Earnings call transcript: Alliance Entertainment sees strong Q1 FY2026 growth

Alliance Entertainment Holding Corp (AENT) reported its financial results for the first quarter of fiscal year 2026, showcasing significant growth and operational advancements. The company achieved an 11% year-over-year increase in revenue, reaching $254 million, and saw a remarkable improvement in adjusted EBITDA. Despite a slight decline in stock price, the company remains optimistic about its future prospects.

Key Takeaways

• Revenue for Q1 FY2026 increased by 11% year-over-year to $254 million.
• Adjusted EBITDA surged by 259% compared to the previous year.
• Gross margin improved by 340 basis points, reaching 14.6%.
• Net income stood at $4.9 million, or $0.10 per diluted share.

Company Performance

Alliance Entertainment demonstrated robust performance in Q1 FY2026, marked by a substantial increase in both revenue and adjusted EBITDA. The company's strategic focus on product innovation and operational efficiency has contributed to its strong financial results. Alliance Entertainment has continued to expand its market presence, maintaining its position as a leading distributor in the physical media sector.

Financial Highlights

• Revenue: $254 million, up 11% year-over-year.
• Adjusted EBITDA: $12.2 million, a 259% increase from $3.4 million.
• Gross Margin: 14.6%, an improvement of 340 basis points.
• Net Income: $4.9 million, or $0.10 per diluted share.
• Trailing 12-Month Revenue: Nearly $1.1 billion.

Outlook & Guidance

Alliance Entertainment expects continued growth throughout fiscal year 2026. The company is focusing on mergers and acquisitions, particularly in the collectibles and distribution sectors. Additionally, the Handmade by Robots brand is anticipated to have a more significant impact in fiscal years 2027 and 2028. A new $120 million credit facility with Bank of America is set to support these strategic initiatives.

Executive Commentary

"We're entering the rest of fiscal 2026 from a position of strength," said Jeff Walker, CEO. He emphasized the company's fully integrated ecosystem, which supports its growth strategy. Amanda Gnecco, CFO, highlighted the consumer trend of owning rather than renting content, reflecting the company's alignment with market demands.

Risks and Challenges

• Supply Chain Issues: Potential disruptions could impact distribution efficiency.
• Market Saturation: Increased competition in the physical media sector may affect market share.
• Macroeconomic Pressures: Economic downturns could influence consumer spending on entertainment products.
• Licensing Agreements: Reliance on exclusive agreements may pose risks if partnerships change.

Q&A

During the earnings call, analysts inquired about the strength of vinyl sales and the impact of AI implementation on operational efficiency. Executives noted that collector enthusiasm is driving vinyl sales and that AI tools have significantly improved efficiency. The potential for more studio licensing deals was also discussed, indicating future growth opportunities.

Overall, Alliance Entertainment's Q1 FY2026 results reflect a solid performance, driven by strategic initiatives and market demand. Despite a slight dip in stock price, the company's outlook remains positive, supported by its strong financial position and growth plans.

Full transcript - Alliance Entertainment Holding Corp (AENT) Q1 2026:

Conference Call Operator: Greetings and welcome to the Alliance Entertainment First Quarter Fiscal Year 2026 Earnings Conference Call. At this time, all participants are on a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Paul Kuntz. Thank you, sir. You may begin.

Paul Kuntz, Investor Relations, Alliance Entertainment: 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, or 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. We are cautioned not to place undue reliance on these forward-looking statements, which reflect the company's opinions only as of 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 revisions to these forward-looking statements in light of new information or future events. Throughout today's discussion, management will attempt to present some important factors relating to the business that may affect predictions.

You should also review the company's Form 10-K filed September 10, 2025, for a more complete discussion of these factors and other risks, particularly under the heading Risk Factors. During the 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 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 and is available in the investor relations section of Alliance Entertainment's website at aent.com. Your hosts today, Jeff Walker, Chief Executive Officer, and Amanda Gnecco, Chief Financial Officer, will present the results of operations for the first quarter of fiscal year 2026 ended September 30, 2025.

Bruce Ogilvie, Executive Chairman, is also on the line and will be participating during the Q&A session. At this time, I will turn the call over to Alliance Entertainment CEO, Jeff Walker.

Jeff Walker, Chief Executive Officer, Alliance Entertainment: Thank you, Paul, and good afternoon, everyone. I'm pleased to welcome you to today's call. We opened fiscal 2026 with strong momentum, delivering both top-line expansion and improved profitability. Revenue grew 11% year over year to $254 million, reflecting solid demand across physical media, collectibles, and direct-to-consumer channels. Adjusted EBITDA increased to $12.2 million from $3.4 million a year ago, a 259% improvement, while gross margin expanded 340 basis points to 14.6%. These results highlight the strength of our content portfolio, disciplined expense management, and the efficiency gains we're achieving through automation and the early benefits of our AI initiatives. At the same time, our Handmade by Robots brand continues to scale rapidly. New collectible launches this quarter drove exceptional sell-through and expanded retail placement, and we're seeing growing fan engagement across both our own sites and partner channels.

This business has quickly become a pillar of our collectible strategy, and we expect continued strength through the holiday season. We also strengthened our corporate governance, welcoming two new highly accomplished independent directors, Dimitri Kosko and Sheila Bangalore, each bringing deep expertise in finance, AI technology, and governance. Their experience complements our leadership team and supports the company's next phase of growth and innovation. Operationally, we're advancing our AI-powered sales transformation. The rollout of HubSpot Sales Hub and Microsoft Copilot is already improving lead prioritization, automating content creation, and enabling our teams to work faster and smarter. These tools are helping us convert opportunities more efficiently as we capitalize on our busiest quarter of the year. Finally, our exclusive content portfolio continues to expand. Through AMPT, we've signed a new distribution agreement with Virgin Music Group, which adds another premium catalog to our growing roster of label partners.

Combined with our ongoing success in film, gaming, and collectibles, these partnerships reinforce Alliance's position at the center of physical media and pop culture ecosystems. Taken together, fiscal 2026 is off to a strong start. We're executing on our strategy, driving profitable growth, advancing technology adoption, and deepening our relationships across entertainment categories. As we move through the balance of the year, our focus remains on delivering consistent results, expanding our exclusive content base, and creating long-term value for our shareholders. This slide offers a quick snapshot of our performance over the past several fiscal years and on a trailing 12-month basis through September 30, 2025. Over the trailing 12 months, revenue totaled nearly $1.1 billion, reflecting stable demand across our core categories and the return to year-over-year top-line growth we saw this quarter.

Adjusted EBITDA reached $45.3 million, up from $36.5 million in fiscal 2025 and $24.3 million in fiscal 2024. That continued expansion demonstrates the structural improvements we have made in product mix and cost efficiency. Our adjusted EBITDA margin on a trailing basis now stands at roughly 4.2%, and in the first quarter alone, we achieved 4.8%, a level we view as the new baseline for fiscal 2026 and beyond. That margin durability reflects higher value content, automation benefits, and early productivity gains from our AI initiatives. Earnings per share rose to $0.38 on a trailing 12-month basis, building on a $0.30 last year and a $0.09 the year before. This steady earnings progression highlights the efficiency and strength of our model, even in a balanced revenue environment.

On the balance sheet, we ended the quarter with $3.2 million in cash, inventory of $121.7 million, and debt of $66 million, essentially flat versus June 30, 2025, but well below our year-ago levels. Our equity position grew to $108 million, reflecting stronger retained earnings and disciplined working capital management. Subsequent to quarter end, we further strengthened our financial flexibility by closing a new five-year, $120 million senior secured revolving credit facility with Bank of America. This agreement replaces our prior asset-based facility and reduces borrowing costs by up to 250 basis points, with $61 million of undrawn availability at closing. The new structure provides lower interest expense, longer duration, and greater liquidity to support both seasonal inventory needs and future growth initiatives. Together, these metrics show a company that's expanding margins, generating consistent earnings, and operating from a stronger financial foundation.

We're entering the remainder of fiscal 2026 with the balance sheet, liquidity, and operating discipline to sustain that momentum. Before I hand it over to Amanda, I want to take a moment to revisit what makes Alliance such a unique platform, the engine that powers the collectibles value chain. At its core, Alliance Entertainment connects fans to music, movies, games, and collectibles they love. We sit at the intersection of content and commerce, curating, sourcing, and delivering products that celebrate pop culture across every format. Our model is built on a fully integrated ecosystem, from exclusive product development to omnichannel fulfillment. On the front end, we partner with more than 150 studios, labels, and manufacturers to source and create the most sought-after titles and licensed collectibles. Additionally, through our own brands, like Handmade by Robots, we design and distribute exclusive products that collectors can't find anywhere else.

Those products move through a centralized distribution and logistics network that reaches 35,000 retail locations and 175 online platforms worldwide. Whether it's a major retailer, a specialty store, or a direct-to-consumer order, our automation and fulfillment systems ensure accuracy, speed, and cost efficiency at scale. From there, our omnichannel delivery model brings those products to life, serving both B2B partners and consumers directly through our own retail group, which operates sites such as deepdiscount.com, importcds.com, and Movies Unlimited. This structure gives us complete visibility across the supply chain and allows us to respond quickly to demand shifts. Each business unit, AMPED Entertainment and Music, Alliance Home Entertainment and Film and Television, and our growing collectible segment, plays a specific role in that ecosystem. Together, they create a diversified portfolio that blends reoccurring distribution revenue with higher margin proprietary content and collectibles.

It's this combination of deep relationships, efficient infrastructure, and a focus on fan-driven categories that gives Alliance its competitive edge and supports the margin profile we delivered in the first quarter. With that, I'll now turn it over to Amanda to walk through the financial results for the first quarter of fiscal 2026 in more detail.

Amanda Gnecco, Chief Financial Officer, Alliance Entertainment: Thanks, Jeff. For the quarter ended September 30, 2025, we generated net revenue of $254 million, an increase of 11% from $229 million reported in the first quarter of fiscal year 2025. Cost of revenue as a percentage of revenue improved from 88.6% to 85.4%, a 320 basis point improvement year over year. Gross profit increased 46% year over year to $37.2 million, with gross margin improving to 14.6%, up from 11.2% in the prior year period. Operating income increased nearly fivefold to $10.5 million, up from $2.1 million last year. Net income rose to $4.9 million, or $0.10 per diluted share, compared to $0.4 million or $0.01 per share in the prior year period. On an adjusted basis, EBITDA rose $12.2 million, up 259% from $3.4 million a year ago, representing an adjusted EBITDA margin of 4.8%.

That's nearly triple the prior year rate of 1.5% and aligns with the baseline we expect to maintain through fiscal 2026 and beyond. Overall, the first quarter delivered solid revenue growth, expanded margins, and continued financial discipline, a clear reflection of the progress we've made across both operations and product mix. Our financial improvement is grounded in a strong operational foundation. Alliance operates one of the most advanced entertainment distribution networks in North America, processing more than 50 million units each year and capable of scaling to over 260,000 daily units during peak demand. This scale allows us to manage both major new releases and seasonal surges efficiently without compromising speed or accuracy. Our investment in state-of-the-art automation, including AutoStore and Shure SortX systems, has materially increased throughput and lowered per-unit handling costs.

Those systems, combined with data-driven inventory management, enable us to move hundreds of thousands of SKUs across 76 countries while maintaining quality and consistency. We're also realizing significant cost efficiencies from these initiatives. Energy-efficient systems, reduced manual touches, and a flexible labor model are helping us control expenses even as volumes rise. That efficiency directly supports the 340 basis points improvements we've achieved this quarter. Just as important, these technologies protect product integrity and improve sustainability, minimizing waste and ensuring that every item reaches the customer in pristine condition. It's an advantage that builds trust with both retailers and consumers. While our operations are large, they're nimble and adaptable. Whether we're fulfilling a mass merchant order, shipping direct to consumer, or managing a limited collector release, the same infrastructure powers each channel. That versatility is what allows us to capture high-margin opportunities while maintaining discipline on cost.

In short, the operational investments we've made over the past two years are delivering exactly what we intended: greater efficiency, better scalability, and sustainable margin performance. They give us the confidence that the profitability profile we achieved in the first quarter is not a peak, but a new baseline we can build upon. One of the key strengths of our business model is our omnichannel distribution network that powers both B2B and direct-to-consumer growth. Alliance serves approximately 175 online retailers and more than 35,000 physical stores, giving us unmatched reach across entertainment and collectibles. Through this network, we connect fans and retailers with the products they love, whether it is vinyl, film, gaming, or licensed collectibles. Our direct-to-consumer has become a major revenue driver, now contributing 37% of total net revenue.

We deliver this through both our owned e-commerce platforms and dropship partnerships, which allow customers to access the industry's deepest catalog without retailers carrying physical inventory. This capital light model expands our retail partners' online assortment while keeping working capital requirements low for everyone involved. On the B2B side, our relationships with leading national chains, independent stores, and specialty retailers remain a cornerstone of our business. We provide these partners with high-quality, in-demand products supported by robust fulfillment, automated replenishments, and seamless system integration. The result is stronger in-stock performance, faster delivery, and improved profitability for our retail customers. Our omnichannel platform is what makes Alliance so versatile. We can support a major studio release, fulfill thousands of individual collector orders, and manage retailer-specific campaigns all through the same infrastructure. This flexibility gives us a competitive advantage in a market where consumers expect instant access, variety, and reliability.

As retail continues to blend physical and digital experiences, our role as trusted, technology-enabled fulfillment partner becomes even more essential. It is a model that scales efficiently, serves our partners well, and continues to drive meaningful margin contributions across the business. With that, I will turn it back to Jeff for closing remarks.

Bruce Ogilvie, Executive Chairman, Alliance Entertainment: Thanks, Amanda. As we think about the strength of our retail partnerships, one of the best examples is our role as category advisor for Walmart's video category. This designation reflects the depth of our expertise in physical media and the trust we've built with the largest retailer in the world. In this capacity, Alliance provides Walmart with data-driven analysis, consumer insights, and operational support that inform how the video category is planned, merchandised, and executed across both in-store and online channels. Our team delivers strategic guidance on assortment, casings, and promotional planning, helping Walmart align inventory and shelf space with real-time shopper demand. We also provide forecasting and analytics that highlight emerging trends, guiding their buying decisions and release timing. For Alliance, this partnership is more than a recognition of capability. It's a validation of the strategic value we bring to our retail partners.

It demonstrates how our scale, data, and category knowledge go beyond distribution to help drive category growth across the industry. By pairing our operational excellence with deep consumer insight, we're not only supporting Walmart's success, we're strengthening the overall ecosystem for physical media and collectibles. Our exclusive distribution and licensing agreements provide a strong competitive edge. These partnerships secure Alliance unmatched access to premium and exclusive content pipelines, reinforcing our leadership position and ensuring we remain indispensable to both studios and retailers. Today, our exclusive distribution and licensing agreements collectively drive more than $365 million in annual sales and continue to expand across music, film, and collectibles. Within Alliance Home Entertainment, our exclusive licensing agreement with Paramount Pictures has become a major revenue contributor. Under that agreement, we now handle the full life cycle: creation, manufacturing, marketing, and retail distribution for Paramount's Blu-ray, 4K, and DVD catalog.

The relationship has been a key driver of the 59% year-over-year increase in physical movie sales in the first quarter and continues to strengthen our position as the leading distributor of premium film and TV content in North America. Across music, our AMP Entertainment division represents more than 110 label partners, giving us the industry's most diverse catalog of independent and specialty music content. In collectibles, we're expanding our owned and licensed offerings. Handmade by Robots, which we acquired in December 2024, has quickly grown into a cornerstone of our collectible strategy. We've expanded its retail footprint and licensing pipeline, with upcoming releases featuring characters from Sanrio, Jurassic World, Peanuts, Sonic the Hedgehog, SpongeBob SquarePants, Toho, and others, all of which will begin rolling out through fiscal 2026.

Our long-standing collaboration with Weta Workshop also continues to deliver high-quality collectibles and prop replicas from iconic franchises, while our new Master Replicas partnership adds another layer of premium fan-focused products. Together, these exclusive and owned brands form a powerful portfolio that drives high-margin revenue, deepens our relationships with studios and licensors, and reinforces Alliance's position at the center of the entertainment and collectibles ecosystem. Before we move to Q&A, I want to touch on our ongoing strategic M&A priorities. M&A has always been a core part of how Alliance builds scale and capability. Over the years, we've completed 15 successful acquisitions, each expanding our reach across content, collectibles, and fulfillment. Every deal has been grounded in the same principles: strategic fit, operational synergy, and accretion. Today, our pipeline remains active, but our approach is as disciplined as ever.

We're focused on opportunities that extend our licensing relationships, deepen our collectibles portfolio, and enhance our e-commerce and fulfillment capabilities. That includes specialty brands, niche distributors, and complementary entertainment businesses that align with our capital light model. Our recent success with Handmade by Robots is a great example of that strategy in action, an acquisition that's delivering strong performance, expanding into new retail channels, and opening the door to high-value licensing opportunities. We're now applying that same playbook to evaluate the next set of opportunities that can strengthen our position in the collectibles and physical media ecosystem. With the new Bank of America credit facility in place, we have both the financial flexibility and operational infrastructure to pursue these opportunities thoughtfully. Our focus will remain squarely on driving sustainable, profitable growth and building long-term value for our shareholders.

We're entering the rest of fiscal 2026 from a position of strength, supported by exclusive content, advanced operations, and proven ability to execute. The progress we made this quarter reinforces our confidence in that strategy, and we're excited about what comes next. Before we turn to questions, I want to take a moment to thank our employees across every division. Their hard work, creativity, and execution are what drive our success. I'd also like to thank our customers, partners, and shareholders for their continued support and trust in Alliance Entertainment. We're proud of the momentum we've built and committed to delivering on the opportunities ahead. Operator, we're ready to open the line for questions.

Conference Call Operator: Thank you. At this time, we will conduct a question-and-answer session. If you would like to ask a question, please press Star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press Star 2 to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the Star keys. Once again, that's Star 1 to ask a question at this time. One moment while we poll for questions. The first question comes from Thomas Forte with Maxim Group. Please proceed.

Bruce Ogilvie, Executive Chairman, Alliance Entertainment: Great. Bruce, Jeff, Amanda, congratulations on the quarter. I have three questions. I'll ask them one at a time. The first question is, could physical media outperform this holiday versus prior ones due to the relative favorability when it comes to tariff status versus other categories, including apparel and toys?

Jeff Walker, Chief Executive Officer, Alliance Entertainment: Good afternoon. This is Jeff Walker, CEO. We are definitely seeing strong sales in all the entertainment categories right now. I do not know if it is related to the tariffs in other categories and the minimal amount of tariffs in music and video, or actually no tariffs in music and video, but I think collectors are excited about their collections. Movies, music, gaming, and collectibles are all a huge thing of gift items. I think we are going to see a lot of people being gifted items, especially vinyl in particular, this year.

Bruce Ogilvie, Executive Chairman, Alliance Entertainment: Thanks, Jeff. If anyone's listening, I look forward to vinyl on my holiday list. If someone wants to give me something, vinyl would be greatly appreciated. Sticking with vinyl then, can you talk about the performance of Taylor Swift's Life of a Showgirl versus her last album, The Tortured Poets Department, as a proxy for the current state of consumer demand for vinyl?

Jeff Walker, Chief Executive Officer, Alliance Entertainment: I think a lot in the news there on Taylor, you saw some of the records that she broke with that. Interestingly enough for us, the Taylor Swift album, we did a lot of fulfillment for that album. None of it was booked into the quarter that we just reported. The street date was October 3rd. We were not allowed to ship anything out until October 1st. We did not book anything in the previous quarter or in the current quarter we just reported. I think one thing also to keep in mind with all of the sales that she did on vinyl and CD, the CD sales for Taylor were extremely strong as well. One of the things I have been saying about it is nobody had to buy a vinyl record or a CD of Taylor Swift.

They can listen to her music on all the different digital and online platforms. They are purely buying it because they want to collect something of their favorite artists and they are huge fans of her. That really goes to the conversation about all of our media products are for fans and they are for collectors. That is what we are feeding right into. I do not see that slowing down. People have collected music and video and gaming and other collectible items for centuries in a sense. That is right smack where we are at. The ability to listen to the music digitally does not derail people's desire to have something in their house that they can look at and that they can show off to their friends and so forth there.

Bruce Ogilvie, Executive Chairman, Alliance Entertainment: Great. Thanks, Jeff.

Amanda Gnecco, Chief Financial Officer, Alliance Entertainment: Tom, one thing I could just add to Jeff there. There is a consumer is wanting to own their content instead of rent their content. That is also starting to happen. There is a small little push in that area there, which is helping our business.

Bruce Ogilvie, Executive Chairman, Alliance Entertainment: Excellent. All right, so last one, and thanks for taking all my questions. It sounds like your exclusive physical media deal with Paramount's doing incredibly well. What are your thoughts on forging exclusive deals with other studios?

Jeff Walker, Chief Executive Officer, Alliance Entertainment: We're always working on new opportunities in the company. I do think that there's a good path there for studios to transition to Alliance to really run that aspect of the physical media for them. We're in different levels of conversations with studios on that, big and small. There's a lot of studios out there that have fantastic content. We're just continuing to show and prove that we're a great solution for those studios to maximize the sales of physical media for them. The more that we continue to prove that quarter in and quarter out, the more that those opportunities will come our way.

Amanda Gnecco, Chief Financial Officer, Alliance Entertainment: Yeah. Tom, one thing to add to that, what Jeff says, one thing to add to that, Tom, is that because we do our own physical distribution ourselves, it is not outsourced to a third party, that creates a tremendous advantage we have over anybody even thinking about trying to do what we are doing.

Bruce Ogilvie, Executive Chairman, Alliance Entertainment: Wonderful. All right. Thank you for taking all my questions. Congrats again on the quarter.

Jeff Walker, Chief Executive Officer, Alliance Entertainment: Thank you.

Conference Call Operator: Thank you. The next question comes from Michael Kutzinski with Noble Capital Markets. Please proceed.

Michael Kutzinski, Analyst, Noble Capital Markets: Thank you. Thank you for taking my questions. I want to offer my congratulations as well. It is a great quarter. A couple of questions. I understand that Handmade by Robots contributed in the quarter. I was just wondering, you had very strong results in collectibles. Did Handmade by Robots, did that have broad retail distribution in the quarter? I was just wondering if you can just give me a little color of what we could expect, especially as we go into the second quarter. Should we start looking for more of a significant impact of that brand as we go into the second quarter, maybe the third quarter? I just wanted to get your thoughts on the impact of that brand on that segment.

Jeff Walker, Chief Executive Officer, Alliance Entertainment: Yeah. Hey, Michael. Good to hear from you. Handmade by Robots, we acquired that almost a year ago. We've been really ramping up with licensing and new designs, new IP coming out. We have significant releases this month here in November. We have some new licenses getting finalized with Disney and some of the other big licensors right now. I would say that for fiscal, we're doing well with the brand. For fiscal 2026 that we're in today, I don't think Handmade is going to make a huge impact on the overall financial aspect of Alliance. As everybody knows, Alliance is a big company, and we're really ramping that up.

I think we're going to start to see a financial impact in fiscal 2027 and 2028 with respect to Handmade as this continues to ramp up on the brand and we continue to get more placement with retailers and so forth. We are continuing to add to the team, the Handmade team, to drive those sales and so forth going forward. Most of the growth in Alliance's revenue and profitability here in fiscal 2026 is not going to be attributed to Handmade, even though it's on a significant growth pattern for that business. It just started small, and it's growing quickly.

Michael Kutzinski, Analyst, Noble Capital Markets: Thanks for that, Color. I want to go back to the vinyl question. Vinyl sales seem to be a little stronger than what I was expecting. I was just wondering if you can maybe give us your thoughts on what was the factor there. Certainly, you just mentioned that Taylor Swift was not a big factor in the quarter. Can you kind of give us some thoughts on what were the driving factors in vinyl in the quarter?

Jeff Walker, Chief Executive Officer, Alliance Entertainment: We're seeing continuous consumer demand in vinyl across the board. I think also the artists in particular have really—there's been a lot of new releases. I think top new releases or new—I mean, top artists are having pretty strong following and success right now. Music overall is a category that consumers are gravitating to. The vinyl continues to expand. It's a pretty wide range from all ages in the vinyl. There are some other additional components with vinyl with reissues and some of the older catalog pieces of vinyl. They are reissuing those on a different color vinyl or some other aspect there. That really helps build some more new demand to that particular vinyl piece.

Michael Kutzinski, Analyst, Noble Capital Markets: Gotcha.

Jeff Walker, Chief Executive Officer, Alliance Entertainment: I think one last thing on that. I think a couple of very big artists from the past are looking at bringing out some of their vinyl in the near future in colored vinyl that has only been available in black vinyl. I think things like that can really help support the vinyl sales.

Michael Kutzinski, Analyst, Noble Capital Markets: Gotcha. Then the movie segment seemed to obviously had an exceptional quarter, certainly benefiting from Paramount. I'm just wondering if I maybe underestimated the Paramount aspect of that or if there were maybe another significant lift outside of the Paramount deal. I was just wondering if you can just kind of frame for us the significance of the Paramount licensing agreement to the movie segment or if there were maybe other contributing factors that might have accounted for such strong results in the movie segment.

Jeff Walker, Chief Executive Officer, Alliance Entertainment: Yeah. I think overall our movie division is doing pretty well. We are seeing some really crazy strong numbers with Steelbook, which is a collectible version of a steel packaged DVD. We're a big distributor on that for all the studios. We're seeing really good sell-through there. In addition, it's a collectible Steelbook. It's a nice higher price point as well. The numbers are pretty robust with Steelbook. With respect to Paramount, we've had solid releases. We really spent a lot of time making sure that we've got all the catalog product out. We've got it all in stock. Our in-stock percentages are good. I think one thing to think about in Paramount, at the time that we picked up the Paramount business, the bulk of video DVD at this point is Walmart stores, Amazon, and Alliance.

The three of us do almost 90% of all the DVD sales. Alliance supports a lot of other stores, including Barnes & Noble, a lot of e-commerce for Walmart and Target, and a lot of independent stores and so forth. That's our niche in it. When we got the Paramount license business, we have our existing business that improved the margins from there. We picked up the Paramount business to Walmart and Amazon. That's what's driving some of our Paramount sales growth.

Michael Kutzinski, Analyst, Noble Capital Markets: Congratulations. And good luck on the rest of the year.

Jeff Walker, Chief Executive Officer, Alliance Entertainment: Thank you. We're looking for a great fourth quarter.

Conference Call Operator: Thank you. At this time, I would like to turn the call back to Paul Kuntz for web questions. Please proceed.

Paul Kuntz, Investor Relations, Alliance Entertainment: Thank you. Our first question we had is, you mentioned serving as category advisor for Walmart's video business. Could you elaborate on how that role translates into incremental revenue or share gains for Alliance and whether that model could expand into other product categories?

Jeff Walker, Chief Executive Officer, Alliance Entertainment: Okay. The category advisor role with Walmart, I think everybody needs to understand that this is an independent group of people that are Alliance employees that are dedicated to be the category advisor team for Walmart on behalf of all the studios. This team assists Walmart in their video direction with store planning, promotional aspects, and future plans in the video category. That team is there to represent all the studios and work with Walmart on strategic initiatives going forward. With that, they're not connected to our Alliance sales team that is focused on selling not only Paramount product, but all of our distributed video product to Walmart and the sales aspect there. The advisory role does not necessarily translate into extra revenue for Alliance.

What it does translate into is confidence in Alliance and the team from Walmart, which is a big aspect going forward in our long-term strategies with all the studios and so forth. As you got to realize that we are at Alliance, we're also the third largest physical account behind Walmart and Amazon with all the studios' product on physical product there. Whether it could expand into other product categories, we are the—they do not have a specific category advisor for music, but the Alliance team sales team, we do manage and sell all the vinyl and CDs at Walmart currently in that as well. One thing I want to mention just for recall is the advisor role also is focused on the combination of the store strategy and the e-commerce strategy.

That's something that we're right in the middle of as we do all the e-commerce fulfillment for Walmart on music and video. That strategy there helps to coordinate all of that together so that it's really an omnichannel strategy for Walmart with respect to video and also for music.

Paul Kuntz, Investor Relations, Alliance Entertainment: Thank you. Our next question, you talked about early success from implementing AI tools. From a simple standpoint, how are these tools helping your teams?

Jeff Walker, Chief Executive Officer, Alliance Entertainment: Ooh, AI is great. We're hot on AI here right now. A couple of things we're doing. We've definitely rolled out Copilot as we're a Microsoft-based company here with our software. We've got 280 people on Copilot license, actively working with that on a daily basis, helping them be more efficient in aspects of doing their roles. Our team is very excited about that. We have internal training programs and so forth in place and even best practices calls that we're doing. We're really seeing a big impact on that.

I think we rolled that out in July or August of this year and really look at it and say, "We've continued this role with that over this year, this 12 months, how much better in advance we will be next July with respect to that on the AI side." The last part is we also are rolling into a HubSpot implementation on our sales management, which also involves our AR team and our marketing team. That is really going to streamline business there. That platform has a lot of robust tools and things leaning on AI strategies and abilities there.

Paul Kuntz, Investor Relations, Alliance Entertainment: Great. Thank you. Our next question, you've talked about momentum heading into the holiday season. What are you most excited about from a product or partnership standpoint in Q2? How is the holiday demand shaping up so far?

Jeff Walker, Chief Executive Officer, Alliance Entertainment: Holiday is shaping up pretty well. We're pretty excited about this quarter that we're in. We're seeing consumer demand pretty strong across the board. We're just seeing solid numbers right now. I know vinyl is continuing strong. Our handmade is on a roll right now as that's building. On the video side, we're doing a lot of new strong things too. We should have a strong quarter here.

Paul Kuntz, Investor Relations, Alliance Entertainment: Thank you. Our next question, you highlighted a significant 17% reduction in interest expense year over year. With the new Bank of America facility, what's the expected annualized savings? How does that impact free cash flow trajectory in fiscal 2026?

Jeff Walker, Chief Executive Officer, Alliance Entertainment: Yeah. That was a big improvement for us going to Bank of America. We reduced our interest from SOFR 4 to SOFR 1 and 5/8. That type of difference, if you run about a $60 million borrowing across 12 months, I believe that's about $1,500,000 interest savings per year. We're in pretty good shape with that. We also will get the benefit or have been getting the benefit of the Fed rate reductions as that has been bringing down the SOFR as well on top of that. As we move into January and the beginning of 2026, we're going to be sitting with a pretty nice interest rate cost going forward for calendar 2026 that we're pretty happy about.

Paul Kuntz, Investor Relations, Alliance Entertainment: Thank you. Our next question, Handmade by Robots seems to have strong traction. Are owned IP products now meaningfully lifting blended gross margin?

Jeff Walker, Chief Executive Officer, Alliance Entertainment: I think I got most of that answer there with Mike earlier. It's overall margin. We're seeing good margin in Handmade by Robots. The overall sales volume is compared to our $1.1 billion in revenue is not at the level that it's going to make significant impact yet this year in fiscal 2026. I think you'll start to see impact in fiscal 2027 and 2028 from an earnings standpoint there.

Paul Kuntz, Investor Relations, Alliance Entertainment: Thank you. Then we have another question. If Paramount does not win the bid to acquire Warner Bros. Discovery, does that influence Alliance's chance of getting a licensing deal with Warner Bros.?

Jeff Walker, Chief Executive Officer, Alliance Entertainment: I think those are totally separate conversations there. All the studios, at some point, we believe in the future, will move towards a licensing model on physical media. We are positioning ourselves to be the front runner as to the place that studios would move to. They all have different time frames and initiatives within their organizations. With respect to Paramount, whatever happens with Warner, I do not know that that means one way or the other for us there. I will say this, awesome more news today about David Ellison wanting to feature some more focus more on theatrical releases for Paramount. That is smack dab a home run for Alliance if they release a few more top 10 pull theatrical releases. Those movies roll into our DVD release after that.

We are optimistic with Paramount itself, whether they acquire Warner or not, that they are investing in content. That investment in content will be a positive thing for Alliance.

Paul Kuntz, Investor Relations, Alliance Entertainment: Thank you. Our next question, as you look ahead to the rest of fiscal 2026, what gives you the most confidence in Alliance's ability to sustain the strong margin performance that you've established over the past two quarters?

Jeff Walker, Chief Executive Officer, Alliance Entertainment: The results that we've been producing the last two quarters, they're not a fluke. They're where our business is currently. We see a lot of strength in there. We have a lot of initiatives that we're working on for 2026, internal initiatives for organic growth and other opportunities to grow the business. We're pretty bullish as to what we've got. You have to realize that I have an all-star team of people here at Alliance. It's not just me and it's not just me and Bruce. I mean, we have a significant team of all stars in all these different areas. Each one of these areas that Alliance is participating in, those leaders are running fast in those areas.

That is why you're starting to see this performance and the growth that we're putting together is because we've got a big team of people that are all running fast in their areas and working to add new customers, new sales, new product lines to their areas. That is all that's driving us forward here. Part of that too is we got to remember that my entire team here, there's over 700 people that also have shares in the company. As we went public two and a half years ago, everyone on the team was awarded shares. Newcomers onto the team are in a vesting program for their shares. We have the entire organization focused on driving this business forward and growing the business and doing great work. That is what you're seeing.

I have no reason to doubt that our team is going to continue to do that through 2026 and beyond.

Paul Kuntz, Investor Relations, Alliance Entertainment: Thank you. We're coming up on an hour here. That looks like the last question that came in. Any final comments that you would like to leave with the audience before we wrap up?

Jeff Walker, Chief Executive Officer, Alliance Entertainment: I'm just excited on what we're doing. We're on a roll. As I just said, we've got a great team. Fun working with our team. Everybody's working hard. We got a lot of fun stuff coming up. I think that's where we're at. We're super excited to be able to put together good numbers and continue doing that and driving that forward. That's what we're working on right now. We're working hard on it. Thank you, everybody, for joining our call today.

Conference Call Operator: Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a great day.

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