Yahoo Finance Alliance Entertainment Holding Corporation (NASDAQ:AENT) Q3 2024 Earnings Call Transcript
Alliance Entertainment Holding Corporation (NASDAQ:AENT) Q3 2024 Earnings Call Transcript May 11, 2024
Alliance Entertainment Holding Corporation isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Greetings, and welcome to the Alliance Entertainment Third Quarter Fiscal Year 2024 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. Before we begin the formal presentation, I would like to remind everyone that statements made on the call and webcast may include predictions, estimates, or other information that might be considered forward-looking. While these forward-looking statements represent our 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 our opinions only as of the date of this presentation.
Please keep in mind that we are not obligating ourselves 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, we will attempt to present some important factors relating to our business that may affect our predictions. You should also review our most recent Form 10-K for a more complete discussion of these factors and other risks, particularly under the heading Risk Factors. During this conference call, we will discuss non-GAAP financial measures, including a discussion of adjusted EBITDA. We believe 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 to 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 is available in the Investor Relations section of our company’s website aent.com. Your hosts today, Bruce Ogilvie, Executive Chairman; and Jeff Walker, Chief Executive Officer and Chief Financial Officer, will present the results of operations for the fiscal third quarter ended March 31, 2024. At this time, I will turn the call over to Alliance Entertainment Executive Chairman, Bruce Ogilvie.
Bruce Ogilvie: Thank you, operator, and good afternoon, everyone. I’m pleased to welcome you to today’s fiscal third quarter ended March 31, 2024 financial results conference call. For those of you that are new to our story, we bring entertainment to you. Alliance stocks the world’s largest selection of music, movies, video games, gaming hardware, arcades, collectibles, toys, and consumer electronics. We are a trusted omni-channel supplier to the largest retailers and wholesalers across the globe and a trusted distributor to the world’s most recognized entertainment content and gaming brands. As – from our most recent June 30, 2023 fiscal year-end, we produced over $1.1 billion in annual revenue and employed over 700 team members.
Alliance is the gateway between brands and retailers. We are a trusted omni-channel supplier to Walmart, Amazon, Best Buy, Costco, Target, Kohl’s, BJ’s, Meyer, Barnes & Noble, Dell, Verizon, over 2,000 additional independent music retailers and wholesalers worldwide, and a trusted distributor for Walt Disney, Paramount, Sony Pictures, Warner Brothers, Universal Pictures, Microsoft, Nintendo, Activision, Electronic Arts, Mattel, Hasbro, Sunco, Arcade1Up, Universal Music, Sony Music, Warner Music Group, and over 600 other suppliers. We have over 200 customers that sell online worldwide that rely on our supplied metadata of descriptions and images we ship to more than 35,000 storefronts in 72 countries and are a stocking distributor of over 325,000 in-stock SKUs to the largest retailers and wholesalers in the world.
For this slide, you will see nine months of sales of our current fiscal year compared to the previous four years. We wanted to show you how diversified Alliance is and how consistent sales by configuration are. The diversified products offered are a big part of Alliance’s winning formula, and will balance out steady flow of new releases with evergreen, consistent catalog titles. Over $200 million of our $1.1 billion is product where we are the exclusive distributor, but we have licensed and sell exclusively. AMPED and Distribution Solutions divisions distribute physical exclusive music and exclusive videos, respectively, and our Mill Creek division engages in exclusive video licensing with content from Disney, Sony, Universal, Lionsgate, CBS, and others.
Distribution Solutions being $120 million of the $200 million has over 62 significant exclusive video studios that rely on Distribution Solutions to manufacture, supply, market video products, and has direct sales accounts with Amazon, Walmart, Target, thousands of retailers and websites through Alliance Entertainment’s vast distribution channels, by having exclusive content that creates a sticky relationship with retailers. Distribution Solutions has also developed digital video distribution consisting of streaming and premium downloads with fiscal year 2023 digital revenue of $8.4 million and year-to-date fiscal year 2024 is $17 million. Of the $17 million year-to-date fiscal year 2024, two titles consisting of Nefarious and The Blind totaled $7.9 million.
AMPED has more than 90 exclusive labels that rely on AMPED to supply and market music, vinyl, and CD, and sells and markets music through Amazon, Walmart, Target, Barnes & Noble, Best Buy, and over 2,000 independent music stores in the U.S. through Alliance Entertainment’s worldwide distribution channels. Artists and labels are attracted to AMPED, like USHER or ATEEZ, the K-pop artists, because they use AMPED as their exclusive physical distributor and the artists do their own digital and social media marketing to maximize their profitability. K-pop artists like ATEEZ are a rapidly growing genre for AMPED. Mill Creek licenses video content from studios to create, manufacture, market, and sell video DVDs with content licensed from Walt Disney, Sony Pictures, Universal Pictures, Lionsgate, CBS, Paramount, and other significant studios.
This is a little history about our growth and where we are today. In 2013, Jeff and I had built up Super D from $18 million in sales starting in 2001 to $194 million. The major event that happened in 2013 was Super D acquiring Alliance Entertainment. Alliance was $725 million in revenue to our $194 million. We merged our operations in California into Alliance’s warehouse operations in Kentucky. After the acquisition of Alliance combined, we became the largest distributor of music and video in the world and was the start of our major consolidation path. In 2016, we acquired Anderson Merchandisers, which included the vendor-managed inventory accounts providing all music to 3,900 Walmart stores and all 900 Best Buy stores. Being solely music and movies, we were looking for a third category of content to distribute.
This led us in 2018 to the acquisition of Mecca. Mecca had direct relationships with Microsoft, Sony, and Nintendo. By acquiring them, we were able to become a distributor of video game products. The Mecca acquisition gave us about another $100 million worth of revenue. In the same year, 2018, we were offered the opportunity to take over Distribution Solutions from Sony Pictures. Distribution Solutions gave us another vendor number with Walmart, which allowed us to now become a supplier to Walmart about 20 different movie studios that we were exclusive to for Distribution Solutions. In 2020, we acquired Mecca’s competitor COKeM, and eventually consolidated Mecca into COKeM. That expanded our relationship with Best Buy, Target, Kohl’s, Dell, and Verizon.
We also started distributing retro arcades from Arcade1Up. We only show this slide to share that we have a proven track record of completing acquisitions and will continue with that same strategy to grow and diversify our company. We are currently working on four possible future transactions. We put ourselves on hold for acquisitions in 2022 and 2023 for our SPAC merger and getting our new three-year line of credit in place. Alliance provides traditional retailers with world-class distribution and e-commerce capabilities by focusing on service, selection, and technology, providing retailers superior service, stocking the world’s largest physical media and entertainment selection and state-of-the-art technology systems and facilities. Alliance provides efficient omni-channel expansion solutions for retailers offering a full enterprise-level infrastructure and white-label dropships orders directly to consumers on behalf of its customers.
The entire ordering, confirmation, and invoicing process is automated, allowing customers to focus on sales while we refer all the stocking, warehousing, and shipping functions. To the consumer, the shipment they receive looks like it was sent by the large retailers we service. It’s a win for retailers as there’s no inventory risk for all the 200 online retailers that rely on Alliance. Alliance is also a leader in vendor-managed inventory solutions, providing solutions tailored to customers to support their inventory needs. These value-add services provide highly technical, critical business function for our partners. Alliance consolidates and distributes a vast portfolio of entertainment products over six major categories, while our proprietary database powers retailers’ online music and gaming offerings, including vinyl, CDs, DVD, Blu-ray, gaming products, and retro arcades.
Currently, we have over 325,000 unique SKUs in stock to support our customers’ vast selection needs. Alliance has invested in enhancements to our automated handling equipment, which reduces shipping times, streamline order processing, reduce labor costs, and also improve overall warehouse management. In January 2023, we announced we went live with AutoStore, automated storage and retrieval system in our Shepherdsville warehouse. The system improved warehouse operations, allowing us to achieve increased levels of speed, reliability, capability, precision that resulted in significant cost savings. With AutoStore, we went from 41 pickers down to seven, and receiving went down from 14 associates down to four. During the last quarter, we announced the installation of Sure Sort X, a cost-saving sortation technology system from the warehouse automation solutions provider OPEX at our Kentucky facility.
Utilizing this new Sure Sort X technology results in annual labor savings of nearly $400,000, along with an immediate savings of $460,000 from avoiding retrofitting older sorting technology set to be retired. With the introduction of Sure Sort X, the larger format sorter complements the five existing CD, DVD, and vinyl record sorters at Alliance, giving our warehouse the ability to move away from manual sortation of larger products, specifically toys and electronics and accessories. In the investor presentation, there are hyperlinks to see AutoStore, OPEX, and other processes we do in Kentucky. This slide highlights our strategically located operations that include seven offices and four different distribution centers, including 873,000 square foot facility in Shepherdsville in Kentucky.
In 2023, warehouse shipments total over 70 million units through our highly skilled workforce, and tech-enabled facilities and infrastructure that allows Alliance to achieve industry-leading speed and accuracy metrics. I will add that in Shakopee, Minnesota, because of AutoStore in Kentucky, we were able to close the larger two buildings, removing 198,000 square feet of our 220,000 square feet we have currently leased. That closure process started in January will be fully completed by May 31. The warehouse cost savings will be significant in our 2025 fiscal year numbers. 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 in the third quarter ended March 31, 2024. Net revenues for the fiscal third quarter ended March 31, 2024 were $211 million, compared to $227 million in the same period of 2023, a decrease of 7.3%. Consumer direct shipments were 33% of gross sales revenue for the three months ended March 31, 2024. Year-over-year for the nine months ended March 31, revenue generated by consumer direct shipments increased from 34.4% to 39.1% of gross sales, an increase of 4.7%. Gross profit for the fiscal third quarter ended March 31, 2024 was $28 million compared to $27.3 million in the same period in 2023, an increase of 2.5%.
Gross profit margin for the fiscal third quarter ended March 31, 2024 was 13.3%, up from 12% in the same period of 2023, an increase of 130 basis points. Net loss for the fiscal third quarter ended March 31, 2024, was $3.4 million compared to net loss of $7.8 million for the same period of 2023, an improvement of $4.4 million. Adjusted EBITDA for the fiscal third quarter ended March 31, 2024, improved by $5.3 million to $2.9 million from an adjusted EBITDA loss of $2.4 million for the same period of 2023. We have taken significant steps over the past year to strengthen our balance sheet with additional cost savings initiatives planned. Throughout 2023 and into 2024, we are highly focused on reducing inventory and debt. With fiscal third quarter year-over-year inventory decreasing from $163 million to $108 million and debt down from $127 million to $87 million.
We also expect significant cost savings with the planned closing of our Minnesota facility on or before May 31, 2024. Additionally, to support growth, we recently secured a new three-year, $120 million senior secured asset-based credit facility with White Oak Commercial Finance, the proceeds of which was used to refinance the existing credit facility, fund working capital needs, and provide for general corporate purposes. These steps have also positioned us to focus and execute on implementing our acquisition strategy going forward. On this slide, you can see fiscal year 2022, we were experiencing the benefits of COVID with peak sales of $1.42 billion. Fiscal year 2023, our sales normalized after COVID with sales of $1.16 billion. For fiscal year 2023, adjusted EBITDA was negatively affected with one-time supply chain costs of $35.8 million.
We have gotten past those one-time supply issues. For the fiscal nine months ending March 31, 2024, our adjusted EBITDA was 2.6% of revenue. We are continuing to reduce operating costs and improve margins in 2024 to maintain a 4% to 5% adjusted EBITDA to sales. In addition to growth in our year-over-year quarterly gross profit, we reduced operating costs $4.5 million, or 15.2%, through warehouse efficiencies and new technology implemented, going from $29.7 million down to $25.2 million. These efficiencies will have an ongoing positive impact going forward. Gross profit improvements and expense reductions also led to a fourth consecutive quarter of positive adjusted EBITDA, increasing to $2.9 million in the fiscal third quarter, compared to an adjusted EBITDA loss of $2.4 million in the prior year.
Net revenue for the first nine months of our fiscal year ending March 31, 2024, totaling $864 million, compared to $912 million in the same period of 2023, a decrease of 5.3%. Gross profit was $102 million compared to $74 million in the same period of 2023, an increase of 38.4%. Gross profit margin was 11.8% up from 8.1% in the same period of 2023. Net income was $2.1 million compared to a net loss of $30.8 million for the same period of 2023. Adjusted EBITDA for the nine months ended March 31, 2024 was $22.2 million compared to adjusted EBITDA loss of $21 million for the same period of 2023. This slide shows the quarterly results since Q1 2020 for gross profit, GAAP net income, and adjusted EBITDA. Comparing Q3 fiscal year 2020 to Q3 fiscal year 2024, adjusted EBITDA has decreased from $4.8 million to $2.9 million, which is a decrease of 39% over the past four years.
We have taken significant steps over the past year to strengthen our balance sheet with additional cost savings initiatives planned. Throughout 2023 and 2024 to date, we have been highly focused on reducing inventory and debt with third quarter year-over-year inventory decreasing from $163 million to $108 million and debt down from $127 million to $87 million. We also expect significant cost savings for the fiscal year ending 2025 with the planned closing of our Minnesota facility in May of 2024. Additionally, to support growth, we recently secured a new three-year $120 million secured asset-based senior credit facility with White Oak Commercial Finance. the proceeds of which was used to refinance the existing credit facility, fund working capital needs, and provide for general corporate purposes.
These steps have also positioned us to focus and execute on implementing our acquisition strategy going forward. I will now turn the call back over to Bruce.
Bruce Ogilvie: Thank you, Jeff. Alliance has a proven track record of successfully acquiring and integrating competitors and complementary businesses. We have acquired over a dozen companies in the last 20 years, including Alliance Entertainment, AN Connect, Mecca Electronics, Distribution Solutions, CokeM, and Think3Fold. We also continue to focus on acquiring more licenses and exclusive distribution agreements in music, video gaming, collectibles, and electronics. Expanding our existing product and service offering and executing our acquisition strategy will drive Alliance’s efforts towards increasing market share. Alliance will further invest in automating facilities and upgrading proprietary software. Alliance’s direct-to-consumer, or DTC, services are in greater demand as consumer preferences shift and stress retailers’ e-commerce and DTC capabilities.
Enhancing DTC relationship will grow existing revenue lines and improving capabilities will generate a more attractive overall service offering. Leveraging existing relationships, Alliance can expand a new consumer product segments growing its product offerings, and providing more selection and diversity to our existing customer base while attracting new customers in the process. In closing, Alliance is a leading global entertainment wholesaler, direct-to-consumer distributor, and e-commerce provider for entertainment industry with over 30 years of operations and experience within the entire Alliance management team, which beneficially owns more than 81% of the common shares outstanding and has extensive knowledge and tribal knowledge to lead the company towards future growth.
We are a leader in fulfillment and e-commerce distribution with over 325,000 SKUs physically in stock, protected by focused commitment of service, selection, and technology. Suppliers and brick-and-mortar retailers, omni-retailers, online retailers, and consumers rely on our company’s platform feel transactional volume for trusted, dependable relationships. Through the expansion of partnerships with our vendors and our customers, as well as investment in existing facilities, Alliance expects us to continue to grow revenue and expand margins. Again, we have a proven track record of M&A having successfully acquired and integrated 12 significant businesses in 2003. There are significant future acquisition and consolidation opportunities to drive future growth through the acquisition of complementary businesses and competitors.
Finally, the company’s technology platform increases the efficiency of transactions, reduces labor costs, provides great mobile accessibility, and incorporates modern marketing and fintech tools. We look forward to providing our shareholders with further updates in the near term as we strengthen our leadership position as the premier distributor of music, movies, video games, arcades, toys, collectibles, and consumer electronics. We also look forward to seeing some of you at our upcoming Investor and Analyst Day in at our warehouse in Shepherdsville, Kentucky, next week on May 16. I thank you all for attending now, and I’d like to hand the call back over to the operator to begin our question-and-answer session. Operator?
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