Churchill Downs Incorporated Reports 2017 Second Quarter Results

LOUISVILLE, Ky. (July 26, 2017) – Churchill Downs Incorporated (NASDAQ: CHDN) (CDI or Company) today reported business results for the second quarter ended June 30, 2017. Click HERE for full tables. 

Second Quarter 2017 Highlights

• Record net revenue of $451.9 million, 3% increase over the prior year
• Record net income of $78.3 million, 12% increase over the prior year
• Record diluted net income per share of $4.81, 17% higher than the prior year
• Record Adjusted EBITDA of $173.0 million, 8% increase over the prior year

In the quarter, net revenue increased $13.4 million primarily from a $12.1 million increase from TwinSpires, a $9.2 million increase in Racing and a $3.9 million increase from Casinos.  Partially offsetting these increases was a $12.6 million decrease from Big Fish Games.

The $8.5 million increase in net income and $0.70 increase in diluted net income per share was primarily a result of a $12.1 million increase in operating income from our segments and a $2.9 million increase in income from our equity investments, partially offset by a $5.8 million increase in taxes relating to higher operating income and $0.7 million increase primarily due to higher interest expense associated with higher outstanding debt balances.

Adjusted EBITDA increased $12.8 million primarily from a $7.4 million increase in Racing primarily as result of a strong Kentucky Derby week performance and a $4.2 million increase from Casinos due to equity investments and organic growth at certain properties.

OPERATING SEGMENT RESULTS:

We use Adjusted EBITDA to evaluate segment performance, develop strategy and allocate resources.  We utilize the Adjusted EBITDA metric because we believe the inclusion or exclusion of certain recurring items is necessary to provide a more accurate measure of our core operating results and enables management and investors to evaluate and compare from period to period our operating performance in a meaningful and consistent manner.  Adjusted EBITDA should not be considered as an alternative to operating income as an indicator of performance, as an alternative to cash flows from operating activities as a measure of liquidity, or as an alternative to any other measure provided in accordance with U.S. Generally Accepted Accounting Principles (“U.S. GAAP”).  Our calculation of Adjusted EBITDA may be different from the calculation used by other companies and, therefore, comparability may be limited.

The operating segment summaries below present net revenue from external customers and intercompany revenue from each of our operating segments:

During the quarter, net revenue increased $11.0 million from the prior year primarily driven by a $9.0 million increase in net revenue at Churchill Downs primarily from a successful Kentucky Derby week and a $1.5 million increase at Arlington driven by increased handle and admissions during their meet.

Adjusted EBITDA increased $7.4 million from the prior year driven by a $6.5 million increase at Churchill Downs primarily from a successful Kentucky Derby week and $1.1 million increase at Arlington driven by increased handle and admissions during their meet, partially offset by a $0.2 million decrease from other sources.

During the quarter, net revenue increased $3.9 million from the prior year primarily driven by a $2.0 million increase at Oxford, a $1.3 million increase at Calder, and a $0.6 million increase at Harlow’s, all of which resulted from successful marketing and promotional activities.

Adjusted EBITDA grew $4.2 million primarily driven by a:

• $3.7 million increase from strong performance from the Company’s equity investments, including our new equity investment in Ocean Downs in January 2017.
• $0.9 million increase at Oxford driven by the increase in revenues.
• Partially offsetting these increases was a decrease of $0.7 million primarily from a decrease at Fairgrounds and Riverwalk.

During the quarter, net revenue increased $12.1 million primarily due to a 34.0% increase in active players.  TwinSpires handle grew 19.6%, outpacing the U.S. thoroughbred industry performance by 18.4 percentage points.

Adjusted EBITDA increased $0.5 million driven by a $2.2 million favorable impact of the increased wagering, net of costs, associated with the increase in active players and handle.  This increase was partially offset by a $1.7 million 2016 Pennsylvania tax refund which did not recur.

On a sequential basis from first quarter 2017 to second quarter 2017, total bookings increased $1.1 million, or 1.0%.

• Social casino bookings increased by $3.1 million. 
• Casual and mid-core free-to-play bookings declined $1.9 million as expected based on the user acquisition expense reduction.
• Premium bookings declined $0.1 million.

Compared to second quarter of 2016, total bookings declined $15.8 million, or 12.4%.

• Social casino bookings increased by $3.2 million.
• Casual and mid-core free-to-play bookings declined $15.6 million as expected based on the significant user acquisition expense reduction.
• Premium bookings declined $3.4 million primarily driven by customers continuing to shift from paid PC games to free-to-play mobile games.

Compared to second quarter of 2016, net revenue decreased $12.6 million, driven primarily by a:

• $12.1 million decrease in casual and mid-core free-to-play revenue.
• $3.5 million decrease in premium revenue.
• Partially offsetting these decreases was a $3.0 million increase in social casino.

Compared to second quarter of 2016, Adjusted EBITDA increased $0.5 million, driven primarily by an:

• $9.1 million decrease in user acquisition spending.
• $4.0 million decrease in all other expenses.
• Partially offsetting these decreases was a $12.6 million decline in revenues.

Capital Management

CDI repurchased 1,077,029 shares of its common stock in conjunction with its stock repurchase program at a total cost of approximately $171.7 million in the second quarter of 2017.  CDI had approximately $78.3 million of repurchase authority remaining under this program as of June 30, 2017.  Included in our repurchases during the second quarter of 2017 was an agreement with an affiliate of The Duchossois Group to repurchase 1,000,000 shares of the Company’s common stock for $158.78 per share in a privately negotiated transaction.

Conference Call

A conference call regarding this news release is scheduled for Thursday, July 27, 2017 at 9 a.m. ET. Investors and other interested parties may listen to the teleconference by accessing the online, real-time webcast and broadcast of the call at http://ir.churchilldownsincorporated.com/events.cfm, or by dialing (877) 372-0878 and entering the pass code 53523063 at least 10 minutes before the appointed time. International callers should dial (253) 237-1169. An online replay will be available at approximately noon ET on Thursday, July 27, 2017 and continue for two weeks. A copy of the Company’s news release announcing quarterly results and relevant financial and statistical information about the period will be accessible at www.churchilldownsincorporated.com.

Use of Non-GAAP Measures

In addition to the results provided in accordance with U.S. GAAP, the Company also uses non-GAAP measures, including EBITDA (earnings before interest, taxes, depreciation and amortization) and Adjusted EBITDA as described in the Company’s Annual Report on Form 10-K (“Adjusted EBITDA”).

Adjusted EBITDA includes CDI’s portion of the EBITDA from our equity investments.

Adjusted EBITDA excludes:

• Acquisition expense, net which includes:

◦        Acquisition-related charges, including fair value adjustments related to earnouts and deferred payments; and,

◦        Transaction expense, including legal, accounting, and other deal-related expense

• Stock-based compensation expense;
• Gain on Calder land sale;
• Calder exit costs; and
• Other charges and recoveries

For purposes of segment reporting, Adjusted EBITDA includes intercompany revenue and expense totals that are eliminated in the Consolidated Statements of Comprehensive Income.  Refer to the reconciliation of Comprehensive Income to Adjusted EBITDA included herewith for additional information.

The Company uses Adjusted EBITDA as a key performance measure of the results of operations for purposes of evaluating performance internally. The measure facilitates comparison of operating performance between periods and helps investors to better understand the operating results of CDI by excluding certain items that may not be indicative of the Company’s core business or operating results. The Company believes the use of this measure enables management and investors to evaluate and compare, from period to period, the Company’s operating performance in a meaningful and consistent manner. Adjusted EBITDA is a supplemental measure of our performance that is not required by or presented in accordance with U.S. GAAP and should not be considered as an alternative to, or more meaningful than, net income (as determined in accordance with U.S. GAAP) as a measure of our operating results.

The Company updated its definition of Adjusted EBITDA to exclude changes in Big Fish Games deferred revenue during the fourth quarter of 2016.  Additionally, during the first quarter of 2017, certain revenue previously included in our Corporate segment was deemed by management to be more closely aligned with our TwinSpires segment.  The prior year amounts were reclassified to conform to this presentation.