Alliance Entertainment Holding Corporation Q3 FY2025 earnings call

• Alliance is a premier distributor and fulfillment partner in the collectibles ecosystem with over 325,000 unique SKUs and relationships across 35,000 retail storefronts and 200 online platforms.
• Exclusive partnerships accounted for nearly 1/4 of trailing 12-month revenue, with a new exclusive license agreement with Paramount starting January 1, 2025, making Alliance the exclusive U.S. and Canadian distributor of Paramount's full physical media catalog.
• Direct-to-consumer fulfillment accounted for an estimated 40% of gross revenue in Q3 2025, up from 33% in the prior year.
• Implemented automation systems like AutoStore and Sure Sort X, leading to reduced distribution and fulfillment costs and improved efficiency.
• Acquired Handmade by Robots in December, with progress made in expanding its retail distribution.

For the quarter ended March 31, 2025, net revenue was $213 million, a slight increase from $211.2 million in the prior year's third quarter. Gross profit rose 3.7% year-over-year to $29.1 million with gross margin improving to 13.6%. Net income was $1.9 million or $0.04 per share compared to a net loss of $3.4 million or $0.07 per share in Q3 of fiscal 2024. Adjusted EBITDA grew 66% year-over-year to $4.9 million. For the 9-month period ended March 31, 2025, net revenue was $835.7 million compared to $863.5 million the prior year. Gross profit totaled $96.9 million versus $102 million last year, with gross margin holding steady at 11.6%. Net income increased to $9.3 million or $0.18 per diluted share, up sharply from $2.1 million or $0.04 per share last year. Adjusted EBITDA rose nearly 10% to $24.4 million. Inventory balance declined to $93.2 million down from $108 million a year ago, and accounts payable balance increased $139.6 million from $132.5 million.

• Aim to exceed 3% EBITDA margin in fiscal 2026 and move towards closer to 5% EBITDA margin.
• Focus on pursuing new licensing opportunities, especially from major movie studios for physical media monetization.
• Anticipate strong growth in 2026 with new releases from iconic franchises like DC Comics, Harry Potter, etc.

• Tariffs affecting Handmade by Robots, with initial high tariffs halting production temporarily, though now at 30% tariff which is absorbed within margin.
• Allocation issues with hardware suppliers like Microsoft impacting gaming revenue due to limited hardware allocation.
• Potential delays in product releases, such as Grand Theft Auto pushed to next May affecting gaming software sales.

Q: Do you have a good relationship with Nintendo with the arrival of the upcoming Switch 2?

A: Yes, we do. We're excited about the upcoming Nintendo release, have a significant relationship, and are working on unique projects with retailers.

Q: How is Handmade by Robots going?

A: We acquired it, have great characters coming, and see significant growth with new characters in the second half of 2025 and into 2026.

Q: What do you attribute the decline in gaming revenue to?

A: Impact from limited hardware allocation from Microsoft, high comp levels from prior year promotions, and delay in Grand Theft Auto release.

Q: Do you have a long-term target margin range for the business?

A: Aim to exceed 3% in fiscal 2026 and move towards closer to 5% EBITDA margin.

Q: What type of impact are tariffs having on Alliance's business?

A: Music and video not affected by tariffs; Handmade by Robots had production halt with high tariffs, now at 30% tariff absorbed; potential small price increase on arcade products due to tariffs; export potential with reduced tariffs in other countries.

Q: How do you see your financial flexibility evolving over the next few quarters, especially if the right acquisition opportunity emerges?

A: Have reduced revolver debt, improved liquidity, and have availability on line of credit; selective in acquisitions to ensure financial accretion and strategic fit.

Q: Direct-to-consumer fulfillment continues to grow. Can you talk about what's driving the increased adoption from retail partners?

A: Retailers like the ability to not hold inventory, product selection, and proper presentation on their websites; significant fulfillment for big retailers like Walmart, Best Buy, etc., and growth on social sales platforms like Temu, Shein, Instagram.

Q: Can you tell me more about the Paramount exclusive license agreement and what it means for Alliance?

A: Paramount moved to a licensing model for DVD, freeing them from inventory, and Alliance is now responsible for sales and marketing of Paramount's physical media catalog, with significant revenue and earnings potential going forward.

Q: Did any specific titles have an outsized impact on the surge in movie sales this quarter?

A: Consistent catalog business with Paramount, including Yellowstone 1, and key new releases on a quarterly basis.