Funko(FNKO) - 2023 Q4 - Annual Results

Executive Summary Fourth Quarter 2023 Financial Highlights In Q4 2023, Funko's net sales decreased by 12.6% year-over-year to $291.2 million. Despite the sales decline, gross margin saw a significant improvement to 37.6% from 28.3%. The company narrowed its net loss to $10.8 million from $42.2 million in the prior-year period and achieved a positive Adjusted EBITDA of $23.5 million, a strong recovery from a negative $6.3 million in Q4 2022 Q4 2023 vs Q4 2022 Financial Results (in millions) | Metric | Q4 2023 | Q4 2022 | Change | | :--- | :--- | :--- | :--- | | Net Sales | $291.2 | $333.0 | -12.6% | | Gross Profit | $109.4 | $94.3 | +16.0% | | Gross Margin | 37.6% | 28.3% | +9.3pp | | Net Loss | ($10.8) | ($42.2) | Improved | | Adjusted Net Income (Loss) | $0.5 | ($17.9) | Improved | | Adjusted EBITDA | $23.5 | ($6.3) | Improved | Full Year 2023 Financial Highlights For the full year 2023, net sales declined to $1.1 billion from $1.3 billion in 2022. The company reported a significant net loss of $154.1 million, a sharp increase from the $8.0 million loss in the previous year. Adjusted EBITDA fell substantially to $27.2 million from $97.4 million in 2022, reflecting operational challenges and restructuring costs throughout the year Full Year 2023 vs Full Year 2022 Financial Results (in billions/millions) | Metric | FY 2023 | FY 2022 | Change | | :--- | :--- | :--- | :--- | | Net Sales | $1.1 | $1.3 | -15.1% | | Gross Profit | $333.0 | $434.0 | -23.3% | | Gross Margin | 30.4% | 32.8% | -2.4pp | | Net Loss | ($154.1) | ($8.0) | Worsened | | Adjusted Net Loss | ($45.4) | $29.6 (Income) | Worsened | | Adjusted EBITDA | $27.2 | $97.4 | -72.1% | Management Commentary The Interim CEO stated that the company successfully completed a comprehensive plan in 2023 to reduce costs, improve operational efficiency, and focus on core products, addressing inventory issues and workforce size. Q4 results were at the upper end of guidance, driven by strong Direct-to-Consumer (DTC) growth. Despite facing headwinds in 2024 from a softer content schedule and shipping uncertainties, management expects significant bottom-line improvement, supported by further DTC expansion - Successfully completed a comprehensive plan in 2023 to reduce costs, improve operational efficiencies, and focus on core products, addressing inventory issues and workforce size[4] - Q4 2023 net sales and adjusted EBITDA were at the upper end of guidance, fueled by a nearly 30% increase in the direct-to-consumer (DTC) business, which comprised 26% of total revenue[6] - The company anticipates significant bottom-line improvement in 2024 despite headwinds from Hollywood strikes and Red Sea shipping issues, focusing on DTC expansion and limited-edition products[8] Leadership Update The company announced the resignation of Steve Nave, Chief Financial Officer (CFO) and Chief Operating Officer, effective March 15, 2024. Deputy CFO Yves LePendeven will assume the role of Acting CFO - Steve Nave, Funko's CFO and COO, is resigning effective March 15, 2024[9] - Yves LePendeven, the company's Deputy CFO, will serve as Acting CFO upon Mr. Nave's departure[9] Detailed Financial Performance Fourth Quarter 2023 Net Sales Analysis In Q4 2023, total net sales fell 12.6% YoY. By product category, Core Collectibles and Loungefly branded products saw declines of 12.6% and 25.1% respectively, while the 'Other' category grew by 44.0%. Geographically, a strong 26.3% sales growth in Europe was offset by an 18.0% decline in the United States and a 48.5% drop in Other International markets Q4 Net Sales by Product Brand (in thousands) | Brand Category | Q4 2023 | Q4 2022 | % Change | | :--- | :--- | :--- | :--- | | Core Collectibles | $212,776 | $243,340 | -12.6% | | Loungefly Branded Products | $54,908 | $73,346 | -25.1% | | Other | $23,552 | $16,354 | +44.0% | | Total Net Sales | $291,236 | $333,040 | -12.6% | Q4 Net Sales by Geography (in thousands) | Geography | Q4 2023 | Q4 2022 | % Change | | :--- | :--- | :--- | :--- | | United States | $197,368 | $240,647 | -18.0% | | Europe | $78,138 | $61,869 | +26.3% | | Other International | $15,730 | $30,524 | -48.5% | | Total Net Sales | $291,236 | $333,040 | -12.6% | Balance Sheet Highlights As of December 31, 2023, Funko significantly improved its balance sheet health by more than halving its inventory to $119.5 million from $246.4 million at the end of 2022. Cash and cash equivalents nearly doubled to $36.5 million, while total debt saw a moderate increase to $273.6 million Balance Sheet Highlights (Year-End, in millions) | Metric | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Cash and cash equivalents | $36.5 | $19.2 | | Inventories | $119.5 | $246.4 | | Total debt | $273.6 | $245.8 | - Inventory levels were substantially lowered to $119 million at year-end 2023, down from $246 million at the end of 2022 and $162 million at the end of Q3 2023[7] 2024 Outlook and Guidance Full Year 2024 Outlook For the full year 2024, Funko anticipates net sales to be in the range of $1.047 billion to $1.103 billion. The company projects a significant recovery in profitability, with Adjusted EBITDA expected to be between $65 million and $85 million Full Year 2024 Guidance (in billions/millions) | Metric | Outlook | | :--- | :--- | | Net Sales | $1.047 to $1.103 | | Adjusted EBITDA | $65 to $85 | First Quarter 2024 Guidance For the first quarter of 2024, the company guides for net sales between $214 million and $227 million. It expects an adjusted net loss per share in the range of $0.32 to $0.24 and Adjusted EBITDA between $0 million and $5 million Q1 2024 Guidance (in millions, except per share) | Metric | Outlook | | :--- | :--- | | Net Sales | $214 to $227 | | Gross Margin % | ~37% | | SG&A Expense | $87 to $88 | | Adjusted Net Loss | ($17) to ($13) | | Adjusted Net Loss per Share | ($0.32) to ($0.24) | | Adjusted EBITDA | $0 to $5 | Financial Statements Condensed Consolidated Statements of Operations For the full year 2023, Funko reported net sales of $1.1 billion and a net loss attributable to the company of $154.1 million, or ($3.19) per share. This compares to net sales of $1.3 billion and a net loss of $8.0 million, or ($0.18) per share, in 2022. The increased loss was driven by lower sales, non-recurring charges, and higher interest expense Annual Income Statement Highlights (in thousands) | Metric | FY 2023 | FY 2022 | | :--- | :--- | :--- | | Net sales | $1,096,086 | $1,322,706 | | (Loss) income from operations | ($103,827) | ($11,920) | | Net (loss) attributable to Funko, Inc. | ($154,079) | ($8,035) | | Diluted (Loss) per share | ($3.19) | ($0.18) | Condensed Consolidated Balance Sheets The company's balance sheet at year-end 2023 showed total assets of $804.6 million, down from $1.09 billion in 2022, largely due to a significant reduction in inventory from $246.4 million to $119.5 million. Total liabilities stood at $566.6 million, while total stockholders' equity decreased to $238.0 million from $389.7 million Year-End Balance Sheet Highlights (in thousands) | Metric | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Cash and cash equivalents | $36,453 | $19,200 | | Inventory, net | $119,458 | $246,429 | | Total assets | $804,645 | $1,091,145 | | Total current liabilities | $358,832 | $361,397 | | Total stockholders' equity | $238,040 | $389,689 | Condensed Consolidated Statements of Cash Flows In 2023, Funko generated $30.9 million in cash from operating activities, a significant improvement from the $40.1 million used in 2022, primarily driven by a $122.5 million positive change from inventory reduction. Cash used in investing was $39.8 million, and cash provided by financing was $25.6 million. The company ended the year with a cash balance of $36.5 million Annual Cash Flow Summary (in thousands) | Metric | Year Ended Dec 31, 2023 | Year Ended Dec 31, 2022 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $30,935 | ($40,134) | | Net cash used in investing activities | ($39,796) | ($78,065) | | Net cash provided by financing activities | $25,596 | $54,639 | | Net change in cash and cash equivalents | $17,253 | ($64,357) | | Cash and cash equivalents at end of period | $36,453 | $19,200 | Non-GAAP Reconciliations Reconciliation to Adjusted Net Income (Loss) For the full year 2023, Funko's GAAP net loss of $154.1 million was adjusted to a non-GAAP adjusted net loss of $45.4 million. Significant adjustments included a $100.2 million gain from a tax receivable agreement liability adjustment, a $30.3 million inventory write-down, and a $147.6 million income tax expense adjustment which includes a large valuation allowance on deferred tax assets FY 2023 Reconciliation to Adjusted Net Loss (in thousands) | Description | Amount | | :--- | :--- | | Net loss attributable to Funko, Inc. (GAAP) | ($154,079) | | Tax receivable agreement liability adjustment | ($100,223) | | Inventory write-down | $30,338 | | One-time disposal costs (inventory) | $8,687 | | Acquisition costs and other expenses | $14,241 | | Severance, relocation and related costs | $6,486 | | Income tax expense adjustment | $147,630 | | Adjusted net loss (Non-GAAP) | ($45,397) | Reconciliation to Adjusted EBITDA The company's full-year 2023 Adjusted EBITDA was $27.2 million, a sharp decline from $97.4 million in 2022. The calculation starts with a GAAP net loss of $164.4 million and adds back interest, taxes, D&A, and other non-recurring or non-cash items. Key add-backs for 2023 included D&A ($59.8 million), inventory write-downs and disposal costs (totaling $39.0 million), and equity-based compensation ($10.5 million), while a large gain on the tax receivable agreement liability ($100.2 million) was subtracted FY 2023 Reconciliation to Adjusted EBITDA (in thousands) | Description | Amount | | :--- | :--- | | Net loss (GAAP) | ($164,438) | | Interest expense, net | $27,970 | | Income tax expense | $132,497 | | Depreciation and amortization | $59,763 | | EBITDA | $55,792 | | Adjustments (net) | ($28,589) | | Adjusted EBITDA (Non-GAAP) | $27,203 | - Major adjustments to derive Adjusted EBITDA included adding back inventory write-downs ($30.3 million) and one-time disposal costs ($8.7 million), and subtracting a gain on the tax receivable agreement liability adjustment ($100.2 million)[27][28]