Churchill Downs (CHDN)

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Churchill Downs (NASDAQ:CHDN) owns four horse racetracks. Around 70% of revenues come from wagering on live and simulcast races.^[1] Churchill Downs receives a commission on all wagers placed on races run at the company's tracks and they are able to command larger fees for wagers placed at their own facilities. The company also owns 18 off track betting facilities.

The company's income is significantly affected by the number of live racing days at its tracks - more live racing days generate more income. Churchill Downs' total number of racing days fell markedly in 2005 due to damage caused by Hurricanes Katrina and Wilma. Barring natural disasters, the number of race days is regulated by individual state governments and changes little from year to year.

In 2007, the company launched TwinSpires, an advanced deposit wagering business that lets customers in certain states set up accounts and place bets by telephone, text message, or via the internet. Last year Churchill Downs also acquired AmericaTab (ATAB), Bloodstock Research Information Services (BRIS), and the Thoroughbred Sports Network (TSN); the acquisition of ATAB included three online wagering domains (winticket.com, BrisBet.com, TsnBet.com).^[2] Studies show that advance deposit wagering is the "fastest growing segment" of horse race betting.^[3] The company is hoping that their newly acquired wagering domains will increase revenue by capturing more bettors and reducing the number wagers made through third-party web sites and OTBs.

The company's flagship operation, Churchill Downs Racetrack in Louisville, Kentucky has been the home of the Kentucky Derby since 1875.

[edit] Business Financials

In FY 2007, Churchill Downs' overall revenues rose to $410.7 million, a 9% increase from $376.7 in FY 2006. The largest increase in revenue was seen in Louisiana Operations as a result of having 48 more live racing days than the previous year and the opening of a new slot machine facility at the track. Net Revenues rose 9% in FY 2007 spurred by a 20% increase in revenues from gaming (slot machines, video poker, etc...).^[4]

Total expenses for FY 2007 increased by 15% due primarily to the increased number of live race days at Lousiana's Fair Grounds, a net loss of $18.4 million related to Hurricanes Katrina and Wilma (after insurance recoveries), the acquisition of AmericaTab, Bloodstock Research Information, and Thoroughbred Sports Network, and the rollout of TwinSpires.^[5]

In 2007, Churchill Downs completed the sale of Hoosier Park racetrack and its OTBs in Anderson, Indiana to a privately held company.^[6]

^[7]

[edit] Business Segments

• Churchill Downs (31.8% of Total Racing Operations Revenue) - Located in Louisville, Kentucky, Churchill Downs' one-mile dirt track is home to the Kentucky Derby and the Kentucky Oaks, with total purses of at least $2.0 million and $0.5 million respectively. The facility can host 52,000 spectators and 1,400 horses. In FY 2007, Churchill Downs hosted 73 live race days and had net wagering revenues of $60.4 million (21.1% of total wagering revenues).^[8]

• Arlington Park (22.8% of Total Racing Operations Revenue) - Located in Arlington Heights, Illinois, the one and one-eighth mile synthetic track was home to the 2002 Breeders' Cup. In 2007, Arlington Park converted its dirt racetrack to a synthetic surface, which has resulted in a higher average of horses running per race (and thus more wagering and more revenue). Arlington Park's largest annual race is the Arlington Million with a purse of $1 million. The facility can seat 6,054 people and house 2,200 horses. In FY 2007, Arlington Park hosted 94 live race days and had net wagering revenues of $73.7 million (25.8% of total wagering revenues).^[9]

• Calder Race Course (24% of Total Racing Operations Revenue) - Located in Miami-Dade County, Florida, Calder is adjacent to Dolphin Stadium (home to the MLB's Florida Marlins and the NFL's Miami Dolphins) and its main dirt track is one mile. The racetrack annually hosts The Festival of the Sun and the Summit of Speed with a combined purse of $2 million. Calder's main competition is Gulfstream Park, also in the Miami area, which is owned and operated by Magna Entertainment (MECA) The facility has seating for 15,000 spectators and barns for 1,800 horses. A referendum passed in January 2008 will eventually allow Calder to install 2,000 slot machines at the racetrack. In FY 2007, Calder hosted 172 live race days and had net wagering revenues of $90.3 million (31.6% of total wagering revenues).^[10]

• Louisiana Operations (21.7% of Total Racing Operations Revenue) - Fair Grounds Race Course and Slots is located in New Orleans, Louisiana and has a one mile dirt track. Fair Grounds annually hosts the Louisiana Derby, a prep race for the Kentucky Derby and has a purse of $0.6 million. The facility has seating for 5,000 spectators and stables for 2,000 horses. A temporary building houses 245 slot machines but a permanent structure is under construction and will eventually hold 700 slot machines.^[11] After sustaining significant damage and shortened racing seasons due to Hurricane Katrina, in FY 2007 the racetrack host 84 days of live racing and had net wagering revenues of $48.8 million (17% of total wagering revenues).^[12]

• Other Investments - This segment consists primarily of Bloodstock Research Information Services (BRIS) and the Thoroughbred Sports Network (TSN) both of which sell handicapping and horse pedigree history to racetracks, horse owners and breeders, and others in the industry. Churchill Downs also has substantial interest in a telecommunications service used for simulcast and OTB wagering and has a joint venture with Magna Entertainment Corporation that makes racing content from their tracks available to third parties.^[13]

Churchill Downs operates eleven OTB facilities in Illinois, and nine OTBs, 600 video poker machines, and 245 slot machines in Louisiana. In 2007, the company launched TwinSpires, an advance deposit wagering business that lets customers in certain states to set up accounts and place wagers by telephone, text message, or via the internet. Last year Churchill Downs also acquired AmericaTab (ATAB), Bloodstock Research Information Services (BRIS), and the Thoroughbred Sports Network (TSN). ATAB and TwinSpires were merged to provide a single advance deposit wagering platform, while BRIS and TSN sell handicapping and horse pedigree history to racetracks, horse owners and breeders, and others in the industry.^[14] TwinSpires accepts wagers from customers in Oregon, California, Maryland, Virginia, and Washington among other states.^[15] Churchill Downs also has substantial interest in a telecommunications service used for simulcast and OTB wagering and has a joint venture with Magna Entertainment (MECA) that makes racing content from their tracks available to third parties.

^[16]

[edit] Key Trends and Forces

[edit] Number of Live Race Days

Although all of its racetracks offer simulcast wagering for races held at other facilities, Churchill Downs generates most of its revenue on live racing days and the associated wagering. In FY 2007, net revenues for Louisiana Operations increased primarily due to 48 additional live racing days while net revenues for Churchill Downs decreased because of having four fewer race days than 2006. Arlington Park saw higher revenues in part because its Polytrack composite racing surface, installed in 2007, increased the average number of horses running each race and thus more income from wagers.^[18] The company's largest events are the Kentucky Derby, the first in an annual series of three races for three year-old horses known as the Triple Crown, which has a purse of at least $2 million, and the Kentucky Oaks, another thoroughbred race run during the same weekend as the derby, which has a purse of at least $0.5 million. Calder, Arlington Park, and Fair Grounds host other large races that offer combined purses of at least $3.6 million. The Breeders' Cup World Thoroughbred Championship is hosted at a different track ever year but has been hosted by Churchill Downs six times, last in 2006, and Arlington Park hosted it in 2002.^[19] In 2007, Churchill Downs' tracks hosted 423 live race days, 44 more than in 2006.^[20]

[edit] Online Wagering and Advance Deposit Wagering

Over 80% of betting on horse races takes place at off-track locations such as other racetracks, OTBs, casinos, or online.^[21] TwinSpires, Churchill Downs' new advance deposit wager, will allow customers in certain states to set up an account into which they will deposit money and then bet this money via telephone, text message, or internet. With the 2007 acquisition of ATAB, BRIS, and TSN, the company took control over the online gambling domains winticket.com, BrisBet.com, and TsnBet.com. According to the company, studies show that advance deposit wagering is the "fastest growing segment" of horse race betting.^[22] However, as competitive as the horse racetrack industry is, there are significantly more competitors in the online and OTB gambling markets. Although Churchill Downs receives commission on all wagers placed on races hosted at its venues even if placed at another company's OTBs, the company is hoping to capture a larger slice of the OTB and advance deposit wagering market. Barriers within the market consist mainly of states not allowing residents to gamble across state lines and other state-level legislation.

[edit] Legislation That Regulates Gambling

As with gambling, horse racing and horse racetracks are highly regulated by individual state governments. Such regulation provides stability within the industry as each state's regulatory board is responsible for allocating the number of live race days among tracks and the number of live race days allowed per track rarely changes substantially. Regulations on gambling are often reconsidered and revised such as the referendum in Miami-Dade county which will eventually allow the installation of 2,000 slot machines at Calder Racecourse or Kentucky's election of Governor Steve Beshear, a pro-gaming candidate who submitted a bill under consideration that would allow racetracks to operate casinos.^[23]

[edit] Competition

• Magna Entertainment (MECA) owns and operates seven thoroughbred racetracks, one harness racing track, and two tracks for both thoroughbred and harness racing. Three of these tracks include casino gaming in addition to standard horse race wagering, and the company owns XpressBet, an advance deposit wager service. In FY 2007, MEC had total revenues of $625.7 million and net income of $59.3 million.^[24] Churchill Downs and MEC are partners in TrackNet Media Group which distributes racing media content from the two company's tracks to other racetracks, OTBs, and casinos.^[25]

• Penn National Gaming (PENN) is another large competitor that operates three thoroughbred racetracks and three harness racetracks. Four of the racetracks have a total of almost 9,000 slot machines and PENN operates five OTBs. In addition the company owns twelve standalone casinos.^[26] PENN's FY 2007 total revenues were $2,436.8 million with net income of $1,034.2 million.^[27]

[edit] Notes

[edit] References

1. ↑ CHDN 2007 10-K, Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations, page 34
2. ↑ CHDN 2007 10-K, Item 1: Business, page 3
3. ↑ CHDN 2007 10-K, Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations, page 28
4. ↑ CHDN 2007 10-K, Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations, page 35
5. ↑ CHDN 2007 10-K, Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations, page 36
6. ↑ CHDN 2007 10-K, Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations, page 27
7. ↑ CHDN 2007 10-K, Item 6: Selected Financial Data, page 25
8. ↑ CHDN 2007 10-K, Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations, page 34
9. ↑ CHDN 2007 10-K, Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations, page 34
10. ↑ CHDN 2007 10-K, Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations, page 34
11. ↑ CHDN 2007 10-K, Item 1: Business, page 6
12. ↑ CHDN 2007 10-K, Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations, page 34
13. ↑ CHDN 2007 10-K, Item 1: Business, page 3
14. ↑ CHDN 2007 10-K, Item 1: Business, page 3
15. ↑ CHDN 2007 10-K, Item 1: Business, page 9
16. ↑ CHDN 2007 10-K, Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations, page 38
17. ↑ CHDN 2007 10-K, Item 1: Business, page 10
18. ↑ CHDN 2007 10-K, Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations, page 38
19. ↑ CHDN 2007 10-K, Item 1: Business, page 4
20. ↑ CHDN 2007 10-K, Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations, page 35
21. ↑ CHDN 2007 10-K, Item 1: Business, page 10
22. ↑ CHDN 2007 10-K, Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations, page 28
23. ↑ CHDN 2007 10-K, Item 1: Business, page 13
24. ↑ MECA 2007 10-K, Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations, pages 57
25. ↑ CHDN 2007 10-K, Item 1: Business, page 3
26. ↑ Penn National Gaming - Company Fact Sheet
27. ↑ Penn National Gaming - Google Finance
28. ↑ CHDN 2007 10-K, Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations, pages 34-5
29. ↑ MECA 2007 10-K, Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations, pages 55,62
30. ↑ Penn National Gaming - Company Fact Sheet