The 2020 Formula 1 season has come to an end a bit later this year, finishing the championship in Abu Dhabi on December 13th, after pushing through an array of logistical challenges to host races across the globe in the midst of the COVID-19 pandemic. However, Ferrari (NYSE: RACE) failed to rise to the challenge on track, finishing in a lowly 6th place in the Constructors Championship. To put that into perspective, this year marks Ferrari’s worst finish since 1980 and only the fourth time that Ferrari has finished outside of the top 5 since the Constructors Championship began in the 1950s. From a sporting perspective, these results are disappointingly meaningful for the most successful team in Formula 1 history. Motorsport channels and journalists have surely not let the disappointment go unnoticed, while the huge global base of passionate Ferrari fans just try to nervously look ahead to better year in 2021. From a business and investment perspective though, how impactful are these results on the overall Ferrari business? Ferrari does prominently highlight the success of the Formula 1 team near the top of their forward looking statements and again in its risk factors, so it is certainly worth exploring that question.
BRINGING IN REVENUE
A Formula 1 constructor has two main sources of revenue; sponsorships and prize money distributions from the commercial rights holder, Liberty Media. The prize money distributions are made to constructors during the following year’s season. Ferrari and Liberty Media do not directly report the prize amounts received by each team, but we do know from Liberty Media’s 2019 Annual Report that $1.01B in payments were made to the 10 teams in the series. Of that sum, as provided by RaceFans, it is estimated that Ferrari received approximately $205M in prize money in 2019 for their efforts during the 2018 Formula 1 season. Of that $205M sum, $35M is a part of a fixed share that is equally distributed to every team that finishes within the top 10 in 2 of the past 3 years. Another $56M was awarded to Ferrari for their 2nd place finish in 2018 as part of the variable payment made to teams based on performance. For reference, the first place team received $66M and the last place team received $15M based on their respective performance. The other $117M Ferrari received contains various guaranteed bonuses, including over $70M as a Long Standing Team bonus and over $40M as a Constructor Championship Bonus.
The 6th place finish for Ferrari this season will result in a significant reduction of the variable payment awarded based on performance. In assuming a similar prize money pot of $1B and referencing the variable payment made to the 6th placed team previously, Ferrari can expect around $24M less in prize money revenue for this season. Though given the reduced Formula 1 season, which saw only 17 races held as opposed to the original 22 races scheduled, a smaller prize money pot is expected given Liberty Media’s reduced revenue. Therefore, it wouldn’t be surprising to see Ferrari’s prize money for the season to fall to near $170M, potentially $35M lower than their previous haul.
A SHORTENED SEASON
The reduced number of races this year due to the pandemic will also weigh on Ferrari’s other, more immediate, source of revenue; sponsorship revenue. With 5 less race weekends on the calendar, sponsors would be expected to pro-rate the value of the sponsorship to reflect the number of races actually held. We do not know the exact annual value of Ferrari’s Formula 1 sponsorship revenue but on Ferrari’s financial reports, the revenue category of “Sponsorship, commercial, and brand” is where Ferrari captures the net revenues of its Formula 1 team. That category, however, also includes merchandising and licensing. In 2019, that category provided 14% of net revenue at $592M for the company. Research from FormulaMoney though has valued Ferrari’s sponsorship revenue in the 10 years from 2009-2018 to be $2.08B, or an average of $208M per year. Using the average as an approximation for 2019, sponsorship is over a third of the “Sponsorship, commercial, and brand” revenue. Combined with the $205M of revenue from Formula 1 prize money distributions, total Formula 1 revenue would be estimated in excess of $410M, not including merchandising. If sponsorship revenue for 2020 is decreased by an estimated 20%, based on the percentage of races not held, it would result in a revenue loss in excess of $40M.
A NOTICABLE, BUT MINOR SCRATCH
While the projected $35M decline in prize money revenue won’t be reflected until next year’s financials when prize money distributions are made, the projected $40M decline in sponsorship revenue will take its toll on this year’s results. Ferrari’s “Sponsorship, commercial, and brand” revenue for the three quarters ending September 30, 2020 is down 32% compared to the same period last year. However, the first two quarters of 2020 did not host any races, while the 4th quarter hosted 7 races, so the revenue will catch up for the end of the year as the 2019 prize money payments are made proportionally to the timeline of the race calendar.
A projected $70M drop in revenue, nearly a 2% decrease of total net revenues to Ferrari, as a result the 2020 Formula 1 season won’t go un-noticed on the upcoming financial reports, but it is not significant enough to set off any alarms. The road car business is what primarily drives revenue and free cash flow growth to investors, so that is where most of the attention will be aimed. However, the performance of the Scuderia Ferrari Formula 1 team is a critical part of how Ferrari markets its road car business. As Ferrari explains,
The prestige, identity, and appeal of the Ferrari brand depend in part on the continued success of the Scuderia Ferrari racing team in the Formula 1 World Championship. The racing team is a key component of our marketing strategy and may be perceived by our clients as a demonstration of the technological capabilities of our sports, GT, special series and Icona cars, which also supports the appeal of other Ferrari-branded luxury goods.
So while the immediate financial impact of this Formula 1 season will just be a minor scratch to business, Ferrari need to focus on drastically improving race results and restoring its image as the premier motorsport manufacturer.