Liberty Media’s earnings calls are a fascinating study in how to reveal sufficient information about the company’s primary investments – Sirius radio, an audio streaming service; the Atlanta Braves, a US professional baseball team; and, of course, the Formula One Group – to the investor community without over-promising or committing.
If that was impressive, so too was the manner in which incoming F1 CEO Stefano Domenicali dealt with questions from hard-nosed financial analysts during his first official call. He is, of course, experienced in F1 after a successful stint as Ferrari team principal and an old hand in business circles – having doubled Lamborghini’s volumes while CEO – but Wall Street types are another breed entirely.
Having suffered a terrible 2020 Q1 due to Covid – no races were staged during the quarter and only incidental income ($17m) was booked, while costs had been incurred ahead of the cancelled Australian and Bahrain grands prix – the latest numbers ($159m) are on the up, with the bottom line showing a considerable improvement: last year’s $137m loss in Q1 was trimmed to a $33m deficit for the corresponding 2021 period.
True, that still marks a loss, but the trajectory is upwards and encouraging given that only one grand prix was booked during the quarter. Two races, as per pre-Covid, could well have seen black rather than red ink flow, so there are few doubts that scheduled six races – all revenue contributors in some shape or form, including Monaco – Q2 should see F1 back in paper profit. Strip out Turkey, whose race is in doubt, and the ink remains black.
F1 currently holds $1.8bn in cash in reserve which, Maffei said, is earmarked to keep it afloat during tough times: “We’ve had to cancel, for example, Canada and input Turkey in,” he explained, before news broke that Turkey was endangered list due to travel restrictions imposed by the British government.
“We are getting paid for that, but those [amounts] are at way reduced levels compared to what we would get if we had full fans. So we have a fairly large contingency in our own budgeting for the potential that we will not get the kind of revenues that we hope.
“Therefore, that cash is useful,” he said, adding, “But as the year progresses and we get more certainty about promoter revenue, we will look at what we do with that cash.” Prudent management and caution rule the day.
That said, Liberty’s media release states: “Race promotion revenue in the first quarter of 2021 included proceeds from a one-time settlement related to the cancellation of a race originally scheduled to commence in 2020.”
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This revenue would have boosted income, reducing Q1 losses. Which race? Bets are on Vietnam, cancelled last year, then deleted from the 2021 calendar after the promoter was indicted on fraud charges. According to our records the annual fee was $35m plus a 5% escalator through to end-2024, so the settlement could have been anywhere between $35m and $180m. It does, though, mean Hanoi is gone for good…
“As it relates to the settlement, we can’t comment on the specific details, but it did impact our results,” Liberty’s chief financial officer Brian Wendling told analysts of their Q1 results, then added cryptically: “But obviously, when you look at year-over-year results, the fact [is] that we had one race versus zero last year and the proportion of revenue recognition was the material driver of that, but we can’t comment on the specific settlement.”
How is that for an evasive response?
Either way, the markets did not react positively to the overall numbers, with the FWONK share price opening last week at $46.80 before dropping to $44.00 by the close of business on Friday, a 6% slide.
Financial reporting is routine during such calls, with the ‘colour’ – as it is dubbed by Wall Streeters – coming once the numbers have been dispensed with. That’s when the hard questions are asked, when respondents are cagey with replies: They are obviously obliged to be truthful, but the flipside is indiscreet disclosures can play havoc with share prices and potentially spark Securities Exchange Commission investigations.
Although the call related to all three Liberty group companies, around 70% of questions posed during the hour-long call related to F1 and its prospects. Saliently, a question about European football’s (aborted) Super League breakaway debacle and its potential impact on F1 was put to Liberty management.
“We watch Super League with interest because before we were involved with Formula 1, there was certainly the talk [in 2009] of a breakaway in Formula 1, which did not come to pass,” said Greg Maffei, Liberty CEO.
“We feel very confident we understand the breakaway very well, and I think we pretty much eliminated that opportunity or potential at Formula 1,” added Domenicali’s boss, no doubt well aware the sport’s new CEO had played a crucial role in that 2009 breakaway threat as Ferrari team principal.
Maffei’s response is literally true, for by committing to the 2021-25 Concorde Agreement all signatory teams agree not to participate in any series or championship which could reasonably be deemed to be a direct competitor of F1. What he did not, though, reveal is that the agreement contains a clause permitting teams to terminate their obligations provided they give notice by March 1 to leave at the end of that year.
Thus, a breakaway could be staged with sufficient notice period, and thus the veracity of Maffei’s response hinges on the words “pretty much eliminated”, for they are open to interpretation and thus not binding. Don’t kid yourself, Mr Maffei: If the teams are unhappy with any aspects of Liberty’s modus operandi they could break away before 2025.
Domenicali rebuffed a suggestion F1 should retain the current technical regulations given the series’ competitive start to 2021. “Max Verstappen [is] literally banging wheels with Lewis Hamilton” one analyst opined, “F1 is probably having the most competitive season since 2012, with Ferrari coming back, [a resurgent] McLaren and [the rise of] Lando Norris, et cetera.”
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But, as Domenicali pointed out: “The train has already left the station.” Work on the 2022 cars is already well advanced.
“We are very pleased because we are convinced that this year is already a great season, but next year with the changes that are planned will be another great opportunity to showcase what is Formula 1 in terms of the ability of always keeping the attention at the centre. Next year will highlight the possibility to have a bigger fight, not only two or three drivers, but even more, and that’s the objective.” Cautious…
Another questioned how the eventual retirements of Lewis Hamilton and Sebastian Vettel would affect the sport. The pair, with almost a dozen titles between them, are well into their thirties. Hamilton is unquestionably the sport’s biggest star, with a social media presence which dwarfs that of his rivals, yet only signed a one-year contract extension for the 2021 F1 season.
“With regard to Lewis Hamilton, surely [he] is a great asset,” said Domenicali. “He’s doing an incredible job on the sporting side and in terms of image, he was able to grow Formula 1 in other areas that are not specifically related to Formula 1.
“But Formula 1 itself is strong, and drivers, champions are always in a place where one day they may retire,” Domenicali continued. “I don’t know what Lewis is doing. We are talking with him, but of course now he’s focused on his actual season. He’s fully boosted to make sure he’ll be the only driver that [will] win eight titles in the history of Formula 1.”
Domenicali has seen champions come and go – he was with Ferrari during the Schumacher hegemony – so is confident that F1 will survive Hamilton’s retirement, whenever that may be. Who knows, on-track fighting may be all the better without the two dominant drivers of the decade. That said, whether by design or not, Domenicali did not comment about Vettel, at all…
“Formula 1 is solid, robust,” he said. “For sure, whatever will be decision of Lewis, Formula 1 will react and we’ll move forward. The good news is that in Formula 1, we have so many good drivers today, but at least the challenge will be even stronger. Therefore, of course, whatever will be the decision of Lewis, we will respect [it], but Formula 1 is really solid and strong.”
At any rate, this appears unlikely to be a short-term concern for Liberty Media, as Hamilton indicated over the Spanish Grand Prix weekend he intends to extend his current contract before the summer break.
The same analyst also wished to know: “Is an American driver important in F1 in terms of driving popularity here in the US?”
Given Domenicali was talking to (mainly) American analysts, he was most diplomatic in his response. “The answer for me is very clearly ‘yes’. We are working with teams try to understand what is the possibility for an American driver to come to the attention of Formula 1 team in the short term.”
However, Domenicali added, “I don’t see, being very pragmatic and realistic, that coming [to pass] in the next two, three years, but maybe thereafter.”
However, with Zak Brown pushing hard for the inclusion of some form of compulsory testing for rookie drivers by teams – either during Friday practice or in-season – that may happen even sooner, for the Californian intends to give McLaren’s 22-year-old Mexican IndyCar winner Pato O’Ward a formal F1 trial.
On the Sprint Qualifying front – analysts referred to it a “race” but weren’t ‘corrected’ on their terminology as the media has been, while Maffei spoke of a “Sprint Qualifying race” – Domenicali said that Silverstone had “already reported a surge in ticket sales following news that they would be hosting [the first] of these events.”
The question of TV rights also arose, sparked by the end of ESPN’s freebie run and the decision by Disney to close its various sports broadcasters in Asia, including F1 broadcaster Star. Both deals expire at the end of 2022, yet Disney plans to pull the plug on Star in October this year.
Domenicali said Star’s contract would be enforced, suggesting a settlement, while Maffei looked at the bigger picture and spoke of “a trade-off on exposure, which free TV offers against, in many cases, higher short-term rates for either over-the-top (OTT) platforms or even more streaming platforms over platforms like satellite.
“We’ll weigh our total dollars available against the exposure that we get for things like generally promoter value and advertising and sponsorship.”
Intriguingly, this is very much in line with what we suggested last week, namely that F1 should evaluate the full impact of free-to-air TV rather than grab the best financial deals on offer from pay stations.
Following a wholesale revamp of streaming service F1 TV, subscriptions are were said to be up (although Liberty refuses to reveal numbers). F1 TV Pro, which offers live race coverage, is now available in 85 countries, while the non-live Access offering reaches 188.
“F1 TV has also started the season strongly with the record viewing,” said Domenicali, adding that ratings for each race were around three times higher than the 2020 season average, with minutes viewed over the course of a weekend up by more than 60% over last year. He also praised the new app, which provides a number of additional features.
Liberty can be commended for the manner in which it has managed the sport through the Covid pandemic, having arguably done a better job than either of the previous commercial rights holders would or could have.
That said, there is headroom for improvement, particularly on the media rights front. If 2020 was a year of enforced contraction, F1 now faces a season of consolidation ahead of its ‘new era’ in 2022. Crucially, though, the call underscored that F1’s financial foundations are extremely solid and that F1 is in robust health. Call it ‘double vaccinated’ against Covid’s effects.
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