Everett, Washington-based pop-culture products manufacturer Funko, Inc. (FNKO 8.93%) reported second-quarter 2018 earnings on Aug. 9, revealing an extremely healthy top line. Funko posted a year-over-year revenue increase of 32% to $138.7 million, on the strength of a 26% increase in active properties and an improvement in net sales per active property of 5%. "Properties" refers to intellectual property licenses of movies, video games, TV shows, and other pop-culture content, from which Funko creates physical products, such as its "Pop!" vinyl figurines sold in stores.
The company's pop-culture niche poses perhaps the single biggest stumbling block potential investors may encounter when researching this company. After all, Funko profits from what's trending in pop culture, which, on the face of things, seems a rather mercurial method for building consistent profits.
For example, the company's 10 top-performing properties in the second quarter included the 2018 movie blockbuster Avengers: Infinity War, and Netflix's Stranger Things series, which premiered in 2016 and is currently in production on its third season. Recent acquisitions of Pokemon and Fortnite licenses give you a sense of just how firmly Funko's corporate thumb is pressed against the pulse of up-to-the minute global fandom.
Display at Funko headquarters in Everett, Washington. Image source: Funko, Inc.
The company actually celebrates the rapidity -- and evanescence -- of consumer interests, which it continually navigates. On Funko's earnings conference call last week, CEO Brian Mariotti noted that in the second quarter, nearly half of Funko's 20 top-performing properties weren't in the group during the second quarter of 2017; moreover, some of the properties didn't even exist last year.
Yet Funko is extremely careful to avoid over-investment in a single property, no matter how hot popular demand might be. Mariotti proceeded to cite some other counterbalancing figures during the call. During the last three months, no single property accounted for more than 6% of Funko's revenue, and 45% of revenue was tied to evergreen properties, defined as properties that aren't based on a current content or media anchor (i.e., video game, movie, or TV show).
Below, Mariotti elaborates on both the nature of demand for products derived from pop culture, and the company's purposeful approach, which helps it avoid getting singed by revenue concentrations:
Our platform allows us to continually put out new products based on the steady stream of content. Think of it as an indexed fund of popular culture and entertainment. We don't have to be the one coming up with the hit ideas, and although we don't bet heavily on just one or two, we believe that based on our expertise, we can better predict what hot properties will be.
The mix of evergreen and trending properties makes it easier for prospective shareholders to absorb the idea that several of today's top 20 properties weren't here this time last year -- and won't be at the forefront of properties propelling revenue when the comparable quarter rolls around next year.
With the rise of social media, it's apparent even to pop-culture laypersons like myself that something is always trending. Funko doesn't really pick favorites so much as it rides favorites anointed by fans for as long as its core economics allow, while never ceasing to extend its properties portfolio. In the second quarter, revenue was spread across 510 active properties, an increase of 26% over the 404 active properties in the prior-year quarter.
A collectibles component to Funko's products also ensures consistent consumer interest. The company skillfully exploits this by releasing limited editions of various properties twice yearly at the massive annual New York and San Diego Comic Con conventions.
Funko's executives like to emphasize that Funko is typically among the first of potential licensees to approach intellectual property holders of new content. And certainly, the ability to judge early on what specific content might enjoy viral and sustained popularity is a competitive advantage.
The company's distribution prowess through partnerships with retail giants such as Target and Walmart make it a logical choice for owners of pop-culture content seeking to open new revenue streams through product licensing. The implicit endorsement of long-term clients like Disney and Netflix, among many others, also doesn't hurt.
Though the company dominates its niche and maintains balance in its top line, its path to value creation isn't unchecked. Understanding Funko's diversified approach to revenue should be balanced with perspective on one of its chief limitations, which we'll explore in the second article of this two-part series.
