ALLIANCE ENTERTAINMENT HOLDING CORP Q1 FY2025 earnings call

• Alliance Entertainment is a category-leading direct-to-consumer and e-commerce provider for the entertainment industry with over 325,000 SKUs in stock, servicing various brands and retailers worldwide. • The company has a long history of strategic acquisitions, having successfully acquired over a dozen companies to expand product selection and diversify revenue streams. • Technology is crucial, with investments in automation like the AutoStore Automated Storage & Retrieval System at the Kentucky warehouse, which reduced distribution and fulfillment costs by 23% year-over-year in Q1 '25 and allowed consolidation of operations, and the Sure Sort X system from OPEX which delivered savings and enhanced handling of larger products.

For the first quarter ended September 30, 2024, Alliance Entertainment generated net revenue of $229 million, up from $226.8 million in the first quarter of fiscal 2024. Total cost of revenue was $203 million, compared with $201 million in the same quarter last year, resulting in a gross margin of 11.2%, slightly below the 11.6% in Q1 of fiscal 2024. Net income for the quarter was $400,000, a turnaround from the $3.5 million net loss in the same period last year. Adjusted EBITDA for the quarter was $3.4 million, the sixth consecutive quarter of positive adjusted EBITDA. Trailing 12-month revenues are just over $1.1 billion, and adjusted EBITDA is $26.4 million with a margin of 2.4%. Inventory levels dropped to $138 million and debt was reduced to $85 million as of September 30, 2024.

• Opportunities exist to expand licensing opportunities in video and collectibles for margin improvement. • Continued investment in automation and restructuring to enhance operational efficiencies, with technologies like AutoStore driving cost savings. • Mergers and acquisitions remain central to growth strategy, aiming to rapidly expand product categories and verticals across music, home video movies, video gaming, and collectibles to diversify offerings and strengthen relationships with retail partners.

Q: Inventory levels have reduced year-over-year. How do you balance inventory optimization with ensuring adequate stock for anticipated seasonal or market-driven demand surges?

A: 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.

Q: What specific measures are being considered to drive margin expansion in the coming quarters?

A: 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.

Q: 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?

A: 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.