Liberty Media 4th Quarter and Yearly Financial results (Update)

Chase Cary Losing money with F1

UPDATE Annual results published by Liberty Media showed that payments to F1 teams "slid for the second year in a row" in '18 while the sport's revenues and operating loss grew. Total payments to the 10 teams fell to $913M from $919M in '17 and $966M in '16. Although the Formula One Group reported an increase in annual revenues to $1.827B, up $44M from a previous $1.783B, the operating loss grew from $37M to $68M REUTERS.

The news comes as F1 and the teams "continue what are likely to be increasingly complex negotiations" over sporting rules and commercial arrangements for '21 and beyond. Liberty said that advertising and sponsorship income fell in '18 AUTOSPORT.

02/28/19 From Liberty Media's latest financial report as it relates to F1:

Highlights

• 2018 season audience figures increased across TV and digital platforms for second year in a row
  • TV viewers across all F1 programming up 10% to 490 million
  • Fastest growing major sports brand on social media for second straight year, with social media followers up 54% to 18.5 million

• Aggregate attendance at races grew 8% to 4.1 million in 2018
  • Average attendance per race weekend increased 2.7% to approximately 195,000

The Details (Losses Widen to $110M in 2018)

The following table provides the financial results attributed to the Formula One Group for the fourth quarter and full year 2018. Approximately $15 million and $34 million of corporate level selling, general and administrative expense (including stock-based compensation expense) was allocated to the Formula One Group in the fourth quarter and full year 2018, respectively.

“We have made significant investments in the business over the last two years which are showing results through increased fan engagement across race attendance and all media platforms. This provides tremendous momentum as we enter 2019," said Chase Carey, Formula 1 Chairman and CEO. “During the off-season to date, we extended the race contract in Azerbaijan, renewed a broadcast agreement with Sky Deutschland, and signed up additional sponsors, among other things. Our F1 TV platform has added exclusive content to the platform, with live pre-season testing followed by a daily review show, and a new F1 produced documentary on Michael Schumacher. Further regarding content, we are excited for the launch of the F1 Netflixseries ‘Formula 1: Drive to Survive’ on March 8th."

Liberty completed the acquisition of F1 on January 23, 2017. For comparison and discussion purposes, the pro forma results of F1 presented below include results for the twelve months ended December 31, 2017, inclusive of purchase accounting adjustments, as if the acquisition of F1 occurred on January 1, 2016. The financial information below is presented for illustrative purposes only and does not purport to represent the actual results of F1 had the business combination occurred on January 1, 2016, or to project the results of operations of Liberty for any future periods.

Pro Forma F1 Operating Results

Primary F1 revenue represents the majority of F1’s revenue and is derived from (i) race promotion fees, (ii) broadcasting fees and (iii) advertising and sponsorship fees. For the year ended December 31, 2018, these revenue streams comprised 33.8%, 33.1% and 14.6%, respectively, of total F1 revenue. F1 held 5 races in the fourth quarter of 2018 compared to 6 races in the fourth quarter of 2017, and 21 races in the 2018 season compared to 20 in the 2017 season.

Primary F1 revenue decreased in the fourth quarter primarily due to one less event being held in the fourth quarter of 2018 compared to 2017. Broadcast revenue decreased due to the calendar change, as approximately 5/21 of the full year fees were recognized in the fourth quarter of 2018 compared to 6/20 in the prior year. Advertising and sponsorship revenue in the fourth quarter benefited modestly from the adoption of the new revenue recognition accounting standard (ASC 606) on recognizing fees from F1’s Global Partner and Official Supplier contracts. These fee elements were previously recognized pro-rata with the race calendar, but certain elements are now being recognized evenly over the calendar year and others over a smaller number of specific events. While this led to quarter by quarter variation against prior year recognition, the change was neutral on a full calendar year basis.

For the full year 2018, Primary F1 revenue was essentially flat. Race promotion revenue increased modestly primarily due to contractual increases in race promotion fees, as well as a contract amendment for one event that provided for an increase in promotion revenue which was fully offset by a reduction in advertising revenue related to that event. This contract amendment was neutral for total Primary F1 revenue. In addition, race promotion revenue in 2018 was impacted by the calendar variance, with the non-occurrence of the Malaysian Grand Prix in 2018 not fully offset by the return of two European races in France and Germany. Broadcast revenue was essentially flat for the full year 2018 as contractual rate increases and favorable foreign currency movements were offset by the early termination of one contract with a failing broadcast rights broker. Advertising and sponsorship revenue decreased for the full year 2018. Revenue from new sponsorship agreements and growth in certain contractual agreements did not fully offset the aforementioned contract amendment that saw a reduction in advertising revenue fully offset by an equal increase in promotion revenue (which was neutral to primary revenue).

Other F1 revenue increased in the fourth quarter and full year 2018, primarily due to higher logistics revenue, higher digital media and TV production related revenue, increased revenue from various fan engagement activities and higher spare part sales for the F2 and GP3 support series. From 2019 onward, under a long term agreement with the FIA, F1 will operate a new official F3 support series in place of GP3.

Operating loss increased in the fourth quarter and full year 2018. Adjusted OIBDA decreased in the fourth quarter primarily due to calendar variances and decreased for the full year 2018 primarily due to increased costs as the business continued to invest. Cost of F1 revenue increased primarily due to logistics and travel expense, higher costs associated with providing the chassis and component parts to F2 and GP3 teams, digital media development and spend on fan engagement, which more than offset reduced team payments. Selling, general and administrative expense increased primarily as a result of increased marketing and research costs and increased bad debt expense due to payments issues with two commercial partners.

F1’s total net debt to covenant OIBDA ratio, as defined in F1’s credit facilities for covenant calculations, was approximately 7.35x as of December 31, 2018, as compared to a maximum allowable leverage ratio of 8.75x. Income from 21 races was captured in the trailing twelve months ended December 31, 2018 versus 22 races for the period ended September 30, 2018, and the leverage ratio increased accordingly.

The businesses and assets attributed to the Formula One Group consist of Liberty Media’s subsidiary F1, its interest in Live Nation, minority equity investments and an intergroup interest in the Braves Group. There are approximately 9.1 million notional shares of the Braves Group underlying the Formula One Group’s 15.1% intergroup interest as of January 31, 2019.