Alliance's Q1 2026: Contradictions Emerge on Tariffs, Exclusivity, and Movie Segment Performance

Date of Call: November 12, 2025

Financials Results

• Revenue: $254.0M, up 11% YOY (from $229M)
• EPS: $0.10 per diluted share, vs $0.01 in prior year (net income $4.9M vs $0.4M)
• Gross Margin: 14.6%, up 340 basis points YOY (from 11.2%)

Guidance:

• Holiday / Q2 (holiday quarter) shaping up strong; management expects a robust quarter
• Adjusted EBITDA margin baseline of ~4.8% is expected to be maintained through fiscal 2026
• Handmade by Robots to scale over time; meaningful financial impact anticipated in fiscal 2027–2028
• New 5-year $120M Bank of America revolver lowers borrowing costs and increases liquidity
• Company pursuing additional studio licensing and exclusive distribution opportunities

Business Commentary:

* Revenue and Profitability Growth: - Alliance Entertainment Holding Corporation reported revenue of $254 million for Q1 fiscal 2026, up 11% year-over-year. - Adjusted EBITDA increased to $12.2 million from $3.4 million a year ago, reflecting a 259% improvement. - This growth was driven by strong demand across physical media, collectibles, and direct-to-consumer channels, and improved efficiencies from automation and AI initiatives.

• Operational Efficiency and Cost Reduction:
• Gross margin expanded by 340 basis points to 14.6%, with a 320 basis point improvement in cost of revenue as a percentage of revenue.
• 
• The company realized significant cost efficiencies from automation, including AutoStore and Sure Sort X systems, which reduced manual touches and improved energy efficiency.

• These improvements were supported by investments in advanced technology and operational optimizations to enhance scalability and lower per unit handling costs.

• Exclusive Content and Licensing Success:

• Alliance's exclusive content portfolio contributed to a 59% year-over-year increase in physical movie sales, with their exclusive licensing agreement with Paramount Pictures being a major driver.
• The company's partnership with Virgin Music Group added another premium catalog to their expanding roster of label partners, reinforcing their leadership in the physical media and pop culture ecosystem.

• These exclusive deals have strengthened Alliance's competitive edge and enhanced its margins and revenue stability.

• Strategic Investments and Financial Flexibility:

• Alliance secured a new 5-year, $120 million senior secured revolving credit facility with Bank of America, reducing borrowing costs by up to 250 basis points.
• The new structure provides lower interest expense, longer duration, and greater liquidity to support seasonal inventory needs and future growth initiatives.
• This financial flexibility enables Alliance to pursue strategic acquisitions and invest in organic growth, positioning the company for long-term success.

Sentiment Analysis:

Overall Tone: Positive

• “Revenue grew 11% year-over-year to $254 million,” “Adjusted EBITDA increased to $12.2 million from $3.4 million, a 259% improvement,” and management: “We’re entering the remainder of fiscal 2026 with the balance sheet, liquidity and operating discipline to sustain that momentum.”

Q&A:

• Question from Thomas Forte (Maxim Group LLC): 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?
  Response: Management sees strong demand across music, video, gaming and collectibles—tariffs may help but collector-driven demand (especially vinyl) is the primary driver.

• Question from Thomas Forte (Maxim Group LLC): Can you talk about the performance of Taylor Swift's Life of a Showgirl versus your last album, the Tortured Poets Department as a proxy for the current state of consumer demand for vinyl?
  Response: Taylor Swift shipments did not hit the reported quarter (street date Oct 3); artist-driven collector purchases remain strong and validate continued vinyl demand.

• Question from Thomas Forte (Maxim Group LLC): It sounds like your exclusive physical media deal with Paramount is doing incredibly well. What are your thoughts on forging exclusive deals with other studios?
  Response: They're actively pursuing more studio licensing opportunities; proving results with Paramount should lead to additional exclusive deals given their in-house distribution advantage.

• Question from Michael Kupinski (NOBLE Capital Markets, Inc.): Did Handmade by Robots have broad retail distribution in the quarter and what impact should we expect into Q2/Q3?
  Response: Handmade is ramping licensing and retail placement with notable November releases, but material financial contribution is expected mainly in FY27–FY28, limited impact in FY26.

• Question from Michael Kupinski (NOBLE Capital Markets, Inc.): Vinyl sales seem stronger than expected; what were the driving factors in the quarter (since Taylor wasn't a factor)?
  Response: Broad, ongoing consumer demand, new artist releases, reissues and colored-vinyl variants across demographics are driving vinyl growth.

• Question from Michael Kupinski (NOBLE Capital Markets, Inc.): The movie segment had an exceptional quarter—how significant was the Paramount agreement versus other contributors?
  Response: Movie strength came from collectible SteelBook demand and better in-stock/catalog execution; Paramount licensing—especially distribution to Walmart and Amazon—was a key contributor.

• Question from Paul Kuntz (RedChip Companies, Inc.): How does serving as category adviser for Walmart translate into incremental revenue or share gains and could the model expand into other categories?
  Response: The advisory team builds Walmart confidence and coordinates omnichannel strategy but doesn't directly book sales; it supports long-term relationships and could inform other categories indirectly.

• Question from Paul Kuntz (RedChip Companies, Inc.): How are the AI tools helping your teams?
  Response: Microsoft Co-Pilot (280 licenses) and HubSpot are improving efficiency, speeding lead prioritization and automating content/sales/AR workflows.

• Question from Paul Kuntz (RedChip Companies, Inc.): What are you most excited about for the holiday quarter and how is demand shaping up?
  Response: Holiday demand is strong across vinyl, Handmade and video; management expects a strong holiday (Q2) performance.

• Question from Paul Kuntz (RedChip Companies, Inc.): With the new Bank of America facility, what's the expected annualized interest savings and impact on free cash flow in fiscal '26?
  Response: New facility cut spread from ~SOFR+4% to SOFR+1.625%; on ~$60M average borrowing this is roughly $1.5M annual interest savings, improving FY26 free cash flow.

• Question from Paul Kuntz (RedChip Companies, Inc.): Are owned-IP products (Handmade) meaningfully lifting blended gross margin?
  Response: Handmade shows strong margins but remains small versus $1.1B revenue; meaningful blended-margin impact expected in FY27–FY28.

• Question from Paul Kuntz (RedChip Companies, Inc.): If Paramount doesn't win a bid for Warner Bros. Discovery, does that affect Alliance's chances with Warner Bros.?
  Response: Management views studio licensing discussions as separate; Alliance expects studios generally to move toward licensing and believes its positioning remains favorable regardless of that outcome.

• Question from Paul Kuntz (RedChip Companies, Inc.): What gives you confidence in sustaining the strong margin performance for the rest of fiscal '26?
  Response: Confidence stems from operational initiatives (automation/AI), improved product mix, disciplined cost management and an incentivized, execution-focused team—management sees recent results as the new baseline.

Contradiction Point 1

Impact of Tariffs on Collectibles Segment

It directly impacts expectations regarding the financial impact of tariffs on the collectibles segment, potentially influencing company costs and investor expectations.

How does this affect your margins? Is it related to tariffs? - Michael Kupinski (NOBLE Capital Markets, Inc., Research Division)

2026Q1: Tariffs have been managed within cost structures. Tariffs haven't significantly affected product demand or sales. - Jeffrey Walker(CEO)

How are tariffs impacting your business, and what mitigation strategies are you implementing? - Thomas Forte (Maxim Group LLC, Research Division)

2025Q4: The collectibles segment, particularly Handmade by Robots, manufactures in China and incurs China tariffs. These tariffs have been managed within cost structures. - Jeffrey Walker(CEO)

Contradiction Point 2

Impact of Exclusivity on Revenue Growth

It involves differing opinions on the revenue growth impact of exclusive deals, which are crucial for market positioning and strategic partnerships.

What are your thoughts on entering exclusive partnerships with other studios? - Thomas Forte (Maxim Group LLC, Research Division)

2026Q1: We're always working on new opportunities in the company. 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. - Jeffrey Walker(CEO)

What does Alliance's selection as Walmart's video category adviser signify? - Paul Kuntz (RedChip Companies, Inc.)

2025Q4: Being selected as Walmart's video category adviser demonstrates Alliance's capabilities and aligns with Walmart's long-term strategy of supporting physical media. - Jeffrey Walker(CEO)

Contradiction Point 3

Movie Segment Performance and Contributing Factors

It highlights differing explanations for the strong performance of the movie segment, which could impact investor understanding of the company's success factors.

What factors contributed to the movie segment's strong performance driven by Paramount? - Michael Kupinski (NOBLE Capital Markets, Inc., Research Division)

2026Q1: Our movie division is doing pretty well. We're seeing some really crazy strong numbers with SteelBook, which is a collectible version of a steel packaged DVD. With respect to Paramount, we've had solid releases, and we really spent a lot of time making sure that we've got all the catalog product out, and we've got it all in stock. - Jeffrey Walker(CEO)

Did any specific titles drive the surge in movie sales this quarter? - Paul Kuntz (RedChip)

2025Q3: Our content continues to be strong. We're seeing really strong numbers with the SteelBook, a collectible version of steel packaged DVD. With respect to Paramount, they've transitioned to a licensing model on DVDs. We're now responsible for sales and manufacturing, offering that physical format to retailers and consumers. This partnership extends the life of the DVD and contributes significantly to Alliance's revenue and earnings. - Jeff Walker(CEO)

Contradiction Point 4

Gaming Revenue Decline and Future Growth

It involves differing explanations for the decline in gaming revenue and expectations for future growth, impacting investor understanding of the company's strategic direction in gaming.

What caused the decline in gaming revenue? - Thomas Forte (Maxim Group LLC, Research Division)

2026Q1: Our video game segment experienced a decline in revenue primarily due to limited hardware allocation, particularly from Microsoft. Despite this, we expect strong growth in the coming year due to new hardware releases from Nintendo and anticipated new software releases like Grand Theft Auto. - Jeffrey Walker(CEO)

What caused the decline in gaming revenue? - Paul Kuntz (RedChip)

2025Q3: Gaming revenue decline is attributed to limited hardware allocation, particularly from Microsoft. Despite this, we expect strong growth in the coming year due to new hardware releases from Nintendo and anticipated new software releases like Grand Theft Auto. - Jeff Walker(CEO)

Contradiction Point 5

Vinyl Sales Performance and Demand Trends

It highlights differing perspectives on the factors driving vinyl sales and consumer demand, which are crucial for understanding market trends and strategic decision-making.

What factors drove the stronger-than-expected vinyl sales? - Michael Kupinski (NOBLE Capital Markets, Inc., Research Division)

2026Q1: We're seeing continuous consumer demand in vinyl across the board. The top artists are having pretty strong following and success right now and top new releases are new... There are some other additional components with vinyl with reissues and some of the older catalog pieces of vinyl. - Jeffrey Walker(CEO)

Vinyl and physical movie sales have both posted strong YoY gains. What trends are you seeing in consumer demand for physical media, and how do you plan to capitalize on this momentum? - Paul Kuntz (RedChip)

2025Q2: Consumer demand for physical media is robust, driven by collecting and owning physical products. Alliance is capitalizing on this trend by offering collectibles in different formats and expanding product offerings like steel books. - Jeffrey Walker(CEO)