Churchill Downs Incorporated. Most know the name because of its iconic namesake, the legendary Kentucky Derby. It's a spectacle of horses, hats, and mint juleps, a celebration steeped in history and tradition. But beyond the glamour and the roar of the crowd, a subtle shift is taking place, one that even seasoned Wall Street analysts may be overlooking. Churchill Downs is quietly, but strategically, building a powerful gaming empire that extends far beyond the racetrack.

While the financial reports and transcripts paint a picture of steady growth and solid performance, a closer examination reveals a much more intriguing narrative. Churchill Downs isn't simply riding the wave of its annual equestrian extravaganza. It's leveraging its success and expertise in pari-mutuel wagering, honed over decades at the racetrack, to conquer the rapidly evolving world of Historical Horse Racing (HRM) machines. And they are doing so with an almost unnerving level of precision and discipline.

In both Kentucky and Virginia, Churchill Downs is expanding its HRM footprint aggressively. Their strategy? Maximize machine deployment in high-yielding markets. This laser focus is evident in their recent move to increase the number of HRMs at their upcoming Rose Gaming Resort in Dumfries, Virginia, from 1,150 to a whopping 1,650. This strategic maneuver, coupled with the existing 150-machine facility already operating in Dumfries, demonstrates their unwavering commitment to capturing the lucrative Northern Virginia market.

But the real brilliance lies in their acquisition of Exacta Systems, a move that goes beyond simple financial engineering. Exacta's central determinant system technology allows Churchill Downs to optimize its gaming floors, driving revenue and margin improvement. And while they've already converted approximately 10% of their Kentucky gaming floors to Exacta's system, their plans for Virginia remain under wraps.

Here's where a compelling hypothesis emerges. Could Churchill Downs be planning a wholesale conversion of their Virginia HRM facilities to the Exacta system? The implications are staggering. In Q1 2024, their Virginia HRM properties saw a 27% increase in adjusted EBITDA compared to the prior year, with $6 million attributed to savings from the Exacta transaction. If they replicate this across their entire Virginia portfolio, the potential margin expansion and revenue growth could be substantial.

Consider this: their Virginia HRM properties, excluding racing, generated a combined 54% margin in Q1 2024. Applying the $6 million Exacta savings proportionally across all their Virginia HRMs (approximately 2,790 at the end of 2023), we arrive at a potential cost saving of roughly $12.9 million per year. This would translate to an approximate margin improvement of 4.6 points. Coupled with the projected increase to 4,440 machines by Q3 2024, the financial impact could be even more dramatic.

HRM Machine Deployment and Projected Margin Improvement in Virginia

The following chart illustrates the growth in HRM machine deployment in Virginia and the projected margin improvement based on Exacta System savings.

This calculated approach to HRM expansion isn't limited to their own facilities. Churchill Downs is also leveraging Exacta to provide B2B services to third-party operators in multiple states, including New Hampshire, where they are now one of the central determinant system providers for 9 out of the 10 operational HRM venues.

Churchill Downs is playing the long game. They're building a robust, multi-faceted gaming business with HRM as its cornerstone. While the Kentucky Derby remains a crown jewel, their quiet HRM revolution is poised to reshape the company's future. And as they continue to deploy machines, optimize their gaming floors, and expand into new markets, even the savviest analysts might be caught off guard by the sheer scale and profitability of Churchill Downs' burgeoning gaming empire.

"Fun Fact: The iconic Twin Spires at Churchill Downs Racetrack weren't part of the original design. They were added in 1895 and have become synonymous with the Kentucky Derby and Churchill Downs' rich history."