FNKO - Earnings call transcript Q4 2018

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Operator

Good afternoon, and welcome to Funko’s Conference Call to Discuss Financial Results for the Fourth Quarter 2018. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. Please be advised that the reproduction of this call in whole or in part is not permitted without written authorization from the company.

As a reminder, this call is being recorded.

from President, Brian Financial and today Officer, Chief Officer. call Perlmutter, Andrew Russell the management Mariotti, are Executive On Nickel, Chief I to the turn will call now Mr. over started. things to Nickel get Please go ahead, sir.

Russell Nickel

relationships, may include may awareness, Investors acquisitions per our which call of full Litigation engagement related diluted funko.com. measures remarks the note press other are net opportunities, and you, momentum, the by the contain section and quarter of investors statements we trends, materially adjusted and investor of income, results expenses, may forma undertake third debt, a pro SEC. afternoon the These abilities good such as and the issued risk we A as our growth, and website copy statements financial performance. indicated financial on EBITDA, various our those Reconciliations today’s press and release section in be differ most year in GAAP Thank share regarding believe today financial call these Relations those be call non-GAAP license comparable release operating obligation of be important Private only of statements measures performance. a and important XX-Q may that of earnings found net investment goals, financial measures and forward-looking on assess regarding the Actual at the XXXX within in as will certain financial Reform the that and discussed to non-GAAP afternoon. consumer EBITDA, statements to represent company’s plans, and Management’s of our directly factors, the adjusted of earnings included covering including fourth forma from no this this expectations XXXX. Act results in to customer company’s business factors we update brand and industry website. this initiatives, our was and anticipated forward-looking forward-looking release form relations our and filings can made meaning result quarter section Securities referring and margin, for Please them. on with pro the on XXXX Any EBITDA adjusted adjusted to our to views collaboration

accessed a visual consult prepared also our section to discussion that this of Relations call over Investor now have can Brian. the I with website. We be follow turn investors in presentation and to it along the can will

Brian Mariotti

us. thank Good for joining afternoon, and you

sales Russell year Nickel, a On another full the up capped XX% $XXX million quarter Funko with call in sales greatly that put that fantastic QX were up announced President. Net Perlmutter, expectations. Andrew XXXX, XX% me over also $XXX which to are XXXX. our great our million, and our and just CFO, our at exceeded

Our significantly exceeded targets line XXXX. has late when growth we we went top in set public the growth

the are seeing both our represent expected than internationally. properties domestically and that demand product We stronger for and they

immediately after established IPO. our the our estimate XXXX XXXX sales exceeded In fact, consensus sales

we We year-over-year. growth quarter top raised bullish we were guiding and/or public. XXXX, have went more XX% line XX% beaten And for to since to guidance every even

through producing forward. the estimates, our sales a market Loungefly, a acquisitions going going strained cash than Andrew that refinanced and did take all so in facility, but interest would company the and demand first our full phenomenal depress going and with in I our our in Russell as of XXXX decisions want completed the many exceed some markets ways broader review telling traditional which near-term. here to in has operation. toy our year. for companies public you We outperforming performance We’re the our details over cost, are consciously and of made margins was XX%. far some over year the only to growth the it markets to in and made which domestic credit by we XXXX, sales, made expand that savings spending our it of per million of successfully doubled of knowing grow our whole more are expectations. and But more We you start stock thousands of was annualized world $X new own saw but and reach stores not QX sales strong growth XX% highlights. including year the year, an slashing business We our rise as the optimistic three our products our our achieve international to We in sales integrated their we the a to our

our you aggressively to Both see plan demand customer quarter. satisfy expected actions might to none during the entire noncompliance both fulfillment factors our backs our We customers’ in quarter, to or impacted us capabilities, expect, to It charge our the for in more in opportunity fans. QX contrary, were much the our that significant this part our market our so enlarge As our we and allowed result again stronger sign in plans. growth XXXX. required additional slacking the importantly a discounting demand on to which expectations that of Europe, incur products of took margins demand. our demand fill meeting and to led through but than pursue sales strained emphasize also of exceeded increase of unusual Quite us want cost. the these we and to domestically I

We’re not percentage. for margin managing

be and kind to Funko their drive of Retailers over mindset so our in are way about product of do to discuss challenging, we that and intelligently, us growth high this of category for make, pop first to that make demand our the will we this have a willingness intend basis year. to look we increase a disciplined Licensers $XXX fans with but enabled commitment this Creative, investments needed market. we to continue to It XXX% which last are is and but on looking and of will that to those fan seeing Andrew the us board XXXX XXXX, to opportunities to global us. enlarge the we some continue to To pressure was for notably intend connect their also into with front creating We acquisition most to address their to years growth base. and capture up this and three We’re later. IP the engage that expansion believe to our are traffic avenues sales we experience million in continuing fans. in from invest as continue. with dominate long-term managing million our shown $XXX offerings, our customers through global game in the new with further points diversifying can which planning culture, Forrest-Pruzan the are Keeping

Our retail. Hollywood given brand, of enhance in in store continuing opening overwhelming HQ a including brand to and Everett, the retailtainment our store Washington our placement at and success branding

in as fulfillment direct UK. including U.S. systems UK our strategy e-commerce consumer process. expand finally, go-to-market network capability, our enhance our improving including our capabilities, refining well distribution and Our continuing and processes to and as the and our strategy, internal planning in capabilities And and to including the

the earlier, I approach to go to aggressively. more growth for XXXX is even our said As

last year, higher growth expected that to mid-teens that much the XX% than is XXXX This in higher top currently guiding are rate sales Wall sales We than guidance comes for XX% this came year. on higher Street growth projecting. growth of

So we’re not only we’re raising target, base. doing the top on it higher growth a of

higher to increased behind XXXX We brand growth guide to Our function of Funko a global on level in several momentum is a ability a see of factors. basis. the the

there year connect that more growing international product can into at front opportunities more are people to we of. opportunities, existing it even retailers, they last a growth in what us, expand showed that categories where our are fan more space is Our including

of the and and continued looking and services We growing studios, is TV, in Rick of new that and new X, video and like this an as we fast them stars, tentpole content enterprise Game And icons a at in library strength game have approach XXXX have Stranger an Avengers: Morty. content of diversity licenses the number such TV A+ of new Fortnite properties seasons to full leverage. area, to of can Frozen of from game the army big Kingdom evergreen In fashion sports Netflix, Hearts Endgame, as speed. year with studios, into massive base content Add lines movie getting well the our Marvel, Captain XXXX we video a constant average Episode as above a year, Overwatch. Things, all of properties lightening of growing of a IX. we have to marketplace like X, streaming proliferation of publishers, including Story and product Star Toy music combined Wars: Thrones, leading

also Post drive and summary, James retailers and with excited and the why to In the help few in of York, we of types opportunities fourth the and new curates been retail a categories. of Retailers quarter. sellers demand portion great part Edition Amazon position some products and a programs LeBron we’ve Malone create by significant Vinyl. our terrific opportunity programs We’re with reason us able the of offering. drive did different presales to large had a growth a a create years and were just Special about sales seeing products why many This around Michael giving in with Among is of music New expanded traction Toy ability high world, back. top great we Jordan we’re BTS our in year us as enjoy traffic to us. the and Pop! is different Funko Since front top product look a placement before Fair released sports in we our an to

expand. the full Our in QX of performance created brand validates Funko the and and the power market to and the year believe we continue we have strong

are our and making We nicely enlarge to market operations beyond. to and improve the expect the investments payoff in XXXX we

licensers, I our support team, entire end, will that to and has success their going Before I thank date to for contributed drive want continued partners success retail forward. our to our

to fan Andrew excitement is what the day. call it As our to Perlmutter, passion Andrew? our turn engaging and whose now over will us amazing motivates always, I that, President. With a base, special every thanks

Andrew Perlmutter

Brian. Thank you,

growth Brian fourth I’m for we’re As what keep on doing In sales going better my this a and the terrific a last focus did year quarter, comments coming our drive said, we to XXXX, what to expected off we’re which going. to than caps momentum year significant an year multiple Funko. our growth off and balanced of international expanded and at We existing growth sales came markets in categories, of continued and international U.S. base was product growth the from growth retailer showed all our sources, network. new and had of retailers, and including properties, growth. expansion internationally

growth continued factors these we our from continue of cornerstone The active QX drivers is was sold be entertainment In of XXXX. of expect which expansion content XX% to our across over QX, properties, XXX to We properties. against growth time. up the key

we by before, grow did content we proliferation of per X%. said over the the increase we In number time properties able license the our and quarter, broaden portfolio. as number As continues but to also to active only expect the we of were fourth property we active XX% sales this grow not

Wars sales for content. top newly usual of properties is Washington accounted which XXXX" XXth are percentage XX% "the XX properties an Studios new QX properties Our portfolio. a showcases is about about the year. last full and this on Potter, were The top Fortnite, Mouse, the XX% best-selling fund on Evergreen in we biggest The X% our XX% of were not In accounted phenomenon year. Anniversary, reliant just XX% a Stranger new Nightmare Harry Post reliant the mixture Mickey which evergreen fact how our of dependent Fortnite, for for in number Dragon of released and pop for XX XX% that as of properties of our Before accounted Marvel Star Ball one QX quarter and in around and important, Classic, sales, same business small culture. pop but QX, quarter on Things, in as Infinity Z, index accounted is called Avengers: The and Those like for Overwatch, the War, of only just of culture Funko we’re sales that content. only many our nor it’s about sales hits, not shows property of year, for the the Christmas. Again,

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XX% accounted as of the total the in For figures same XXXX. for year, sales,

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of both strengths. No in or bags, of year X% other customer outside our sales accessories, total wallets, the full sales. and XXXX diversification with our being the for grew categories QX sales either of Funko’s than gross one of the continues for quarter our year. Our and total key grew apparel, products than XX% to in which faster all our more single accounted be figures fastest-growing of customer

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and e-commerce For sales sales. total were of XX% up accounted full nearly our for XX% the year,

make grow our As accessible we our expect fans XXXX. is in Ultimately, business, goal improve some and our want gains wherever continue to to to whenever see and and our available them. products we BXC

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to London, with engagement Nuremberg, months. XXXX, and products, new busy New app fans, a redesigned Fairs this announce in partners. already create our launch Funko We retail these of few meet to the next with Toy Kong, expect leveraged events points attending had season, We has Hong To start tradeshow and in York.

action at Amazon’s As we lists Toy announced figure the the toys and products those over products many start category. rose of quickly XXX of new to in Fair, best-selling top of the games

with use engage said, we As also to we these shows our fans.

made of Toy over impressions Over X million XX on the we over four and million social fan days had engagements Fair, media.

continuing our continue had of over Twitter, As the expand on and views. videos media YouTube Facebook, YouTube, our across we amassed the to end we and At strengthen X.X brand followers globally, we our and XXXX, following. also Instagram, million million to are reach XXX social over

few Before announced Forrest-Pruzan turn words the recently to I say let our over a about Russell, acquisition call me of Creative.

companies Ravensburger development game to Spin Master, design as other such industry’s Their and and licensed partnered the the our designing Ravensburger, is name games game of publish a receive groups. XXXX Mattel, just respected that to Forrest-Pruzan of within a highest has and one Year board design won the most business Villainous, and historically to Game been highly Award, industry. the award are with experienced which FPC Hasbro, few. Asmodee, can

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into and time. With than in category to offering games broaden gamers Our years team will for experience, the The action figure substantially Funko. game this the this the the FPC board fans they XX be our will expertise licenses combining discover that new brand plan consumers. where near-term aisle, game the revenue of solidifies board products and verse is We favorite the the to as but We board completely properties new people perfect board category. is their lead the the diversity aligning leading culture X,XXX our position acquisition, our focus pop games, this in charge solution further in that of which bring larger as bring to can our category the Pop! pop properties. and other and pop broad offering the will we former deliver believe have. this another We culture the to as it experience with avenue fit. With board retailers, of will stream Funko licensers, for game of over Funko culture into and over see

a prove reward we will think We to growth. contribute time, move, excited it expect have high our results bottom on to year. future over this about a that I’m or be to this this that While low will material don’t line impact move top risk,

Russell Nickel

turn results. I’ll the our discuss call everyone. Thanks, over to now Andrew. Good to Russell financial afternoon,

a results Net throughout a number quarter our properties. quarter, fourth net broad-based internationally million balanced driven sales increased $XXX.X increased quarter As and was demand $XXX.X sales the States by to sales geographical in $XX.X XXXX, million positive strong basis, the XX.X% a global of United the net number our strong products reflected and for higher million. the were case and On XX.X% trends. were underlying and XX.X% increased to in across of fourth to in

the recall, Europe and fourth Europe We system in net a year. net us XX.X% as figures sales in to fourth ERP implemented to our still XX.X% investments limitations in UK achieve accessories, to category over a by apparel the growth. capacity year, you million $XX These in this new of the rolled earlier sales higher quarter, products other XX% in in the believe of a quarter demand. million As such bags, homewares increased and Mainland expected growth quarter. we the the prior support XPL the and net given of out $XXX.X growth fulfillment constrained in helped system than network increased the the the of in in sales UK and was basis, some operation product On

quarter As up margin, prior basis points last decreased year Andrew in the Pop! year sales brand, the of amortization over a Pop! year. and QX Vinyl was excludes a XXX to and the figures from XX.X%. XX% basis XX% noted, prior which depreciation global Gross on increased as over of

time the toward while neutral that lower gross a of shift reductions that at factors to we we do second communicated than price primarily higher to with order lower to the in quarter, gross start in get driving result which fourth well in adversely as third do customers were our and gross would more sales, of the the better knew as after serve and in half There we number quarter the fans. markets operating atypically actions XXXX across took margins took third most margin due QX, at percentage. during impacted a XXXX, to other As and quarter to in we year-over-year XXXX were the of significant the margins high a expected and decisions in having FOB income, streamline pricing of demand Europe margins

customer’s At these price Fortnite passed I in gross these as our was to shipping did Quite resulted we of result at end margin demand incur adhering customer our missing slow in an on want carton. customers and typically These been in and were we to higher minimize demand But instance, or some impact higher It or the freight us arise shelf expected contrary of provide not Before the cost of in request Also, we label did they able our we reduction to stress, have products detailing notice, than additional failure on factors, our for but higher a profit negatively non-compliance customers wrong of is shipping if advanced to some short the – the place and it made costs. get ship given the to percentage. triggered better of margin chargebacks that a to us fast many chargeback and the costs discounting, so have higher placing some order shipping, products as fulfillment not fall support, we of requirements, Customer the had the supply airfreighted dollars, through some the all demand on decision Brian, would ultimately to volume, slowed as our to promotional likely not as possible. to noncompliance we costs. chargeback. consumers. higher gross shipping gross window, a This considerably increased incurred retailers, our shipments our the or that avoid historically. these was than down in reduction we a did that demand. when

the internally mitigate We’re both future. to charges these working customers in and our with

HMV on profit recognized. bankruptcy able Finally, $XXX,XXX we reserve, late the with bad in do recognize our million full opportunities intend did higher margins was be of one we to quarter bankruptcy. fourth long-term gross we levels time, in not do not growth recognition now, expect declared are continued within to which customers, to quarter, an seeing we gross to order than our so. but are though SG&A. in This recorded shipments UK, in even get policy, debt sacrifice additional to the line, Over any in made cost the $X being the the cogs revenue the Consistent on about revenue us

XXXX as incremental operations prior this the our the Funko exited up studios. And in new quarter, we other markets our the as expenses in operations increased into and where position a In and distribution majority quarter, as business at selling, in Europe the initiatives, in fourth was year. measure as strategic associated Animation XX% quarter, very from the up million inventory XX% year. about general, As the good heading the investments XX% with and the half our increase direct sell-through The can in driven and of was well to of in including Loungefly administrative dollars the growth well second over we channel retailers this by year. international remained the $XX

against we are leverage quarter, operating expenses. starting to last indicated had see our we As

which ones in SG&A basis our fourth not expenses were reflects of of of the expansion Of compensation to XX% points. the stock that in major $X expense and lower and continued the sales expense from higher improvement to Depreciation tooling depreciation to the $XX.X last increase our in year corporate future last year were million. fourth the majority items, operations as percent our and at were growth. net as only increased the a The from on expense XX.X% percent cost QX in support XX.X% rent, a facilities compared of as XXX million mold compared to prior product of of and amortization the and facilities. net was year of SG&A quarter hold we as an quarter offerings sales, improvements As all offices continued lease and warehouse to our well expand our

interest again fourth million interest decreased to that due debt. quarter the refinanced to our XXXX Our in compared quarter fourth QX percent XX.X% $X.X gross million This fourth in XXXX. from QX the was grow reported the and investments rates in to last reported in was we up lenders of to operating $XX.X in we million, lower XXXX million income despite a the the year. margin business operating we as in of the XX% from $XX.X of was quarter, of the the made after and Net their quarter have XX.X% $X.X came sales the quarter XXXX. expense in from margin in first Despite XX.X% lowered

ended XXXX. XXXX. the we up million, million, HMV XXX% was adjusted impact $X.XX through XXXX adjusted XXXX. full end in increase $XX.X margin share net forma these at with earnings million million up and to the all XX% million pro EBTIDA business, in summarize EBITDA $X.XX XXXX. to $X.XX going $XX.X% an up we release. key metrics XXXX. even $XXX.X of QX up $XXX.X pro in $XXX.X gross QX Adjusted net basis XX.X% despite up in we XX% of versus the up million to Adjusted fiscal bankruptcy, Touching found XXXX. I XX% pro being detail year, quarter the made in versus of $XX.X the will net the forma increased increased in was This debt XX% up were in share year compared in negative diluted compared in result XXXX, in compared increased XXXX, at and certain reduction million quarter year. the year earnings which the income fourth are was of again pro forma highlights, income represents sheet to margin, have our Again, EBITDA of factors $XX.X million with compared sales to few diluted XXX% $XX.X compared and XX% EBTIDA XXXX, from leverage. $XXX.X Adjusted only for per adjusted to in XX a end XXXX. a in $XX.X balance Net fourth QX was of in XXX% XXXX, a can were for to forma be investments achieving million, compared million on was XX%, $XX.X million. at XXXX for despite press per adjusted Inventory sales which $X.X Adjusted over in $XXX.X Without million the to points the XXXX end and all As

even of or XX% average with outlook XX% a assumes XX%, to tax we diluted in blended of sales, of to share share range sales earnings relatively XXXX, $XXX consistent alluded which approximately increase count million million, per as we Brian investment shares. EBTIDA weighted forma a corporate a approximately million of the diluted and net pro $XXX an XXXX, performance million million XX.X in which accelerate $X.XX expect of earlier to to make our would adjusted growth of and Turning rate $X.XX, our be of $XXX our XX% $XXX approximately approximately to to adjusted net for to

Brian we support in be As number further said, a of investing opportunities. will areas to growth

of Some investment Areas being Creative, well Forrest-Pruzan will our spending near-term of and category. ahead investments us the are expected acquisition revenue of benefit these of spending produce the the of positions in benefit. made which boardgame some include

an the way are store and in store response fans. to Washington, Hollywood, Everett, additional in as our our Funko exposure we opening for Given get brand connect see further to the a retail we which with

will that XXXX this revenue the store once is We in expected expenses of the year. ahead see pre-opening later opens benefit

on revenues expanded will and the which the will expect forward which shelf We for confident the back the less distribution third-party recall have and on us to help final a use realize us million consolidation the that sales they rollout so payback somewhat as content our can Expansion Europe, the now greater to XXXX from $X won’t rate. UK, particularly about of to sales Continued spending in in pretty fresh full of help growth ERP first to constrained QX. and keep to to are invest be in they as new the our start With relevant. and turn in please in QX. this Q&A year, would a important our comment helped quarter forward steps A QX the Europe, call session. merchandisers, prepared ability quick network like growth us order this start in raising continuing over to to – XXXX, we in but in in that, team approximately guidance onboard XXXX. XX%. And are enhance operations operator same could expect in efficiency. and growth the These I this for cost we into improve investments We these pull customers course, sales part our XXXX than year and pulled big we XX% our consciously of that to growth our in and somewhat why are we our off sales we were market, guidance in in paying of to our of

Operator

you. conducting question this Piper of we’ll question. Our Erinn Thank and time, [Operator with At be Please a question from the first answer line your Murphy with comes session. proceed Instructions] Jaffray.

Erinn Murphy

really XX% and in the year-to-year. very strong Thanks. guess the how for about nice for the touch and afternoon, XX% curious what Great. on the a the more guidance My seeing for number year team, what saw maybe to rates very, in have then fourth but you’re U.S. comparability a the of with job Russell, Good on curious my balance if for recognized really you U.S. extensions year, the you question was solid the with probably should the for quarter And just international. the the respect on to QX, actually you of for just Walmart, could run U.S., QX that the think we particularly upon first there.

Russell Nickel

out or domestically, I’d – take – growth really XX% balance. rest making to the question. Walmart, In expecting of growth then domestic in Andrew in strong coming the the in about to for growth growth to regarding seeing coming the regards And Europe let up – an XX% that and Yes. the XX% we’re markets overall of markets really the we’re rest expecting with continuing XXXX, that

Andrew Perlmutter

Yes.

within So chain new was the very the rollout compliance Walmart, the We strong section. successful. saw with a the collectibles

QX. strong And with seeing expect As programs we far are we them as grow XXXX. to and several that in sell-through they setup followed, I believe was that had in opportunity the very and concerned

Erinn Murphy

just of some margins, two the you, going to comments gross back And the guess Okay. remarks, that’s the in Thank questions. helpful. on that prepared then are I

more in piece truly suggests renegotiations over the we on to about if margin you obviously XX% hinder gross was would anything there, more also thought royalty, with structural. key talked time of some think structurally that outside FOB that in IPO but getting think partners continue is if then mix the changes Europe? what First, from your I are your I’m getting any I doing there’s you are that back pricing there anything or time. release guess And second curious changed to that happening or then specific rate? that about of some the is the And think is is you transcript, the there

Russell Nickel

No.

negotiations the with licensers in that take no to our the was regard and was difference margin, largely QX our So year one it that There drove have change impact. should first, the that between year. last mix in an of – I’ll gross this

year and XXXX of as want structural. of percentage factories. align having year of beginning our on obviously more the So directly after on referenced relates increased and they’re this retailers their to pricing that margin then again what global end really in that products then it’s shift at want Underground the some and QX coming moving QX pricing back our mix. buys an talked The from streamline Toys, by about And of the a of there’s there’s sooner, changes of In basis. very products more in last call we our QX shifting and to and we been structural bought year regard driven nothing last changes, really gave we to to at

operating it’s coming but of impact gross between and again, percentage which margin leverage, SG&A. or no So out has shift a real FOB,

Erinn Murphy

should I as should even first kind then forward mean, kind GM? Okay. thoughts And be march second thinking where of ended we think just a about be for half of we the this is or you the any year, how there guess half, other you about kind QX from XXXX, about for I just modeling then of

Russell Nickel

we’re front again profit. – opportunities percentage, don’t fact the a are through, their and negative we air-freight of dollars through, Those on those to No. -- behalf. flow so that product us I’m see from retailers gross we not in those our flow margin and but us, saying opportunities in they gross impact we with frequently growth charge the want

We’re to a guiding not specific.

course the growth over the healthy have, If that to the this lines probably opportunities that of we’re focused the there Again I’d year. hold it the on we you knowing growth same long-term impact might what saw around have year, of business. are and of

Erinn Murphy

in the next of you off billion sales, Okay. And last aspirations in kind IPO, said were the for was from longer- at out question, picture and then Brian. term not and $X starting is maybe sales, too some about $X bigger music opportunities traction, you some kind I’m Thank for billion? curious starting the in these just gets thinking beyond drive you. you’re how that. in what of you’re categories you’ve longer great to and to that above term year next billion far of this big When see reference just

Brian Mariotti

to some own the to revenue billion. pass And push are we’re aisle. go on that how that definitely think, and doing right there’s and and and going industry to able of comments our our stream partner we IP stakes, dealing going larger category with $X get sector our be the of toy has Forrest-Pruzan in think Mattels experience We into in we class chest licenses, experience to Andrew’s that’s Hasbros Nights one No, IP revenue working almost some of years that’s our that’s expertise, what take our our growth with we XX grow made above the that in the that ground reaches. much new Yes. think artist the a at a global opportunity the game the the with down is demographic helping Masters war now. think play the us recognize some younger of and we are we categories to scale what on significant own distribution than much work and a creation, of our like an that is team We and action XXX licenses world revenue much Spin traditionally the and figure in Asmodees and in toy certainly Freddy’s of think category creative and Five acquire that that’s I the first

avenue going So in billion fast future. that’s to our that’s help another think another $X – we us push

working talk are company. are those ones get the two alike big but are yet next really I’m of those us things going So the to the on that couple about, overtime we’re level not to to prepare as be

Erinn Murphy

all best. Thank you the guys. And

Brian Mariotti

Thank you.

Operator

next comes Please with of your line from Wissink with question Stephanie proceed question. Our Jefferies. the

Stephanie Wissink

Thanks. Good afternoon everyone.

just of about as we more a up? coming for a XXXX retailers about Erinn’s off you’re dollar the about in how then questions, growth mechanics, one bit content, Just again per also Just tradeshows, of the new property the think XXXX? be Brian, slowing property if properties should you. think we the And category. curious should follow-up one seeing I’m mechanically number new you talk dollars can the about the property on in Thank the sports you, going and think versus and for

Brian Mariotti

take Stephanie. question the I’ll second first. Thanks, Yes.

year there’s think good. us so because is content an interesting the I it for – is

of how many so could potentially see something because it driven. a dealing movie leverage that we with with in And not we’ll hit And properties two, unique quarter, we a three, big we’re anniversary yes, four, If we that XX A+ we’re as us up can’t make had was content. you not say, properties.

I could first to it a less this year though. that shakes the properties could will sure, against one. potential lever there interesting strong be be make see I’m less think the the exactly of – to be I how actually there So but Repeat content. understood because year question not out, and

Stephanie Wissink

Erinn retail some had those. of some asked new about channels music think you’re and sports. I with And opening

Brian Mariotti

Yes.

crossing into traditionally sports amazing I an Footlocker are of on goes Pop something away websites been Jordan quarters we’ve think exclusives leveraging sales they’re seen business Nike to we culture. of and – a and align is the I pop we’re pop a activations, happy with Footlocker collecting that with that parallel desperately seeing They Adidas two retail that great and to sneakerhead in of we’ve partners our Fanatics our being or examples on how pop activations into two basic culture wanted an Fanatics concerns worth already e-commerce their culture Obviously, their really world. have get think some success, gave that’s everyday in our that’s that Michael both Pop LeBron bug crashed and is Footlocker consumer e-tailer, seen. over platform and so them. with the geographical category sometimes content DNA. Fanatics And

retailers, sports. we’re to and great two that continuing music expand us retailers for So, both with two new

Stephanie Wissink

with on looking Does more IP the a us, owned acquisition just around road and come the any one you’re down it development? Final acquisition platform the of or is that to of for gaming exploit Forrest-Pruzan. that gaming

Andrew Perlmutter

of they’ve as drives yet. that pieces the in the or time found an mechanics not to they’ve game. have It’s And IP necessarily haven’t the the a created, the catalog. games it brought engines for game, XXX right me These home that their in and question. there’s equally or the hear had the games of created they refer over that brought back. engine of back at They large it. game catalog actually market It’s they’ve you’ll great It’s what are

to the us developing with as game them are That so we these of said, we And all for are move gates. explore forward. opportunities engines new out

of both those about excited we’re avenues. So,

Brian Mariotti

a to in library we strategy culture turnaround need that the get is own. marketplace there But our helps plus think us immediately. is a fast I with that library the to comes definitely creating it using pop when something of

Stephanie Wissink

Thank you.

Operator

SunTrust Swartz with question proceed next Our question. of Michael Robinson line from with Humphrey. comes the your Please

Michael Swartz

you the avoid a of you, on Good those, whether the guys. Russell, I evening, the or was of quarter a some of just shipping. of with magnitude related number get gross chargebacks to the to was margins. it some elevated sense maybe, trying can starting of in outlined Hey that guys. items costs expedited

Russell Nickel

negative then which by to the a get Yes. to were or frankly, of formed gross margins would profit terms including won’t Again, was the of I those airship in. backed have our detail want you the with each they shipping, demand and at elevated wanted but exceeding from related driven to quarter. were highlight again, really the zero to of kind us pro in of total, in line demand I largely request expectations, retailers these most into in where fourth overall in gross impact gross the margin. impact it Again, one. been But percentage, you that if of out,

Michael Swartz

outlined of demand the or lot distribution seem the Are any of to of things. terms brings meet Okay, far the that that as there be the it great. in question more year ahead limitations guess capacity to the and or on kind constraints A side investments for manufacturing to just helpful. of capacity ability That’s manufacturing? I standpoint. from you as retail

Brian Mariotti

we unique factories. Absolutely XX have not,

with versus greater we manufacturing that only month-to-month There we There grow. of XX% at bandwidth but a basis shortage of of – can Vietnam a produce China. digging to us those represent on we We those into factories’ a no But into is a to have that capacities, slowdown about of now are XXX% are to to if both to team. a asking probably we’re us into they year to and a every of making continue for each within percentage is shift are able be XX% good what we are coming and XX% our factories. of factories part ton toys a

at any So not all. issue that of be kind will

Michael Swartz

a it. Appreciate great. Thanks Okay, lot.

Operator

from proceed comes question line question. your Ng Please with Sachs. Michael next with the of Our Goldman

Michael Ng

underlying Great. about see the gains Thanks growth and you have a for where optimism acquisition the boardgame talk or this Can of about lot the potential I your time. of two. you category, category do Is just a you Forrest-Pruzan? or own of right. think then innovation you and in do will brand for tool there’s the boardgames a both? Thanks. lack compelling see share market opportunities Funko And or profitable some marketing this for creating as of its be a

Andrew Perlmutter

there we’ve this the to we’re category why the side, very one in business. as how But think believe importantly the we’re of a by approached tremendous as most getting that will a non-traditional innovation to to we opportunity going similar way that is to into That’s and reasons the which definitely I said, I is can to game innovation side, that Funko going It’s in this both ahead. it we say profitable there Yes, one. being space. that it to is we bring aisle. we’re a tremendous for of I be Andrew. believe approaching That figure get this disrupt about into category say amount the going opportunity excited would take

Michael Ng

just help function sell-through. XXXX? was about expanding sell-through expect the guess there? And up it shelf reconcile up do I in stocking think gap just Walmart I Was my some in quarter, selling the you you it said up and XX% Great. XX%. to a Thanks. accelerate of question of second was And just you space? And Could the U.S. then is

Brian Mariotti

about get the XX great in remind we So, – I’ll from it’s a you top question. sell-through data U.S. customers our of

new We So, did that into that of one, like up a customers it’s moved all couple not customers. a Walmart, store. stocked they top of as have retail our

– changed beginning mean culture platforms e-commerce – understand to what in to because buy-in were some order they what can and Pop! habits. our just also We saw Also specifically products their them. that to they’re beginning

to was overall will to about inventory important us. their they X%. for so the increase sell-through, only It’s up report retailers that I note the up buy. that channel started say was which but to And their XX%,

and about very feel whole which that XXXX. between seeing a seeing We’re healthy inventory going the of the inventory levels correlation a of we’re the as why we into sell-through they’re channel a level is carrying, strong – good

Michael Ng

could if with terms just we license last – as kind about one comment a Brian, one in potential particularly off Apex you maybe, of you’re demand up and And Fortnite seeing comments creeping Brian, start any XXXX, I on Legends great. could what there? Okay, of for Thanks.

Brian Mariotti

lot Legend Vegas would a an would got won question come Apex just in I money there knowing up. money. Daddy’s himself be some of

Michael Ng

that. of half want I Brian,

Brian Mariotti

any to look continues ways, strong. Fortnite be So,

this aware adoption. on Pop! what just the business Fortnite we’ll interest culture We’re partnership be. with trust is is property. to Apex monitoring having we with. a that retailers. said, at well with party far our par And be give on obviously, doing where anything we’re sell-through. as for and that going else, is like of you a that It bigger line, anything Certainly, needle on us, that With We And us. Epic; moving kind for we’re model. year that’s extremely the interesting think is part of and top the the it’s as did And that’s of, going to of a thought rate dialogues was meaningful full run year continued in on license last

Michael Ng

Okay. Great. guys. you Thank

Operator

Our Capital Please your next BMO of line with from Johnson question proceed Gerrick Markets. question. comes the with

Gerrick Johnson

question directing Thanks Sean. right, for All my the way.

can of So, proportion be what to you transferable in games? would licenses current about your terms of talk Forrest-Pruzan, library of

Andrew Perlmutter

a have Yes. I of conversations say our large licenses. that we current number had with would

So been avenue enthusiastic diversification. far, every that of talked to very this about license new has have we product

you rate expected. high percentage, that has specific give a extremely probably this fair wouldn’t you adoption to the be can and tell been at I just so And we juncture. as

Gerrick Johnson

the of your perhaps expectations for Thank – you. year. for housekeeping Okay. questions expectation your quarter A year CapEx and then equity compensation couple and in for the the also

Russell Nickel

Yes.

for fourth the line it as see you’ll out. that and So, comes with in we’re expecting what quarter CapEx was

the the year spend as Next, year we Hollywood next and next things about $XX to from year with our expected CapEx Store, addition of also, continue compensation the to see a little when then next as it in with year. we will CapEx you’ll we And to in stock full are relates recognized continues GAAP see stock line, the grants approximately the as increase in K stock expense we invest. see file of perspective a bump million

Gerrick Johnson

quarter. Okay, Wouldn’t heard great. that in thought one gross say And me lower last sales that margin. how help maybe lowered question would I understand increased your margin? your – I your gross Help FOB margin you that the

Russell Nickel

give to a of we an retailers FOB, discount top given We when – its we’re sell from typically, line.

not they’re we’re – covering costs. the because freight So,

royalty in there there’s So, an costs the But that is to element. related increase typically it.

that it’s decrease gross given So, the the we give. in it’s our decreasing – given margin discount

Gerrick Johnson

right. All

Okay. Got you. Thank you.

Russell Nickel

Gerrick. Thanks,

Operator

question. with the Our from comes of JPMorgan. line your question Horvers with next proceed Please Christopher

Christopher Horvers

guys. evening Good Thanks.

expansion category like with boardgame the product here has seems the accelerated really Loungefly company. with it So, now and

weed United So, your as recent and categories, IPO, particularly, original of the hard international the does expansion new categories obviously, you you – States? need on go Forrest-Pruzan, was a retailers, sort the there within new to push how the to it the Europe success plan of as of the was around the but outside growing like and well, back acquisition Europe existing is thought of the does change there process

Brian Mariotti

don’t think so. No. I

strategically. rest the of at looked the we’ve really think world I

to global I the a keep we in on I America. just think two XXXX, focus. we we that resonates added grew that XXX%, think just Latin change people believe doesn’t content on XXXX a people From philosophy we basis. it that about

I create categories programs us whimsical wonderful to our has all be key do other of the for of able and of out having space partners expanded think success is category some within that garner manufacturers. continue to to that farm allowed stuff to what retail the instead to

section to TV we a section, section be, categories we a if figures, been have it’s basically the anything that’s whatever retro categories that expertise that section our that really section, really Pop! carry the So, understand culture. can would XX’s retail the are ad these is just and if about shop partners all with all it’s that has carry everything an that for getting adjacent we key helped us a necessary and in truly one-stop

is allowing to whimsical consumables the serial coming surprise off. on paid having Even us they really thing Pop! Has are consumer it’s and as to the some this So, delight section. just the when

Christopher Horvers

lack direct as to side, you you lot then a were think a And Obviously, you still have could – obviously, there’s products? exist destination Funko. for web going Do that could a branded destination something Amazon, there Walmart, of to the of that just the do on what needs that’s and web for participate know funko.com. you under not on you work I think be and that’s fandom-type perhaps, product? you singular Funko.com But but type you called can this ownership in have Target, the philosophically

Brian Mariotti

a Target, build Walmart as time target.com energy own much seeing and success in Walmart.com so in half great with Amazon last grown up up the focused to and helping and BXC. we’ve think and growing I our a their we’ve business year build

own any into you Pop! when sports. who’s see a think definitively foothold and sports to is it don’t back I so really vast we’re going culture, putting putting foothold into and music because see So, is fanatics, who’s Pop! and ever diverse retailer a one a to go and Footlocker, so

going to there. you’re multiple think players I see

search can better continue has unless to of broad I that to category too it’s get garner a It’s that of opinion, anybody more and a to see that more differing capabilities own our definitively too see, no, making I we engine don’t sure But our and don’t sales. have and way mainstream. now We this. consumer Andrew direct with and any marketing,

Andrew Perlmutter

that out I as funkoshop.com is of the traffic Yes. business websites lot we little that add fandom. What generate for that I would just has have we dwarfs whole to have the other as – to their with a is would we there. just around companies a been of on talked focus found us, say and

– we’re what third-party on would think rather funko.com. we as So, building would I as our we focus partners saying is well

Christopher Horvers

model commentary – any Yes. growth? to for Got the lap going cadence top-line not other questions around further you’re some it. Russell Fortnite. And Obviously, just

sort to of XQ franchises number not end that XQ and of Walmart terms Any out? You’re the in lap How the mentioned growth going of content the overall with year. variation calendar XQ? movie year-over-year shift you from XQ – until besides does interact to of the a that coming top-line

Russell Nickel

Yes.

demand now aspect given a of is also other right Fortnite fourth the it and quarter. the and came the bit of think FOB that little the I in strong sales

below Other I think you little may of a QX pretty guidance normal for just see the a think also it’s terms than overall year. I annual cadence growth. our top-line being that, full in

Christopher Horvers

you one last me any you Do any the then of to need that from that keep And debt not balance on leverage? anticipate expectation of you sheet? – down going are paying around level the – to that level of or

Russell Nickel

accelerate I the think we’re going paydown going to keep and to maintain – I any don’t debt. think we’re of

ratio performance. getting to comfortable with our are leverage a We

now, the but our market manage Forrest-Pruzan the refinance, we’ve with to such to is the and in invest position take in manage advantage a of right our evaluate obviously, and to opportunities continue business, in the We’ll able as focus interest cost. to We’re when see be presented that position opportunities continue created.

Christopher Horvers

Understood. Have year. Thanks, guys. a great

Russell Nickel

Thank you.

Brian Mariotti

Yes. Thank you for your interest.

Russell Nickel

Go ahead. Yes.

Brian Mariotti

earnings want quarter just of the sooner. you XXXX I if forward Funko, thank again, of you to say we the support speaking and to your for guys look on first and interest to not

very you thank much. So,

Operator

conference. concludes today’s This

at You disconnect for may you participation. this lines your Thank time. your

Funko (FNKO) 1 Mar 192018 Q4 Earnings call transcript