Q3 2019 Earnings Call
Good afternoon, and welcome to phone calls conference call to discuss final financial results for the third quarter 2019. At this time all participants are in a listen only mode. Later, we will conduct a bit a question and answer session and instructions will follow at that time.
Please be advised that reproduction of this call in whole or in part because not permitted without written authorization from the company. As a reminder, this conference call is being recorded.
On the call today from management, our Brian Mariana <unk>, Chief Executive Officer.
Andrew a parameter president and Jennifer for young Chief Financial Officer.
I'll now turn the color of the Andrew Harless manager of Investor Relations to get started please proceed.
Thank you and good afternoon, a press release covering the company's third quarter 2019 financial results was issued this afternoon a copy of that press release can be found any investor relations section on the company's website.
Management's remarks on this call may contain forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995. These may include statements regarding our business goals plans abilities and opportunities industry and customer trends growth momentum in investment initiatives new products collaboration in life.
Relationships consumer engagement and brand awareness acquisition related expenses and anticipated financial performance.
Actual results may differ materially from as indicated by these forward looking statements as a result of various important factors, including those discussed in the risk factor section our Form 10-Q for the quarter ended September Thirtyth 2019, and our other filings with the FCC.
Any forward looking statements made on this call represent our views only as of today and we undertake no obligation to update them.
Please also note that we'll be referring to certain non-GAAP financial measures on today's call such as EBITDA adjusted EBITDA adjusted EBITDA margin adjusted net income adjusted earnings per diluted share and net debt, which we believe maybe important to investors to assess our operating performance.
Reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures are included in our earnings release and in the Investor Relations section or web site at Taco Dotcom.
We've also prepared a visual presentation that investors can consult to follow along with this discussion that can be accessed any investor relations section of our website I'll now turn the call over to Brian .
Thanks, and happy Halloween, everyone bunker once again delivered another quarter of strong growth and financial performance, we continue to exceed execute against our plan and invest in the long term future a funko on todays call I'd first like to review our Q3 results and then provide an update on our key.
Growth initiatives, followed by reviewing some stuff some of the strategic investments, we're making in the business that we believe well set up funko for continued long term success.
For the quarter or net sales were 223 million up 26% over Q3 of last year, driven by broad based growth domestically and internationally as well it's across figures and other products.
Sales in the U.S. rose, 21%, while the rest of the World grew 37%, primarily driven by continued strength in Europe .
Our figures business grew 24% in the quarter driven by continued pop momentum as well with expanded selection of advent calendars and sales of our other products grew 33% driven by growth of apparel bags, and wallets, which includes our allowance fly Brad as well as the introduction of.
Board games as we made our initial shipments of our bunko burst game in the quarter.
Additionally, gross margins came in at 38.3% roughly in line with last year and we remain on track to achieve for your gross margins of 37.5%.
The strong growth in sales continues to be driven by multiple factors more properties higher sales per property more stores in more markets and continued expansion of our product categories.
What we saw in the quarter with what we expected at the outset of the year an increase in sales per property driven by the strong content slate for the year. However, even as Barry year for content releases, we are still diversifying our license space and reaching new fan bases around the world.
Let's turn now to our key growth initiatives, we continue to make significant progress on our growth strategies, which include.
Growing our licensing property base, expanding our products based on our own IP.
Introducing new product lines in categories, expanding a new and existing retailers and further penetration international markets. We remain very excited about the growing array of opportunities across all of our growth avenues.
Well, it's over 1100 licenses with over 200 content providers spanning the entire spectrum of pop culture, including movies Sports television video games animate and more.
Funko is built on the principle that everyone is a fan or something and been quest something for every fad, we're increasingly being approached by brands Studios and notable icons to engage with their fan base and connect them with our array of products. Our license was realized that we can keep their content current and past content.
Relevant and top of mind. This is becoming even more important giving the proliferation of caught that that continues to occur across the world of pop culture.
Funko remains uniquely positioned between licensors and fans to benefit from the secular trend, we're continuing to grow our license space and find fresh and enticing ways to engage with databases around the world.
One of our key strategies continues to be finding new and innovative ways to broaden our product offering as we expand the avenues in which spans can connect with pop culture as I mentioned earlier within the quarter. We began shipping funko burst, which is our first foray into board games Funko versus a great example of us, creating new and exciting ways for.
Fans to conducted their favorite characters and properties and compounding our own IP with license content.
Well, it's doing early days, we're very excited about the initial reaction that we have received from retailers and from our consumers. We plan to continue to invest and grow the board game business in 2020 with the release of additional funko person offerings as well as licensed and non licensed games. Additionally, as we've mentioned before we're in.
The process of developing multiple toy lines based on our own IP that are intended to be sold in the traditional toy. While we believe this will provide funko an opportunity to capture new space at retailers. While also attracting a younger demographic. We look forward to providing more information regarding these exciting product launches in the coming quarters.
While we are looking to broaden our product offerings, there are still tremendous strength and growth potential within our own existing product lines. For example sales of lounge five products have growing 70% year to date and on pace by the end of this year to be three times the size of when we bought the company a little over two years ago the Guy.
Growth at loudest by showcases how we can leverage our diversified license base and our retail base to grow adjacent product categories. Additionally, we continue to see sustained growth and strength of the pop Brad pop is now when its 10th year and posted double digit growth in the quarter and was up over 30%.
Year to date.
The strength of the Funko and pop brands are now leading to licensing opportunities for us as top studios and producers seek to leverage the look and feel of our IP to attract global audiences. This includes our partnership with Microsoft on our gears pop.
Our partnership with a universal games on Funko pop Blitz and now the recent joint announcement that Warner Brothers has taken an option on making a pop movie.
Pop as an entertainment platform that encompasses digital and physical goods through figures apparel accessories video games short form video is board games and now potentially a full late movie.
We wouldn't be able to build such a dynamic platform without are highly engaged an ever growing fan base in March of this year, we launched our new funko App that allows users to track their funko collection create wish lists and browse our catalog to date, our App has had over 4.5 million downloads.
30 million items added to collections in wish lists and over 100 million searches. Additionally in Q3, we lost our first ever loyalty program. The Funko fan club, which is designed to reward our most engaged users on our platform. The program will also give us a better view into our consumers are and their affinity.
We continue to reach new fan bases across the world and engaged with them and in person experiences comic cons and toy fares as well as digitally through our App short form videos blogs podcasts and social media.
We have millions of followers on social media globally, and we're seeing an increase in our international following especially in key markets, such as Mexico, Brazil, UK, Canada in India.
We remain dedicated to engaging with our fans and connecting them to their favorite characters and band UBS.
Another major factor of our growth strategy continues to be broadening our base of retailers domestically and around the world our partnerships with our diverse set of retailers is one of our key strengths.
Domestically, we continue to grow within our existing channels by expanding shelf space and finding new placement opportunities with our retailer stores.
Our U.S. mass market channel grew over 65% in the quarter driven by popped vital and the expansion of additional product categories, such as apparel games bags and wallets.
Additionally, we continue to drive traffic in stores and online our worldwide sales to third party ecommerce retailers increased over 50% in the quarter, but internationally, we continue to expand our distribution and bring on new retailers one of the major drivers of international growth continues to be the European.
Region.
Our growth in Europe was over 60% in the quarter and is up 40% year to date for example, during the quarter, we successfully on boarded foot locker Europe now, giving us an international presence in their stores also we expanded into new retailers in Latin America, adding over 900 doors in the region for Q3 alone.
Additionally, we continue to see growth and adoption within our top international retailers, such as Tesco Primark, Carrefour Mueller and the entertainer. We believe there is tremendous opportunity to grow internationally, given the fact, the continents proliferating and resonating on a global basis.
Now I'd like to briefly touch on some of our strategic investments, we're making in the business as we indicated our last call we've been making taking full advantage of our strong sales and profit momentum to make investments. We believe will pay off in the future. These include the development of several new innovative and disruptive toy lines.
The consolidation and streamlining of our operations in the UK.
And the Buildout of brand experiences, which includes our new retail store in Hollywood, which is scheduled to open next month.
These investments resulted in that shipped in spending.
Into the second half of the year and we're pleased that these investments are proceeding as planned and look forward to reaping the rewards in the future.
Furthermore, I like to expand a bit on our plans for our UK operations as we discussed earlier in the year, we're consolidating our facilities in the UK from several locations into just one given the high growth and the demand we've seen in the region. We believe it centralizing our distribution will set us up for long term success by doing this.
It will reduce our costs to fulfill and increase our speed to market.
While the transition may cause some disruptions we are working diligently to ensure it is as seamless as possible.
This was an initiative that we originally earmark for 2020, but we were able to accelerated into 2019.
This causes more the cost to be recognized this year, but will enable us to realize the benefits sooner.
So in summary, we had another quarter of strong growth in sales and profits driven by a broadening set of factors. We believe we'll continue to produce growth over the long term.
We're expanding our revenue base in terms of products licenses customers and territories and we're making the investments. We believe are needed to produce continued strong growth for years to come.
As a reminder, this is Jens first quarterly earnings call with us and I couldn't be more thrilled to have are on board. She brings us tremendous experience that we believe is going to help us build and execute on our strategic vision before I turn the call over to Gen. Let me take the opportunity to thank all of our team members who contributed to our strong result as.
Well as our retail and licensing partners most of all thanks, you. Thanks to you our fans, whose passion for entertainment content and for Funko is the number one reason we exist and why we succeed Jen.
Thanks, Brian and good afternoon, everyone Im very excited to be here today under the joint such an Amazing company management team I'm looking forward to helping funko continue to execute on its initiatives and driving profitable growth for today's call I'll first discuss our Q3 financial results following that I will discuss our fiscal year 2019 outlook for.
For the third quarter 2019, our net sales increased 26% to $223.3 million, primarily driven by the continued expansion of products. Some properties in our portfolio broader distribution into new territories and customers and greater sales per property.
Additionally, within the quarter approximately $3 million Fob shipments were accelerated into September that were originally scheduled for early October as we had an opportunity to speed up production on certain products as our customers wanted the products more quickly.
In the quarter and number of active properties increased 13% to 627, and net sales per active property or $356000, which was up 11% year over year.
And the first nine months of 2019, we sold against 737 active properties, 23% more than a year ago, and our sales per active property or $789000 at 5% over last year. As a reminder, we expect net sales per active property to fluctuate from time to time, depending on the content slate and it given period over the long term.
We believe it at a good sign to see more sales per property and growth in the number of properties.
As it wasn't a third quarter of last year, the top performing property in the quarter with Harry Potter and evergreen property, which accounted for approximately 9% of our total sales Harry Potter was boosted by the diversity of product categories that we sold against the property in the quarter, including pop figures advent calendars board games apparel bags wallet.
Threed NAND flash looking at the total evergreen category. The diversity of products continued strength in top line on an increased number of properties trove evergreen properties as a whole to be 58% of total sales in Q3 as a reminder, evergreen properties are those that are not tied to current releases.
Third quarter, our top customer accounted for less than 9% of our total sales and no other customer accounted for more than 7%, which highlights our retail diversification.
Geographical basis, and the third quarter net sales in the United States increased 21% Q1 hundred $47.3 million and net sales internationally increased 37% to $76 million.
Furthermore, we continue see strength in Europe , and Asia in the quarter as each region was up more than 60% year over year Asia is a relatively new market for us so while the growth rates are high it only represents a small percentage of the overall business.
On a product category basis, Q3, net sales of figures increased over 24% to $176.5 million net sales of other products, such as bad accessories apparel games, and Homewares increased 33% to $46.8 million.
Gross margin, which excludes depreciation and amortization decreased by 10 basis points from Q3 of last year to 38.3%.
Slight decrease in gross margin compared to last year was primarily driven by higher duties related to our last light products, partially offset by lower royalty and other shipping and freight cost as a percentage of net sales. Additionally, while we continue to see product costs continue to decline. It was offset in Q3 by a mix shift toward lower margin product.
Through the first nine months of 2019, our gross margin was 37.8% inline with the level, we reported over the same period last year.
Additionally, we continue to make progress on reducing the amount of customer noncompliance charge back as we build out our operation team and refine our processes.
As we had anticipated and communicate it on our last earnings call. We shifted some of our investment spending to the second half of the year as a result, selling general and administrative expenses in Q3 increased 27% to $52.4 million.
This amounted to 23.5% of Q3 net sales and represented a 20 basis point increase compared to last year. The increase in SGN may is mainly driven by.
$5 million and personnel cost as we continue to invest in our global planning operations and June 18, as well as the inclusion of Funko gains, which we acquired in February and 4.5 million and written facility warehouse and office apart and administrative expenses related to the continued expansion of our offices and warehouse facilities.
Including the addition of our Hollywood retail store.
Additionally, within the quarter, we recognize $3.8 million and SGN expense that was related to our investigation in regards to the custom matter at launch by the secondary offering in September and initial severance and relocation cost related to the consolidation of our UK facilities.
Depreciation and amortization expense in Q3 increased 5% from the prior year.
To $10.5 million. This represents 4.7% of Q3 net sales and has a 90 basis point improvement as a percentage of sales over the prior year.
The combination of higher revenues and lower operating cost as a percent of sales offset by the slightly lower gross margins resulted in operating income increasing 36% to $22.6 million in the quarter.
Operating income represented 10.1% of Q3 net sales and is a 70 basis point improvement over the prior year.
Net interest expense decreased 37% to $3.6 million in Q3, due to reduce debt levels and lowered rates following our debt refinancing in Q4 last year.
Additionally, during the third quarter, we successfully refinanced our credit facilities to lower our interest rate by 75 basis point as well as extend the maturity of the facility by one year.
As a result of these factors adjusted net income increased by $6.3 million or 46% to $19.9 million compared to $13.6 million in Q3 2018.
Adjusted earnings per diluted share was up 41% to 38 cents compared to 27 cents and Q3 2018, and adjusted EBITDA increased 20% to $40.6 million compared to $33.9 million in Q3 at 2018.
This represents an 18.2% adjusted EBITDA margin, which decreased 100 basis points compared to the third quarter of last year. The reduction in adjusted EBITDA margin is mainly due to our investments in the DNA that I previously outlined.
Looking at the balance sheet, we ended Q3 with net debt at $224.2 million compared to $248.5 million at the end of Q3 2018.
Inventory was $94.3 million versus $82.3 million at the end of Q3, 2018, which represents an increase of about 15%.
Turning now to our 2019 outlook.
As we've previously mentioned, we have decided to shift investment spending into the second half the year.
Considering the fourth quarter specifically.
We have pushed marketing spend ended the quarter to help support new product launches in brand experiences, which includes our new Hollywood retail store.
Incremental investment into the expansion of our product categories, including Funko games last July and toys.
And as Brian mentioned, we had accelerated the timeline of our plans to consolidate our UK operation, which will increase expenses in the fourth quarter, including additional severance and restructuring costs.
These investments will flow through both SGT and Capex with most of the benefit being recognized in 2020.
While we continue to invest we are maintaining our guidance ranges, we laid out on the second quarter conference call, which are net sales of $848 million to $850 million representing year over year growth of 20% to 24%.
Adjusted EBITDA of $140 million to $145 million.
And adjusted earnings per diluted share of $1.15 to $1.22, which assumes a blended corporate tax rate of 25% any weighted average diluted share count at 53.5 million shares at the ended the year.
With that I will turn the call over to the operator for questions.
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Okay.
My first question comes from Erinn Murphy with Piper Jaffray. Please proceed with your question.
Great. Thanks, good afternoon.
A question for you all first just on the international business.
Jennifer I think you referenced that both Europe , and Asia Pac were up over 60%, but if when I look at the overall international was up 37% is there something else going on in Latin America or is there something else, we're not thinking about from a timing perspective, maybe just help us think about the puts and takes there just given the strength of both Europe and Asia.
I think there's there's no other real new information that's on the other areas of the business internationally, we just.
Europe is one of our largest recent reagents and it's important to call out the growth that we've been seeing in that area.
Can you just explain why it though the rate the international segment is just up 37%, though I guess, that's what I'm not understanding.
Yes, so the other regions were not as we're not as high a 60%. So if they came in below the 37% it averaged 37.
Okay Fair enough and then maybe just help us.
Along the same lines of the international operations that the consolidation in the UK that you're seeing can you quantify what the incremental shift of spend was into the back half that maybe wasn't in the guide before and then can you walk us through what the timeline is in terms of they go lives schedule for a concern that consolidation.
Yes, so in Q3, 'em, we recognized about a $180000 as expense and you can find that I'm in the 8-K as well there are incremental expenses that we will see in Q4, and we haven't quantified those specifically yet but they are not pull forward. Most most of it the pull forward from Q1 2020.
Okay, and then maybe Brian for you might kind of Big picture question. What are the questions. We get a lot from clients is helping at helping kind of shape. The sustainability of the revenue growth. If we go into next year, which I recognize the movie slate contemplate isn't as strong as this year can you just help us think about some of the drivers that you're excited about I know Theres poker.
On Vancouver's, which maybe you could talk about how that's trending thus far in just help us think about somebody off that than in years than the diversification you have in years for me the content fleet isn't as strong as than other years.
Aaron.
I still think it's you know on on par with maybe 2018 2016.
But.
2000 in the quarter and we just ended in Q3 2019 kind of shows you with 58% Evergreen content. What 2020 is going to look quite it's going to look like a quarter, that's monetize with a lot of diverse evergreen properties and I think we're over 700 diverse properties again.
In Q3 up from like low hundred low six hundreds in Q2, that's how we're going to that's how we're going to make our money next year, it's going to be a lot of of diversity of licenses and hitting those fan bases, where we know that people have fandom and so yes, but we also have in at a very large slate of focusing on.
You know.
Laid out for us for 2020, Theres going to be some international distribution, it's going to more than likely happen and we havent had that at all and dragging ballsy. Another one of our large performers is.
Opened up the categories for us to be able to monetize even more super excited about the terminals movie from Marvel and obviously, the new Wonder woman seek war and the Harlequins equal and then obviously Disney plus we think Theres a robust content.
Slate earmarked for 2020, and even more in 2021, so it's going to be a lot of what funko. It's done for the last six seven years, which is really monetize that evergreen content and then stuff that's coming in that people are getting excited about you know a full year or brick and mortar see.
Things like that it's going to be diverse and all over the place, but that's what we've always excel that.
Great. Thank you and then just last on just the Funko first can you just share kind of how retailers are have been receiving it and I'm kind of what your outlook is for fine fun excuse me Funko first for the holiday. Thank you. Yes. Obviously, it's early early days, we were really excited about going to Genconn, which is kind of a comic con for.
Game players, we got that in front of a lot of game reviewers and the reviews for the game were phenomenal. So we think we nailed gameplay and people treated as a serious mid level strategy game on top of that obviously just early stages in.
Sell through but so far retailers are happy majority of games really start to pump right around black Friday. So there is a significant bump that we expect to see black Friday on but we're excited to do we also don't want to.
Make life of the fact that you know funko games.
Currently at one of the two mass retailers has 28 games a created sitting on the shelves and so this is a game company that we're excited about creating other license games have nothing do with funko IP like pop and then also non licensed games. So this is just the beginning of we think a really good partnership with that acquisition of forest present and we.
Spec funko burst to be obviously very well represented in the future. We're excited about the start but this is up just to beginning of a much more coming out of that part of our business and we couldn't be any more excited for that.
Great all the best Thank you.
Our next question comes from Stephanie Wissink with Jefferies. Please proceed with your question.
Thanks, Good afternoon, everyone, Brian we'd love to hear your top 10, if you're willing to give them too huh.
So you heard us talk five.
No I mean, obviously potter.
Number one again, and then DC comics fortnight, Marvel Avengers, and game, which is obviously a property with a massive tailwind still I think run a wave three now of of the venture and games and then we had nine fall by Classic Star Wars Nightmare before Christmas frozen to and Dragon Ballsy. So you know again.
Different top 10 every quarter is a little bit different.
Potter driven a lot by funko verse.
You know continued expansion of the allowance fly Softlines brand using monetizing Potter and Harry Potter had been calendar is which is.
A big category for Us and we sold out probably way too quickly in 2018 learned a little less than produced more for for series two of the Harry Potter I've been calendar.
But you see heavy emphasis still on on evergreen content, and which is I think bodes well for 2020 for us but.
Diverse a and yet still seeing solid solid performance from fortnight. This would be I think a one.
Q2 s into three for the four quarters, we've had for four nights and we're excited to see that still continuing to hold hold steady.
That's great actually just a follow up the Aaron earlier question, we get the same question around sustainability and I'm wondering if Harry Potter is the best illustration within your brand property mix of where you have.
Diversify the product Assortments the channel mix.
The reach the globalization is that a good brand for us to you that study I do I would certainly add.
Number two and number four for the for the quarter, which is DC comics and Marvel. We just continue to monetize those every year. We've had a star wars movie come out we've got we've sold almost as much classic if sometimes not more classic than we did for the New Star Wars movie. So that continues to be monetized Nightmare before Christmas legs is an annual gift that keeps.
Giving.
Every year monetize it during fourth third and fourth quarter. There are a lot of brands out there that continued to perform a year after year in a myriad of of product categories on a global basis. So.
You know, we keep saying pop culture is not going away contents being created fast and furious and obviously a light year next year for like Marvel and Star Wars, but then if you look at what Marvel's looking like in 2021, I think the yet for slated movies and the re slated Disney plus TV shows so it's going to be a virtual cornucopia of me.
Marvel content and 2021 so.
Yes, I agree, but all all these all these evergreen properties continue to be able to be monetizing some of the most unique ways on a global basis.
Okay final vendor cost keeping for us because I think you said, Matt was up and I didn't catch it 50 or 60% yes.
Yep Yep, 65%.
Yes, maybe start with a little bit about what's happening there beginning they gaining new categories within the box talk a little channel Yeah. I think we reset early days when when we went to two and half quarters of Wal marts non ordering as they transition from.
Toys to the entertainment section there is a blueprint in place and it was target that had been doing this for years and growing in categories and growing in space, we're seeing a little bit of that.
Working right now in Walmart specifically when they first started they didn't want anything in soft lines. If you go into a Walmart right now there are and capsid have our nightmare before Christmas that out both soft lines from lounge fly and hard lines as well. So we are seeing category expansion, we're seeing out of aisle.
Now, let trains and end caps that they were necessarily.
Thinking we were going to get when we first started that migration over to entertainment. So it is working I will preface. The fact that still mass is less than 15% of our overall business.
But it is doing very very well we're off to a great start and I think we would say we'd had a very successful.
First year in the new section at Walmart and so.
We're excited about both those businesses, Walmart and target growing and continuing to expand shelf space.
Thank you have a great holiday. Thank you very much.
Our next quarter next question.
Alex Perry Bank of America Merrill Lynch. Please proceed with your question.
Hello, Thanks for taking my question.
Just first on tariffs.
Can you just walk us through that a little bit and remind us what percent of your U.S. imported goods are from China and 29 teen what you expect that to be in 2020 on strategy strategies to mitigate the tariff impact in any potential fourq you impact as it relates tariff. Thanks, Yes I agree.
A question Alex Yes, you. So we will kind of restate, what we've said going the last couple of years, which is right now 70% of our products for Hardlines Funko products are produced outside of China, currently, which obviously gives us a competitive advantage on like companies.
30% is distributed rest of the world, including less than 15% getting back into the United States. So.
We have got contingency contingency plans upon contingency plans, if and when the tariffs to go into it into place on December 15th, including reducing cost to goods in China moving products outside of China.
Potentially raising a very very light small raises on on cost of goods to our retail partners.
All of which are levers we can pull if the tariffs are truly enacted on December 15. So I would tell you. We're prepared we've got a record said, we thought that if the tariffs to go into into place. It. So it's a one quarter.
Headwind for US and then we will make the adjustments and we'll continue to rock and roll, but I think we're in really really good position too.
Overcome whatever's put in front of us and we havent seen any kind of retailer.
You know hesitancy on ordering because of potentially upcoming tariffs, yes, and I'll just add to that in Q4.
We didn't see any shift in fob and given that the tariffs are.
As of now set to go in December 15th So so far so good on our part.
Great Thats Super helpful. And then I was hoping maybe you could talk to us about some of the sell through in selling dynamics I think last quarter, you mentioned that both sell through in cell and were up double digits. Just wondering if you could give us some color on.
The dynamics for this quarter. Thanks.
Yeah.
And as again, obviously and as a company is continuing to grow and what we see as we've kind of taken a look at sell through is that the data that we're getting from our retailers is now representing about a third of our business, where I think historically when the company was in a much different place much more domestic base not as international it was a higher percentage so yeah as we talk.
About cells to go forward, a third really probably isn't a great measure to put out there in terms of giving directional.
Help for you guys. So yes, I think we're going to see if we can try to get more retailers report into this on this metrics that we feel comfortable you're talking about it go forward.
Great Thats Super helpful Bus book.
Thank you thanks.
Our next question is from drew Crum with Stifel. Please proceed with your question.
Okay. Thanks, guys. Good afternoon, So you talked about or address why you're not raising the adjusted EBITDA guidance for the year could you comment on revenue.
In that same thing and talk about some of the puts and takes you have.
In the fourth quarter.
And then separately just given the activity in the UK what are the cost savings associated with restructuring and consolidation of facilities and expect to see you next year. Thanks.
Okay I'll start with the guidance question, so coming out of Q2.
The company, we guided to $840 million to $850 million on an annualized basis and as you know we do give annual guidance and we feel really good on that to date, we've grown 28% in for Q3 were at 26% the range within that guidance is a little over 1%. So it's already a pretty tight spread there as well.
Look forward, though as well you know and Q4, we are coming up against a very high Q4 last year. It was approaching 38% and the growth rate and even with our current guidance Q4 will be our biggest quarter ever as a company. So we're feeling really good about where we are right now.
And overall and if you remember that a lot of frozen and Star Wars shipments did come into Q3, and we did have that $3 million. An fob that also came into Q3. So although we are very positive on Q4, I think if you look at the two year stack, it's a very healthy and build.
Well just relate to that would you expect fortnight to grow year on year.
Recall, when you guys began selling that in yes.
Yes, a lion's share or the of the the to be a success. We have with Ford I was right out of the gate New was early early Q4 of last year. It's a massive number I mean theres no doubt about it.
But we are also pleasantly surprised at how it's been it's vault into a very consistent stable basis since all that pent up demand an interest in that product in Q4 of of 2018.
Got it okay.
And then on yes.
Yes, sorry about that yeah, we haven't quantified yet with the cost savings we will be a couple other reasons that we are consolidating is one is going to streamline our operations would you think will be great. It's also going to laugh for capacity as Europe continues to grow and the UK continued to grow this will be an enabler for the growth there as well, we do anticipate that it will be.
Some cost savings and.
In 2020 per se.
Okay. Okay. Thanks.
Thank you.
Our next question comes from Linda Bolton Weiser with D.A. Davidson. Please proceed with your question.
Yes, hi, thank you.
So Brian I believe that you have talked about when you talk about developing your own content that in about five years.
20% of your revenue will be from your own content.
You update us that progress and how the property is going with Barnes and noble and also secondly can you say in a similar vein in five years, what percentage of your revenue will be from toys. Thanks, Yes, Hi, Linda of Great questions, Yes, I'll clarify I say in a perfect growth we love.
To have a 2020, 5% of our revenue would be our own IP suddenly, it's certainly a goal to shoot toward.
We obviously see a lot of wonderful companies out there like spin Master Hasbro, obviously that did have a lot of their own IP in or monetizing. It accordingly, so it's definitely a goal for our company and again, we always like to say 150 World class artists, who want to give them a voice and let's say in what's being created they have great ideas and their head so.
All of that is is.
Funneling into 2020, which is putting out wonderful distinct new toy lines that are going to be merchandise in a very disruptive way all of it or is it most of those our original IP and we'll begin to see the monetization. Although we're very very conservative outlook on what that is going to be.
Starting in 2020. This is a slow build but we're excited we're excited about the retailer support we've already garnered for those lines and.
If I were you know again I think we just want to continue to evolve as a company. Our focus has been continuing to grow what pays the bills, which is the pop culture bucket, but also to continue to.
Create new revenue streams like the games industry like toys like lounge flight was soft lines.
The don't rely on pop.
To grow and I think we've done a really good job is starting to lay some relief Bonnie exciting ground work into new revenue streams that are going to continue to diversify the company as a whole. So I don't have any kind of percentages of what you know our business would be for total toys I do believe.
Like anything else, we develop we make money on it.
The low cost of development applies the same to toys is it does to our pop vinyl figures because we do everything in house, we do it very very quick and very well.
So we are going to make money on this how much is obviously.
Up to the retailers end up to the people buying the product at the retail stores, but there is tremendous upside there and we're excited about what that possibly can be so if we do our <unk> a good job, we think each and every year that percentage will increase.
Great. Thank very much you bed.
Our next question comes from Mike King with Goldman Sachs. Please proceed with your question.
Hey, good afternoon, and thank you for the question.
Two first given all the.
Expansions into adjacent categories and strategic investments could you just provide us an update on your long term margin targets for gross margin in EBITDA and what you see as the timeline and path to get there and then second just a follow up on the question about the UK consolidations.
Yes, if we did see some disruption.
When we see that in and what do you think the magnitude can be thank you very much.
Great.
So yeah margin great question, I know theres been a lot of talk on previous calls around margin.
I'm not ready really give out of specific target yet or a timeline, but you know as I look at the business I do think there's room for improvement in both.
Adding new revenue streams as and as Brian would just speaking to in terms of those being actually a positive on the margin as well as optimizing our existing business inventory and Cogs of our Cogs driven by inventory. It's the biggest line on the piano and yeah as I continue to get up to speed on the business is the area that and I'll be focused on to make sure that we definitely are.
Optimizing the margin line and in terms of the UK consolidation that would primarily be you potentially a little bit in Q4 in Q1, and we Havent quantified of course, we are on the team has done an amazing job and the fact that we've been able to actually pull up the timeframe speaks to how well the execution is going on that so we're feeling.
Fairly good about right now.
Great. Thank you very much.
Ladies and gentlemen, Weve reached the end of the question and answer session. At this time I'd like to turn the call back to Brian Mariano for closing comments.
Thank you and for your interest in support of Funko, We look forward to seeing some of you guys in Hollywood It to visit the new store next week and or at Toy Fair in New York in February and speaking to you guys again on fourth quarter earnings call. If not sooner so have a happy and save Halloween. Thank you very much.
This concludes todays conference you may disconnect your lines at this time and we thank you for your participation.