Funko, Inc. (FNKO) on Q1 2021 Results - Earnings Call Transcript
Operator: Good afternoon. And welcome to Funko's Conference Call to discuss Financial Results for the First Quarter of 2021. At this time, all participants are in a 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 authorization from the company. As a reminder, this call is being recorded. I will now turn the call over to Mr. Ben Avenia-Tapper, Director of Investor Relations to get started. Please proceed.
Ben Avenia-Tapper: Thank you, and good afternoon. With us on the call today are Brian Mariotti, Chief Executive Officer; Andrew Perlmutter, President; and Jennifer Fall Jung, Chief Financial Officer.
Brian Mariotti: Good afternoon, everyone. And thank you for joining us today. We are pleased to deliver a strong start to the year which marks the largest Q1 in Funko's history. A year ago at this time, I was talking about the steps we were taking to navigate an unprecedented period of uncertainty due to the pandemic. Today, I'm happy to provide a very different update. After returning to top-line growth in Q4. We have continued to see strong consumer demand, which is driving broad-based strength across our brands, products, channels, and geographies. First quarter net sales came in ahead of expectations increasing 38% versus prior year. The outperformance primarily reflects an earlier than expected recovery in Europe, as well as higher than anticipated sales within our own direct to consumer channel. Importantly, we continue to improve profitability, and careful cost controls drove adjusted EBITDA margins well ahead of plan and a 790 basis points over last year. Q1 was highlighted by a number of positive indicators across the business that reinforced the strength of Funko's pop culture platform and the ability to connect with our fan base across the world. Our brands have never been stronger. Pop and Loungefly continue to resonate with fans around the globe and drive growth across our channels. In Q1 pop 33% versus a year ago, highlighting not just the strength of the quarter, but also reinforcing the power of our pop culture platform as we continue to extend our reach across products, channels, and geographies. Loungefly branded products grew more than 80% year-over-year, as we saw a solid recovery in our domestic specialty channel and increased traffic across Europe, as well as the continued success of Loungefly.com.
Andrew Perlmutter: Thanks, Brian. Our record first quarter results are testament to the ongoing progress our teams are making against our key strategic initiatives. We're excited to build upon our strong start to the year by continuing to deliver innovation and delight our fans around the world.
Jennifer Jung: Thanks, Andrew. And good afternoon, everyone. We're pleased to report strong first quarter results highlighted by net sales growth of 38%, which reflects improving consumer demand and broad base strength across our brands, products, geographies and channels. The overall performance relative to our expectations was primarily driven by better than anticipated results in Europe admits accelerating consumer demand, as well as over performance within our B2C channels. All comparisons are year-over-year unless otherwise stated.
Operator: Your first question comes from the line of Erinn Murphy from Piper Sandler.
Unidentified Analyst: Great, thanks. Good afternoon. This is Curt on for Erinn, great to speak with you Jennifer and gentlemen. Congrats on the great quarters. A couple of questions here. First off, where do you see the long-term penetration rate of DTC overtime, and how does that reshape the P&L profitability?
Jennifer Jung: Hey, Curt, this is Jen, how are you?
Unidentified Analyst: Doing great.
Jennifer Jung: Good. We feel really great about what we've been able to achieve with DTC, over the past year growing it to 10% penetration in the quarter. We're going to continue to focus on that and continue to build that. As Andrew mentioned, it's one of our long-term strategies. And we expect that to continue to grow as we look beyond. But we feel really good about the progress we made, but we're continuing to focus on it and have it be a priority.
Unidentified Analyst: Awesome, great. And then just on the NFT acquisition, what's the margin profile of that business? And how do you guys use that affecting top-line long-term?
Brian Mariotti: Yeah, I'll let Jen chime in. I mean, obviously, we view the businesses, it's going to have a higher profit margin than what our traditional physical products go. But it is obviously a very new business. We're going to be very conservative and take a measured approach. Now we get into the business as a whole. And I think, obviously, because we're being very cautious with the revenues, it probably won't have a much of a material effect on margins, year one maybe, you're two. But if this continues to grow, and we are very excited about our philosophy and our strategy in this space. I mean it could end up ultimately having an effect on our profitability.
Unidentified Analyst: Got it. Great. And then just one more for me. Just can you speak to what you're seeing in terms of original content today, and where that could be overtime as a revenue guide building?
Brian Mariotti: It's been a focus of ours, right. And I think we've had some real good successes in the last three or four quarters. Our own IP has been either in the top ten or just outside the top ten each and every quarter. That's significant progress from just a couple of years ago, when we basically zero revenue from our own IP. So we will continue to strategize on how to grow that business. So one of our outlets which is Paka, which is a Japanese inspired original IP lining, continue to exchange on a on a quarter-over-quarter basis. We continue to brand more Funko-styled products, like our Pop Protectors and our Pop Cases. And we think there's obviously significant room there. We have obviously our Snapsies initiative as well. So we're certainly putting resources to that. And we definitely see this growing, and we'll continue to put a focus on it quarter-after-quarter.
Unidentified Analyst: Awesome, thank you so much. That's it for me.
Brian Mariotti: Yep. Good. Thanks for talking.
Operator: Your next question comes from the line of Steph Wissink from Jefferies
Stephanie Wissink: Thank you. Good afternoon, everyone. I have a follow up to Curt's question on the NFT opportunity. Brian, you're talking about it kind of out over the next couple of years. But what in addition to the revenue opportunity, are you thinking about in terms of expanding your engagement with your fan? Your DTC opportunity platform has been significant, yeah. Talk a little bit about engagement.
Brian Mariotti: Yeah, I mean, that's a great question. I mean, Andrew and I had conversations with licensors. We've had conversations with retailers, they have retailers request out. This is what's so exciting about linking the physical and the digital together. There are so many different ways to engage. There's so many different ways to get people excited about what NFT's are. Just one example, we could drop a free NFT for Freddy Funko, wearing a San Diego Comic Con T-shirt just days before the event give the NFF away. It's numbered, it's free, it gets them into the ecosystem. They have to sign up for an account. And it has value and there's retailers that want to participate whether it's through NFT cards, dropping a Pog and NFT pot into an actual physical product and having a link that is well events. And that cross collaboration of people that are embedded as collectors in the NFT space that never bought a physical product from Funko and vice versa. People have been in the Funko physical space who've never bought an NFT product. We think there's a cross-pollination that's going to happen between that. And they're just - we're really excited, I think. But it all starts with sound fundamentals and for us it's diversity of licenses, content, content, content, keeping that fresh, keeping it low price point to get in keeping the content varied on a week-to-week basis, finding ways to make the content interactive, finding ways to link it to rare physical products to get people in who might not ever consider buying an NFT before. Because we all know the secondary market with pops is very robust. There's so many ways to interact. There's so many different ways to engage the fan base. It's super exciting. And I think that we're just going to take a real measured approach to our strategy, our licenses, our connections to the fans and really make this look like it is a long-term proposition. It is not a money grab. Because you see some of the programs out there, if it or NFT they just feel like quick cash grab. And we're not about that. This is a long-term strategy that we think goes hand-in-hand with what we already do, which is engaging pop culture enthusiasts and fans in a very fun, unique way.
Stephanie Wissink: Just as a follow up to that. Brian, could you talk a little bit about your DTC exposure by market? I think you're just opening Europe now, but how is that developing? And are you seeing any common patterns among consumers engaging with you on DTC?
Brian Mariotti: Yeah. Obviously, it's still heavy, North America. But Europe again, we brought that along two years earlier than expected. And one of the few ways we took advantage of the pandemic was obviously, rushing that investment in that work done ahead, while Europe was almost completely shut down. What we're seeing - I think things we're most proud of, is the average basket size. And people now buying the regular items more than they are buying the exclusive. We used to be a flash shell driven business on direct to consumer. We dropped something limited, people would come in and get that limited item and get out oftentimes crashing our website, oftentimes selling out in mere minutes. And now what we're seeing is they're coming for the - sometimes to be exclusive, and then they're adding to the basket, the rest of the everyday line. And I think that's a real testament to what we've accomplished there. And Johanna Gepford is leading that charge, she's been with me and Funko for about nearly 15 years. She understands our customer journey and our customer better than just about anybody. She's doing a wonderful job of just trying to create a special environment in Funko that feels a little bit different than our other retail partners. And I think you'll continue to see new formats and new ways to engage that fan base. It's definitely different than our other trusted partners.
Stephanie Wissink: Thank you very helpful.
Operator: Your next question comes from Tami Zacharia from JPMorgan.
Tami Zacharia: Hi, thank you so much for taking my questions. So my first question is, can you share a little bit about the TokenWave acquisition? How much cash was spent for what percentage of ownership? And what kind of revenue and earnings accretion, if at all, do you expect from the acquisition this year?
Brian Mariotti: Generally I answer that part. I can answer any strategic partners. But yeah.
Jennifer Jung: The acquisition was for 51% stake in the company. It's a relatively new company. At this point, we aren't really disclosing much about the purchase price, as well as any revenue that we are. As Brian was talking - speaking to earlier. We're taking things very cautiously and conservatively. So at this point, it's our platform that we're working on for a June launch and we're really excited about it. That it fits perfectly within our strategy, and it makes great sense for us at Funko.
Tami Zacharia: Got it? That's super helpful. So basically, that would mean the guidance you have for this year doesn't include any significant sort of contribution from NFT revenues.
Jennifer Jung: Correct.
Tami Zacharia: Okay, got it. And so my second question is any thoughts on the rising cost of resin, and freight? And how you think about the impact of those on margins this year?
Brian Mariotti: There was the first question that was - that you said resin?
Tami Zacharia: Correct?
Brian Mariotti: Yeah, but we don't use resin in our product. I'll let Jen answer the second part of it. Just to make sure you understand. We don't we don't use resin in any of our products so that wouldn't be necessarily applicable here.
Tami Zacharia: Got it. Super helpful. Yes.
Jennifer Jung: And for the shipping, we definitely saw some headwinds, as we called out on our last earnings call. We expected to see headwinds, but we also noted that we thought we could actually offset those headwinds. So our Q1 margin does reflect the shipping headwinds. And we do expect those to continue throughout 2021. But we are taking other measures and we have some - we're seeing some great strides in our overall margin that's being able to offset those at this time.
Tami Zacharia: Got it. Perfect. Thank you so much, and best of luck.
Brian Mariotti: Thank you.
Tami Zacharia: Thank you.
Operator: Your next question comes from the line of Linda Weiser from D.A. Davidson.
Linda Weiser: Hi, how are you? I was wondering if you could comment on - I know you had talked about a lot of brick-and-mortar distribution expansions prior to the pandemic. And I was wondering if you could just kind of comment, what happened with some of those. I noticed like even in Walmart, your section is not that big sell. It seems like there's opportunity. And I think you talked about Best Buy and things like that. Could you kind of update us on distribution gain opportunities and what you've accomplished?
Andrew Perlmutter: Yeah, I can take that one. Thanks for the question. This is Andrew. So we are really excited with where we are. When we talk about our product diversification strategy, I think that you're going to start to see that bear fruit at retail with our existing and new partners as well. If you take a look at the mass channel, specifically, the product diversification and growing the core business, are both lending to additional space at retail. So, if you take a look at the sports and anime and music initiative that we have, you will see increases in both promotional and existing shelf space, in the mass channel, as well as other channels this year, that are fully supported by that initiative. So we couldn't be more excited about that. In addition to that, we're also seeing growth in other categories that we have grown into. For example, games, we're seeing expansion of our shelf games in that category, youth collectibles, we're continuing to see expansion, even apparel and things, things like that, that where we're seeing some good expansion. So we're excited about that. We're always building bridges to new retailers growing, floor space within those particular retailers. I think you mentioned Best Buy. We are working with Best Buy. We're continuing to refine those programs in store. And they've just got a new team in place. So we're getting to know the new team. But we're seeing expansions at many of our channels. We're seeing a lot of good success with the drug channel. So we've got our foot down on the gas and we're continuing to build
Brian Mariotti: Yeah, Linda, I talk with the big wins in Europe as well with like retailers like Carrefour. We continue to penetrate all of their different markets where we're just very France-focused. It's now all over Europe in their stores. So there is a lot of wins in the brick-and-mortar space.
Linda Weiser: Great. And then in terms of your international expansion. I mean, obviously Europe is starting to come around. Are you - and things strengthen up here are you going to be looking to expand into some new international markets? And what would be your next your next targets internationally?
Brian Mariotti: Yeah, definitely. The team is focusing on obviously, Poland, in Russia specifically. But yeah, there is a focus there. We've got some great new leadership in terms of sales and different teams now that are breaking out by region in Europe to really focus on some of these other countries that are under penetrated. Germany is another country has come a long way in a very short period of time. So what we're doing is strengthen all of the different countries. We're doing really well in the Nordics now. So there is absolutely growth in a high level of interest in continuing to build the brand throughout Europe, but definitely CE and Germany, and the Nordics are three that are really humming right now.
Linda Weiser: Great, thank you very much. Good luck.
Brian Mariotti: Appreciate it.
Jennifer Jung: Thanks Linda.
Andrew Perlmutter: Thank you.
Operator: Our next question comes from the line of Garrett Johnson from BMO Capital Markets
Garrett Johnson: Hey, good afternoon. I wanted to follow up on the input cost question. And I guess if we need to be specific polyvinyl chloride and what those prices are looking like? How that's affecting your production? And if you need to increase price to cover those costs, or - and what kind of pricing power do you have?
Brian Mariotti: Yeah, Garrett, we have not had a cost of goods increase in over five years in any of our manufacturing. And we don't use resin, PVC vinyl is definitely our product choice when it comes to raw materials. But we've always been able to overcome any kind of cross price increase due to just pure volume. The amazing amount of volume we pushed. And as we migrated out of China, and into Vietnam, aligning with stronger, larger, better-funded factories have enabled us to actually lower our cost of goods a little bit each and every year. So we're in a really strong position right there. Obviously, there's some headwinds with container space and containers pricing. And some delays, but that's really the only thing that's really facing us in terms right now in terms of cost of goods.
Garrett Johnson: Okay, all right. Thank you.
Brian Mariotti: Yeah.
Operator: And I show no further questions at this time. Are there any closing remarks for management?
Jennifer Jung: Thank you everybody for your time today. We really appreciate it.
Operator: Ladies and gentlemen, this does conclude today's conference. Thank you for your participation. You may now all disconnect.
