Churchill Downs exceeded analyst expectations for net revenues and EBITDA in the third quarter of 2016, the company reported Thursday, but concerns remain over the performance of its Big Fish Games social gaming unit.
The Louisville-based gaming and racing company, owner of the Kentucky Derby, posted a record net revenue of $303.4 million for the quarter and more than doubled its year-over-year net income – from $4.2 million to $8.7 million.
While earnings per share rose from $0.24 to $0.52, this figure fell well short of the $0.89 estimated by from Zacks Investment Research. Adjusted EBITDA was down by 7 percent from $72.2 million to $67.3 million, though it still bested the consensus estimate of $66 million. The company issued a $1.32 per share divided, a 15 percent jump over the prior year.
One of the key themes of this earnings report was the subpar performance of the company’s social gaming division.
Big Fish Games, the Seattle-based social gaming unit acquired by Churchill in December 2014, was a key revenue driver for the record quarter, increasing its net revenue by $18.7 million from the prior year. However, this figure was slightly below analyst expectations, and EBITDA for the division fell by $9.8 million due primarily to user acquisition costs, developer fees and platform maintenance costs.
Bill Carstanjen, chief executive, said on an investor conference call Friday morning that he was not surprised by the sluggish Big Fish performance, citing typically slower summer months, the Olympics, the prolonged presidential election cycle and “the phenomenon known as Pokemon Go.”
“The better than expected bottom line quarter may not be enough to drive the shares higher, in our view, given the hyper focus on the Big Fish Games unit, which was lower than expected on the top line,” said David Katz of Telsey Group in a note to clients. “The quarterly results were solid in some aspects and surprisingly strong in others. Ultimately, we believe the key focus remains on Big Fish, which could temper the shares response to the results.”
Big Fish offers three segments of social games – social casino, casual and mid-core free-to-play and premium. While the social and premium segments experienced some decline, the casual and mid-core games offset by bringing in a $23.5 million increase in revenues, a 23 percent increase in average paying users and a 5 percent increase in bookings per paying user.
“We believe very strongly in the social casino space. We believe we have the focus and strategy to return this segment to growth,” Carstanjen said, warning against premature comparisons of Big Fish products to newer games that have not withstood the test of time.
He also acknowledged that the company had learned from some of the mistakes it has made as it continues learning how to navigate the social games space. “Going forward, we are adopting a more cautious approach to scaling titles with limited history, regardless of how they may perform,” he said.
TwinSpires, Churchill’s platform that offers online wagering on horse racing, also helped to drive the strong overall revenue performance, bringing in $55 million – a 9 percent jump from the prior year quarter. Total TwinSpires handle also grew by 14.3 percent, which bested the remainder of the U.S. horse racing sector by 13.5 percentage points.
Much like Churchill’s colleagues in the regional gaming space, overall casino gaming revenue was largely stagnant in the third quarter – registering just a $0.3 million uptick to $83 million.
