Alliance Entertainment, a leader in direct-to-consumer and e-commerce for the entertainment industry, has reported a modest increase in net revenue and a significant improvement in net income for the first quarter of Fiscal 2025. In a conference call on November 14, 2024, the company announced a net revenue of $229 million, up from $226.8 million in the same quarter the previous year.
Despite a slight dip in gross margin from 11.6% to 11.2%, Alliance Entertainment achieved a turnaround in net income, posting a profit of $400,000 compared to a $3.5 million loss in the prior year. The company also marked its sixth consecutive quarter of positive adjusted EBITDA at $3.4 million.
Key Takeaways
- Net revenue increased to $229 million, up from $226.8 million year-over-year.
- Gross margin slightly decreased to 11.2% from 11.6%.
- Net income improved to a $400,000 profit from a $3.5 million loss.
- Adjusted EBITDA remained positive for the sixth consecutive quarter at $3.4 million.
- Strategic investments in automation reduced distribution costs by 23% year-over-year.
- Inventory levels and debt were reduced to $138 million and $85 million, respectively.
- The company plans to expand licensing opportunities and continue investing in operational efficiencies.
Company Outlook
- Alliance Entertainment aims to expand market share and improve margins through new licensing opportunities in video and collectibles.
- Further automation investments and strategic M&A are planned to diversify offerings and strengthen retail partnerships.
- The company is positioned for growth as family-owned competitors exit the market, and major studios look to license physical media rights.
Bearish Highlights
- The company experienced a slight decline in gross margin compared to the previous year.
- Overstock (NYSE:BYON) inventory contributed to the reduced margins, but has since been cleared.
Bullish Highlights
- Exclusive distribution agreements generated over $250 million in revenue in fiscal 2024.
- Operational efficiencies, such as the AutoStore system, have significantly cut distribution costs.
- The Sure Sort X system is expected to yield annual savings of $400,000.
Misses
- There were no significant financial misses reported in the earnings call.
Q&A Highlights
- CEO Jeff Walker emphasized the focus on creating incremental value for shareholders.
- The company is actively discussing acquisitions with a dual strategy of consolidating wholesalers and expanding into new categories of licensed entertainment products.
- No further questions were asked during the call.
In summary, Alliance Entertainment (ticker not provided) has demonstrated resilience and strategic foresight in its operations, navigating a competitive market to post a profit in Q1. With continued efforts in automation and strategic partnerships, the company is poised for potential growth in the entertainment distribution sector.
InvestingPro Insights
Alliance Entertainment's recent financial performance aligns with several key insights from InvestingPro. The company's turnaround to profitability in Q1 Fiscal 2025 is reflected in the InvestingPro Tip that "Net income is expected to grow this year." This positive trend is further supported by the fact that Alliance Entertainment has been "Profitable over the last twelve months," according to another InvestingPro Tip.
The company's strategic investments in automation and operational efficiencies are paying off, as evidenced by the 23% reduction in distribution costs year-over-year. This focus on improving margins is crucial, especially considering the InvestingPro Data showing a modest gross profit margin of 11.71% for the last twelve months as of Q4 2024. This figure closely matches the 11.2% gross margin reported in the latest quarter, indicating consistent performance in this area.
Alliance Entertainment's market position and growth potential are further highlighted by its price-to-earnings (P/E) ratio of 28.78, as reported by InvestingPro Data. This valuation suggests that investors are pricing in expectations for future growth, which aligns with the company's plans to expand licensing opportunities and pursue strategic M&A activities.
It's worth noting that Alliance Entertainment has shown strong recent performance in the stock market, with InvestingPro Data revealing a remarkable 172.35% price total return over the past three months. This significant increase may reflect investor confidence in the company's turnaround strategy and future prospects.
For investors seeking a more comprehensive analysis, InvestingPro offers 13 additional tips for Alliance Entertainment, providing a deeper understanding of the company's financial health and market position.
Full transcript - Alliance Entertainment Holding Corp (AENT) Q1 2023:
Operator: Greetings and welcome to the Alliance Entertainment Fiscal 2025 First Quarter Financial Results Conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I will now pass the call over to Paul Kuntz, a member of Alliance Entertainment's IR team at RedChip. Paul?
Paul Kuntz: Thank you. Before we begin the formal presentation, I would like to remind everyone that statements made on the call and webcast may include predictions, estimates, and other information that might be considered forward-looking. While these forward-looking statements represent the company's current judgment on what the future holds, they are subject to risks and uncertainties that could cause actual results to differ materially. You are cautioned not to place any reliance on these forward-looking statements, which reflect the company's opinions only at the date of this presentation. Please keep in mind that the company is not obligating itself to revise or publicly release the results of any revision to these forward-looking statements in light of new information or future events. Throughout today's discussion, management will attempt to present some important factors related to business that may affect predictions. You should also review the company's Form 10-K for a more complete discussion of these factors and other risks, particularly under the heading of Risk Factors. During this conference call, management will discuss non-GAAP financial measures, including a discussion of adjusted EBITDA. Management believes non-GAAP disclosures enable investors to better understand Alliance Entertainment's core operating performance. Please refer to the investor presentation for reconciliation of each non-GAAP measure for the most directly comparable GAAP financial measure. A press release detailing these results crossed the wire this afternoon at 4:01 p.m. Eastern Time and is available in the Investor Relations section of Alliance Entertainment's website at aent.com. Your host today, Bruce Ogilvie, Executive Chairman, and Jeff Walker, Chief Executive Officer and Chief Financial Officer, will present the results of operations for the fiscal 2025 first quarter ended September 30, 2024. At this time, I will turn the call over to Alliance Entertainment Executive Chairman, Bruce Ogilvie.
Bruce Ogilvie: Thank you, Paul, and good afternoon, everyone. I'm pleased to welcome you to today's call. For those of you that are new to our story, we bring entertainment to you. We are a category-leading direct-to-consumer and e-commerce provider for the entertainment industry, servicing as the gateway between brands and retailers. With over 325,000 SKUs in stock, we provide the world's largest selection of music, home video movies, video games, gaming hardware, arcades, collectibles, toys, and consumer electronics. We are a critical supplier for omni retailers, helping them expand their long-tail entertainment online selection and putting them on a level playing field with Amazon (NASDAQ:AMZN). We white label all their direct-to-consumer shipments to look like they are shipped by the omni retailer, but in reality, these are actually shipped by Alliance. We are a trusted partner to retailers and wholesalers worldwide, including Walmart (NYSE:WMT), Amazon, Best Buy (NYSE:BBY), Costco (NASDAQ:COST), Target (NYSE:TGT), Kohl's (NYSE:KSS), BJ's, Meijer, plus over 2,500 independent music stores and many other retailers. We are a trusted distributor of home entertainment movies for Paramount, Sony (NYSE:SONY) Pictures, Warner Brothers, Universal Pictures, Lionsgate, and others. For video games, video game consoles, retro arcades, controllers, and physical software games, we distribute products for Microsoft (NASDAQ:MSFT), Nintendo, Arcade1Up, Activision, Electronic Arts (NASDAQ:EA), Sega, Ubisoft (EPA:UBIP), Square Enix, Take-Two (NASDAQ:TTWO), and others. And music for vinyl records and CDs, we are a trusted distributor for Universal Music (AS:UMG), Sony Music, Warner Music Group (NASDAQ:WMG), and over 90 exclusive independent music labels. For collectibles, we distribute for Funko (NASDAQ:FNKO), Mattel (NASDAQ:MAT), LEGO, Hasbro (NASDAQ:HAS), and over 50 other suppliers. Alliance is the exclusive North American distributor for Arcade1Up retro arcades. Alliance Entertainment is the global leader in the $10 billion physical media industry and we generate over 1.1 billion revenue in fiscal 2024 with our team of 654 dedicated employee owners. Our leading position in the industry provides us with unparalleled scale and leverage and has created significant structural and economic barriers of entry that we believe safeguards our market leadership position. We are a value-added retail distributor with exclusive distribution rights for approximately 150 movie studios and music labels in the film and music industry. Our exclusive distribution and licensing deals accounted for over $250 million of our revenue in fiscal 2024. Our extensive portfolio of unique content combined with our deep inventory of long-tail selections of more than 325,000 in-stock SKUs enables us to cater to bulk shipments for B2B and direct-to-consumer retailers with a vast selection of products. This helps us create sticky relationships with our retailers and growing these exclusive relationships is a key focus for us going forward. We have over 200 online retailers that rely on us to stock the world's largest selection of entertainment products for them, and we ship to more than 35,000 storefronts reaching 72 countries globally. Importantly, we have a long and proven track record of growth through strategic acquisitions over the past 20 years. We successfully acquired and integrated over a dozen companies, allowing us to rapidly enter new markets, expand our product selection, and further diversify our revenue streams. Building Alliance from the ground up through acquisitions into the market leader has created an all-star team with an unrivaled experience and further strengthens our industry-leading position has remained very aligned with our shareholders, insiders, and employees holding approximately over 94% of the outstanding shares of the company. After experiencing a surge in demand during the pandemic, many areas within the physical media market have been normalizing back to historical growth levels in the high single digits. Even the CD market has joined the revival with CDs outselling digital albums at a 3 to 1margin in the first six months of the year according to the mid-year report from the Recording Industry Association of America. Nearly a quarter of our annual revenue is generated from products from which we are the exclusive distributor. These exclusive deals are managed through our distribution solutions, AMPED, Mill Creek, and Arcade1Up divisions, and they have significantly enhanced our market position by providing unique products that deepen relationships with both suppliers and retailers. Distribution Solutions was responsible for $134 million of this revenue in fiscal 2024. Distribution Solutions partners with over 60 movie studios to manufacture, supply, market their home video content. We distribute this exclusive content to major retailers such as Amazon, Walmart, and Target, as well as thousands of other smaller retailers. By leveraging Alliance Entertainment's vast distribution network, this exclusive content creates a strong, sticky relationship with retailers, strengthening ongoing demand. On the music side, our AMPED division is a leader in the distribution of exclusive physical music content. AMPED has exclusive relationships with more than 90 music labels distributing music across major retailers like Amazon, Walmart, Target, as well as over 2,500 independent music stores throughout the U.S. Labels and artists, such as Shaboozey, Usher, K-Pop sensation, ATEEZ can bypass major music suppliers, thus lowering their cost and self-distribute themselves using AMPED for their physical distribution needs. This allows them to focus on their own digital streaming and social media marketing while maximizing profitability through our extensive brick and mortar and omni retailer relationships. K-pop in particular has become a rapidly growing segment for AMPED, contributing significantly to our sales growth. Our Mill Creek division specializes in exclusive video content licensing for major studios, including Disney (NYSE:DIS), Sony Pictures, Universal, Lionsgate, CBS, Paramount, and others. Mill Creek licenses, manufactures, and distributes DVDs for these leading studios, enhancing our ability to offer exclusive, unique, in-demand video content that is sought out by consumers and retailers alike. We also became the exclusive North American distributor for Arcade1Up during this first quarter. We began working with Arcade1Up on a non-exclusive basis in 2020. Arcade1Up licenses and manufactures home arcades, consoles with significant market share in the retro gaming space. Prior to entering our exclusive agreement, Arcade1Up accounted for $74 million of our fiscal 2024 revenue, and in Q1 of our fiscal year '25, we saw revenue from this relationship increase to $12.6 million, up over 20% from $10.2 million in Q1 of fiscal '24. We've had a long history of discipline, strategic acquisitions that have been critical to our leadership in the entertainment space. Starting with Super D, which Jeff and I grew from $18 million in sales in 2001 to $194 million by 2013. We made the transformative acquisition of Alliance Entertainment, our largest competitor at the time, significantly expanding our footprint and establishing us as the largest distributor of the music and video globally. Since then, we've built on this foundation with targeted acquisitions. In 2016, AN Connect strengthened our vendor-managed inventory capabilities, and secured exclusive CD distribution rights with Walmart and Best Buy. In 2018, we entered the gaming space through Mecca and expanded further with the acquisition of its competitor COKeM in 2020, solidifying key relationships with major retailers and suppliers, including Microsoft, Sony, and Nintendo. Our exclusive home video distribution business was enhanced with the 2018 acquisition of Distribution Solutions from Sony Pictures, which grew from working with 18 studios at the time to nearly triple that today. Most recently in 2022, we added collectibles to our portfolio through the acquisition of Think 3Fold, further diversifying our offerings. With each acquisition, we've diversified our offerings and strengthened our position as the premier distributor of physical entertainment products. We approach every deal with the same discipline strategy. To illustrate how we execute and scale these opportunities, let's take a closer look at our acquisition of Distribution Solutions. When we acquired Distribution Solutions in 2018, they were doing approximately 80 million in revenue and working with 18 studios. Fast forward to today, and in fiscal 2024, Distribution Solutions accounted for $134 million in revenue, and we're now working with nearly three times the number of studios. As we look at new deals, we continue to apply the same criteria that worked for us in the past, and we're confident this strategy will continue to yield results in the future. Technology is the backbone of our operations and crucial driver of efficiency, cost savings, and growth. In 2023, we began making strategic investments in automation and technological innovation to enhance our ability to serve our customers more effectively. One of these investments was the implementation of AutoStore Automated Storage & Retrieval System at our Shepherdsville, Kentucky warehouse. This state-of-the-art system has transformed our operations in Kentucky, allowing us to process over 2,000 lines per hour with significantly fewer staff. As a result, year-over-year, our distribution and fulfillment costs in Q1 '25 were 23% lower than Q1 '24. AutoStore also increased our storage capacity enabling us to consolidate operations and close the larger of our two Shakopee, Minnesota buildings, reducing lease space by 162,000 square feet and permanently lowering cost. Another important efficiency initiative was the installation of Sure Sort X system from OPEX in Q3 of fiscal '24. This innovative technology has further advanced our capabilities and has already delivered more than $500,000 in savings, as expected to save an additional $400,000 annually. It also allows us to efficiently handle larger products like collectibles and electronics, further expanding our capabilities and productivity. I will now hand the call over to Alliance's CEO and CFO, Jeff Walker, my partner.
Jeff Walker: Thank you, Bruce, and thank you all for joining us today. We will now turn to an overview of our financial results for the first quarter ended September 30th, 2024. We generated $229 million in net revenue for the first quarter, up from $226.8 million in the first quarter of fiscal 2024. Our total cost of revenue was $203 million in the first quarter, compared with $201 million in the same quarter last year. This resulted in a gross margin of 11.2%, slightly below the 11.6% achieved in Q1 of fiscal 2024. We expect initiatives to streamline costs and enhance efficiency will drive margin improvement in future quarters. We are pleased to report we delivered net income of $400,000 for the quarter, a major turnaround from the $3.5 million net loss in the same period last year. An impressive $3.9 million improvement and a clear signal that our focus on operational efficiency is paying off. This led a significant improvement in earnings per share, which went from a negative $0.07 per share in Q1 of fiscal 2024 to a profit of $0.01 per share Q1 of fiscal 2025. Adjusted EBITDA for the quarter came in at $3.4 million, our sixth consecutive quarter of positive adjusted EBITDA. This slide compares our trailing 12-month top line and adjusted EBITDA to our financial performance over the last several years, showcasing how we've navigated a dynamic environment. Following an unprecedented surge in demand during the COVID-19 pandemic that drove our top line to a peak of $1.4 billion in fiscal 2022, demand has normalized with revenues adjusting to $1.1 billion for fiscal '[23 and '24. As of the end of the first quarter of fiscal '25, our trailing 12-month revenues are just over $1.1 billion and our adjusted EBITDA is trending higher at $26.4 million with our adjusted EBITDA margin now at 2.4%. Turning to our balance sheet, our focus on reducing inventory and debt has paid off with inventory levels dropping to $138 million and debt reduced to $85 million as of September 30, 2024. These reductions have streamlined our operations and improved our financial flexibility, positioning us well for continued growth and the execution of our acquisition strategy going forward. As we look to the future, Alliance Entertainment is poised for continued growth by leveraging our strength as a capital-light, low-cost provider with unmatched reach in the industry. Our strategy remains clear, expand our market share, improve our margins, and drive EBITDA growth. First, we see tremendous opportunities to expand licensing opportunities in video and collectibles, which will produce significant margin improvements in the future. Second, we continue to invest in automation and restructuring to enhance the operational efficiencies. Technologies like AutoStore are already driving significant cost savings, and these improvements will continue to boost our margins while providing the scalability we need to capture more market share. Thirdly, mergers and acquisitions remain central to our growth strategy. Through strategic M&A, we plan to rapidly expand our product categories and verticals across music, home video movies, video gaming, and collectibles. By doing so, we will not only diversify our offerings, but also strengthen relationships with our major retail partners, positioning Alliance for long-term success. The opportunities ahead are significant. Family-owned competitors are aging out, and large movie studios and companies are looking to sell or license physical media rights. Our capital light model combined with our proven ability to integrate acquisitions sets us apart from the competition. These major movie studios will be leaning on Alliance, providing us with opportunities to license their home video content and allowing these major movie studios to focus on their core competency of making movies, exhibiting in theaters, doing premium downloads, and focusing on their streaming services, while we focus on our core competency, distributing packaged physical media. We are excited about the road ahead, and we are confident that our strategic initiative will drive future growth and profitability in the quarters and years ahead. With that, I'd like to now hand over the call back to the operator to begin our question-and-answer session. Operator?
Operator: Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] It seems at this moment we have no questions from the conference call, and I would like to hand over to Paul for any webcast questions.
Paul Kuntz: Thank you. And we do have a few webcast questions that have already come in. Our first question, inventory levels have reduced year-over-year. How do you balance inventory optimization with ensuring adequate stock for anticipated seasonal or market-driven demand searches?
Jeff Walker: Yeah. Okay. This is Jeff Walker, CEO. I'll address this question here. You know, we have very sophisticated purchasing systems and very experienced buyers in all the different configurations that we purchase. We're a significant business here that purchases almost $1 billion a year of products. And as a stocking warehouse, we're focused on making sure that we have that product in stock ready to go for all of our customers, retailers and customers that rely on us for that. We really have two different types of product. The evergreen sellers, which is a big part of our business in all the different categories. There's ongoing sellers and those have pretty consistent sales patterns with those. And they have also historical sales patterns from Q4 of last year as well. And then we have new release product that we determine, you know, as we need to preorder new release product coming in, we're collecting orders and demand from all of our customer base to determine how many of a particular SKU that we need to preorder and have ready there. So, our inventory also does increase pretty substantially here from, you know, in the fourth quarter as we gear up for a significant sales increase during Q4. So you will see our inventory higher today on our September 30th balance sheet than it was on June 30th because some of that inventory is coming in and getting bought and prepared for fourth quarter coming up.
Paul Kuntz: Thank you, Jeff. And our next question we have, what specific measures are being considered to drive margin expansion in the coming quarters?
Jeff Walker: Yeah, on the margin side, we're definitely seeing some improvements in margin right now. I know that our margin was a little bit lower this last quarter than the year before. We did move through a little bit of some overstock inventory that we still had. We've gone through that at this point. And so we're going to see margins enhancing without having any additional overstock inventory there. We are also seeing enhancements as we move more into some more licensing models on inventory rather than straight distribution. Those definitely enhance margin for us, as well as just being very focused on making - getting additional rebates and so forth from our suppliers as we continue to move forward.
Paul Kuntz: Thank you, Jeff. And our next question, you mentioned mergers and acquisitions have been a big part of Alliance's growth. Can you talk more about the criteria that you use for potential acquisitions? And are there any specific targets that you can talk about on the horizon?
Jeff Walker: Yeah, we're definitely active in acquisition conversations right now. Obviously, from specific targets, we're under very strict NDAs for that. I will say that we really have two different strategies for acquisitions. As most people on this call know, we have a very diversified business in music, video, gaming, and collectibles. And within those categories, there are other wholesalers or distributors, in some cases, manufacturers in each of those categories that provide us with some good acquisition opportunities that, in many cases, those become opportunities of consolidation and roll-up into Alliance. And those are very accretive to value when we do that type of acquisition because typically there's a lot of cost synergies that come out, and in that particular case, those are very valuable acquisitions for us. The second group of acquisitions that we're looking at is, we sell entertainment products, and we're focused on licensed entertainment products. And there still are many categories of licensed entertainment products that we currently are not selling. And so an opportunity for us to get into a new category of licensed entertainment products that is a real big win for us to continue to expand our overall selection. And that type of acquisition can provide us with a new set of vendors, suppliers in a different category of entertainment products, as well as a new set of customers. And when you put that type of business with Alliance, we may not get as many of the overall synergies in that but we get a whole new opportunity to sell their products to the Alliance existing customers and our products to the target company's existing customers. And that's where you potentially get some very big sales expansion. And so in that particular acquisition opportunity, we're looking at some pretty interesting opportunities there. And the focus is really trying to take one plus one and make three out of that and create some real significant incremental value for Alliance shareholders.
Paul Kuntz: Great. Thank you, Jeff. Sounds very exciting. That actually looks like we don't have any further questions from the webcast audience, so I'll just leave it back to you there, Jeff, or if you want to pass back to the operator.
Bruce Ogilvie: I'll take that. This is Bruce here. Yes, operator, we're all done, and thank you very much. Thank you very much for dialing in.
Operator: Thank you. Ladies and gentlemen, that concludes today's conference. Thank you for joining us. You may now disconnect your lines.
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