Alliance Entertainment (AENT) Q1 2027 Earnings Call Transcript

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DATE

Thursday, Nov. 12, 2026

CALL PARTICIPANTS

• Chief Executive Officer - Jeffrey Walker
• Chief Financial Officer - Amanda Gnecco
• Executive Chairman - Bruce Ogilvie

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TAKEAWAYS

• Net Revenue -- $278.8 million, growing 10% year over year due to gains in physical movies, music, and collectibles.
• Gross Margin -- 15.1%, expanding 50 basis points reflecting stronger product margins and a favorable product mix.
• GAAP Net Income -- $7.6 million, increasing 56% primarily driven by lower financing costs and non-GAAP warrant valuation adjustments.
• Physical Movie Revenue -- $101.1 million, increasing 20% supported by exclusive distribution relationships with Paramount and Amazon MGM Studios.
• Vinyl Revenue -- $86.7 million, increasing 14% driven by higher unit sales and average selling prices for new releases and special editions.
• CD Revenue -- $41.2 million, growing 22% due to high-profile releases and increased interest in international music like K-pop.
• Collectibles Revenue -- $11.9 million, rising 87% year over year as the segment expanded to 4.3% of total company revenue.
• Gaming Revenue Decline -- $18.4 million, reflecting reduced availability of Microsoft hardware and a difficult comparison against a prior-year Nintendo launch.
• Distribution and Fulfillment Fee Revenue -- $5.7 million, increasing 18% due to higher demand for value-added logistics services.
• Interest Expense -- $1.2 million, declining 49% as the effective interest rate dropped to 5.3% from 8.4% following a bank refinancing.
• Operating Cash Flow -- $4.3 million, increasing 58% year over year despite higher working capital requirements.
• Inventory -- $152.0 million, increasing 20% sequentially to support seasonal stocking and holiday demand.
• Operating Expenses -- $31.5 million, increasing 18% as the company supported revenue growth and invested in operational capabilities.
• Distribution and Fulfillment Expenses -- $12.0 million, rising from $9.9 million due to higher labor utilization and specialized handling requirements.
• Selling, General and Administrative Expenses -- $17.9 million, increasing from $15.1 million reflecting higher consulting, professional services, and employee-related costs.
• Revolving Credit Facility Availability -- $48.9 million, remaining on a $120 million facility with additional collateral-supported capacity of $33.4 million.
• AutoStore Lease Savings -- $3 million, representing the expected annual pretax benefit following the final lease payment scheduled for Jan. 2027.
• Adjusted EBITDA -- $12.3 million, increasing 1% year over year after excluding non-cash warrant remeasurements and transaction costs.
• GAAP Diluted EPS -- $0.15, increasing 50% from $0.10 in the prior-year quarter.

SUMMARY

Alliance Entertainment Holding Corporation (NASDAQ:AENT) reported results for the first quarter of fiscal 2027, highlighting growth across physical media categories and the expansion of the collectibles segment. Management reported that revenue gains in physical movies and music were driven by exclusive distribution relationships and a resurgence in collector demand for vinyl and compact discs. The company reported an increase in GAAP net income that was supported by lower financing costs and favorable non-cash adjustments related to warrant liabilities. Strategic initiatives during the period focused on enhancing authentication technology, implementing artificial intelligence for operational efficiency, and launching a retail test phase to return physical music products to a major national electronics retailer.

• CEO Walker indicated that the company is conducting a 14-store test with Best Buy for vinyl and CD departments, with potential expansion to 100 to 300 stores in 2027.
• Management stated that the final payment for the AutoStore operating lease is scheduled for Jan. 2027, which is expected to result in a $250,000 monthly reduction in operating expenses.
• The company announced a strategic investment in ArtPics, a firm that converts original one-of-a-kind fine art into an authenticated trading card format using the company's NFC technology.
• CEO Walker stated, "Almost everyone is a super fan of something," noting that the company is leveraging studio relationships to develop exclusive physical products like collector SteelBooks.
• Management reported that AI initiatives currently focus on automating accounts receivable and accounts payable workflows, which are expected to support operating cost savings in fiscal 2028.
• CEO Walker noted that Best Buy allocated the company a 14-foot by 14-foot section to establish a music department in participating test locations.

INDUSTRY GLOSSARY

• NFC: Near Field Communication technology used for short-range wireless data exchange and product authentication.
• SteelBook: A premium, metal-cased collectible packaging for physical media such as movies and video games.
• K-pop: A popular music genre originating in South Korea that significantly contributes to physical compact disc and collectible sales.
• AutoStore: A high-density automated warehouse storage and retrieval system used to optimize fulfillment efficiency.
• Endstate Authentic: The company's proprietary authentication platform utilizing NFC technology to verify product legitimacy and provenance.
• Handmade by Robots: The company's owned brand of stylized vinyl collectible figures featuring licensed characters.

Full Conference Call Transcript

Operator: Greetings, and welcome to Alliance Entertainment's First Quarter Fiscal Year 2027 Financial Results Conference Call. [Operator Instructions] As a reminder, today's conference is being recorded. I will now turn the call over to Paul Kuntz, a member of Alliance Entertainment's IR team at Red Chip. Paul, please go ahead.

Paul Kuntz: 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. 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 filed September 10, 2026, 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, adjusted net income and adjusted earnings per share. Management believes non-GAAP disclosures enable investors to better understand Alliance Entertainment's core operating performance.

Please refer to the investor presentation or today's earnings press release for a reconciliation of each non-GAAP measure to the most directly comparable GAAP financial measure. Your host today, Jeff Walker, Chief Executive Officer; and Amanda Gnecco, Chief Financial Officer, will discuss results for the first quarter of fiscal 2027 ended September 30, 2026. Bruce Ogilvie, Executive Chairman, is also on the line and will participate during the Q&A session. With that, Jeff, the call is yours.

Jeffrey Walker: Thank you, Paul, and good afternoon, everyone. I'm excited to share the progress we're making at Alliance and the opportunities we're building for the years ahead. We began fiscal 2027 with revenue growth of 10%, reaching $278.8 million. Gross profit grew 13% to $42.1 million and gross margin improved to 15.1%. GAAP net income increased 56% to $7.6 million and diluted earnings per share increased 50% to $0.15. Lower financing costs and favorable changes in the fair value of warrant liabilities also contributed to the earnings increase. Amanda will explain those drivers and our operating performance in a moment.

The revenue growth is important because it came across several parts of our business: movies, physical music, collectibles and distribution and fulfillment services. We are building on that demand while expanding the products and services Alliance can offer. Our relationships with studios, labels, brands and retailers give us a foundation to develop exclusive products, grow collectibles and bring authentication technology to new customers. We believe these opportunities can make Alliance a larger and more valuable partner to the companies and fans we serve. Streaming has changed how people consume entertainment, but fans still want to own something that connects them to the music, stories and characters they love. We're seeing that in special editions, vinyl records and collectibles.

Almost everyone is a super fan of something. For those customers, the right physical product is part of the experience. Alliance has the studio and label relationships, retail reach and fulfillment capabilities to bring those products to market. We can help a partner develop a product, get it in front of collectors and deliver it to their doors. That is why we're excited about the opportunity to do more with the platform we already have. Let me walk through how that is showing up across the business, starting with home entertainment. In Q1, physical movie revenue increased 20% to $101.1 million. Our relationships with Paramount and Amazon MGM Studios contributed through new releases, broader title availability and expanded retail distribution.

Our role also increasingly extends to developing the products collectors want. Take Project Hail Mary. Our creative team worked closely with the filmmakers to develop the artwork for the Amazon Exclusive Collectors Steel book. That is a tangible example of the value we can add beyond traditional distribution. We can contribute to the creative product connected with the retailers and handle fulfillment. That broader role deepens our studio relationships and expands the ways we can create value. In physical music, vinyl revenue increased 14% to $86.7 million, while CV revenue increased 22% to $41.2 million. Both categories benefited from higher unit sales and average selling prices.

New releases, reissues and special editions supported vinyl demand while high-profile releases and interest in K-pop and international music contributed to CV growth. Vinyl gets a lot of attention, but the CV results are another reminder of the breadth of the opportunity. When artists offer fans something distinctive, physical music can remain a meaningful part of the experience. On the retail side, we're helping our partners offer more of these products without having to carry every item in their own warehouses. They can offer a broader assortment online while we manage the inventory and ship directly to the consumer. Distribution and fulfillment fee revenue increased 18% to $5.7 million in the quarter, reflecting higher demand for these services.

Collectibles was another standout for the quarter. Revenue increased 87% to $11.9 million from $6.4 million a year ago. The category represented 4.3% of our quarterly revenue compared to 2.5% in the prior year period. Growth reflected expanded licensed offerings, broader sourcing and vendor relationships and our owned Handmade by Robots brand. With Handmade by Robots, we're working directly with licensors on product development and bringing those products to market through our existing retail relationships. We're participating in design and licensing as well as distribution with the potential to capture more value from each product. We are also offering encapsulated Handmade by Robot figures through Alliance Authentic, which launched in January with Preserved vinyl.

We're preparing to bring that same approach to premium movies SteelBooks, extending the offering across more of the entertainment categories we already serve. With Alliance Authentic, our goal is to offer collectors a differentiated authenticated product. We source the products directly from the label studios and brands and fans buy them already preserved, field, individually numbered and NFC-authenticated. The preservation and authentication are part of the product from the start, giving the collector confidence in what they own and creating opportunities for additional services and engagement after the initial sale. Endstate Authentic powers the NSV authentication technology behind Alliance Authentic. We are expanding that technology beyond our own products through commercial partnerships with other companies.

That creates another way to grow, supplying authentication products and services to brands and collectors we may not reach through distribution alone. Earlier this week, we announced a strategic investment in ArtPics, a company bringing original one-of-a-kind fine art into the trading card format. These aren't reproductions. Every card is an original piece of artwork and Endstate's technology gives collectors a way to verify its authenticity. ArtPics has already been using our technology and recently extended its relationship with Endstate for another 2 years. What I like about this opportunity is that it shows how Endstate's technology can serve different collectible categories.

They expand the market we can address and give us new ways to participate in the growth of collectibles. We are also investing now in AI implementations to help us grow revenue and improve the way we operate. This work includes automating financial workflows, accelerating software development and giving our teams more capacity to serve customers and expand the business. As these initiatives are implemented and scaled, we expect them to support revenue growth and generate operating cost savings in fiscal 2028. We will evaluate the benefits against the cost of implementation and ongoing operation. Our objective is to improve productivity so that over time, we can grow the business without a proportional increase in operational costs.

Alongside our continued investment in warehouse automation, this is an important part of our effort to convert more of Alliance's growth into operating income and cash flow. With that, I'll turn the call over to Amanda to discuss first quarter financial performance.

Amanda Gnecco: Thank you, Jeff. Turning to our financial results. I will highlight the key drivers of our first quarter performance, including revenue growth, gross margin, operating expenses and earnings before discussing cash flow and our balance sheet. Unless otherwise noted, all comparisons are to the first quarter of fiscal year 2026, the prior year period. Net revenue increased 10% to $278.8 million from $254 million. As just discussed, growth in movies, physical music and collectibles drove our revenue performance. This was partially offset by lower gaming revenue, reflecting reduced availability of Microsoft products, the absence of Arcade products this quarter and a challenging comparison against the prior year period, which benefited from the Nintendo Switch 2 launch.

Gross profit increased 13% to $42.1 million from $37.2 million. Gross margin improved to 15.1% from 14.6%, an increase of 50 basis points. The improvement reflected stronger product margins, partially offset by higher royalty costs associated with certain studio distribution relationships and increased freight expenses, including fuel surcharges. Total operating expenses increased 18% to $31.5 million from $26.6 million. As a percentage of revenue, operating expenses increased 80 basis points to 11.3%. Distribution and fulfillment expenses increased to $12 million from $9.9 million. The increase was primarily driven by higher warehouse labor requirements associated with increased fulfillment capacity, special projects and changes in the product mix.

Importantly, hourly fulfillment payroll costs increased just 2%, with the majority of the expense increase attributable to higher labor utilization rather than wage inflation. We remain focused on aligning labor capacity with volume and improving fulfillment efficiency as the business grows. Selling, general and administrative expenses increased to $17.9 million from $15.1 million, primarily reflecting higher employee-related costs, consulting and professional service expenses and costs supporting our ongoing operations and growth initiatives. Operating income was $10.6 million compared with $10.5 million. While gross profit increased, higher operating expenses offset much of that growth. Improving operating leverage remains a key priority, and we are focused on managing expenses, streamlining workflows and leveraging technology to support more efficient operations.

GAAP net income increased 56% to $7.6 million from $4.9 million, and diluted earnings per share increased 50% to $0.15 per share. The year-over-year improvement was driven primarily by lower financing costs and favorable noncash warrant valuation adjustments. First, interest expense declined 49% to $1.2 million, and our average effective interest rate fell to 5.3% from 8.4% following the October 2025 refinancing with Bank of America. The lower rate more than offset the higher average revolver borrowings during the quarter. Second, we recorded a noncash gain of $0.9 million from changes in the fair value of warrant liabilities compared with a noncash loss of $1.5 million a year ago.

That was a favorable year-over-year swing of $2.3 million before income taxes. As a noncash valuation adjustment, this change does not reflect the underlying performance of our operations. Income tax expense increased to $2.7 million from $1.9 million, while the effective tax rate decreased to 26% compared with 28% in the prior year quarter. Turning to our adjusted results. Adjusted EBITDA increased 1% to $12.3 million. Adjusted net income was essentially unchanged at $7.2 million and adjusted diluted earnings per share remained at $0.14 per share. Reconciliations and descriptions of the adjustments are included in our earnings release. Turning to cash flow. We generated $4.3 million from operating activities compared with $2.7 million a year ago, an increase of 58%.

As we outlined in our last earnings call, improving cash generation and working capital efficiency remains a central priority for fiscal year 2027. This quarter's improvement represents positive progress, particularly as we continue to invest in inventory to support our business. During the quarter, inventory represented a $25.4 million use of cash, while trade receivable used $8.9 million, reflecting the timing of sales and customer collections. These investments were partially offset by $27.8 million increase in our accounts payable. We also reduced outstanding borrowings under our revolving credit facility by $3.4 million during the quarter while cash flow improved, our business continues to require significant working capital investment, particularly in inventory.

We remain focused on improving inventory productivity, accelerating collections and managing working capital more efficiently as revenue grows. These efforts are central to our objective of converting a greater share of earnings into operating cash flow. Our approach to capital allocation remains disciplined and consistent. We are prioritizing investments that support profitable growth, strengthen our capabilities and enhance long-term returns. We will remain disciplined in evaluating acquisition opportunities, prioritizing strategic alignment and attractive financial returns. In closing, we delivered solid revenue and gross profit growth, benefited from lower financing costs and improved operating cash flow.

As we move through fiscal year 2027, our focus is on building on that progress, strengthening operating leverage and converting more of our growth into sustainable earnings and cash generation. The operational improvements and technology initiatives just discussed are important components of that strategy. With that, I will turn the call back over to Jeff.

Jeffrey Walker: Thank you, Amanda. What excites me about Alliance today is that we're building on a growing core business while opening additional paths for growth. Our distribution relationships put us close to the products and brands fans want. Our work in collectibles and product development expands the role we can play. Endstate's authentication technology gives us opportunities to serve other companies and their customers. For the rest of fiscal 2027, our focus is on putting those opportunities to work, building on demand in our core categories, expanding our collectibles offering and growing the customer base for authentication.

At the same time, we're investing in AI and automation that we expect to help us generate revenue growth and operating cost savings in fiscal 2028. We have more ways to grow than we did before, and our job is to turn that potential into results for shareholders. That means executing with discipline, managing working capital and translating growth into stronger operating earnings and cash generation. I'm excited about the business we're building and looking forward to sharing our progress. I want to thank our employees for their hard work and content and licensing partners, collectors and shareholders for their continued support. Operator, we're ready to open the line for questions.

Operator: [Operator Instructions] And today's first question comes from Michael Kupinski with NOBLE Capital Markets.

Richard Magnusen: This is Richard Magnusen in for Michael Kupinski. You mentioned fuel charges impacting your freight costs. Can you tell us how much of that is continuing to this quarter? And then regarding tariffs, how much of the collectibles and electronics business is still exposed?

Jeffrey Walker: This is Jeff Walker. Starting with the fuel cost, I mean, we definitely have some increased fuel costs right now with fuel surcharges. I don't consider it a super high threat to our profitability of our business, but we would definitely like to see the fuel surcharges coming down. With respect to the tariffs, tariffs are not a big concern for us at this point. We did get a significant refund on the tariffs. We already received that money back. And with respect to our Handmade by Robots, we're not seeing a lot of impact on that.

And then on all the other collectibles that other companies produce that we buy from, we're not seeing a huge impact on that in our business here at this time.

Richard Magnusen: And then regarding inventory, the inventory increased approximately 20% sequentially to $152 million, reflecting preparation for the holiday selling season. How much of that inventory increase represents normal seasonal stocking versus new studio licensing and collectibles opportunities? And what level of inventory reduction and cash generation should investors expect during the second and third fiscal quarters?

Jeffrey Walker: With respect to the inventory up for September 30, it's pretty consistent with our patterns really every year at this time. We have to bring in inventory as we start shipping even some late September, but heavily in October into our major retail customers and so forth. So our inventory does go up as we really write in that late September time frame. You will continue to see that come down and back to our normal cadence on our inventory after the holidays here. We feel we're in a pretty good inventory position right now.

Operator: [Operator Instructions] And our next question comes from Thomas Forte with Maxim.

Thomas Forte: So I apologize for joining late and asking questions you may have already discussed, but I have a handful of questions. I'll go one at a time. So the first question I had was you recently announced an anime-related effort with JAKKS Pacific. Can you talk about why you're doing it and why you think it's a good opportunity for Alliance Entertainment?

Jeffrey Walker: Yes. Thank you for the question, Tom. So we are pretty heavy into anime, especially with our collectibles and also in some of our video content that we sell. And this is a great connection here with JAKKS and Alliance. We're really focused on selling those products into the collectible stores that is a huge sales channel for us. We're pretty significant, not only in the music stores out there, but independent collectible stores as well. So this is a good match up for us. And we're definitely pretty heavily invested in anime products and quite a bit of our collectible growth is in that anime category as well.

Thomas Forte: And for my second question, I had the pleasure of hosting a panel with you on it. And you had some outstanding answers on how Alliance is leveraging artificial intelligence that I think investors may not fully appreciate. So can you -- for investors who may not have had the opportunity, can you talk about how you're capitalizing on AI on multiple levels?

Jeffrey Walker: Definitely. First and foremost, I'm definitely very pro AI CEO here. And I think it's going to be incredible for our business over the next years here as we implement more AI capabilities. We look at it kind of in a couple of different ways. First and foremost, we have been focusing on how we use AI to expand our sales. And part of that is how we get more targeted to not only our wholesale customers what wanted and needed for their stores, but also with -- on our consumer brands and so forth, how we can target the right customer with the right product using AI tools.

And I think we're seeing some of the results of that definitely with the last -- all of 2026 here with pretty significant sales increases. And I do think some of our AI initiatives have been helping to drive that. The next part is we, over the summer, began to train a group of our IP programmers, our technology programmers with AI tools, and that's been a very successful program. We're now into round 2 with a secondary group of our technology professionals going through an everyday class on AI technology to help give them all the tools to really speed up our technology development. And that's going to translate into some very significant wins for us.

In the meantime, we're working on completing a project in the AR side with AI that's cash application using AI. We've got a project in the works right now on our AP side, which matches up vendor invoices and receipts and all of that. We've also got a redevelopment of our Web Ame, which is Alliance's B2B website. And that's a core rebuild using AI. The speed and performance of the prototype right now is exceptional, and we're adding new features to what we currently have with Web Ame.

We are not -- we're purposely not rolling that out right now because it's right in the middle of Q4, but that's set for a launch in mid-January with subsequent releases through the whole first quarter of January. That's significantly going to help our store buyers and our customers with their purchasing online and help them with suggested titles and titles that they're missing and so forth there. And then the last part of our AI initiative is with all of our business team, which is sales, accounting, purchasing and so forth there. Everybody is currently on Copilot and working with Copilot. Right now, we're moving into the second phase of advanced training with everybody.

And really, the intention is how are we making our team as AI fluent as possible. And that's where we're going with it right now. And when I look at this, we're in a perfect position to really lead in our industry with our AI capabilities, and it's going to be extremely important going forward. And I think we're positioned really well. And the last thing I will say is we are investing some money into this right now. And it is part of our operating expenses right now with help on all this stuff.

But I think just as we invest in a significant equipment in the warehouse and so forth, we have to invest with AI training with our entire team at Alliance. And it's also a huge win for the team that's at Alliance because we all need to have a really high level of AI fluency going forward for our professions and our jobs.

Thomas Forte: All right. So Jeff, I'm going to assume that you already talked about Grand Theft Auto VI and how that could be wonderful for Alliance. You have not?

Jeffrey Walker: Not yet. Go ahead.

Thomas Forte: So that would be my next question. How should we think about Grand Theft Auto VI? It looks like the gaming category was down. Can one title alone reignite the category for you?

Jeffrey Walker: Well, my conspiracy theory is that Microsoft is down all day today because people are downloading Grand GTA VI. So it's -- the magnitude of this game is pretty incredible. I was expecting it to go -- the Internet to go down on next Thursday, the 19th when you can actually play it all. It is a significant game for us. I don't -- it's not going to completely reverse our gaming numbers. It is a significant shipping. We have shipped that product this week. It went out at the beginning of this week to all of our different retail partners. We are also very optimistic about the vinyl record for Grand Theft Auto that is street dating next week.

And I think overall, it's great for the entertainment side. But we have a significant amount of business this quarter even without Grand Theft Auto. So -- but it's a big game for sure.

Thomas Forte: And then I apologize if you already discussed this, but it looks like you had another quarter where CD sales grew faster than vinyl. Anecdotally, I feel like I'm hearing a lot more conversations about the resurgence in CDs. I'm just wondering if you feel like versus last quarter feels more durable or bigger? Any thoughts there would be appreciated.

Jeffrey Walker: Well, I think it's going to continue, same as on the vinyl side. We're not seeing a slowdown here. We're seeing consistent growth in that. We also -- so I think collectors are being collectors that they're fans and they're collecting both CD and vinyl. So I think it's going to continue. I don't see any slowdown in that right now.

Thomas Forte: And then last 2 for me. So you've successfully called multiple bottoms. So are we closer to the bottom on DVDs?

Jeffrey Walker: I think we are. I think it's either 27 here that we're at the bottom there. I will say with respect to our sales, we're seeing a resurgence on the DVD side. And we have a strength in DVD right now, obviously, with our Paramount and MGM side of our business. But also with those, especially on the Paramount side this year, we've released new catalog titles that have helped support that. And on the MGM side, we're working on the same thing to continue to release product that was not available previously. But I do see a trend right now on the DVD side.

And I think it's somewhat also going to follow along if you're following along with the theatrical numbers and the movie theaters there -- this is going to be the highest year ever here in '26, finally passing up 2019 and getting back on track there. So I think that's part of the growth back on the video side. And I'm actually starting to see some post right now of people opening video rental stores. And they will have to get product for those stores from Alliance as we're really the video distributor for something -- for a store like that.

And I think a lot of us on this call would love to see a great video rental store in their neighborhood to go with the family and pick out some type of -- some DVD to watch that night. So that could definitely be on its way back.

Thomas Forte: And then last one. So I'd appreciate your current thoughts on strategic M&A, assuming you haven't talked about that yet, if you have, then feel free to pass on that one.

Jeffrey Walker: I've got a pretty robust pipeline right now that I'm working on. It's a big, big focus for me personally right now on the M&A side. We're definitely seeing some interesting opportunities, conversations that we were in a year or 2 ago that we're back in those conversations. And we definitely see some good opportunities out there. And they can go anywhere from collectibles into music and video predominantly in those 3 areas. And we also did the investment there into ArtPics recently. So we are looking also at strategic investments similar to ArtPics.

So you have the aspect of a complete acquisition of a company and then also the aspect of a strategic investment, especially if it's a company that we're working with Endstate and implementing or already implementing the NFC chips and how we're helping a company like ArtPics to grow that business. I'm super excited about ArtPics. Everybody on the call should take a quick look at their website, ArtPics artist. It's a fantastic business model. And I've talked a little bit about collectibles in the past. The one thing I love about ArtPics is each one of the cards is an individually drawn card from an artist. So they're one of ones.

And for all of you that follow along in collectibles, something that's a one of one is scarcity, the top of the scarcity ladder there. And so when you have a significant artist that's doing big art pieces and they're doing one-of-one cards, they could -- and those cards are autographed. We have our NFC our Endstate NFC chip on the back of the card, and then that's encapsulated. So now you've got the authenticity of that one-on-one card. It's a great business model. And Gareb, who's the CEO there, is extremely connected into the comic book and art world.

And there's just a lot of crossover between what he's doing and what Alliance is doing in the industries that we're in. So I'm super excited about that opportunity there right now.

Operator: And at this time, we will take the next question over audio from Steve Chick with Sebis Garden Capital.

Stephen Chick: Congrats on a good quarter, guys. I had -- I want to follow up on the gaming question because as I look at the category, you kind of called out the 40% decline in this quarter and reduced availability of Microsoft product. I wonder if you could elaborate on that. And then as you look to this very next quarter, you're comparing against a pretty easy trend in that category from a year ago. And with GTA and anything else, I'm actually kind of wondering if the upcoming quarter could be even positive in that segment.

Jeffrey Walker: Yes. I do think it will be positive in that segment because the 2 big things that dragged us last year was Microsoft hardware and our comp on the Arcade business that we had. I think -- so one of the really strong parts in our gaming business is our relationship with Nintendo on the hardware and the software. And we do a lot of great special projects with Nintendo with the major retailers and so forth there. And really, in today's space, it really does seem like it's Nintendo that's committed to physical gaming product for the long run.

You have Microsoft and Sony really kind of on the edge as far as where their future direction is with physical gaming software. And so we're pretty well positioned, and we focus a lot of our time and energy with Nintendo and helping them do well with their game launches and their hardware launches and so forth. So I do think that we have a solid great opportunity there on the Nintendo side.

Stephen Chick: And then separately, the AutoStore lease, I think, ends the last payment of those monthly payments you're making, I think the last one is to be made in January. Correct me if I'm wrong on that, and it's like $250,000, which is pretty significant. How is that going to show up as we head into 2027. Is that a lease expense that you're no longer going to be incurring? Or where is it? How does that financial state?

Jeffrey Walker: Yes, we're pretty happy about that. It's $250 a month. We got December and January left, and then we will not have that expense. So yes, you will see a net income because it's an operating lease, you're going to see a $3 million pickup annually on our net income of pretax income without that lease payment. It's a significant win for us.

Stephen Chick: And then last, if I could. The -- so the Class E share notification from August, is that like kind of what's the plan from here? I mean any you kind of entertaining any other -- anything else to do with those shares? If you could speak to that, it would be great.

Jeffrey Walker: Right now, we're in our inquiry research mode on those, trying to determine what the next steps are with those. That's kind of where we're at right now. So I don't have too much other detail on that at this time.

Operator: Our next question is from David Heiserman with ThinkEquity.

David Heiserman: Jeff, can I go back to one of your exciting comments you made earlier? Is the Grand Theft Auto VI going to release a soundtrack on final? Will Endstate be authenticating that?

Jeffrey Walker: Well, they are releasing it on vinyl. The street date is November 20. It's coming through Atlantic Records, and it's got a whole bunch of A top artists on that album, a lot of songs that are in the game as well. So it's going to be a big release. And yes, we will be encapsulating a limited amount of those. But the bigger aspect is the overall sales through a lot of sales channels on that as well.

David Heiserman: Does everyone know that? Or is that like an inside scoop?

Jeffrey Walker: No, it's pretty well out there on that. Yes, it's -- they've released different songs already, not all the songs, but they have released some songs on it. Yes, it's pretty well out there. It's predictably going to be -- it's definitely going to be one of the top 10 titles of this quarter. It could end up being the top title of this quarter with all the major artists that are on it.

David Heiserman: And then in trying to get on to the ArtPics website, I stumbled upon Star Picks. Is that a similar project of one of your founders?

Jeffrey Walker: I think StarPics is a component that Gar was doing with ArtPics, but we're really focused on the ArtPics aspect of it.

Operator: And at this time, I would like to turn the conference over to Paul Kuntz to review any questions submitted over the webcast.

Paul Kuntz: Thank you. Our first question, what have you learned from the initial rollout of Alliance Authentic and which product categories do you see as the biggest opportunities for expansion?

Jeffrey Walker: So the product of Alliance Authentic is fantastic. The ability to encapsulate an uncirculated product, whether it's a vinyl record, we're doing Handmade by Robots, we're doing Funko Pops. We're just ready to launch some steel book in that. And then encapsulating those and putting an NFC chip in it that authenticates that, that piece is real. When you take that item and you look out 10 to 20 years down the road on those items, and then there's only a limited number of them as on the vinyl as an example.

One of them that -- to your question about what was really hot, we were at New York Comic-Con and the Rolling Stones recent album had -- I think it was 5 different album covers that were Marvel characters on the album cover. It was a Marvel album cover. They were limited edition vinyl records, and then we took 5 units of those and encapsulated those a number of 1 through 5. So when you look now in that particular situation, those all sold out very quickly at Comic-Con. And when you take that and you go 10 or 20 years down the road, and I don't know the exact amount.

Let's say they sold 5,000 units of each of those albums, and there's 5 of those that were encapsulated, uncirculated at the beginning, you can imagine that those 5 are the most valuable 5 units of that product that was made. And that's what this is all about, is creating the ultimate vinyl collectible or the ultimate Funko collectible because it's, a, first off, known to be authentic and real -- it's uncirculated and it has the chip in it, and there's only a limited number of them that were preserved in that condition. So that's why we're -- I'm so bullish on this particular business and the line that we're doing here.

And as we make product and products in the warehouse, we've got it listed up for sale. And I'm also kind of excited because as that product, if it doesn't sell immediately, as it's aging, it's getting more valuable. So I like that aspect as well.

Paul Kuntz: And our next question, how much more opportunity is there to expand your relationship with the major studios, particularly beyond traditional distribution?

Jeffrey Walker: Well, we're constantly in conversations with all of our studio partners. We are the licensee for Paramount and MGM -- Amazon MGM. But also, we're the third largest account for Universal, Sony, Warner, Lionsgate, Disney. The 3 big accounts for physical DVD at this time is Walmart in the stores, Amazon and Alliance. So we're a significant partner with all of those studio partners, and we work hard to market all the product on video, whether it's through our independent stores, whether it's online, we're driving right now with our own brand of Movies Unlimited that we've been focusing a lot on rebranding that, remarketing that. That website is producing serious growth in sales right now.

And that website is focused on all movie product. And so we do feel that we're an integral part in a lot of different conversations with our studio partners right now.

Paul Kuntz: Thank you, Jeff. And we're coming up close to an hour here. So this will probably be our last question. How big is the opportunity for Endstate Authentic?

Jeffrey Walker: Endstate Authentic has -- I've been working a lot with Bennett, who's the President of it. This year, we've had a lot of great conversations with customers. existing customers and new potential customers. It's a very interesting business model, having an NFC chip for authenticity and the areas that we can deploy that chip. We've got existing customers in the watches and the high-end watches industry. We're in a lot of conversations in the art industry. Stephanie as well on the team is still working on a lot of stuff in apparel and sneaker aspect there, trading cards, collectibles, grading companies, all those areas are areas where an NFC chip is extremely valuable.

So we're seeing some great conversations right now. We are also exploring what other products on the Alliance side, separate from Alliance Authentic that we can implement NFC chips in, which gives the ability to potentially add more content to that product by scanning the chip, has opportunities to create marketplaces and things like that for resale. So I'm still extremely bullish on the opportunities that we have there with Endstate Authentic. And Paul, I got one more thing I want to close with that we didn't talk about.

One of the things, initiatives that some of you may know, we don't have a lot of press on it, but it's definitely not a secret because it's out in the stores right now. We are doing a 14-store test with Best Buy right now on vinyl records and CDs. They went live about 3 weeks ago in late October. As most -- many of you probably know, Best Buy really got out of the music and even the video in the stores. And earlier this year, they approached us about doing a vinyl department in Best Buy.

And we've been working on this for the last 6 months that a bunch of great people on the Lions team have been heavily working on this. We designed 3 full racks of vinyl and the CD rack, and then there's also a turn table with Victrola turn tables in there. And we've got a 14-store test that went live, like I said, in October. And we anticipate this test to be successful and be looking to roll out into more than 100 plus -- 100 to 300 stores in 2027 on the vinyl side there or music, not just vinyl and Best Buy. And we're pretty excited to get Best Buy back in it.

And so I guess circling back to the very first question about the longevity of vinyl and CD. Now we've got Best Buy who probably 15, 20 years ago was the #1 seller of music in the U.S. at one point there, getting back into having a section. They're in a prominent place in Best Buy. They allocated us a 14-foot by 14-foot section to put a music department into Best Buy. So we're pretty bullish on that. We've got a great team that's managing what titles are going in there and so forth. And we're definitely starting to see the sales click through the point-of-sale system there.

So it's a big new opportunity, and it's exciting to get Best Buy back in the fold on the music.

Operator: And at this time, this does conclude today's question-and-answer session as well as today's conference. Thank you for attending today's presentation, and you may now disconnect your lines. Thank you.

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