08/07/2012 9:35AM

Churchill Downs: Kentucky Derby week, online betting propel second quarter earnings

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Strong growth in its live and online racing operations propelled Churchill Downs Inc. to record revenues and profits for the second quarter of 2012, an indication that the company still relies on its bedrock business despite its turn toward casino gambling over the past several years.

Bolstered by strong returns from Kentucky Derby week and double-digit growth for its online horserace business, total revenue for the quarter was $270.8 million and net income was $48.6 million, according to financial statements released late on Monday, despite weak or negative growth at the company’s three principal casino properties. The results demonstrate that racing can be operated profitably in a highly challenging environment while simultaneously highlighting the competitive pressures facing gambling companies in areas where casino gambling has begun to approach the saturation point.

In a conference call on Tuesday morning, Churchill’s chief financial officer, Bill Mudd, said that revenue from live-racing operations increased 8 percent compared to the second quarter of 2011, in part because of additional race days at Churchill Downs in Louisville and Calder Race Course in Florida, but principally because of growth in handle, ticket sales, and sponsorship revenues related to the Kentucky Derby and Kentucky Oaks. Handle at all three of Churchill’s tracks that operated during the quarter was up 7 percent, Mudd said.

Handle growth at the company’s live racetracks was dwarfed, however, by a 13.4 percent gain in handle during the quarter through twinspires.com, the online betting site that Churchill has built into the racing industry’s dominant account-wagering property through organic growth and a series of acquisitions over the past five years. Revenue for twinspires.com and its related companies was up 13 percent during the quarter, during a three-month period in which handle overall on U.S. horse races was flat.

“Overall, it was a great quarter,” Mudd said on the conference call.

Earnings per share for the quarter was $2.77, up 17 percent compared to earnings per share of $2.37 during the second quarter of last year.

While racing revenues enjoyed a surprising surge, Churchill’s casino results were weak at best, illustrating that gambling companies are increasingly facing competitive pressures due to the rapid legalization of casinos in U.S. markets over the past decade, the limited supply of gamblers willing to wager their money on slot machines, and the stubbornness of the recession, which has hit the demographics that patronize casinos especially hard. Mudd called the casino results “mixed.”

Revenue at Churchill’s Calder casino in Miami was down 12 percent during the quarter. Churchill officials cited the recent opening of a new casino south of Calder for the erosion, along with aggressive marketing efforts by nearby Native American casinos. At Churchill’s Mississippi casino, Harlow’s, revenue was up $4.3 million, but the growth in that figure was due entirely to depressed revenue figures for the second quarter last year, when Churchill had to close the casino for 25 days in May due to damage caused by Hurricane Irene. Revenue at the company’s Louisiana casino properties during the quarter was “flat,” Mudd said.

Mudd said that Churchill has yet to launch a strategy to counter the efforts of its casino-gambling competitors and that the company continued to study the results.

“We are being very careful in reacting to these competitive pressures,” Mudd said.

In the second quarter, revenue from Churchill’s online gambling business exceeded that of its casino gambling businesses, at $52.7 million compared to $51.4 million. Racing revenue, meanwhile, was just over three times either of those figures, at $160.4 million.

Debt at the end of the quarter was $63 million, compared to $127.6 million at the end of 2011. Churchill has been using the cash being generated from its casinos to pay down its debt, leading to speculation that the company will soon reach out to acquire other properties.

“We’re always on the lookout for a good deal,” Churchill’s chief executive officer, Bill Evans, said on the conference call. He would not provide specifics.