Funko, Inc.

Good afternoon and welcome to Funco's conference call to discuss financial results for the third quarter of 2021. 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 a whole or in part is not permitted without written authorisation from the company. As a reminder, this call is being recorded. I will now turn the call over to Ben Avenia-Tapper, Director of Investor Relations to get started. Please proceed.

Thank you and good afternoon. With us on the call today are Brian Mariotti, Chief Executive Officer, Andrew Perlmutter, and Jennifer Falyong, Chief Financial Officer. Before we begin, I'd 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 what we expect. In addition to any risks that we highlight during the call, important factors that may affect our future results are described in our most recent SEC reports and today's earnings release. In addition, we will refer to non-GAAP financial measures during the discussion. reconciliations to their most directly comparable U.S. GAAP financial measures, and supplemental financial information can be found in the earnings press release in 8K 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.com. I will now turn the call over to Andrew.

Good afternoon, everyone, and thank you for joining us today. I am thrilled to report another record quarter with demand for Funco products as high as we've ever seen. Funco continues its strong performance and exceeded expectations for the quarter despite ongoing supply chain disruption and rising freight costs. Growth was broad-based and spanned across geographies, brands, product categories, and channels. Recovering our specialty channel domestically and in Europe continues to provide a tremendous lift, while strong growth in the mass market channel, including third-party e-commerce, exceeded expectations. Because of our excellent third quarter results and exceptional demand, we continue to see we are raising our net sales guidance for the year. Throughout the Funco portfolio, we're developing products that resonate with our fans while continuing to expand our product categories and fan base. We've extended our flagship pop brand beyond figures in the entertainment and collectible aisle into soft lines and accessories. We've also broadened our figure lineup beyond the pop brand and into the toy aisle with top-selling action figures like our new Turbo Man figure. We're not only expanding our shelf space with these moves, we're also continuing to broaden our fan base. Loungefly is a great example of this consistent growth mindset. We acquired LoungeFly in late 2017 when it was generating less than $20 million in annual revenue, a figure we nearly doubled in Q3 of 2021 alone. Today, we have successfully executed against our geographic expansion initiative. Softlines is now our fastest-growing category internationally. Domestically, we continue to see strong performance aided by the reopening of theme parks as well as new channel partnerships and best-in-class product design. Our direct-to-consumer channel is another great example and is driving growth across product categories and geographies. Delivering another quarter of exceptional growth and reaching 11% of total net sales, DTC continues to be a critical driver of our success, both domestically and through FunkoEurope.com. Our digital and logistical improvements in conversion, fulfillment, and user experience yielded excellent results. On Funko.com, for instance, sessions, transactions per user, and conversion rates were all up more than 40% year over year. And FunkoEurope.com, which we launched last year, has nearly tripled the number of sessions with similar operational improvements to our domestic site. And it's worth noting that we achieved this success in the same quarter that our wholesale business generated strong double-digit growth, exceeding expectations and demonstrating the viability and sustainability of our multi-channel approach. In our core pop platform, we continue to extend the brand with excellent results, whether it's the rapid sellout of our pop die-cast line or pop deluxe albums, or our extremely popular ornament partnership with Hallmark. These examples illustrate the tremendous potential of a platform built around fandom and pop culture. Our efforts go beyond the pop brand, including the launch of our gold action figure line, targeting a sports and music fan base that was rolled out to the mass market in September and has been met with similar enthusiasm. In fact, our target growth areas for content, sports, music, and anime, each increased more than 50% in the third quarter. I also want to call out the streaming show Squid Game, which launched on September 17th and soon became a global sensation. In typical Funko fashion, we were, we believe, the first to sign a licensing agreement and using our world-class speed to market, the first to launch a figure lineup for pre-sale with a full set of pop vinyl figures mere weeks after the show was released. It should come as no surprise that our posts announcing these figures were the highest performing social media posts across all of our channels in Funko's history. Through the Pop Vinyl platform and our other form factors, Funko is once again proving to be the authority in our industry, connecting fans to their favorite properties at the speed of pop culture. Within our games business, the titles we launch at the end of Q2 are gaining significant traction. We again grew games by strong double digits led by mass market channel and particularly strong results in third-party online retailers. This traction in mass market reflects our successful efforts to move into additional aisles with expanded shelf space at some of our largest retail partners. On the collectible games front, we launched Battleworld Series 2, which generated excellent early results. With this success, we look forward to expanding our collectible games portfolio in the future. Finally, in our youth collectibles business, we had an excellent quarter in action figures with Five Nights at Freddy's, as well as the very popular Turbo Man, which was one of our top selling items for this fall. Additionally, we launched Snapseed Series 2 at all our mass market partners as we continue to extend our fan base. We delivered these achievements while we also proactively managed supply chain disruptions throughout the quarter, and as a result, exceeded expectations. Let me touch on some of the factors that drove the outperformance. The majority of our products are not seasonal in nature. The best examples of this are our evergreen products, which were, again, 65% of net sales in Q3 2021. With that said, in those product categories where we do have higher seasonal exposure, we've made sure to prioritize items as appropriate. Obvious items like our advent calendars, but also products that are more likely to be gifted, including our games. In fact, throughout the quarter, we were in a position to take additional shelf space left open by competitors who found themselves without product due to supply chain disruptions. Given the challenges of the container shortage and higher freight costs, we managed to partially offset these headwinds by balancing our traditional freight arrangements with additional container space. We've been proactive in addressing COVID-related factory stoppages in Southeast Asia. In Vietnam in particular, our products are produced across multiple factories spread throughout the country. This allowed us to shift production to less affected areas when disruptions did occur in a region. Today, we're expanding that regional diversity even further to stay ahead of possible disruptions in the future. Before I turn the call over to Brian, I'll reiterate that the demand for the Funko brand has never been stronger. This is reflected in our third quarter results and our increased guidance. At the same time, we've been proactively managing the supply chain challenges that are facing many across a wide array of sectors and industries. Our employees, our partners, and our fans all deserve a tremendous thank you for making this possible. Now I'll turn the call over to Brian to discuss some of the ways we have and will continue to drive these outstanding results.