Funko, Inc.

Good afternoon and welcome to FONCO's conference call to discuss financial results for the fourth quarter of 2020. 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 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.

Andrew Harless Thank you, and good afternoon. With us on the call today for management are Brian Mariotti, Andrew Perlmutter, President, and Jennifer Fall Young, Chief Financial Officer. A press release covering the company's fourth 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 on this call may contain forward-looking statements within the meanings 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 where I formed 10-K for the year ended December 31st, 2020, and other filings with the SEC. Any forward-looking statements made on this call represent our views only as of today. We undertake no obligation to update them. We'll be referring to certain non-GAAP financial measures on today's call, such as adjusted EBITDA and adjusted EBITDA margin, which we believe may be important to investors to assess our operating performance. Reconciliation non-GAAP financial measures to the most directly comparable GAAP financial measures are included in our earnings release. We've also prepared a visual presentation that investors consult, follow along with this discussion, and can be accessed at investor.fundclub.com.

I'm now turning the call over to Brian. Thank you for joining the call today, and I hope that everyone is staying safe and healthy. Before we begin, I want to commend our Funko teams around the world that demonstrated tremendous resiliency and came together to execute in 2020. It's because of them that we were able to continue to bring joy to our fans in a highly disruptive year. Some major highlights of 2020. First, we delivered innovation, which is the heart of Funko. We successfully launched new products ranging from Snapsies and Funko Vinyl Soda to Pop Albums, Skit Shop, and a dozen of new board games, all of which expanded our presence among key retail partners, extended our reach to new consumers, and further diversified our revenue stream. To that end, our diversification strategy continued to bear fruit in 2020, as our non-figured products represented almost 23% of our sales. supported by our LoungeFly branded products of 17% and our expanded game portfolio growing over 50%. Second, we continued to successfully leverage evergreen content, which allowed us to keep our products fresh and relevant during a time when many new releases were paused. For the year, sales related to evergreen content represented 66% of our business, up from 51% in 2019. Additionally, there is only a single property in our top 20 that is related to a theatrical rhythm. This unique ability to leverage evergreen properties across a wide variety of genres, products, brands, and retailers enables us to drive revenue while continually reaching new fan bases. Third, we strengthened our direct-to-consumer platform in 2020 through several initiatives. We added important digital capabilities to enhance usability and functionality We increased the number of SKUs on the site up from only a few hundred to over 2,000. We launched FunkoEurope.com in October, almost two years ahead of our original plan. These actions allowed us to grow our total direct-to-consumer sales by 80% to over $50 million. As a percentage of sales, D2C represented 8% of the business in 2020, up from less than 4% in 2019. This was a nascent business in 2017, and in just a few years' time, has become a rapidly growing channel for us. We are continuing to invest behind D2C to accelerate our capability, drive growth, and build scale. Our fourth accomplishment, in addition to expanding our D2C businesses, we have successfully pivoted and focused on supporting our global mass market and third-party e-commerce channels, driving growth compared to 2019. Exiting the year, these channels accounted for 35% of sales, up from 28% in 2019. Fifth, in December, we launched POP People at our two flagship retail locations. This gives our fans the ability to create their own custom POP figure and box for themselves, their friends, or family. We have seen tremendous initial response from our fans over the last three months, and Pop People has quickly become the top-selling item at both of our Funko stores. Given the strong consumer demand, we are working to rapidly bring Pop People to our websites in 2022 to allow our fans all over the world to build their own pop and connect with our iconic brand. We think this is a powerful way to enhance the experience while also attracting new fans to our site. Last and more importantly, we found new ways to engage with our fans around the world. At a time when in-person events were not possible, we pivoted and innovated to ensure that we stayed connected to our fans, whether it was through social media or hosting virtual cons in connections with Comic-Cons in San Diego, New York, and Emerald City. We saw such strong fan engagement that in multiple instances, we sold more through our virtual cons than through our in-person events last year. And our social media engagement was greater than that of the Comic-Con themselves. We are particularly pleased to wrap up the year with a solid fourth quarter, which was highlighted by our return to revenue growth, improved profitability, and continued progress against our key growth initiatives. Q4, Mesdell grew 6% to $227 million, coming in significantly above our expectations. Our strong revenue performance, coupled with solid cost controls, drove adjusted EBITDA margins of 14.7%, up 270 basis points compared to last year. Also, we continued to strengthen our balance sheet as we increased our liquidity position over 70% versus prior year to $127 million. Q4 was highlighted by a number of strong trends that make us even more bullish about the Funko brand, the underlying strength of our pop culture platform, and our ability to connect with our fan base around the world. We saw exceptional demand in the U.S., where sales increased 18% to $171 million and represented our largest domestic quarter ever. This was driven by strong growth across the mass market, third-party e-commerce, and direct-to-consumer channels. We also saw better than expected performance among our specialty retail partners, but recovery in that channel still remains gradual. From a brand perspective, domestically we achieved strong growth of 12% in pop and 55% in lounge fly during Q4, demonstrating the strength and resiliency of our brands. A second trend that is particularly notable is the enduring strength of evergreen content, which represented 68% of sales in the quarter. This demonstrates our ability to drive growth without relying on new releases as we increasingly connect fans to their favorite Evergreen content. Additionally, our diversification strategy is continuing to gain solid traction. In Q4, our figures category was flat compared to last year, and virtually all of our growth was driven by our other products, fueled by strong performance within our launch by brand and our expanded game offerings. Also, we are continuing to see more and more fans turn to our Funko and LoungeFly websites for their pop culture purchases. Sales from our own e-commerce sites grew over 170% in the quarter. In fact, our e-commerce sites would have ranked in the top three of our largest customers globally. Lastly, from an international lens, We performed better than expected as pandemic disruptions in Europe were partially offset by sustained demand from both our retail partners and consumers. We are continuing to see strong demand signals from the European region for 2021 and believe we are well positioned to further expand our international footprint. Funko's brands are what? Licensers, retailers, and most importantly, our fans' trust when it comes to pop culture. Our diversity across product categories, licenses, genres, and distribution allows us to reach a broad consumer base. Just in 2015, over 90% of our sales were attributed to figures. Since that time, we've expanded into growth adjacencies and diversified our product mix to include bags, wallets, board games, apparel, toys, accessories, and more. We have grown our non-figure category from about $25 million in 2015 to nearly $150 million in 2020. And that category now represents 23% of our sales. However, during this time, we have remained focused on strengthening our figure business, which we have doubled since 2015 and represents over $500 million in 2020. We are continuing to drive growth and build on our diversification by extending our reach across product, category, channel, and geography. We have done this by expanding our product offerings through strategic acquisition and entering new categories, increasing our penetration in genres such as sports, anime, and music, continuing to build internationally into Europe, Latin America, and Canada, Broadening our distribution to new and existing retailers, as well as directly to consumers through our own website. Continually finding new and innovative ways to engage with our growing family. By way of example, just a few weeks ago, in lieu of New York Toy Fair, we hosted our first ever Virtual Funko Fair, in which we partnered with our licensors and retailers to engage our fans and launch new offerings. We couldn't be more thrilled with the response we received and the tremendous success of the event, in which fan engagement far exceeded any in-person toy fair we have attended over the years. The event led to nearly 1.5 million units being pre-sold to fans through our retail partners, and many of these products are still six to nine months away from being released. In addition, this resulted in over 90 million impressions across social media. We plan to continue to leverage virtual events throughout 2021 to drive community, awareness, and engagement amongst fan bases across the world. We exited 2020 strongly positioned from a strategic, operational, and financial standpoint, and we are incredibly excited about the journey ahead. We have well-defined strategies for growth, and we are executing against substantial PAMs. The global licensed merchandise market is over $290 billion, and the global toy and game market is more than $90 billion. Our runway is significant, and our strategies to lever our core pop culture platform, diversify the business, and drive profitability are continuing to gain traction. We expect 2021 to be our strongest sales year yet, which gives us the confidence to continue to invest in the business to drive long-term growth. For the year, we expect to deliver sales growth of 25% to 30%, reflecting broad-based strength across our brands, products, channels, and geographies. This also reflects growth from 2019 pre-pandemic levels. Importantly, we are continuing to manage the business with discipline and expect to deliver strong growth on top and bottom line in 2021. We greatly appreciate the support of our partners, fans, and shareholders, and look forward to keeping you updated on the progress throughout the year. Now I turn the call over to Andrew to discuss our strategic initiatives.