the Portfolio on a
fair value basis as demonstrated by the Operating NAV provided as
an alternate performance measure, the Company also actively manages
the Songs to add further value and has no defined exit strategy for
any of its investments.
All companies in which the Company has a controlling interest,
namely those in which it has the power to govern financial and
operational policies in order to obtain benefits from their
operations, are fully consolidated. Control as defined by IFRS 10
is based on the following three criteria to be fulfilled
simultaneously to conclude that the parent company exercises
control:
-- a parent company has power over a subsidiary when the parent
company has existing rights that give it the current ability to
direct the relevant activities of the subsidiary, i.e. the
activities that significantly affect the subsidiary's returns.
Power may arise from existing or potential voting rights, or
contractual arrangements. Voting rights must be substantial, i.e.
they shall be exercisable at any time without limitation,
particularly during decision making related to significant
activities. The assessment of the exercise of power depends on the
nature of the subsidiary's relevant activities, the internal
decision-making process, and the allocation of rights among the
subsidiary's other shareowners;
-- the parent company is exposed, or has rights, to variable
returns from its involvement with the subsidiary which may vary as
a result of the subsidiary's performance. The concept of returns is
broadly defined and includes, among other things, dividends and
other economic benefit distributions, changes in the value of the
investment in the subsidiary, economies of scale, and business
synergies; and
-- the parent company has the ability to use its power to affect
the returns. Exercising power without having any impact on returns
does not qualify as control.
Consolidated Financial Statements of a group are presented as if
the Group were a single economic entity. The Group does not include
any non-controlling interest.
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.
d) Revenue recognition
Bank interest income
Interest income from cash deposits is recognised as it accrues
by reference to the effective interest rate applicable, which is
the rate that exactly discounts the estimated future cash flows
through the expected life of the financial asset to the asset's
carrying value or principal amount, and is accounted for on an
accruals basis.
Revenue from operations and associated costs
Revenues from operations are recorded when it is probable that
future economic benefits will be obtained by the Group and when
they can be reliably measured. The revenue earned by the Group is
recognised in accordance with IFRS 15 and solely consists of
royalty income, which is divided into three main revenue
categories:
i) Mechanical royalties - these are collected by PROs worldwide
which represent songwriters and other copyright owners. Mechanical
royalties are also collected by royalty collection agents or the
portfolio administrators with whom the Group contracts;
ii) Performance royalties - these are collected by various PROs
worldwide which represent songwriters and other copyright owners;
and
iii) Synchronisation fees - these are typically paid directly to
the owner of the relevant copyright or its publisher, on the terms
and in the amounts agreed with the relevant film or television
production company, advertising agency or end customer.
These revenue categories are further disaggregated into
individual revenue streams which are disclosed in detail in Note
13. The Group follows the same accounting policies in respect of
all revenue streams, unless otherwise disclosed.
As royalty income is typically reported by the royalty
collection agents/performance rights organisations on an arrears
basis via statement and where statements have not been received at
the year end, the Group accrues for those reporting delays by
assessing historic and forecasted earnings over the equivalent
reporting period based on evidenced historic revenue reporting,
seasonality and industry consumption and growth rates since the
last statement date.
Licence arrangements for all income types which include
publishing income (mechanical, performance, downloads, Streaming,
Synchronisation and writer share income), income derived from
master recordings and producer royalties.
The Group enters into licence arrangements in respect of
Catalogues of Songs with third-party collection agents. Licences
granted to collection agents are deemed to constitute usage based,
right of use licences as per IFRS 15.
Revenue arising from licences entered into with collection
agents is therefore recognised in the period. Payment is received
once the royalty statement is delivered, the royalty statement
includes amounts covered by both the usage and processing
accrual.
This revenue, which is net of the administration fee retained by
the collection agent, is disaggregated to be reviewed by song usage
period, source of income, work title, reporting period and any
third party royalty entitlements where necessary.
The contractual basis of the licence arrangements are such that
the agents are deemed as 'principals' for tax purposes, therefore
the Group recognises its revenue net of administration fees.
Where available at the end of each month or at an earlier
interval to which the revenue relates, revenue is recorded on the
basis of royalty statements received from collection agents.
Where notification has not yet been received from collection
agents, an estimate is made of the revenue due to the Group at the
end of the month to which the usage of the music copyright relates.
Estimates are made on the basis of the historical track record of
music Catalogues, ad hoc data provided by collection agents,
industry forecasts and expected seasonal variations.
Non-recourse fixed fee arrangements are recognised at the point
at which control of the licence passes to the collection agents.
Variable consideration is recognised in the period when the usage
of the Catalogues of Songs occurs.
e) Royalty costs
Royalty costs are contractual royalties due to songwriters,
calculated on a quarterly or semi-annual basis, and these are
deducted from gross revenue when calculating net revenue. Royalty
costs are paid when the songwriter is in a recouped position. These
royalty costs are associated with songwriters that are published or
administered by HSG or Kobalt.
f) Expenses
Expenses are accounted for on an accruals basis. Expenses are
charged through the Consolidated Statement of Profit and Loss.
g) Dividends to Shareholders
Dividends are accounted for in the period in which they are
declared and approved by the Board of Directors. The Company, being
a Guernsey regulated entity, is able to pay dividends out of
capital, subject to the assessment of solvency in accordance with
Companies Law. Nonetheless, the Board of Directors carefully
consider any dividend payments made to ensure the Company's capital
is maintained in the longer term. Careful consideration is also
given to ensuring sufficient cash is available to meet the
Company's liabilities as they fall due.
h) Assets
Catalogues of Songs
Catalogues of Songs include music Catalogues, artists' contracts
and music publishing rights and are recognised as intangible assets
measured initially at the fair value of the consideration paid.
Catalogues of Songs are subsequently amortised in expenses over the
useful life of the asset and shown net of any impairment
considered. This amortisation is shown in the Consolidated
Statement of Profit and Loss as 'amortisation of Catalogues of
Songs'. An assessment of the useful life of each Catalogue is
considered at each reporting period, which is 20 years, in line
with what the Board of Directors and Investment Adviser deem to be
industry standard.
Asset impairment
Each time events or changes in the respective Catalogues of
Songs or economic environment indicate a risk of impairment of
intangible assets, the Group re-examines the value of these assets
for indicators of impairment. When there are indicators of
impairment, the impairment test is performed to compare the
recoverable amount to the carrying value of the asset. The
recoverable amount is determined as the higher of: (i) the value in
use; or (ii) the fair value (less costs to sell) as described
hereafter, for each individual asset.
The value in use of each asset is determined by the Board and
Investment Adviser with the support of independent third parties
commissioned to appraise the Catalogue value at time of
acquisition, which is the discounted value of future cash flows
using cash flow projections consistent with the expected portfolio
cash flows and the most recent forecasts as at that time. Applied
discount rates are determined by reference to an appropriate
benchmark as determined by the Board and reflect the current
assessment by the Group of the time value of money and risks
specific to each asset. Growth rates used for the evaluation of
individual assets are based on industry growth rates sourced from
independent market reports and other third-party sources.
The fair value is determined by the Portfolio Independent
Valuer, which is also the discounted value of future cash flows by
using cash flow projections consistent with the expected Portfolio
cash flows and the most recent forecasts as at that time cross
referenced, where appropriate, against market multiples for recent
transactions for similar assets. The Portfolio Independent Valuer
use their own proprietary analysis to project out income streams,
which is based on independent market reports and third-party
sources. The discount rate used by the Portfolio Independent Valuer
is 8.5% and unchanged since the interim results of 30 September
2021 (31 March 2021: 8.5%).
Whilst the Board and Investment Adviser regularly assess other
indicators of impairment (such as a songwriter's or key performance
artist's reputation etc.), the Board and Investment Adviser
typically use the fair value of the assets, being the Catalogues of
Songs, as an initial indicator of impairment. For assets that are
currently valued below their fair value, the Board and Investment
Adviser will review the prevailing qualitative and quantitative
factors that determine the value in use in assessing whether the
indication of impairment holds true.
Given the potential delays within the music industry, of
copyright registrations and LOD assignments, an impairment is only
considered when the recoverable value is less than fair value after
a two year period. A co-efficient analysis, which incorporates
various factors including the time remaining when the recoverable
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, which then informs the asset
impairment to be made. If the recoverable amount is still lower
than the carrying value of an asset or group of assets and the
qualitative and quantitative aspects do not support a recoverable
amount higher than the carrying amount, an impairment loss equal to
the difference is recognised in profit and loss. The impairment
losses recognised in respect of intangible assets may be reversed
in a later period if the recoverable amount becomes greater than
the carrying value, within the limit of impairment losses
previously recognised.
Loans and receivables
Trade receivables, loans, and other receivables that have fixed
or determinable payments that are not quoted in an active market
are initially measured at fair value plus transaction costs
directly attributable to the acquisition and subsequently measured
at amortised cost using the effective interest method, less
allowance for Expected Credit Loss (Note 4). Interest income is
recognised by applying the effective interest rate, except for
short term receivables when the recognition of interest would be
immaterial.
Derecognition of assets
The Group derecognises an asset only when the contractual rights
to the cash flows from the asset expire, or when it transfers the
asset and substantially all the risks and rewards of ownership of
the asset to another entity.
If the Group neither transfers nor retains substantially all the
risks and rewards of ownership and continues to control the
transferred asset, the Group recognises its retained interest in
the asset and an associated liability for amounts it may have to
pay.
On derecognition of an asset in its entirety, the difference
between the asset's carrying amount and the sum of the
consideration received is recognised in the Consolidated Statement
of Profit and Loss.
i) Contingent consideration
Under the terms of the acquisition agreements for Catalogues,
contingent consideration may be payable dependent on future
independent valuations of the Catalogues or revenue received within
a specific time frame of acquiring the Catalogues that reach agreed
upon revenue targets. At 31 March 2022 a provision of $0.9 million
was recognised as contingent consideration as it is likely the
performance conditions will be met and an economic outflow will
arise.
j) Deferred consideration
In such cases where payment is deferred under the terms of the
acquisition agreements for Catalogues, a liability will be
recognised at net present value with any associated finance charge
to be accrued over the respective deferral period.
k) Financial liabilities and equity
Debt and equity instruments are classified as either financial
liabilities or as equity in accordance with the substance of the
contractual arrangement.
Equity instruments
An equity instrument is any contract that evidences a residual
interest in the assets of an entity after deducting all of its
liabilities. Equity instruments issued by the Company are
recognised at the value of proceeds received, net of direct issue
costs.
Repurchase of the Company's own equity instruments is recognised
and deducted directly in equity. No gain or loss is recognised in
profit or loss on the purchase, sale, issue or cancellation of the
Company's own equity instruments.
Financial liabilities
Financial liabilities, including borrowings, are initially
measured at fair value, net of transaction costs.
Financial liabilities are subsequently measured at amortised
cost using the effective interest method, with interest expense
recognised on an effective yield basis.
Derecognition of financial liabilities
The Group derecognises financial liabilities when, and only
when, the Group's obligations are discharged, cancelled or they
expire.
l) Share-based payments
Investment Adviser's performance fee
The Group recognises the variable fee for the services received
in a share-based payment transaction as the Group becomes liable to
the variable fee on an accruals basis.
The fair value of the performance fee, as defined in the
Investment Advisory Agreement, which is payable to the Investment
Adviser in Shares is recognised as an expense when the fees are
earned with a corresponding increase in equity.
m) Cash and cash equivalents
Cash at bank and short-term deposits which are held to maturity
are carried at cost. Cash and cash equivalents are defined as call
deposits, short term deposits with a term of no more than 3 months
from the start of the deposit and highly liquid investments readily
convertible to known amounts of cash and subject to insignificant
risk of changes in value. Cash and cash equivalents consist of cash
in hand and short-term deposits in banks with an original maturity
of 3 months or less.
n) Functional and foreign currency
Determination of functional currency
Whilst the functional currency of the Company is Dollars, some
subsidiaries have a functional currency of Sterling which is
translated into the presentation currency. The entities which
continue to have a functional currency of Sterling are shown in
Note 2(a).
Items included in the Consolidated Financial Statements of each
of the Group's entities are measured using the currency of the
primary economic environment in which each entity operates ("the
functional currency"). The Consolidated Financial Statements are
presented in Dollars, which is the Group's functional and
presentation currency of the Company and each of its
subsidiaries.
Treatment of foreign currency
At the balance sheet date, monetary assets and liabilities that
are denominated in foreign currencies are translated at the rates
prevailing at that date. Non-monetary items carried at fair value
that are denominated in foreign currencies are translated at the
rates prevailing at the date when the fair value was determined.
Non-monetary items that are measured in terms of historical cost in
a foreign currency are not retranslated. Exchange differences are
recognised in profit or loss in the period in which they arise.
Transactions denominated in foreign currencies are translated into
Dollars at the rate of exchange ruling at the date of the
transaction.
As disclosed in the prior year Annual Report, the functional and
presentation currency of the Company and a number of its
subsidiaries changed from Sterling to US Dollars with effect from 1
October 2020. The change in presentation currency is a voluntary
change with retrospective application. The accounting policy for
the change in functional and presentation currency is outlined
below:
Period to 31 March 2021
All movements in the Consolidated Statement of Profit and Loss,
Consolidated Statement of Comprehensive Income, Consolidated
Statement of Financial Position, Consolidated Statement of Changes
in Equity and Consolidated Statement of Cash Flows, have been
translated using the prevailing daily foreign exchange rates.
Period from 1 April 2020 to 30 September 2020
All movements in relation to the Consolidated Statement of
Profit and Loss, Consolidated Statement of Comprehensive Income and
the Consolidated Statement of Changes in Equity were translated
using the prevailing daily foreign exchange rates. All Equity
reserves in the Consolidated Statement of Financial Position were
also translated using the prevailing daily foreign exchange
rates.
Assets and liabilities in the Consolidated Statement of
Financial Position were translated into Dollars at the closing
foreign currency rates as at 30 September 2020, with the exception
of the Catalogues of Songs figure which was fully recalculated
using applicable daily rates.
The movement in the Foreign currency translation reserve in this
period was calculated as the difference between the movement in the
net asset position and the total Equity reserves as translated at 1
April 2021 and 30 September 2020.
The Consolidated Statement of Cash Flows was translated as
follows; movements which related to the Consolidated Statement of
Profit and Loss, Consolidated Statement of Comprehensive Income and
those in relation to Equity reserves were translated using the
prevailing daily foreign exchange rates, movements which related to
assets and liabilities are calculated as the movements using the
rates at 1 April 2021 and 30 September 2020.
Periods ended before or on 31 March 2020
All movements in relation to the Consolidated Statement of
Profit and Loss, Consolidated Statement of Comprehensive Income
were translated at the average prevailing daily rates for the
relevant accounting period, this is also the basis for the
historical profit or loss held in Retained earnings per the
Consolidated Statement of Financial Position and Consolidated
Statement of Changes in Equity.
All historical capital raises and dividend payments were
translated at the prevailing daily foreign exchange rates.
Assets and liabilities in the Consolidated Statement of
Financial Position were translated into Dollars at the closing
foreign exchange rates as at each reporting date, with the
exception of the Catalogues of Songs figure which was fully
recalculated using applicable daily rates.
The Foreign currency translation reserve was calculated as the
difference between the net asset position and the total Equity
reserves as stated at each reporting date.
The Consolidated Statement of Cash Flows was translated as
follows; movements which related to the Consolidated Statement of
Profit and Loss were translated at the average prevailing daily
rates for the relevant accounting period, those in relation to
dividend payments or capital raises were translated at the
prevailing daily foreign exchange rates, and movements which
related to assets and liabilities were calculated as the movements
using the closing foreign exchange rates as at each reporting
date.
3. Business combinations
The acquisition method of accounting is used to account for all
business combinations, regardless of whether equity instruments or
other assets are acquired. The consideration transferred for the
acquisition of a subsidiary comprises the:
-- fair values of the assets transferred;
-- liabilities incurred to the former owners of the acquired
business;
-- equity interests issued by the Group;
-- fair value of any asset or liability resulting from a
contingent consideration arrangement; and
-- fair value of any pre-existing equity interest in the
subsidiary.
Identifiable assets acquired and liabilities and contingent
liabilities assumed in a business combination are, with limited
exceptions, measured initially at their fair values at the
acquisition date.
The excess of the:
-- consideration transferred; and
-- acquisition-date fair value of any previous equity interest
in the acquired entity over the fair value of the net identifiable
assets acquired is recorded as goodwill. If those amounts are less
than the fair value of the net identifiable assets of the business
acquired, the difference is recognised directly in profit or loss
as a bargain purchase.
Where settlement of any part of cash consideration is deferred,
the amounts payable in the future are discounted to their present
value as at the date of exchange. Contingent consideration is
classified either as equity or a financial liability. Amounts
classified as a financial liability are subsequently remeasured to
fair value, with changes in fair value recognised in profit or
loss.
On 10 September 2020, the Company acquired the entire share
capital of Big Deal Music Group (rebranded as Hipgnosis Songs
Group) a boutique full-service song company which owns a portfolio
of copyright interests and is headquartered in the US. It was
acquired for total consideration of $88.2 million based on the fair
value of assets transferred into the Group of $87.9 million,
resulting in $0.3 million of Goodwill being recognised on
acquisition (including $1.6 million cash, advances, copyright
investments and operating company working capital items). The
consideration for the acquisition was funded from the proceeds of
the Company's C Share equity fundraise in July 2020 and through the
issue of 17,609,304 new Ordinary Shares issued at a price of
120.65p per Ordinary Share. As part of the business combination,
the assets were revalued to fair value on the date of the business
combination and liabilities evaluated and recognised in the
respective balances in the Consolidated Financial Statements.
The results of Hipgnosis Songs Group are not disclosed
separately in the Consolidated Statement of Profit and Loss as
these are deemed immaterial on a consolidated Group basis.
4. Significant accounting judgments, estimates and
assumptions
The preparation of the Group's Consolidated Financial Statements
requires the application of estimates and assumptions which may
affect the results reported in the 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.
Functional currency
Functional currency is defined as the currency of the primary
economic environment in which the Company operates, and IAS 21
outlines primary and secondary factors a Company should consider
when determining its functional currency.
As disclosed in the prior year Annual Report, the functional and
presentation currency of the Company and a number of its
subsidiaries changed from Sterling to US Dollars with effect from 1
October 2020. The change in presentation currency is a voluntary
change with retrospective application. The methodology used to
apply the presentation currency change in the prior year is
outlined in Note 2(n).
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. In the
current year, the Investment Adviser recommended changes to the
revenue accrual estimation methodology to include a PRO income
accrual based on each Catalogue's revenue history and a Usage
Accrual based on the expected usage lag for each PRO and publisher,
which was adopted by the Board of Directors.
Net revenue is subject to a royalty cost accrual applied to
gross revenue receipts primarily within the Hipgnosis Songs Group
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
year ending 31 March 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.
Findings from the Company's sensitivity analysis demonstrates
revenue by source from the following types of organisations:
-- 34% Independent publishers
-- 29% Major publishers (US & UK)
-- 19% US PROs
-- 13% Record labels
-- 5% Ex-US PROs
As demonstrated in the following breakdown of Accrued Income and
Income Receivable, 64% ($4.6 million) of the $7.2 million Income
receivable balance outlined in Note 8, has been received at the
time of signing the Consolidated Financial Statements, with the
remainder expected within 30 days. To date, there has been no
default of debt for royalty payments by PROs, Publishers or Record
Labels.
Additional credit risk with regards to Accrued income is taken
into consideration at the point of calculating each accrued amount.
On calculation, latest forecast earnings are considered and
adjusted down for the latest trend of cash receipted earnings if
there Is any suggestion of a downwards performance indicator.
Accrued Income and Receivables at 31 March 2022 were $111.9
million (on a gross basis), a breakdown of which is set out
below:
-- $7.2 million receivable representing royalty statements
received in March 2022 with payment received in
April 2022 and May 2022.
-- $32.9 million for calendar Q1 2022 earnings where, due to the
time lag in royalty reporting, statements are not expected to be
received until calendar Q3 and Q4 2022;
-- $9.7 million for calendar Q4 2021 earnings which are not
reported to the Company until calendar Q2 2022;
-- $7.3 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 can
typically result in an earnings lag of up to 24 months;
-- $6.8 million HSG gross revenue accrual, which includes the
accrued PRO lag. Separately, a $5.6 million royalty creditor
representing contractual royalties due to writers has been
recognised;
-- $36.0 million income Usage Accrual, see Usage Accrual section
for more details; and
-- $12.0 million relating to calendar Q2 2021 to Q3 2021
earnings for Catalogues where royalty reporting is still in the
process of being redirected/switched over to the Company. These
accruals are based on royalty statements received with invoices due
to be raised on completion of the Letter of Direction.
The Audit and Risk Management Committee continues to evaluate
credit risk during COVID-19 and has not become aware of any issues
with cash collections or changes in the existing royalty collection
arrangements.
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 effecting 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 to
which the historical loss ratios assessed and expected credit
losses 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 year end HSG gross recoupable advances are $31.6 million with
an expected credit loss provision of $13.0 million recognised
against the advances. The movement in the provision for expected
credit losses is included as an other operating expense in the
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 each Catalogue is considered at each reporting period, which is
20 years, in line with industry standard.
Assessment of impairment and the calculation of Operative
NAV
As disclosed in Note 2(h) above, intangible assets are subject
to 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 31 March 2022
concluded that $1.5 million (31 March 2021: $nil) 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 2021: 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 recoverable 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 is not
reflected in the fair value of each Catalogue of Songs as
determined in accordance with IFRS 13.
5. Taxes
The major components of income tax expense for the year ended 31
March 2022 and year ended 31 March 2021 are:
Current income tax
Year ended Year ended
31 March 31 March
2022 2021
$'000 $'000
---------------------------------------------------- ---------- ----------
United Kingdom corporation tax based on the profit
for the year at 19% (2021: 19%) 123 5,604
Adjustments in respect of prior periods 2,369 -
Non-reclaimable withholding tax on royalty payments
received 251 -
---------------------------------------------------- ---------- ----------
Total current tax 2,743 5,604
---------------------------------------------------- ---------- ----------
Deferred taxation
Origination and reversal of timings differences - -
---------------------------------------------------- ---------- ----------
Total tax 2,743 5,604
---------------------------------------------------- ---------- ----------
The Company was Guernsey tax resident for the current and
previous periods but exempt from taxation in Guernsey under the
provisions of the Income Tax (Exempt Bodies) (Guernsey) Ordinance,
1989 and was charged an annual fee of GBP1,200.
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 most
appropriate to prepare the tax reconciliation below at the standard
UK tax rate for the year of 19% (2021: 19%).
The Group currently has no exposure to US Tax given HSG is
currently not making a taxable profit. Aside from the US, the Group
has no other foreign subsidiaries.
It is noted that the Company applied to Her Majesty's Revenue
& Customs (HMRC) for approval of the Company as an investment
trust company and such approval was granted. The Company's
conversion to an investment trust company took effect from 1 April
2021 (and shall continue for such time as the Company maintains
this status). The Company will be treated as being resident in the
UK for tax purposes from such date. With effect from this change,
the Company will cease to be a Guernsey tax exempt vehicle under
The Income Tax (Exempt Bodies) (Guernsey) Ordinance, 1989, as
amended.
The March 2021 Budget announced an increase to the main rate of
UK corporation tax to 25% from April 2023. This rate which is
substantively enacted at the statement of financial position date,
however the impact of this proposed change is not included within
these Consolidated Financial Statements.
The actual tax charge for the current year and the previous
period differs from the standard rate for the reasons set out in
the following reconciliation:
Year ended Year ended
31 March 31 March
2022 2021
$'000 $'000
-------------------------------------------------------- ---------- ----------
(Loss)/Profit on the Group's ordinary activities
before tax (16,700) 44,538
Tax on the (loss)/profit on the Group's ordinary
activity at the standard UK rate of 19% (3,173) 8,462
Factors affecting charge for the year:
Expenses not deductible for tax purposes 887 -
Adjustment in respect of previous periods 2,369 -
Effect of overseas tax rate (760) -
Deferred tax not recognised 3,169 -
Net non-reclaimable withholding tax on royalty payments
received 251 -
Tax effect on non-taxable income - (2,858)
-------------------------------------------------------- ---------- ----------
Total actual amount of current tax 2,743 5,604
-------------------------------------------------------- ---------- ----------
6. Catalogues of Songs
$'000
-------------------------------------------------- ---------
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 (used in Operative
NAV) 2,693,974
--------------------------------------------------- ---------
Cost
At 1 April 2020 882,906
Additions 1,089,293
--------------------------------------------------- ---------
At 31 March 2021 1,972,199
--------------------------------------------------- ---------
Amortisation and impairment
At 1 April 2020 25,400
Amortisation 67,875
Impairment -
-------------------------------------------------- ---------
At 31 March 2021 93,275
--------------------------------------------------- ---------
Net book value
At 1 April 2020 857,506
At 31 March 2021 1,878,924
--------------------------------------------------- ---------
Fair value as at 31 March 2021 (used in Operative
NAV) 2,213,719
--------------------------------------------------- ---------
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). At 31 March 2022 the Portfolio consisted of Catalogues
of Songs held for no longer than 4 years. An assessment of the
useful life of each Catalogue is considered at each reporting
period, which is 20 years, in line with industry standard. At 31
March 2022 accumulated amortisation for Catalogue of Songs is
$199.1million (31 March 2021: $93.3 million) and the accumulated
impairment to date is $1.5 million (31 March 2021: $nil).
The Board engaged Portfolio Independent Valuer, Citrin Cooperman
Advisors LLC (formerly Massarsky Consulting, Inc.), to value the
Catalogues as at 31 March 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 2021: 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 were also estimated, often at
the level of individual Songs, and incorporated into their
valuation. Citrin Cooperman has also taken into consideration macro
factors including the growth of Streaming revenue, the global
growth of the recorded music industry and the short - and
medium-term impact of COVID-19 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 used in the Operative NAV
is as follows:
-0.5% discount rate will grow the FV of the Portfolio by 8.0%,
increasing the Operative NAV by $254.8 million which represents an
increase of 21.0 cents Operative NAV per share.
+0.5% discount rate will reduce the FV of the Portfolio by 9.0%,
reducing the Operative NAV by $214.9 million which represents a
decrease of 20.3 cents Operative NAV per share.
7. Cash and cash equivalents
Cash and cash equivalents comprise cash held by the Group
available on demand and cash held in deposits. Cash and cash
equivalents were as follows:
31 March 31 March
2022 2021
$'000 $'000
------------------------- -------- --------
Cash available on demand 30,067 112,634
------------------------- -------- --------
30,067 112,634
------------------------- -------- --------
8. Non-current receivables, trade and other receivables
31 March 31 March
2022 2021
$'000 $'000
------------------------------ -------- --------
Non-current receivables 640 3,298
Accrued income 104,658 71,100
Royalties receivable 6,605 8,687
HSG net recoupable advances 18,604 9,095
Prepayments and other debtors 7,274 15,448
VAT Receivable 7,309 -
------------------------------ -------- --------
145,090 107,628
------------------------------ -------- --------
Credit Risk and Provision for Expected Credit Losses
The Group has applied IFRS 9, Financial Instruments, during the
year, which includes the requirements for calculating a provision
for expected credit losses on financial assets. As disclosed in
Note 4, the probability of future default against revenue
receivable balances has been deemed close to nil. At 31 March 2022,
an ECL provision is recognised against the HSG recoupable advances
as below:
High Risk Medium Risk Low Risk Total
------------------------------ --------- ----------- -------- --------
Expected loss rates -100.0% -41.1% - -41.1%
Gross carrying amounts 6,712 15,324 9,576 31,612
Provision for expected credit
losses (6,712) (6,296) - (13,007)
------------------------------ --------- ----------- -------- --------
Net carrying amounts - 9,028 9,576 18,60 4
------------------------------ --------- ----------- -------- --------
9. Loans and borrowings
During 2021, the Company entered into an agreement with a
syndicated group of lenders, with JPMorgan Chase Bank (JPM) as Lead
Arranger, to increase its Revolving Credit Facility (RCF) from
GBP150 million to $400 million. On 6 January 2021 it was announced
that the facility was upsized to $600 million subject to total
borrowings not exceeding 30% of Net Asset Value. On 26 March 2021,
the Company drew down $90.0 million under its RCF resulting in
gross indebtedness of $577.3 million and net indebtedness of $438
million. This gross indebtedness represented approximately 32.8% of
the last published Adjusted Operative Net Asset Value at that time
and therefore constituted an inadvertent breach of the Company's
borrowing restriction under its investment policy of 30% of Net
Asset Value. The amounts drawn down were held by the Company as
cash and were unutilised, and on 5 April 2021 $50.0 million of
these drawings were repaid thereby curing the temporary breach.
On 22 June 2021 the Company drew down $13.0 million of the RCF
and on 22 July 2021 the Company drew down a further $58.7 million
of the RCF. This results in gross indebtedness of $600 million
which is the maximum available limit of the RCF.
The RCF, which had its maturity date extended to 2 April 2025 on
15 April 2020, provides the Company with greater flexibility to
fund investments and provide additional working capital.
The RCF's key covenant imposes a loan to value test, a fixed
charge coverage test and a liquidity test reviewed quarterly and is
secured by, inter alia, a charge over the shares in all the
subsidiaries of the Company and over all of their assets including
all Catalogues of Songs of the Company held through these
subsidiaries, a charge over the bank accounts of the Company and a
floating charge at the fair value deemed by J.P. Morgan. 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 value of the net assets of the Company.
The RCF bears interest at a fixed rate of 3.25% plus a floating
rate of interest based on London Interbank Offered Rate (LIBOR). In
the financial year ending 31 March 2023, the RCF will transition
from a floating rate of interest based on LIBOR to a floating rate
of interest based on Secured Overnight Financing Rate (SOFR). The
Company has considered the impact this will have on interest
payments and it is not expected to have a material impact. The
Board, together with the Investment Adviser, is in the process of
reviewing its leverage structure with a view to reducing interest
rate risk and controlling costs for the Company.
31 March 31 March
2022 2021
$'000 $'000
------------------------------------- -------- --------
Opening balance - loan drawn down 577,292 74,014
Amounts drawn down during the period 72,708 503,278
Amounts repaid during the year (50,000) -
------------------------------------- -------- --------
Total loan drawn down 600,000 577,292
------------------------------------- -------- --------
Cumulative borrowing costs (6,008) (11,432)
------------------------------------- -------- --------
Closing balance 593,992 565,860
------------------------------------- -------- --------
During the year, $20.4 million (31 March 2021: $7.3 million) was
charged as interest on the amounts drawn down.
10. Non-current deferred investment payables, other payables
and
accrued expenses
31 March 31 March
2022 2021
$'000 $'000
-------------------------------------------- -------- --------
Non-current investment acquisition payables 925 1,588
Amounts owed to songwriters 16,957 18,522
Investment acquisition payables 11,197 40,459
Trade payables and accruals 4,106 5,250
VAT payable - 2,609
Loan interest payable 500 1,277
Corporation tax payable 2,570 4,798
Directors' fees payable 83 -
-------------------------------------------- -------- --------
36,338 74,493
-------------------------------------------- -------- --------
As at 31 March 2022 an amount of $12.1 million relating to the
acquisition of 4 Catalogues remained outstanding (31 March 2021:
$42.0 million relating to the acquisition of 10 Catalogues).
The Group have a number of contingent bonuses which are
dependent on the individual catalogues meeting certain defined
performance hurdles as defined in the catalogue acquisition
agreement. Management's assessment based on the underlying
catalogue acquisition agreement and catalogue performance to date,
is that there is a remote probability that a number of contingent
bonuses will become payable. The fair value of this contingent
liability is $5.8 million.
11. 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 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:
Share capital 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 have been used
to fund an investment in accordance with the Company's Investment
Policy.
No. of Units
------------------------------------ -------------
Issued and fully paid:
Shares as at 1 April 2020 615,851,887
Shares issued on 10 September 2020 17,609,304
Shares issued on 24 September 2020 163,793,103
Shares issued on 30 November 2020 1 214,202,503
Shares issued on 5 February 2021 61,983,471
-------------------------------------- -------------
Shares as at 31 March 2021 1,073,440,268
-------------------------------------- -------------
$'000
------------------------------------ -------------
Issued and fully paid:
Share capital at 1 April 2020 801,844
Shares issued on 10 September 2020 27,600
Shares issued on 24 September 2020 241,702
Shares issued on 30 November 2020 1 304,132
Shares issued on 5 February 2021 103,622
Share issue costs (12,049)
-------------------------------------- -------------
Shares as at 31 March 2021 1,466,851
-------------------------------------- -------------
1 236,400,512 C Shares converted to 214,202,503 Ordinary
Shares
On 10 July 2020 236,400,512 C Shares were issued and converted
on 30 November 2020 to 214,202,503 Ordinary Shares at a conversion
rate of 0.9061 Ordinary Shares for each C Share held.
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.
12. Net Asset Value per Share and Operative Net Asset Value per
Share
31 March 31 March
2022 2021
----------------------------------- ------------- -------------
Number of ordinary shares in issue 1,211,214,286 1,073,440,268
IFRS NAV per share (cents) 130.65 136.28
Operative NAV per share (cents) 184.91 168.29
----------------------------------- ------------- -------------
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
31 March 31 March
2022 2021
$'000 $'000
--------------------------------------------------- --------- ---------
IFRS NAV 1,582,399 1,462,845
Adjustments for revaluation of Catalogues of Songs
to fair value 457,441 250,343
Reversal of amortisation 199,800 93,275
--------------------------------------------------- --------- ---------
Operative NAV 2,239,640 1,806,463
--------------------------------------------------- --------- ---------
13. Revenue
1 April 2021 1 April 2020
to to
31 March 31 March
2022 2021
$'000 $'000
------------------------- ------------ ------------
Mechanical income 10,657 9,535
Performance income 22,291 24,652
Digital downloads income 4,405 4,480
Streaming income 72,850 34,348
Synchronisation income 22,530 28,020
Publishing admin income 300 199
Masters income 8,448 8,424
Writer share income 45,103 34,889
Other income 6,037 7,675
Producer royalties 7,763 8,445
------------------------- ------------ ------------
Total revenue 200,384 160,667
------------------------- ------------ ------------
All revenue streams disclosed in this note are in scope of IFRS
15.
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 8 Trade and other
receivables.
14. Other operating expenses
1 April 2021 1 April 2020
to to
31 March 31 March
2022 2021
$'000 $'000
------------------------------------------- ------------ ------------
Aborted deal expenses 1,951 848
Bank charges 34 42
Contingent bonuses 936 -
Directors' and officers' insurance 366 512
Disbursements and sundry expenses 355 594
Postage, stationery and printing 42 59
Movement in ECL provision for HSG advances 1,570 4,247
HSG staff payroll and expenses 6,598 3,678
Travel and accommodation fees 551 184
------------------------------------------- ------------ ------------
Total other operating expenses 12,403 10,164
------------------------------------------- ------------ ------------
15. Foreign exchange
1 April 2021 1 April 2020
to to
31 March 31 March
2022 2021
$'000 $'000
-------------------------------- ------------ ------------
Foreign exchange (losses)/gains (14,857) 15,814
-------------------------------- ------------ ------------
(14,857) 15,814
-------------------------------- ------------ ------------
The foreign exchange impact reflects the effect of movements in
foreign currency exchange rates throughout the year. In the prior
year, the foreign exchange gain includes an adjustment as a result
of the Company changing its functional currency from GBP to
USD.
Currency risk is discussed further in Note 17.
16. Dividends
A summary of the dividends is set out below:
Dividend
per share Total Dividend
1 April 2021 to 31 March 2022 Pence $'000
------------------------------------------------ ---------- --------------
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
Interim dividend in respect of quarter ended 30
September 2021 1.3125 21,214
Interim dividend in respect of quarter ended 31
December 2021 1.3125 21,186
------------------------------------------------ ---------- --------------
5.25 84,300
------------------------------------------------ ---------- --------------
Dividend
per share Total Dividend
1 April 2020 to 31 March 2021 Pence $'000
------------------------------------------------ ---------- --------------
Interim dividend in respect of quarter ended 30
March 2020 1.25 9,485
Interim dividend in respect of quarter ended 30
June 2020 1.25 10,108
Interim dividend in respect of quarter ended 30
September 2020 1.3125 13,979
Interim dividend in respect of quarter ended 31
December 2020 1.3125 18,437
------------------------------------------------ ---------- --------------
5.125 52,009
------------------------------------------------ ---------- --------------
Subsequent to the year end, the Company announced an interim
dividend for the quarter from 1 January 2022 to 31 March 2022 of
1.3125p per Ordinary Share, paid on 15 June 2022. The Company
continues to pay dividends in Sterling.
17. Financial risk management
Financial risk management objectives
The Group's activities expose it to various types of financial
risk, principally market risk, credit risk, and liquidity risk. The
Board has overall responsibility for the Group's risk management
and sets policies to manage those risks at an acceptable level.
Fair values
Management assessed that the fair values of cash and cash
equivalents, trade and other receivables and trade and other
payables approximate their carrying amount largely due to the
short-term maturities and high credit quality of these
instruments.
Capital risk management
The Group manages its capital to ensure that it will be able to
continue as a going concern while maximising the capital return to
Shareholders. The capital structure of the Group consists of issued
share capital and retained earnings, as stated in the Consolidated
Statement of Financial Position.
In order to maintain or adjust the capital structure, the Group
may buy back shares or issue new shares. There are no external
capital requirements imposed on the Group.
During the year ended 31 March 2022, the Group drew down $72.7
million (31 March 2021: $503.3 million) and repaid $50.0 million of
the RCF which remained drawn down as at 31 March 2022 by $600
million (31 March 2021: $577.3 million).
The Group's investment policy is set out in the Investment
Objective and Policy section of the Annual Report.
Market risk
Market risk is the risk that the fair value or future cash flows
of a financial instrument will fluctuate as a result of changes in
market prices. The Group is exposed to currency risk and interest
rate risk.
a) Currency risk
Currency risk is the risk that the fair values of future
cashflows will fluctuate because of changes in foreign exchange
rates. The revenue earned from the Catalogue of Songs may be
subject to foreign currency fluctuations. Royalties are earned
globally and paid in a number of currencies, therefore the Group
may be impacted by adverse currency movements. The Group will
convert the majority of overseas currency receipts into US Dollars
by agreeing to currency exchange arrangements with collection
agents, or otherwise itself undertaking foreign exchange
conversions. The Group may engage in full or partial foreign
currency hedging and interest rate hedging. The Group will not
enter into such arrangements for investment purposes.
The currencies in which financial assets and liabilities are
denominated are shown below:
GBP EUR Other
Converted Converted Converted
USD to to to Total
As at 31 March 2022 $ $ $ $ $
---------------------------- ------------- ---------- ---------- ---------- -------------
Current and non-current
receivables 132,276,352 10,502,849 1,744,705 565,596 145,089,502
Cash and cash equivalents 25,453,842 4,314,025 298,750 - 30,066,617
---------------------------- ------------- ---------- ---------- ---------- -------------
Total financial assets 157,730,194 14,816,874 2,043,455 565,596 175,156,119
---------------------------- ------------- ---------- ---------- ---------- -------------
Revolving Credit Facility 600,000,000 - - - 600,000,000
Current and non-current
payables 31,448,059 4,882,926 7,259 - 36,338,244
---------------------------- ------------- ---------- ---------- ---------- -------------
Total financial liabilities 631,448,059 4,882,926 7,259 - 636,338,244
---------------------------- ------------- ---------- ---------- ---------- -------------
Net asset/(liability)
position (473,717,865) 9,933,948 2,036,196 565,596 (461,182,125)
---------------------------- ------------- ---------- ---------- ---------- -------------
*At the reporting date 31 March 2022, if Sterling had
strengthened/weakened by 10% against the Dollar with all other
variables held constant, the net assets and movement in profit and
loss would have been $993,395 higher/lower.
**At the reporting date 31 March 2022, if the EUR had
strengthened/weakened by 10% against the Dollar with all other
variables held constant, the net assets and movement in profit and
loss would have been $203,620 higher/lower.
GBP EUR Other
Converted Converted Converted
USD to to to Total
As at 31 March 2021 $ $ $ $ $
---------------------------- ------------- ------------ ---------- ---------- -------------
Current and non-current
receivables 158,928,673 (54,090,437) 2,342,940 446,482 107,627,658
Cash and cash equivalents 117,349,227 (6,549,651) 1,834,603 - 112,634,179
---------------------------- ------------- ------------ ---------- ---------- -------------
Total financial assets 276,277,900 (60,640,088) 4,177,543 446,482 220,261,837
---------------------------- ------------- ------------ ---------- ---------- -------------
Revolving Credit Facility 577,292,000 - - - 577,292,000
Current and non-current
payables 140,174,178 (66,307,194) 625,732 (165) 74,492,551
---------------------------- ------------- ------------ ---------- ---------- -------------
Total financial liabilities 717,466,178 (66,307,194) 625,732 (165) 651,784,551
---------------------------- ------------- ------------ ---------- ---------- -------------
Net (liability)/asset
position (441,188,278) 5,667,106 3,551,811 446,647 (431,522,714)
---------------------------- ------------- ------------ ---------- ---------- -------------
*At the reporting date 31 March 2021, if Sterling had
strengthened/weakened by 10% against the Dollar with all other
variables held constant, the net assets and movement in profit and
loss would have been $566,711 higher/lower.
**At the reporting date 31 March 2021, if the EUR had
strengthened/weakened by 10% against Dollar with all other
variables held constant, the net assets and movement in profit and
loss would have been $335,181 higher/lower.
b) Cash flow and fair value interest rate risk
The Group is exposed to cash flow interest rate risk on cash and
cash equivalents and also on the interest bearing RCF. The RCF
bears a fixed rate of interest plus a floating rate of interest
based on London Interbank Offered Rate (LIBOR). This interest rate
is LIBOR rolling over at 7 November 2020, the Group is able to
elect 1, 3 or 6 month rollovers, with no change expected.
At 31 March 2022, based on the value of interest-bearing RCF
balance held at that date, if interest rates had been 100 basis
points higher/lower and all other variables were held constant, the
Company's loss after tax for the year would not have been
materially impacted.
Credit risk
Credit risk is the risk of loss due to failure of a counterparty
to fulfil its contractual obligations. The Group is exposed to
credit risk in respect of its contracts with PROs and other
collection societies. This exposure is minimised by dealing with
reputable PROs whose credit risk is deemed to be low given their
respective position in the industry.
As reported in Note 4, there is no impairment of the receivables
balance, credit risk of third parties has been taken into account
when calculating accruals, and expected credit loss charge for the
year on HSG advances was $1.6 million (31 March 2021: $4.2
million).
The Group is exposed to credit risk through its balances with
banks and its indirect holdings of money market instruments through
those money market funds which are classified as cash equivalents
for the purposes of these Consolidated Financial Statements.
The table below shows the Group's material cash balances and the
short-term issuer credit rating or money-market fund credit rating
as at the year-end date:
31 March 31 March
2022 2021
Location Rating $'000 $'000
---------------------------- ------------ ------- -------- --------
Barclays Bank plc Guernsey/UK A-1 27,367 106,889
City National Bank US A+* 2,599 5,241
Pinnacle Financial Partners US Baa1 79 461
JPMorgan Chase Bank, N.A. US A-1* 12 12
---------------------------- ------------ ------- -------- --------
*Rated by Standard & Poor's
Liquidity risk
Liquidity risk is the risk that the Group will encounter in
realising assets or otherwise raising funds to meet financial
commitments. The Group's liquidity risk is managed by the
Investment Adviser and Directors on a monthly basis.
Liquidity risk is also the risk that the Group may not be able
to meet their financial obligations as they fall due. The Group
maintains a prudent approach to liquidity management by maintaining
sufficient cash reserves to meet foreseeable working capital
requirements.
The Group prepares a 3 year rolling cash forecast, which is
reviewed by the Board on a monthly basis. The cash flow forecast
includes a sensitivity analysis with downside scenarios on income
streams impacted specifically relating to COVID-19 and interest
rate movements. Cash is delivered with royalty statements, and the
majority are delivered quarterly or semi-annually. A small number
of collections are delivered monthly. Cash is collected and
processed throughout calendar quarters or half years by the
administrators and paid out on either 60/90 day accounting.
During the year ended 31 March 2022, the Group had no financial
liabilities other than the RCF: $600 million (31 March 2021: $577.3
million) and trade and other payables: $36.3 million (31 March
2021: $74.5 million).
At the reporting date, the Group's financial assets and
financial liabilities are:
Carrying Between Between Total
amount Less than 1-3 3-12 1 and 2 and Over contractual
Current and non-current assets 1 month months months 2 years 5 years 5 years cash flows
receivables $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000
------------------------ -------- --------- ------- ------- -------- -------- -------- ------------
Accrued income 104,750 4,882 51,381 48,395 92 - - 104,750
Royalties receivable 7,153 4,977 241 1,387 411 137 - 7,153
HSG net recoupable
advances 18,604 - - 18,604 - - - 18,604
Prepayments and other
debtors 7,274 1,442 - 5,831 - - - 7,274
------------------------ -------- --------- ------- ------- -------- -------- -------- ------------
VAT Receivable 7,309 - (1,383) 8,692 - - - 7,309
------------------------ -------- --------- ------- ------- -------- -------- -------- ------------
Total 145,090 11,301 50,239 82,909 503 137 - 145,090
------------------------ -------- --------- ------- ------- -------- -------- -------- ------------
Carrying Between Between Total
Other payables, accrued amount Less than 1-3 3-12 1 and 2 and Over contractual
expenses, loans and assets 1 month months months 2 years 5 years 5 years cash flows
borrowings $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000
---------------------------- --------- --------- ------- -------- -------- --------- -------- ------------
Bank loan (593,992) - - - - (593,992) - (593,992)
Amounts owed to songwriters (16,957) - - (16,957) - - - (16,957)
Investment acquisition
payable (12,122) (2,500) - (8,697) (925) - - (12,122)
Trade payables and
accruals (4,106) (829) (3,250) (27) (4,106)
Loan interest payable (500) (500) - - - - - (500)
Corporation tax (2,570) - - (2,570) - - - (2,570)
Directors' fees payable (83) (83) - - - - - (83)
---------------------------- --------- --------- ------- -------- -------- --------- -------- ------------
Total (630,330) (3,912) (3,250) (28,251) (925) (593,992) - (630,330)
---------------------------- --------- --------- ------- -------- -------- --------- -------- ------------
Net receivable/(payable) (485,240) 7,389 46,989 54,658 (422) (593,855) - (485,240)
---------------------------- --------- --------- ------- -------- -------- --------- -------- ------------
18. 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.
All Directors are non-executive. The Directors' remuneration,
excluding disbursements, for the year ended 31 March 2022 amounted
to GBP458,360/$613,720, with outstanding fees of GBP18,750/$24,745
due to the Directors at 31 March 2022 (31 March 2021:
GBP582,000/$762,068 with outstanding fees of GBPnil due at 31 March
2021). There were no supplementary fees paid to Directors in the
year ended 31 March 2022. Directors are reimbursed for
out-of-pocket expenses incurred in fulfilling their roles,
including costs of travel and accommodation (as required).
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.
19. Material agreements
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, and develop strategies to maximise the earning
potential of the Songs in the portfolio through improved placement
and coverage of Songs.
The Investment Adviser is entitled to receive an advisory fee
(payable in cash) and a performance fee (usually payable
predominantly in Shares subject to an 18 month lock up
arrangement). The full terms and conditions of the calculation of
the advisory and performance fees are disclosed in the Company's
prospectus, which is available on the Company's website
(https://www.hipgnosissongs.com/). However in summary:
Advisory fee
The advisory fee is calculated at the rate of:
i) 1% per annum of the Average Market Capitalisation up to, and including, GBP250 million;
ii) 0.90% per annum of the Average Market Capitalisation in
excess of GBP250 million and up to and including GBP500 million;
and
iii) 0.80% per annum of the Average Market Capitalisation in
excess of GBP500 million.
Advisory fees for the year were $16.5 million (31 March 2021:
$11.5 million) with $nil outstanding at the reporting date (31
March 2021: $nil).
Performance Fee
In respect of each accounting period, the Investment Adviser
(or, where the Investment Adviser so directs, any member of the
Investment Adviser's team) is entitled to receive a performance fee
(the "Performance Fee") equal to 10% of the Excess Total Return
relating to that accounting period provided that the Performance
Fee shall be capped such that the sum of the advisory fee (payable
in respect of the Average Market Capitalisation of Ordinary Shares
only) and the Performance Fee paid in respect of that accounting
period is no more than 5% of the lower of: (i) Net Asset Value; or
(ii) Closing Market Capitalisation at the end of that accounting
period.
The Excess Total Return for an accounting period is calculated
by reference to: (i) the difference between the Performance Share
Price at the end of that Accounting Period and the higher of: (a)
the Performance Hurdle (being issue price compounded by 10% per
annum from initial Admission subject to appropriate adjustments in
certain situations); and (b) high watermark (being the Performance
Share Price at the end of the last Accounting Period where a
Performance Fee was payable); multiplied by (ii) the weighted
average of the number of Ordinary Shares in issue (excluding any
shares held in treasury) at the end of each day during that
accounting period.
For the purposes of calculating the Performance Fee:
"Performance Share Price" means, in relation to each accounting
period, the average of the middle market quotations of the Ordinary
Shares for the 1 month period ending on the last business day of
that accounting period (which shall be adjusted as appropriate: (i)
to include any dividend declared but not paid where the Ordinary
Shares are quoted ex such dividend at any time during that month;
(ii) to exclude any dividend paid in respect of the shares during
that month; and (iii) for the PSP Adjustments). During the period,
the average of the middle market quotations was 120.80p; and
"Performance Share Price Adjustments" means adjustments to the
Performance Share Price to (i) include the gross amount of any
dividends and/or distributions paid in respect of an Ordinary Share
since initial Admission; and
(ii) make such adjustments to take account of C Shares as were
agreed between the Company and the Investment Adviser, acting
reasonably and in good faith, at the time of issuance of such C
Shares.
The amount of Performance Fee payable to the Investment Adviser
shall be paid in the form of a combination of:
a) cash equal to all taxes or charges payable with respect to
the Performance Fee by the Investment Adviser or member(s) of the
Investment Adviser's Team; and
b) Ordinary Shares ("Performance Shares") which are either
issued by the Company where the Ordinary Shares are on average
trading at par or at a premium to the last reported Operative NAV
per Ordinary Share at the relevant time or purchased from the
secondary market where the Ordinary Shares are on average trading
at a discount to the last reported Operative NAV per Ordinary Share
at the relevant time and transferred to,
the Investment Adviser or member(s) of the Investment Adviser's
Team.
The Performance Shares are subject to 18-month lock-up
arrangements.
The performance fee for the year was calculated and accrued as
below:
31 March 31 March
2022 2021
$'000 $'000
------------------------------- -------- --------
Cash amount accrued as payable - 300
Amount to be paid as shares - 234
------------------------------- -------- --------
Total performance fee - 534
------------------------------- -------- --------
Administration Agreement
Pursuant to the Administration Agreements: (i) Ocorian
Administration (Guernsey) Limited has been appointed as
Administrator of the Company; and (ii) Ocorian Administration (UK)
Limited has been appointed as administrator to the subsidiaries.
The Administrator or Ocorian Administration (UK) Limited (as
applicable) are responsible for the day-to-day administration of
the Company and the subsidiaries which accedes to the relevant
Administration Agreement (including but not limited to the
calculation and publication of the semi-annual NAV, the IFRS NAV
and Operative NAV) and general secretarial functions required by
the Companies Law (including but not limited to maintenance of the
Company's accounting and statutory records). For the purposes of
the RCIS Rules, the Administrator is the designated manager of the
Company.
Under the terms of the Administration Agreement between the
Administrator and the Company, the Administrator is entitled to a
fixed fee as at 31 March 2022 of GBP187,500 ($246,259) (31 March
2021: GBP172,500, $236,977) per annum for services such as
administration, accounting, corporate secretarial, corporate
governance, regulatory compliance and stock exchange continuing
obligations. Additional ad hoc fees are payable in respect of
certain additional services, these amounted to GBP177,112
($232,616) (31 March 2021: GBP275,300, $345,829). Administration
fees for the year to 31 March 2022 amounted to GBP364,612
($478,875) (31 March 2021: GBP447,800, $582,806) of which GBP43,125
($56,639) (31 March 2021: GBP20,822, $28,593) was outstanding at
the year end.
Under the terms of the Administration Agreement between Ocorian
Administration (UK) Limited and the subsidiaries the Administrator
is entitled to a fixed fee as at 31 March 2022 of GBP14,000
($18,387) (31 March 2021: GBP14,000, $19,233) per subsidiary and a
variable incremental fee per annum per additional Catalogue held by
a subsidiary for services such as administration, corporate
secretarial and accounting. Administration fees for the
subsidiaries for the year amounted to GBP489,683 ($673,007) (31
March 2021: GBP455,877, $602,770) of which GBP237,490 ($311,916)
(31 March 2021: GBP145,117, $196,743) was outstanding at the year
end.
Registrar Agreement
Computershare Investor Services (Guernsey) Limited (a company
incorporated in Guernsey on 3 September 2009 with registered number
50855) has been appointed as registrar to the Company pursuant to
the Registrar Agreement. In such capacity, the Registrar will be
responsible for the transfer and settlement of Shares held in
certificated and uncertificated form. The Registrar is also
entitled to reimbursement of all out-of-pocket costs, expenses and
charges properly incurred on behalf of the Company.
Under the terms of the Registrar Agreement, the Registrar is
entitled to a fixed fee as at 31 March 2022 of GBP7,500 ($9,850)
per annum in respect of the Ordinary Shares (31 March 2021:
GBP7,500, $10,303), together with additional ad hoc fees in respect
of additional out of scope services provided by the Registrar of
GBP44,464 ($58,399) (31 March 2021: GBP39,284, $51,641). Registrar
fees for the year were GBP51,964 ($68,249) (31 March 2021:
GBP52,284, $69,500) with GBP14,644 ($19,233) outstanding at the
reporting date (31 March 2021: GBP10,875, $15,154).
20. Earnings per share
31 March 31 March
2022 2022
Basic Diluted
---------------------------------------------------- ------------- -------------
Loss for the year ($'000) (19,443) (19,443)
Weighted average number of Ordinary Shares in issue 1,175,596,128 1,175,596,128
Earnings per share (cents) (1.65) (1.65)
---------------------------------------------------- ------------- -------------
31 March 31 March
2021 2021
Basic Diluted
---------------------------------------------------- ------------- -------------
Loss for the year ($'000) 38,935 38,935
Weighted average number of Ordinary Shares in issue 825,090,869 825,090,869
Earnings per share (cents) 4.72 4.72
---------------------------------------------------- ------------- -------------
The earnings per share is based on the profit or loss of the
Group for the year and on the weighted average number of Ordinary
Shares for the year ended 31 March 2022.
There are no dilutive shares at 31 March 2022.
21. Auditor's remuneration
Audit and non-audit fees payable to the Auditors can be analysed
as follows:
1 April 2021 1 April 2020
to to
31 March 31 March
2022 2021
$'000 $'000
---------------------------------------------------- ------------ ------------
PricewaterhouseCoopers CI LLP annual audit fees 600 732
---------------------------------------------------- ------------ ------------
PricewaterhouseCoopers CI LLP annual audit fees 600 732
---------------------------------------------------- ------------ ------------
Pricewaterhouse Coopers CI LLP C Share conversion
fees - 11
Pricewaterhouse Coopers CI LLP reporting accounting
services - 346
Pricewaterhouse Coopers CI LLP Interim review fees 53 54
---------------------------------------------------- ------------ ------------
PricewaterhouseCoopers CI LLP non-audit fees 53 411
---------------------------------------------------- ------------ ------------
22. Presentation change
The Company has made the following immaterial changes to the
presentation of the Consolidated Statement of Profit and Loss and
Consolidated Statement of Financial Position during the year. This
has resulted in the following presentation changes of the
comparative figures.
Consolidated Statement of Profit and Loss
As reported As reported
in 31 March in 31 March
2021 Annual 2022 Annual
Report Report
1 April 2020 1 April 2020
to to
31 March Presentation 31 March
2021 change 2021
$'000 $'000 $'000
------------------------------------------- ------------- ------------ -------------
Income
Total revenue 160,752 (85) 160,667
Interest income 88 - 88
Royalty costs (22,450) - (22,450)
------------------------------------------- ------------- ------------ -------------
Net revenue 138,390 (85) 138,305
------------------------------------------- ------------- ------------ -------------
Expenses
Advisory and performance fees (13,236) 1,186 (12,050)
Administration fees - (1,186) (1,186)
Legal and professional fees (7,840) 459 (7,381)
Audit fees (732) - (732)
Brokers' fees (81) (47) (128)
Directors' remuneration (666) (14) (680)
Listing fees - (625) (625)
Subscriptions and licences (236) - (236)
Public relations fees - (36) (36)
Charitable donations (307) - (307)
Other operating expenses (10,561) 400 (10,161)
Amortisation of Catalogues (67,875) - (67,875)
Impairment loss of Catalogues - - -
Amortisation of borrowing expenses (2,600) - (2,600)
Fixed asset depreciation - (137) (137)
Loan interest (7,331) - (7,331)
Finance charges for deferred consideration (339) - (339)
HSG FV gain 2,139 - 2,139
Net JV income - 85 85
Foreign exchange gain/(losses) 15,814 - 15,814
------------------------------------------- ------------- ------------ -------------
Operating expenses (93,851) 85 (93,766)
------------------------------------------- ------------- ------------ -------------
Operating (loss)/profit for the period
before taxation 44,539 - 44,539
Taxation (5,604) - (5,604)
------------------------------------------- ------------- ------------ -------------
(Loss)/profit for the period after tax 38,935 - 38,935
------------------------------------------- ------------- ------------ -------------
Consolidated Statement of Financial Position
As reported As reported
in 31 March in 31 March
2021 Annual 2022 Annual
Report Report
1 April 2020 1 April 2020
to to
31 March Presentation 31 March
2021 change 2021
$'000 $'000 $'000
----------------------------------------- ------------- ------------ -------------
Assets
Catalogues of Songs 1,878,924 - 1,878,924
Other assets 3,740 - 3,740
Goodwill 272 - 272
Non-current receivables - 3,298 3,298
----------------------------------------- ------------- ------------ -------------
Non-current assets 1,882,936 3,298 1,886,234
Trade and other receivables 107,628 (3,298) 104,330
Cash and cash equivalents 112,634 - 112,634
----------------------------------------- ------------- ------------ -------------
Current assets 220,262 (3,298) 216,964
Total assets 2,103,198 - 2,103,198
----------------------------------------- ------------- ------------ -------------
Liabilities
Loans and borrowings 565,860 - 565,860
Non-current deferred investment payables - 1,588 1,588
----------------------------------------- ------------- ------------ -------------
Non-current liabilities 565,860 1,588 567,448
Other payables and accrued expenses 74,493 (1,588) 72,905
----------------------------------------- ------------- ------------ -------------
Current liabilities 74,493 (1,588) 72,905
Total liabilities 640,353 - 640,353
----------------------------------------- ------------- ------------ -------------
Net assets 1,462,845 - 1,462,845
----------------------------------------- ------------- ------------ -------------
Equity
Share capital 1,466,851 - 1,466,851
Other reserves 234 - 234
Foreign currency translation reserve (419) - (419)
Retained earnings (3,821) - (3,821)
----------------------------------------- ------------- ------------ -------------
Total equity attributable to the owners
of the Company 1,462,845 - 1,462,845
----------------------------------------- ------------- ------------ -------------
23. Subsequent events
On 12 May 2022 the Company declared a dividend of 1.3125p per
Ordinary Share in respect of the quarter ended 31 March 2022 which
was paid on 15 June 2022.
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
RNS may use your IP address to confirm compliance with the terms
and conditions, to analyse how you engage with the information
contained in this communication, and to share such analysis on an
anonymised basis with others as part of our commercial services.
For further information about how RNS and the London Stock Exchange
use the personal data you provide us, please see our Privacy
Policy.
END
FR FFFFFDRIVLIF
(END) Dow Jones Newswires
July 14, 2022 02:00 ET (06:00 GMT)
Hipgnosis Songs (LSE:SONG)
Historical Stock Chart
From Jun 2024 to Jul 2024
Hipgnosis Songs (LSE:SONG)
Historical Stock Chart
From Jul 2023 to Jul 2024