Good day, ladies and gentlemen, and welcome to the Churchill Downs, Incorporated Third Quarter Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. As a reminder this call is being recorded. I'd now like to introduce your host for today's conference, Mike Anderson, Vice President, Treasury and Investor Relations. Sir, you may begin.

Thank you. First, let me apologize for the delayed beginning. We've had a few technical difficulties with the bridge line today. But good morning, and welcome to our third quarter earnings conference call. After the company's prepared remarks we will open the call for your questions. The company's third-quarter business results were released yesterday afternoon. A copy of this release announcing results and other financial and statistical information about the period to be presented in this conference call, including information required by Regulation G, is available at the section of the company's website titled, news located at churchilldownsincorporated.com as well as in the website's investor section. Before we get started I would like to remind you that some of the statements that we make today may include forward-looking statements. These statements involve a number of risks and uncertainties that could cause actual results to differ materially. All forward-looking statements should be considered in conjunction with the cautionary statements in our earnings release and the risk factors included in our filings with the SEC, specifically the most recent reports on Form 10-K and Form 10-Q. Any forward-looking statements that we make are based on assumptions as of today, and we undertake no obligation to update these statements as a result of new information or future events. During this call we will present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in today's earnings press release. The press release and 10-Q are available on our website at churchilldownsincorporated.com. And now let me turn the call over to our Chief Executive Officer, Bill Carstanjen.

Thanks, Mike. With me today are several members of our team, including Bill Mudd, our President and Chief Operating Officer; Alan Tse, our General Counsel; Mike Anderson, our Vice President of Corporate Finance, Treasury, and Investor Relations; Scott Graff, our Vice President and Controller; and last but certainly not least, Marcia Dall, our new CFO. Welcome, Marcia. I'll make a few general comments about the third quarter and then turn this over to Marcia. After she is finished with her comments, Bill Mudd, Marcia and I will be happy to take your questions. The company delivered record net revenues of 61% over third quarter 2014, and record adjusted EBITDA, up 117% over third quarter '14. We also generated cash from operating activities through the first three quarters of 2015 of $223.2 million, up 95% over prior year. The most significant catalyst for this growth is Big Fish Games. But it is important to mention that our three other operating segments, TwinSpires, regional casinos, and even racing also made nice contributions to our adjusted EBITDA in the quarter. I'm going to begin with a few brief comments about these three operating segments and then provide more detailed commentary regarding our Big Fish Games segment. With respect to TwinSpires, wagering was up 9.4% in the third quarter over prior year on a strong uptick in unique players, resulting in adjusted EBITDA growing -- adjusted EBITDA growth of 24%. Marcia will go into some of the details surrounding these results in her comments. From a bit of a higher level perspective, the top line was better than I thought both with respect to our business and the industry as a whole. Handle was up 3.7% in the third quarter across the industry. Our team's marketing and customer retention strategies appear to be increasingly…

Thanks, Bill. It was a great pleasure to have joined the Churchill Downs leadership team. As you know, I joined Churchill a little over two weeks ago. I'm looking forward to meeting with many of you in the upcoming months. As Bill shared with you, and as you can see from our press release, we delivered a strong performance in the third quarter with record levels of net revenues, adjusted EBITDA, and net cash flows from operating activities. Big Fish Games provided a significant lift to our year-over-year performance, and we were also able to grow adjusted EBITDA for our casino, TwinSpires, and racing operations compared to the third quarter of last year. I will first give you additional insight into our third-quarter financial performance, which will include a brief update on the Big Fish earn-out. And then I'll provide additional perspective regarding our dividend and share repurchase announcement. Beginning with a summary of our financial performance, total net revenue was $280 million, up $106 million or 61% compared to the third quarter of last year, primarily driven by the performance of Big Fish Games. Big Fish bookings, which reflects the revenue recognized, plus the change in deferred revenue in the quarter grew 34% on a comparative basis. Our casino and free-to-play games had strong growth in the quarter that was partially offset by the expected continued decline in premium games. In our casino platform on a comparative basis we did see a slight decline year-over-year in average paying users that was more than offset by a 9% increase in average bookings per paying user. Our free-to-play casual games benefited from the continued success of a Gummy Drop! program that was launched in 2014 as well as the worldwide launch in September of what we hope is our newest hit…

Thanks, Marcia. We're ready to take your questions. So fire away.

[Operator Instructions]. And our first question comes from Brian Davis from Telsey Advisory. Your line is now open.

Hi, good morning. It's David Katz. Just a -- if we could talk about Big Fish, and I know the policy is not to give any forward-looking guidance, but if we could just talk qualitatively about the three different pieces of that business. And specifically the casino business, which you refer to as maturing, is that something where you still see a flood of competition coming? How do you think about the size of that pie and the prospective slices that you could capture of it? And then as far as the premium side of the business, is that something that you expect stabilizes at some point or evolves away entirely over some long period of time? That would be helpful.

Sure. Hi, David. It's Bill. I'll start on this and my colleague, Bill Mudd may join. That was a multi-part question. So I'll start at the top with the social casino segment. When we described it as maturing, we were really referring to the fact that this is a space that saw 100% quarter to prior quarter growth rates in the beginning, and it's trended down over the last number of quarters. So it was a reference to the fact that the growth rate has been decelerating and we're harvesting the fact that we've spent a lot of marketing dollars over time and now have a very stable, large group of customers that play on our platform. And that's a good thing. Again, respecting the construct of being a public company and not making forward-looking statements, if you read some of the reports that are out there and you look at some of the trends, this is still a space that you see organic growth in. It's just not at quite the same incredibly lofty levels that it had been previously, which is not an uncommon story to see play out. You do see lots of innovation coming into the space, lots of smaller, newer startups that are offering interesting innovations and different takes on the social casino genre. So that's good to see. We support innovation. It gives us lots of ideas for what we should do ourselves. But for us, we're an established, significant platform that's been around since early on in this space. And that is a great place to be both for purposes of to keep giving your customers what they like, and also a platform to innovate and try new things. So without crossing the line with forward-looking statements or anything like that, this is…

I would add to that, Bill, just a couple things. One is, in the premium segment, there are some franchises that will be around for as long as people want to continue to buy them. The biggest weekend in the premium segment is when we release some of the franchise titles right around the Thanksgiving holiday. But the other thing I would say is that business, there's still going to be a niche in that business. And one of the big products -- not big products, but one of the very successful products we launched this year is a product called Lifeline on the iWatch. That's actually a premium product that you purchase the game and you own the game. So you'll probably see a little bit of shift to games like that rather than kind of the hidden object games that you play on PC. But the real growth in games is really in the free-to-play genre, as Bill mentioned. And he gave you a little bit of a teaser in his comments about, you know, we've got two games now that show very good signs of promise. And as we've talked before, the way that we invest in these products is really in the form of user acquisition. The cost to build a game is small relative to that. And we've seen early signs of being able to recoup our ad spend on those games. And the more data you have, so the longer the game's out there, the more confident you are in the lifetime value of those customers. So we're going to start spending more money in the fourth quarter on user acquisition for both Dungeon Boss and Sunken Secrets. So that should give you an indication of what you think is going to happen with the way of spending in the fourth quarter. And hopefully, that results in some growth in some subsequent quarters as Bill had mentioned in his comments. Hopefully that helps.

It does. And I think you've both sort of gone back to the UA spending in the near term. One of the things we could use a little more help in thinking about is the volatility levels on the margin in that business as a result and how you think about managing that over time. Is it conceivable that we, at some point, could see quarters with no margin, that are made up down the road? How wide should we be thinking about the volatility of the margin of that business the long term?

I think if you look at the quarters we've already reported on for this business, you can see a bit of a range. I think we're -- more than any kind of significant foreshadowing, what we were trying to just indicate in the comments is, the goal right now when you have hit games is not to maximize the adjusted EBITDA. It's to grow the business over time. But that doesn't mean that there's a massive range at play here. I'm limited with respect to, as a public company, providing guidance. But what I would encourage you to do, David, is just go look at the margins that have been present in this business since we've owned it. And you'll just see a bit of a range. And really the important point is -- that's not necessarily a giant range, it's just there is a range there. And it's a function of what the opportunities are and what's going on in the business at the time. But we don't want to send the signal that we're sacrificing future growth in order to maximize the adjusted EBITDA margin in any given quarter. You're going to see variability. In a healthy business in this segment, there will be some variability in your adjusted EBITDA margin, and it's a function in part of your user acquisition opportunities. So hopefully that helps a bit and gives you some sense of perspective.

It does. And one last one, as we see the casino side maturing a bit, what gives you comfort that the casual free-to-play has a fair amount of runway before it matures? And I hope I'm not putting words in your mouth, but my impression is that you do think there's a significant runway on that business before it starts to mature in a similar way. What gives you comfort with that?

A lot of times we look at information and metrics that are well beyond our business in what we do. And there's a lot out there that talks about the spending patterns on mobile devices and user habits on mobile devices, what do people spend their time doing, what do people spend their money on, how much time are they spending on these devices? I think there's some pretty interesting data out there that I would encourage you to look at and look for. It's the same data anybody can see. And it suggests that this is a healthy economic opportunity, a healthy space for those companies that can pivot as they see changes in people's preferences and can develop a product that meet those preferences. And there are pretty good metrics beyond our company that you can find in some of the publicly available data, pretty good metrics for many folks that are making these sorts of products.

The other thing I would add to that, David, is that we're a very tiny fish in a huge pond when it comes to the free to play, outside of casino genre. And even in casino genre, our share is still relatively small. So that's why we need to continue to innovate. We need to continue to bring out a portfolio of products. We find those couple of products that work, and that's where we put our business analytics and user acquisition capabilities to work. And that's what's beautiful about that business. Whenever we go spend money on user acquisition, which is the real cost of this business, our team is so quantitative, they really understand the spread between the lifetime value of the customer and the cost to install that customer. So I think the play here is, even if the market for games slows, we have huge potential to grow share. So that's how we think about it, by innovation.

Got it. Appreciate it. Thanks very much.

Thanks, David.

And our next question comes from Adam Trivision from Gabelli & Company. Your line is now open.

Hey, everyone. Thank you for taking my call, or my question. I guess first up, can you give us an update on how you're thinking about Arlington Park, assuming slots at tracks doesn't happen, or kind of how you're planning there in terms of monetizing the assets?

Yes, I mean, right now as you know, there's a budget impasse in Illinois. They've got to get through that before they get back to the gaming bill. We still feel very bullish on our ability to get the gaming bill passed. The State certainly needs the money and the horse racing industry needs the money to compete on the purse levels. So we continue to look at the value of that land versus the value of that land as a casino and racing establishment. And right now, it still makes sense to continue to play for the casino and racing establishment. And if it gets to a point where we don't think we're going to get casino, then we'll reevaluate.

Very good. And I guess secondly and relatedly, maybe can you give us some color on how you're thinking about Calder, given the kind of back and forth between the Seminoles and the State and their ability to have table games?

You know, Adam, that's a tough question because that's a play in which we only have a bit part. So we certainly are following very carefully the interplay between the Seminoles and the governor and the legislature. And certainly, if and when there is a new compact, there is hopefully an opportunity for the pari-mutuels such as us to participate in the legislative process to improve our lot in life. So beyond saying that it's a significantly important issue for the company, we pay a lot of attention to it and we're very involved in the process down there. I don't know that I can read the tea leaves for you in any way that would be helpful. \ We'll be looking for opportunities for ourselves as there is change in Florida as a result of the fact that the -- at least the compact with respect to table games expires this week. And at some point they're going to have to address between the Seminoles and the State what to do about that fact that it has expired.

Okay. And then I guess lastly, could you just kind of update us on your thoughts in terms of where you're targeting leverage and what you're seeing potential acquisitions? I know traditionally you guys had acquired casino properties. But with your commentary regarding some of the interesting social casino or social gaming companies you're seeing start up, would there be any interest there?

Well, as you know, we can't really say what we're doing on the acquisition front. I think it's fair to say that we look at any opportunity, whether it be a brick and mortar casino or a social casino. What I think is also fair to say is that we have a platform already in the Big Fish acquisition, both on the casino side, on the free-to-play side. So anything we do in that business is most likely to be kind of a bolt-on acquisition where we can create a lot of value, either through cost synergies or revenue synergies or use of our business analytics capability. On the casino side, very opportunistic, we're going to be -- we'll look at stuff that makes sense from a pricing perspective.

Okay, great. Thank you very much.

[Operator Instructions]. And I'm showing no further questions at this time. I would now like to turn the call back over for any further remarks.

Thanks, Marcia. Thank you, everybody. Thanks for your support. Thanks for your time today. Look forward to speaking to you next time. Have a good weekend.