Funko, Inc.

Good afternoon and welcome to Funco's conference call to discuss financial results for the third quarter of 2022. 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 authorisation of the company. As a reminder this call is being recorded. I will now turn the call over to Ben Abinyatapa, Director of Investor Relations to get started. Please proceed.

Thank you and good afternoon. With us on the call today are Andrew Perlmutter, Chief Executive Officer, and Jennifer Fall-Young, 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 press 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 all along with this 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. It was great to meet many of you at our Investor Day event in September. Funko delivered another quarter of record sales in Q3, up 37% year-over-year to $366 million. Our strong net sales performance was driven by the power of the Funko brand, supported by the strength of our employees, fans, and retail and content partners across the globe. As discussed on our last earnings call, we continue to operate in an uncertain consumer market. While it is hard to pinpoint when this environment will normalize, we are confident that we are well-positioned to outperform our marketplace and continue to deliver strong, top-line performance over the long term. Our strong results come from across the entire portfolio as we generated year-over-year double-digit growth in all of our reported geographies and brand categories. LoungeFly again led the way, growing 57%, while poor collectibles and other brands grew 34% and 25% respectively. Direct-to-consumer grew 36%, while both Europe and other international exceeded 30% growth. We've managed to distinguish our brands by continually delivering products that connect fans from across all fandoms with their favorite content characters and stories in a uniquely Funko way. This, in turn, has cultivated an amazingly loyal and committed fan base of collectors and pop culture enthusiasts. This fan enthusiasm was particularly apparent with the return of in-person events. We drew massive sold-out crowds at San Diego and New York Comic Cons, as well as our own FunCon. Not only are these events great barometers of our fan engagement, they also led to many of this year's top DTC sales days. The enthusiasm our fans have for Funko is palpable. They dress up, they wait in line for hours, they carry the Funko flag. They are really our greatest brand ambassadors. Among our core collectible brands, Our flagship pop vinyl continues to generate growth through innovation. Our calendar program is a great example. We launched this line in 2018, and it has grown more than eightfold in four years. This year, we've expanded the concept to include a countdown to anything as we bring the fun of the countdown calendar to new holidays, such as Halloween. Emerging collectible brands, including Soda, Gold, and Popsies, we continue to show strong performance and see a long runway for growth. For example, our launch of Popsies at Walmart has been such a success that we'll be significantly expanding our shelf space allocated to emerging brands in 2023. Our new installation will include Popsies, as well as a number of other exciting initiatives to be announced in coming months. Finally, the most recent addition to our collectible brands is Mondo, which we acquired last quarter. While still early in that integration, we've already started to see synergistic benefits as we integrate Mondo into the Funko support functions. We believe the Mondo acquisition sets us up well for strong growth in music content. Much more to come on that. Turning to Loudfly, Demand across all channels, particularly our park partners, has been incredibly strong. LoungeFly's 57% growth in the quarter brings their year-to-date growth to nearly 90%. Importantly, LoungeFly's direct-to-consumer sales jumped from 10% of total sales in Q1 to 16% this past quarter, reflecting the growing strength of the brand. We believe this success is a direct result of our unique style of fan engagement, including our first brand tentpole event Summer of Loungefly, which strengthens the connection between our fans and the brands they love. In toys and games, we are now up to 180 games in our catalog, which is critical to the long-tail revenue central to the games business. Our incredible game designers continue to produce hits on both current and timeless IP. Within our collectible gaming business, our new Kingdom Media game has had an extremely strong introduction and was a finalist for the 2022 Toy of the Year in the Collectibles category. We soft-launched the title at D23 this year, and it's sold out every day. On the toys front, we recently launched the latest product in our highly successful Five Nights at Freddy's lineup. Featuring Snap technology, we've created an interchangeable action figure that is true to the game's most fundamental elements. Importantly, this is the first step in building an entire ecosystem we have planned for this property. Stay tuned for more announcements. Finally, our digital brands continue to generate very strong growth. Since we entered the digital collectible space a year ago, we more than doubled our net sales versus the same quarter last year. Due to the sustained demand, we have increased drop frequency and grown the average size to well over a half a million dollars in net sales. We've had multiple drops that topped 1 million in net sales, and we've announced digital collectible collaborations with some of our largest wholesale partners. Just last month, we released a Halloween drop made up of entirely our own IP that sold out in under 30 minutes. A key point of differentiation for Funko digital collectors has been the introduction of additional utility. Our rarest digital collectibles are redeemable for a physical version of similar scarcity. This feature has been a key factor in bringing physical first collectors into the digital space. This remains a nascent market, and we're very excited about its future. Turning to channel highlights, within wholesale, we saw strong growth from our mask partners despite broadly high levels of inventory at retail. While Funko products continue to be traffic drivers for our retail partners, have seen some order delays or reductions given the broader economic climate our results in direct to consumer which i'll speak to shortly highlight the continued strength of the funco brand however we do expect these wholesale order reductions and delays to persist in the short term given the current macro environment these expectations have been reflected in our full year guidance our dvc channel saw another quarter of strong double-digit growth exceeding 30% and representing what we like to call our single largest customer by net sales. Average order value and traffic across our e-commerce sites were both of strong double digits. Turning to our international geographies, Europe posted another strong quarter with growth across both established and emerging regions. Demand remains very strong, and we continue to see excellent progress on our strategic partnership initiatives as we thoughtfully leverage the most efficient retailers in the region. Among the other geographies, we experienced excellent growth in LATAM and Oceania. While we're still in the early stages of reaching our growth potential in Asia, we've recently hired leaders experienced in the region to execute on our growth strategy in this critical market. As described in previous calls, we've experienced very strong growth over the past year and a half. This success necessitates infrastructure investment to ensure we have the capacity and capability to maintain and build on that growth over the long term. In Q2, we opened our consolidated fulfillment center. Moreover, we achieved this upgraded infrastructure without the benefit of the warehouse management software it was designed to operate with. Together with our ERP implementation in 2023, These software upgrades will better position us to sustain our double digit growth and drive efficiency as we continue to scale our operations. Supporting the complex upgrades to our core infrastructure has resulted in higher than expected short term operating expenses and increased margin pressure. These actions are critical to service our near term demand, as well as support our long term growth objectives. We are actively managing through these interim fulfillment dynamics, and we believe these investments will result in consistent margin expansion in the future. Due to the macro headwinds previously discussed, we are revising our full year net sales target to between $1.29 and $1.33 billion, up approximately 27% at the midpoint year over year. We are also lowering our full year EBITDA margin to high single digits as we manage through the previously mentioned infrastructure upgrades necessary to support the sustained growth. In closing, we are pleased with our ability to continue to generate and service robust demand. We again delivered record top line results amidst an uncertain consumer market. While we continue to manage through that uncertainty in the fourth quarter, we are still on pace to deliver high teens growth in the second half. Our very strong results through these three quarters and our confidence in the resiliency of our business model is a testament to the power of the Funko brand and the incredible loyalty of our fans. We remain similarly competent in our ability to achieve the five-year objectives we laid out at our recent investor day event, both top and bottom line. We are managing through these short-term macro factors and investing in infrastructure and operation upgrades. When combined with our focused execution, we believe these steps will enable future growth and margin expansion over the next several years. In closing, I'd like to thank our fans, partners, and employees for their continued dedication and support for FONCO. Now Jen will provide more details on the financial results of the quarter.