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

Thanks. Before we get into the formal presentation, I want to remind everyone that statements on this call and webcast could contain predictions, estimates, or other information that may be viewed as forward-looking. Although these forward-looking statements reflect the company's present judgment about what lies ahead, they carry risks and uncertainties that might make actual results differ materially. Please don't rely unduly on these forward-looking statements, which represent the company's views only as of today's presentation date. Also note that the company is not committing to revise or publicly release the results of any revision to these forward-looking statements should new information or future events arise. During today's discussion, management will try to lay out some important factors tied to the business that could influence predictions. You should also look at the company's Form 10-K, filed September 10, 2026, for a fuller discussion of these factors. Thank you. Your host today, Jeff Walker, Chief Executive Officer, and Amanda Gnecco, Chief Financial Officer, will go over the results for the first quarter of fiscal 2027, ended September 30, 2026. Bruce Ogilvie, Executive Chairman, is on the line as well and will take part in the Q&A session.

Jeff, over to you now. Thanks, Paul, and hello everyone on this afternoon's call. I'm glad to walk through how Alliance is progressing and what we're setting up for the coming years. Fiscal 2027 opened with top-line growth of 10%, bringing revenue to $278.8 million. Gross profit rose 13%, hitting $42.1 million, while gross margin climbed to 15.1%. GAAP net income came in 56% higher at $7.6 million, and diluted earnings per share were up 50%, landing at $0.15. Reduced financing costs, along with favorable swings in the fair value of warrant liabilities, also helped lift earnings. Amanda will walk through those factors and how our operations performed shortly. The top-line increase matters since it showed up across multiple areas of our operations: movies, physical music, collectibles, and distribution and fulfillment services. We're capitalizing on that demand as we broaden the products and services Alliance can offer. Ties with studios, labels, brands, and retailers provide a base for creating exclusive products, expanding collectibles, and delivering authentication technology to additional customers. In our view, these possibilities can position Alliance as a bigger and more valuable partner for the companies and fans we serve. Streaming has altered the way people consume entertainment, yet fans still want to own something that links them to the music, stories, and characters they love. We're noticing that with special editions, vinyl records, and collectibles. Nearly everyone obsesses over something. For such customers, having the right tangible item is integral to the experience. Alliance possesses studio and label partnerships, retail access, and fulfillment infrastructure to launch those items commercially. We're able to assist a partner in creating a product, placing it before collectors, and getting it delivered right to their homes. That's why the chance to expand what we do with our existing platform has us enthusiastic. Let me explain how this is appearing throughout the business, beginning with home entertainment. Physical movie revenue rose 20% in Q1, reaching $101.1 million. New releases, wider title availability, and broader retail distribution from our ties with Paramount and Amazon MGM Studios all added to that result. Increasingly, we're also involved in creating the products that collectors are looking for. Consider Project Hail Mary: to develop the artwork for the Amazon exclusive collector's steelbook, our creative team collaborated closely with the filmmakers — a concrete illustration of the value we can provide outside traditional distribution. We're able to help shape the creative product, link it to retailers, and manage fulfillment. That wider involvement strengthens our ties with the studios and opens up more ways for us to generate value; in physical music, vinyl revenue rose 14% to $86.7 million, and CD revenue climbed 22% to $41.2 million. Higher unit sales and average selling prices lifted both categories. Vinyl demand was driven by new releases, reissues, and special editions, and CD growth came from high-profile releases along with interest in K-pop and international music. Vinyl draws plenty of attention, but the CD numbers serve as one more sign of how broad the opportunity is. Physical music remains a meaningful piece of the experience when artists offer fans something that feels distinctive. On the retail front, we enable our partners to supply more of these products without having to keep every item in their own warehouses. They can present a broader assortment online, while we take care of the inventory and ship directly to the consumer. Revenue from distribution and fulfillment fees climbed 18%, reaching $5.7 million for the quarter, driven by increased demand for those services. Collectibles stood out as another bright spot this quarter. That category's revenue jumped 87%, hitting $11.9 million, up from $6.4 million during the same period last year. Collectibles made up 4.3% of quarterly revenue, compared with 2.5% in the prior-year period. The growth came from a wider range of licensed offerings, expanded sourcing and vendor relationships, and our Handmade by Robots brand. Through Handmade by Robots, we collaborate directly with licensors on developing products and launch them via our established retail partnerships. We're involved in design and licensing as well as distribution, which lets us potentially capture greater value from every product. Additionally, we provide encapsulated Handmade by Robots figures via Alliance Authentic, which kicked off in January featuring preserved vinyl. We're preparing to apply that identical strategy to high-end movie steelbooks, broadening the selection into additional entertainment segments we currently support; through Alliance Authentic, our aim is giving collectors a distinctive product that's authenticated. We obtain the goods straight from labels, studios, and brands, and fans purchase them already preserved, sealed, individually numbered, and NFC authenticated. Preservation and authentication are built into the product from the outset, giving the collector confidence in what they own and creating opportunities for additional services and engagement after the initial sale. Endstate Authentic powers the NFC authentication technology behind Alliance Authentic. Through commercial alliances with other firms, we're taking that technology past our own product line. That opens an additional growth avenue—delivering authentication goods and services to brands and collectors who might not be reachable via distribution on its own. This week, earlier on, we announced a strategic investment in ArtPix, a business that brings original, one-of-a-kind fine art into the trading card format. These are not reproductions. Each card is an original piece of artwork, and collectors can use Endstate's technology to confirm its authenticity. ArtPix already has been using our technology and recently renewed its relationship with Endstate for another 2 years. What appeals to me about this opportunity is that it demonstrates how Endstate technology can serve different collectible categories. These deals widen our addressable market and open fresh avenues for us to take part in collectibles' growth. We're additionally putting money into AI deployments right now, aimed at boosting revenue and refining how we run things. That effort covers automating finance-related workflows, speeding up software creation, and freeing up more team capacity for serving customers and growing the business. After these programs are established and scaled, we anticipate they will contribute to revenue growth and generate operating expense savings in fiscal 2028; we'll measure the gains against the costs of implementation and continued operation. Our goal is stronger productivity, so that over time the business can grow without operational costs climbing proportionally. Alongside what we're continuing to put into warehouse automation, this is hugely important for our effort to convert a larger share of Alliance's growth into operating income and cash flow. On that note, I'll pass things over to Amanda, who will walk through the first quarter's financial results.

Thanks, Jeff. Now on to our financial results, where I'll walk through the main drivers behind the first quarter, covering revenue growth, gross margins, total operating expenses, and earnings, before moving to cash flow and the balance sheet. Except where stated otherwise, every comparison is against the first quarter of fiscal year 2026, which is the prior year period. Net revenue rose 10% to $278.8 million, up from $254 million. As Jeff mentioned, movies, physical music, and collectibles fueled that top-line growth. Partly offsetting it was a decline in gaming revenue, which reflected reduced availability of Microsoft products, no arcade products in the quarter, and the absence of a game console, plus a tough comparison against the prior year period that had benefited from the Nintendo Switch launch. Gross profit came in at $42.1 million, up 13% from $37.2 million. Gross margin went to 15.1% from 14.6%, which is a 50 basis point gain. That improvement came from stronger product margins, partly offset by higher royalty costs tied to certain studio distribution relationships and by greater freight expenses, including fuel surcharges. Total operating expenses were $31.5 million, up 18% from $26.6 million. Measured as a percentage of revenue, operating expenses rose 80 basis points to 11.3%. Distribution and fulfillment expenses grew to $12 million from $9.9 million. That increase was mainly driven by greater warehouse labor needs tied to added fulfillment capacity, special projects, and shifts in the product mix. Importantly, hourly fulfillment payroll costs were up only 2%, so most of the expense increase came from higher labor utilization rather than wage inflation. We continue to concentrate on matching labor capacity to volume and on making fulfillment more efficient as the business expands. Selling, general, and administrative expenses rose to $17.9 million from $15.1 million, largely reflecting higher employee-related costs, consulting and professional service expenses, and costs supporting our ongoing operations and growth initiatives. Operating income was $10.6 million, compared with $10.5 million. Although gross profit grew, higher operating expenses absorbed much of that improvement. Better operating leverage remains a key priority, and we are focused on managing expenses, streamlining workflows, and leveraging technology to support more efficient operations. GAAP net income rose 56% to $7.6 million from $4.9 million, and diluted earnings per share rose 50% to $0.15 per share. The year-over-year gain came primarily from lower financing costs and favorable non-cash warrant valuation adjustments. First, interest expense fell 49% to $1.2 million, and our average effective interest rate dropped to 5.3% from 8.4% after the October 2025 refinancing with Bank of America. That lower rate more than offset higher average revolver borrowings during the quarter. Second, we booked a non-cash gain of $0.9 million from changes in the fair value of warrant liabilities, versus a non-cash loss of $1.5 million a year ago; that was a favorable year-over-year swing of $2.3 million before income taxes. Because this is a non-cash valuation adjustment, the change does not reflect the underlying performance of our operations. Income tax expense rose to $2.7 million, up from $1.9 million, even as the effective tax rate fell to 26% versus 28% in the same quarter last year. Now moving to adjusted results: adjusted EBITDA grew 1% to $12.3 million, adjusted net income came in basically flat at $7.2 million, and adjusted diluted earnings per share held steady at $0.14 per share. Descriptions of the adjustments, along with reconciliations, appear in our earnings release. Shifting to cash flow, operating activities produced $4.3 million for us, up from $2.7 million a year earlier, which is a 58% increase. As we laid out on our previous earnings call, generating better cash and running working capital more efficiently stays a central priority for fiscal year 2027. The improvement this quarter marks positive progress, especially given that we keep investing in inventory to support the business. Inventory accounted for a $25.4 million use of cash during the quarter, and trade receivables used $8.9 million, which reflects the timing of sales and customer collections; a $27.8 million rise in our accounts payable partly offset those investments. We also paid down $3.4 million of outstanding borrowings under our revolving credit facility in the quarter. Although cash flow got better, the business still needs substantial working capital investment, inventory in particular; we stay focused on raising inventory productivity, speeding up collections, and managing working capital more efficiently as revenue grows. Those efforts are central to our goal of turning a larger portion of earnings into operating cash flow. Our capital allocation approach stays disciplined and consistent. We are putting priority on investments that back profitable growth, strengthen our capabilities, and improve long-term returns. We will stay disciplined when evaluating acquisition opportunities, putting strategic alignment and attractive financial returns first; to close, we delivered solid growth in revenue and gross profit, benefited from lower financing costs, and improved operating cash flow. As we move through fiscal year 2027, we are focused on building on that progress, strengthening operating leverage, and converting more of our growth into sustainable earnings and cash generation. The operational improvements and technology initiatives we just discussed are key components of that strategy. With that, I will hand the call back to Jeff.

Thank you, Amanda. What gets me excited about Alliance right now is that we're growing a strong core business at the same time as we open up more avenues for growth. Through our distribution relationships, we sit close to the products and brands that fans are after. Our efforts in collectibles and product development widen the part we're able to play. With Endstate's authentication technology, we have chances to serve other companies along with their customers. As we look at the remainder of fiscal 2027, our focus is on putting those opportunities to work, building on demand across our core categories, broadening what we offer in collectibles, and growing the customer base for authentication. Simultaneously, we're putting money into AI and automation that we expect will help us drive revenue growth and save on operating costs in fiscal 2028. We now have more ways to grow than before, and our job is turning that potential into results for shareholders. That means executing with discipline, managing working capital, and converting growth into stronger operating earnings and cash generation. I'm excited about the business we're building and I look forward to sharing our progress. I want to thank our employees for their hard work and content and licensing partners, collectors, and shareholders for their continued support. Operator, we're ready to open the line for questions.

Hi, Richard Magnuson here, filling in for Michael Kopinski. Thanks for joining our call. You brought up fuel charges and how they affect freight costs. Could you share how much of that is carrying over into this quarter? Then on tariffs, what portion of the collectibles and electronics business remains exposed?

Hi, Jeff Walker here. To begin with fuel costs, sure, we’re certainly facing some higher fuel expenses at the moment because of fuel surcharges. I wouldn’t call it a very big danger to how profitable our business is, though we’d really welcome a decline in those fuel surcharges; as for the tariffs, they aren’t a major worry for us right now. We did obtain a sizable refund related to the tariffs. That money has already come back to us. Regarding our Handmade by Robots, we aren’t seeing much of an effect there; across all the other collectibles made by other companies that we purchase, we aren’t seeing a large effect on that in our business here at present.

Alright, turning to inventory — it rose about 20% from the prior quarter, reaching $152 million, which shows we're getting ready for the holiday selling season. I'd like to know how much of that rise comes from routine seasonal stocking and how much is tied to the new studio licensing and collectibles opportunities. Also, what amount of inventory reduction and cash generation should investors anticipate in the second and third fiscal quarters?

Regarding the inventory figure for September 30th, it's fairly in line with what we see each year around this point. We need to bring inventory in as we begin shipping, including some in late September but mostly during October, to our major retail customers and so on. So our inventory does rise right around that late September period. You'll keep seeing it come down and return to our usual inventory cadence once the holidays are behind us. We believe we're in a fairly solid inventory position at the moment.

Great, so I'm sorry I'm joining late and asking things you might have gone over already, but I have a few questions. I'll take them one at a time. So my first question was, you announced an anime-related effort with Jakks Pacific recently. Could you explain why you're doing that and why you see it as a good opportunity?

Yes, thanks for asking, Tom. So we're quite heavily involved in anime, particularly with our collectibles and also with some of the video content we sell. And here's a great connection with Jakks and Alliance; we're really focused on selling those products into collectible stores, which is a huge sales channel for us. We're pretty significant not only in the music stores out there, but in independent collectible stores as well. So this is a good matchup for us. We're definitely pretty heavily invested in anime products, and quite a bit of our collectible growth is in that anime category as well.

Great, and for my second question, I actually had the pleasure of moderating a panel with you, and you gave some excellent responses about how Alliance is using artificial intelligence that I believe investors might not fully appreciate. So for those investors who might not have had the chance, could you explain how you're taking advantage of AI across several levels?

Absolutely. Above all, I'm a CEO who is very pro-AI, and I believe it will be tremendous for our business in the coming years as we bring more AI capabilities online. We tend to view it in a few different ways. Above all, we've been concentrating on how we can use AI to grow our sales. Part of that involves getting more targeted not only toward our wholesale customers and what their stores want and need, but also toward our consumer brands and so on, figuring out how we can reach the right customer with the right product through AI tools. I believe we're already seeing some results from that, certainly across all of 2026 with quite substantial sales increases, and I do think a number of our AI initiatives have helped drive that. The next piece is that over the summer we started training a group of our IT programmers, our technology programmers, in AI tools, and that program has been very successful. We're now in round two, with a second group of our technology professionals taking an everyday class on AI technology to give them all the tools to really accelerate our technology development. That will translate into some very significant wins for us. Meanwhile, we're working to finish a project on the AR side involving AI, a cash application that uses AI. We have a project underway right now on our AP side, which matches vendor invoices with receipts and all of that; we've also got a redevelopment of our WebAMI, which is Alliance's B2B website, and that's a core rebuild using AI. The speed and performance of the prototype right now is exceptional, and we're adding new features to what we currently have with WebAMI. We are deliberately not rolling that out right now because it's right in the middle of Q4, but it's set to launch in mid-January, with subsequent releases through the whole first quarter; that is significantly going to help our store buyers and our customers with their purchasing online and help them with suggested titles and titles that they're missing and so forth. Another part of our AI initiative involves all of our business team, which is sales, accounting, purchasing, and so forth. Everyone is currently on Copilot and working with Copilot. Right now, we're moving into the second phase of advanced training with everybody, and really the intention is how do we make our team as AI fluent as possible? So that's the direction we're taking at the moment. When I look at it, we're perfectly positioned to genuinely lead our industry through our AI capabilities, and that will matter enormously down the road. I believe our position is a strong one. The final point I'd make is that we're putting some money into this today, and it currently sits within our operating expenses, along with support for all of this. But much like we put capital into major equipment in the warehouse and so on, we need to put money into AI training for our whole team at Alliance. AI is also a big win for the people at Alliance, since all of us will need a genuinely high level of AI fluency in the future for our professions and our jobs.

Okay, Jeff, I’ll take it that you’ve already covered Grand Theft Auto VI — how it will impact the company’s future and why that could be fantastic. We haven’t. You haven’t? Not yet. Please go ahead. That was going to be my next question. How are we supposed to think about Grand Theft Auto VI? The gaming category appears to have declined. Is a single title enough on its own to reignite that category for you?

Well, my conspiracy theory is that Microsoft is down all day today because people are downloading Grand Theft Auto VI. This game’s magnitude is pretty incredible. I expected the internet to go down next Thursday, the 19th, when you can actually play it all. It’s a significant game for us. It won’t completely reverse our gaming numbers, but it is a significant shipping. We shipped the product this week; it went out at the beginning of this week to all of our different retail partners. We’re also very optimistic about the vinyl record for Grand Theft Auto that is street dating next week. And I think overall it’s great for the entertainment side. We have a significant amount of business this quarter even without Grand Theft Auto, but it’s a big game for sure.

Okay, and I'm sorry in case you've covered this already, but it seems we had yet another quarter in which CD sales rose more quickly than vinyl. From what I hear anecdotally, there seem to be many more conversations about CDs making a comeback. I'm just curious whether, compared with last quarter, you view this as something more lasting or larger in scale. Any perspective on that would be welcome.

Well, my view is that it will keep going, just like on the vinyl side; we aren't seeing any deceleration here; what we're seeing is steady, steady growth in that area. Collectors keep collecting — they are fans, and they collect both CD and vinyl; so I believe it will keep going. At this moment I don't see any deceleration in that.

Right, and the last couple of questions from me. You've managed to call several bottoms already. So on DVDs, are we getting any nearer to the bottom?

My view is that we're at the bottom there, either in '27 or right now. Regarding our sales, I'd say we're witnessing a comeback on the DVD side, and DVD is strong for us at the moment, clearly on the Paramount and Amazon MGM side of the business; but also with those, particularly on the Paramount side, we've put out new catalog titles this year that have supported that, and on the MGM side we're doing the same work to keep releasing product that wasn't available before. I do see a trend on the DVD side at present, and I think it will partly follow along too if you're tracking the theatrical numbers and the movie theaters out there; here in '26 this is going to be the highest year ever, finally overtaking 2019 and getting back on track. So I think that's part of the growth returning on the video side. And I'm actually beginning to see some posts right now of people opening video rental stores, and those stores will need to source product from a company like Alliance, since we really are the video distributor for a store of that kind. Many of us on this call would love to see a great video rental store in their neighborhood to go visit with the family and pick out some type of DVD to watch that night. So that could definitely be making a comeback.

Okay, so this is the final one, and once more, thanks for fielding my questions. I'd like to hear your latest thinking on strategic M&A, provided you haven't already covered it. If you have, please just skip that one.

At the moment I've got a fairly strong pipeline in the works; M&A is a huge, huge priority for me personally right now. We're certainly coming across some interesting opportunities — deals we were discussing a year or two back, and now we're back in those discussions — and we definitely see solid opportunities out there. Those can range anywhere from collectibles to music and video, mainly across those three areas; we also made the investment into ArtPix recently, so we're likewise looking at strategic investments along the lines of ArtPix; so there's the angle of a full company acquisition, and then the angle of a strategic investment acquisition, particularly when it's a business we're working with through Endstate and implementing, or have already implemented, the NFC chips and how we're assisting a company such as ArtPix in growing that business. I'm incredibly excited about ArtPix. Everyone on this call ought to take a quick look at their website, ArtPix Artists. It's a wonderful business model. And I've spoken a bit about collectibles before. What I really love about ArtPix is that every single card is individually drawn by an artist, so each is a one-of-one; and for any of you who follow collectibles, a one-of-one means scarcity, the very top of the scarcity ladder. When you've got a major artist producing large art pieces and they're making one-of-one cards, and those cards carry autographs, we have our Endstate NFC chip on the card's back, and then it's encapsulated. So at that point you have authenticity for that one-of-one card. It's a terrific business model. And Gareb, the CEO there, is deeply connected in the comic book and art world, and there's simply a great deal of crossover between what he's doing and what Alliance is doing in the industries we operate in. So I'm incredibly excited about that opportunity right now.

Great. Jeff, thank you for answering every one of my questions. I appreciate that.

Thanks, Tom.