Good afternoon, and welcome to Funko's Conference Call to discuss Financial Results for the Third Quarter 2019. 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 conference call is being recorded. On the call today from management are Brian Mariotti, Chief Executive Officer; Andrew Perlmutter, President; and Jennifer Fall Jung, Chief Financial Officer.

I will now turn the call over to Andrew Harless, Manager of Investor Relations to get started. Please proceed..

Thank you, and good afternoon. A press release covering the company's third 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; new product 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 Factors section in our Form 10-Q for the quarter ended September 30, 2019, 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 obligation 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 margins, adjusted net income, adjusted earnings per diluted share and net debt, which we believe may be important to investors to assess our operating performance.

Reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures are included in 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 consult to 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 Happy Halloween, everyone. Funko once again delivered another quarter of strong growth and financial performance. We continue to execute against our plan and invest in the long-term future of Funko.

On today's call, I would first like to review our Q3 results and then provide an update on our key growth initiatives, followed by a review of some of the strategic investments we are making in the business that we believe will set up Funko for continued long-term success.

For the quarter, our net sales were $223 million, up 26% over Q3 of last year, driven by broad-based growth domestically and internationally, as well as across Figures and Other products. Sales in the U.S. rose 21% while the rest of the world grew 37%, primarily driven by continued strength in Europe.

Our Figures business grew 24% in the quarter, driven by continued pop momentum as well as expanded selection of advent calendars.

And sales of our Other products grew 33%, driven by growth of apparel, bags and wallets, which includes our allowance by brand as well as the introduction of board games as we made our initial shipment of our Funkoverse game in the quarter.

Additionally, gross margins came in at 38.3%, roughly in line with last year, and we remain on track to achieve full year gross margins of 37.5%. The strong growth in sales continues to be driven by multiple factors, more properties, higher sales per property, more stores and more markets and continued expansion of our product categories.

What we saw in the quarter was what we expected at the outset of the year, an increase in sales per property driven by the strong content slate for the year. However, even is this down year for content releases, we are still diversifying our license base and reaching new fan bases around the world.

Let's turn now to our key growth initiatives, we continue to make significant progress on our growth strategies, which include growing our license and property base, expanding our products based on our own IP, introducing new product lines and categories, expanding in new and existing retailers and further penetration in international market.

We remain very excited about the growing array of opportunities across all of our growth avenues. Funko has over 1,100 licenses with over 200 content providers spending the entire spectrum of pop culture, including movies, sports, television, video games, anime and more.

Funko is built on the principle that everyone is a fan of something, and Funko has something for every fan. We are increasingly being approached by brand, studios and notable icons to engage with their fan base and connect them with our array of products.

Our licensors realize that we can keep their content current and past content relevant and top of mind. This is becoming even more important giving the proliferation of content that continues to occur across the world of pop culture. Funko remains uniquely positioned between licensors and fans to benefit from the secular trend.

We are continuing to grow our license base and find fresh and enticing ways to engage with fan bases around the world. One of our key strategies continues to be finding new and innovative ways to broaden our product offering as we expand the avenues in which fan can connect with pop culture.

As I mentioned earlier, within the quarter we began shipping Funkoverse, which is our first foray in the board games. Funkoverse is a great example of us creating new and exciting ways for fans to connect their favorite characters and properties, and combining our own IP with licensed content.

While it's still at early days, we are very excited about the initial reaction that we have received from retailers and from our consumers. We plan to continue to invest and grow the board game business in 2020 with the release of additional Funkoverse offerings as well as licensed and non-licensed games.

Additionally, as we have mentioned before, we are in the process of developing multiple toy lines based on our own IP that are intended to be sold in the traditional toy aisle. We believe this will provide Funko an opportunity to capture new space at retailers, while also attracting a younger demographic.

We look forward to providing more information regarding these exciting product launches in the coming quarters. While we're looking to broaden our product offerings, there is still tremendous strength and growth potential within our own existing product line.

For example, sales of allowance by products have grown 70% year-to-date and are on pace by the end of this year to be three times the size when we bought the company a little over two years ago. The growth at Loungefly showcases how we can leverage our diversified license base and our retail base to grow adjacent product categories.

Additionally, we continue to see sustained growth and strength of the Pop! brand. Pop! is now in its 10th year and posted double-digit growth in the quarter and was up over 30% year-to-date.

The strength of the Funko and Pop! brands are now leading to licensing opportunities for us as top studios and producers seek to leverage the look and feel of our IP to attract global audiences.

This includes our partnership with Microsoft on our Gears POP!, our partnership with our Universal Games on Funko Pop! Blitz, and now the recent joint announcement that Warner Brothers has taken an option on making a Pop! movie.

Pop! is an entertainment platform that encompasses digital and physical goods through figures, apparel, accessories, video game, short-form videos, board games and potentially a full-length movie. We wouldn't be able to build such a dynamic platform without our highly engaged and ever-growing fan base.

In March of this year, we launched our new Funko app that allows users to track their Funko collection, create wish list and browse our catalog. To date, our app has had over 4.5 million downloads, 30 million items added to collections in wish list and over 100 million searches.

Additionally in Q3, we launched our first ever loyalty program the Funko Fan Club, which is designed to reward our most engaged users on our platform. The program will also give us a better view into who are consumers are and their affinity.

We continue to reach new fan bases across the world and engage with them in in-person experiences, Comic-Con and Toy Fair, as well as digitally through our app, short-form videos, blogs, podcast and social media.

We have millions of followers on social media globally, and we are seeing an increase in our international following especially in key markets such as Mexico, Brazil, U.K., Canada and India. We remain dedicated to engaging with our fans and connecting them to their favorite characters and fandoms.

Another major factor of our growth strategy continues to be broadening our base of retailers domestically and around the world. Our partnerships with our diverse set of retailers is one of our key strength.

Domestically, we continue to grow within our existing channels by expanding shelf space and finding new placement opportunities with our retailer stores. Our U.S. mass market channel grew over 65% in the quarter driven by Pop! Vinyl and the expansion of additional product categories such as apparel, games, bags and wallets.

Additionally, we continue to drive traffic in stores and online. Our worldwide sales to third-party e-commerce retailers increased over 50% in the quarter. Internationally, we continue to expand our distribution and bring on new retailers. One of the major drivers of international growth continues to be the European region.

Our growth in Europe was over 60% in the quarter and is up 40% year-to-date. For example, during the quarter, we successfully onboarded Foot Locker Europe, now giving us an international presence in their stores. Also, we expanded into new retailers in Latin America, adding over 900 doors in the region for Q3 alone.

Additionally, we continue to see growth and adoption within our top international retailers, such as Tesco, Primark, Carrefour, Muller and the entertainer. We believe there is tremendous opportunity to grow internationally given the fact that the content is proliferating and resonating on a global basis.

Now I'd like to briefly touch on some of our strategic investments we are making in the business. As we indicated on our last call, we've been taking full advantage of our strong sales and profit momentum to make investments we believe will pay off in the future. These include the development of several new innovative and disruptive toy line.

The consolidation and streamlining of our operations in the U.K., and the build-out of brand experiences, which includes our new retail store in Hollywood, which is scheduled to open next month.

These investments resulted in the shift in spending into the second half of the year and we are pleased that these investments are proceeding as planned and look forward to reaping the rewards in the future. Furthermore, I'd like to expand a bit on our plans for our U.K. operation.

As we discussed earlier in the year, we are consolidating our facilities in the U.K. from several locations into just one. Given the high growth and the demand we've seen in the region, we believe that centralizing our distribution will set us up for long-term success. By doing this, it will reduce our cost to fulfill and increase our speed to market.

While the transition may cause some disruption, we are working diligently to ensure it is as seamless as possible. This was an initiative that we originally earmarked for 2020, but we were able to accelerate it into 2019. This causes more of the cost to be recognized this year, but will enable us to realize the benefits sooner.

So in summary, we had another quarter of strong growth in sales and profits, driven by a broadening set of factors we believe will continue to produce growth over the long-term.

We're expanding our revenue base in terms of products, licenses, customers and territories, and we're making the investments we believe are needed to produce continued strong growth for years to come. As a reminder, this is Jen's first quarterly earnings call with us, and I couldn't be more thrilled to have her on board.

She brings us tremendous experience that we believe is going to help us build and execute on our strategic vision. Before I turn the call over to Jen, let me take the opportunity to thank all of our team members who contributed to our strong results as well as our retail and licensing partners.

Most of all thanks to you -- thanks to you our fans, whose passion for entertainment content and Funko is the number one reason we exist and why we succeed.

Jen?.

Thanks, Brian, and good afternoon, everyone. I'm very excited to be here today and have joined such an amazing company and management team. I'm looking forward to helping Funko continue to execute on its initiatives and driving profitable growth.

For today's call, I will first discuss our Q3 financial results; following that, I will discuss our fiscal year 2019 outlook.

For the third quarter of 2019, our net sales increased 26% to $223.3 million, primarily driven by the continued expansion of products and properties in our portfolio, broader distribution into new territories and customers and greater sales per property.

Additionally, within the quarter, approximately $3 million of FOB shipments were accelerated into September that were originally scheduled for early October, as we had an opportunity to speed up production on certain products as our customers wanted the products more quickly.

In the quarter, the number of active properties increased 13% to 627, and net sales per active property were $356,000, which was up 11% year-over-year. In the first nine months of 2019, we sold against 737 active properties, 23% more than a year ago and our sales per active property were $789,000, up 5% over last year.

As a reminder, we expect net sales per active property to fluctuate from time-to-time, depending contemplate in a given period. Over the long-term, we believe it is a good sign to see more sales per property and growth in the number of properties.

As it was in the third quarter of last year, the top performing property in the quarter was Harry Potter, an evergreen property, which accounted for approximately 9% of our total sales.

Harry Potter was boosted by the diversity of product categories that we sold against the property in the quarter, including Pop! figures, advent calendars, board games, apparel, bags, wallet, accessories and plush.

Looking at the total evergreen category, the diversity of products continue to strengthen Pop! Vinyl and increased the number of properties drove evergreen properties as a whole to be 58% of total sales in Q3. As a reminder, evergreen properties are those that are not tied to current releases.

In the third quarter, our top customer accounted for less than 9% of our total sales and no other customer accounted for more than 7%, which highlights our retail diversification. On a geographical basis, in the third quarter, net sales in the United States increased 21% to $147.3 million, and net sales internationally increased 37% to $76 million.

Furthermore, we continue to see strength in Europe and Asia in the quarter as each region was up more than 60% year-over-year. Asia is a relatively new market for us. While the growth rates are high, it only represents a small percentage of the overall business.

On a product category basis, Q3 net sales of figures increased over 24% to $176.5 million and net sales of other products, such as bags, accessories, apparel, games and homewares increased 33% to $46.8 million. Gross margin, which excludes depreciation and amortization decreased by 10 basis points from Q3 of last year to 38.3%.

The slight decrease in gross margin compared to last year was primarily driven by higher duties related to our Loungefly products, partially offset by lower royalty and other shipping and freight costs as a percentage of net sales.

Additionally, while we continue to see product costs continue to decline, it was offset in Q3 by a mix shift towards lower margin products. Through the first nine months of 2019, our gross margin was 37.8% in line with the level we reported over the same period last year.

Additionally, we continue to make progress on reducing the amount of customer noncompliance charge back as we build out our operation team and refine our processes. As we had anticipated and communicated on our last earnings call, we shifted some of our investment spending to the second half of the year.

As a result, selling, general and administrative expenses in Q3 increased 27% to $52.4 million. This amounted to 23.5% of Q3 net sales and represented a 20 basis point increase compared to last year.

The increase in SG&A is mainly driven by $5 million in personnel costs as we continue to invest in our global planning operations and G&A team as well as the inclusion of Funko Games, which we acquired in February.

And $4.5 million in written facility warehouse and office support and administrative expenses related to the continued expansion of our offices and warehouse facilities, including the addition of our Hollywood retail stores.

Additionally, within the quarter, we recognized $3.8 million in SG&A expense that was related to our investigation in regards to the customs matter at Loungefly, the secondary offering in September and initial severance and relocation costs related to the consolidation of our UK facility.

Depreciation and amortization expense in Q3 increased 5% from the prior year to $10.5 million. This represents 4.7% of Q3 net sales and is a 90 basis point improvement as a percentage of sales over the prior year.

The combination of higher revenues and lower operating costs as a percent of sales, offset by the slightly lower gross margins resulted in operating income, increasing 36% to $22.6 million in the quarter. Operating income represented 10.1% of Q3 net sales and is a 70 basis point improvement over the prior year.

Net interest expense decreased 37% to $3.6 million in Q3 due to reduced debt levels and lowered rates following our debt refinancing in Q4 of last year. Additionally, during the third quarter, we successfully refinanced our credit facilities to lower our interest rate by 75 basis points, as well as extend the maturity of the facility by one year.

As a result of these factors, adjusted net income increased by $6.3 million or 46% to $19.9 million compared to $13.6 million in Q3 2018. Adjusted earnings per diluted share was up 41% to $0.38 compared to $0.27 in Q3 2018. And adjusted EBITDA increased 20% to $40.6 million compared to $33.9 million in Q3 of 2018.

This represents an 18.2% adjusted EBITDA margin, which decreased 100 basis points compared to the third quarter of last year. The reduction in adjusted EBITDA margin is mainly due to our investments in SG&A that I previously outlined.

Looking at the balance sheet, we ended Q3 with net debt of $224.2 million compared to $248.5 million at the end of Q3 2018. Inventory was $94.3 million versus $82.3 million at the end of Q3 2018, which represents an increase of about 15%. Turning now to our 2019 outlook.

As we have previously mentioned, we have decided to shift investment spending into the second half of the year. Considering the fourth quarter specifically, we have pushed marketing spend into the quarter to help support new product launches and brand experiences, which includes our new Hollywood retail store.

Incremental investments and the expansion of our product categories including Funko Games, Loungefly and toys. And as Brian mentioned, we had accelerated the timeline of our plans to consolidate our UK operations, which will increase expenses in the fourth quarter including additional severance and restructuring costs.

These investments will flow through both SG&A and CapEx with most of the benefit being recognized in 2020. While we continue to invest we are maintaining our guidance ranges, we laid out on the second quarter conference call, which are net sales of $840 million to $850 million, representing year-over-year growth of 22% to 24%.

Adjusted EBITDA of $140 million $145 million and adjusted earnings per diluted share of $1.15 to $1.22 which assumes a blended corporate tax rate of 25% and a weighted average diluted share count of 53.5 million shares at the end of the year. With that, I will turn the call over to the operator for questions..

Thank you. At this time, we'll be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Erinn Murphy with Piper Jaffray. Please proceed with your question..

Great. Thanks. Good afternoon. A couple of questions for you all. First, just on the International business, Jennifer, I think you reference that both Europe and APAC were up over 60%, but if -- when I look at the overall international, it's up 37%.

Is there something else going on in Latin America? Or is there something else we're not thinking about from a timing perspective.

Maybe just help us think about the puts and takes there just given the strength of both Europe and Asia?.

I think there is no other real new information that's on the other areas of the business internationally. We just -- Europe is one of our largest regions, and it's important to call out the growth that we've been seeing in that area..

Can you just explain why the International segment is just up 37%, though? I guess that's what I'm not understanding..

Yes.

She other regions were not as high as 60%, so if they came in below the 37%, it averages out to 37%?.

Okay, fair enough.

And then maybe just help us along the same lines of the international operations with the consolidation in the UK that you're seeing? Can you quantify what the incremental shift of spend was into the back half that maybe wasn't in the guide before? And then can you walk us through what the timeline is in terms of they go-live schedule for that consolidation?.

Yes. So, in Q3, we recognized about $180,000 of expense, and you can find that in 8-K as well. There are incremental expenses that we will see in Q4 and we haven't quantified those specifically yet, but they are pull forward, most of it's a pull forward from Q1 2020..

Okay. And then maybe Brian for you kind of big picture question, one of the questions we get a lot from clients is just helping kind of shape the sustainability of the revenue growth as we go into next year, which I recognize the movie slate. Their contemplate isn't as strong as this year.

Can you just help us think about some of the drivers that you're excited about there is Pokemon, Funkoverse? I think you could talk about how that's trending thus far and just help us think about some of the offsets in years and the diversification you have in years or maybe that contemplate isn't as strong as in other years?.

Yes, I still think it's on par with maybe 2018, 2016, but 2000 -- the quarter end, we just ended in Q3 of 2019 kind of shows you with 58% evergreen content. What 2020 is going to look like? It's going to look like a quarter that's monetized with a lot of diverse evergreen properties.

And I think we have over 700 diverse properties again in Q3, up from like low 600s in Q2. That's how we're going to make our money next year. It's going to be a lot of diversity of licenses and hitting those fan bases, where we know that people have fandom. So, yes, but we also have a very large slate of Pokemon laid out for us for 2020.

There's going to be some international distribution that's going to more than likely happen and we haven't had that at all.

And Dragon Ball Z, another one of our large performers is opened up the categories for us to be able to monetize even more, super excited about The Eternals movie from Marvel, and obviously the new Wonder Woman sequel and the Harlequin sequel. And then obviously Disney+.

We think there is a robust content slate earmarked for 2020, and even more in 2021. So it's going to be a lot of what Funko has done for the last six years, seven years, which has really monetized that evergreen content. And then stuff that's coming in that people are getting excited about, a full year of Rick and Morty, things like that.

It's going to be diverse in all over the place, but that's what we've always excelled at..

Great, thank you. And then just last one, just on Funkoverse, can you just share kind of how retailers are -- have been receiving it and kind of what your outlook is for Funkoverse for the holiday? Thank you..

Yes, obviously, it's early days. We were really excited about going to Gen Con which is kind of the Comic-Con for game players. We got that in front of a lot of game reviewers, and the reviews for the game were phenomenal. So we think we nailed game play and people treated as a serious mid-level strategy game.

On top of that obviously just early stages in sell-through, but so far retailers are happy. Majority of games really start to pump right around Black Friday, so there is a significant bump that we expect to see Black Friday on.

But we're excited, but we also don't want to make light of the fact that Funko Games currently at one of the two mass retailers has 28 games they created sitting on the shelves. And so this is a game company that we're excited about creating other license games, they have nothing to do with Funko IP, like Pop! and then also non-licensed games.

So this is just the beginning of, we think, a really good partnership with that acquisition of Forrest-Pruzan, and we expect Funkoverse to be obviously very well represented in the future. We're excited about the start, but this is just the beginning of much more coming out of that part of our business and we couldn't be any more excited for that..

Great, all the best. Thank you..

Our next question comes from Stephanie Wissink with Jefferies. Please proceed with your question..

Thanks. Good afternoon, everyone.

Brian, we'd love to hear your top 10 if you're willing to give them to us, or even just top five?.

Endgame, and then we had F9, followed by Classic Star Wars, Nightmare Before Christmas, Frozen 2 and Dragon Ball Z. So again a different top 10, every quarter is a little bit different.

Potter driven a lot by Funkoverse continued expansion of the Loungefly softlines brand using -- monetizing Potter, and Harry Potter advent calendars, which is a big category for us. And we sold out probably way too quickly in 2018, learned a little less and produced more for Series 2 of the Harry Potter advent calendar.

But you see heavy emphasis still on evergreen content and which is -- I think bodes well for 2020 for us. But diverse and yet still seeing solid performance from Fortnite. This would be, I think, a one, two twos and a three for the four quarters we've had for Fortnite. So we're excited to see that still continuing to hold steady..

That's great. Actually just a follow-up to Erinn's earlier question. We get the same question around sustainability and I'm wondering if Harry Potter is the best illustration within your brand property mix of where you have diversify the product assortment, the channel mix, the reach, the globalization.

Is that a good brand for us to use as a case study?.

I do. I would certainly add number two and number four for the quarter, which is DC Comics and Marvel. We discontinued to monetize those. Every year, we've got a Star Wars movie come out, we've sold almost as much classic if sometimes not more classic than we did for the new Star Wars movie. So that continues to be monetized.

Nightmare before Christmas like is an annual gift that keeps giving. Every year, monetized it during -- third and fourth quarter. There are a lot of brands out there that continue to perform year-after-year in a myriad of product categories on a global basis.

So we keep saying pop culture is not going away, content is being created fast and furious, and obviously a light year next year for like Marvel and Star Wars, but then if you look at what Marvel is looking like in 2021, I think they got four slated movies and the re-slated Disney+ TV shows. So it's going to be a cornucopia of Marvel content in 2021.

So I agree, but all these evergreen properties continue to be -- able to be monetized in some of the most unique ways on a global basis..

Okay.

Final one just housekeeping for us was, I think you said math was up, and I didn't catch it 50% or 60%?.

Yes. 65%..

65%? Maybe share with us a little bit about what's happening there? Are you gaining space, gaining new categories within the box, talk a little bit about the channel?.

Yes, I think we said early days when we went to two-and-a-half quarters of Walmart's non-ordering as they transition from Toys to the entertainment section. There is a blueprint in place, and it was Target. They have been doing this for years and growing in categories and growing in space.

We're seeing a little bit of that working right now in Walmart specifically when they first started, they didn't want anything in soft lines. If you go into a Walmart right now, they are end caps that have our Nightmare Before Christmas that have both softlines from Loungefly and hardlines as well.

So we are seeing category expansion, we're seeing out of aisle pallet trains and end caps that we weren't necessarily thinking we were going to get, when we first started that migration over to entertainment. So it is working. I will preface the fact that still mass is less than 15% of our overall business, but it is doing very, very well.

We're off to a great start and I think we'd say we'd had a very successful first year in the new section at Walmart. And so we're excited about both those businesses Walmart and Target growing and continuing to expand shelf space..

Thank you. Have a great holiday..

Thank you very much..

Our next question is from Alex Perry, Bank of America Merrill Lynch. Please proceed with your question..

Well, thanks for taking my question. Just first on tariffs, can you just walk us through that a little bit and remind us what percent of your U.S.

imported goods there from China in 2019? Where you expect that to be in 2020? Strategies to mitigate the tariff impact and any potential 4Q impacted as it relates to tariffs?.

Yes. Great question, Alex. So we'll kind of restate what we've said going to last couple of years, which is right now 70% of our products is for hard lines. Funko products are produced outside of China currently, which obviously gives us a competitive advantage on like companies.

The 30% is distributed, rest of the world, including less than 15% getting back into the United States.

So we have got contingency plans upon contingency plans if and when the tariffs do go into place on December 15, including reducing cost of goods in China, moving products outside of China, potentially raising very, very light -- small raises on cost of goods to our retail partners, all of which are levers we can pull if the tariffs are truly enacted on December 15.

So I would tell you we're prepared, we've gone on record and said we thought that if the tariffs do go into place, it's a one quarter headwind for us and then we will make the adjustments and we will continue to rock and roll.

But I think we're in really, really good position to overcome whatever is put in front of us and we haven't seen any kind of retailer hesitancy on ordering, because of potentially upcoming tariffs..

Yes. And I'll just add to that, in Q4, we didn't see any shift in FOB given that the tariffs are as of now set to go in December 15. So, so far so good on our part..

Okay. That's super helpful. And then I was just hoping, maybe you could talk to us about some of the sell-through and sell-in dynamics, I think last quarter you mentioned that both sell-through and sell-in were up double-digit. Just wondering if you could give us some color on the dynamics for this quarter? Thanks..

Yes. This is Jen, obviously.

As the companies continue to grow, what we see as we've kind of taken a look at sell-through is that the data that we're getting from our retailers is now representing about a third of our business, where I think historically when the company was in a much different place much more domestic place not as international, it was a higher percentage.

So as we talk about sell-through go forward, a-third really probably isn't a great measure to put out there in terms of giving directional help for you guys. So yes, I think we're going to see if we can try to get more retailers report into this on this metrics, so that we feel comfortable you talking about it going forward..

Great, that's super helpful. Best of luck..

Thank you..

Thanks..

Our next question is from Drew Crum with Stifel. Please proceed with your question..

Okay, thanks. Hey, guys, good afternoon. So you talked about or addressed why you're not raising the adjusted EBITDA guidance for the year.

Could you comment on revenue in that same vein and talk about some of the puts and takes you have in the fourth quarter? And then separately, just given the activity in the UK, what are the cost savings associated with restructuring and consolidation of facilities we expect to see next year? Thanks..

Okay. I'll start with the guidance question. So coming out of Q2, the company re-guided to $840 million to $850 million on an annualized basis. And as you know, we do give annual guidance. We feel really good that to date, we've grown 28%, and for Q3 we're at 26%.

The range within that guidance is a little over 1%, so it's already a pretty tight spread there. As we look forward though as well, Q4 we are coming up against a very high Q4 last year. It was approaching 38% growth rate. And even with our current guidance, Q4 will be our biggest quarter ever as a company.

So we're feeling really good about where we are right now. And overall, you have to remember that a lot of Frozen and Star Wars shipment did come into Q3 and we did have that $3 million in FOB that also came into Q3. So although we're very positive on Q4, I think if you look at the two years stack, it's a very healthy build..

Just related to that, would you expect Fortnite to grow year-on-year? I don't recall when you guys began selling that in?.

Yes. The lion share of the basics that we have with Fortnite was right out of the gate and it was early Q4 of last year. It's a massive number. I mean there is no doubt about it. But we are also pleasantly surprised at how it's evolved into a very consistent stable basis, since all that pent-up demand and interest in that product in Q4 of 2018..

Got it. Okay..

Yes, sorry about that. We haven't quantified yet what the cost savings will be. A couple of the reasons that we are consolidating is, one, it's going to streamline our operations, which we think will be great. It's also going to let for capacity as Europe continues to grow and the U.K.

continue to grow, this will be an enabler for the growth there as well. We do anticipate that it will be some cost savings in 2020 per se..

Okay. Okay. Thanks, guys..

Thank you..

Our next question comes from Linda Bolton Weiser with D.A. Davidson. Please proceed with your question..

Yes, hi. Thank you. So, Brian, I believe that you have talked about, when we talk about developing your own content that in about five years, 20% of your revenue will be from your own content.

Can you update us on that progress and how the property is going with Barnes & Noble? And also secondly, can you say in a similar vein, in five years, what percentage of your revenue will be from Toys? Thanks..

Yes. Hi, Linda. Great questions. Yes, I'll clarify it. In appropriate growth, we'd love to have 20%, 25% of our revenue be our own IP. Suddenly, it's certainly a goal to shoot toward and we obviously see a lot of wonderful companies out there like Spin Master, Hasbro, obviously, that did have a lot of their own IP and are monetizing it accordingly.

So it's definitely a goal for our company. And again, we always like to say 150 world-class artists, we want to give them a voice and say what's being created. They have great ideas in their heads. So all of that is funneling into 2020, which is putting out wonderful distinct new toy lines that are going to be merchandize in a very disruptive way.

All of it -- most of those are original IP and we'll begin to see the monetization, although very conservative outlook on what that's going to be. Starting in 2020, this is a slow build, but we're excited. We're excited about the retailers support we've already garnered for those lines.

And if I were -- again I think we just want to continue to evolve as a company. Our focus has been continuing to grow what pays the bills, which is the pop culture bucket, but also to continue to create new revenue streams, like the games industry, like Toys, like Loungefly with softlines, they don't rely on Pop! to grow.

And I think we've done a really good job of starting to lay some really fun exciting groundwork into new revenue streams that are going to continue to diversify the company as a whole. So I don't have any kind of percentages of what our business would be for total Toys. I do believe like anything else we develop, we make money on it.

The low cost of development applies the same to Toys as it does to our Pop! Vinyl figures, because we do everything in-house, we do it very, very quick and very well.

So we are going to make money on this, how much is obviously up to the retailers and up to the people buying the products at the retailer stores, but there is tremendous upside there, and we're excited about what that possibly can be. So if we do a good job, we think each and every year, that percentage will increase..

Great, thank you..

You bet..

Our next question comes from Mike King with Goldman Sachs. Please proceed with your question..

Hey. Good afternoon, and thank you for the question. I just have two.

First, given all the expansions into adjacent categories and strategic investments, could you just provide us an update on your long-term margin target for gross margin and EBITDA and what you see as the timeline and path to get there? And then second, just a follow-up on the question about the UK consolidation, if we did see some disruption when will we see that and what do you think the magnitude could be? Thank you very much..

Great. So, yes, margin, great question. I know there's been a lot of talk on previous calls around margin.

I'm not ready to really give out a specific target yet or a timeline, but as I look at the business, I do think there is room for improvement in both adding new revenue streams as Brian was just speaking to in terms of those being actually a positive on the margin, as well as optimizing our existing business.

Inventory and COGS our COGS driven by inventory is the biggest line on the P&L. And as I continue to get up to speed on the business, it is an area that I'll be focused on to make sure that we definitely are optimizing the margin line. And in terms of the UK consolidation, that would primarily be potentially a little bit in Q4 and Q1.

We haven't quantified. Of course, we are -- the team has done an amazing job and the fact that we've been able to actually pull up the timeframe speaks to how well the execution is going on that. So we're feeling fairly good about it right now..

Great, thank you very much..

Ladies and gentlemen, we've reached the end of the question-and-answer session. At this time, I'd like to turn the call back to Brian Mariotti for closing comments..

Thank you for your interest and of Funko. We look forward to seeing some of you guys in Hollywood to visit the new store next week and/or at Toy Fair in New York in February, and speaking to you guys again on the fourth quarter earnings call, if not sooner. So have a happy and safe Halloween. Thank you very much..

This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation..