Formula One Group (FWONK) Earnings Call Transcript & Summary

Okay. We're going to get started. Good afternoon, everybody. I'm Ben Swinburne, Morgan Stanley's media and telecom analyst. For important disclosures, please see the Morgan Stanley research disclosure website. at morganstanley.com/researchdisclosures. And I'm excited to welcome to the conference. I think speaking for the first time with us, certainly as Liberty's CEO, Derek Chang, Derek has been the CEO of Liberty Media since last February. But is a veteran executive across the global media sports and entertainment industry. Derek, thanks for coming. Good to see you.

Thanks for having Ben, and congratulations on your new gig.

Thank you so much.

Disney is a big partner of F1, I'm very excited to be working with you in that capacity.

Absolutely. That sounds great. All right. Why don't we get started. There's a lot to talk about and a lot going on in the world. I think maybe we should start with sort of what's happening geopolitically in the Middle East. I think you guys -- I know look at the calendar, there's races in April in that region? What's sort of the message today to investors on how you guys are thinking about navigating this?

Yes. I mean clearly, it's very timely. And obviously, unfortunate for much broader. But I think as it relates to us, well, right now, we have people in transit to Melbourne for the season opening race and that all is, at this point, still going as planned, which we are excited about because it should be. And we'll get more into this later a very, very exciting season. I think, in particular, as we look at the calendar, we have 2 races in the Middle East in April in Bahrain and Jeddah. MotoGP has a race also in Qatar and in April. So those are situations that we are, as you might imagine, clearly monitoring what's going on and how that might impact us. And I think that we probably have more definitive news on that in the very near future. I don't have anything more than that right now. We have contingency planning that we do on this sort of stuff. And we're evaluating that and any potential impacts that might have on our business. But again, no details right now. And again, hopefully, as with all conflicts it end soon. But how it impacts our business. We'll have more news on later.

Okay. All right. So nothing to add right now. Why don't we talk a little bit about sort of where the Liberty Media is in its -- was it 4.0, I think we're at for John. But you completed the Liberty Live split off in December. Where does that sort of leave the company now kind of structurally and strategically if we start high level? .

Sure. I think the Liberty Live spin-off has made us split off, have made us clearly a much more simplified structure. So now we're operating Liberty Media with 2 primary assets, which is Formula 1 and MotoGP. Two premier sports brands, sports IP. And I think as we think about Liberty Media, focusing on those as operating assets and the growth what we need to do to support that growth is clearly job 1. I think as you look beyond that, where we can continue to grow and seeing Liberty Media as a continuing growth vehicle, where can we invest into those businesses alongside those businesses and then ultimately into similar types of businesses all that for us is what we're evaluating now. I think that we're excited about what we have, and we're really excited about current geopolitical situation notwithstanding, really excited about these businesses. Looking forward to seeing them grow.

Great. Maybe before we dive into the business, the fact that it's a simplified company focused on sports, kind of narrow your M&A lens? Or is your M&A lens -- was it already narrow maybe before the Liberty Live spin-off in terms of where you would deploy inorganically?

Well, I think if you look at the history of Liberty Media, we've been pretty opportunistic. And I think that will always be a hallmark of Liberty Media. I do think though that the company is set up in a certain way right now, we have to maintain sort of discipline across what we're investing in and how we're doing that and all that sort of stuff. But I would say that comparable sorts of businesses are the ones we would be most interested in. I think where we can add value in a Liberty Media sort of way, whether that's through relationships, spotting opportunities, financial structuring, all that sort of stuff would play into what we're going to pursue.

Got it. Maybe just one more. Are there any practical implications that investors should be thinking about of John Malone transitioning to sort of Chairman Emeritus. And how is that impacting sort of the day-to-day running of in your role as CEO of the company? .

I would say there's probably a negligible impact on a day-to-day basis. John has obviously put in what he believes is a skilled management team, a supportive Board, the knowledge of the Board. And I think that it's up to us to plot the strategy as we move forward. That being said, John is -- has a significant holding our control of the company in the company. So we would -- it would make sense for us to have continuing dialogue with John and understanding so to where his priorities are. And I think, over time, that's kind of been how we fund things and I don't see that necessarily changing. It is great, though, to have John in the position that he has been in and the position even now because, as we all know, John is a long-term holder. And that has very positive effects for us as we run these businesses.

Okay. All right. Why don't we talk about Formula One, the business? So you wrapped up 2025 reporting earnings recently, revenues were up 14%, adjusted OIBDA up 20%. Of course, the market always wants to know what's next. And you could talk a little bit about the sort of growth drivers for the business and how sustainable you think those are into the future? .

Sure. I think if you look at our revenues, we've sort of got 3 main sources of revenue, the rights, sponsorship, race promotion. And I think we see different levels of growth across those probably, but I think they're all healthy, which is great. On the media right side, last year, we announced sort of new deals or renewals in the U.S., which I'm sure will talk about later. Brazil, Japan. Just this morning, we announced that we are renewing with Foxtel in Australia. ESPN down in Latin America, beIN in Southeast Asia. So a lot of activity over the course of the last year with what I believe are the right partners who will help us both from a traditional broadcast standpoint, but as we think about new ways to engage fans, the right partners in a lot of these markets do that. From a race promotion standpoint, you see most recently last year, we announced, I believe, renewals in Austria, in Austin, we recently announced a new deal with Barcelona, Barcelona and Spa will rotate races alternate. So we are continuing to see sort of good growth in that sector. We are also continuing to see good demand and interest, both from our existing partners, but as well other cities and locations out there, which I think will help support what we're trying to do -- continue to do from a global standpoint. But the other thing about sort of race promotion that people miss sometimes is you've got traditionally a fee that gets paid to you to host a race. But then we have a lot of hospitality in inventory at predominantly the Paddock Club. And I think as we renew deals or strike new deals, creating more of that inventory for both us and the local partner is a good thing and produces a lot of value because clearly, that type of hospitality and inventory is in high demand. And if it's in high demand and you can supply it, hopefully, that generates more revenue overall. So I think there's twofold benefits on the race promotion side. And then I think probably what people are talking about most recently is probably on the sponsorship side. And clearly, that team at F1, Stefano, Emily Prazer, those guys have really been honed in on sponsorship and what that means. And I think in addition to just sort of the fees that get paid for that sort of business, I think almost more important is the types of companies that we are associating with. When you think about this last year and people coming online and new deals that we've done in terms of LVMH, LEGO, Pepsi, Disney, we just announced earlier this year, a deal with Standard Charter in terms of wealth management. And so that sort of has the ability for us to expand our own brand because those guys are sort of associating us what they're doing and all the marketing right that a lot of those brands put behind their own brands accrues to us also. I think the other thing that you're seeing from a sponsorship standpoint that -- it's good to note is, clearly, we've added a lot of new sponsors. We do believe that there are categories that are certainly still available. But then the other interesting dynamic in terms of demand is there's so much demand it's causing the sort of you have different tiers of sponsors, global sponsors on down. You get movement, sometimes people trading up because they want that profile and therefore, paying more people sometimes trading down because maybe at that level, it's no longer affordable for them, but when they move down, they're probably coming in at a higher rate than what that level traditionally has been. And the other dynamic that you're seeing is people coming to us, existing partners coming to us and asking to renew early. We just did a sales force deal. I think we announced that today. And part of that is men looking out there long term, saying, "Hey, this is a brand we want to continue to affiliate with. We like it. we want to renew now because we worry that the price goes up as the days go on."

Right. That's great. We'll dive into those revenues streams in more detail in a minute, but I did want to at least ask you about upcoming season from an F1 sport and fan point of view. You've got new cars, you've got a new team coming on. There's a lot of change going on. There's been -- I mean, I don't know, some controversy, I guess you would agree or not during testing. How would you sort of describe the changes coming to F1 this year and what they might mean for the business as we look out over the course of 2016?

Yes. No, you're right. The new cars, new engines, new features, which all people will have to learn and understand we're trying to make them more user friendly. But I think it really brings a lot of excitement to what's going on. And the fact that you're talking about testing you probably didn't know that they tested last year, right? Again, that's bringing sort of more awareness of this sort of thing to all of our fans. And so I think anything that brings that sort of engagement is always good. Now yes, the new rules, the new technology, different teams may get impacted differently. But they're all big boys, and that's part of their job, which is to figure out how to sort of maximize their performance under whatever the current rules are. So you're seeing a lot of that going on right now. And by nature, some people will complain. Some people will be happy, and we'll see how that goes. It will always bring intrigue, which again, is good because as you know, we're not just a sport. We are an entertainment brand. And I think anything that supports that and get people interested is good. I think when you think about the new team, Audi and Cadillac, Audi bought Sauber and Cadillac is a new team to the grid. And I think for this market, for the U.S. market, having Cadillac comment is hugely significant. They spend, I don't know, you probably know what a Super Bowl at cost this year, like $7 million, something like that. So Cadillac brought a Super Bowl ad, right, to showcase and introduce their delivery. And then really, this is -- that was they're coming out. And so when you have Cadillac putting the might of the Cadillac organization behind the F1 entry, you can think about what that then means in terms of them promoting the sport, their team, whether it's in their dealership, whether dealerships, whether it's through -- whatever it is, they're bringing that much more awareness to it. In a market that hasn't necessarily seen that from a manufacturer, right? So again, how we engage, how we attract new fans, all that is sort of happening in multiple ways.

Only F1 could the Super Bowl ad be still a drama.

As always.

All right. The other big thing that's happening in the U.S. this year is your Apple deal, which is commencing here with Australia coming up, I guess, in a weekend, weekend or two. There's been a lot of discussion about the monetization, the reach elements to it, what Apple brings to the sport. Talk about why you're excited about this partnership and maybe one of the things you think investors might be missing about the benefits long term of being in business with Apple.

Yes. So first of all, I do want to say thank you to ESPN for having a long 6-year history with us and helping us to promote sport, get it to where it is. You can report that back to your new bosses. .

I'll get back to that. .

But Apple, look, I think we're -- we all know sort of the distribution landscape in media and sports media has been changing literally every single day over the past 15 years. And so what we saw was an opportunity with Apple to really go big in this space. And to your point, people will question it and people have questioned it, we feel very confident in sort of this relationship. And Apple in our minds brings a lot to the table in this construct. So it's not just sort of Apple TV. It is sort of Apple Music, Apple News, the Apple Stores, just like we talked about Cadillac earlier, they have similar sort of touch points that go well beyond what you think about from a traditional television standpoint, a traditional video standpoint. So we don't focus on reach in sort of an archaic definition of sort of how many people are watching on TV. But really, how do you touch your fans? How do you engage with your fans. And I think as we will see over the next sort of 5 years, the product should develop, maybe not so much the first year, but as they put their engineers to task and they think about what they can do with F1, we will see, I think, a lot of cool stuff come out. But look, at the Apple movie, right, this past summer, the last summer of the Apple movie, which grossed over $600 million, right? The biggest sports movie of all time, Brad Pitt's biggest movie of all time. So what that did for F1, I think Apple will continue to look for ways to do that sort of -- just yesterday, they had on right by your offices in, what is it, 1575 Broadway?

1585.

1585 Broadway, right? The F1 on that screen, the cars going right past you. So they are committing tons of support effort, promotional value into this relationship. And I think you also saw recently, Apple did a deal with IMAX theaters to distribute the races into -- certain races into those theaters. And then just last week, did a deal with Netflix, where Apple will stream season 8 of Drive to Survive, and Netflix will broadcast the Canadian Grand Prix this year alongside Apple. So 2 huge platforms coming together to promote F1 today, which is phenomenal for us, right? And I think when you think about the start of your question, one of the things we saw in doing a deal with Apple is that they're operating in a different space than traditional broadcasters. So again, not to go back to ESPN, but if you think about it and having sat at this chair a long time ago at DIRECTV, where I had to negotiate with all the broadcasters and the limitations I would put on them as part of the negotiation in terms of where they could broadcast, when they could broadcast, all that sort of stuff would have put someone like ESPN in a much more restrictive position in terms of what they could do with F1 and our product where Apple could go do that deal with Netflix. I don't think you'd see that happening, for instance, with an ESPN, right? So it opens up many new opportunities for Apple to promote F1.

Yes. So what is the impact, if at all, on your direct-to-consumer strategy in the U.S.? Because F1 TV has been a really nice growth story globally, but particularly here -- and I think -- and I know that's changing at least the way consumers access it within the Apple ecosystem. So how do we think about what that product does for the business and whether there's any change as a result of the Apple relationship?

I don't think, with respect to that business, it changes that much other than the which sold, as you said, access, right? It's going to -- you're going to get it through the Apple TV platform. And for people last year, depending on what level of service you had, it's probably a $2 increase or even a $4 decrease from having the stand-alone F1 product. So we don't feel that there's a huge economic difference on that. But most importantly, F1 TV continues to exist. It's just how it's sold, which also means we continue to get data from that product. And that feeds into, as you were saying earlier, are sort of our understanding of our consumer of our fans. So in addition to sort of what they view on F1 TV, what [indiscernible] they're buying, what tickets they're buying, all that sort of stuff feeds into, hey, this is what we know about our fans, which we can, a, understand better, monetize ourselves, serve them better with product and whatever it is, but also for our partners, whether they're sponsors media partners, whatever it is, give them that information in a way that is helpful to them, which then brings more value to us because of what they pay us or whatever it is.

You mentioned Drive to Survive before. Obviously, that's been a huge part of F1's rise in popularity around the world. You have the F1 movie. And now we're seeing this sort of innovation and evolution of content for the company with Netflix et cetera. How do you think about content and storytelling just as a continued growth driver for sports, F1 and maybe even for Moto over time? .

Yes. So I think once that that's important is 60% of their fans access F1 on a daily basis, right? So whatever that is, reading articles, social media, watching Instagram of someone's dog or whatever it is, one of the drivers is dog, right? So whatever it is, they're accessing it, which means those people are not just waiting for the race to be broadcast on Sunday. And what that says is, hey, content is important. Storytelling is important. All of that is important because it's what feeds the machine. At the end of the day, it's not just what happens on Sundays. Sunday is exciting, but it's all this other stuff. And that also gets us into sort of segmentation of sort of fan base, right? You've got hardcore fans. You also have casual fans. You have fans who are interested in the testing. Like, Ben, you're an expert now, right? So you're watching the testing. But you may have fans that don't even watch much of the race but they're engaging in so many different ways because they're watching the movie or they're just watching short-form content on social media of Lando eating dinner, whatever it is, and so content, storytelling, all of that is critical to the brand.

Got it. I did want to ask you, you mentioned earlier, you've had a number of media rights renewals outside the U.S. That's a market investors generally have a little less visibility into. Can you talk a little bit, at least even qualitatively about sort of the growth you're seeing in your international renewals since every market is kind of unique?

Yes. So what you've seen is in certain markets, we were -- we just renewed with Foxtel. So that's an existing partner that we're continuing to do business with. In other markets where we might have gone in a different direction, you're actually seeing the traditional heavyweight broadcasters in some of these markets come back to us or start new with us because they've seen what the growth of F1 is. So Globo in Brazil, right? Everyone knows that. Televisa in Mexico, right? Fuji in Japan, right? These are the heavy weights. And so them seeing that value and then wanting our product, our races, our content is really a big demonstration to me of what we've done on this front.

Okay. And then you mentioned earlier sponsorship, new categories, different tiers. I think the probably the popular view out there is that's still your highest growth opportunity is on a percentage basis of your major revenue streams do you see continued long runway in sponsorship for the business?

Yes. I mean, when I talk to Stefano, he's as pumped as ever. So, I think he, his team. There's a very, very creative group of people. And what they've been able to do -- I get called all the time from other leagues because as you might imagine, given my career, pretty traveled at this point. but I say, hey, how did you do that? How do you do that on hospitality? How do you do that on sponsorship? How did you come up with that creative idea? So that also tells me, "Hey, we're doing the right stuff." And I think that creative engine continuing and will continue to lead to successful sort of growth for us.

Okay. You guys had your third Las Vegas Grand Prix back in November. It sounds like it was a success financially. Can you talk a little bit about kind of where that race is, what the long-term vision that businesses is? And if you think it continues to be a driver of sort of value for the company over the next couple of years? .

Yes. So if you go back to before we started Vegas, I think we were taking on a lot, and I think we all recognize it was probably going to be a bumpy road, but the reward at the end of all it was going to be there. And even though we're not at anywhere near the end, even 3 years later, we've seen that pan out, right? So first few years just operationally getting that right and probably spending in places just because you had to get the race going that evening. Our relations with the community probably not great off the start, right? You think about it, a new race in your city, shutting down the streets for 3 night or whatever it is, not a great look. But now three years later, you've seen our community relations, our local relations probably in a good spot as ever. And people in Vegas take pride in the fact that the race is there now. And that, I think, has allowed us to work much more collaboratively with the local government, with our local partners, right, the casinos to actually start thinking about really what this can become in the future and not, hey, complaining about the fact that we did this wrong or they did that wrong or that sort of stuff, which, over the first 2 years, you probably had that. So hopefully, through the growing pains, and now thinking about what the future can hold. So we are working very closely with all of them figure out how do we make the race better? How do we present it better? How do we help sell? How do they help us drive fans and all that sort of stuff, which is a pretty cool place to be. I think that 1 of your points is what does this mean for F1. It means a ton, right? And I think most visibly, sort of the impact in the U.S. and what Vegas has meant. It's been the third race, but I think people look at it and they're like, "Oh, my god, 3 races now Vegas, Miami, Austin, this is a critical piece of that strategy. The other thing that you've seen and one of the reasons that we made this investment as opposed to licensing it to someone else was sort of speed to market and getting it done in our own way. And we were able to do that. And I think that turned on, we talked about sponsorship earlier, a few different sponsors that sort of engage with us because we had Vegas and now have gone and stay global with us. Amex is a great example of that. And so what that -- what Vegas has done to sort of burnish the brand around the world globally is sort of a huge impact that doesn't always show up in the direct Vegas P&L. .

Yes. I mean, given those benefits, would it make sense to self-promote so to speak, in other markets? Or is this really a unique situation given the U.S. and Vegas?

Yes. I think it's pretty unique just because we're operating in a jurisdiction where we actually have familiarity. I think there was a reason why Vegas itself was critical to our strategy, and I just elaborated as to why. I wouldn't say we wouldn't do it somewhere else, but stars would have to align a way that made sense for us to do it versus sort of several other people who are now clamoring to get in with races in different locations.

Okay. Last F1 question, then we'll turn to Moto. You've got the Concorde Agreement now done that runs through 2030. So you have line of sight on all the pieces of your relationship with the teams. What should investors understand about the, in particular, the team payment structure and sort of the operating leverage that the business can see over the course of the 5 years? .

Yes. I think what we said recently is we see about 200 basis points in '26 and then stable sort of after that. I think the best part about the Concorde Agreement is a continuation of an arrangement with all the people in the ecosystem that matter for another 5 years. And so we have the operating parameters of how we work together over the next 5 years. And if you go back 10 years to when Liberty bought F1 and the state of the relationships with F1 and the promoters, F1 and the teams, not good. Not good at all. And I think a large part of the success most recently has been the fact that the level of trust that exists now between us and the teams is significantly different than what it was 10 years ago. So now we've come together and think about collaborating on stuff, not what are you trying to take for me versus him and why does he get that? And I think you've seen it play out, Drive to Survive, the first season, Ferrari and Mercedes were not there.

We heard about that.

And now you do these different projects, whether it's Disney or LEGO and things like that where you need everyone to participate and you see them all sort of coming to the table. Yes, we're still squable on stuff, but it's all small relative to the fact that everyone has gotten religion around the fact that if we can work together, the whole pie grows and everyone benefit.

Yes. Well, the team values have definitely grown.

Yes.

All right. Let's talk about MotoGP. You closed that deal last summer. How would you say the business is performing versus your kind of initial underwriting plan? Any surprises, good or bad, that we should be aware of at this point?

Yes. So we're still getting into it, but I think coming away with our initial impressions as very, very excited to have this business. There aren't many businesses like this. You go to a couple of these races and you understand sort of the passion that is there. You also understand just the sport itself and sort of the emotion that evokes because it is so sort of raw and dangerous. And that is what that brand, I think, will be. I think from a business commercialization standpoint, it's going to be a bit of a build. And we've talked about that, which is, hey, we got to build the pieces to this. I don't think there's fundamentally anything to the sport per se and huge investment that way, is building out the team and people with the requisite skills in terms of building brands, commercializing the enterprise. And so that's all sort of doable in our minds. It will take some time. It probably will be a little bit choppy. But as we start to look towards '27, and '27, we start to see some of the rise in sort of promoters as we've struck new deals. And those will start to flow in, I think, in '27. We're already having engaged conversations on the media front with respect to renewals that we have, or deals that are going to come up. And then in sponsorship, it is still predominantly endemic sponsors and that's going to be an area of opportunity. And as we sort of again create the brand -- excuse me, not create it, but build that brand. And then monetize against it, we'll see sort of a more general sponsors come in. I think an important thing here is it is an amazing sport and an amazing brand with a long history. So there are a lot of stories to be told. We just need to tell it to more people, and we will build that audience, and we will build that fan engagement. .

To that end, you've got your team deal up, I think, at the end of '26 with the MotoGP teams. What are your main objectives? What are you trying to get out of that renewal to help realize the opportunity? .

I think we're close to getting that done. And I think what we're trying to do there is sort of build a construct with those teams where people, again, have a similar level of trust with each other, understand that we're all in this to build the business. And I think we will get there. I think there's opportunity that is playing out on the team side. Tech3 was sold recently to a group led by David Blitzer, both Main Street, IKON. And look, these are people that understand sport as an entertainment asset and the fact that you actually need to invest. I know a couple of other teams may sort of have new investors come in at some point. And what we're looking for is those investors to have a similar mindset to us. And again, how do we invest and build this sport together. And I think you'll see sort of a lot of success over a several year period once that happens.

Okay. Maybe in the last couple of minutes, Derek, Liberty always has or not always, but certainly under the F1 Moto world has a high-class problem generating a lot of cash flow and deleveraging pretty rapidly. You guys, I don't think have a sort of formal leverage target anymore, but how should your investors think about deploying capital over the next couple of years as the balance sheet gets to be at a leverage level that's pretty -- at least my words conservative over the next few years? .

Sure. I think -- and I think we talked about this at the beginning, but we are deleveraging. And to your point, hopefully, we'd be at a point relatively soon where you'd say, "Hey, how are you investing your capital." And I think what we talked about is we would like to invest in growth, growth in our businesses, growth alongside our businesses, similar types of businesses, kind of what I was talking about earlier and then maintaining sort of that disciplined approach to it, trying to leverage off of what Liberty has done in the past, what it is now, our relationships, our ability to spot those sorts of opportunities, our ability to finance them creatively -- and -- but we're also not going to do sort of dumb deals. And we also understand sort of what the expectations are. And so we've got to make sure that whatever we do, we have the ability explain that properly to our investors. But I do feel like Liberty now after what we did last year with a lot of corporate maneuvering the acquisition of Moto, the split-off of Liberty Live at the end of the year, we're in a good position. We've talked about the financial strength, and I think we should use that.

Okay. Well, we're out of time. Derek, thanks so much for coming. Good to see you.

Thanks for having me. Thank you, everyone.

Thank you, everybody.