Alliance Entertainment Q1 2025 Earnings Call Transcript

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Provided by Quartr
November 12, 2024

There are 4 speakers on the call.

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.

Operator

Paul?

Speaker 1

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 undue 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.

Speaker 1

Throughout today's discussion, management will attempt to present some important factors related to the business that may affect predictions. You should also review the company's Form 10 ks for a more complete discussion of these factors and other risks, particularly under the heading of 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 a reconciliation of each non GAAP measure to the most directly comparable GAAP financial measure.

Speaker 1

A press release detailing these results crossed the wire this afternoon at 4:0:1 p. M. Eastern Time and is available in the Investor Relations section of Alliance Entertainment's Web site ataent.com. Your host today, Bruce Ogilby, Executive Chairman and Jeff Walker, Chief Executive Officer and Chief Financial Officer, will present the results of operations for the fiscal 2025 Q1 ended September 30, 2024. At this time, I will turn the call over to Alliance Entertainment Executive Chairman, Bruce Ogilby.

Speaker 2

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.

Speaker 2

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. 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, Amazon, Best Buy, Costco, Target, Kohl's, 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 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, Nintendo, Arcade 1 Up, Activision Electronic Arts, Sega, Ubisoft, Square Enix, Take 2 and others.

Speaker 2

In music for vinyl records and CDs, we are a trusted distributor for Universal Music, Sony Music, Warner Music Group and over 90 exclusive independent music labels. For collectibles, we distribute for Funko, Mattel, Lego, Hasbro and over 50 other suppliers. Alliance is the exclusive North American distributor for arcade 1 up retro arcades. Alliance Entertainment is the global leader in the $10,000,000,000 physical media industry and we generate over $1,100,000,000 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.

Speaker 2

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 $250,000,000 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.

Speaker 2

And we shipped 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 as we remain 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.

Speaker 2

Even the CD market has joined the revival with CDs outselling digital albums at a 3:one margin in the 1st 6 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 Arcade 1UP 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 $134,000,000 of this revenue in fiscal 2024. Distribution Solutions partners with over 60 movie studios to manufacture, supply, market their home video content.

Speaker 2

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 AMP division is a leader in the distribution of exclusive physical music content. AMP 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.

Speaker 2

Labels and artists such as Shaboozy, Usher and K Pop sensation, ATEEZ can bypass major music suppliers thus lowering their cost and self distribute themselves using AMP 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 AMP contributing significantly to our sales growth. Our Mill Creek division specializes in exclusive video content licensing for major studios including Disney, Sony Pictures, Universal, Lionsgate, CBS Paramount and others. Mill Creek licenses, manufacturers 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.

Speaker 2

We also became the exclusive North American distributor for Arcade 1UP during this Q1. We began working with Arcade 1UP on a nonexclusive basis in 2020. RK1UP licenses and manufactures home arcades consoles with significant market share in the retro gaming space. Prior to entering our exclusive agreement, RK1UP accounted for $74,000,000 of our fiscal 2024 revenue. And in Q1 of our fiscal year 2025, we saw revenue from this relationship increase to $12,600,000 up over 20% from $10,200,000 in Q1 of fiscal 2024.

Speaker 2

We've had a long history of disciplined strategic acquisitions that have been critical to our leadership in the entertainment space, starting with Super D, which Jeff and I grew from $18,000,000 dollars in sales in 2,001 to $194,000,000 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, AAN 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 MEKA and expanded further with the acquisition of its competitor Kokam 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.

Speaker 2

Most recently in 2022, we added collectibles to our portfolio through the acquisition of Think 3 fold, 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 disciplined 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 $80,000,000 in revenue and working with 18 studios.

Speaker 2

Fast forward to today and in fiscal 2024, Distribution Solutions accounted for $134,000,000 in revenue and we're now working with nearly 3 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 and retrieval system at our Shepherdsville, Kentucky warehouse.

Speaker 2

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 staffed. As a result, year over year, our distribution and fulfillment costs in Q1 'twenty five were 23% lower than Q1 'twenty four. 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 ShearStore X system from OpEx Q3 of fiscal 'twenty four. 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.

Speaker 2

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.

Speaker 3

Thank you, Bruce, and thank you all for joining us today. We will now turn to an overview of our financial results for the Q1 ended September 30, 2024. We generated $229,000,000 in net revenue for the Q1, up from $226,800,000 in the Q1 of fiscal 2024. Our total cost of revenue was $203,000,000 in the Q1 compared with $201,000,000 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.

Speaker 3

We expect initiatives to streamline cost 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 $3,500,000 net loss in the same period last year, an impressive $3,900,000 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 in Q1 of fiscal 2025. Adjusted EBITDA for the quarter came in at $3,400,000 our 6th 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.

Speaker 3

Following an unprecedented surge in demand during the COVID-nineteen pandemic that drove our top line to a peak of $1,400,000,000 in fiscal 2022, demand has normalized with revenues adjusting to $1,100,000,000 for fiscal 2023 2024. As of the end of the Q1 of fiscal 2025, our trailing 12 month revenues are just over $1,100,000,000 and our adjusted EBITDA is trending higher at $26,400,000 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 138,000,000 and debt reduced to $85,000,000 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.

Speaker 3

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. 2nd, 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.

Speaker 3

Thirdly, mergers and acquisitions remain central to our growth strategy. Through strategic M and 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.

Speaker 3

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 our 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 initiatives 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 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.

Speaker 1

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

Speaker 3

searches? Yes. Okay. This is Jeff Walker, CEO. I'll address this question here.

Speaker 3

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 $1,000,000,000 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 2 different types of product. The evergreen sellers, which is a big part of our business in all the different categories.

Speaker 3

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 on as we need to pre order 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 in the Q4 as we gear up for a significant sales increase during Q4. So you will see our inventory higher today on our September 30 balance sheet than it was on June 30 because some of that inventory is coming in and getting bought and prepared for Q4 coming up.

Speaker 1

Thank you, Jeff. And our next question we have, what specific measures are being considered to drive margin expansion in the coming quarters?

Speaker 3

Yes. 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.

Speaker 3

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.

Speaker 1

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?

Speaker 3

Yes. We're definitely active in acquisition conversations right now. Obviously, from on specific targets, we're under very strict NDAs for that. I will say that we really have 2 different strategies for acquisitions. As most people on this call know, we have a very diversified business in music, video, gaming and collectibles.

Speaker 3

And within those categories, there are either 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.

Speaker 3

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.

Speaker 3

And the focus is really trying to take 1 plus 1 and make 3 out of that and create some real significant incremental value for Alliance shareholders.

Speaker 1

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 would pass it back to the operator.

Speaker 2

I'll take that. This is Bruce here. Yes, operator, we're all done, and thank you very much.

Operator

Thank you. Ladies and gentlemen, that concludes today's conference. Thank you for joining us. You may now disconnect your

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Alliance Entertainment Q1 2025
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