Good afternoon, and welcome to Funko's Conference Call to discuss Financial Results for the First Quarter 2019. At this time, all participants are in a listen-only mode. Later, we will have 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. On the call today from management are Brian Mariotti, Chief Executive Officer; Andrew Perlmutter, President; and Russell Nickel, Chief Financial Officer. I will now turn it over to Mr. Nickel to get started. Please go ahead, sir.

Thank you, and good afternoon. A press release covering the Company's first quarter 2019 financial results was issued this afternoon and a copy of that press release can be found in the Investor Relations section on the Company's website. Management's remarks on this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These may include statements regarding our business goals, plans, abilities and opportunities, industry and customer trends, growth, momentum and investment initiatives, collaboration and license relationships, consumer engagement and brand awareness, acquisitions and related expenses, and anticipated financial performance. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in the risk factor sections of our Form 10-K for the fiscal year 2018 and our other filings with the SEC. Any forward-looking statements made on this call represent our views only as of today, and we undertake no obligations to update them. Please also note that we will be referring to certain non-GAAP financial measures on today's call such as EBITDA, adjusted EBITDA, adjusted EBITDA margin, adjusted pro forma net income, adjusted pro forma earnings per diluted share and net debt, which we believe may be important to investors to assess our operating performance. Reconciliations of non-GAAP financial measures to the most directly comparable GAAP financial measures are included on our earnings release and in the Investor Relations section on our website at funko.com. We have also prepared a visual presentation that investors can follow along with this discussion, and it can be accessed in the Investor Relations section of our website. I will now turn the call over to Brian.

Thanks, and good afternoon, everyone. Funko had another fantastic quarter and got 2019 off to an even better start than we were envisioning. Our net sales were up 22% over last year better than we expected and better than what was implied in our full-year guidance. We also saw improvements in gross margin in the quarter, continuing to trend the last couple of quarters more of our sales growth flow through to the bottom line thus giving us greater operating leverage. We have now exceeded our internal forecast and analyst consensus for net sales and adjusted EBITDA for all seven quarters we have reported as a publicly traded company. And most excitingly, our future has never looked brighter. As you know, Funko is built and has thrived on the principle that everyone is a fan of something. And that Funko has something for every fan. This allows Funko to act as an index fund of pop culture. Funko's continued strong growth comes from the simple premise that we are uniquely positioned at the epicenter of pop culture, connecting licensers, retailers and fans. Licensers rely on us to connect them to their fans and to keep their content properties top of mine through a growing range of retail channels. Retail was relying as to bring fans into their stores, seeking way to interact with this content and our products. And most importantly, our fans rely on us to create and deliver a growing assortment of products they want in order to stay engaged with the content they love. No other company brings me such a fast fashion approach to pop culture the way Funko does. As we've been saying, content creation has been and is continuing to explode. The consumption of that content is also continuing to rise. Currently we see…

Thank you, Brian. Our partnerships with our retailers around the world are one of Funko's key strengths. As Brian mentioned, we connect our fans with their favorite content through our retail partners. Funko's unique ability to drive traffic to our retailers is one of the elements that differentiate Funko from the competition. In addition to successful newly launched properties like Fortnite, Avengers: Endgame, Game of Thrones, and Captain Marvel, we saw continued ability to tap into our back catalog with Harry Potter, Star Wars and DC Comics. We saw increased year-over-year sales with our core retail partners across the board. These increases were partly driven by product diversification such as Loungefly and other softlines products as well as the introduction of higher priced items such as our 10-inch Pop! Vinyl, Movie Moments and Pop! Rides. With the shift in the timing of Easter and the release of Avengers and Game, which was a month later than last year's Infinity Wars, there was a shift in retail sales from March and April for those accounts where we have POS sell through data through April, our year-to-date sell through was up nearly 20% in dollars. We continue to increase sales in all of our major channels including mass, mall and other specialty stores, and we continue to open new accounts and cultivate expansive programs with larger existing customers. As an example, due to the success that we were seeing at best buy, we have expanded our presence and our expected to launch a branded Funko section in the second quarter. As part of our channel segmentation strategy, we are also building our programs like the DIY pop program at Michael's Arts and Crafts store. The Funko brand continues to resonate and expand globally. In addition to North America, we have seen double-digit…

Thanks, Andrew, and good afternoon, everyone. As Brian and Andrew have indicated, we delivered better than expected results for our first quarter due to broad based strong performance across product lines and geographies. We exceeded our own expectations on sales, gross margin and adjusted EBITDA. Net sales in the quarter increased 22% to $166.8 million and we're primarily driven by continued expansion of products and properties in our portfolio. In the quarter, the number of active properties increased 35% the $611 and net sales per active property where $273,000 which was down 10% year-over-year. As a reminder, we expect net sales per active property to fluctuate from time-to-time. We believe it is a good sign to see our sales spread over such a wide range of properties. The top performing property in the quarter was fortnight, which accounted for just over 10% of our total sales. Among our top 10 properties, three were based on evergreen content. Three were based on new theatrical releases, two were based on current TV shows and the other two were based on current video games. Not too similar to prior periods. Our top 10 properties accounted for 41% of total sales compared with 39% in the first quarter of last year. In Q1 just under 45% of our sales came from evergreen properties or back catalog content that is not tied to a current movie, video game or a TV show. That is fairly typical level for us. In the first quarter, no customer accounted for more than 8% of our total sales, which just highlights are diversification that we are not reliant on any one retailer and that our products are channel agnostic. On a geographical basis, in the first quarter, net sales in the United States increased 22% to $108.7 million and…

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Drew Crum with Stifel. Please proceed with your question.

Okay, thanks. Good afternoon, everyone. So a number of puts and takes on the gross margin during the quarter. Is that a good run rate to think of in the out quarters or do you expect that to move around? And then secondly, could you comment - go ahead.

No, sorry. I'll let you finish it.

Yes. Just kind of - separately was curious as to what you've seen, I know it's early, but we assume in terms of the Avengers performance this year versus last year.

So on the gross margin, I do think we will see, as we've said, we would expect that gross margin will have some puts and takes throughout the course of the year and overall for the entirety of the year, we would expect it to be in line with where we ended 2018. We saw some positive movement versus that in Q1, but we also saw why we saw higher FOB sales versus what we saw in Q1 of last year. It was lower than where we were in Q3 and Q4 of last year. So as that FOB mix shifts, there will be some play and some impact on gross margin.

Yes. Drew, it's Brian. On the Avengers question, obviously the box office numbers were staggering for the first weekend. Our sell through has been a little bit better than previous years Avengers: Infinity War products. I think the biggest thing is that it looks like this might have a little bit of a bigger tailwind to it on the movie end and our second waver products are going to be much larger than the second waver products from Avengers: Infinity War a year earlier. So I think we're going to be able to monetize it a little further into the future, because there was a lot of ammo that was left off for us getting a pre look at, which was great. It surprised us and it gave us a lot of stuff to work on. I think the appetite is going to be there. So we're over obviously static at the movie performance and our performance with the products at retail.

Okay. Thanks guys.

Yes, appreciated.

Thanks.

Our next question comes from the line of Erinn Murphy with Piper Jaffray. Please proceed with your question.

Great. Thanks. Good afternoon. [Indiscernible] I guess, I want to [indiscernible] you didn't talk about what the Walmart initiative and kind of rolling out deeper into the entertainment and DVD section. Could you talk a little bit more about how that's performing and kind of what the consumer response has been? And maybe, I don't know if you've had it, but where is your average linear, but currently at Walmart versus Target?

So I can take that one. Thank you for the question. I can tell you that our program with Walmart is meeting or exceeding expectations. Without going into too much detail about the performance of any one retailer, I can tell you that Walmart is happy with it. We are in the process of rolling out a couple of really big programs right now. For example, Avengers: Endgame. There's a program around Game of Thrones. So we're excited about it. We think that there's more opportunity in front of us with Walmart, not only to take our existing space and continue to build ways on - make ways to make it more productive. But also we're looking at other space around the stores, as we mentioned in new categories like the games category and a couple of other new ventures that we're looking at. So we're bullish on the relationship. We're happy with where it is. I can get back to you on the average linear footage. It changes a year-over-year and without going into too much detail, I can tell you that, that should be, that should be increasing over the next 12 months.

Yes, Erinn, it's Brian. I think it's a lot like we thought it was going to be, we saw how the target initiative five years ago grew and grew and then there with the incremental opportunities in different departments and we're seeing the same thing. I think the power of what we can do. The people we can bring into Walmart, typically in the brick and mortar stores. The rather quick sell through on special exclusive as in and programs is really got their appetite up. So we're doing everything we possibly can to make this relationship great for the future to come, but it's off to a start.

Good to hear. And then maybe just on lounge by Brian, you talked about that at the beginning of repaired remarks in terms of their. Can you talk a little bit more about kind of where the growth is coming from? I kind of wet the distribution footprint looks like today for Loungefly, and if you can kind of how big that business is now?

Yes. I mean it's basically doubled since we bought it, just pre-IPO. The big thing for us has been just injecting the Funko DNA, making sure that they're aligning with our brand calendar, getting the information on the products that they're making out to us at the mothership. So that we can help them with sales internationally, because they didn't have a footprint internationally, making sure that they make the right products at the right time and hit the timelines. For example, I think they released all their Black Panther product, six months after the movie came out last year. So these are the things that that we've managed to course correct. And we've added some great creative people from a hybrid, which is a larger apparel company. Then I'm probably the largest in our industry. Two of their big people came over to Loungefly to help continue to guide that business. So we're just seeing better alignment with all of our programs on all of our retailers, better international sales, more timely development and really just true alignment with what Funko's initiatives are. I think all those are really allowing the business to grow as fast as we hoped it would.

Got it. And then Russell, one for you, just going back to the gross margin, I just want to - you can maybe break it out into different ways to us 70 basis points. If you were to take out the laughing of the Toys "R" Us impact from last year, where would growth margins have been in the quarter? Thank you.

It would have been about - I said believe it was about - would have been about $38.6, so it was about 50, would have been up 50 basis points higher. And then the impact that take that back down to kind of where we ended the quarter was driven by the higher charge backs that we saw lower than what we saw as we make progress, lower than what we saw in Q4. But it was higher than Q1 of last year, and then also the increase in FOB sales. I think it was about 25% of our sales in the first quarter of this year. We're from direct from the factory so.

All right. Thank you guys, and all the best.

Thanks Erinn.

Thank you.

Our next question comes from the line of Steph Wissink with Jefferies. Please proceed with your question.

Thanks. Good afternoon everyone. We have two questions. The first is maybe Russell for you on the investment. You can just help us think about where those land in the P&L, if it's a splitting gross margin or SG&A. And then maybe give it some perspective on when those investments start to feed into the model and kind of how they'll roll into 2020? And then one, I think Brian, for you on the app, just as we've been playing around with the app over the last couple of weeks, we noticed that there's definitely a collector angle to it. You can track value of some of the products and see some of the new releases. If we think into the future, is there the possibility that there is a marketplace that you develop for buying, swapping and trading some of your product? How should we think about that app is kind of a center connector for your collectors?

I'll take something that one first. Yes. So we are very happy about the early response and the undertaking we have, the first foremost this is - this is for the fans. This is to allow them in real time to understand what's being released how to track and more importantly deeply to the products, whether it's from a Hot Topic or a hottopic.com, or a Walmart, or a Target, or a Barnes & Noble or whatever or back to Funko shop, the ability for one bit of information to link to wherever that product is truly helpful. And I think it's really going to be the basis of our direct-to-consumer as we continue to grow that avenue. So I think we were super excited about that. I think you see the writing ahead in terms of a marketplace. And I think that we are looking into a lot of what's going on in our industry and sometimes outside of our industry like with retailers like go in StockX in that secondary market. And we're having conversations with eBay. So there's a lot of conversations going on right now for us to formulate a plan on that kind of a secondary marketplace. So and for trading, for collector to collector. So this is the beginning steps of a really great initiative and win for us. And our fans are loving it the numbers of people tracking their collections, it's just absolutely astronomical, but it's just the beginning. So we're pretty excited about what that's going to bring.

Yes. And Erinn on the investments they would happen if we execute on them in the second half of the year and they would largely flow through SG&A, it would be a combination of certain one-time expenses as well as incremental expenses that would continue on into 2020.

Thanks guys. Appreciate it.

Thanks.

[Operator Instructions] Our next question comes from line of Alex Parry with Bank of America Merrill Lynch. Please proceed with your question.

Hey guys. Thanks for taking my question. I just have one here. Can you speak to the rollout of Funko at Foot Locker? We've noticed more sort of Pop! pictures within their store. You just elaborate on how many doors are in currently and what the plan is for 2019? And then just on top of that, can you talk through sort of the crossover and the core customer that you see with Foot Locker if there a core Funko customer? Thanks.

It's Andrew here. I can take that one. So when we first started our conversation with Foot Locker, they had a specific vision in mind when it came to collectibles and they came to Funko as a resource, since then the dialogue has evolved rapidly. As you've seen, you're seeing more Pop! and other collectible fixtures rolling out to their stores. There's potential that you'll start to see other softlines products either from Loungefly or some of our other apparel plays in their stores as well. That being said, the number of stores is still relatively small, the Pop! shop, which is their main collectibles play. I believe that they're trying to roll that out. I think it's 180 or 120. I don't know that they've actually landed on an official number, but I think they have a goal between 120, 180 stores this year. So we're excited about that. As far as the product mix is concerned. Like I'd mentioned, we started sort of like all eyes on sports figures, whether they be the Michael Jordan that's sold out within a couple of minutes that crashed our website with LeBron James. Oddly enough, the most successful social media interaction the Foot Lockers ever had was our Post Malone figure, which is great. I mean, that's a musician outside of the sports world, so that's opened up a new door that they knew would be successful. They flew product in on their own dime to get that out to market first. Sold out very quickly, and like I said, it was our most popular retweeted, I believe it was retweeted social media posts.

Yes. Alex, I think we see the customers are definitely different, but the same mentality the sneaker had are absolutely obsessed with collecting sneakers and all the information on the new releases. And so it's definitely opening up our market and enlarging our market. But the mentality seems to be the same. So they are dropping items like Miles Morales, Spider-Man Pop! at the same time there was a Nike at the CO-Lab, it did very, very well. So that mix in different demographic is running in parallel lanes with our collector base. So being able to cross into their lanes has been very, very exciting for us as we continue to broaden in larger marketplace. So we're excited about the relationship.

Perfect. That's very helpful. Thanks guys.

Appreciate it.

Thank you.

[Operator Instructions] Thank you. Our next question comes from the line of Tami Zakaria with JPMorgan. Please proceed with your question.

Hi. Thanks for taking my question and congrats on a great quarter. I just have a really quick one. So you saw strong growth in the number of properties, but a decline in sales per property this quarter. So can you help us think about these two metrics for the rest of the year?

Yeah, look, I think that we always release that information, because we think it's interesting to share, the diversity of our licensed portfolio. But again, one property for a musician like Amy Winehouse, [indiscernible], and so does the Avengers: Endgame, which we might have developed over hundred and some products. So for us the most important thing is leveraging more properties per quarter. So when you do that, you're obviously most of the time going to see a downward trend on dollars per property. But the healthy mix we're looking for is that we're continuing to leverage as many diverse properties as we can, which goes back to our model that everybody's a fan of something and we have something for everybody. So we'll continue to put those two metrics and we have, since we've been public. But I think the key thing to key on is how diverse the license bandwidth is. And it's very atypical to traditional toy companies like Hasbro and we don't focused on four or five unique properties, a Spin Master, a Mattel, we sport 1,100 different licenses and that's really the key to our success.

Got it. Thank you so much.

You bet. Great talking to you.

Thank you. We have no further questions at this time. I would now like to turn the floor back over to management for closing comments.

Yes. Before I close, let me address our recent announcement that Russell will be leaving Funko at the end of the year. Russell has been with us for over 5.5 years during an amazing period of growth and transformation and we wouldn't be there where we're at currently today without them. And we wish him the best for his future endeavors. He leaves behind a phenomenal and strong financial team and we look forward to finding a great replacement. It's having over here - with having Russell here through the end of the year, I think we're going to have a seamless transition in a world-class transition. So just wanted to bring that up, and thank you again for everybody's interest and support of Funko, and we look forward to see some of you guys at Comic Con in San Diego in July, and speaking to you again in our second quarter earnings, if not sooner. So, thank you very much.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.