Q1 2021 Funko Inc Earnings Call

And welcome to the Funko conference call to discuss financial results for the first quarter of 2021.

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 of this call is being recorded.

I will now turn the call over to Mr. Ben Academia, Tapper and director of Investor Relations to get started please proceed.

Thank you and good afternoon with asking the call today are Brian Mariotti, Chief Executive Officer, Andrew Perlmutter, President and Jennifer Fall Jung Chief Financial Officer before we begin I would.

Like to remind everyone that during the course of this conference call management will discuss forecasts targets and other forward looking statements regarding the company and its financial results. While these statements represent our best current judgment about future results and performance as of today. Our actual results are subject to many risks and uncertainties that could cause actual results to differ materially from.

And what we expect.

In addition to any risks that we highlighted during the call important factors that may affect our future results are described in our most recent SEC reports and today's earnings press release. In addition, we will refer to non-GAAP financial measures during the discussion reconciliations to their most directly comparable U S. GAAP.

GAAP financial measures and supplemental financial information can be found and the earnings press release and 8-K that we released earlier today all of these items plus a visual presentation that investors can consult to follow along with the discussion are available on our Investor Relations website, Investor Funko Dot Com I will now turn the call over to Brian.

Good afternoon, everyone and thank you for joining US today, we're pleased to deliver a strong start to the year, which marks the largest Q1 and funko has history of.

A year ago at this time I was talking about the steps you are taking to navigate and unprecedented period of uncertainty due to the pandemic today I'm happy to provide a very different update after returning to topline growth and Q4, we have continued and see strong consumer demand, which is driving broad based strength across our brands and products.

Channels and geographies.

First quarter net sales came in ahead of expectations, increasing 38% versus prior year. The outperformance primarily reflects and earlier than expected recovery in Europe.

And as well as higher than anticipated sales within our own direct to consumer channel.

And importantly, we continue to improve profitability is careful cost controls drove adjusted EBITDA margins well ahead of plan and up 790 basis points over last year Q1 was highlighted by a number of positive indicators across the business that reinforced the strength of funko pop culture platform and the ability to <unk>.

With our fan base across the world, our breath of never been stronger pocket lounge like continue to resonate with fans around the globe and drive growth across our channels and Q1 pop crude 33% versus a year ago, highlighting not just the strength of the quarter, but also reinforcing the power of our pop culture platform.

We continue to extend our reach across products channels and geographies lounge.

And <unk> branded products grew more than 80% year over year, and we saw a solid recovery and our domestic specialty channel and increased traffic across Europe as well as the continued success of lounge by Dot com and the quarter. We continue to see our product diversity strategy take hold and our non figure business grew 52%.

Over 2020 led by bags wallets accessory plush and games.

These diversification efforts have allowed us to connect with a broader fan base, while also expanding our relationship with many of our largest retail partners.

Our direct to consumer business grew over 160% year over year and now represents 10% of the overall business. That's up from 4% just two years ago and in fact, our E. Commerce sites alone generated net sales equivalent to our largest single customer and the quarter we.

And we've continued to see solid momentum on both of our U S and European sites and fans increasingly turn the funko to connect with pop culture.

And our successful efforts to broaden our fan base.

Expand our product offerings and elevate our customer experience from a region perspective consumer demand and the U S remains robust as sales increased 39% over 2020.

We saw strength across our of third party E Commerce.

Mass market and direct to consumer channels, while the U S. Specialty channel is beginning to show signs of recovery and.

In Europe, we're seeing a consumer demand recovery, that's both sooner and stronger than we initially anticipated as a result sales and Europe came in and well ahead of expectations growing 55% over 2020.

From a channel perspective third party E Commerce, our recently launched Funko Europe website, and the specialty retail channel drove the strength and the quarter.

We were encouraged to see improving demand and the region, but the environment remains dynamic with many countries and markets still under restrictions.

We believe our solid Q1 performance reflects the substantial runway ahead for funko, we are strongly positioned from a strategic financial and operational perspective to drive sustained long term growth.

As such we remain focused on executing against our key initiatives true.

Our broad consumer appeal and expand our total addressable market, which brings me to our most recent Tam expansion opportunity and we're thrilled to be entering in the end of key market, which provides us another compelling platform to connect with our fans and.

And we announced last month with the strategic acquisition of the majority stake and token wave, we've accelerated our entry and the N F T's and will extend our product platform to include digital collectibles.

And the synergies between the digital collectible space and our physical product portfolio are significant.

Equally powerful is the crossover appeal between and T collectors, and our funko fan base.

By merging the physical with the digital we can provide bands with a very accessible way become and NFC collector digital versions of some of our most popular of physical pop figures will bring an entirely new experience to our existing fan base and provide us with the opportunity to bring NFC collectors onto the funko platform for a law.

<unk> partners, we represent a turnkey solution to enter and exciting new market with the trusted partner.

We are planning and the initial launch and true featuring a unique property each week and.

The starting price point of only $9 99.

Collectors, who scored the railroads and Ftes will also receive exclusive rights.

Physical funko figure free of charge once sold out and F. T will only be available to purchase again on the secondary market with funko and our licensing partners receiving of royalty payments on each additional transaction and importantly, we chose best in class partners to launch our effort tokens.

<unk>, which runs on the lack of network provides us with a leading mobile platform for displaying and valuing NFC collections lacked the gift.

Blockchain built specifically for Nf teeth, and provides a secure and convenient network for buying and selling and trading and Ftes and importantly, wax provides the viral are virtual and real life technology, which will enable us the exclusive physical products to our ultra rare and of peace.

We recognize the news cycle around NFC and significant and the enthusiasm is high.

We view this like any other new venture we are starting small and keeping our entry costs low and taking a measured approach with the goal of building a business that is sustainable and profitable.

And we look ahead of the remainder of 2021, we're particularly pleased with our strong start to the year and feel confident that the business is positioned for long term success. Our team continues to drive innovation and remain focused on our strategic initiatives around suncoast core of pop culture platform product diversification DTC expansion.

And international growth, while the macro environment remains somewhat uncertain. We are encouraged to see easing restrictions and the U S and strengthening consumer demand signals globally.

Given the earlier than anticipated recovery, we are seeing across some of our key channels and regions. We are raising our outlook for the full year. We expect the achieved net sales of 865 to 900 million up approximately $50 million at the midpoint of our previous guidance range and adjusted EBITDA margins of 14.

<unk> the 14, 5%.

Jim will share more details on our outlook when she reviews our financial results.

We greatly appreciate the support of our partners fans and shareholders and look forward and keeping you updated on our progress throughout the year.

Now I'll turn the call over to Andrew to discuss our strategic initiatives.

Thanks, Brian our record first quarter results are testament to the ongoing progress our teams are making against our key strategic initiatives.

And we're excited to build upon our strong start to the year by continuing to deliver innovation and delight our fans around the world. Let me update you on our four major growth pillars first maximizing our core business.

We are driving growth and our core by extending our reach across fan groups, using evergreen content and new and creative ways.

We're targeting specific underpenetrated genres, as well as creating new and unique products that resonate with our fans.

Our ability to leverage nostalgic properties and the uniquely funko manner continues to drive growth and her.

The green content, which made up 66% of our sales and Q1.

As the new content slate strengthens over.

Over the remainder of this year and into next with increased theatrical and television and video game releases and we will continue to emphasize evergreen favorites.

While also introducing new and exciting properties.

And important ingredient to our success with evergreen properties is the ability to target underpenetrated genres that have significant fan bases with sizable market opportunities.

For example, we've identified sports music and anime as compelling opportunities and momentum has been building and since we put our stake and the ground last year.

Do you view this as a particularly compelling opportunity because it provides us with the ability to reach new and unique fan bases and ultimately grow and coast ecosystem.

As you know innovation has always been the lifeblood of funko and it's truly what makes this business drive during the pandemic, we have not taken our foot off the gas.

By way of example, we are rolling out new pop formats, such as pop albums and pop kind of books. We also recently announced the launch of gold the distinct vinyl figure platform.

The old figures are designed to appeal to of sports and music fan base, where we currently are Underpenetrated importantly.

Importantly, these product introductions provide us with an opportunity to expand our footprint with our key retail partners. Our second strategic initiative is product diversification as Brian mentioned, our non figure products grew over 50% year over year, driven by a broad based strength across our categories. As we continue the day.

<unk> the business by broadening our lounge fly brand offerings, expanding our games portfolio, and introducing new and exciting and used collectibles bound fly continues to grow the brand both domestically and in Europe, we see substantial runway to drive growth and expansion through continued innovation across multiple product categories.

And expanding our distribution with the mass market third party e-commerce and direct to consumer channels.

And the youth collectible category, we've been able to extend our reach by appealing to a younger demographic broadening both our customer base and our footprint within retail partners.

And of course of the year, we will be focused on supporting our recent launch of snap <unk> and building excitement around some of our traditional properties like five nights of credits.

Turning to gains we continue to gain strong traction and the category Q1 growth of more than 40% was driven by our expanded portfolio and distribution through new retail partners with more than 40 titles slated for the remainder of the year, including a second edition of our popular Marvel Battle World, We are well positioned to continue gaining.

Sure and this market.

Our third initiative is the.

Expansion of our DTC business.

Over the past year, we have significantly enhanced our global digital capabilities, enabling us to drive more direct and meaningful engagement with our fans.

We were pleased to see our investments and hard work there for as we gain meaningful traction and the U S as well as Europe, where we recently launched fund from Europe Dot Com.

Importantly, we've been able to strengthen our customer experience from initial engagement.

Through purchase.

While we made great progress to date, our DTC initiative is still and it's early stages we.

And we're expanding the breadth and depth of our product offerings on the website building additional tools for fan engagement, including tiered loyalty and rewards programs and.

Hansen the capabilities on our App and making important back and improvements as Brian mentioned, we've grown our D to C business from just 4% two years ago of a.

10% of sales today, and we believe there is still tremendous runway ahead and our final area of strategic focus is our international expansion effort, while the global landscape continues to see wide variances and recovery, we are making excellent progress against our objectives.

And within Europe, more strategically expand into new regions, where we see strong affinity for pop culture outside of Europe, We're streamlining our operations through the strategic channel partnerships, and Canada and Latin America.

And Australia, New Zealand, where our Q1 saw less disruption from the pandemic, we focused on broadening our product distribution.

With particular emphasis on establishing the <unk> brand and.

And broadening our games presence.

And the Asia Pacific region.

And we will continue to invest thoughtfully, where we believe our brands have profitable growth opportunity.

And to execute on the opportunities in front of us and look forward to keeping you updated as we progress through the year.

I will now turn the call over to John to take you through the financials and 2021 expectations.

Thanks, Andrew and good afternoon, everyone. We're pleased to report strong first quarter results highlighted by net sales growth of 38%, which reflects improving consumer demand and broad based strength across our brands and product geography and channel.

The health of performance relative to our expectations was primarily driven by better than anticipated results in euro and yen.

Accelerating consumer demand as the over performance within our DTC channel all of.

Comparisons are year over year and that's it.

The way stated net sales and the U S increased 39% to $137 million, while Europe was 55% to $40 million and other international region increased 2% and expecting the ongoing pandemic headwinds and several key markets.

And the number of active properties and Q1 was 762 and increase of 12% from prior year.

Net sales per active property of our 248000 in the quarter and increase of 24%.

From a list of our top performing properties in the quarter. Please see the accompanying earnings presentation.

And as the product category basis, Q1, net sales of figures from 35% to $161 million.

The other sales increased 32% to 39 million, primarily reflecting the strength and our landslide branded products, which grew 82% and the quarter.

Additionally, we saw strength within our game play and accessories category sales of our pop branded products and 33% with strong double digit growth both domestically and in the.

First quarter and gross margin of about 41, 4% and increase of 100 basis points versus Q1 and 2020 and.

And year over year improvement, primarily reflects favorable sales mix and improved product margins, partially offset by an increase and shipping and freight costs.

And the percentage of sales SG&A leveraged by 750 basis points coming in at 27, 1% versus 34, 6% and 2020.

SG&A dollars increased 8% the Q1.

And slightly higher than we anticipated due to the over performance in the quarter.

Moving down the P&L, our strong topline performance flow through from the bottom line and Q1, adjusted EBITDA increased substantially to $30 million adjusted EBITDA margin expanded 790 basis points to 15, 7% and adjusted diluted earnings per share increased to $20.

Turning to the balance sheet and cash flow, we ended the quarter with $75 million of cash and cash equivalents and 75 million of availability under our revolver, representing total liquidity of $150 million.

That represents an improvement of nearly 50% versus a year ago. We ended the quarter with total debt of 183 million and 25% compared to Q1 of last year.

Inventory at quarter end to let's take the $2 million up 16% on sales growth of 38% the business generated strong operating cash flow of $37 5 million during the quarter.

And when you look at the remainder of 2021, we expect the macro environment and remain dynamic.

And the first half consumer demand has been strengthening sooner than we anticipated driving over performance relative to the first half sales outlook, we provided on our year end earnings call.

And kind of our full year guidance had already contemplated and more normalized demand environment and the second half of our expectation for second half sales growth and the low to mid double digits remains unchanged.

For the contact for full year 2021, we are raising our top line outlook at the midpoint by about $50 million and we now expect sales of $865 million to $900 million we.

And we continue to expect the gross margin to strengthen in 2020, one driven by an increase and our direct to consumer and business as well as retail and distribution and that.

And the balance of the year of we expect SG&A on a dollar basis to increase sequentially each quarter and the mid to high single digits.

Full year adjusted EBITDA margin is expected to be in the range of 14 to 14, 5% representing an increase of 178, the 220 basis points compared to 2020.

We expect adjusted net income of 50 cubic of $16 million based on the blended tax rate of 25% and adjusted earnings per diluted share of <unk> 98 to $1 12 based on a weighted average diluted share count of $53 $3 million. We appreciate your time. This afternoon, now, Brian and Andrew and I will be glad to take your questions.

Ladies and gentlemen, if you would like to ask a question. Please press star one on your telephone keypad again to ask a question. Please press star one on your telephone keypads, well pause for just a moment to compile the Q&A roster.

Your first question comes from the line of Erinn Murphy from Piper Sandler.

Great. Thanks. Good afternoon. This is curt on for Erinn and great to speak with you of Jennifer and gentlemen.

Congrats on the great quarter, just a couple of questions here first off where do you see the long term penetration rate of DTC overtime, and and how does that reshape the P&L profitability.

Hey, Curt this is Dan how are you.

Great and really good.

And we feel really great about what we've been able to achieve the D to C and over the past year and growing at the 10% penetration and the quarter. We're going to continue to focus on that continues to build that as and as Andrew mentioned as one of our long term strategies and we expect that to continue and it though as we look at.

And beyond that you know, we feel really good about the progress you've made the or continuing to focus on it and have it be of priority.

Awesome, Great and then just on the just on the.

And a key acquisition.

What's the margin profile of that business and how do you guys view that.

The top line long term.

Yes, I can certainly all of the J code I'll, let Jim chime in I mean, obviously, we view the businesses, it's going to have a higher profit margin and what our traditional physical products go but it is obviously, a very new business and be very conservative and take a measured approach now.

How we get into the business as a whole and I think obviously, because we're being very cautious with the revenues that you probably wont have much of a material effect on on margins you know year, one maybe you're too but if this continues to grow and we are very excited about our philosophy and our strategy and this space I mean, the it could end up.

Ultimately, having an effect on our profitability.

Got it great and then just one more from me just can you speak to what Youre seeing in terms of original content today, and where that could be over time as our revenue guidance.

Yeah.

It's been a focus of ours, right and and I think we've had some some real good success since the last three or four quarters from our own IP has been either in the top 10 are just outside the top 10, each and every quarter.

The significant progress from just a couple of years ago, when we had.

And basically zero revenue from our own IP. So how we will continue to to strategize on how to grow that business of one of it one of our outlet just talk of Parker, which is a Japanese inspired original IP line and I confuse the change on the on a quarter to quarter basis.

We can do just the brand more funko style products like our pop protectors, and our pop cases and.

We think there is obviously a significant room there we have obviously, our snap <unk> initiative as well. So we're certainly putting resources to that and we definitely see this growing and will continue to put a focus on it quarter after quarter.

Awesome. Thank you so much that's it from me.

Good thanks for the document.

Your next question comes from the line of Steph Wissink from Jefferies.

Thank you good afternoon, everyone I have a follow up the question on the N F. T opportunity, Brian you were talking about and it kind of out over the next couple of years, but what.

In addition to the revenue opportunity are you thinking about in terms of expanding your engagement with your fan the DTA at the same platform has been significantly and talk a little bit about engagement.

Yeah, I mean, that's of Great question Andrew.

Have you had conversations with with licensed service, we've got conversations with retailers. We have retailers request out. This is what's so exciting about linking the physical and the digital together there are so many different ways to engage of so many different ways to get people excited about what and Ftes are just one example, we could drop of <unk>.

<unk> NSP for Freddy funko wearing of Senegal comic Con and T shirt.

Just days before the event give the NFPA away numbered it's free and get them into the ecosystem at the sign up for an account and it has value and there is retailers that want to participate whether it's through and if the cards dropping a PA and and ft talk into an actual physical product and having a in a link the as well.

And then.

And.

And that cross collaboration of people that are embedded as collectors and the NFC space.

The that have never bought of physical product from funko, and vice versa. The people, who have been and the funko physical space who've never bought and NFC product. We think there's a cross pollination and it's going to happen between that and they're just we're really excited and I think but it all starts with sound fundamentals and and for US it's diversity of licenses content content.

Content and you'd be not fresh keeping at the low price point to get in keeping the content varied on a week to week basis.

Finding ways to make the content of interactive finding ways to link at the rare physical products to get people and who might not ever consider buying and NFC before because we all know the secondary market with with boxes is very robust.

There's so many ways to interact with so many different ways to engage the fan base.

Super exciting and I think that we're just gonna take of real measured approach to our strategy our licenses our connections to the fans and really make this look like and it's a long term proposition and is not of Moneygram because you see some of the the programs out there that are.

And <unk>. They just feel like quick cash grabbed and we're not about that and the long term strategy that we think goes hand in hand, with what we already do which is engaging pop culture enthusiasts and fans and and a very unique way.

And just as a follow up to that Brian could you talk a little bit about your DTC exposure by market I think there's just the opening Europe now, but how is that developing and are you seeing any common patterns among consumers engaging with you on DTC.

Obviously, it's still heavy North America, but Europe again, we brought that along two years earlier than expected and the one of the few ways and you took advantage of the pandemic was obviously.

Rushing net investment and that work done ahead, while Europe was almost completely shut down what we're seeing is and everything. We're most proud of is the average basket size and people now buying the regular items more than they are buying the exclusives, we used to be of flash cell driven business.

Direct to consumer we dropped something limited people will come in and get that limited items and get out oftentimes the crashing of her website oftentimes filling out and the mere minutes and now what we're seeing is they are coming for the sometimes of the exclusive and then theyre, adding from the basket. The rest of the everyday line and I think that's a real testament to what we've accomplished there and.

Johan of deferred is leading that charge. He has been with me and funko for about the nearly 15 years, she understands our customer journey and our customer of better than just about anybody and she's doing a wonderful job of.

Just trying to create a special environment and funko that feels a little bit different than our other retail partners and I think you'll continue to see new formats, and new ways to engage that fan base of definitely different.

Our other trusted partners.

Thank you very helpful.

Your next question comes from Tami Zakaria from Jpmorgan.

Hi, Thank you so much for taking my questions and.

So my first question is can you.

Sure and little bit about the token wave acquisition, how much cash Smith and <unk>.

For what percentage of ownership and what kind of revenue and earnings.

And if at all do you expect from the acquisition this year.

John I'll, let you answer that part I can answer and you kind of strategic part of it but yeah.

And the acquisition of as far as the 1% stake and and the company.

The relatively new company and at this point, we arent and I don't really know.

The clothing and much of that the purchase price and.

Well as the revenue that we are.

And as Brian was talking to earlier.

What type of day, very cautiously and conservatively. So we at the point of our platform that we're working on for Andrew.

And he and lots of all the world.

And I haven't got it and.

And that the perfectly within our strategy and a great.

The center for Funko.

Got it that's super helpful. So.

So basically of that would mean and the guidance you have for this year doesn't include any any significant.

Sort of contribution from and S T investing.

Correct because of Okay got it and.

And so my second question is any thoughts on the rising cost of resin and.

Freight and how you think about the impact of those on margins this year.

Yeah.

I was wondering if you could comment on I know you had talked about a lot of brick and mortar distribution expansion prior to the pandemic and I was wondering if you could just kind of comment what happened and some of those I noticed like even and Walmart Your sex and is is not that big so it seems like there's opportunity.

And I think you've talked about best buy and things like that cause you're kind of update us on distribution gain opportunities and what you've accomplished.

Yeah, I can check that one very true. The question was Andrew shall we are we are really struggling with where we are when we talk about our fault of diversification strategy you know I could get your the started to see that bill of food at retail with our existing and new partners as well you know if you take a look at the mass channel.

Specifically, the proud of diversification and growing the core of business are both of London additional space at retail. So you know if you take of if you take a look at the sports and anime and music initiative, but we have you will see increases and and both promotion.

And existing shelf space and the mass channel as well as of the trails. The this year that are fully supported by that initiative. So we we couldn't be more excited about that in addition to that will also see growth and the other categories that we have grown and you for example games we're seeing.

Expansion of ourselves shelf games, and and in that category Uhm youth collectibles, we're continuing to see expansion, you know, even apparel and things and things like that the blue and we're seeing some some good expansion. So we're excited about that we're always building a bridge as the new retailers growing force base within those particular retailers and.

You mentioned best buy we are working with best buy will continue with the we'll find those programs and store and it just got a new team and place. So we will get in the note of new team, but we're seeing we're seeing expansions at at many of our channels. We're seeing a lot of the good success of the drug channel. So.

We've got our foot down on the gas and the continuing the bill.

Yeah and Linda.

Big wins, and Europe, as well with like a retard like car for we continue to penetrate all of the different markets, where it was just very you know France focused it's now all over Europe and their stores and there there is a lot of wins and the brick and mortar space.

Great and then in terms of your international expanse and I mean, obviously Europe is starting to come around are you and things strengthen up here are you going to be looking to expand into some new international markets and what would the your next your next targets and internationally yeah.

Definitely the T V.

The focusing on on how the deep Coleman and and the rush of specifically, but yeah. There was the focus there and we've got some great new leadership and in terms of sales and and different teams now that are breaking out by region and Europe to really focus on some of these other countries that are underpenetrated Germany's another country, that's come along the way and.

A very short period of time, so what we're doing the strength and all of the of different countries were doing the living room and the Arctic now. So there there is absolutely growth and and and a high level interest and continuing to build the brand throughout Europe I definitely see.

See and and Germany, and the Nordic sure of three that are really really humming right now.

Great. Thank you very much good luck.

<expletive> and and find out.

Thank you.

Our next question comes from the line of character Johnson from the M Arab capital markets.

Hey can afternoon I wanted to follow up and the input costs of question and I guess, if we need to be specific polyvinyl chloride and and what those price that are looking wise, how that's affecting your production and if you would need to increase price to cover those costs or and what kind of price and.

Sure do you have.

Yeah of Garrick, we have not had a <unk> a cost of goods increase and over five years and any of our manufacturing and we don't use resin Ah PVC vinyl is definitely our our our product choices when it comes to raw materials, but we've always been able to overcome any kind of price price increase due to just just pure volume the the the.

The amazing amount of volume, we pushed and as we migrated out of China, and India, Vietnam of lining with stronger larger better funded factories have been able to actually lower our cost of the goods a little bit of each and every year. So we're we're and a really strong position right. There obviously, there's some headwind with the container space and and and and.

The painters pricing and and.

And some some you know some some delays, but that's really the only thing that's really facing us and terms right now of in terms of the cost of goods.

Okay alright, thank you.

Yep.

And I shall no further questions at this time are there any closing remarks from management.

Thank you and something for your time today, and we really appreciate it.

Ladies and gentlemen, and this does concludes today's conference. Thank you for your participation you may know I'll disconnect.

[noise].