Alliance Entertainment Holding Corporation Q3 FY2025 earnings call

• Exclusive distribution and licensing strategy: Exclusive partnerships accounted for nearly 1/4 of trailing 12-month revenue, including a new home entertainment exclusive license agreement with Paramount. - Direct-to-consumer fulfillment model: Accounts for 40% of gross revenue in Q3 2025, scalable and capital-light, with growth driven by retailer adoption and consumer demand. - Automation and warehouse optimization: Implemented systems like AutoStore and Sure Sort X, reducing distribution and fulfillment costs by over 10% year-over-year and optimizing facility footprint. - M&A strategy: Completed acquisition of Handmade by Robots, with plans to leverage it for growth in licensed collectibles.

For the quarter ended March 31, 2025, net revenue was $213 million, slightly up from $211.2 million in Q3 2024. Gross profit rose 3.7% year-over-year to $29.1 million with gross margin improving to 13.6%. For the 9-month period ended March 31, 2025, net revenue was $835.7 million, down from $863.5 million. Gross profit totaled $96.9 million with gross margin steady at 11.6%. Adjusted EBITDA for Q3 2025 was $4.9 million, up 66% year-over-year. Direct-to-consumer fulfillment accounted for an estimated 40% of gross revenue in Q3 2025, up from 33% in Q3 2024.

• Aiming to exceed 3% EBITDA margin in fiscal 2026. - Focused on getting closer to 5% EBITDA margin. - Positive outlook for 2026 with new releases in Q4 2025 and beyond, including iconic franchises from DC Comics, Harry Potter, etc.

• Tariffs impacted Handmade by Robots, but now fully operational with 30% tariff absorbed within margins. - Gaming revenue decline due to limited hardware allocation from Microsoft and delayed Grand Theft Auto release. - Cycles in the gaming industry affecting hardware and 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 it's following plans with new characters in the second half of 2025 and into 2026.

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

A: Limited hardware allocation from Microsoft, high comp levels from prior promotions, and delayed Grand Theft Auto release.

Q: You hit 2.5% EBITDA margin on a trailing 12-month basis, up from 2.2%. Do you have a long-term target margin range for the business?

A: We are on track to exceed 3% in fiscal 2026 and focus on getting 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 was impacted but now fully operational. Arcade business may see small price increase due to tariffs. Export potential from reduced tariffs is a positive.

Q: You've made progress on working capital and reduced debt. How do you see your financial flexibility evolving over the next few quarters, especially if the right acquisition opportunity emerges?

A: We have financial flexibility, significant availability on line of credit, and are picky with acquisitions to ensure financial accretion, operational synergy, 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, our product selection, and our team's work to enhance retail websites. We work with large chains like Walmart, Best Buy, and niche players, and see growth on social sales platforms like Temu and Shein.

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

A: It's a win for both Paramount and Alliance. Paramount frees up inventory, and Alliance is the exclusive U.S. and Canadian distributor of Paramount's physical media catalog, contributing significant revenue and earnings 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.