Funko, Inc.

Good afternoon, and welcome to Funko's conference call to discuss financial results for the third quarter of 2020. At this time, all participants are in listen-only mode. Later, we will conduct 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 is not permitted without written authorization from the company. As a reminder, this call is being recorded. I will now turn the call over to Andrew Harless, Manager of Investor Relations, to get started.

Please proceed. Thank you, and good afternoon. With us on the call today for management are Brian Mariotti, Chief Executive Officer, Andrew Perlmutter, President, and Jennifer Fall Young, Chief Financial Officer. A press release covering the company's third quarter 2020 financial results was issued this afternoon and is available on our investor relations website, investor.funco.com. Before we begin, I need to remind you that management's remarks in this call make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in the risk factors section of our Form 10-Q, the three-month edit September 30, 2020, and our other filings with the SEC. Any forward-looking statements made on this call represent our views only as of today, and we undertake no obligations to update them. We will be referring to certain non-GAAP financial measures on today's call, such as adjusted EBITDA and adjusted EBITDA margin, which we believe Thank you for joining the call today, and I hope that everyone is staying safe and healthy.

Before I jump in, I'd like to thank the entire Funko team for their tireless efforts, which has allowed us to deliver a solid quarter highlighted by revenue above our expectations and improved profitability versus a year ago. During this dynamic time, our teams are ensuring that we will continue to innovate and connect with our fans while making progress against our four key growth initiatives. In the third quarter, we delivered net sales of $191 million and strong gross margins while maintaining prudent cost control. This drove adjusted EBITDA margins of 18.9% up 70 basis points over a year-over-year basis. We also continued to strengthen our balance sheet and increased our liquidity position over 50% compared to last year to $107 million. From a top-line perspective, there are a number of positive indicators across the business, and we believe Funko is well-positioned heading into the fourth quarter and 2021. In the face of pandemic headwinds and virtually zero theatrical releases, we drilled strong consumer engagement and demand in Q3. Some noteworthy call-outs. One, Evergreen products represented 70% of our revenue. This demonstrates our ability to connect with fans through nostalgic and beloved characters across multiple genres and underscores that Funko is not reliant on new tempo movies to deliver products our fans love. Two, we continue to outperform and see strong demand within the domestic mass market and third-party e-commerce channels in the quarter, both of which grew over 15% compared to prior years. Three, more and more consumers are turning to Funko.com and LoungeLight.com for their pop culture products. In the quarter, we saw sales driven by our own e-commerce platforms again grow by over triple digits as the investments we have made into our platforms and capabilities begin to pay dividends. Four, we are seeing positive consumer response to many of our new launch games. For instance, this week, Funko Games had over 10 titles on Amazon's top 100 hot new releases for the games and accessories category. And lastly, fan engagement with Funko remains strong, highlighted by the tremendous participation we saw in our last virtual con during October. More on this shortly. Now let's turn to third quarter performance and our expectations for the balance of the year. Regent and Channel Mix continue to be primary drivers for our top-line performance in the COVID environment. Our U.S. business declined 4% in the quarter, reflecting a slower recovery within our specialty channel, which was partially offset by strength in our third-party e-commerce, mass market, and direct-to-consumer channels. As I mentioned previously, strong consumer demand drove overperformance within our domestic third-party e-commerce and mass retailers. Growth in these channels is attributed to strength within our core collectible products, as well as our expanded game and lounge-fly offerings. As the third quarter progressed, we began to see modest improvements in trends within the specialty channel, driven by store reopenings and retailers shipping their inventory to their e-commerce sites. Additionally, we are seeing ongoing momentum in our direct-to-consumer channel, which nearly doubled in Q3, driven by an increase in our own e-commerce sites, which had another quarter of triple-digit growth. Our D2C business represented 8% of our sales in Q3, up from 4% a year ago. Turning now to our international performance, as expected, Bunco's recovery in Europe has been more gradual than the U.S., given that our customer base in the region is more heavily weighted to the specialty channel. During Q3, COVID headwinds persisted in both EMEA and LATAM, with Oceana and Canada regions performing well, better than the U.S., in fact. Looking forward, we expect to see continued pressure in the European region in Q4 as a result of new COVID restrictions that recently took effect in multiple countries. We are navigating the macro uncertainty by operating and planning our business conservatively. As always, we are laser focused on innovating and delighting our fans. Equally important, we are remaining nimble so that we are prepared to manage through potential closures within the U.S. and international markets. Currently, we expect Q4 net sales to decline 10% to 8%, which includes almost 20 million or eight points of pressure related to new restrictions and closures throughout Europe. Notwithstanding the global uncertainty around potential pandemic restrictions, we expect to see strong performance within our domestic mass market, third-party e-commerce, and B2C channels, offset by continued softness within the European region and U.S. specialty channels. Importantly, we feel good about Funko's positioning heading into the holiday season, when we will have our most diverse product offering in the market yet. This is enabling us to expand our relationship with key retail customers as we partner with them to deliver an expanded product offering, which includes Funko games and youth collectibles. At the same time, we expect to drive consumers to our own e-commerce sites through creative marketing programs supported by a broad product offering. The investments we have been making in our own digital capabilities and B2C fulfillment leave us well prepared to meet the anticipated demand. Even in today's highly dynamic environment, we are continuing to see fans actively engage and seek out Funko products in-store and online. As I previously mentioned, just a few weeks ago, we wrapped up our Funko Virtual Con in conjunction with New York City Comic Con. and could not be more enthusiastic about the level of engagement and passion we received from the Funco family. Not only did we see our engagement levels triple compared to last year's in-person Comic-Con, but we were also able to drive higher sell-through of Comic-Con items at our retail partners. The broad-based love of pop culture we have been witnessing for many years now has not diminished due to the pandemic. Consumers and mega fans alike are continuing to view, engage, and create communities around their favorite properties, content, and teams. Over the long term, we are confident that Funko is positioned to drive growth as we continue to diversify our business across new product categories, geographies, and channels. We are continuously working to bring new fans into the Funko ecosystem by harnessing our innovative culture to create new products and leverage new licenses. This year has certainly come with a unique set of challenges for everyone. I want to again give my thanks and appreciation to the entire Funko team for helping us bring joy to our fans. Also, thank you partners, fans, and shareholders for your continued support. I hope everyone has a wonderful and safe holiday season and New Year's. Now I turn the call over to Andrew to discuss our strategic initiatives.