Alliance Entertainment Holding Corporation (AENT) Earnings Call Transcript & Summary

Hello. This is Craig Bralsbord with RedChip Companies. Thank you for joining today's event with Alliance Entertainment, which trades on the NASDAQ under the ticker AET. With us today, we have Bruce Ogilvie, Executive Chairman of Alliance Entertainment; Jeff Walker, the CEO; and Amanda Gnecco, the CFO. We will begin with a brief presentation in a moment and then we will answer your questions. [Operator Instructions] Before we begin, please allow me to read the safe harbor statement. This call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements pertaining to future financial and/or operating results, along with other statements about the future expectations, beliefs, goals, plans or prospects expressed by management constitute forward-looking statements. Any statements that are not historical facts should also be considered forward-looking statements. Of course, forward-looking statements involve risks and uncertainties. Alliance team please go right ahead.

Craig, thank you very much. Thank you, everybody, for joining us today, taking the time to learn about our company. Some of you may be new to us, I'll give you like a little brief background where we are. I'm trying to explain everything, and then we're going to have a Q&A session after about 22 minutes. On my screen here, hopefully, you can see is -- this is a picture of all the different kind of types of products we carry, which consists of movies, music, video games, toys and collectiveness. Music consists of LP CDs and [indiscernible] As far as movies go, it's 4K, blue ray standard definition as well as the steel books, which will talk more about that. On the gaming side, it's consoles, software, controllers, anything related to a video game and then on Toys and collectibles is all kind of collectible items like products like Funko or [indiscernible] robots, which is our exclusive product as well as turn tables, Bluetooth speakers, any record or music store item that we'd be collectible or something they want to carry in their store to offer their consumers. Well, we are as we buy from all these major suppliers, and I'm showing on my screen here, this is what we call the Temple Class 8 suppliers. Think of everybody likes to use the 80-20 rule. So you're looking at 80% of our business comes from our top 20% of our customers. And this is just the sampling of who those top suppliers are for us. That drives our revenue. It's not easy to get open with these suppliers. You have to provide good fiscal responsibility, you have to pay your bills on time. You have to add value in the marketplace, and you have to be a stocking distributor, which we are. We stockholder 325,000 SKUs in our stock. It's not things that we have made available for sale. We actually stock physically in our warehouse that we have there. As I kind of go along here, I'll play a little bit of my background. All these customers, I'm sure you've heard of all these customers. Once again, we're using the 820 rule here. 80% of our revenue becomes at least top 20% of our customers here. They drive all this revenue not easy to get open with these retailers. So you have to help these retailers you have to add value for them. You have to meet all their SLAs and also, you have to be a financially sound company to do business with them. They don't want to just be dealing with some fly by night operation there. With all these retailers, we ship directly to their stores or will shift to their distribution center or will drop ship on their behalf when we white label the product make it look like it came for these retailers, but really a shift from our facility, which is in Shepherdsville, Kentucky. To understand our revenue breakdown of our $1.1 billion in revenue here, you'll see vinyl is our largest physical category and makes up close to 32% of our revenue there. Video movies, which is DVD Blu-ray and ultra-high disk, that's another 30% of our revenue there, that $333 million there. CDs is 12% of our revenue. And if you look at the quarter, they just ended compared to the year-over-year numbers I'm showing here also on the screen here, you'll see the CDs had really played an uptick in the quarter that just ended there. Collectibles and electronics are the other categories there. You looked at year-over-year for 12 months, 12/31/25, compared to 12/31/24 $1.63 billion prepared to $1.71 billion. What they really tells you is we're a very steady state business. We're very consistent in our revenue. With sure there are some headwinds in some areas where we can gain market share in other areas. We're always in leading in the marketplace. And because we're so diversified, that really helps us go along really well. As I was talking about in the quarter that just ended there you'll see the CPs are up by a whopping 93% and pretty much almost double revenue there and CDs are just proving to be a really good value for the consumer there. Vinyl store remains very strong for us, they're up 17% there. And then our movie category consisting of movies and all our licensing opportunities, which is a big growth area we're going to talk about later. You can see that was up 6% quarter-over-quarter there. Collectibles and electronics are carrying their weight. So the overall quarter, up 21%. We like to beat the fact that we're growing, and that's a good thing. And you can see that our revenue quarter-over-quarter there up being 21%, $258 million versus $213 million. To help understand what kind of revenue we have in our profitability. We have the fiscal years fiscal year '24, by the way, our fiscal year ends on June 30, so fiscal year '24 in '24 billion, $1.1 billion, '25 $1.063 billion. And then our trailing 12 months for train just ended 12/31/26 $1.1 billion. So we are up, we're trending up, which is good. And the other thing that's really trending up is our earnings per share, $0.09 fiscal year '25, $0.30 in fiscal year '25 in the trailing 12 months, we're running $0.45 per share. Of course, you can see on the right side, our adjusted EBITDA also grew at that time came time period, $24.3 million all up to $47.9 million, coming in at 4.3% adjusted EBITDA there. Our debt is pretty consistent, our inventory. It may look a little bit higher than what it did the previous quarter there. Main reason why is that we took on some licensing opportunities with Paramount and MGM Studios. We're expanding our Alliance authentic line and our [indiscernible] which I'll talk more about later there. Last -- yesterday, our stock closed at 601. You can see in the bottom right there, the market. We are on the ticker. Our market cap is about $306 million, trading range of $4.34 to $8.80. That PE trailing 12 months, 13.36 that is an opportunity here now for those of you who don't have our stock. Last year, we were trading pretty much right around 21 -- between 20 and 22 PE. And right now, we're on sale at a PD of 13.36% in and you can see what our average volume is trending in their shares outstanding of 51 million, 3.3 million shares in the flow. We have warrants that are set to expire in February 28 strike price of $11.50, $9.21 million, and the employees of the company, all own stock in the company. We think that's really important there. Everybody were employee owned, and everybody is vested and everybody is working hard to grow the company in the direction for all involved. These financial highlights just for the quarter here. So I talked about that $258 million of $213 million, so plus 21%. You can see our earnings per share went up from $0.04 to $0.05 quarter-over-quarter and you look all way down to the bottom right there, and you can see our EBITDA is up 4% over the quarter there. So that's all a good thing here. Just looking for 9 months' worth of revenue by itself there, you can see that our -- for the 9 months, our adjusted EBITDA up 47% there. And all the arrows are pointing in the right direction, and we're really happy to show that, that kind of activity we're having there. The secret to our success is our distribution center, which is in Shepherdsville, Kentucky, that's roughly 873,000 square feet made up of mezzanines and sorters, handheld picking and this big huge red box, you can see here on my screen here, which is called AutoStore. AutoStore kind of thing is a warehouse within a warehouse inside this area of 22,000 square feet consists of 22 -- I'm sorry, 52,000 shelf locations. The shelf locations looks like a tote and these to stack on top of each other. And instead of the picker, the process or walking to the shelf to pick the product -- that person will stand by their station and the top and shelf is brought to them. That really speeds up to productivity. So it eliminates all the travel time, in trying to find an empty shelf location or just find the stock. So it's a real win. We went from 41 processors that we're picking vinyl and we're now down to 7 processors. And we got the same benefit of using -- for receiving instead of having about 12 people receiving the product and go trying to find an empty shelf location. The shelf will come the shelf, which is the toll will come to that person and always get to distill the product and they're done. Big time saver and when you have 340,000 SKUs and we ship over 57 million units annually, we have the ability to ship 261,000 units 1 day and shipped to 7 countries. We're really, really proud of this center. The particular auto store, at least that we have a schedule to run out in January of '27. That was a 4-year purchase that we did on that equipment. It's a $1 by at the end of it. So we will own that. We'll have no more expense related to auto store, which is about $250,000 a month there. We're going to figure out how we're going to use that money for the next type of automation equipment we can invest in to get more efficiencies and drive down our cost to pick pack and shipping out of that facility. We are an omnichannel distribution company with omni, we basically ship to brick-and-mortar locations, and we also do e-commerce fulfillment for those retailers there. We shipped -- we support over 175 online retailers of their websites. And when I say support, we ship them all the metadata, all the hard work, all the images, all the track listing details basically, so they can populate their websites and make it available for the consumers to shop or makes a very sticky relationship with all that data 5. We shipped over 35,000 store fronts and over 40% of our business -- I'm sorry, over 35% of our business, close to 40% of our business is what we are doing drop shipping on behalf of these retailers. We get white label, it looks like that retailer is the seller of record where they are the seller of record. But it looks like they're also the shipper of record and that's actually as it's our operation in Kentucky that could do all those things and make everything look so seamless for them. makes their job very, very simple. They don't have to have the tribal knowledge to know what to buy, what not to buy. These companies have a lot of turnover in personnel. We were really steady state there with our team, and all that tribal knowledge is still with us there. Taking advantage of our years worth of history and knowledge in our data warehouse and using AI, we can model and forecast exactly what these retailers need, what should be brought in which should not be brought in basically by every trade by every ZIP code in the country. You saw that our music category was up. Final was really up. Well, in addition to all those -- I showed you that all those top retailers we sell to, we pretty much sell to every independent retailer in the United States. They rely on us for their vinyl. In working with all these independent retailers who we sell to, we're a proud support of record store date. That's a big, huge event for the record industry. It's almost 19 years in accounting every year, it's always better than the year before. Just to give you an example, the last year, we shipped about 660,000 exclusive titles, record to our day titles to those stores. this year that just ended, which was the April right around tax day in April. We shipped over 700,000 net stores there. Basically, what it is, it's the independents a coalition to get together and decide what exclusive content can we bring in that gets the consumer excited about that they want to get them to come into their record store and make a purchase. It doesn't go to any of the large change, no Walmart target, no Best Buy, no Barnes & Noble, no Amazon. Only independent retail, and we're a large part of that. And we're very happy that the industry trust us so much. The backbone of helping those independent music stores is one of our divisions this called AMP. AMP is our music division. This is a division where we're the exclusive seller of over 101 music labels of their content. I like to call these labels. They're basically there like the fourth major right now and consolidating them all together. And at the peak, the majors probably had about 90% to 92% market share but their market share has been shrinking a little bit because the independents have been gaining more market share, which really helps our business because we gain more market share when they gain the market share. And the reason that's all happening, and it's very easy for a label, our artist basically kind of set up their own studio, create their own music, do their own marketing, get on all the playlists, do their marketing, get on TikTok. They can do all that themselves and manage all their digital side of the business. And all they really need is somebody that can handle the physical side, and that's where we come in. So a lot of these are labels instead of going to a major record company they want to do it themselves and they will and they do a very good job, and then they come to us to handle their physical distribution. So as we get pick up more labels and we keep adding to them, it just keeps growing every year, it's over $100 million or $1.1 billion is coming from this division there of all these exclusive labels, and it's a real growth area for us. This is something we started back in 2013 or '14. And I think the first year was less than $10 million, and we've grown it to be over $100 million today, and it continues to grow. To complement or to not really compete, but in addition, we have all these exclusive distribution opportunities on the music label side, we did the same thing on the video side with the movie studios. We started this back in 2018. We took over a division for selling pictures. And we picked up about 20 different movie studios that were really the exclusive distributor and we were the only person selling that product. Since then, we've grown up to over 48 studios, some of our major studios, we are the licensor, where we've taken over the home entertainment departments of some of the major studios. There's a lot of change going on in the marketplace with the movie studios, but about 2022, Disney decided they wanted to outsource their home entertainment department. They did in ours. We did an RP, we won that RFP. We've got their bottom 1,800 titles from Disney Studios, which included Fox. Paramount did the same thing in '24, I believe, that they put out their RFP and we won that RFP. So starting in January 1, 2025. We became the home entertainment department for Paramount. We brought in some of their inventory, licensed their content and now exclusive seller of that. And that's just been a really great shot in the arm for our movie studio division. We did such a good job with Paramount. We were able to convince on Amazon. It's the James Bond franchise, plus everything is on Prime video. We now have that started January 1 of '26. We look at this growth and there's opportunities. There's still going to be more opportunities out there. however, all just kind of waiting to see what the final outcome is with Skydance to completing the purchase of Warner Bros. discovery. Sometimes that would be decided by the end of this year, and there'll probably be an RFP to outsource some of those home entertainment departments, which will be involved in those. Another channel profitability and growth is our handmade by Robots division. This company was originally owned by another company, and we purchased them a year ago, December we picked up their form factor. We say form factors, these little figure rings that you see on the left-hand side of the screen there. If this is -- there are molds, and we picked up the IP and picked up that name. And Jeff Walker, my business partner, he had an idea and the vision and belief that if we could by this company and take advantage of all our relationships we currently have with movie studios, the video game companies, the record labels, the collectible companies and go license the rights to put out different versions of our form factor. And then sell that because we are so entrenched in all of mass retail of all the relationships we have with all those big large retailers that I shared, we think earlier there -- and if we could just grow this to be a $100 million division, it might take us 3 years to get to that $100 million, that would add about $40 million worth of gross point our business. So that would be fantastic to add to our bottom line. And that's just kind of all of our plan there, how do we diversify into more higher-margin products that we can distribute. And this is one of our paths to get there. And so far, it's doing me really well. Jeff probably talked about later used Comicon San Diego, that's a big licensing show, big stuff there. There's a lot of stuff going on there. We have a great presence there at that particular event. Another vision and diversification and Jeff will talk more about this later as is called the Alliance Authentic. Alliance Authentic is a way of taking vinyl, a record in encapsulating that vinyl. There's so much going on in the collectible space right now with trading cards, field cards, baseball cards, as well as it could be movies, gains, anything where it's getting encapsulated in plastic and then a grading authority is putting a grade on and determining what the great quality is of that there. Well, we're right emit all in all those vinyls coming in. And when there's -- there was a tremendous demand for vinyl and people have been collecting vinyl for years. This is a way of kind of making it and preserving it for history and prosperity. In fact in the old days, when I was a kid and Jeff the same way you used to be able to get uncirculated coins that were in a plastic who've never been circulated and they received. Well, same idea, we take a record that gets released by an artist. We encapsulated in plastic. We number it to create scarcity. So far, we've done no more than 100 maining on title and now as little as 1 and then we could put an entity chip into that, and that's to create authenticity to make sure it's not counterfeits legitimate. And then also, it's a way of linking the product to our website, our marketplace, a way of tracking that what's in your collection who owns it and when it was purchased and what number you have and what any other material that belongs on any other bonus material that can rate to it digitally will also be part of that website. getting a tremendous amount of interest on this, especially from the label side and the artist. This is the way that we can come up with partnership and ideas there where the artist can kind of get residual income on future sales. And when you think of the concert tickets, they don't really like those because they get sold by scalpers and make all the money, but there's a way there's [indiscernible] opportunities here to work with the hardest in the labels and we're pretty excited about this because it's another growth area opportunity for us. While we were learning about Alliance Authentic and trying to get that established, we came across a company called State authentic. In end state authentic is the company that came up with all the technology using the NFC chip. NFC chip is a way of -- you would put that into product and you can use that and you could tap on that chip, when you tap on that chip, that can kind of take you to a website or a portal wherever is needed. Kind of think of it as a QR code when you cap with a web address but with that, it's a unique ID. It's only used it's one and done. Once you tap it once, and it's a new key. So there's just a lot of great opportunities in dealing with the world of counterfeiting and authenticity. And we thought that state had a really fantastic product here in the technology, the founders of that company we just purchased that -- we like this so much. We purchased it last year. That transaction closed last year in 12/31. And there are some fantastic conversations with a lot of opportunities out there where this technology can be embedded in all kinds of products. It's not just going to be for Alliance Authentic it's customers they have already that they're using this. It's a very fast way to get consumers registered. It's one way you could totally block out counterfeiting and stealing of goods and all that because you've authenticated. The consumer just takes their self on out, taps the chip boom, this is legit, boom. We don't know what this is. That's how quickly it is. You can put them in a Louis Vuitton shoes, apparel, anything you imagine. So we think this is a real growth area. Plus there's a new initiative in Europe and it's called the EU Echo design of substantial products requiring digital products, Passport, DPP is a short in. And basically, these tags are getting so along in the garments because you've got to identify everything that's in that garment went into it, where it was done and what a perfect solution for that, for all that information and keeping that information, keeping it unique to that actual garment, is using an NFC chip. So our team has a lot of great conversations. There are going to be some more announcements for possible trading companies using this technology. So we're pretty excited about that. We have a retail division. This retail division has all these different brands that we sound these websites, these catalogs in every marketplace that's out there, we're trying to sell. We just want to make sure our products are available anywhere and everywhere in the world. It helps us understand what the pulse of the consumers, what they're after there. And the other thing it does, it really gives us an advantage if we ever have any distressed inventory that we're trying to turn into cash. When you have something that you can't get ready that you can't sell, you got to sell it to some guy for $0.10 on the dollar, which we're not too excited about. This way, we can retail it for a lower price and make sure we get -- at least get our cost out of it there, for that's a win. Most of our product is returnable, but there are some items in the end that we have to sell it on our own. So in kind of closing here before I open the Q&A, we got to what we got Jeff and I from 2001 to 2020 -- beyond 2020, Jeff and I completed 16 successful acquisitions. We acquired a bunch of companies so we could diversify maybe eliminate a competitor, go in areas we've never been in before or take on more customers that we didn't have before. All those things took us from $18 million of revenue to $1.4 billion of revenue in the peak of 2020 during COVID there. We plan to continue expanding our collectibles and media portfolio. We just keep adding more things that we can distribute and diversify and do all that. I talked about hammer robots, that's a real growth area for us, just continue to strengthen our popculture and collectibles offering, future targets. There are more collectible brands licensing opportunities on the video side. There's going to be more studios that want to come our way. There's always lots of discussion and dialogue going in that area. So we're really excited about that. And we also know we have to grow by doing acquisitions. We've probably got 3 or 4 discussions going on, companies we'd want to wire. We got to where we got by doing lots of acquisitions, and we did all that without bringing in private equity were no raise. We did it all by bank debt, and that always preserves shareholder value by doing it that way, by borrowing money versus issuing more shares. But we're -- but now having been a public company and the ability to raise money and then or issuing stock where it makes sense. All these things that we can do, and we have the opportunity to do that. So exciting times for Alliance. So I'm going to pause at this moment, and I'm going to open up for Q&A.

Bruce, AMP distribution posted 39% year-on-year revenue growth for the first 9 months of fiscal 2026. Can you break that down? How much is new label artist pickups how much is category tailwind from the vinyl and CD demand curves? And how much is share consolidation from smaller indie distributors exiting which of those 3 is most durable heading into fiscal 2027.

It sounds like a competitor asking the question.

I'll take it, Bruce. So our AMP division has consistently been producing good results with our existing labels that we represent there, we did pick up a big -- our biggest label is Virgin Music Group, which went live at the beginning of September of last year. And that's a pretty significant label, they were distributed through Universal before, and they moved that distribution from Universal to Alliance. And one of the questions is, why do they do that? And the reason that it's working for the independent labels to be at Alliance versus as like a universal is we sell to all of the major retailers as well, obviously, Amazon and other major retailers. And then we also sell to all the independent stores. And a lot of those stores order from in at least a weekly in time every day or every other day schedule so they can quickly replenish if they sold a title and bring that title back in. And then the next part is we are the guys that when all that product from a virgin music group is in our warehouse, all of their inventory, that inventory is feeding up into all the e-commerce sites that Bruce mentioned that we do fulfillment for. So it maximizes all the buy buttons on websites, including Amazon and Barnes & Noble and award and so forth. So when these labels come over, they're seeing an increase in sales by coming over to Alliance. So we also did pick up a significant amount of business from Red Eye as well because they were seeing the same thing in their labels. And we're in a lot of continuing conversations about other labels coming over. We've got some pretty big releases. We're very excited about the maybe should album was coming out July 31. Now it's a big title for us. As we know, he was a breakout artist last album, and that's coming through our AMP division. So we're definitely seeing some big growth. We don't see it slowing down on there. And then last part is with growth in CV and vinyl, both categories growing, that's all supporting the revenue growth and end. You've now stacked Paramount 2025 and Amazon MGM 2026.

Without commenting on any specific counterparties, what's your read on studio appetite for outsourcing physical to a specialist. If you were going to ramp a new agreement in 2027, how soon would that need to be nailed down?

Yes. We are in active conversations with all the studios. But every studio has their own agendas and their own strategies. And their own operations and their own agreements in place for different things. So it's really a studio-by-studio conversation. We do think in the long term, that alliance is the appropriate solution for studios. It's just a matter of timing and things like that happening. And Bruce did mention as Paramount Warner. We have no idea what that's going to entail. But we do know if that merger goes through. That creates different changes within the video industry overall. And then it leads to different people having to review their status quo of what they're doing and reevaluate all their different opportunities. So we are in a good position there, but we can't really comment on new decisions from those videos. We do think that we are a great solution. And I do know that both Paramount and MGM are happy with what we're doing. One of the things that we are doing that is important then demonstrates to the studios we don't have is we've been able to expand the catalog selection of both Paramount and MGM. So products that were not available movies that weren't out on a particular DBD format or something like that. We've been able to get them on to a 4K format and doing strategic steel book products and things like that. So because we're focused on physical product, we're much more focused on what we can bring out into that physical market where on studio side, when they're managing it, they're really just focused on their top line tempo releases and how they sell those. And we're really looking to continue to expand the sales and their ongoing capital movies. So there's a little bit of a difference there. We are actually -- there's quite a bit of catalog products for they're going to be extremely happy with the royalty that they're getting from Alliance with us doing an extra $10 million we show MGM products because we brought out some catalog products that they weren't selling in the past.

The Comicon pop-up opening today with preserved vinyls from major artists is a very interesting start for Alliance Authentic. It's your first in-person activation. What are you hoping it proves up and how does putting the platform directly in front of collectors turn into recurring higher margin revenue?

I'm here I'm actually here in the lobby of a common bond right now while I'm on this call. The Alliance Authentic vinyl is a pretty high ticket here right now. This is a world of collectors here, obviously, and they collect all sorts of different products. And when you put a vinyl in the encapsulation add the NFC chip and their number, which is a big bank for collectors. They're really hot on this product. And I think the other component is people love vinyl or the art of the album, the album cover. And when you put this album in a really nice drilling encapsulation and we've been displayed there the colors and everything, this pop on it, it truly becomes a piece of art that you could have on your book sell for your desk or somewhere in your house. Think about your favorite album and having it on display there being separate from your whole vinyl collection and say, hey, I want to have my favorite album right here that I can display and show that as Bruce said, there might only be 100 of those encapsulated and you have one of the -- there's a lot of aspects clearly, especially in the collector space. The limited aspect of it, making them numbered is a huge component and the last part on this with Alliance Authentic, everybody on the call to take a look at allianceauthentic.com, and you'll see what we're talking about there. There's also a peer-to-peer marketplace. So we're developing the aspect of everybody that owns it vinyl collectible until or a handmade or any other encapsulated one. They're one of our collectors and Alliance or Beni you can sell that item on the marketplace by tapping the chip and listing it for sale. So we're building a peer-to-peer marketplace with Alliance Authentic as well. That whole technology with the chance in the marketplace is all tare the end state tools that we're also working to sell to other companies as a back-end component for state.