Kentucky Derby Owner Sees Legal Sports Betting Giving Business a Boost

Churchill Downs is already well aware of ways that the legalization of sports betting in its backyard could help its business.

The owner of the Kentucky Derby predicts the legalization of retail and online sports betting sites in the Bluegrass State will deliver considerable benefits for its business. 

Kentucky lawmakers passed a bill in March that will bring legal sports betting to a state already well-acquainted with wagering through its horse-racing industry, a huge part of which is Louisville-based Churchill Downs Incorporated (CDI). 

CDI stands to gain from Kentucky sports betting in a few different ways. One is that it can open brick-and-mortar sportsbooks at its historical racing machine (HRM) facilities and racetracks, such as Churchill Downs. CDI already operates retail sportsbooks in other states.

Another perk is that CDI qualifies for multiple mobile sports betting licenses in Kentucky on which other gaming companies will want to piggyback.

“We will look to go live at our retail locations once regulators have promulgated all of the required regulations and operational standards,” CDI CEO Bill Carstanjen said Thursday during the company’s first-quarter earnings call. “Currently, we expect this will happen in the second half of 2023.”

A monetizable market

Carstanjen said CDI qualifies for nine retail sportsbooks and that kiosks will be installed at racetracks and HRM facilities, which they think will help attract customers to the physical properties. 

Moreover, Carstanjen said CDI is eligible for up to eight online sports betting licenses, from which the company could make money via market-access agreements.

“With respect to online wagering, we have entered into contracts to provide certain online wagering platforms, including FanDuel, access to the Kentucky market in connection with which we receive a revenue stream,” Carstanjen said. “We also expect to enter into other market access arrangements in the near future.”

The buddy system

The FanDuel partnership and those to come would be consistent with what CDI has been doing in the online sports betting world, which is becoming a technology provider to sportsbook operators who want to offer wagering on horse races. Churchill Downs has struck that sort of arrangement with FanDuel and DraftKings, and Carstanjen suggested the decision is already paying dividends. 

Furthermore, Carstanjen’s comments highlight the potential of the legal sports betting market in Kentucky. The state has long been a horse-racing hub, but allowing for a broader type of wagering took multiple attempts by Kentucky lawmakers despite longstanding ties to the gaming industry. Now, even the introduction of retail sportsbooks alone could inject some life into CDI’s existing properties.

“We actually designed our facilities thinking that this may happen in Kentucky at some point,” Carstanjen said during Thursday’s conference call. “So we've already built the sports bars, and we'll put in the kiosks, refine the customer offering. And it'll be a nice bonus. It's not material to the scale of the company or anything like that, but it'll help each of these HRM properties, not only from the contribution of the sports-wagering piece but from the additional traffic that it drives to the rest of the facility.”

Crunching the numbers

Investors liked what they heard during Thursday's conference call, as shares of CDI were up more than 13%, to $285.50, as of around 2:45 p.m. ET.

The comments from the CEO also came after CDI reported record net revenue of $559.5 million for the first quarter, which ended March 31. That quarterly income was up from $364.1 million a year earlier. 

CDI's profit was also up for the first quarter, to $155.7 million this year compared to $42.1 million in 2022. Those figures were helped by CDI’s acquisition last year of the gaming-related assets of Peninsula Pacific Entertainment LLC, including Del Lago Resort and Casino in Waterloo, NY.

However, the rise in revenue came even as CDI's TwinSpires division saw receipts fall during the first quarter, to $96.3 million in 2023 compared to $101.4 million in 2022. The culprit for the decline was CDI's decision to exit the online sports betting business. The mobile sportsbook arm of TwinSpires has now shut down everywhere but Arizona, although the brand still functions in multiple markets as an online horse-racing app.

Churchill Downs was concerned about the online sports betting business ever being profitable and has instead decided to become a horse-racing partner with bookmakers such as DraftKings and FanDuel. The arrangements allow for CDI to benefit from the much-larger customer bases of the bookmakers and for the bookmakers to add a new product to their lineup. 

With the Kentucky Derby next week, CDI is hoping to show investors the fruits of its new partnerships in its second-quarter results. Furthermore, while TwinSpires-related revenue fell in the first quarter, adjusted earnings rose to $29.4 million this year from $24.1 million in 2022.

“We expect to see our B2B business accelerate in the second quarter with the Kentucky Derby,” Carstanjen said.