Churchill Downs Incorporated Reports 2016 Fourth Quarter And Full Year Results

LOUISVILLE, Ky. (February 28, 2017) – Churchill Downs Incorporated (NASDAQ: CHDN) (CDI or Company) today reported business results for the quarter and full year ended December 31, 2016. Click HERE for full tables. 

Fourth Quarter 2016 Highlights

• Record net revenue of $278.3 million, up 2% over the prior year
• $23.7 million gain on sale of excess land at Calder
• Record net income of $26.8 million and record diluted net income per share of $1.60
• Adjusted EBITDA of $56.5 million, 5% higher than the prior year

Full Year 2016 Highlights

• Record net revenue of $1.3 billion, up 8% over the prior year
• Net income of $108.1 million, 66% increase over the prior year
• Diluted net income per share of $6.42, 73% higher than the prior year
• Adjusted EBITDA of $334.5 million, 11% above the prior year

Fourth Quarter 2016 Results

In the fourth quarter 2016, net revenue grew $5.9 million primarily as a result of a $4.6 million increase in TwinSpires, driven primarily by a 9% increase in active players and $2.9 million in incremental revenue from Big Fish Games from growth in our casual and mid-core free-to-play games.  Partially offsetting these revenue increases was a $1.6 million decline primarily from our Riverwalk Casino.

The increase in fourth quarter net income and diluted net income per share were primarily a result of the $23.7 million pre-tax gain on sale of excess land at Calder and an $8.6 million increase in operating income from our segments.  Partially offsetting these increases were a $9.6 million increase in taxes primarily from incremental operating income and a higher quarterly effective tax rate compared to the prior year and a $3.4 million increase in interest expense associated with higher outstanding debt balances.

Adjusted EBITDA grew $2.9 million during the fourth quarter as a result of a $6.3 million increase in Big Fish Games primarily from decline in user acquisition spending and a $1.1 million increase from TwinSpires as a result of handle growth.  Partially offsetting these increases were a $3.2 million increase in Corporate expenses driven primarily by non-recurring fourth quarter 2015 expense reduction associated with our deferred compensation program, a $0.5 million decrease from Casinos and a $0.8 million decline from all other segments.

Full Year 2016 Results

Net revenue increased $96.3 million driven primarily by a $72.5 million increase from Big Fish Games primarily from casual and mid-core free-to-play game growth, a $20.4 million increase from TwinSpires primarily due to a 23% increase in active players and a $3.1 million increase in Racing due to a strong Kentucky Derby and Oaks week performance.

The $42.9 million increase in net income and $2.71 increase in diluted net income per share were primarily a result of a $26.6 million increase in operating income from our segments, a $23.7 million pre-tax gain on sale of excess land at Calder, an $18.3 million decrease in expense related primarily to the acquisition of Big Fish Games, an $11.4 million decrease in Calder exit costs and a $6.2 million increase in income from our equity investments.  Partially offsetting these increases were a $15.1 million increase in interest expense associated with higher outstanding debt balances, a $13.1 million increase in taxes primarily from higher operating income from our segments, a $9.4 million increase in selling, general and administrative expense and a $5.8 million gain from the sale of our remaining HRTV investment in 2015.

Adjusted EBITDA increased $32.0 million driven by a $10.9 million increase in Casinos as a result of improved performance from our equity investments, organic growth and operational efficiencies within certain owned properties, a $10.6 million increase from Big Fish Games driven by the growth in casual and mid-core free-to-play games, a $7.9 million increase from Racing primarily associated with Kentucky Derby week improvements and a $6.6 million increase from TwinSpires as a result of handle growth.  Partially offsetting these increases were a $3.8 million increase in Corporate expenses driven primarily by a non-recurring fourth quarter 2015 expense reduction associated with our deferred compensation program and a $0.2 million decline from Other Investments.

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 (“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:

For the quarter, net revenue grew $0.7 million and Adjusted EBITDA was relatively flat as increased revenue at Churchill Downs was partially offset by declines at Fair Grounds and Calder.

For the full year, net revenue increased $5.9 million driven by a $6.3 million increase at Churchill Downs primarily due to a successful Kentucky Derby and Oaks week and a $1.3 million increase at Arlington due to an additional 37 host days during 2016.  Partially offsetting these increases was a $1.7 million decrease primarily driven by five fewer race days resulting in a 3% decline in handle at Fair Grounds.

Adjusted EBITDA increased by $7.9 million primarily driven by:

• $5.2 million increase in profitability from Kentucky Derby and Oaks week driven by increased ticket sales revenue, increased media revenue and record attendance;
• $1.8 million increase at Calder primarily from reduced property taxes and insurance savings from the cessation of pari-mutuel operations;
• $0.8 million increase at Arlington on higher pari-mutuel revenues associated with 37 additional host days;
• $0.8 million increase at Churchill Downs, excluding Kentucky Derby and Oaks week, from handle increases during live race meets;
• Partially offset by a $0.7 million decrease primarily driven by a decline in revenue associated with five fewer live race days and higher variable expenses at Fair Grounds.

During the quarter, net revenue decreased $1.5 million from the prior year primarily as the result of declines at Riverwalk from competitive pressures and a decline at VSI driven by softness at locations impacted by a weak oil industry. Partially offsetting this decline were revenue increases at Calder and Harlow’s driven by modest market share gains at these properties. Adjusted EBITDA declined $0.5 million as a result of the overall decline in revenue.

For the full year 2016, net revenue decreased $0.1 million driven by:

• $3.7 million decrease at Riverwalk due to loss of market share in a declining market;
• $2.1 million decrease at Fair Grounds Slots as it maintained market share despite a weak local economy and the impact of the April 2015 Orleans Parish smoking ban;
• $0.6 million decline at Harlow’s due to a declining market which was negatively impacted by adverse weather conditions;
• Partially offset by:
  • $4.2 million increase in Oxford due to successful promotional activities, favorable weather conditions and strong local economic conditions;
  • $1.7 million increase at Calder due to growth in the overall market as well as successful marketing and promotional activities;
  • $0.4 million increase from a full year of management fee revenue at Saratoga.

Adjusted EBITDA grew $10.9 million for the full year 2016 primarily driven by:

• $5.1 million increase in Saratoga Casino Holdings management fee and equity income;
• $3.3 million increase in Miami Valley Gaming equity income driven primarily by market share growth and successful promotional activities;
• $2.7 million increase at Oxford from a strong regional gaming market combined with operational expense efficiencies;
• $1.7 million increase at Calder driven by strong marketing programs;
• $1.4 million decrease in corporate expense allocations to the Casinos segment;
• Partially offset by declines of $2.0 million at our Mississippi properties due to overall market revenue declines and aggressive local promotional activity and a $1.3 million decrease at our Louisiana properties driven by the ongoing impact of the April 2015 Orleans Parish smoking ban coupled with a weak oil industry.

During the quarter, net revenue grew $4.6 million, or 10%, primarily due to a 9% increase in active players from enhanced marketing efforts.  TwinSpires handle increased 12% compared to a total industry decline of 1%.  Adjusted EBITDA increased $1.1 million driven primarily by the favorable impact of increased wagering, net of content costs, from handle growth and an increase in active players.

For the full year 2016, net revenue increased $20.6 million, or 10%, primarily due to a 23% increase in active players who were acquired from marketing efforts primarily during the Triple Crown season.  TwinSpires handle grew $131.8 million, or 14%, outpacing the U.S. thoroughbred industry performance by 13.1 percentage points.  Adjusted EBITDA grew $6.6 million primarily driven by the favorable impact of increased wagering.

For the quarter, total bookings decreased $9.6 million, or 8%.

• Social casino bookings declined by $3.6 million compared to the prior year reflecting a 1% increase in average paying users and a 9% decline in average bookings per paying user.
• Casual and mid-core free-to-play bookings declined $0.8 million from a 3% decrease in average paying users and a 1% increase in average bookings per paying user.
• Premium bookings declined $5.2 million, or 20%, primarily driven by customers continuing to shift from paid PC games to free-to-play mobile games.

During the quarter, net revenue grew $2.9 million compared to the prior year as a result of higher revenue in our casual and mid-core free-to-play games partially offset by revenue declines in the social casino and premium divisions as a result of lower bookings.

For the quarter, Adjusted EBITDA grew $6.3 million reflecting a $2.9 million increase in net revenue and a $9.3 million decrease in user acquisition fees.  The increase was partially offset by a $4.1 million increase in platform and development fees and a $1.8 million increase in all other expenses.

For the full year, total bookings grew $33.0 million, or 7%.

• Social casino bookings declined $10.7 million compared to the prior quarter reflecting a 9% decrease in average paying users and a 3% increase in average bookings per paying user.
• Casual and mid-core free-to-play bookings grew $59.8 million from a 29% increase in average paying users and an 8% increase in average bookings per paying user.
• Premium bookings declined $16.1 million, or 15%, primarily driven by customers continuing to shift from paid PC games to free-to-play mobile games.

For the full year, net revenue increased $72.5 million, driven primarily by an $87.4 million increase in casual and mid-core free-to-play revenue from multiple games. Partially offsetting this increase was a $4.0 million decline in premium revenue and a $10.9 million decrease in social casino revenue associated with a reduction in bookings.

For the full year, Adjusted EBITDA increased $10.6 million, driven primarily by:

• $72.5 million of increased revenue primarily from our casual and mid-core free-to-play growth
• Partially offset by:
  • $36.3 million increase in platform and developer fees;
  • $20.2 million increase in user acquisition fees;
  • $5.4 million increase in other expenses.

Corporate

CDI repurchased 89,932 shares of its common stock in conjunction with its stock repurchase program at a total cost of approximately $12.6 million, based upon settlement date, in the fourth quarter of 2016. CDI has approximately $121.6 million of repurchase authority remaining under this program at December 31, 2016, based upon trade date.

Conference Call

A conference call regarding this news release is scheduled for Wednesday, March 1, 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 74188294 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 Wednesday, March 1, 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 generally accepted accounting principles (“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 10K (“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.

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 GAAP and should not be considered as an alternative to, or more meaningful than, net income (as determined in accordance with 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 2016, CDI updated its definition of Adjusted EBITDA to exclude depreciation and amortization from the Company’s income from joint ventures and equity investments.  The prior year amounts were reclassified to conform to this presentation.  We also prospectively implemented a change in accounting estimate for corporate expense allocated to other operating segments to use an activity based allocation rather than a revenue based allocation.