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Real Madrid Financial Analysis - 2017/18

Before the release of financial report of 2018/19, I run into the last year’s book (I know it’s a little bit late) to find some financial rationale behind the sport’s decision...

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The revenue rocketed over 700m for the last year, and suddenly 800m is no longer an unachievable goal for a football club, thanks to the accelerating growth of the whole football industry.

Back to the financial report, the operating income for the club in 2017/18 amounted to €748 million, increasing by 11.3% from the last season. The rapid growth set a record for the last decade which was achieved by a steady rise in competition awards and commercial income as well.

If we extend the chart to the beginning of this century, it shows an accumulated growth over 530% for the 19 years, with an annual average increase of 11% approximately.


Profitability -

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Compared to the other world-class football clubs, whose financial figures were disclosed by Deloitte Money League, La Liga dual occupied the first two on the revenue list, while Manchester United dropped behind Real Madrid and Barcelona to the third place following a record growth in 2016/17, mainly due to continuous underperformance in the Premier League and devaluation of the local currency. On the other hand, the German giant Bayern Munich became the fourth club that achieved an annual operating income over €600 million. And Liverpool, after an incredible season (well, they have an even better season since then), achieved a record rise of almost €90 million in revenue, and outperformed the Blue Lion to become the third wealthy club in the Premier League. In general, the upgrade in PL broadcasting package has gained their clubs an advantage over other continental clubs, which would be enhanced in the future with the stabilization of GBP.

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Looking back to the club, the operating income was divided into the following categories as reported: Membership & Tickets, Matches, Broadcasting and Commercial, all of which were increased in the last season. Membership & Tickets increased by 4.6%, while Matches rose by 16.6%, Broadcasting by 7.9%, and Commercial by 16.2%. Let’s have a breakdown one by one.

For the first, we combined the income from membership, tickets and matches together. The table below categorized these incomes by each competition. During 2017/18, Los Blancos claimed four titles including Spanish Super Cup, European Super Cup, Champions League and FIFA Club World Cup, while none of which stimulated the income since they had achieved three of them in the previous season as well. The real driver of the income was ICC, the pre-season friendly matches. The high rewards and exposure to fans and media are the reason why the Galacticos flew to US year after year. Also, the current pattern of matchday income with a slowdown increase has urged Florentino to break the ceiling (well, they will build a ceiling actually) and bring us a brand new Bernabeu.

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Next is broadcasting, which was increased by 7.9% compared to the previous season.

Domestically, according to the data published by La Liga, the broadcasting fee from domestic matches was €148 million, slightly lower than Barca of €154 million, while both increased from the previous season.

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The table above illustrates the La Liga broadcasting income and league rank for all 20 top league clubs and 3 relegated clubs. The La Liga broadcasting package has come to the second year, and the total broadcasting income reached €1.33 billion, 6.3% higher than the previous season. Clubs with a growth rate over 10% included Atletico, Sevilla, Real Sociedad, Eibar and Alaves, showing that all football clubs on different scales had the chance to benefit from the new broadcasting package. Also, the parachute package is considerable for those humble clubs.

Talking back to Real Madrid, the domestic broadcasting income rose from €140.1 to 148 million, or a5.6% growth. Although the growth rate is not so significant, especially compared to the smaller clubs, it serves as a one of the pillars to the club’s income structure and might be reinforced while La Liga updated the package a year after.

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Also, the pillar can be reinforced by overseas broadcasting, in which the Champion League TV rights. Last year we said Champion League was no longer the main source of revenue increase, since either the competition bonus nor TV pool upgraded. Just a reminder, a club benefits from Champion League in two ways: a) Competition bonus awarded for participants and winners in each round, and b) TV money, assigned by countries for teams with better performance from a pool that each country negotiated with broadcasting companies. However, this year the income slightly increased by nearly 10% due to that the underperformance of Atletico and Barca leaved a greater share in TV pool for Real Madrid. That reminds us that the 10% increase is almost impossible to repeat since we can’t defend the title forever, nor expect Roma to beat Barca on away goals every time. Thus, with no inflation effect considered, the €88.6 million would be an unachievable record in a decade perhaps. Anyway, UCL is still our goddess.

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Focus on La Liga, Real Madrid is, of course, the biggest money maker from UEFA games for the last 7 years, ahead of Barca. And Simeone has brought Atletico to the third successful club in Spain. Sevilla has surpassed Los Che with a constantly dominant performance on Europa League. No matter how La Liga clubs dominated the UEFA competition, their UEFA incomes were still largely allocated to competition bonus instead of TV money, which was the opposite of the income structure of Premier League clubs. The gap of marketing exposure and negotiation power between British clubs and Spanish clubs can also be seen in their commercial incomes.

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Commercial incomes include sponsorship income, commodity sales, commercials and other incomes. For Real Madrid, the main sponsors include Adidas (with a partnership til 19/20) and Emirates Airline (with a contract renewed til 21/22, €70m for each year). The partnership with IPIC has been expired from this season, and no other big name appeared, showing that the club has been focused on the renewal of partnership with Adidas (which was announced in May 2019 for a record).

Compared to other big clubs, Real Madrid remained as the fourth high in rank of commercial income, following Bayern, Barcelona and Manchester United, but with a leading increase amount of €41m. Even so we’d like to remind that the effect of departure of Ronaldo has not been reflected on the figures yet.

Until now, we have gone through all four income sources. In a summary, seeing that the revenue from matches and broadcasting have less potential to growth (at least for the next season), the club has put every effort on continuous development of commercial activities and the new business mode – the remodeling of Estadio Santiago Bernabéu.

Since the revenue is less possible to achieve a significant increase, the profitability lies on the other side of the coin – expenditures.

8.5 The largest component of expenditure is personal expense. Last year, we warned our readers of the highest wage ratio in the past decade, but this year this ratio seems being well-controlled, with a 3% decrease, and being possible to decrease further in the next season due to the departure of the GOAT.

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The table above illustrated that the total personnel expenses increased €24.6m, of which €17.6m were from football teams, mostly from first team players, and €7m were from the basketball team, the new European champion.

As for the football team, expenses on players and coaches from the first team increased €19.8m, of which salaries rose by €33.6m while image rights and bonuses went down by €3.5m and €10.2m respectively. The decrease of group bonuses can be explained by the weak performance in domestic competitions, though the rest needs a further inquiry.

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During September 2019, following the winning of La Duodecima, seven players earned their new contracts, effective from the season 2017/18. All new contracts contained a salary increase higher than €3m each. That would explain the €33.6m increase on expenditures. But we also noticed that the club altered its strategy a little by cutting the expenditure on image rights, in order to put restrictions on salary ratio and retain the best players at the same time.

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As usual, we compared our personnel expenditures with Barcelona. Last year, we found that Real Madrid surpassed Barcelona in total salaries for the first time in last three years, which coincided with the situation in season 2014/15 when Barca won three champions and renewed lots of contracts. However, this year we were shocked that the salary of our rivalry rocketed over €500m, increased by €151m, approximately 40% from 2016/17. The increase was largely due to the renewal of Messi’s contract and the arrivals of Coutinho and Dembele. And their actual wage ratio was 76.6%.

Last year, we said that salary rise might force clubs to sell their key players like Neymar or Ronaldo. Sometimes, emotionally people feel that a great player deserves more, but pragmatists might disagree. We can’t say who’s right at this point, but we don’t want to see that both clubs and players hurt in a decision. At least, our club chose to invest in the future, by not only inviting the new generations of players but also upgrading its infrastructure.

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Moving forward to other expenditures, we didn’t recognize any dramatic fluctuations except for the item under the "Other Operating Expense". The other operating expense, including external services, indirect taxes, transportation, and others, increased by €46m last season, of which almost €29m was mandatory contributions regulated by Royal Decree 5/2015, and €13m was project related.

Thus, the EBITDA was back to €90m plus, largely due to the revenue growth and salary control. And the net profit was €31.2m, €9.8m higher than the previous season. In conclusion, the profitability was improved on the book.

But what about the real money?

Liquidity –

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At first, the total liabilities were decreased further by €16m, with non-current part down by €28m. As a result, the non-current liabilities were under 25% of the total liabilities, and the debt ratio was under 55%, which was slightly improved, but could be a signal for qualifying certain performance goals set for fund raising.

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Let’s put cash and bank balances into consideration. The chart above illustrated the change of club’s net debt in 20th century. For the third consecutive year, the net debt was negative, meaning that the cash and cash equivalents were safe to pay any debt liquidated with a surplus on hand. Also, we measured the club’s liquidity by Net Debt to EBITDA ratio and Net Debt to Equity ratio, both of which were showing a health image.

At the meantime, the asset structure altered as the liability did, with current ratio increased from 70.6% to 76.9%, and current to total assets increased from 29.5% to 32.5%. Long term investment was halted, especially investment in players. All evidence pointed to the same goal – getting prepared for the remodeling work.


Forecast –

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Firstly, we compared the actual result from 2017/18 to the budgeted figure set earlier for that season. And we found unexpected deviations in Revenue – matches and Personnel expenses, which probably indicated that the contract renewal with certain players was not planned, or the club intended to transfer certain players out but failed eventually. It’s just a guess of course.

Second, we compared the actual result from 2017/18 to the budget set for 2018/19. Revenue in all categories was predicted unchanged, showing their confidence in performance both on and off the pitch. The personnel expenses were forecasted a little decrease, probably resulting from the departure of Ronaldo. €45m provision was budged, explained on the report, for several assets of the stadium that will cause fall along the next exercises once the project of remodeling of the stadium begins. And €102.2m of gain/loss on disposal of long-term assets was the last legacy that Ronaldo marked on the report.


A conclusion –

If we had to choose a word to summarize the financial report of 2017/18, getting prepared would be my choice (well, two words maybe). Prepared for what? For the certainties and uncertainties. It is certain that the La Liga will upgrade its broadcasting package from 2019/20. It is certain that the sponsorship contract with Adidas will expire in 2019/20, and the renewal will be completed before that. It is certain that the remodeling work of the stadium will be approved and commence in the next two years. Also, it is certain that the players who hold the Champion League Cup are getting old year after year. Besides the above, everything else would be uncertain and need the club to be well prepared. Thus, before 2019/20, any increase in expenditures will be scrutinized, which will certainly dissatisfy someone. But time after time, the old man showed his magic to win someone back and sing alongside him – Hala Madrid!


Extra –

When I finally finished this piece, a "horrible" news came to my notice: The club released its financial result for 2018/19. So, I had no choice but to add the following chart.

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All the P/L figures beat the budget, but the net debt increased. Considering the cash balances decreased by €34.4m, we assume that the total liabilities were increased by €45.5m. Detailed explanation would be found in the complete financial report published in this October, but we assume it in relation to the remodeling work.

That would be all my opinions on the financial report. If you have any disagreement, supplement, advice or request, please feel free to leave a comment. Cheers.