Earnings Call Transcript - FNKO Q4 FY2025

Katie Wilson, Head of Investor Relations

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 Lependevin, our chief financial officer. Welcome, guys. Josh, I have heard this is one of your favorite places in Los Angeles.

Josh Simon, CEO

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. I even 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

Katie Wilson, Head of Investor Relations

earnings call from here today. So how have your first six months been? Well, see, we're just

Josh Simon, CEO

getting back from the toy fair circuit. So London Toy Fair, Nuremberg, New York Toy Fair. I've been going to these tour 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, you know, 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, you know, 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

Katie Wilson, Head of Investor Relations

dive into that detail here in a little bit and i'm guessing some of that was driven by this guy

Josh Simon, CEO

derpy right behind me one of my one of my favorites near and dear to my heart obviously um 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 it into fans and consumers' hands in Q4. We also won the viral hit of the year award from Toy Book, 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 and 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 dimensions to you know 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

Katie Wilson, Head of Investor Relations

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 Cs,

Josh Simon, CEO

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 um 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 like 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 you know 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 Topps and Fanatics. We're part of the new MLB Superpack 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

Katie Wilson, Head of Investor Relations

the way did I see Funko in a Super Bowl commercial you did you did it was it was surprising for all

Josh Simon, CEO

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's 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 US, is opening up a brand new stadium, Miami Freedom Park, in a couple weeks on April 2. We have a presence in their flagship store. It's a Funko and Lounge Fly shop and shop with exclusive products and also a really great unique pop yourself experience that you could 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, you know, a great film for us. And other areas that we're expanding into as well, you know, I think the I'm sure Eve is a huge fan of this, but the world of romanticcy and book talk, if I'm not mistaken. You know, we just, we dropped a little teaser video for The Cruel Prince, which is a really popular book on TikTok. 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 don to don which was a top seller for us at you know at walmart in q4 and continued growth in video games as well a great you know 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 hyper strike 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 was one of these like crazy viral trends in q4 we decided let's make a video of Jason and you know his matcha and send just send it to him as a gift and his reaction was great I think I think

Speaker 1

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

Katie Wilson, Head of Investor Relations

really got it all jokes aside yeah and it's really exciting because this is a new type of product

Josh Simon, CEO

we're offering it is and one example of a new type of product we're offering because um 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 Biddy Pop, you know, I talked a little bit about as a new example of a product that's been around for a couple 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, You know, big, you know, feature and animated series ideas in addition to a really interesting, unique AI-based animation toolkit they have called Spurry that will allow us to create some content much faster and bring new and iconic forms of storytelling to Funko fans everywhere.

Katie Wilson, Head of Investor Relations

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

Josh Simon, CEO

Yeah, we we really have fans all over the world and we want to make sure that we're showing up wherever our fans shop. You know, as we like to say, turning shelves into stages. This store is obviously a best expression, you know, of how we're able to do that. But, you know, there's a ton of other opportunity in the U.S. from a retail standpoint and outside of the U.S. Europe, which has been our primary driver outside of the U.S. for a number of years now, was 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? So as part of that, we just created a new role for a guy named Andy Addy, who is our longtime chief commercial officer. He has 40 years of really great experience in the toying 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 U.S. 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. you know largely coming from japan we've seen a huge growth in all things k culture korean beauty k-pop korean food so i think you know 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

Katie Wilson, Head of Investor Relations

pretty massive for us turning to you eve could you say a little bit more about the financial results

Eve Lependevin, CFO

Sure, happy to. This is a 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.

Katie Wilson, Head of Investor Relations

How was the financial outlook for 2026?

Eve Lependevin, CFO

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. dollars. 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 skew cuts that we implemented last year.

Josh Simon, CEO

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 uh 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

Eve Lependevin, CFO

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 Bidipop and Pop Yourself, which we launched in Europe last quarter.

Katie Wilson, Head of Investor Relations

Josh, how do you see 2026 shaping up?

Josh Simon, CEO

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, all 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 US 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 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

Katie Wilson, Head of Investor Relations

it's really just about us executing this year. 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 um yeah it

Eve Lependevin, CFO

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 um 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

Katie Wilson, Head of Investor Relations

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?

Josh Simon, CEO

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, you know, 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. telling, we really believe in the power of, you know, 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, yes, 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, you know, 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

Katie Wilson, Head of Investor Relations

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

Eve Lependevin, CFO

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

Katie Wilson, Head of Investor Relations

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?

Eve Lependevin, CFO

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 as we'd expect yeah within the 2026 guidance

Katie Wilson, Head of Investor Relations

what would you highlight as the key initiatives to both drive top line results and and margin

Josh Simon, CEO

versus 2025 I guess I'll start from a top line standpoint I mean obviously I just I talked about the content slate that's a huge driver of top line growth this year biddy pop is you know 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 we'll see, but you'll really start to see us drive incremental growth from that sort of further into the future. And 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.

Eve Lependevin, CFO

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, you know, we're forecasting to have a better margin than we've ever had. And those 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 DA Davidson asks,

Katie Wilson, Head of Investor Relations

can you quantify the tariff impact you experienced in 2025 and what incremental pressure you expect in the first half of 2026?

Eve Lependevin, CFO

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, so the ones that were recently struck down.

Katie Wilson, Head of Investor Relations

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?

Josh Simon, CEO

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, you know, Paramount, Universal. We really value those relationships. We spend a lot of time with those partners. So from a 26 slate standpoint, you know, 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. So I'd say the world of creators is a huge example of that. We appointed a new board member, Reid Duchar, 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 and more in that space.

Katie Wilson, Head of Investor Relations

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 uh let's see I I don't want

Josh Simon, CEO

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

Katie Wilson, Head of Investor Relations

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

Josh Simon, CEO

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.