Walter G Arce ASP Inc Walter G Arce/ASP Inc
The Legendary Churchill Downs in Louisville, KY
As the hyper lead-ups — civic, social and equine — to its 143rd rendition end and the dust begins to rise on a two-minute run around a hallowed dirt oval, the Kentucky Derby in Louisville remains American horse racing’s city upon a hill. And as it shines, Churchill Downs Inc., the event’s corporate parent, radiates with expanding prominence and profitability.
To the parent
CDI has spent decades remaking itself from a single-entity racetrack business into one of the nation’s leading racing, gambling and online entertainment companies. In addition to Churchill Downs, it owns and operates three other racetracks; six casinos; off-track betting facilities; a video poker business; data and telecommunications companies; TwinSpires, the nation’s principal online horse racing wagering business; and Big Fish Games, one of the world’s largest producers and distributors of casual online and mobile games. The company has more than 5,000 employees and maintains operations in 11 states.
CDI’s latest economic indicators underscore its success. In 2016, the company reported record net revenue of $1.3 billion, up 8 percent from $1.21 billion in 2015; net income of $108.1 million, up 66 percent from $65.2 million in 2015; adjusted EBITA of $334.5 million, up 11 percent from $302.5 million in 2015; and diluted net income per share (NASDAQ: CHDN) of $6.42, up 73 percent from $3.71 in 2015.
The largest operating segment in the CDI pantheon is Big Fish Games, a Seattle-based company it acquired in December 2014. Big Fish had 2016 net revenue of $486.2 million, which was up $72.5 million from 2015 and accounted for 75 percent of CDI’s $96.3 million net revenue increase last year.
Other segments also had strong 2016 net revenues over 2015:
• Racing revenues, spurred by Derby week, increased $5.9 million to $268.1 million.
• TwinSpires’ revenues were up $20.6 million to $221.9 million.
• Casino net revenue dropped slightly, by $1 million to $332.8 million.
CEO William Carstanjen credits a “growth-through-diversification strategy” for CDI’s record revenue numbers.
“We’ve made smart choices in the assets we’ve added to our stable, from the companies we’ve acquired to the team members we’ve recruited,” Carstanjen said. “Both have given us a solid foundation for future growth and the flexibility to make investments in new areas of potential growth. But we haven’t forgotten our roots.”
To the roots
The Derby remains CDI’s iconic symbol and profitable resource. Last year, it generated attendance of 167,227 and all-source (worldwide) wagering of $192.6 million on Derby day races — both numbers the second-highest, after 2015, in its history. Its record adjusted Derby week EBITDA was up $5.2 million from 2015. (Its TV ratings declined 14 percent from 2015 and were the lowest since 2012.)
Since 2001, CDI has spent more than $230 million in capital improvements at Churchill Downs. Projects have included a major $121 million clubhouse and grandstand renovation; a new private luxury area with $10,000 Derby day seats; a new grandstand terrace; a $12 million 4K ultra-HD video board; new owners’ suites; $34 million in clubhouse renovations, including a just-finished $16 million project; and a $37 million luxury suites addition to be completed next spring.
To the shining city
The Derby is one of American racing’s few remaining transcendent events. For decades, the industry has faced well-documented, and poorly addressed, problems — a shrinking and aging fan base; competition from casinos, lotteries and online gaming; drug and medication issues; too much low-end racing; dwindling media exposure; negative brand perception; and more. The economic impact of these problems is significant. According to The Jockey Club, racing here is losing fans at a rate of 4 percent a year and pari-mutuel wagering has dropped 30 percent, from a high of $15.2 million in 2003 to $10.7 million last year.
Against racing’s downtrend, there were some bright spots in other segments of the Thoroughbred industry in the past year. Two champion horses broke North American earnings records: California Chrome, the 2014 Kentucky Derby winner who stands at stud at Taylor Made Stallions near Lexington and won $14.7 million in 27 races; and Arrogate, a Breeders Cup Classic and Dubai World Cup winner, who has already won $17 million in only eight career starts and is still in training.
And the breeding industry — at least in Kentucky and at the high end — remains strong, with six of the world’s 10 most expensive stallions standing at Bluegrass farms. The six are topped by Tapit, who stands for $300,000 at Gainesway, and include War Front at Claiborne, 2015 Triple Crown winner American Pharaoh and Uncle Mo at Ashford, Curlin at Hill ’n’ Dale and Medaglia d’Oro at Darley. In addition, the undefeated Mastery, who likely would have been a heavy favorite to win this year’s Kentucky Derby but was injured and may not race again, will stand at Claiborne when he’s retired from racing.