Greetings, and welcome to the Alliance Entertainment Fiscal 2025 Second Quarter Financial Results Conference Call. 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. Paul?
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 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 revision 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 for a more complete discussion of these factors and other risks, particularly under the heading Risk 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. 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 host today, Jeff Walker, Chief Executive Officer and Chief Financial Officer; and Amanda Gnecco, Chief Accounting Officer, will present the results of operations for the fiscal 2025 second quarter ended December 31, 2024. At this time, I will turn the call over to Alliance Entertainment's CEO and CFO, Jeff Walker.
Thank you, Paul, and good afternoon, everyone. I'm pleased to welcome you to today's call. For those new to our story, Alliance Entertainment is the leading direct-to-consumer e-commerce provider and distributor of entertainment collectibles, serving as the gateway between entertainment brands and retailers. With over 325,000 SKUs in stock, we offer the world's largest selection of music, movies, video games, gaming hardware, arcades, collectibles, toys and consumer electronics. We help omnichannel retailers significantly expand their entertainment collectible offerings online. Through our white label direct-to-consumer fulfillment, we ship orders on behalf of major retailers, reinforcing their brand while leveraging our logistics capabilities. We are a trusted partner to leading retailers, including Walmart, Amazon, Best Buy, Costco, Target and Kohl's, as well as 2,500 independent music stores and specialty retailers.
Our distribution network spans major studios such as Paramount, Sony, Warner Bros., Universal and Lionsgate, as well as top gaming, music and collectible brands, including Microsoft, Nintendo, Funko, Mattel and Hasbro. We are also the exclusive North American distributor for Arcade1UP Retro Arcade system. Our extensive supplier relationships and broad product portfolio make us the backbone of entertainment distribution, ensuring that retailers and consumers have access to the widest selection of physical media and collectibles available today. Alliance Entertainment is the global leader in the $10 billion physical media industry, generating over $1.1 billion in revenue in fiscal '24 with our team of 654 dedicated employee owners. Our scale, supplier relationships and distribution expertise create significant competitive advantages, reinforcing our leadership in entertainment distribution.
We hold exclusive distribution rights for approximately 150 movie studios and music labels, with these partnerships contributing over $250 million in revenue in fiscal 2024. Our unique content portfolio, combined with our deep catalog of 325,000-plus SKUs in stock, allows us to serve both bulk B2B orders and direct-to-consumer shipments efficiently, strengthening long-term relationships with major retailers. With a global reach spanning over 35,000 storefronts across 72 countries, we serve more than 200 online retailers that rely on our inventory and fulfillment capabilities. Strategic acquisitions have played a key role in our expansion, allowing us to quickly enter new markets, diversify revenue streams and solidify our industry leadership. Over the past two decades, we've successfully integrated over a dozen companies, expanding our footprint across physical media, gaming and collectibles.
Building Alliance from the ground up, both organically and through acquisitions, has allowed us to assemble an all-star team with unparalleled industry expertise. This experience further strengthens our market-leading position, and our alignment with shareholders remains a key differentiator, with insiders and employees collectively holding over 94% of the company's outstanding shares. Following a surge in demand during the pandemic, the physical media market has largely returned to its historical growth trajectory in the high single digits. Notably, the CD market has also seen a revival, with CDs outselling digital albums by a 3:1 margin in the first six months of the year. According to the midyear report for the Recording Industry Association of America, we now consider physical media of vinyl, CDs, DVDs, all collectibles, as fans continue to build their collections of these formats. Physical collectibles are in high demand today.
Nearly a quarter of our annual revenue comes from exclusive distribution agreements, strengthening our market position and deepening relationships with both suppliers and retailers. These exclusives are managed through our Distribution Solutions, AMPED, Mill Creek and Arcade1UP divisions, providing unique content that differentiates Alliance in the market. Distribution Solutions partners with over 60 movie studios to manufacture, supply and market home entertainment content, distributing to major retailers such as Amazon, Walmart and Target as well as thousands of independent and specialty retailers. This segment was further strengthened by our new exclusive home entertainment license agreement with Paramount, which took effect January 1, 2025. Under this partnership, Alliance is now the exclusive distributor of Paramount's physical media catalog, including DVD, BluRay and UHD formats across the U.S. and Canada, expanding our leadership in home entertainment distribution.
On the music side, our AMPED division provides exclusive distribution for over 90 music labels, allowing artists and labels to self-distribute physical media while leveraging our deep relationships with Amazon, Walmart, Target and 2,500 independent music stores. K-pop has been a particularly strong growth driver with AMPED supporting major releases and fueling increased sales. Mill Creek licenses and distributes exclusive video content from major studios, including Disney, Sony Pictures and Universal, enabling us to offer high-demand films and TV shows in collectible physical formats. Additionally, we are now the exclusive North American distributor for Arcade1UP. Since transitioning from a nonexclusive agreement, this partnership has already driven meaningful revenue growth, reinforcing our leadership in retro gaming distribution. Exclusive content and partnerships remain a core focus for Alliance as we expand our offerings and drive long-term value for our retail partners and shareholders.
Strategic acquisitions have been central to Alliance Entertainment's growth, allowing us to expand into new markets, diversify our offerings and strengthen our leadership in entertainment distribution. Our journey began with Super D, which Bruce and I grew from $18 million in sales in 2001 to $194 million by 2013. The transformative acquisition of Alliance Entertainment, our largest competitor at that time, solidified our position as the leading global distributor of music and video. In 2016, we acquired ANconnect, securing vendor-managed inventory capabilities and exclusive CV distribution rights with Walmart and Best Buy. In 2018, we entered the gaming sector through the Mecca Electronics acquisition, followed by the COKeM acquisition in 2020, strengthening our relationships with major gaming brands like Microsoft, Sony and Nintendo. The 2018 acquisition of Distribution Solutions from Sony Pictures significantly expanded our exclusive home video distribution business, growing from 18 partners at the time to nearly triple that today.
In 2022, we diversified further by acquiring Think 3Fold, adding collectibles to our portfolio. Most recently, in December 2024, we acquired Handmade by Robots, an innovative collectible brand known for its unique vinyl figures designed to replicate the look of a handmade plush toy. This acquisition strengthens our presence in the high-growth collectibles market and expands our portfolio of licensed products, featuring major franchises like DC Comics, Harry Potter, Jurassic World, Peanuts, Disney, Sonic the Hedgehog, Star Trek and many more. With Handmade by Robots now part of our distribution network, we see significant potential to scale this brand across major retailers and online platforms worldwide. Each acquisition has followed the same disciplined strategy, enhancing our product selection, improving operational scale and deepening our retail and supplier partnerships. This approach has established Alliance as the premier distributor of physical entertainment products and positioned us for continued growth.
When we acquired Distribution Solutions in 2018, it generated approximately $80 million in revenue and worked with 18 studios. Since then, the business has nearly tripled its studio partnerships and has grown into a key driver of our exclusive content strategy. In fiscal 2024, Distribution Solutions contributed $134 million in revenue, underscoring the success of our approach to scaling acquisitions. As we further evaluate future opportunities, we will remain committed to the same disciplined strategy, identifying acquisitions that expand our content portfolio, enhance operational efficiencies and strengthen our relationship with retailers and suppliers. We are confident this approach will continue to drive long-term value. Technology is the backbone of our operations and a critical driver of efficiency, cost savings and growth. Strategic investments in automation and technological innovation enhance our ability to serve our customers more effectively.
Technology is the backbone of our operations, driving efficiency, cost savings and scalability. In 2023, we began making strategic investments in automation to enhance our ability to serve customers while improving our financial performance. One of our highest impact initiatives has been the implementation of AutoStore, an advanced automated storage and retrieval system at our Shepherdsville, Kentucky warehouse. This system has significantly improved our efficiency, enabling us to process over 2,000 lines per hour with a leaner workforce. It has also increased storage capacity, allowing us to consolidate operations and close a 162,000 square foot facility in Minnesota in May of 2024, reducing costs and optimizing our footprint. Additionally, we installed the Sure Sort X system from OpEx, further streamlining our fulfillment process. This system has already delivered over $500,000 in savings with an expected $400,000 in additional annual cost reduction.
It also improves our ability to process larger products such as collectibles and electronics, expanding our capabilities in high-growth categories. These investments are a critical part of our long-term strategy to drive profitability and operational excellence. By leveraging automation and technology, we are strengthening our competitive position and reinforcing Alliance as the most efficient, scalable distributor in the entertainment industry. I will now hand over the call to Alliance's Chief Accounting Officer, Amanda Gnecco.
Thank you, Jeff, and thank you all for joining us today. We will now turn to an overview of the company's financial results for the second quarter and six months ended December 31, 2024. Turning to our financial results for Q2 fiscal year '25. We generated $393.7 million in net revenue compared to $425.6 million in the prior year period. Vinyl sales grew 12% year-over-year to $109 million, while physical movie sales surged 23% to $86 million, driven by strong demand for 4K UHD and collectible SteelBook editions. Gross margin dollars for the quarter were $42.3 million, with a gross margin percentage of 10.7%, reflecting product mix and promotional activities. Operating expenses declined 6% year-over-year to $27.5 million, with distribution and fulfillment costs down 18%, benefiting from ongoing automation and warehouse consolidation initiatives. Net income for Q2 fiscal year '25 was $7.1 million compared to $8.9 million in Q2 fiscal year '24.
This includes a $2.5 million noncash charge related to the revaluation of warrant liabilities, which reduced EPS by $0.05 per share. Excluding this noncash charge, net income would have been $9.6 million, an increase from the prior year. Adjusted EBITDA for the quarter was $16.1 million compared to $17.9 million in the prior year period. For the first half of fiscal year '25, net revenue totaled $622.7 million compared to $652.3 million in the first half of fiscal year '24. Physical movie sales increased 19% year-over-year to $139 million, while vinyl sales grew 10% to $180 million. Gross margin percentage for the six-month period was 10.9%, with operating expenses declining 10% year-over-year to $53.5 million. Net income for the first half of fiscal year 2025 was $7.5 million. As mentioned a moment ago, net income was impacted by a $2.5 million noncash charge during the second quarter. Adding back the $2.5 million warrant liability, net income for the first half of fiscal year 2025 would have ended at $10 million versus $5.5 million in the first half of fiscal year 2024, an increase of 82% year-over-year.
Adjusted EBITDA came in at $19.5 million, an increase from $19.2 million in the prior year. We also continue to strengthen our balance sheet, reducing our revolver balance from $101 million to $70 million year-over-year. This 31% reduction in debt improved liquidity availability from $19 million to $50 million, further enhancing our financial flexibility. This slide compares our trailing 12 months top line and adjusted EBITDA to our financial performance over the last several years, showcasing how we've navigated a dynamic environment. Following an unprecedented surge in demand during the COVID-19 pandemic that drove our top line to a peak of $1.4 billion in fiscal year 2022, demand has normalized with revenues adjusting to $1.1 billion for fiscal year '23 and '24. As of the end of the second quarter of fiscal year '25, our trailing 12-month revenues are just under $1.1 billion, and our adjusted EBITDA is trending higher at $24.5 million, with our adjusted EBITDA margin now at 2.3%.
Turning to our balance sheet. We've continued to strengthen our financial position through disciplined working capital management and debt reduction. As of December 31, 2024, we had $2.5 million in cash and an available credit facility balance of $50 million, up from $19 million a year ago. We reduced our revolver balance by $31 million year-over-year to $70 million, reflecting our ability to convert accounts receivable and inventory into cash. Inventory levels remained stable at $96.3 million, while trade receivables increased to $147 million, aligning with our seasonal sales cycles. Our total liabilities stood at $306.2 million, with stockholders' equity improving to $95.6 million compared to $87.6 million at the end of fiscal year 2024. The combination of reduced leverage, increased liquidity and disciplined expense management provides us with the flexibility to invest in strategic growth initiatives while maintaining a solid financial foundation.
As we look to the future, Alliance Entertainment is poised for continued growth by leveraging our strengths as a capital-light, low-cost provider with unmatched reach in the industry. Our strategy remains clear: expand our market share, improve margins and drive EBITDA growth. First, we are committed to profitability and cash flow generation, ensuring we remain disciplined in managing expenses while improving operational efficiencies. Second, we continue to expand our exclusive content and product offerings, as demonstrated by the Handmade by Robots acquisition and the launch of our exclusive Paramount home entertainment partnership. These strategic moves reinforce our position in high-growth categories like collectibles and premium physical media. Third, we are focused on strengthening our balance sheet, evidenced by the $31 million year-over-year reduction in our revolver balance and the 163% increase in availability.
This financial flexibility positions us to pursue future growth opportunities while maintaining a strong foundation. With these priorities in place, we remain confident in our ability to execute our strategy, capitalize on new opportunities and deliver long-term value for our shareholders. With a stronger balance sheet, key growth catalysts in place and a continued focus on operational excellence, we are well-positioned for sustained profitability and success in the second half of 2025 and beyond. 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. 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 their home video content, allowing these studios to focus on their core competency of making movies, exhibiting in theaters, doing premium downloads and focusing on their streaming services, while we, as a company, focus on our core competency of distributing packaged physical media. We are excited about the route ahead, and we're confident that our strategic initiatives will drive future growth and profitability in the quarters and years ahead.
I will now hand the call back over to the operator to begin our question-and-answer session.
Thank you. And we do have a few webcast questions. Our first question: Can you elaborate on the expected financial and operational impact of your distribution deal with Paramount? How does this partnership position Alliance for future growth in the home entertainment space?
Thank you, Paul. This is Jeff Walker, CEO of Alliance. We are thrilled about our new partnership with Paramount Pictures. Alliance is currently the leading distributor and sales and marketing company for physical DVDs. We are excited about the opportunity to license all of Paramount's catalog and new DVD releases, including ultra-high definition and SteelBook editions. This partnership aligns perfectly with our focus on physical media, allowing us to place these products in front of consumers not just in retail stores, but also on websites across the United States and Canada. We aim to promote the enduring appeal of collectible DVD products for fans who wish to own their favorite movies at home. This collaboration will help extend the life of DVD products as Alliance manages this distribution under license and continues to grow the business. This presents a significant opportunity for us. One of the first new releases we have is Gladiator 2, which was in theaters in December. It is set to be released on March 4, and we forecast an initial shipment of 150,000 units into the market for Gladiator 2, which will have a notable impact on our financial profitability in the first quarter of 2025.
Thank you, Jeff. Another webcast question we had — the acquisition of Handmade by Robots is exciting. How do you see this brand fitting into your broader collectible strategy? And what opportunities do you foresee for cross-promotion with your existing entertainment catalog?
Thank you, Paul. For me, I'm super excited about Handmade by Robots. I love the brand. I love the product. I think the product — the originality of the product is brilliant. Having a licensed character that is a vinyl collectible designed to look like it's knitted and then they're painted with different colors, and we're doing special editions that are black light, glow-in-the-dark and glitter. There are all sorts of different variants that we can do with Handmade by Robots. The other component that I find fascinating in the brand is the name of it. In today's world where everyone is going to have a robot in their house, and I look at it and say, this is what a robot would make. We are very enthusiastic about this brand. We launched the Handmade by Robots website and there’s a pretty robust Instagram account for Handmade by Robots. We're in the process of licensing and designing a significant number of new characters here that will start to hit the market midyear 2025.
It fits exactly with what we do. We sell movies. For example, there's a new movie coming out for SpongeBob in the fourth quarter exclusive to Paramount, and we're going to have SpongeBob characters with Handmade by Robots to go along with that movie. There’s a deep connection within that. It's not just about movies — there are video games, and we have some animated products that are also coming out later this year. It's just a great format and platform, we’re very excited about the opportunity. From the financial aspect, it changes it from being just a distributor of collectibles to where we're also the licensee and manufacturer, which will help towards higher-margin products.
Thanks, Jeff. And we have another question from the webcast. Can you give us a sense of the metrics you are looking for when making an acquisition? Or is it multiples of EBITDA, for instance?
Well, every acquisition has its own story and opportunity. People who do acquisitions understand that. There are a lot of different variables that go into place. We are definitely looking at several acquisition opportunities today. A key component is to acquire earnings, and as a strategic acquirer, we're always looking for something where we have consolidation opportunities to take out overhead and costs. We are also looking at new products that we can bring in to sell to our existing customers and/or sell products to the acquiring companies' customers as well. We are very prudent in our use of capital. We’ve done numerous acquisitions over the years without a lot of additional working capital. It's a combination of many factors. The number one thing for us today is to look for an acquisition that will be very accretive to the overall enterprise value of Alliance and will bring good profitability and channels going forward.
Each acquisition is scrutinized individually, and I think we have a pretty good formula for that. We also have a fantastic team here at Alliance that has participated in many acquisitions. Acquiring the company is one aspect; however, more importantly, is the integration of that acquisition after it's acquired, ensuring everyone works on the same team and looks at all the opportunities of two businesses together. We have a very experienced team at Alliance that knows how to do that, which is one of the biggest contributors to the success of an acquisition.
Thank you, Jeff. And our next question: With direct-to-consumer sales reaching 42% of gross revenue, how do you plan to further optimize this channel and what efficiencies can be leveraged to drive additional margin expansion?
Direct-to-consumer, that's one of our definite winning formulas here at Alliance. The reason I say that is, as many of you know, we stock 325,000 SKUs in our warehouse, and we have those available on as many websites as possible to get consumer eyeballs on our products. We’ve had great success. A good example is the Arcade product from Arcade1UP. When we acquired the company four years ago, it was only selling through Best Buy. Alliance picked it up, allowing these products to be available for sale on various major retailers. If you search Google for Pac-Man Arcade, you'll see all the retailers selling that. It's all coming from Alliance, stored in our warehouse facility, and all of those retailers love that model. They have no inventory risk; they're getting sales. We drop-ship it with their names on it. This is a winning formula for how we operate in direct-to-consumer. With Handmade by Robots, we went straight down the same path right after we acquired that, ensuring every SKU in our warehouse is available on as many websites globally. We aim to drive sales on Handmade by Robots through e-commerce while also featuring it in brick-and-mortar stores.
Great. Thank you, Jeff. And another question: You successfully reduced operating expenses by 13% and distribution costs by 18%. How sustainable are these cost reductions? Are there further automation initiatives in the pipeline?
We have a fantastic warehouse operation, primarily our big facility in Shepherdsville, Kentucky, led by Warwick, our COO, and the team there is just fantastic. They are instrumental in driving cost efficiency and constantly work on improving how we do things while enhancing our efficiency. We see no end to that. We have an ongoing project list that continues to expand, maintaining a focus on efficiencies. We achieved significant savings with our move from the Minnesota warehouse, but we will continue to see operational benefits as we move forward due to the commitment of our team.
Thank you, Jeff. We'll take one more question in the queue. Vinyl and physical movie sales have both posted strong year-over-year gains. What trends are you seeing in consumer demand for physical media? And how do you plan to capitalize on the momentum?
That's a good question. We're very happy that we're seeing vinyl, movies and even CDs doing well. This points to us being in the collectible business. People collect vinyl records, DVD collections, or Handmade by Robots items. Everyone on this call likely has something they collect. We're noticing a robust consumer interest in collectibles. Vinyl is super-hot among collectors, particularly for both new artists and old favorites. As for movies, collectible versions like SteelBook editions are particularly sought after. For instance, looking at Paramount titles like Top Gun, Forrest Gump, or Titanic, those are beloved movies that people want to own in collectible formats. We are fully engaged in this collectible momentum. Furthermore, the Handmade by Robots acquisition aligns perfectly, hitting the center of collectibles and physical products. We're all about collectible items right now, and we believe this will continue driving our growth in the coming years.
Excellent. Thank you, Jeff. And that was the last question in the queue. Are there any final comments you want to leave the audience with?
I guess the final thing is I'm super excited about 2025. We've been working on some of these things. Working on an agreement like this with Paramount doesn't happen overnight - it's been a long process. The Handmade by Robots initiative is crucial for us, and we have active acquisition conversations ongoing that could materialize in the first half of this year. We feel bullish about our prospects going forward and believe we have a solid position moving into 2026. We’ve made significant strides and done a great job throughout 2024.
This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.