Funko, Inc.

Hi, everyone, and welcome to Funko's 2025 Fourth Quarter Financial Results Conference Call. I'm Katie Wilson, and I'm here at the Funko Store in Hollywood. With me are Josh Simon, our Chief Executive Officer, and Eve Lapendovin, our Chief Financial Officer. Welcome, guys.

Hello.

Josh, I have heard this is one of your favorite places in Los Angeles. It is.

It is, yeah. I've been on the job for about six months now. I think I've spent the majority of my time in this store. They actually gave me a key to the store earlier this week so I can come and go, you know, even after hours. But what I love about being here is it really embodies the strength and how much fun the Funko brand is. You kind of see around us here from an IP standpoint. k-pop demon hunters mickey mouse michael jordan in the background come here over the weekends and there's people from all over the world all ages all demographics and it's really fun watching them kind of discover their favorite fandom or ip and so we thought it would be a fun new way to do the earnings call from here today so how have your first six months been Well, see, we're just getting back from the toy fair circuit, so London Toy Fair, Nuremberg, New York Toy Fair. I've been going to these toy fairs for a while in various capacities, and I can say definitely I've felt more energy around the Funko brand than I have in a bit. It was really fun to meet with our licensors and retailers. In Q4, we also had a great presence at New York Comic Con, so I had a great chance to meet with a lot of our fans and YouTubers. And so the energy was great. And we're seeing that energy translate into momentum on the business side. In Q4, our net sales were better than expected. Profitability at the higher end of expectations. And I know Eve will dive into that detail here in a little bit.

And I'm guessing some of that was driven by this guy, Derpy, right behind me?

One of my favorites, near and dear to my heart, obviously, K-pop Demon Hunters. And look, what's great about that one is I think it really demonstrates one of our superpowers, which is how quickly we're able to move in creating these really great collectibles. I think it was about four months from ideation and design, to getting into fans' and consumers' hands in Q4. We also won the viral hit of the year award from Toybook, which is a really coveted awards program. So that was great. There were plenty of other really fun ways that we came to life in Q4 as well. It was the final season of Stranger Things, sadly, but the Duffers were on The Tonight Show with Jimmy Fallon, They actually reenacted the season and the series finale using only Funko Pop. So that was really fun to see. We launched Pop Yourself in Europe, which is the experience where you can create a custom Funko Pop of you or a loved one. And we rolled out Biddy Pop into Walmart. Biddy Pop is this great example of how we're able to continue to add fun. dimensions to the iconic Funko Pop silhouette. It rolled out in all Walmart doors in Q4. It was incremental placement in the toy aisle. It was incremental placement at Impulse and out of aisle. And it really helped to drive some strong sales in Q4 as well.

So during the last earnings call, you talked about the make culture pop strategy. I believe you mentioned culture, creativity, and commerce. How's that going so far?

Well, if you remembered the three C's, then so far so good. It's going great. Look, the idea is that how do we participate in all of those moments that are shaping culture? Really, the goal is to become the preeminent brand for turning pop culture into collectibles. and also turning those collectibles we create into culture and cultural moments. So let's start with culture. I've said it a few times here, but really that means just being at the center of the moments that fans are talking about while it's actually happening. K-pop Demon Hunters is a great example of that, but we do it pretty broadly. We have great relationships with licensors all over the world and pretty much a portfolio of about 900 actively managed licenses at the moment. But in addition to that, there's still a ton of white space that we could get after. Sports is one that's a little bit more nascent for us, but we launched a really great new partnership with Tops and Fanatics. We're part of the new MLB Super Pack with trading cards and blind biddy pop products. That rolled out in Walmart, Target, GameStop, sporting goods stores like Dick's. So just sort of one example in sports, but even in these massive fandoms, I think there's plenty more opportunity for us.

And speaking of sports, by the way, did I see Funko in a Super Bowl commercial?

You did. You did. It was it was surprising for all of us. I mean, I sat down with my family to watch the Super Bowl. And in one of those first commercial breaks, like on comes this really great spot from the NFL that sort of celebrating the, you know, intergenerational love of football and like in an opening frame in a, you know, in a young kid's bedroom. There's a shelf filled with NFL Funko Pops. So, you know, that was really great to see. You know, in that sports space, though, I mentioned there's, you know, continues to be more opportunities in Miami, inner Miami, the football or soccer club there if you're here in the U.S., is opening up a brand new stadium, Miami Freedom Park, in a couple of weeks on April 2nd. We have a presence in their flagship store. It's a Funko and Loungefly shop and shop with exclusive products and also a really great, unique pop yourself experience that you can only do there in the stadium. And in addition to these sports moments, Q4 was also really great from an entertainment perspective. We had Zootopia 2 from Disney, which was a great movie and a massive hit. Wicked for Good and Evil, also a great film for us. And other areas that we're expanding into as well. I'm sure Eve is a huge fan of this, but the world of romanticism and book talk, if I'm not mistaken. We dropped a little teaser video for The Cruel Prince, which is a really popular film. um book on tick tock it it generated like a million views within a couple of days and so that's an area you'll see us expanding into more obviously anime has been huge for us you know there are big titles that everyone has heard of like one piece which we continue to do well in and then newer titles like dawn to dawn which was a top seller for us at you know at walmart and q4 and continued growth in video games as well, a great franchise mouse PI that was also strong for us in Q4.

And how are you participating in those surprise moments that pop up?

I mean, a lot of it is through speed, you know, as I mentioned earlier, related to K-pop, Demon Hunters. But we have a new program called Hyperstrike. The idea behind that is, like, how can we design, manufacture, and get products and collectibles into our fans' hands in a matter of days or weeks? So we'll be rolling that out in a more commercial way later this year. But we started experimenting with it in Q4. We were doing a lot of, like... one of one characters for celebrities and friends of Funko. One thing we tried to kind of experiment with is like the insane world of these sort of like online, you know, videos, user generated content, meme culture that come up. So there's a great guy named Jason Giampi. He's known as the quarter zip guy. It was one of these crazy viral trends in Q4. We decided, let's make a video of Jason and his matcha and just send it to him as a gift. And his reaction was great. I think we have a little clip of it to show.

gang. I got my own Funko Pop. Like really look at the resemblance is uncanny. Really look at it. Let's take time to analyze it together. Nah, peep though. Like they really got it. All jokes aside.

Yeah. And it's really exciting because this is a new type of product we're offering.

It is. And one example of a new type of product we're offering because that's that second C creativity is really about how we take these pop culture moments and then translate them into physical form in some way. So obviously Bidipop, you know, I talked a little bit about as a new example of a product that's been around for a couple of years and we're really seeing some strong growth there. It capitalizes on, you know, what people love about Funko Pop. We've sold a billion units of pops over the years. It's this really iconic, you know, silhouette. And so there's more dimensions of pop and some net new products that we're working on to drive additional growth. The thing that's great about that iconic silhouette is starting to think about how we can reach fans and tell stories in new ways. And so we recently announced a partnership with an incredible production company called Rideback. Really great storytellers. I think they're experts at creating worlds from products. They produce the Lego movies. They produce the live-action Lilo and Stitch. Really, really excited to work with them. We're developing some new ideas with them from big feature and animated series ideas in addition to a really interesting, unique AI-based animation toolkit they have called Spurry that allows will allow us to create some content much faster and bring new and iconic forms of storytelling to Funko fans everywhere.

You also mentioned commerce as a part of Make Culture Pop. I have a guess that this store is a part of that. Are you expanding how you think about commerce and is that happening around the world?

Yeah, we really have fans all over the world. And we want to make sure that we're showing up wherever our fans shop. As we like to say, turning shelves into stages. This store is obviously a best expression of how we're able to do that. But there's a ton of other opportunity in the US from a retail standpoint and outside of the US. Europe, which has been our primary driver outside of the US for a number of years now, is really strong. At the end of the year, We were actually the second largest collectible brand by market share right after Pokemon, which was great. From January 25 to January 26, our sales were up 20% in the EU. That was basically about double the market growth there, according to Circona Retail Tracker. And similar to what we've been able to sort of grow in Europe, the next idea is how do we do that in Latin America and Asia? As part of that, we just created a new role for a guy named Andy Adi, who is our longtime chief commercial officer. He has 40 years of really great experience in the toy and collectible space building businesses. He's our new chief international officer. He's going to be focused on growth in Asia and Latin America, and I think his dedicated focus is really going to help us to get traction there. And the opportunity is big for two reasons. I mean, you think of China, Japan, Korea. China and Japan are the second and third largest toy markets outside of the US. So there's a lot of incremental business growth we know we can get in those countries. But the other great thing is like so many cultural trends now globally are being influenced by Asia. So obviously anime has always been a really big fandom for us, largely coming from Japan. We've seen a huge growth in all things K-culture, Korean beauty, K-pop, Korean food. So I think our business opportunity to grow there is strong. And then the cultural influence that I think will provide a halo of growth all over the world as we develop more relationships with licensors and creators in that region, I think will also be pretty massive for us.

Turning to you, Eve, could you say a little bit more about the financial results?

Sure, happy to. This is an earnings call after all, so let's get to the numbers. So for the fourth quarter, our net sales were $273 million. We were pleased to finish the year on a high note. We had guided to Q4 being up modestly over Q3. We were actually up 9%, so better than we expected. And by the way, there's more details, including these slides, that are posted on our IR website. For gross margin, we were at 41%, and that was, again, slightly higher than guidance. And by the way, with the exception of the second quarter in 2025, we've now been above 40% for the last seven of the last eight quarters, so really pleased with that trend. Our SG&A expenses were $91 million, and that was down 12% from Q4 of last year. And finally, adjusted EBITDA was $23 million, which, again, was at the high end of our expectations.

How is the financial outlook for 2026?

So for 2026, we expect net sales to be up modestly year over year, but a substantial improvement in profitability. So specifically, we're guiding to net sales being flat to up 3% compared with 2025 and our adjusted EBITDA between $70 million and $80 million. So let me give you a little bit more color on that. For sales, we expect our Funko core product lines to be up high single digits year over year. But that's offset by LoungeFly down double digits. And that's primarily due to the SKU cuts that we implemented last year.

And one thing that I'll jump in and add about LoungeFly is that we are really excited about what the growth potential for that business could be. I think there's a really... unique way to own this space of wearable storytelling, as we like to call it. We know there's a really passionate fan base there for the product. So as a result of that, we just put in place our first ever GM for the lounge fly business, Jessica Kong. She's a lot of really great experience across lifestyle brands and experiential. We think she'll be really great for the business. She's about a month in. We're already pretty far along in building the strategy and plans to get that brand and business back to growth. And we'll share more details about that in the next quarter.

Thanks, Josh. So back to our guidance for gross margin, we expect 41 to 43 percent for 2026. And that increase over the recent trend is really driven by the renewal of some key licensing agreements with our major studio partners, which will result in lower minimum guaranteed royalties. As far as tariff assumptions, we're assuming that tariff rates remain around 15% for the remainder of the year. And in terms of refunds, we're exploring all avenues, and we'll update our guidance when we have more information later this year. So finally, with regard to adjusted EBITDA, we expect a substantial improvement. That really is driven by actions that we've already taken. That includes all of the tariff mitigation strategies that we implemented last year, including price adjustments and cost reductions, annualizing, the renewal of the licensing contracts that I mentioned, and finally, just beginning to see traction on some of our growth initiatives, primarily in the Funko product lines. including Biddy Pop and Pop Yourself, which we launched in Europe last quarter.

Josh, how do you see 2026 shaping up?

We're all really excited for 2026. I think it's probably the strongest entertainment slate that I've seen in the last four or five years. From a film standpoint, we've got Mandalorian and Grogu, Toy Story 5, Moana live action, tons of great things from Disney, Supergirl from DC, Masters of the Universe, Minions 3, Spider-Man Brand New Day. Avengers Doomsday at the end of the year. This week, Netflix's live action series of One Piece just debuted. Season two of One Piece, which is always huge for us. Then obviously in the sports world, it's a World Cup year. We have the England, U.S., and French teams. I mentioned we just signed this new deal with McLaren. Some new product launches that we have coming up that I'm just going to tease for a little bit now. But really, when you take a step back and look at what's driving the toy industry right now, there's three trends. It's coming from growth in collectibles, growth in licensed IP, and growth in Cadult. Those are all areas that sort of squarely are in the Funko wheelhouse. And so it's really just about us executing the share.

Well, with that, we'll turn to our questions here. And the first question is coming in from Stephen Lachick of Goldman Sachs. Please describe the shape of the flat to plus 3% guidance past Q1. Should it be pretty consistent throughout the year? And what gets you to the top versus low end of that guide?

Sure, I'll take that one. Yeah, it should actually be pretty consistent throughout the year. This is not a hockey stick plan where we depend on, you know, having a huge second half of the year. We actually expect Q2 to comp up a little bit over last year. That was pretty disrupted by the tariff impact when those were first announced and then also pretty steady growth throughout Q3 and Q4 as well.

To what extent does Funko view original content creation as a growth driver? How much does the company plan to invest in original content? And how does AI play into this strategy?

I mean, look, I'd say as a growth driver, I think it can be a serious growth driver in the long term. I mean, obviously, our entire business is driven by entertainment content and IP. And so I think as we explore more dimensions of storytelling through the Funko universe, I think over time, assuming those things are hits and people love it and watch it, we think it can actually drive growth. But it's going to take time to develop, produce, and sort of get that content out to audiences. Look, I think we're seeing the same trends everyone is from an AI standpoint in storytelling. We really believe in the power of people to tell great stories, our design teams and creative teams internally to craft these great characters. So far, it's been a great tool for efficiency and letting our teams focus more on the creative work than the busy work. And then I think just from a capital standpoint, I mean, look, we're looking to partner with the same exact partners who we already work with on the licensor side, some of the biggest studios around the world to help us develop and create these elements of content, movies, TV, etc., So from our standpoint, you know, we're looking to rely on their expertise on the storytelling side and partnership side and shouldn't be a significant capital investment from from us.

Does Funko need to use any of its extended credit agreement in 2026 or will the company continue to pay down debt like they did in Q4?

So the answer is no, we don't expect to need to do any additional borrowing. We're managing right now on our operating cash flows and expect to continue to do so. We make regular quarterly principal and interest payments on the debt, and we plan potentially later in this year and certainly early next year to make some incremental debt paydowns like we did in Q4.

Eric Wold of Texas Capital asks, can you break out the POS trends and inventory restocking domestically versus Europe? And if you saw any noticeable trends, positive or negative as the quarter progressed? What about so far during Q1?

Yeah, great question. We did see a continuation of the trend that we spoke about in Q3. We continue to see great double digit growth in POS sales in Europe. And in the U.S., we actually saw an improving trend throughout Q4 to a positive comp year over year. And actually, we've seen that trend continue into Q1. From a retailer inventory point of view, we watch that obviously very closely from the larger partners that report that information to us, and I think it's in a healthy place right now, and restocking is kind of going as we'd expect.

Within the 2026 guidance, what would you highlight as the key initiatives to both drive top-line results and margin versus 2025?

I guess I'll start from a top line standpoint. I mean, obviously I talked about the content slate. That's a huge driver of top line growth this year. Bidipop is another example of that. A lot of the broader initiatives that I mentioned will start to seed into this year. So international growth, some of the new products, those are things that will seed, but you'll really start to see us drive incremental growth from that sort of further into the future. There's also some fun new initiatives that we have this year, too. We talked about World Cup. We have a fun lineup that's going to launch later this year celebrating America's 250th. I mentioned the pop mystery products that are launching later this year. So, you know, all of those things will start to add up. But I think primarily like the strength we've seen in Biddy, the strength we've seen in the entertainment slate should drive a lot of the top line growth. And you want to take the margin?

Yeah, sure. From a margin perspective, I spoke about some of the main drivers already. The good news is we're forecasting to have a better margin than we've ever had, and that's largely driven by things that are in our control, such as the price adjustments that we made last year. and the renewal of some of our major licensing contracts. Now, as we kind of go through the rest of the year, there will probably be puts and takes. I'm hoping for some favorable trends within the tariff world. Currently, we're paying 10%, the newly announced 10% tariff rates that may go up to 15%. unsure what that might be later on in the year. On the other hand, we're also monitoring the situation right now in terms of oil prices and potential impact to shipping costs. So there are a few unknowns, but for the most part, we feel confident about maintaining that level of gross margin.

Keegan Cox of D.A. Davidson asks, can you quantify the tariff impact you experienced in 2025 and what incremental pressure you expect in the first half of 2026?

Sure. So in 2025, our total tariffs and duties were close to $40 million. And about half of that was related to the IEPA tariffs or the ones that were recently struck down.

And for the first time, we've also invited investor questions from our investor base. So the first one is, to what extent has Funko signed new or expanded IP partnerships ahead of the relatively strong film slate in 2026?

Well, look, I think as it relates to the film slate itself, the good news is, you know, last year we renewed licenses with all of the major studios around the world. Disney, which is inclusive of Lucasfilm, Pixar, Marvel, Netflix, Paramount, Universal. We really value those relationships. We spend a lot of time with those partners. So from a 26 slate standpoint, I think we're in pretty great shape there. I mentioned some of the World Cup teams that we signed licensing deals with. I think for us, kind of talking about some of the white space earlier, for me, the focus is really thinking about what are those net new kind of white space incremental areas where we don't currently operate. I'd say, you know, the world of creators, you know, is a huge example of that. We appointed a new board member, Reid Dutcher, who represents, you know, some of the biggest creators in the world, you know, who everyone's familiar with on Twitch and YouTube and TikTok. He's been a really invaluable advisor and looking to tap into his expertise and guidance as we embark on more in that space.

coming in from an investor in South Africa. The whole of South Africa would love it if you would make Funko Pops of the Springbok rugby team.

Interesting. Well, let's see. I don't want to let South Africa down, so we will look into it. But it's funny. It's a great question. I can't expound a lot on rugby, which I apologize to any fans out there, but I respect the sport. But it's a great question. I think it definitely, I think, showcases both the opportunity that exists in sports and also... just kind of the global extent of our fandom. So fun to hear a question from an investor in South Africa. Well, we will look into it.

Well, that does wrap up our questions. Josh, any final words?

Well, I just want to thank you for hosting and being here today. Thank everyone for watching. Excited to be back in May with our next earnings call and continue to share our progress across the business.