Mike Anderson - VP Finance and Treasury, IR William Carstanjen - CEO Bill Mudd - President and COO Marcia Dall - CFO Alan Tse - General Counsel.

Cameron McKnight - Wells Fargo David Katz - Telsey Group Adam Trivison - Gabelli & Company.

Good day, ladies and gentlemen, and welcome to the Churchill Downs, Incorporated 2016 First 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 conference call is being recorded.

I'd now like to introduce your host for today's conference Mr. Mike Anderson, Vice President, Treasury and Investor Relations..

Thank you, Vitoria. Good morning, and welcome to our first quarter 2016 earnings conference call. After the Company's prepared remarks we will open the call for your questions. The Company's 2016 first 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-Q and Form 10-K.

Any forward-looking statements that we make 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 Form 10-Q are available on our website at churchilldownsincorporated.com. And now I'd like to turn the call over to our Chief Executive Officer, Bill Carstanjen..

Thanks Mike. Good morning everyone. Even though we are still 8 days from this year's Kentucky Derby, I'll go ahead and say it, Happy Derby Week. With me today are several members of our team, including Bill Mudd, our President and Chief Operating Officer; Marcia Dall, our Chief Financial Officer; and Alan Tse, our General Counsel.

I’ll make a few general comments and then turn this over to Marcia. After she is finished her comments, Marcia, Bill Mudd and I will be happy to take your questions. Let's spend a few minutes on our first quarter and then I will touch briefly on the Kentucky Oaks and the Kentucky Derby.

The company produced record net revenues and record adjusted EBITDA for the quarter. Both of these metrics speak to the strength of the company and we are pleased with the trend.

It’s worth noting that Big Fish was a significant driver of the increase and net revenues, but actually negatively impacted the growth and adjusted EBITDA by delivering approximately $5 million less than prior year.

We know many of you have questions about this, we will explain in a minute why Big Fish was up so significantly on the net revenue line but down on adjusted EBITDA.

First things first though, we did see a decline of $23 million in our free cash flow for the quarter compared to the first quarter of last year but this was entirely driven by unusual items that more than offset the growth in cash flow from our co-operations that we otherwise experienced.

Marcia will provide more detail on the unusual items in her comments. Turning to our business divisions. There were things to point out about each. With respect to our Casinos segment, net revenue increased a modest $0.5 million over prior year but adjusted EBITDA was up $3.9 million or 13%.

Marcia will explain the variance of our prior year in more detail, I would just like to offer a couple of general comments. Across our portfolio of properties, some of our markets remain better than others but generally this continues to be a relatively stable and predictable segment for us.

Our operating teams are very focused on cost efficiencies, and that helps us manage effectively to the bottom line even in our markets that are more challenged for top line growth. We get asked on most of these calls what we think about the macro environment. To generalize, the current macro environment seems relatively consistent with recent periods.

We have no cause to expect significant changes and thus we continue to be conservative in how we invest in and operate our properties. I feel our teams are continuing to get better at this, as both they and the company as a whole get more experience in our local market.

As I said Marcia will get a bit more granular in her comments, but I should note that we have been happy to see that our Oxford Casino in Maine has been growing both net revenue and adjusted EBITDA. As we announced yesterday, we decided market conditions at Oxford warranted the construction of a 100 plus room hotel at our property.

We like gaming properties with small capital footprints to maintain so construction of a $25 million hotel is not an expenditure we take lightly. Our analysis tells us that makes a great deal of sense in this case. We are deep into the planning for that and hope to have it open around the middle of next year.

We’ve also been pleased with our Miami Valley operation between Cincinnati and Dayton. We think we’ve build what our customers want in that market and we are focused on learning how to grow run it and run it efficiently as possible.

Turning to our TwinSpires segment, wagering or handle as we call it was up 10.6% in the first quarter after being up 11% in the fourth quarter. According to Equibase and/or across the industry as a whole was up about 3.1% meaning we are through the industry by 7.5 percentage point. Adjusted EBITDA was up $2 million or about 20%.

Our team is hyper focused on acquiring new users and improving revenue for existing user.

We have benefited over a long period of time from the trend of horse players moving their play online from traditional brick-and-mortar outwards, we market expensively around the Kentucky Derby, the Triple Crown season and the British Cup since that is when the sport acquires new fans. We continue to see success doing this.

While we are constantly and aggressively trying to improve on all of our operating processes, our strategies for growing the business have been pretty consistent over time. We believe we are still on the right path based on our quarterly growth trajectory.

Before we lead to twinspires.com, those of you with Apple mobile devices, iPhones and iPads please download the twinspires.com app so that you can bet the Kentucky Derby and all of the other races from the convenience of wherever you happen to be.

Those of you with Android devices, sorry but Goggle does not yet allow gambling apps, while we keep working on that please open up twinspires.com on your Internet browser, that's a great experience as well. Let's turn to Big Fish games.

For those of you who really understand this business, forgive me, but I would like to remind some of the others who are not as familiar how this business works. Big Fish is both a major content creator and an expert at content distribution.

With respect to content creation, we operate six internal studios each with different approaches to the same goal of producing popular and profitable mobile games. These studios build games internally as well as partner with the network of third party developers to greatly supplement our internal game production capability.

The goal is always to have a broad portfolio of content against which we can apply our world-class marketing and business analytics to achieve broad distribution of our most promising games.

While Big Fish Casino has been the flagship free to play mobile platform of Big Fish games, we are fortunate that it is joined by an increasing portfolio of other games against which you compete to be the highest and best use of our marketing resources.

Big Fish contributed $128 million of bookings and $15 million of adjusted EBITDA in the first quarter. You will notice that while bookings are up significantly in the first quarter on both the prior quarter and from the first quarter of 2015, adjusted EBITDA and of course the adjusted EBITDA margin rate was down.

Last quarter the fourth quarter of 2015 bookings were $121 million and adjusted EBITDA was almost $27 million while first quarter 2015 bookings were $104.8 million and adjusted EBITDA was $20 million. So despite higher bookings in the first quarter of this year, year-over-year adjusted EBITDA dropped approximately $5 million over prior year.

$3.3 million was a result of non-recurring benefit in the first quarter of 2015 in connection with the business combination accounting rules. I want to put that side, I want to focus on why the remaining $1.7 million decline in adjusted EBITDA occurred in the first quarter of 2016.

As we have discussed on past earnings calls, adjusted EBITDA as a percentage of bookings is going to vary from quarter-to-quarter based on how we allocate resources for user acquisitions spending or as we call it UA.

This is by far the largest expense for the Big Fish business and thus margins decline when we scale UA up for our new or improved games, margins increase when we harvest our sunset older games and hence pull back on UA.

The accounting reason for this is that UA expenses recognized immediately but the revenue associated with that UA expense is realized over the life time of those new users which can last from days to months or even years after they installed the game.

So as we produced new hit games and invest UA to scale the game, even though it has a long term positive ROI, adjusted EBITDA is usually driven down in the short term. In the first quarter, we spent approximately $14 million more on user acquisition than we did in the first quarter of 2015, a 47% increase.

We currently have 8 games in which we are meaningfully investing in UA spend versus two games at this point last year. In fact, UA expenses in the first quarter of 2016 were flat to down for those two games we were also investing in during the first quarter of 2015 Big Fish Casino and Gummy Drop.

So almost all of this increase in the first quarter of '16 UA expense is due to new investment opportunities for our newer or revamped games. Fairway Solitaire, Fairway Solitaire Blast, and Cascade, Sunken Secrets, Dungeon Boss and Vegas Party Slots. As opportunities with respect to these games emerged, we have been scaling UA accordingly.

In the fourth quarter of 2015, we spent approximately $9 million more on UA than we did in the prior quarter and in the first quarter of this year, we increased UA by another approximately $12 million over the fourth quarter.

This ramp up in user acquisitions spend is obviously impacting our margins but this is a positive sign for the future as it shows continued product improvements in existing games but the healthy pipeline for new games. We want to spend intelligently on UA now for bigger returns later on.

Note that our increased investment in more games does not mean that those - these other games will achieve the revenue scale of Big Fish Casino or Gummy Drop. Although they may and we certainly hope they do.

Instead it just means that these games show metrics that indicate we have the opportunity to invest UA today to yield a positive return down the road. As you know we do not make forward looking projections and I’m not doing so here.

I’m simply explaining that you have seen and we’ll continue to see variations in our margins and adjusted EBITDA, as we either take advantage of attractive new opportunities to increase UA spend for various gains or reduce UA spend for titles where the UA spend is less efficient.

The continued growth in bookings for the quarter shows that we are on the right course, and note the current performance in bookings is largely a function of UA spend from various prior period as oppose to UA spend from this quarter. A few thoughts on Big Fish Casino and the social casino category in general.

Big Fish Casino which is as much a social platform as it is a game continues to be a leader in the mobile social casino segment. Big Fish Casino experienced a modest $1.9 million decline in bookings in the first quarter versus prior year.

The slight year-over-year decline was primarily due to a larger decline in February when we did not repeat the higher level of promotions that we had done in the prior year. Bookings were actually up year-over-year in January and March.

The relatively flat performance of Big Fish Casino highlights that the healthy first quarter bookings growth of the overall Big Fish segment was driven by our newer titles in the free-to-play casual and mid-core category.

With respect to Big Fish Casino, our cost per install or CPI has risen steadily over time reflecting both the general maturing of the social casino genre and the challenge of finding new players for a very well known product and brand like ours. With fewer opportunities to invest marketing at our targeted ROI, we reduced UA spend accordingly.

However Big Fish Casino recently completed a platform upgrade and implemented new content and features, while it is early these updates appear to have enhanced many of the metrics we targeted and improved the overall performance of the game. One proof point is that we are seeing increases in paying users.

I don't want anyone to think we aren’t committed to the social casino genre, we are and we are bullish on it over the mid to long term. In the quarters ahead, we will continue to publish new slot content and introduce new or improved features that increase the long-term value of new users to install the game.

As Big Fish Casino’s performance improves, and as we add new products in this genre we will increase our UA investment to maintain our leadership in this important category.

Now Vegas Party Slots; Vegas Party Slot is not nearly to the scale of Big Fish Casino however its bookings are growing and we believe it adds graphically rich Vegas Slot style products for our social casino lineup.

I would like to see this game grow more quickly to scale than it has been but there are still positive signs for us and our experience has taught us that it pays to be patient.

As I just mentioned, we also plan to release new products in the social casino space that will add to our portfolio in the social casino market segment and create new growth opportunities, more on that in the quarters to come as these products hit the market we are on this.

Finally the premium casual game division i.e., our traditional PC and mobile based pay up front games business. This segment continues to experience secular decline as we expected as consumer preference shifts towards free to play mobile products.

Although it continues to contract, it also continues to be a profitable business with margins largely in line with recent quarters. This business produces attractive margins by operating efficiently and sensibly. We have noticed that the rate of decline in bookings has slowed but we do not know yet if that trend will hold up in subsequent quarters.

Finally I would like to cover a few points with respect to our horse racing segments. While net revenues and adjusted EBITDA improved over prior year outside of our live race meet at the Fairgrounds in Louisiana there is not a great deal of action in this division during the first quarter.

We just try to operate as efficiently and consciously as we can. As quiet as the first quarter maybe, the second quarter has a bit more action for us.

As I mentioned the Kentucky Derby is a week from tomorrow, as you may recall we put out a press release very shortly after each Kentucky Derby covering some of the key operating and financial metrics for the event. We will let that press release speak for itself, suffices to say we are excited for the 142nd addition of the Run for the Roses.

We have completed our $19 million renovation of the Turf Club and stakes room and we are looking forward to showing that off along with celebrating the day with all of our customers.

Finally you may have seen the press release earlier this week announcing that the Breeders Cup will return to Churchill Downs racetrack in 2018 which will mark the first time the event will have been movable since 2011, that's a great development and we are thrilled to see it return.

With that, I would like to turn this over to Marcia to provide some additional details on the quarter, after that we’ll be happy to take questions. Thank you.

Marcia?.

Thanks Bill, and good morning everyone. I'm so excited to experience the 142nd Kentucky Derby next week. As Bill mentioned in his opening remarks, we delivered a strong performance for the first quarter with record levels of revenue and adjusted EBITDA. Free cash flow was down $23 million compared to the prior year quarter.

I will go into more detail on the drivers of this decline in a few minutes. We are pleased that we generated $2.8 million of net income or $0.16 of diluted earnings per share which is up $4.4 million from the prior year quarter. Now I will go into more detail on the drivers of each of these key financial measures beginning with total revenue.

So the revenue for the first quarter was up $37.5 million as we were able to increase net revenue in each of our segments. Big Fish Games was the largest driver of our revenue growth reflecting a strong growth in our casual and mid core free to play games during the quarter.

Big Fish Games had a 22% growth in bookings, our social casino bookings were down 4% due to a 9% decline in average paying users that was partially offset by 6% increase in average bookings per paying user.

Our bookings from our casual and mid core free to play games more than doubled compared to the prior year quarter, and as Bill mentioned we did see a 9% decline in bookings related to our premium paid games. Turning to our other segments, our TwinSpires revenue increased $4 million compared to the prior year.

Handle increased 10.6% which was 7.5 points higher than the industry growth in the quarter. Through strong retention and activation efforts, our team was able to increase unique players with 7% and generated a 30% increase in new registration. We also continued to benefit from the migration of customers to online horse race wagering.

Racing revenue from external customers also increased $2.4 million in the quarter reflecting higher simulcast pari-mutual revenue at Arlington from the increase in number of host days and a small increase in pari-mutual revenue at Churchill Down.

We did have a slight decline in Fairgrounds racing revenue as a result of 4% decline in Handle on three fewer race days.

Our casino segment generated $0.5 million increase in revenue as we continued strong revenue growth at our Oxford Maine casino, modest growth in our Louisiana video poker facilities and management fees income from our Saratoga investments was nearly offset by quarter-over-quarter reductions in revenue from our Fairgrounds slots in Louisiana and our Mississippi Casino.

Oxford Maine casino grew its market share and benefited from great weather with 14 less severe winter weather days in the prior quarter and from a good economy that is drawing a less than 3% unemployment rate. Our Fairground slot facility continues to be impacted by the smoking ban in the Orleans Parish.

This should be the last quarter with a significant year-over-year variance given the implementation of the smoking ban in late April 2015.

Revenue from Harlow's, Riverwalk and Calder was negatively impacted by market declines, increased competition and specifically in the case of Harlow's by heavy flooding in the surrounding area during the second week of March. Turning to adjusted EBITDA, our adjusted EBITDA for the quarter was up $3 million compared to the prior year.

Our casino segment adjusted EBITDA improved by $3.9 million from the strong top line growth at Oxford Casino, a $1.1 million increase in management fee and equity invested income from Saratoga, a $1 million increase from market share growth from Miami gaming joint venture and effective cost management especially at our Mississippi casino properties.

This growth was partially offset by $1 million impact as a result of the smoking ban at our Fairgrounds property.

Our racing segment adjusted EBITDA improved by $1.8 million primarily as a result of the increase in Arlington and Churchill Downs pari-mutual and other operational revenue that was partially offset by a decline in racing related revenue from Fairgrounds on fewer live racing days.

TwinSpires delivered $2 million of incremental adjusted EBITDA primarily based on their strong revenue growth. As Bill mentioned, Big Fish Games did have a $5 million decline in adjusted EBITDA as we expected compared to the prior year quarter.

$1.7 million decline was driven by the $13.5 million increase in user acquisition spend that Bill discussed which was mostly offset by the impact of higher bookings.

$3.3 million of the $5 million decline in the adjusted EBITDA for Big Fish Games was related to a lower benefit in first quarter 2016 compared to first quarter 2015 as a result of business combinations accounting rules related to game technology and rights.

And finally regarding free cash flow, we reported a decline of $22 million in our free cash flow compared to first quarter of last year driven by unusual items that more than offset growth in cash flow from our core operation. There were 3 unusual drivers of the decline in our cash flow from operations.

The first unusual item was related to the Big Fish earn out payment, $20 million out of the $282 million Big Fish earn out payment made in March 2016 is included as a reduction in cash flow from operations.

The $20 million represents the fair market value portion of the earn out payment that based on accounting rules must be reported as a reduction in cash flow from operations. This is the same $20 million that has flowed through the income statement as an adjustment to EBITDA since the acquisition in December 2014.

The second unusual item was $12 million tax refund related to Big Fish that was received in first quarter 2015 and reported based on the accounting rules as cash flow from operations and then paid to the prior owners of Big Fish as part of the acquisition agreement.

The payment to the prior owners of Big Fish was reported as financing cash outflow in the same quarter 2015. And the third unusual item was $9 million tax refund that Churchill Downs received in first quarter of 2015. Our cash flow from operations excluding these unusual items was up $18 million primarily from growth in our core operations.

Regarding our debt levels, we did pay $282 million of the Big Fish earn out in March. We funded the payment from cash flows from operations and $205 million of borrowings under our existing credit facility. We plan to repay the remaining amount of the earn out in two payments $34 million in March 2017 and $34 million in December 2017.

And lastly the primary drivers of the $4.4 million increase in net income was a $10.4 million increase in operating income that was partially offset by a gain on sale of our interest in HRTV in the prior year. With that I will turn the call back over to Bill so he can open the call for questions, Bill..

Thanks Marcia. Okay everybody, if anybody has any questions we are happy to take them..

[Operator Instructions] Our question comes from Cameron McKnight of Wells Fargo. Your line is now open..

Good morning, thanks very much. So first of all on Big Fish, just looking at the difference between revenue and EBITDA, looks as though expenses at Big Fish have gone from about $70 million to $75 million to $105 million over the past two or three quarters.

Can you walk us through the decision process to increase spending in Q4 and increase spending again q-o-q in the first quarter of this year?.

Hi Cameron, this is Will Mudd. If you refer back to Bill's comment and that’s obviously a lot information in his comments and you have to listen very carefully because this is a business that you really have to think through and understand. So if you go back to last year we really were investing in two products, Gummy Drop and Casino.

And those were the two products as you remember they had - Big Fish had just kind of entered the free to play space. And the free to play space is a space where when you acquire customers the returns on those customers as you get more data, you feel more comfortable and invest more money in UA.

Let's take the $14 million as an example that we increased in the first quarter of this year versus the first quarter of last year and I will also remind you there was a $12 million increase versus what we had done in the fourth quarter of last year.

So we have ramped up UA over the last couple of quarters because we have seen good investments put that money into.

Let's take that $14 million, so typically when you have a free to play game, the returns on those games vary anywhere from, let's just say 6 months that's kind of average shortest, because if you can do it 3 to 4 months, you keep pushing more UA into it until you get to a number that you feel comfortable with.

6 months on short answer 18 months you really get comfortable with the product like the casino business okay. So if you spend money it’s going to take anywhere from 6 months to 18 months to earn that money back. Let's take the $14 million as an example in Q1, let's assume that $14 million is all spent March 30, now that's not really what happens.

We spend it based on everyday depending on how much return we get but let's assume we spend all March 30. That $14 million we didn't get a dime for that in the first quarter of this year.

Now let's assume that there is a 14 month payback just to make the math simple, so if it is a 14 months payback and you assume it is linear which it is not, I mean there is definitely some changes to it but when you blend it all together it gets to be linear, let's assume that we get $1 million in the incremental EBITDA every month for 14 months that's the payback period right.

So you lose $14 million month one, second quarter you pick up 3 million because you pick three months of EBITDA. So if you spend that same 14 million in the second quarter then you know it could be only that $11 million in EBITDA right.

And then when you get to the third quarter you pick up $3 million more, now that $14 million is only $8 million and so on. And there is a comp counting effect to it. Now the reason why EBITDA is only down $1.7 million on apple-to-apple basis is because we have been spending that money.

And so the good news, to me it’s really good news when you see that the bookings grew 22% and that we were able to spend an extra $14 million because it is really investing in our future course and that is how we think about it.

So as Bill said, if you look at how we spend our money we are evaluating these things constantly, there are millions of devices out there, there are lots of different types of devices, there are lots of different types of games, there are lots of marketing channels and you know the big data that Big Fish does which I would put them up against anyone from an analytics capability perspective is evaluating each one of those investments.

So if you look at what we have done versus the fourth quarter as an example, very excited about Dungeon Boss, we got more data, we actually spent less on UA in Dungeon Boss in the first quarter than we did in the fourth quarter because we have more data and we have like monetization and retention patterns which still spent quite a bit of money on year over year basis which is the biggest driver of UA increase although it wasn't near the majority so we evaluated constantly.

Now we are tweaking the game to get the monetization retention patterns to where we want it to be so that we can put more investment into it.

In the meantime we have old games that we have tweaked Fairway Blast and Fairway Solitaire which are evergreen games that we own, we run the IP on and they are the biggest driver of increase on a quarter-over-quarter basis outside of actually we have increased spending on Gummy Drop on a quarter-to-quarter basis because we made some additions to that game.

So Fairway Blast and Fairway Solitaire huge increases in spending.

Cascade in another match 3 you will see that in the top 150 pretty consistently now, another match 3 game so when you look at games like our Fairway series, last year we were doing $38000 a day, this year in the first quarter doing $96000 a day, those are the people that hanging around stick to that game they have got a lot of data, we were able to pump some money into UA and that's the real way you have got to think about this business.

Last year same thing, we did $8000 a day last year, we started pumping money into it now, if it is unique patch three product we are going $33,000 today and that is growing, we are investing in our future.

So we don't want to have one product like Gummy Drop and one product like Casino, this is a new business in the free to play space and we are going to continue to pump money in the games that we see that we have a great return on investment. Hopefully that helps..

Okay. Got it. Thanks. If we dial back the clock to I think around the second quarter of last year, you guys posted great results, sequential growth in revenue, sequential growth in EBITDA. At that time you cautioned, hey guys look there is going to come a quarter where we are going to have to invest heavily in the product.

Quarter-on-quarter results are going to be lumpy.

Is this basically the quarter that you were alluding to back then, where the marketing spend does increase significantly?.

I think, who knows, we get into the second quarter and we find out that the metrics fall apart because some third party event happens, maybe it drops but I don't see us pulling back on investing in these games if we keep getting good returns.

And if you look at kind of what we did last year we really had 2 games we were investing in through the third quarter and in the fourth quarter where you saw that we increased investment by over $9 million in UA compared to the second quarter of last year or the third quarter of last year.

So we increased UA spending from third quarter fourth quarter about 9 million, these things go and you have got to think about the momentum of the game. So if there is ever a point where the margin get crazy good then we probably don't have enough games to invest in then I start to worry we better be working on R&D.

But right now these games show great metrics, we have done Sunken Secrets is a great example of a game that we pull backed on in the first quarter, we just did a release and we’ve had a great few days and we got to get more data, but that's a game that I can see us push in the accelerator more on in the second quarter.

So it's really hard to tell any forward looking guidance, because this is a day were we look at stuff on a daily basis to see what our returns are..

I got it - I’m sorry..

Cameron let me add something that. I think if there's been optimism in the past expressed on call it's not really been foreshadowing it's just that we see in soft-launch that we have games.

Usually in soft-launch we don't see the monetization characteristics that we're looking for long term, but we take a lot of optimism from whether we're seeing our retention of customers and time on device, time in the game.

So usually the last thing we need to work on is monetization period to get that thing to work right, but one thing we were seeing last year like we're seeing now, we were seeing more games in our portfolio that we had some optimism we may be able to develop into monetizable games.

So as we've said from the beginning when we enter the space, we wanted to pursue a portfolio effect where we were taking sharper or swing in the bat at many different types of pitches because we thought there was some commonality in the teams in the skill set that would allow us to try different zones of the games.

So it doesn't mean though that when we see something in soft-launch it means 6 months later we're going to be investing heavily in that game because Bill was just highlighting at any different time our assumptions can no longer -can turn out to no longer be true.

Sometimes we can't get the game to monetize, sometimes it doesn't monetize of the level that we'd like and sometimes there's another game that comes out that's better. All of things can change our perceptions, so we don't go into this thinking that we've got a game one year from now and it's going to be a mega hit.

Everyday it’s the analytics, everyday it's careful analysis to see what we've learned from the day before. So this is a business where you can be anything other than humble. Every day you have to look at your analytics.

And every day you have to invest in the products that are worth investing in and you have to be working on developing new games based on what you see other people doing out there that are successful..

Got it. Thanks. One last question from us. You guys have constantly been investing in the Derby, and really haven't stood still there.

Can you summarize for us this year what new offerings and amenities are on offer at the Derby?.

Yes, we'd be happy too, so this year it's been $18 million really renovating two key areas. One is our third floor Turf Club area. We've taken another area was which was the math and dining room for people who are there.

And we completely redone that, we've added a much broader area we've closed the balconies with some roofs and added new tables out there.

On the fourth floor in our stakes aristocrats and directors room, we've taken all those walls out and created a much bigger space with more - with more opportunities for guests, for tables and whatnot and there's also balconies and clothes there as well. So we've done a lot of things that really improves from the existing spaces on the interior side.

And really when you think about our segmentation from our customer base, we've got a mansion which was the all try and then we had kind of other areas, so this takes that area and kind of shrubs it in between the mansion and millionaire's row, which is another segment of our customer database.

So what the initial people have gone through, there is some articles out there where Kevin Flannery and the race track team which did a great job for us out there, they went out and did a bunch of reviews there's the articles of line when people got out and see pictures and these are the things we've when the articles were written..

Okay, great. Thanks very much guys. .

Thank you. And our next question comes from David Katz of Telsey Group. Your line is now open..

Hi, good morning. I heard everything that Bill Mudd went through in terms of Big Fish and the business. If I can just go back to that issue, and we could talk about, obviously our plight is to put together a forecast, and based on how you describe what you describe, that seems challenging, which I am sure you can appreciate.

So should we be looking at this business in a last 12 month, or next 12 months basis in total? And overlook the quarters, so to speak? And if that's correct, help us think about what the next 12 months could look like? Again understanding that it's not easy to give guidance, and that may not be your policy, but our charge, obviously is to put together a forecast and decide how to value it?.

David I think it's going to take a couple of - have that question because there's some specificity and also there is some generality and we're getting into all that so. So as Bill see I'll start.

I would say that one view into the health or the expectation of our company, and again we don't give forward looking guidance is to look at the games that we have released and look at the profile of those games. I think that gives you a sense of what's going on currently and that can change compared to say 12 months ago.

As we talked earlier today 12 months ago we really had two games that we had any real sort of upside to investing in on a significant scale that was Gummy in the Social Casino space. Now we have more games of different sizes that you see some patterns of investing.

So that's really I think a key driver to look at in terms of what we’re doing, as how many games do you see us without there and what sort of size do you see in those games for in terms of the publicly available data. That gives you a general feeling for what's going on.

And I would say that one thing that helpful to understand is, we're not - you don’t see these games under our trajectory that we've shown, you don't see these games go from zero to a thousand miles an hour, you will see them build individually.

So it's really a question of how many new games that we put out there and what level of activity do you see in some of the public data on those games. And I'm sorry for the feedback we're having out there, but I don't think that's on our end..

David this Bill Mudd. I'm trying to come up with a fair analogy, but I would say that it's like looking at very high growth companies and no one obviously that would come to mind would be Amazon where they just implant a lot of money into growing that business early on or maybe a Netflix.

But we have a very big challenge here and it's a challenge that is, we could have delivered a very high EBITDA margin business in the first quarter and blew everybody out of water. And Bill and I and the team out in Seattle had a very long discussion about whether we want to do that.

In fact, we could have spent a lot more on UA if we really wanted to this quarter. So we thought where we ended up was a good balance of investing in growth for the future and presenting a P&L that our investors would be happy with.

So let me say that it is a very difficult job to balance the expectations of all your constituents well at the same time ensuring that you continue to grow the company and do what's right long term.

So the way I would think about this is, first of all it, it can be very difficult and I think what Bill said was a very salient point, it’s good news we have a lot of products that we can invest, so if you go in the fourth quarter and I know if I want to give any forward looking guidance this is a great example I can.

Fourth quarter we're very excited about Dungeon Boss. We paid a lot of money and was the single biggest contributor to our UA spend increases versus the second quarter, excuse me - versus third quarter of last year.

So, however we got into the first quarter of this year and we saw that the retention and monetization characteristics centered around, advance and things that we’re not on the ongoing consistent basis. We had a pullback and rethink some of the mechanics how that the games work and the team from a technology space is continuing do that.

Now in the meantime we have continued to invest a lot of UA in it and it is the biggest on a year-over-year basis even though it was down versus a quarter-over-quarter basis. So the way that I think about this business is if we're investing in UA and bookings are growing, that's a good thing.

If we stop investing in UA, then I would probably be a little bit more concerned and this things held up momentum right. We're in pricing this year, next year we're going to have hopefully a much bigger set baseline of bookings that are in our base.

We already have a big base of UA spend, so hopefully we'll have new games, and we’ll be able to increase those even more and we're getting both growth and in bookings and growth in EBITDA and growth in UA that's what our goal is, that does take time and you have to have a big portfolio games to get there, and I think this is the beginning of that..

I think our growth and bookings or change in bookings is a real indicator of the health of our business in the long term growth prospects of our Big Fish business.

And I think the one important challenge for us with our investor community is to demonstrate over time that we make smart investment decisions when it comes to UA to profitably drive bookings as opposed to just artificially inflate bookings or make bad decisions on marketing spend to acquire bookings.

One thing we think we've already proven and I think it's a long term challenge and focus for us is to always demonstrate that we are making smart choices on UA investment to drive responsible, sensible and profitable bookings growth..

I’m going to add on that point one more time that Bill just said. When you think about UA spend that we spent this quarter, you really have to believe that and know that the Big Fish team is very good at what they do and we're going to return on investment. So it's not like they're spinning this bookings with the hope of something to come.

They spin it based on data very, very data and analytically driven company and we don't invest in things that are jump balls, we invest in things that we know we are going to get return on. And that's the way I think about it.

So we're really allocating the maximum amount of UA spend we can still make and still deliver P&L that we feel good about in the current period. So that's the balancing act that goes on. We're very happy, actually very happy with the results we’ve achieved this quarter.

And we're very happy that we're setting ourselves up for growth over the long term..

So if you don't mind if I follow that up, I just want to be clear about sort of the nature of my question. I think that you have earned the confidence of a lot of us and myself included.

And so I mean not to question the decision to invest or not to invest in a business like this because I would say that I think most of us understand how I think that the term I use and I know this morning was that - it can be circuitous right it's not necessarily a straight line up or forward. And so the decision to invest you have our trust.

I think more along the lines of how do we sort of gauge our expectations over the short medium term as we sort of maintain that confidence going forward because for better or worse, we're sort of in this public arena that there is some attributes that we can't there's no getting around it, I think you see what I'm getting at right. .

I think so and I'm going to take a stab, I believe I do understand the question. And I would say that Big Fish is an evolving growing business and it's different than it was a year ago.

And I think as you look to the future of it, there are a couple things to keep in mind and that is as the business has grown, as you see in our first quarter we are demonstrating our propensity to have more games that are investable.

So I think, before you think about what's that particular margin rate per quarter, you have to look at the performance of the games that we have in the portfolio now.

You have to look at and a lot of the data you can track publicly to help you figure out now especially since you have a little path performance data on us in these games, you can look at that data to help you figure out what we're doing.

We don't provide the forward looking guidance and it wouldn't be sensible to march down that path of trying to do that. So I would ask that you use as a proxy and understanding of how many games we have out there on the relative size of those games.

Doesn't mean those games will continue on a trajectory or is that some won't get smaller that some won't grow faster than others.

But I think you have to - and I would ask that our investor community, be cognizant of the fact that the company was built to offer more than one game, to offer more than one product line and it is a good thing as demonstrated in the bookings that we are now demonstrating that we can offer, half a dozen plus games at once.

So I think, right now that's again without offering forward looking guidance that's the universe that we find ourselves and we have more than two games, we have half a dozen or more. I think now perhaps going forward people will be more on the look-out as they see us introduce new games that move up the App Annie charts et cetera.

But right now hopefully our current portfolio of products is give the investor community a bit of a sense of how we're growing on the bookings line and what sort of investments we're making to grow half a dozen plus games instead of one or two..

Okay. Thank you..

Thank you. Our next question comes from Adam Trivison of Gabelli & Company. Your line is now open..

Hi guys. Thanks for taking my question.

I hate to harp on the issue, can you talk about the cost structure of Big Fish X UA, and how that has tracked since you guys have owned it? I know there wasn't much integration off the bat, how much has been done, how much will be done in the back office, at least?.

Sure Adam, it's Carstanjen again here. There are different theories behind every acquisition and we’ve had different theories as we've done acquisitions, as we rolled up a couple account wagering platforms in the past, synergies were a big part of that. However when it comes to Big Fish this is a growth company.

So you've got to pick your poison, you’ve got to pick what you're most focused on and what's most important. For us with Big Fish we were acquiring a new platform and new vehicle in which to grow the company. So trying to find or core synergies in core functions or common functions have not been a focus.

I think overtime you might see us grab low hanging fruit, of course, we'll do that when there's low hanging fruit.

But it is not a primary thesis or a primary objective to try to squeeze cost out of this business because this business has a lot, a good runway ahead of it and a lot of great people in a very strong culture in Seattle and we're more focused on being able to grow it than we are squeezing cost efficiencies out by merging functions..

Okay..

And I would also say that, the heaviest cost piece of that business really the user acquisition spending. And that's going to be dictated by the products that we have that we feel comfortable investing in. And then of course we have the platform fees from Apple and Amazon store, the Google stores - Android stores I should say.

So those obviously are very variable with the amount of bookings that we get. And then the rest of it is, we'll get some customer service as we grow the company, we had some that cost but there isn't been leverage on that but the rest of it is very leverageable. Probably analytics and the marketing side of it and so on so..

That makes sense.

When did you guys do the platform upgrade on Big Fish Casino, and did I hear you right, there is now user-acquisition growth, you are seeing user acquisition growth post that launch? And then do you have any color on spend per user post launch?.

The upgrade is really been ongoing. So over the end of the fourth quarter and into the first quarter and currently, we've been focused on improving a bunch of attributes of that product both in terms of what the customer sees and then what's behind the scenes that they don't see to improve the operation of the site. So it's been an ongoing process.

I think the brand itself is very well understood in the social casino space among the larger customers. So there comes a point where most of the better bigger customers are familiar with us and have tried us. And that's why you'll see us.

And we have focused on some infrastructure improvements that will allow us to better offer new or different product besides the ones that the market is most familiar with. You'll see that over time.

But also within our core brand, our core Big Fish social casino offering after treading some water as we made some of these improvements, we are starting to see some improvements in some of our basic metrics like climbing, seeing the paying users climb..

Okay. That helps. And then one last one.

What's the process to gets TwinSpires onto the Android platform, and what can do you, or how much of it is just up to Google?.

It's completely up to Google, so they do not allow any kind of gambling apps in the Android stores much to my chagrin. But even our new venue next at for Churchill Downs, we - the area where you'll have lot to bet online in that app.

On the Android store we had to make it a much softer path to TwinSpires than we were able to do on the iTunes store, otherwise we wouldn't get it approved. So unfortunately that's completely outside of our control. .

Okay, great. Thank you for answering my questions..

Thank you. And at this time I’m showing there are no further participants in the queue. I'd like to turn the call back to management for any further remarks..

Thanks very much. And again we appreciate all of the questions that you ask us. We appreciate you investing in our company. We're striving for clarity and explaining better how our company works now and how Big Fish works. So again thanks for joining us on the call. We look forward to talking to you next time..

Ladies and gentlemen, thank for your participation on today's conference. This concludes your program. You may now disconnect. Everyone have a great day..