Formula One Group (FWONK) on Q3 2022 Results - Earnings Call Transcript
Operator: Welcome to the Liberty Media Corporation’s Third Quarter 2022 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference will be recorded today, November 4th. I would now like to turn the call over to your host, Courtnee Chun, Chief Portfolio Officer. Please go ahead.
Courtnee Chun: Thank you, and good morning. Before we begin, we’d like to remind everyone that this call includes certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual events or results could differ materially due to a number of risks and uncertainties, including those mentioned in Liberty Media’s most recent 10-K and 10-Q or Liberty Media Acquisition’s most recent Forms 10-K and 10-Q filed with the SEC. These forward-looking statements speak only as of the date of this call and Liberty Media and Liberty Media Acquisition expressly disclaim any obligation or undertaking to disseminate any updates or revisions to any forward-looking statements contained herein to reflect any change in Liberty Media or Liberty Media Acquisition’s expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based. On today’s call, we will discuss certain non-GAAP financial measures for Liberty Media and SiriusXM including adjusted OIBDA and adjusted OIBDA. The required definitions and reconciliations for Liberty Media and SiriusXM Schedules 1 and 2 can be found at the end of the earnings press release issued today, which is available on Liberty Media’s website. Now, I’d like to turn the call over to Greg Maffei, Liberty’s President and CEO.
Greg Maffei: Thank you. Good morning. Today speaking on the call, we will also have Formula One’s President and CEO, Stefano Domenicali; and Liberty’s Chief Accounting and Principal Financial Officer, Brian Wendling. So, let me start with Liberty SiriusXM. Last quarter, we discussed our intention to reduce debt at LSXM and we took actions during the third quarter. We opportunistically repurchased about 21% of the 1.375% Basket convert combining prudent debt management and effective share buyback. FWON paid $64 million and BATR paid $14 million to LSXM to settle their respective intergroup interest. The remainder of the repurchase was funded with LSXM cash and $27 million from an unwind of a bond hedge and warrant. Effectively, this was a share repurchase across the LMC equities with $179 million effective cost to repurchase 4.5 million LSXMA shares and $1.1 million FWONA and $500,000 BATRA intergroup interest shares effectively repurchased. We are still hedged on the remaining exposure under that convert with our intergroup interest. Turning now to SiriusXM itself. They reported solid third quarter financial results despite the macro factors impacting the business. The resilient sub base experienced a record low churn of 1.5%, revenue was up 4% and EBITDA was flat as we continue to make investments, including end product development. Despite soft auto sales, we continue to achieve vehicle penetrations with an enabled fleet of approximately $150 million. SiriusXM also set out strong cash flow business and guidance for the year, full year guidance for 2022. We continue to monitor headwinds in advertising and the reduced SAR impact on the top of the funnel. Sirius is also making progress in the streaming business. September was one of the biggest streaming sub-acquisition months they’ve experienced to date. And we continue to add exclusive and diverse content, both in and out of the car. For example, we extended the NFL agreement. Sports has proven obviously to be high appeal for new subs to both convert at a higher rate and higher retention, once they are obtained. Turning to Live Nation. Live Nation continued to see incredible demand with fans prioritizing spending on live events. Versus 2019, AOI was up 45% and free cash flow was up 88%. Live also beat last quarter’s record for highest quarterly attendance with over 44 million fans across 11,000 events. Per fan spending was up 30% through September in U.S. amphitheaters, and Ticketmaster experienced all-time high GTV, which was up 62% versus 2019. Live is closing out a record year, but there is more growth to come with 115 million tickets already sold and sponsorship for 2023 up 30% over this point last year. Turning now to the Formula One Group. We continue to come up with new analogies, which are familiar and F1 continued to fire on all cylinders with incredible fan demand. There is significant growth in grandstand and Paddock Club attendance with many sellouts and records broken. Importantly, as we’ve invested, there has been a continued growth also in the U.S. market with three races planned for next year, including our landmark Vegas race. We also announced the renewal of our ESPN contract at a value, which was many multiples of the prior contract. We also announced a record 24 race calendar for the coming year, including renewing in Monaco, where we have a 3-year agreement to keep that iconic race on schedule; renewing in Mexico City, where we have a 3-year deal, which highlights the value that F1 brings to all cities. For example, between 2015 and 2021, the Mexico City Grand Prix generated $2.4 billion of economic activity and created 57,000 jobs. We will continue to capitalize on the momentum of the business. An example recently is the film that Apple has planned, which we think will be epic. We had a star-studded cast, including Brad Pitt. It’s directed by Joseph Kosinski, and it’s produced by Jerry Bruckheimer, all stars in their own right, very exciting. At the corporate level, we refinanced the FWONK convertible on attractive terms with fewer shares underlying the instrument and a lower initial conversion price of $86.06. And now turning to the Braves. Braves finished an impressive season, securing their fifth straight NL East title. They finished 101 and 61. For the first time since 2003, they won over 100 games and it was an epic comeback for the second half of the season. As you may recall, beginning -- the start of June, we were 10.5 games behind the Mets. From there, we went on a Major League best, nearly 700 win rate from the start of that June until the end of the season. The fans had an incredible turnout with 52 games sellouts at Truist and more tickets sold at the stadium since we had done -- since last in 2000. Obviously, the finale was not what we had hoped. But I remind you, we did win the World Series last year. We are for a few more weeks the reigning World Series champions. And there are wonderful things that come from that, but it also can lead to increased costs. We think they ultimately create value for the franchise and fan engagement, which will drive revenue. But on the increased cost side, the largest component has been reinvesting in increased payroll. We think that sets us up well up -- well rather for future years. But other elevated costs from record attendance and 4 additional home -- we have other elevated costs rather from our record attendance and 4 additional home games at the Truist ballpark. There were also modest cost increases for post World Series activities, for example, a trophy tour and creating special merchandise. And let me finish by talking about LMAC. We recently sent out a press release announcing our vote for an early rewind. While the results have not been what we wanted in terms of finding the deal that we thought was attractive, I would tell you we evaluated over 140 targets, but the high valuations for 2021, the poor IPO market, plus overall market volatility led us to the conclusion that we could not find a solid target with attractive valuation and return characteristics. Finally, the recent tax law changes under the IRA created additional corporate liabilities if we were to extend the unwind into 2023. And therefore, we took action to unwind and return the capital to the investors in 2022. And with that, I’m going to turn it to Brian to let him talk about our financial results in more detail.
Brian Wendling: Thank you, Greg, and good morning, everyone. At quarter end, Liberty SiriusXM Group has attributed cash and liquid investments of approximately $225 million, which excludes $39 million of cash held directly at SiriusXM. There’s also $1.3 billion of undrawn margin loan capacity at the parent level related to our SiriusXM and Live Nation margin loans. In September, Liberty SiriusXM Group paid approximately $284 million to repurchase $210 million aggregate principal amount of the 1.375% cash convertible notes. This was funded with $179 million of cash on hand as well as cash from the Formula One Group and Braves Group from the settlement of their intergroup interest held at Liberty SiriusXM, corresponding to the amount of notes repurchased. As a result, 1.1 million FWONA shares and $500,000 BATRA shares underlying the portion of their respective intergroup interest held by LSXM were canceled. Liberty SiriusXM Group also received $27 million of proceeds from the net settlement of the bond hedge and warrants related to the repurchase of the convertible notes. As of November 3rd, the value of the SiriusXM stock held at Liberty SiriusXM Group was $19.5 billion, and the value of the Live Nation stock held was $5.3 billion. We have $2.8 billion in principal amount of debt against these holdings. Total LSXM Group attributed principal amount of debt is $13.4 billion, which includes $9.9 billion of debt that’s directly at the SiriusXM level. Formula One Group had attributed cash, liquid investments and monetizable public holdings of $1.1 billion at quarter end, which excludes $1.1 billion of cash held at Formula 1. Total Formula One Group attributed principal amount of debt was $3.5 billion, which includes the $2.9 billion of debt directly held at Formula 1, leaving $567 million at the corporate level. During the quarter, we issued $475 million aggregate principal amount of 2.25% FWONK convertible notes due 2027. A portion of the proceeds from the offering were used to repurchase $213 million aggregate principal amount of the 1% FWONK convertible notes due 2023, leaving just $27 million outstanding at the end of the quarter. F1’s $500 million revolver is undrawn and Formula 1’s leverage at the end of the quarter was 2.8 times. As Greg mentioned, LMAC filed a proxy statement to obtain stockholder approval to unwind before year-end. Formula One Group has incurred approximately $20 million in costs since LMAC’s IPO in January of 2021 through the initial warrant investment and subsequent working capital loans. On unwind, these are material investments will not be recoverable, but the $250 million forward purchase agreement that Formula One Group had committed to LMAC will be terminated. On the Formula 1 operating business, we will remind you that F1 is best viewed on a full year basis, given some volatility in the quarters. F1 held 7 races during the third quarters of both 2021 and 2022. However, there wasn’t one additional flyaway race during Q3 of ‘21 with Russia having taken place last year and France hosting a race this year. Race promotion revenue decreased accordingly for the quarter. The flyaway races typically pay higher fees than European races. As a reminder, we recognize team payments pro rata across the race calendar, though a quarter where we recognized less revenue due to the mix of races, the team payment percentage may appear disproportionately larger. F1 also recognized higher other cost of revenue, primarily due to one additional Paddock Club operating in Q3 2022 and from the cost of servicing significantly larger Paddock Club attendances compared to the prior year period. SG&A as a percent of total revenue was generally in line with historical averages for the third quarter. We did have modest increases in personnel costs due to a change in the company’s LTIP from a stock to cash-based bonus program and increased headcount to support growth. Looking year-to-date, revenue increased 35% and our adjusted OIBDA grew 43% with 140 basis points of margin expansion. Finally, at the Braves Group, at quarter end, they had attributed cash and liquid investments of $159 million, which excludes $15 million of restricted cash and the Braves Group had attributed principal amount debt of $601 million. Liberty and our consolidated subsidiaries are in compliance with the debt covenants at quarter end. And with that, I’ll turn it over to Stefano [Technical Difficulty].
Stefano Domenicali: Thanks, Brian. The 2022 season has continued to deliver very impressive racing for all our fans and once again shows how the new technical regulation have delivered closer racing on the track. The interest in Formula 1 is huge from fans, potential partners and those who want to host the race. We continue to believe that this is due to us taking the right strategic decisions to grow the sport in the correct way and to focus on the most important priorities. Formula 1 just finished a couple of amazing weekends in Mexico City and in Austin, and the 2022 season has delivered exciting action on the track. Max Verstappen has been an incredible this decision, setting a record for most wins in the season with 14 Grand Prix wins so far in 2022 with his win in Mexico City last weekend. He secured his second world championship in Suzuka and Red Bull won the Constructor’s Championship, their first since 2013. The team dedicated the victory to Red Bull’s Founder, Dietrich Mateschitz. He was a visionary who helped transform our sport and they will be missed. Even with this championship settled, there is still a battle among the drivers and constructor as where they finish can have a meaningful impact both financially and operationally. Excitement for our sport continues to grow. Certainly, we’ve seen that in the race attendance and now had 10 races with crowds over 300,000 with three of those exceeding 400,000. Many of these events have been complete sellout. A great example of growing interest is Austin, where we welcomed 440,000 fans across the event, more than double the attendance in 2019. The promoter states that the ticket demand could have reached 500,000, but for this focus on maintaining a high-quality fan experience. We’ve also seen more first-time and female attendees at our races. Across the 10 races where we gathered spectators data this year, first-time attendees were about 50% of the total crowd. And we’ve seen surge in demand on the higher end, too, with record sale in Paddock Club and our hospitality products. This sort of demand means our races slots are highly coveted and we were pleased to confirm the 2023 calendar a few weeks ago. We were happy to renew our agreement with Monaco and will race there through 2025, with expanded rights for Formula 1 related to broadcast, Paddock Club and sponsorship. We also announced a one-year renewal for Belgium and a three-year renewal for Mexico City. As Greg mentioned, the economic benefit F1 has brought to Mexico City since 2015 has been incredible. This highlights the value of our sport can bring to cities globally. Additionally, we will increase the number of sprint events in 2023 to 6 from the current 3. These events are in high demand from our promoters and provide additional sponsorship opportunities and value to our broadcast partners. We will announce the venues for those events soon. We were thrilled to announce that Audi will join Formula 1 in 2026. They have selected Sauber as their strategic partner and plan to acquire a stake in the Sauber Group, who will compete as a now de facto team from 2026. Formula 1 presents a global stage for the Audi brand, and they see the high performance and competition in our sport as a driver of innovation and technology. Audi was further attracted to F1 given our efforts in sustainability and cost efficiency, which will aid in achieving their own sustainability goals. It also shows the increasing value of the teams in the current environment, driven by the stability provided under the new regulation and the growth of the sport, of which everyone in F1 continues to benefit. We are delighted to grow our partnership with AWS. As we announced yesterday the expansion of our partnership with them becoming a Global Partner of Formula 1. We both share a passion for technological innovation, and we work together to build the fun experience of the future. Viewers continue to tune in as well as we have seen substantial interest related to our media rights. We announced a partnership with Sky that extends right in Germany and Italy until 2027 and the U.K. and Ireland until 2029. Sky Sports F1 will continue to be the only dedicated channel to broadcast motor sport in each of these markets and their highly rated commentary will be available in over 80 markets. Sky has seen significant growth in the viewership so far this season with average viewership in the UK up to 60% since 2019; Italy up to 20% since 2021; and Germany up to 24 since 2021. They’ve also seen attractive demographic shift with viewers becoming more diverse and younger. We also extended our U.S. agreement with ESPN through 2025. They have been a great partner to us. And with this new deal, at least 16 races per year will air on either ABC or ESPN with all broadcast commercial-free. Through 18 races in 2022, they’ve seen an average audience of 1.2 million up from 994,000 [ph] in 2021. The Miami Grand Prix drew an average viewership of 2.6 million, the largest U.S. audience on record for a live GP. Additionally, we extended our agreement with ServusTV in Austria until 2026 and secured a partnership with Telcel and Telmex in Mexico to bring F1TV Pro to a subscriber who can easily add the service on to their existing contracts for mobile or internet services. The F1 Esports Series Pro championship presented by Aramco returned for 4 events, each spanning over 3 years. This includes more live show as the teams and the drivers battle for their $750,000 prize spot. Similar to F1, we have seen several high-profile drivers move across the grid. We look forward to building on the incredible engagement for 2021 when we saw 4.5 million fans tune in for the grand finale. This year, we had 1.3 million players attempt to qualify, almost 3 times the amount we had in 2021. We continue to expand the way we engage with fans and introduce the F1 Arcade in London. This is the first F1 licensed experiential venue. Patrons can be fully immersed with 60 motion simulators and experience the thrill of racing while enjoying premium food and beverage offerings in the heart of London. We plan to roll out this concept in additional cities. And finally, to further our progress to net zero, Formula 2 and Formula 3 announced a partnership with Aramco to pioneer sustainable fuel for 2023. This is an important step to reach a 100% sustainable fuel by 2026, which will be a requirement of all FIA championships. F2 and F3 have proven to be a great test bed for innovation as they were with the 18-inch tires now used in Formula 1. We continue to show the innovation and leadership in the technology space and believe that our sustainable fuel can have a huge real world benefit for the automotive sector and greenhouse gas emission. I want to thank the whole F1 family, our fans and our investors for all the support this year. Tomorrow, we are hosting a launch party in Las Vegas at Caesars Palace. We are bringing the best race in the world to the entertainment capital of the world, including a large caravan on Las Vegas Boulevard. We look forward to completing an amazing 2022 season as we travel to Brazil and Abu Dhabi. Avanti tutta, full speed ahead. And now, I will turn the call back over to Greg. Bye, bye. Ciao.
Greg Maffei: Thank you, Stefano, and thank you, Brian. We look forward to seeing many of you at our Annual Investor Day on Thursday, November 17th. Please visit the IR calendar on our website for registration details. John Malone and I will be hosting our annual Q&A session. If you’d like to submit questions in advance, you can e-mail investor@libertymedia.com. We appreciate your continued support of and interest in Liberty Media. And with that, operator, I’d like to open the line for questions.
Operator: [Operator Instructions] Our first question comes from Doug Mitchelson with Credit Suisse.
Operator: Next question is from Bryan Kraft with Deutsche Bank.
Operator: Our next question is from Jason Bazinet with Citi.
Operator: Our next question comes from David Karnovsky with JP Morgan.
Operator: Our next question is from Ben Swinburne with Morgan Stanley.
Operator: Our next question comes from Barton Crockett with Rosenblatt Securities.
Operator: Our next question is from David Joyce with Barclays.
Operator: Our final question comes from the line of Matthew Harrigan with Benchmark.
Greg Maffei: So, operator, I think we’re done. Thank you all for your interest in the Liberty Media Group, and we look forward to seeing many of you in a couple of weeks in New York. And if not, until then the next call. Thank you very much, operator.
Operator: You’re very welcome. This concludes today’s conference. You may disconnect your lines at this time, and we thank you for your participation.
