Executive Summary / Key Takeaways

• Churchill Downs Incorporated delivered record first quarter 2025 net revenue and Adjusted EBITDA, demonstrating resilience and growth momentum despite macroeconomic headwinds and weather impacts.
• The company's strategic focus on expanding high-margin Historical Racing Machine (HRM) operations in Kentucky and Virginia, coupled with proprietary Exacta technology, is a key growth driver, contributing significantly to recent performance and offering substantial future runway.
• Disciplined capital allocation is evident in the temporary pause of a large multi-year Kentucky Derby project due to construction cost uncertainty from tariffs and inflation, while smaller, high-return projects at the track and continued HRM expansion proceed on budget and schedule.
• The unique blend of iconic assets like the Kentucky Derby, a growing portfolio of regional gaming and HRM venues, and vertically integrated wagering technology provides a differentiated competitive position against both digital-first and traditional gaming rivals.
• Management anticipates continued strong performance, projecting 2025 Kentucky Derby results comparable to the record 2024 event and expecting bank covenant net leverage to decline in 2026 as recent investments mature and contribute to free cash flow.

The Enduring Power of Place and Play

For over 150 years, Churchill Downs Incorporated has been synonymous with one of America's most cherished sporting traditions: the Kentucky Derby. Founded in 1875, the company's roots are deeply embedded in live horse racing at its namesake track. Over time, CDI has strategically evolved, expanding its footprint through the development of live and historical racing venues, cultivating a significant online wagering presence, and building a portfolio of regional casino gaming properties. This journey has transformed CDI into a diversified entertainment entity operating across three core segments: Live and Historical Racing, Wagering Services and Solutions, and Gaming.

CDI's overarching strategy centers on leveraging its iconic brand and regulatory licenses, expanding its high-margin Historical Racing Machine (HRM) business, growing its wagering technology and services, and optimizing its regional gaming operations. This multi-faceted approach positions CDI uniquely within the broader gaming and entertainment landscape, where it competes against large digital-first operators like DraftKings (DKNG) and Flutter Entertainment (FLUT), integrated resort giants like Caesars Entertainment (CZR), and regional gaming operators such as Penn National Gaming (PENN). While digital competitors excel in online scale and innovation speed, and integrated resorts offer vast physical footprints, CDI carves out a differentiated space by blending the enduring appeal of live racing events with the expanding reach of HRMs and its proprietary technology stack.

A foundational element of CDI's competitive moat lies in its technological capabilities, particularly within the wagering and HRM space. The company's ownership of Exacta provides a crucial central determinant system technology for Historical Racing Machines. This technology offers tangible benefits, enabling CDI to optimize the gaming floors at its own HRM venues for improved performance and reduce technology fees through vertical integration. This not only enhances the profitability of its Live and Historical Racing segment but also fuels a growing B2B business, providing the Exacta system to third-party HRM operators in states like Kentucky, Wyoming, and New Hampshire, including 11 of 12 operational venues in New Hampshire.

Furthermore, CDI's United Tote subsidiary manufactures and operates pari-mutuel wagering systems, providing essential technology and services to racetracks and wagering businesses, including major platforms like FanDuel and DraftKings for horse racing content distribution. This B2B wagering strategy is viewed as a significant growth opportunity for the industry and CDI. The company is also actively engaged in R&D to develop HRM-based electronic table games, with plans to implement these in certain existing HRM locations prior to the end of 2025, aiming to further enhance the performance and appeal of its venues. These technological assets contribute directly to CDI's operational efficiency, margin profile, and ability to capture value across the racing and wagering ecosystem, providing a distinct edge in its core niches.

Performance Reflecting Strategic Execution and Market Dynamics

Churchill Downs Incorporated delivered a strong start to 2025, reporting record first quarter net revenue of $642.6 million, a significant increase from $590.9 million in the prior year quarter. This performance translated into record first quarter Adjusted EBITDA of $245.1 million, up from $242.5 million in the same period last year. These results were achieved despite facing material weather events, the impact of one less day due to the 2024 leap year, and an increasingly uncertain macroeconomic environment influenced by tariffs and trade war disputes.

The Live and Historical Racing segment was a primary driver of revenue growth, increasing by $27.4 million, largely attributable to the successful openings of The Rose Gaming Resort in Virginia (November 2024) and Owensboro Racing and Gaming in Kentucky (February 2025). While segment Adjusted EBITDA saw a modest increase of $1.2 million, performance was impacted by a decrease from Virginia HRM venues (excluding The Rose) due to factors including weather, a higher handle tax rate resulting from the increased number of machines with The Rose opening, consumer softness, and competition. However, management noted meaningful sequential growth in gross gaming revenues at The Rose throughout the quarter and strong early performance from the new Owensboro venue.

The Gaming segment's revenue increased by $24.0 million, primarily benefiting from the opening of the Terre Haute Casino Resort in Indiana in April 2024. Segment Adjusted EBITDA saw a slight increase of $0.7 million. Performance in this segment was tempered by regional gaming softness and increased competition, particularly impacting wholly-owned gaming properties and equity investments. Management observed a continued trend of strength in rated play but weakness in unrated play across their regional gaming portfolio, consistent with recent quarters. Terre Haute was highlighted as performing well with margins in the top quartile for regional gaming properties.

The Wagering Services and Solutions segment saw a modest revenue increase of $0.3 million but delivered a 4% increase in Adjusted EBITDA, rising by $1.7 million. This growth was primarily driven by the Exacta business, benefiting from incremental HRMs utilizing the technology in Virginia and New Hampshire and lower compensation expense, partially offset by a decrease from the sports betting business and increased legal expenses in TwinSpires Horse Racing.

Overall profitability metrics remain robust. While specific consolidated margin figures for Q1 2025 were not detailed, the company's Adjusted EBITDA margin of approximately 38.1% in Q1 2025 reflects strong operational efficiency, particularly within the high-margin HRM and wagering segments. This compares favorably to the operating margins of some competitors, such as DraftKings (-15% operating margin in Q2 2024) and Penn National Gaming (1% operating margin in Q2 2024), highlighting CDI's profitable asset base. However, CDI's revenue growth rate in Q1 2025 (~10%) lagged behind the rapid expansion seen by digital-first competitors like DraftKings (45% revenue growth in Q2 2024) and integrated resort operators like Caesars Entertainment (28% revenue growth in Q2 2024), reflecting different growth profiles and market exposures.

From a liquidity standpoint, CDI generated $234 million in free cash flow in the first quarter of 2025, primarily driven by strong operating cash flow. Cash flows used in investing activities decreased significantly compared to the prior year, mainly due to lower capital expenditures. Cash flows used in financing activities increased, reflecting debt payments and increased dividend payments and share repurchases. The company's bank covenant net leverage stood at 4.0 times at March 31, 2025. Management expressed confidence that cash flows from operations and available borrowings under their credit facility will be adequate to fund business operations and planned capital expenditures over the next twelve months.

Strategic Investments and Future Outlook

CDI's strategic roadmap is focused on driving long-term shareholder value through targeted capital investments and operational execution. A key area of focus remains the Kentucky Derby and Churchill Downs Racetrack. For the upcoming 151st Derby, the Starting Gate Pavilion and Courtyard project has been completed on time and on budget, adding 8,500 new premium seats and enhancing amenities. Looking beyond 2025, the company had announced ambitious multi-year plans to reinvent key areas of the track, including the Sky Terrace, Conservatory, and Infield General Admission areas, with a projected cost of up to $920 million targeting completion by Derby 154 in May 2028.

However, citing increased general economic uncertainty and the risk of significant inflation driven by new tariffs, which have created unanticipated and unquantifiable cost increases for construction materials, management made the difficult decision to temporarily pause these larger multi-year projects in April 2025. This pause allows the company to assess evolving economic conditions and evaluate potential changes to the timing and sequencing of the projects, underscoring a commitment to disciplined planning and ensuring prudent capital deployment for long-term returns. Despite this pause, smaller, high-return projects at the track, such as the $25-$30 million renovation of the Finish Line Suites and the Mansion, are proceeding and are expected to be completed for the 2026 Derby.

The expansion of the high-margin HRM business remains a core growth pillar. In Virginia, the company is seeing good early progress at The Rose Gaming Resort, noting meaningful sequential revenue growth and improved rated player metrics as marketing efforts build the customer database. The expansion of the Richmond HRM venue is ahead of schedule and on budget, with an additional 400 games expected to be operational before Memorial Day weekend, adding to the approximately 100 games already added. The new Roseshire Gaming Parlor in Henrico County is also ahead of schedule and on budget, expected to open early in the fourth quarter of 2025. These projects, along with potential shifting of existing machines, are expected to bring CDI to the maximum permitted 5,000 HRMs in Virginia by the end of 2025. In Kentucky, the new Owensboro Racing and Gaming venue successfully opened in February 2025, and the Marshall Yards HRM venue in Calvert City is on budget and track to open in the first quarter of 2026.

Management anticipates that the 151st Kentucky Derby will deliver results comparable to the record-setting 150th Derby in 2024, projecting one of the best results in company history across key financial metrics, particularly Adjusted EBITDA. For the full year 2025, the company expects project capital expenditures to be approximately $250.0 million to $290.0 million, a reduction from prior forecasts reflecting the temporary pause of the large Derby projects. Maintenance capital is projected at $100 million to $110 million. The company expects bank covenant net leverage to remain in the four times range for the remainder of 2025, with an anticipated decline to between 3.6 times and 3.8 times in 2026 as recent investments in Indiana, Virginia, and Kentucky continue to ramp up and contribute meaningful Adjusted EBITDA and free cash flow.

Risks and Challenges

While CDI has demonstrated strong performance and a clear growth strategy, several risks and challenges could impact its trajectory. The macroeconomic environment, particularly the uncertainty surrounding tariffs and inflation, poses a risk to future large-scale construction projects and could potentially impact consumer discretionary spending, affecting both gaming and racing revenues. Regional gaming markets face ongoing softness and increased competition, which could pressure margins and growth in that segment. Weather events can also significantly impact performance, particularly for live racing and physical venue operations.

Legal and regulatory risks are also present. The lawsuit challenging the constitutionality of the Historical Horse Racing Act in Louisiana, which has seen unfavorable rulings affirmed by the state Supreme Court, poses a potential adverse impact on the company's Louisiana HRM results if the application for rehearing is denied and the opinion becomes final. The ongoing challenge of illegal gray games in states like Kentucky and Virginia requires constant vigilance and enforcement efforts to protect the legal gaming market. Furthermore, while management is confident in its ability to manage labor costs, wage inflation remains a factor to monitor across the industry.

Conclusion

Churchill Downs Incorporated has built a compelling investment narrative around its unique portfolio of assets, anchored by the iconic Kentucky Derby and significantly enhanced by its expanding high-margin HRM business and proprietary wagering technology. The company's record first quarter 2025 results underscore its operational strength and ability to generate growth even amidst macroeconomic uncertainty and competitive pressures.

While the temporary pause of a major Derby development project highlights the company's disciplined approach to capital allocation in a volatile cost environment, it does not derail the overall growth story. The robust pipeline of HRM expansion projects in key states like Virginia and Kentucky, coupled with the ramp-up of recently opened venues like The Rose and Terre Haute, is expected to fuel continued Adjusted EBITDA growth and free cash flow generation, supporting deleveraging efforts and providing capacity for future investments or shareholder returns. CDI's blend of irreplaceable assets, technological capabilities, and a demonstrated track record of strategic execution positions it favorably to navigate the evolving entertainment and gaming landscape and deliver long-term value for investors.