Fourth Quarter and Year End 2017 Financial Results for Formula 1

F1 TEAMS TO GET $47-MILLION LESS THAN BERNIE GAVE THEM

Liberty Media today released the Fourth Quarter and Year End 2017 Financial Results for Formula 1, revealing the $47-million hit teams will take in income relative to what was dished out at for 2016.

Formula 1’s income has been on the decline for some years now and this was expected, but the fall in revenue paid to teams from $966-million in 2016 to $919-million last year is the first time they have received less than a previous year.

The dip in income can be attributed to one less round in 2017 compared to 2016, plus the departure of UBS and Allianz among other things.

Interestingly income fell by a nominal $12-million (less than one percent) from $1796-million in 2016 to $1784-million last year.

Bernie Ecclestone’s era of a one-man (plus a few minions) show was a very lean operation, while Liberty are already 120 strong at their new headquarters and are likely to swell to 150 during the course of this year.

In the report below Liberty write: “Cost of F1 revenue increased primarily due to spend on fan engagement, filming in Ultra High-Definition and higher freight costs, which more than offset reduced team payments. Selling, general and administrative expense also increased for the fourth quarter and full year 2017 as a result of additional headcount and new corporate offices.”

Formula One Group

The following table provides the financial results attributed to the Formula One Group for the fourth quarter and full year 2017. Approximately $13 million and $49 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 2017, respectively.

“The 2017 season was successful in increasing viewers across TV and digital platforms,” said Chase Carey, Formula 1 Chairman and CEO. “In 2018, we continue to focus on fan engagement through increasing carriage on linear and digital platforms, enhancing the race excitement, hosting more F1 Live events and collaborating with our partners. We look forward to the start of the season later this month in Melbourne.”

Liberty completed the acquisition of F1 on January 23, 2017. For comparison and discussion purposes, the pro forma results of F1 are presented below for the three and twelve months ended December 31, 2017 and 2016, 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.

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. F1 held 20 races in the 2017 season compared to 21 in the 2016 season.

Race promotion revenue decreased in the fourth quarter, primarily due to legacy contractual terms of one Grand Prix event, which provided for a one time material step down in the promotion fee effective after the 2016 season and carrying through the remaining term of the contract through 2020. This agreement was entered into by previous management and is atypical and not reflective of terms carried in F1’s other promotion agreements.

For the full year 2017, race promotion revenue decreased due to one less event being held, the aforementioned reduction in one promotion fee, as well as a contract amendment discussed in the second quarter that provided for a decrease in promotion revenue which was partly offset by the impact of increases in other revenue streams.

The reduction in race promotion revenue for the fourth quarter and full year was partially offset by the impact of other contractual increases.

Broadcast revenue increased in the fourth quarter and full year 2017 due to the impact of certain contractual rate increases. The increase in the fourth quarter was also driven by the pro-rata recognition of broadcast revenue across the season, as 6/20 of the full year fees were recognized compared to 6/21 in the prior year.

The increase in the full year was partially offset by the adverse impact of weaker prevailing foreign currency exchange rates used to translate a small number of Pound and Euro-denominated contracts into US dollars.

Advertising and sponsorship revenue decreased in the fourth quarter primarily due to the prior year recognition of a proportion of two non-renewed sponsorship agreements, partially offset by revenue from one new sponsorship contract.

For the full year, advertising and sponsorship revenue increased as higher fees and growth in certain contractual arrangements plus revenue from new sponsors more than offset the aforementioned two non-renewed agreements.

Other F1 revenue increased modestly in the fourth quarter and full year 2017, primarily due to higher logistics and digital media revenue, contributions from broadcasting in Ultra High-Definition and higher hospitality revenue, partially offset by lower spend by competing teams in the GP3 series due to it being the second year of the GP3 vehicle cycle.

Operating income decreased in the fourth quarter and operating loss increased for the full year 2017. Adjusted OIBDA decreased in the fourth quarter and full year 2017 primarily due to the aforementioned reduction in revenue and increased costs.



Cost of F1 revenue increased primarily due to spend on fan engagement, filming in Ultra High-Definition and higher freight costs, which more than offset reduced team payments. Selling, general and administrative expense also increased for the fourth quarter and full year 2017 as a result of additional headcount and new corporate offices.

Additionally, stock-based compensation increased related to awards granted to members of F1 management.

On January 22, 2018, Liberty provided revised expectations regarding certain F1 tax considerations. Liberty now expects a mid- to -high-single-digit effective cash tax rate on UKEBITDA for the F1 business.

This update is due to the cumulative impact of changes in UK tax law, conclusions reached by Her Majesty’s Revenue and Customs regarding the future treatment under UK tax law of certain historic transactions and the effects of an F1 corporate restructuring in the fourth quarter of 2017.

F1’s adjusted OIBDA (as reported) less stock-based compensation is a reasonable proxy for UK EBITDA for this purpose.

F1’s total net debt to covenant OIBDA ratio, as defined in F1’s credit facilities for covenant calculations, was approximately 7.1x as of December 31, 2017, as compared to a maximum allowable leverage ratio of 8.75x.