Funko, Inc.

Good afternoon and welcome to Funko's 2025 Third Quarter Financial Results conference call. At this time, all participants are in listen-only mode. Later, we will conduct a question and answer session. If you would like to ask a question, please raise your hand. If you have dialed in to today's call, please press star 9 to raise your hand, star 6 to unmute. 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 hand the conference over to Funko's Director of Investor Relations, Rob Jaffe. Please proceed.

Hello, everyone, and thank you for joining us today to discuss Funko's 2025 third quarter financial results. On the call are Josh Simon, our recently appointed Chief Executive Officer, and Yves Lependevin, the company's Chief Financial Officer. This call is being broadcast live at investor.funko.com. A playback will be available for at least one year on the company's website. I want to remind everyone that during the course of this call, management's discussion will include forward-looking information. These statements represent our best judgment as of today about the company's future results and performance. Our actual results are subject to many risks and uncertainties that may differ materially from those stated or implied, including those discussed in our earnings release. Additional information concerning factors that could cause actual results to differ materially is contained in our most recently filed SEC reports. In addition, during this call, we refer to non-GAAP financial measures that are not prepared in accordance with U.S. generally accepted accounting principles and may be different from non-GAAP financial measures used by other companies. Investors are encouraged to review Funko's press release announcing its 2025 third quarter financial results for the company's reasons for presenting non-GAAP financial measures. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP financial measures is also attached to the company's earnings press release issued earlier today. Also, we have posted supplemental financial information on the investor relations section of the company's website, which includes, among other things, a net sales bridge, a gross margin bridge, and key IP and product drivers. I will now turn the call over to Josh Simon. Josh?

Thanks, Rob. Good afternoon, everyone, and thank you for joining us. This is my first earnings conference call at Funko, and I want to start by saying I couldn't be more thrilled to be joining the team at this exciting time. Over the course of my career, I've seen this industry from a variety of perspectives, making movies at Disney, creating products at Nike, and most recently leading the global consumer products and live experiences division at Netflix. Now across all those worlds, I gained a strong understanding for fandom, the culture of entertainment, and how it translates into physical products. And I can unequivocally say there is no one better at it than Funko. There's one clear trend I saw across my years in entertainment and consumer products. Almost every filmmaker, creator, or celebrity with whom I've worked inevitably asked if they would get their own Funko Pop. It's seen as a sign of having made it in the entertainment world among the biggest Hollywood talent. From the outside, that love for Funko and its brand and products was energizing. Now, I want to begin with some takeaways from my first 60 days after diving deep into the business and speaking with our customers, licensors, and employees. Then I'll outline some of what I think it will take to get back to growth. I had the opportunity to meet with some of our most passionate fans at our retail stores and at New York Comic Con. I've been able to spend time with our employees in the US and Europe, And we've engaged in senior leadership strategy sessions with key retailers like Hot Topic, Walmart, and Target, licensors like Disney, Warner Brothers, Universal, and Netflix. And I have a deep, longstanding set of relationships with most of these partners and welcomed an honest dialogue. In talking with our partners, I heard two consistent themes. First and most importantly, they see the growth opportunity together and are energized by the far reaching scope of our brand and products. And second, they suggested some very clear areas where we can improve. We definitely appreciate and value their feedback and we'll use it to further strengthen our competitive advantages. Namely, first, we have a passionate and broad fan base. In September at a fan event at our Hollywood store, I was able to celebrate an important milestone for the company, 1 billion units sold. This amazing achievement puts us in very rare company among the most successful toy brands in the world. Membership in our fan loyalty program has grown 27% since the start of the year. We have a strong footprint of 9 million followers across our social media channels, and our customer base is highly diversified and evenly split between male and female, with purchasers across an 18 to 55-year-old demographic, many of whom are buying for kids. Second, we work with the world's biggest IP and serve fans across every corner of the pop culture universe. Our robust relationships across multiple genres, more than 900 active licensed properties, and 250 plus content providers create a strong moat around this industry leading portfolio of licenses. Our product offering is highly diversified. We're not reliant on one character or single franchise. Now, I'm pleased to announce that we've recently signed several multi-year renewal agreements with major licensing partners, Warner Brothers, NBCUniversal, 20th Century, Paramount, and our biggest partner, the Walt Disney Company, which includes Pixar, Marvel, and Lucasfilm. Third, our products are sold everywhere fans shop. through a large and diversified global network of retailers, including more than 1,400 mass market specialty e-commerce and mom-and-pop partners around the world, as well as our own websites and flagship stores. There are very few brands that are equally relevant across a mass retailer like Walmart, and they can spark a robust resale market on eBay at the same time. I'm still early into my tenure here, but my leadership team and I have identified our areas of focus and are ready to act immediately. Our growth will be driven by what we're calling our Make Culture Pop strategy, built at the intersection of three pillars, culture, creativity, and commerce. This is where Funko has excelled and will align our priorities and organization to maximize the opportunity in these three focus areas. Let's start with culture. We aim to be the definitive brand for transforming pop culture into products. That includes fandoms that are existing strengths like film and TV, along with exploring new corners of pop culture through categories like footwear, cosmetics, and food. We can do more in the areas of K-pop, sports, music tours, and fashion, and working with relevant content creators to expand into newer areas of fandoms like Twitch streamers, YouTubers, and influencers. We want our products to be at the center of the moments everyone is talking about, created by us or with us. Now, some examples of what that means. We will look to identify trends even faster and supercharge our speed to market. Let me give you a quick example of what I mean through the lens of K-pop Demon Hunters, Netflix's most popular movie ever. Our team was among the first to recognize the appeal of this property for both mass audiences and collectors. We moved quickly to create an exciting lineup of products that has become one of our biggest presale items ever when it launched on Funko.com a month ago. And the Funko team was able to bring this product offering to market within just a couple of months across pop figures, backpacks, and accessories, compared with much longer lead times by other major toy companies. This speed to market is one of our unique advantages and will be one of the only toy companies to have K-Pop Demon Hunters products on retail shelves this holiday season. We're operationalizing our Quick Strike and Hyper Strike offense across our entire value chain to make this more repeatable. By operating at a faster pace and being more on trend, we also aim to position our products at the center of what everyone is talking about across all corners of pop culture. For example, we partnered with The Late Show with Stephen Colbert for a surprise on-air product reveal timed to the show's 10th anniversary in September. The episode featured Stephen Colbert unveiling a brand new Funko Pop and marked a major crossover moment between late night television and fandom culture. The launch included a live studio audience giveaway creating a shared moment of celebration between Colbert, his millions of at-home viewers, and Funko collectors around the world. In music, we added to our Funko Pops music artist collection with Fade, a Latin American sensation with nearly 30 million fans across Instagram and TikTok. In just a few weeks, our partnership has driven more than 5.7 million views on social media and is representative of our efforts to work with more artists who are in the global zeitgeist and create touch points for our growing customer base outside of the US. In addition to Fade, we've recently added a number of other artists to our Funko Pops music artist collection, including the K-pop band BTS, the Swedish rock band Ghost, Sabrina Carpenter, and classic artists like Tom Petty, Metallica, and Ozzy Osbourne. Now, an important part of cultural relevance also comes from embracing our community of passionate collectors around the world. Just as I saw at Nike, supporting the collector's market through exclusive drops and giving them something special is critical to building fan communities and driving brand awareness and excitement. It's a major priority for us to rebuild credibility and enthusiasm with core collectors and mega fans who have been loyal to us for years by improving execution around limited editions, storytelling, and drop cadence. In the third quarter, we dropped a number of limited edition collectible pop figures with various tiers of rarity.

Dunharrow from the Lord of the Rings, Starkiller from Star Wars, Sonic, Spidercat, Bob's Big Boy, and Phantasm. Each of these one-of-a-kind pops sold out within one week. First-hand, we expanded our relationship with Inter-Miami of Major League Soccer. At the start of this MLS season, we have dedicated retail space at the team's new state-of-the-art home stadium, where fans will be able to purchase on-site a pop yourself with InterMiami's official logo. standard Funko Pop figures of the team's most famous players and exclusive products only available at the store. Or take the growing global fandom of Anna we have even more opportunity to grow this business, which represented 30% of our sales in Q3, and is now our second largest fan vertical. The U.S. market for anime remains very strong, and we've only scratched the surface with expansions in Europe, Asia, and Latin America. Now let's talk about creativity. The goal is to continue innovating new form factors, expanding our product offering, and obsessing over the details across design, development, and storytelling so our products feel meaningful for fans. We built a beloved and truly unique franchise with Pop, and we're working on adding additional dimensions for fans, more excitement, and burning compelling new products to market. One example already showing traction is Bitty Pop, our mini vinyl figures. Biddy Pop is integral to our evolving strategic partnership with Walmart. Last month, Biddy Pop was officially introduced in their toy aisle. It made Walmart's 2025 top toy list and was featured in Walmart's toy book catalog, which went out to over 40 million homes in the U.S. just in time for the upcoming holiday season. The replacement of Finipop was expected to land in 1,800 Walmart stores later this month. We intend to further expand the line to include more licensed and original characters in environments that allow fans to create realistic worlds or use their imagination to create new ones. As the blind box format continues to grow in popularity around the world, we're planning to expand our existing blind box offering mystery minis. These collectible figures, which have been on the market for the last 12 years, are smaller than our pop vinyl and larger than our video pop figures. potential in the blind box space across new IPs, genres, and fandoms, spanning film, series, and social media, and our own original characters. Earlier this week, we initiated a limited launch with several of our specialty retail partners for our new premium wine box collection. An artist-driven product line that gives fans the opportunity to discover bold and imaginative new designs. Beginning with two entries in this category, we intend to expand it to new IP over the course of 2026. Our premium blind box line includes the and we're looking to add more offerings to both internal and external artists. Now Also important to note, we have a diverse product archive of formats going back 25 years, many of which I think can be leveraged in more relevant ways to capture the hearts of today's fans and collectors. Now let's talk about commerce. We see a significant opportunity to expand internationally, particularly in Asia and Latin America, enhance our presence with existing retail partners, and even our digital and direct-to-consumer capabilities. To start, there's a significant opportunity to grow our international business with a more dedicated focus in Asia and Latin America. This was an area of particular focus for me at Netflix, and there's a clear lane for Funko to excel in these important geographies. With our D2C business, we intend to simplify the experience on our e-commerce site and app. This includes more intuitive design, improved functionality around limited edition drops, wish lists, and loyalty programs. Pop Yourself, which just launched in Europe, is a great example of the unique experience only we can offer. new AI-powered builder later this year, which allows the user to upload a picture and recommends options to more quickly build a customized pop, which we think will be transformative. We're also planning new innovative retail experiences such as selling Bidipop products through vending machines with a surprise or mystery element to the purchase experience. In addition to the Pop Your Stuff kiosk at InterMiami's new stadium, beginning early next year, we plan to add more Pop Your Stuff kiosks to support other year-round retail experiences and pop-up activations both in the U.S. and in Europe. We also plan to refresh existing kiosks in our flagship stores with enhanced capabilities, including the AI Power Builder. Now to summarize, our Make Culture Pop strategy is focused on maximizing opportunities at the intersection of culture, being at the center of the moments everyone is talking about across more fandoms, Creativity through new products and form factors and commerce by being more strategic with partners in the U.S. and Europe, Latin America, and Asia, direct-to-consumer. Now, to be clear, we already have many ongoing initiatives against this plan underway. We're building the right team and capabilities to attack these opportunities in a focused manner and drive growth. Now, that said, I'm only 60 days in, and we have a lot more to come. I'm excited and confident about our team and the opportunity working with our partners to ignite growth and to sell the next 1 billion pop products. And with that, I'll turn it over to Eve to review our Q3 results. Thanks, Josh. Hey, everyone. Thanks for joining us today. For the third quarter, total net sales were $250.9 million in line with our expectations. Compared with Q3 of last year, approximately $11 million of the decrease in net sales can be attributed to skew rationalizations as well as a reduction of clearance sales. As a reminder, we've posted supplemental financial information on our website. which includes a net sales as well as a gross margin bridge. Direct-to-consumer sales mixed in the quarter was 18% of our gross sales, down from 20% in last year's Q3, due in part to a pullback in marketing spend. Gross profit was $100.8 million, equal to gross margin of 40.2%, which was better than expected. Price increases helped fully offset the impact of increased tariffs. It's worth noting that with the exception of our 2025 second quarter, which was significantly impacted by tariffs, we have maintained a gross margin in the 40% plus range since the first quarter of 2024. We're in six of the last seven quarters. SG&A expenses were $79.8 million compared to $92.7 million last year. Approximately half of the reduction came from a full quarter benefit of cost reduction actions taken in Q2, and the other half came from a reduction in marketing spend. Adjusted net income was $3.2 million, or $0.06 per diluted share. And finally, adjusted EBITDA was $24.4 million, which was higher than our expectations. Turning to our balance sheet, at September 30th, we had cash and cash equivalents of $39.2 million. Net inventory was $99.8 million, and our total debt was approximately $241 million. to our outlook. We're pleased with our Q3 results and the progress made against the second half outlook, which we shared last quarter. We now expect for the 2025 fourth quarter net sales to increase modestly from Q3 2025, driven in part by the launch of Pop Yourself in Europe, and sales of our KPOPS Demon Hunters product lines. Gross margin of approximately 40% and adjusted EBITDA margin to be in the mid to high single digits range. A few comments on our refinancing process. Our 10Q filing for the 2025 third quarter includes disclosures about the company's ability to continue as a going concern. As previously announced, We executed an amendment to our existing credit facilities, which mature in September of 2026. The amendment waived financial covenants for Q2 and Q3 and introduced a minimum cash requirement and a series of milestones to demonstrate progress against a refinancing transaction. We've engaged Molison Company LLC to advise the company on our refinancing process, and that process is ongoing. With that, I'll turn it back over to Josh. Thanks, Yves. Compared with where we were two years ago, we've made progress on improving the quality of our business. Our gross margin trend has largely improved. We have a stronger retail footprint. We've fully implemented the price increase and inventory owned and in the channel is lower and at healthier levels. Now, I want to reiterate the sense of urgency and opportunity around our main culture pop strategy, executing across the intersection of culture, creativity, and commerce. In the short term, I'm looking to maintain the momentum that you discussed. Over the long term, what's most exciting to me and I hope is equally exciting to our investors are the multiple opportunities to transform the company for substantial growth. We have a strategic advantage from building this company over the last 27 years, and we intend to leverage that legacy and relationship with our community of fans to take advantage of this huge opportunity in the increasingly global world of entertainment and pop culture fandom. incredibly excited about joining Funko. From my perspective, the company has lots of potential on which we've already been active. And with that, we'll open the call for questions. Operator? We will now begin the question and answer session. If you would like to ask a question, please use the raise hand function now. If you have dialed into today's call, please press star 9 to raise your hand and star 6 to unmute. Please stand by while we compile the Q&A roster. Our first question comes from the line of Steven Leitchick with Goldman Sachs. Your line is open. Please go ahead. Hey guys, thanks for taking the question. Josh, welcome. Thank you for all those thoughtful highlights on the strategy. I'm curious as you look out ahead at some of those opportunities that you outlined, how you're thinking about you know, what opportunities exist over the next 12 months to execute against how investors should be thinking about what you're prioritizing as deciding some of those opportunities. Perhaps what points of the strategy you feel like you need to get correct here over the next year or so before it unlocks the option. value over the longer term to take Funko to the next level, so to speak. Any top priorities that come to mind I think would be helpful for us to understand. Do you have a follow-up? Thank you. Great. Great. Thanks, Steven. Appreciate the question. I mean, look, I'd say in the short term, our focus is on continuing the performance momentum that That we've been talking about, and then over the long term, obviously, transforming for more growth. I do really think it comes down to, and I'll give you some specifics, around the Make Culture Pop strategy. You know, in the short term of the area of culture, I think there's really some areas of fandom where we can continue to expand. Obviously, you know, as you know, we've been doing a lot in the areas of sports and music. But, you know, we just, you know, there's opportunities to move quicker in those areas. And so, you know, as an example, we just recently were able to launch the Dodgers Championship 5-pack. There's some really great details to it. It even includes them, you know, sort of wearing their alternate robos. So really, like, how do we about operationalizing QuickStrike end-to-end capabilities, sensing trends, designing and manufacturing more quickly and getting it to consumers in new ways is really an important part of the cultural impact that we're looking to drive. And obviously we can share more details about that in the future. On the creativity side, I mean, we're really focusing on how we bring more dimensions to hardcore franchise, which is pop. Bitty is a really great example of that. Obviously, we mentioned, you know, how it's rolling out into Walmart now. I'm spending a lot of time engaging more broadly with the creative community, bringing people internally to help think about new new sort of evolutions of products that we can launch leveraging my relationships across you know the entertainment industry and the product space thinking about how we can more closely collaborate with talent those are all sort of immediate things that we can do to continue to evolve our our form factors and creative product strategy. And then on the commerce side, I mean, I've been able to engage with some really great strategic meetings with some of our biggest retailers over the last couple of months. you know, international is a huge component of that. And so I think, you know, particularly based on pre-existing relationships I have there, you know, we'll look to, you know, come back next quarter and talking a little bit more specifically about some goals that we're immediately looking to get after with retail partners in Asia and Latin America. And look, I should also note on the, you know, I think this is an important point to highlight on the commerce side as well. You know, we were able to execute some really great extensions of our licensing deals with, you know, all the biggest studios in the last few months. So I think that puts us on really firm footing to kind of take everything that we talked about as part of our make culture pop strategy and drive growth through those relationships as well. That's great. Thanks. That's really helpful. And then if I could just ask a question. in the near term, in the quarter, in the broader retail environment, maybe for Josh and you on 4Q, just as you have conversations with retailers heading into this holiday season, anything you'd point out in terms of the cadence of stocking how they're approaching restocking this year, how they're particularly engaging with Funko as a brand, as a partner this holiday season that differs from perhaps what you've seen in historic years or perhaps where the levers are as we get deeper into holiday on where restocking could come from, upside, downside, in the model, et cetera. Hey Steven, this is Eve. I'll start by saying, you know, I think we're kind of encouraged by, you know, our POS trend, which has remained relatively strong and stable. In Q3, our global kind of POS in units was down only 3% year over year. Now, we are continuing to see a pretty big difference in our various territories that we operate in. U.S. was more like down mid to high single digits in units, and then EMEA was up in low double digits. So, we continue to see the consumer demand for our products. That being said, obviously, the tariff announcements earlier this year pretty significantly disrupted in Q2 the shipping of our orders out of Asia. In Q3, I'd say we continue to have a bit of a hangover effect from that. We have to keep it Retailers were placing their buys for Q3 and early Q4 shipments during what I call kind of peak uncertainty about what the tariff rates are going to be, how the consumers are going to hold up through the holiday period. And that was in part why our sell-in process was down over the last year in Q3. I would say as we head into the holiday period, It's a bit of a mix depending on the channel and the retailer, but I would say that we continue to have good momentum in Europe. In the U.S., a little bit more cautiousness, I think, from buyers. We do see a little bit more strength and momentum in the Mass Channel, and Josh mentioned the growth in baby pop sales there, so we're encouraged by that. It feels like for the smaller kind of specialty mom and pops, Distributors, you know, maybe a little bit of speculation here, but it feels like might be more kind of financially impacted by the tariffs or just generally being more cautious about over committing to inventory. Yeah, and what I would continue with is, you know, the content slate is pretty big for us in Q4. The final season of Stranger Things will launch. And that's a big priority for some of our biggest retail partners as well as us. Obviously, the sequel or the part two of Wicked will also be in the market, and we have products there. And then, you know, I think most importantly, just as a reminder, we really will have a lot of unique shelf space through our K-pop demon hunters assortment. across both Pongo and Loungefly. So I think, you know, some good, you know, sort of content-slate strength and shared priorities with retail partners on that front. Very helpful. Thank you both. Thanks, Stephen. Our next question comes from the line of Keegan Cox with DA Davidson. Your line is open. Please go ahead. Hi, guys. I just wanted to ask a little bit as you open up this creativity in commerce, I know you talked a little bit about the I was just wondering, how do you look at that market? It seems pretty competitive. I've seen a few of your competitors moving in there, just like my mall visits and retail visits. So I'm just curious to how you see that market and how you plan to attack it. Yeah, well, look, I think for us, the primary driver and excitement is around the pop yourself experience, which, you know, is pretty unique to us. The ability for, you know, a fan to go and create a customized Funko Pop experience of themselves or a friend as a gift is something that I think we are uniquely able to offer. And so when we talk about the kiosk strategy, You know, we have examples of those kiosks that currently exist in a couple of locations primarily in our flagship stores, but we've already been deep into conversations with some of our bigger retail partners about how we can start to create experiences within their real estate footprint and bring that experience to more of our fans around the country and around the world. So I think we offer a pretty unique angle there. And then, as I was just looking at the results, Europe sails down slightly versus, you know, an easier comparison last year. I know you're launching Pop Yourself in the fourth quarter, but what are you seeing outside of that in Europe? Well, like I mentioned previously, our POS trend is pretty strong in Europe. I would say one of the factors that's not super material, but we did have a little bit of production delays that impacted our European sales in the quarter. Just some orders that just couldn't make it out of the factory in time. As a reminder, we moved pretty aggressively to move production from China to Vietnam. And so, you know, that was a bit of a result of that. But we expect those orders to ship in Q4. And then along with the launch of popular stuff in Europe, which happened a few weeks ago, we expect Europe to be back to growth in the fourth quarter. And one more, if I can, just on pricing. I know you were able to essentially offset all the tariff costs, but are you seeing that impact demand? I mean, the POS for the U.S. especially over the weeks. I'm wondering how pricing played into that. We've actually been pleasantly surprised by that. We rolled out the pricing increases. They were in effect on the shelf in early July. I mean, we did anticipate that there would be slightly lower unit volumes. You know, it's hard to attribute that directly to the price increase and not to the other factors going on in the U.S. market. But generally, it's been in line with our expectations. I mentioned that the POS trends of the unit sales have held up pretty well. And then, you know, the price increases are fully in effect. So it's gone pretty well for us. Thank you. Thanks, Keegan. There are no further questions at this time. I will now turn the call back to the management for closing remarks. Thanks to everyone for joining us on the call today. We look forward to sharing our progress on our next call. This concludes today's call. Thank you for attending. You may now disconnect.