Funko, Inc.

Hi everybody, I'm Tristan, but most people know me online as Top Pops. Today we are here on Hollywood Boulevard in front of Funko Hollywood. This is the only store that you can find on the Walk of Fame that has literally every corner of entertainment. Music, TV, anime, gaming, sports, all in one place. Today I'm here to host Funko's first quarter financial results. So, let's go inside. Hey Groot. Morning, Spider-Man. Joining me are Josh Simon, CEO of Funko, Eve Lapendovin, CFO, and Jessica Kong, the GM of LoungeFly.

Tristan, TPOP, thanks for being here. No, thank you. Now, just so everyone knows, you are a super creator, influencer in the world of collectibles. You cover the space more broadly. I think you know more about Funko and POP than probably all of us combined at the table. So we thought it would be great to have you here and bring a new perspective to our earnings call. I think, is this your first earnings call? It is. Okay, just to confirm. I figured. Well, awesome having you here. We appreciate it.

No, it's so great to be here. And now, guys, I've spent a lot of time talking about Funko from the fan side, and today I get to ask the questions from the business side. So let's get right into it. How was Q1 for Funko?

Great business question. You nailed it at the top. The Q1 was really strong. I think it was the example of our make culture pop strategy kind of starting to really manifest itself in the market. We ended Q4 with some momentum and we saw that continue into the year. Overall, our sales were up 5% in the quarter. And if you look at just the core collectibles business, we're up 17%.

And if I can jump in too, it's obviously pleased about the sales growth, but we also reported our highest gross margin ever at 44%. And that drove an adjusted EBITDA of $11 million, which was way better than we expected.

Wow, that's great. Now let's talk about what's new on the product side. Josh, you've talked about Funko being at the center of culture. What did that look like this quarter?

So I go back to the make culture pop strategy, culture, creativity and commerce. So, you know, on the culture side, we want to be part of all of these sort of fan entertainment moments, pop culture moments that are going on around the world while they're happening. Some awesome examples of that in Q1, the big movers were K-pop Demon Hunters, the final season of Stranger Things, One Piece, which is always really strong for us. But we're also starting to see some really other great dimensions of the business with Mando Grogu coming out. Our Star Wars business is really showing some nice growth. And then I'll even just use a more recent example of, you know, Michael Jackson. This is one of my favorites. The, you know, smooth criminal vibe, that sort of iconic, you know, leaning look that always mesmerized me growing up. Like, how did he do it? But great to be part of that moment with the Michael biopic out right now. Then from a creativity standpoint, it's really about how are we taking those moments and turning them into products and frankly, adding some more newness and dimension to our product line. I think Bitty Pop is a great example of that. We saw strength in the quarter coming off of Q4, rolling out into Walmart from a seasonal basis. I'll give a great example, which is, you know, this sort of bitty bouquet for your Valentine's Day lover. You know, you can it's the sort of bouquet stand and you can sort of swap out whatever bitty pops you're interested in there, which I think is a great evolution of a moment that we can play on with bitty pop. You know, I'll point out sort of something in the world of Demon Slayer, which is obviously a great IP for us, kind of like a sumi ink paint deco to, you know, to the pop, which just helps to bring some freshness and newness to the fans of Demon Slayer. And then from a commerce standpoint, it's really about how do we bring these products to life for fans? I think we like to say turning shelves into stages. Some really fun experiences that I think are examples of that from the quarter. I went a few weeks ago to WrestleMania 42 in Las Vegas. Awesome weekend. Those guys always do a great job. We came to life at... the WWE Fan Expo at the Las Vegas Convention Center with a pop yourself experience. So you could customize yourself in exclusive WWE gear that you could only get there. We built the pops on site. We also launched a limited edition WWE covers on our D2C site as part of the WrestleMania weekend, which was awesome. I think it's selling for three to four times on eBay right now, which is cool to see. And then also in the world of sports, I had the chance also to go to Miami. We have a brand new shop and shop that opened at the new Inter-Miami Stadium. I was able to attend the second game in that stadium. Also an awesome pop yourself experience there. An exclusive messy pop, which you can only get at the stadium. And then actually we really rounded out with some incredible lounge fly product as well. I think Eve there in his bag of tricks. There's a great, you know, a great example of some of the lounge fly products that we're selling in the stadium there for Inter-Miami.

Yeah, that's right, Josh. So this is our iconic mini backpack for Inter-Miami, along with one of the many bag charms that are available. So super fun collection.

I love that colorway brings back memories. I grew up in Florida, so it reminds me of, you know, that Miami Vice in the 80s. And we get to live out our sort of like Crockett and Tubbs, you know, duo here. So it's a good one.

Now, speaking of lounge fly, Jessica, is there anything else new that you have?

Oh, well, you know what? I'm so glad you asked. So Latchfly has a really strong base, right? We have an exceptionally loyal fan base. We have high brand equity and best of the best product placement in all the Disney parks, right? We also have really great relationships with key retailers like Fox Lunch and Hot Topic. And we're also getting into premium. And so I can show you here our very first Swarovski collection that launched last year. This is a piece that was part of the collection selling at $400, which is well above the average $80 to $90 price point that we normally hit. And this sold out within hours. Right. So super excited to do more of these going forward. That being said, this year is really an important business reset for us. Right. So we cut our fees back by 50 percent. And so sales will be down as planned this year. But that's really in order for us to improve SKU productivity and overall profitability in general. And we're already seeing the results of that. So super encouraged by that. So with that, we're doubling down on wearable storytelling. So that means one, expanding the styles that we do beyond the iconic mini backpack. And so with that, here is Heihei from Moana. She's a fig girl. She was actually our number one SKU last year, which is great. And we'll continue to do more of these going forward. We also are doubling down on accessories. Bag charms and pins are categories that are driving double digit growth for us. And so thank you, Yves. This is Mickey and Minnie, new figural bag charms that are launching later this year. And look, they hold hands. And then third, we are also expanding our reach with Gen Z. And so we'll be launching a new diffusion line that is much more everyday, functional at a much more affordable price point.

This is all really great. Also, welcome to the team. Thank you. But now I've got to ask, is there any other changes you've made to the management team?

Yeah, we we just had a brand new head of marketing and brand start a couple of weeks ago. Nick Rupp comes to us previously from Nike. Awesome to have him on board. And I mentioned this last quarter, Andy Adi, who's been with Funko for a long time, industry expert in many different ways, moved into a new role as our chief international officer. So really giving some dedicated focus to growing the business in Latin America and Asia. He and I, about a month ago, spent a couple of weeks touring the region. We met with our distributors. We spent time with our licensors and some retail partners in Korea and Japan and a few other locations. And I came away really encouraged. I think from an IP standpoint, we already work with some of the biggest partners in the region. Like I'll use this sort of Zootopia from Disney as an example. This year, that was the highest grossing import movie ever in the history of China. It did about $630 million in box office there. And obviously, we have a longstanding relationship with Disney. One Piece is another example of something in the anime world. And obviously, we're into anime more broadly and really popular in the region. So I think there's a lot of potential. It's going to take some time to build the foundation and the plans and kind of see us really supercharge that growth. But I definitely came away really encouraged about the opportunity in the region and also Andy, you know, helping to lead the charge for us there.

Eve, anything you want to add about the broader economic environment and what the rest of the outlook is for the year?

Yeah. So obviously we're pleased with Q1. It was a strong start to the year. We expect that momentum to continue in Q2. So today we issued guidance for Q2. We think sales will be up low single digits to mid single digits and adjusted EBITDA between five and ten million dollars. And then as we look to the second half of the year, it's a little bit too soon to say, but there are some favorable things going on. The current tariff rates that are in effect are a little bit lower than we planned. So that's great news. And we hope that continues. On the flip side, we're watching the news about oil prices pretty closely. We have not been negatively impacted yet, but it's a little bit too soon to say. So with that in mind. We're just reiterating our original guidance for the year, which was sales flat to up 3% and then adjusted EBITDA between $70 and $80 million.

Thanks so much. And now, Josh, I've got to ask, is there anything that you're excited about coming up later this year?

I think it's, is there anything I'm not excited about? There's a lot this year. I mean, I mentioned that last quarter too, it's an awesome film slate this year, just sort of from beginning to end of the year. Mando Grogu soon, Toy Story, Avengers Doomsday at the end of the year, which is awesome. We actually just spent some time across the street from our offices here in Burbank with the head of DC Studios last week and I think super excited for Supergirl. So big year for movies, TV shows. Sports is obviously also huge this year because of the World Cup. And so, you know, we have the French, English and U.S. national teams. We also have a great relationship with a lot of athletes. I mentioned Messi, you know, earlier, who's playing for France. Argentina, Yamal for Spain, Holland, because Man City is playing for Norway and a few others. And then we even have the mascots. Can you, Eve, can you name any of the three mascots?

Don't put me on the spot.

If you have the three mascots that represent U.S., Canada and Mexico, you know, who are who are hosting the game. So covering it from all dimensions. And then look, the other thing I had mentioned, we talk a lot about the importance of speed, getting products to market faster. We just had an awesome execution of that with WrestleMania, a surprise appearance from I Show Speed, One of the biggest creators in the world. I think he has like 50 million followers each on YouTube, Instagram and TikTok. Right as he was walking out to the ring, we dropped an iShowSpeed pop on our site and also on Fanatics.com. And so you can expect a lot more of us both in that creator space and coming to market much faster kind of in the moment for our fans throughout the year.

This is all really super exciting. Yeah, thank you. And now, let's turn to a couple questions that we have from a few analysts, as well as some fans maybe even watching right now. Okay, first one we have here is coming in from Steve Lacek, Goldman Sachs. He asks, Okay.

Actually, we had a great continuation of the Q4 trend. So I'm happy to report POS globally was up 6% in Q1. In the wholesale channel, it was actually up 12%. And then by territory, that was up 6% in the US and up 28% in Europe. And you can see that's very much aligned to the sell-in. So it's very healthy trend, sell-in, sell-through. And we're pleased with that trend. That's great.

Now, actually, another question from Steven. What level of upside could we see from potential refunds and tariffs?

So we've shared that we've paid approximately $20 million in IEPA tariffs. We're taking all the steps that we need to obtain a refund and kind of following the instructions there. A little bit uncertain on the timing. There is also a market to monetize tariff claims, and we're kind of exploring all of our options at this point. So more to come on that. Okay.

Next question we have here is coming in from Keegan Cox at DA Davidson. He asks, can you talk about gross margin drivers for Q1 and Q2?

Sure. Again, highest gross margin we've ever reported. And it's not, you know, because of some kind of accounting adjustment or anything like that. It's really the result of so many things that we've been working on for the past six months to a year. So reducing the amount of discounting and promotional activity that we've been doing. We've also got renewed licensing agreements with our major partners. And then just channel and sales mix all contributed to that 44% gross margin. And then our guidance, 42 to 44%, we expect that the trend should be able to hold for the rest of the year.

Okay, perfect. Next up, we're going to get into some fan questions here. And the first one's coming in from DaBearsCollection142. They ask, what future Funkos are you excited for?

I guess, for me, there's a few. So coming up at San Diego Comic-Con this year, I'm just going to tease that we'll be launching and rolling out our Pop Mystery lineup. And so that's kind of taking a brand new lineup of people's favorite 4-inch pop vinyl figures, but putting them into more of a blind box mystery format. We're starting off with some really fun lines of WB Horror, our own lineup on the Pop Flora line. We have some really big IP coming into the future that I'm just going to tease right now. And there's also some really, I think, unique and compelling chase elements to it. So that's one I'm particularly excited for. The other one I'd say is we've continued to see some traction in the world of book talk and romanticy. And so I would just say like, we if you can imagine like the biggest titles in that world. For those of you who you know, who indulge as I do. We have those coming and I'll we'll be announcing some of that soon. But I think that's just like a brand new category of fandom for us that I'm excited about.

I'll be honest, I'm pretty excited to make some videos on those too. Next one we actually coming in is from Fun2Collect, and they ask, with Pops from The Fox and the Hound, Oliver and Company, and Atlantis already out, are you looking to keep expanding into older Disney films?

Does Freaky Friday count in that? That would be a personal favorite. But I mean, maybe on the, we work with Disney a lot, obviously. So there's, we are constantly coming up with fun ways to, you know, bring some of their characters to life. I think definitely something we think about a lot on the lounge fly front as well.

Yeah, for sure. Our fans love Disney classics, right? That's something that is core to our portfolio and we'll always continue to develop into that.

Cool.

Sounds good.

This next one here is actually kind of a joint question. There was two people that asked. It's Wasatch Pop and Chad Beaton. They are asking the possibility of retail footprint expansions.

Well, obviously, you're here in the Hollywood store today. I think the next step that we really think about from a retail and a retail experiential standpoint is what we could do with our partners in that space. And so we're currently working on kind of, I think, I'll say revitalizing and reconceiving our space with FAO Schwartz in New York. We're in the early stages there, but I think that's an incredible sort of global flagship shopping destination. I think they do experiential retail better than anyone. They've been incredible partners. So there's some newness we're bringing there. We are working on expanding how we think about that pop yourself kiosk experience and how that could come to life with some retail partners. So we'll be testing that later this year with some partners. We haven't quite announced yet, but we will be rolling that out. And then we'll continue to experiment here in this store. We have a lot of space and I think we'll introduce and refine some concepts that in success, I can imagine us rolling out into more places around the world.

Sounds pretty good.

Yeah.

Now, this next one that we've got here is coming in from Noah MTV, and he asks, what's your favorite comic book character you'd like to see become a pop? Anybody?

I mean, look, we do a lot in that space. And I think, you know, that's kind of goes back to the core DNA of the company. I would say, you know, across the team, we're all really excited about DC's absolute universe is sort of how, you know, I would, I think it's super unique. It's a fresh take on that world. You know, the books have been great chart topping. I think that's an area that I think we're continued to really explore. That's pretty cool.

I'll be honest. I'm excited about those. So now that you've mentioned it, it's pretty cool.

Yeah.

But that pretty much wraps up the questions. I don't know if you have any final words.

I have, well, a couple things. First of all, just back to thanking you for being here and World Cup. We're kicking off a bespoke Pop Yourself experience. So right now with Pop Yourself, you can actually get yourself popped in a U.S. World Cup kit. And then next week, we're launching some additional accessories. So it's not out yet, but we did do a version of Top Pops for you here. You can accessorize yourself with the World Cup trophy. So that's a little thank you for being here today and a little token of gratitude for your first earnings call. It matches exactly what it was. Thank you so much for this.

This is honestly, it's been fun.

No, we appreciate it. And then I'll mention, you know, a lot of the information we talked about today, some additional investor materials and the presentation is available on our investor relations website, along with this for anyone who wants to watch it over and over again, as I'm sure, you know, many, many people out in the world will. I encourage it.

Perfect. Well, thank you so much. Thank you. Thank you.