Churchill Downs reported record revenues and net income for the 2016 fourth quarter on Tuesday evening but fell short of EBITDA expectations, capping a solid year with a mixed showing.
The Louisville-based racing, gaming and entertainment company posted revenues of $278 million for the quarter, up 2 percent year-over-year but below the consensus estimate of $287 million.
EBITDA for the quarter checked in at $56.5 million, $3.5 million below the consensus estimate but up 5.4 percent from the prior year quarter. Net income registered at $26.8 million, or $1.60 per share.
Churchill saw its revenue growth for the quarter come from a strong performance by TwinSpires – its online horse race wagering platform that was up 11 percent year-over-year. Total handle for the quarter grew by 12 percent compared to a 1 percent decline in the industry as a whole.
For the full year 2016, the company reported net revenues of $1.3 billion and adjusted EBTIDA of $334 million and net income of $108 million – up from $1.2 billion, $302 million and $65 million in 2015, respectively.
Bill Carstanjen, chief executive officer, noted that the horse racing industry had seen a slight uptick in wagering for 2016 after several static years and affirmed his company’s commitment to retaining the leadership position.
“We really like this business,” he said on a conference call with investors Wednesday morning. “We have a deeply experienced management team running it and we have a number of ideas we plan to implement.”
Carstanjen was enthusiastic about the preparations for the 2017 Kentucky Derby – which the company owns and operates, particularly a series of renovations that and property improvements that will continue to grow the event’s popularity.
“Our passion and our best opportunities lie within improving everything we do around the Kentucky Derby,” he said. “The Kentucky Derby will continue to be the crown jewel of our company.”
Carstanjen said that a $60 million renovation to the clubhouse at the Churchill Downs racetrack outside of Louisville will offer a shiny new batch of amenities to patrons.
“Our goal is to surprise customers and exceed expectations. We’re making the event bigger, better and more fun for everyone,” he said.
EBITDA from Big Fish Games, the company’s social casino unit that it acquired in 2014, jumped from $19 million to $25.3 million year-over-year. But overall bookings dropped 8 percent from 2015, prompting concern over the long-term viability of the segment.
“We believe that management will ultimately have to manage expectations for Big Fish, which reached our profit forecast on lower revenues and does not appear to be on a path to achieve appropriate returns based on the price of the acquisition,” said David Katz, a gaming analyst with the Telsey Group.
“The decline in our social casino segment is not something we are happy with or willing to accept,” Carstanjen said, admitting that the company is still learning how best to approach the social gaming business and suggested that focusing on bookings alone provides an incomplete picture. “You don’t want to manage the company to bookings, you want to manage it to profitable growth.”
Carstanjen emphasized that Big Fish has built up scale and cachet in the social gaming space that is difficult to replicate and said that customer play – particularly with newer games – always takes some time to ramp up.
“Whales don’t start out as whales, they are grown into whales,” he said. “You have to expect that your early customers in the game are not going to be performing at the same economic level as later on.”
Churchill’s casino business hit some rough waters, missed projections and ultimately dragged down bottom line results.
“The top-line results were softer than we were expecting given reported state gaming revenues,” said Cameron McKnight of Wells Fargo. “The softness was driven by CHDN’s operations in Mississippi and its slot operations in Louisiana that don’t report monthly state revenues.”
Carstanjen attributed the poor performance to heightened competition and struggling economies in those regions.
“While we have to expect that the Mississippi and New Orleans markets will continue to be a challenge, we have to run those businesses efficiently and gain share when possible,” he said.
Churchill Downs shares jumped in after-hours trading on Tuesday but came reverted to the $150 range Wednesday morning.
