Churchill Downs reported a mixed quarter vis-à-vis Wall Street expectations Wednesday afternoon, there is significant buzz surrounding its Big Fish social casino unit following recent mergers and acquisitions activity elsewhere in the industry that has boosted valuations.
For the first quarter of 2017, the Kentucky Derby operator posted revenue of $280 million – a 3 percent dip from the prior year – and adjusted EBITDA of $57 million, up 23 percent.
Net income was up more than 1.5 times to $7.3 million as was diluted earnings per share of $0.44 – a 175 percent jump.
The main drivers behind the overall revenue drop was a $10 million decrease from Big Fish Games and a $2.4 million dip decline in the racing segment. Casino revenues checked in ahead of expectations at $87.5 million.
Big Fish reported bookings revenue of $111 million for the quarter, down from $128 million in the prior year quarter. However, Big Fish EBITDA grew $11.4 million year-over-year because of new operating efficiencies and lower user acquisition costs.
A $2.4 million revenue increase in the quarter from TwinSpires was another highlight. The online racing platform posted $52.3 million in revenues and $13.2 million in adjusted EBITDA and was boosted by a 20 increase in the number of active players and 7 percent growth in total handle – a figure that outpaces the greater U.S. thoroughbred industry by nearly 8 percent.
“While Big Fish Games, TwinSpires and our casino segments drove positive growth, our racing segment was a headwind for us,” said Bill Carstanjen, chief executive officer. He cited the breakout of an equine disease in Louisiana during the quarter that sidelined numerous horses and depressed wagering, along with an anomalous calendar that saw the Louisiana Derby take place the second quarter.
Carstanjen emphasized the Big Fish remains a key asset in the company’s portfolio and affords significant competitive advantage. He iterated that the goal is to build the social casino into a profitable operation over time rather than simply chase short term revenues.
“Our objective is not simply to chase bookings for bookings’ sake but rather to achieve sustainable profitable bookings growth,” said Carstanjen.
While concerns surrounding Big Fish, which was acquired in December 2014, have been ongoing for several quarters, they are being assuaged by the rising valuations in the social casino space following the sale of International Game Technology’s DoubleDown to a South Korean operator.
That sale was valued at 10.5 times the previous 12 months trailing EBITDA, with some analysts putting that figure much higher after factoring in future royalty payments, and it is having the effect of lifting all boats in the social casino space.
Churchill Downs’ shares have surged from $157 to $172 since April 17 when the IGT deal was announced.
“The lower than expected results in most of the key segments, including Big Fish, would be viewed as negative for the shares under normal circumstances. However, we believe the growing context of presently high valuations being paid for social gaming, casino and other unique assets could turn negative news into positive news,” said David Katz, an analyst with Telsey Group.
“As the shares and valuation have moved higher of late, we believe it is driven both by the operating and non-operating opportunities for Churchill Downs,” Katz added.
On April 25, Churchill Downs announced a new share repurchase program that will return as much as $250 million in capital to shareholders. The program replaces an earlier $150 million initiative that had an unused authorization of $115 million remaining.
