February 16, 2006
Chuck Champion; Youbet.com, Inc.; Chairman and CEO
Gary Sproule; Youbet.com, Inc.; CFO
Scott Solomon; Youbet.com, Inc.; General Counsel
Conference Call Participants
Ryan Worst; Brean Murray; Analyst
Todd Eilers; Roth Capital Partners; Analyst
Traci Mangini; ThinkEquity Partners; Analyst
Mark Argento; Craig-Hallum Capital; Analyst
Kevin Foll; NGER; Analyst
Craig Behnke; Founders Asset Management; Analyst
Sean McMahon; Kennedy Capital Management; Analyst
Operator Ladies and gentlemen, thank you for standing by. Welcome to the Youbet.com 2005 fourth quarter results conference call. (Operator instructions) I would now like to turn the conference over to Mr. Chuck Champion, Chairman and CEO. Please proceed.
Thank you, operator. Welcome to Youbet.com's fiscal 2005 and fourth quarter conference call. On the call with me today are Gary Sproule, our Chief Financial Officer; and Scott Solomon, our General Counsel. Today we will review our fourth quarter financial results and provide an update on a number of other items that are of interest to investors, including our recent acquisition of United Tote and strategies for continued growth. At the end of the call we will take questions from analysts and investors.
Before we begin, I would like to refer everyone to the Safe Harbor language in today's press release. We will be taking advantage of the provisions of that statute and you should all be familiar with it. Before Gary reviews the financial results, I will spend a few minutes addressing our fourth quarter results.
Today we reported earnings for the fourth quarter of $1.5 million, or $0.04 per share. Earnings included a $1.9 million income tax benefit, and a $276,000 loss associated with acquisition-related costs. Gary will provide additional details on the fourth quarter earnings in a minute.
On an EPS basis, the quarter was disappointing, but our ADW remains healthy and capable of delivering the returns our shareholders expect from Youbet. As previously disclosed, there were significant race cancellations in the fourth quarter due to weather conditions, other unexpected developments such as some race tracks shortening their meet and Hollywood Park's cancellation of all of its turf races due to track conditions.
In aggregate, there were approximately 300 fewer races this quarter compared to the prior year period due to inclement weather and one-time events. Nevertheless, to put it into perspective, what we did in the fourth quarter this year is what we did in handle for all of 2001.
IRG's handle for the period was disproportionately impacted by the loss of content compared to Youbet's handle, as IRG has fewer tracks available to it and is more dependent on racing from tracks with larger purses such as Hollywood Park. As such, IRG handle was $22.5 million for the quarter. We will delve a little deeper into the fourth quarter issues on this call, and I would note that in 2006 to date we are seeing strong year-over-year handle improvements, indicating that what occurred in the fourth quarter may have been the proverbial perfect storm.
I would also add that we expect to continue to achieve year-over-year growth in net income and in earnings per share at a rate commiserate with what we have achieved over the past few years.
Now let me ask Gary to provide some detailed commentary on the fourth quarter results and then I will come back and comment on some of the key issues that are part of our plan to continue growing our business. Gary.
Thank you, Chuck. This afternoon we reported net income of $1.5 million for the fourth quarter 2005, or $0.04 per diluted share, which compares to a net income of $535,000 or $0.02 per diluted share for the fourth quarter 2004.
The reported net income of $1.5 million includes the following: a non-cash income tax benefit of $1.9 million which was a result of the Company releasing a portion of its reserve against net deferred tax assets on the balance sheet; and also included in the quarter are one-time expenses of $276,000 associated with an acquisition that we are no longer pursuing; and costs associated with the public equity financing related to the United Tote acquisition that we also elected not to pursue.
Total wagers processed, or handle, during the fourth quarter were $113 million, an increase of $36 million, 47% over the fourth quarter handle in 2004, which was $77 million. Our reported $113 million in handle also includes $23 million in handle generated by the International Racing Group, or IRG. Core Youbet handle was $90 million, which was a new fourth quarter record, despite several track closures that Chuck referred to earlier in the call.
Handle growth was also driven by continued, high end, new customer account growth and retention and ongoing marketing campaigns, contents and promotions. Our blended yield, which is defined as our commission revenue less track fees and licensing fees as a percentage of handle was 5.8% in the fourth quarter of 2005. The 5.8% yield on handle is a blend of 3.5% for IRG and a 6.4% yield for Youbet.
Our Youbet yield in the fourth quarter of 2004 was 7%. The reduced yield we experienced at Youbet for the fourth quarter was attributable to the loss of high yield races due to weather and reduced racing schedules; the addition of lower yielding Magna tracks that were not offered in 2004; and increases in our player incentive programs.
In review of the income statement, total revenue for the fourth quarter was $20.8 million, up 28% from $16.2 million last year. Net revenue for the fourth quarter, after deducting fees to our track partners and licensing fees, increased by approximately $1.2 million, or 23% to $6.6 million. This compares to net revenues of $5.3 million last year. Our net revenue improvement was driven primarily by our growth in handle.
Operating expenses, excluding track fees, licensing fees and depreciation and amortization, increased approximately 37% to $7.4 million for the fourth quarter of 2005, up from $5.4 million in the fourth quarter of 2004. IRG accounted for approximately 45% of this increase, as we did not own IRG in the fourth quarter last year. Included in operating expenses for the fourth quarter of 2005 are the one-time expenses I discussed earlier, associated with the aborted acquisition and public equity financing, which totaled $276,000 accounting for 14% of the increase year-over-year.
Approximately $200,000 or 10% of the year-over-year increase is attributable to the increased variable expenses resulting from year-to-year increases in wagering volume. The fourth quarter year-over-year increase in operating expenses was also partially attributable to higher legal consultants and business development expenses.
Net income for the fourth quarter of 2005 increased to approximately $1.5 million, a 175% increase over the prior year period, primarily reflecting the income tax benefit of $1.9 million that I discussed earlier.
I would like to briefly summarize our full year 2005 financial performance, which includes IRG for the last seven months of the year. Handle was $472 million, up 50% from the prior year. Revenues were $89 million, up 36% from the prior year. Net revenues after track fees and licensing fees, were $28 million, up 26% from the prior year. Yield was 5.9%, down from 7% from the prior year.
Income from operations was $3.1 million, up 150% from the prior year. Net income including the income tax benefits in both years was $5.7 million, up 23% from the prior year. Net income excluding the income tax benefits in both years was $3.8 million, up 178% from the prior year.
I would like to briefly review several items on our balance sheet, which continues to reflect our improving operating results and provided the financial flexibility required to close the United Tote acquisition in the absence of a public equity financing.
As of December 31, 2005 Youbet had total assets of $41 million. Total assets included $22 million in cash, cash equivalents and restricted cash. Included in the restricted cash is $4.1 million in our players' trust account. As we have discussed in prior earnings calls, we believe our company is the only gaming company that segregates player funds into a separate custodial account.
Our liabilities were $18 million and our stockholders' equity totaled $23 million. As of December 31, 2005 we had net working capital of $12 million, compared to net working capital of $9 million as of December 31, 2004.
Net cash provided by operating activities for the year ended 2005 was $6.9 million, compared to $4.4 million in net cash provided by operating activities for 2004. At this point, I will turn the call back over to Chuck.
Thanks, Gary. Let me go over some of the other important developments in our Company, starting with our focus on continued growth of our core ADW and IRG businesses. As I noted earlier on the call, we remain very confident in the long-term growth prospects of the ADW channel. This optimism is not only based on our 2005 full year results and our 2006 early results, but also on a number of factors.
First, our ability to offer a delineated product that is built by handicappers for handicappers, with products that include X2 multi-video platform, race replay, turf day super stats, cancel wager features and our new Youbet mobile product.
Second, our ability to create a trusted experience for our customers due to being licensed in multiple jurisdictions, our players trust program, our wagering and monitor systems and our independent wagering compliance committee. Our customers don't have to make two bets; one to win the race and the other to be paid.
Third, our data mining back office tools that support wagering growth in a number of ways, including identified hidden whales, age, segment, target marketing and our ability to access true player potential and offer them wagering opportunities that are attractive to them, and profitable for us and our industry partners. These tools, as effective as they have been, are undergoing additional development and will give us key customer intelligence unlike anything our competitors have available.
Fourth, our planned Youbet player rewards program offers a loyalty program competitive with international book makers for the purpose of maximizing player acquisition, evolution and retention. Player rewards are offered via a tiered structure based on customer segmentation and volume criteria, and integrated within the Youbet wagering platform.
Fifth, we continue to be aggressive in our efforts to convert players acquired through ESPN.com and CBS Sportsline into loyal customers of the Youbet system. As evidenced by the fact that our vastest growing age group is 21 to 30, these programs are key components in demonstrating to race track industry that Youbet is capable of bringing new customers to the sport of horse racing, via development of targeted content, educational materials and technology. In addition, we plan to leverage our Youbet targeting efforts to introduce fan at the games and other subscription content in future quarters, that we expect to be popular in this rapidly growing customer demographic.
We also achieved year-over-year handle improvements of 57% for the 21 to 30 age group; 25% for the 31 to 40 age group; and, 36% for the 41 to 50 age group. In total, just over 50% of Youbet handle now is coming from those under 50 years old.
In addition, we recorded year-over-year handle improvements across almost all of our usage classes. The ADW channel continues to be one of the channels in our industry that continues to grow, with expectations for at least 17% year-over-year growth, and with the initiatives I have just mentioned, we remain optimistic and upbeat about Youbet's prospects for continued, strong organic growth. With our scaleable business model, the top line growth should translate in a meaningful net income and EPS growth.
Turning now for a moment to our two recent, complementary acquisitions, let me first give a brief update on our IRG operations. Through all of 2005, IRG handle was approximately $120 million, of which $77.2 million was generated since the acquisition. With an approximate 3% yield -- and remember, that IRG's customers did not have access to some important racing content in the year. Even without this important content, a lot of it from tracks that are most attractive to IRG customers, we believe IRG handle will grow by about 15% to 20% in 2006, and if they get some of this important content back, then we should expect to see it grow even more this year.
In November, the Oregon Racing Commission licensed IRG to operate a multi-jurisdictional simulcast and interactive wagering hub. This is the first and only pari-mutuel wagering rebate provider that has been licensed by a U.S. regulator, and we believe this license will provide our track partners and regulators with the assurances of domestic regulatory oversight that they desire for these types of companies.
We continue to derive operational synergies from IRG with benefits to be realized throughout 2006. Let me quickly review. LBDC, IRG's original tote vendor, will slowly migrated and eventually replaced by United Tote. This was done seamlessly over a seven-week period, with absolutely no impact to current customers. With an expected payback period of less than two years, and having invested just under $200,000 of CapEx, we replaced and upgraded IRG's entire infrastructure with industry-leading technology to provide unparalleled performance, security, reliability and scalability, guaranteeing high customer satisfaction; allowing for growth and reducing costs by approximately $120,000 a year.
As I had previously mentioned, IRG now meets important industry standards such as being the only entity operating under the Oregon Racing Commission's approval and license.
Turning now to the acquisition of United Tote completed last Friday, we are very pleased with the innovative financing tactics used to complete this transaction, as it allows us to move forward with what we believe will prove to be a very strategic acquisition.
Industry reception to this transaction has been generally positive, and we expect that as investors deepen their understanding of the synergies and opportunities afforded by this transaction, they will be similarly impressed with the value it brings to shareholders.
We were pleased with our revised financial package, and would like to outline some of the key terms of the agreement. We secured an attractive, 5.02 fixed rate on $10.2 million in seller's notes. The optimal combination of $9.7 million in cash, $14.7 million of United Tote existing secured debt, and only 2.2 million shares of Youbet common stock valued at $5.50 a share. We were able to secure in excess of a $2 million reduction from the previously announced purchase price.
We would also like to take this opportunity to publicly welcome [Kendrick Industries] as a Youbet shareholder and would also like to take a minute to thank Rob and Chris [Maholic] along with [Carl Carruthers] at [Kenderho]. They were always professional as they hung with us to get this deal done. These guys turned out to be true pros.
Moving on, it is important to note that United Tote brings to Youbet a number of complementary and strategic options, including a strong and growing tote market share that is currently at about 35% of North American handle. They have recently picked up some key customer wins which include Penn Gaming and Harris. They also are aggressively pursuing international opportunities where there is great growth potential.
Like our core operations, the United Tote business model is as attractive, as it has strong financial leverage with 80% of fixed costs and operating margins of about 40% to 50%. United Tote also brings to Youbet value-added products and services. On the service side, we will soon move to integrate the United Tote and Fast Track card programs with our ADW platforms and player rewards program. It will give track partners a fully integrated solution for their own brand, if they choose.
As we have talked about to many of you over the last two months or so, we are very excited about some of their new, proprietary game content which we believe can gain tremendous scale by leveraging it on our Internet platform. These new products are expected to be attractive to a large percentage of our database of over 160,000 customers and particularly to our fastest-growing handle segment, the 21 to 30 year old age demographic.
A very brief overview of the business model for this type of game is that for every dollar wagered, the pool takeout would be about 80%, leaving us with a yield of around 20% which you understand, is very attractive. We can use these games to backfill some of the calendar gaps in racing content, such that occur in late summer, and again around the end of the holiday season.
Other benefits of the transaction are the significant strategic relationships United Tote has. Relationships with leading gaming operators that we believe can help us achieve a meaningful presence in Nevada now that ADW has been approved in the state. We also expect a number of near-term cost reductions at United Tote, and also to achieve cost synergies between the two companies.
We have already reduced a number of current hub locations, resulting in an estimated annualized savings of at least $600,000 and the United Tote management team will continue this process.
What is most important to me to impress upon you today is that we have a detailed first-hand understanding of this company, and expect United Tote to generate significantly higher revenue and EBITDA in 2006, reflecting the benefits of the successes in 2005 and expanding its market share. We are not going to provide specific guidance, but we will update you on each quarterly call with the gains as we achieve them during that period.
Before we get to your questions, I want to quickly review the meaningful opportunities we have in front of us that we will continue to foster growth from on the top and bottom lines. To be clear, we expect to continue to benefit from strong channel growth that ADW is experiencing. Concurrent with this channel growth, and based on the strength of our marketing programs, current products and new products, and track offerings that will be deployed in the future, including our players rewards program, we expect to continue to grow our market share. To this end, we are increasing our 2006 marketing budget by over $1 million to drive even greater growth and new customer acquisition by targeting select, attractive demographic groups and markets and users of our competitors' offerings.
We have a better offering and more content and are confident that through our marketing new customers will see our advantages. Please note that the acquisition of high end customers will modestly impact yield, but we are managing Youbet for revenue and earnings growth, not just for yield.
For our recent acquired businesses, we expect to benefit from ongoing integrations at both IRG and United Tote. Finally, the IRG and United Tote acquisitions have helped diversify Youbet into a multi-channel, pari-mutuel wagering company with a burgeoning international presence. While we continue to focus on effective integration of both of these companies, this is just the beginning of the implementation of our planned business development and acquisition strategy.
As we have previously stated, we believe the domestic ADW industry is ripe for consolidation, and that Youbet has the technology, integrity, critical mass and access to financing to be the leading industry consolidator.
Additionally, management regularly seeks international partnerships, strategic alliances and acquisition targets, additional channels of wagering, player rewards partnerships and back end wagering solutions. We expect to report continued progress in these efforts throughout fiscal 2006 and beyond.
Now, we are very interested in taking your questions. Operator, please facilitate that process.
Operator Thank you. (Operator instructions) Your first question comes from the line of Ryan Worst of Brean Murray.
Hi, guys. Just a few questions. As far as IRG goes, you've talked about the strong results in '06 so far. Does that include -- is that just legacy Youbet or has IRG also bounced back from the fourth quarter?
Clearly we saw some improvement in their handle in January. It is not quite as positive in February. Most of what we are seeing though is very strong growth in the Youbet product.
Okay. How can that one be strong in February?
Well again, some of the content that IRG needs is not available to us. We are working on that, having industry meetings as quickly as I can to try to secure that content, try to get people to understand the integrity issues around IRG and how they have been strengthened. What IRG can do for the industry. We are working on that and I think in the next several months we will make some inroads. IRG's growth will be equal to or greater than that of Youbet, at least in the 15% to 20%.
Okay. On a different subject, Chuck, for the customer incentive programs, have you started that for Youbet? Does that show up net of commission revenue?
Yes it does show up net of commissions. We have started it, we are developing it further, we are adding additional elements to it. We are being careful to make sure that we don't cannibalize any live or inner track handle. Jeff Franklin, one of our VPs here, has been working on that project for the last eight months. He is doing a lot of testing and has brought in some outside companies to assist with that. The launch will take place prior to the Triple Crown. We are very excited about it because it is a comprehensive program that not only offers forms of cash rebates, but also has other elements within it which include merchandise, travel. It is an integrated solution and it is built right into the platform.
Are you concerned that might impact yields? What is the strategy there as far as existing customers go?
Well it is not just based on volume, it is based on a number of factors and yield is one of the factors that it is based on. Volume is also a factor. It does look at customer profitability and the object of this is to be able to incent customers in certain ways to improve the economics of the business, not to cause it to be a --
And then for United Tote, can you talk a little bit about the CapEx requirements there? Also Gary, if you could just talk about how you are going to report that. Is that going to be separate line items or combined with current line items on the income statement? Thanks.
Sure. On the capital forecast for 2006, that is related to acquiring and developing equipment that eventually gets leased to the track as they acquire new business. So capital investments will be associated with continued growth as opposed to maintaining systems and things like that. That is what you will see at the CapEx line as well as financing that traditionally and then leasing the equipment to the track.
We need to review the breakout with our auditors going forward as to what level of detail we will show on United Tote. I don't think we have a final opinion on that yet. We will obviously try to give investors some indication of progress that we are making, but we haven't concluded in our financial reporting exactly what level of detail we will break out.
I just have one last question. Any news on this industry consortium RFP? Is that still going to be awarded, or is that consortium totally breaking up?
Well it has changed since its original inception. There are fewer members associated with it now than were, for varying reasons. There are still meetings going on. United Tote is still having conversations with several members of the consortium and in fact is looking at other alternatives to be able to satisfy the RFP. So the process continues. I believe that it should come to a conclusion in the next month or so. We are still optimistic that United Tote can participate in that and we have not -- however, to be very clear -- we did not include that in our evaluation of the company and did not include dollars associated with that in our 2006 EBITDA moving forward.
Operator Your next question comes from the line of Todd Eilers of Roth Capital Partners.
Hi, guys. You talked about increased revenue coming from new business from United Tote. Can you help us a little bit in terms of the timing and how that rolls out into '06? Should we expect some of this to start right off the bat here at the beginning of the year? Is this more of a second half event?
The management team at United Tote was already taking very aggressive steps to find efficiencies in their organization, and began in late fourth quarter to implement those, and have plans to reduce expense through the course of 2006.
We have plans to launch games and content through the year on a pretty even basis, starting in the second, third and fourth quarters and then going out into 2007. So some of the cost savings and some of the synergies are already basically being implemented now. Some will take us a little longer. You shouldn't expect to see something where there is no change in the operating performance of the Company in the beginning of the year and then everything bloated into the third and fourth quarter.
You should start seeing, much like you did at Youbet back in 2002 and 2003 where the performance just continues to improve quarter to quarter to quarter as we find more opportunities in the business.
I have to tell you, I had an opportunity to go to Glen Rock and then an opportunity to go down to San Diego where their technologists were about 25%, 30% of the employees of United Tote. They are extremely motivated, they are very bright. Their culture in those two organizations are very similar to ours, and we expect that the integration of the business is going to occur very quickly and virtually seamlessly.
Given all of these types of cost saving activities, what do you think EBITDA margins can get to for United Tote? Let's say at the end of '06?
Well if you take EBITDA and divide it by gross profit for the sake of a definition, I think Chuck referred to about 40% to 50% margin in his speech.
Okay. Can you guys also talk about, with regard to United Tote, any potential new tote contracts coming up here over the next year? And on the same token, are there any contracts that they have with race tracks that might come up that they have to defend as well?
We have had one cancellation of a race track which was Lone Star. They had a change of control provision in their contract which they exercised. Lone Star is owned by MEC. MEC owns one-third of AM Tote so that was not unexpected. I will be having conversations with AM Tote shortly to discuss our tote contract with them.
We have got several sales prospects pending. There are a number of companies in the United States, race tracks that have their tote contracts coming up for renewal. California has renewals, I believe that is going to be a 2007 event, not a 2006 event.
One of the other things I forgot to mention about Lone Star, there is also an escrow associated with Lone Star that actually is for about a year-and-a-half for the revenue that we will be getting as a result of them canceling. So it actually accelerates payments to us. In 2006, it is a positive development to EBITDA.
We also have some international contracts pending and four or five individuals that are working at United Tote to try to secure those deals. Some in Canada, some in Asia, one in South America. Nothing in Europe that I am aware of, but that will be an area that we can start looking at.
Great, thanks. I also wanted to ask, can you update us on the arbitration process at TBG?
Why don't I let Scott Solomon address that issue.
Really nothing material to report from what we have put out in the last 10-Q. The process is proceeding in accordance with Triple A rules. At this point, there has been no order issued as to what the definite timeframe is, or with parameters of discovery. Hopefully we will be able to give you a better update at the next earnings call.
Thanks. And then one final question. Will you guys start to report the stock-based comp in the first quarter? And if so, can you give us an indication as to what that might be on a quarterly basis?
Not at this point. We are still reviewing that with our auditors and probably will address that in the 10-K that we file at the end of the month.
Thanks a lot.
Operator (Operator instructions) Your next question comes from the line of Traci Mangini of ThinkEquity Partners.
Thanks. I just had a question. Could you give us an update on what is going on in Nevada with your strategy there? Are you getting ready to set up a call center? Is that coming soon?
As a matter of fact, Traci, that continues to move along -- we think quite well, particularly with the acquisition of United Tote that I mentioned earlier. They have recently secured a contract for Chester that is operated by Harris. We have had a number of conversations with other gaming companies in Las Vegas that have interests.
The law took a little longer to actually be enacted and the rules to be promulgated, and that has really been what the delay has been. We have been looking for facilities in Nevada and Las Vegas and we are in the process of reviewing licensing requirements and those types of things to move that process forward.
So we inch forward. It has not been a quick process, I realize, but we believe that we will be successful because we believe we offer some of the greatest value and some of the best technology that is available out there today. We believe that they will see that.
Do you or can you share with us, I know the IRG is already moving over to United Tote. What about the core Youbet? Are those contracts coming up so you could move that over soon, or is that a ways to go?
Actually, we have relationships with both Auto Tote and AM Tote. About 50% of our business at Youbet goes through an Auto Tote hub in California. The other 50% goes through an AM Tote hub in Oregon.
AM Tote, we have change of control language so if the change of control occurs at AM Tote we have the same rights that they have with us, and that is to terminate the agreement within a certain period of time and move our business to another provider. We are still looking at our tote contract in that business. We have been serviced well by both AM Tote and Auto Tote. We think there are places that we can work with AM Tote and Auto Tote and we didn't want to do anything precipitous that would prevent those opportunities from occurring.
On the other hand, if others are going to take precipitous action and cancel contracts, it is obviously something that we need to look at. We are not totally convinced that we can't get to the same place with both AM and Auto that we would through United Tote, and that we wouldn't end up with better relationships with both of them if we were able to keep our relationship stable.
Lastly, and this question may be for Scott. From a regulatory standpoint, I know you have a lot of new games that will be coming out and we don't know exactly what all of them are, and the hope is to migrate some of those to the Internet platform. Are there any of those games that would not be protected under the IHA? Should we be concerned for those particular games, about any pending legislation right now?
No, I think I can answer that. We would not bring anything online that didn't meet the requirements of state and federal law. The games that we are talking about fit well within the parameters of the IHA and other gaming law that exists in the United States, so these are not casino-based type games, they are not poker-type games. These are games that are pari-mutuel in nature and will either fit under the IHA or fit under other contest types of law. We don't anticipate any problems with them at all.
Great, thank you.
Operator Your next question comes from the line of Mark Argento with Craig-Hallum Capital.
Good afternoon, guys. One question for you in particular. I know back in January, I think the California Racing Board held their monthly or quarterly meeting. I know one of the big topics of conversation was the whole concept of exclusivity of content.
The question for you is really focused on, what is the ability -- or would the California Racing Board have the authority to potentially break some of those exclusivity contracts that results in your high payments to TVG? Is that within their scope and bounds? If so, what is the probability of something like that happening?
Well it is an excellent question, Mark. We are not entirely sure, being very candid about it. We know that we pay TVG in excess of $80 million to have the rights to certain content. We gave up 17% of the Company originally under the representations that they had all of the content and they did not require any other approvals by anyone else for them to secure that content. So naturally, we are operating as a sub-licensee of that content and it has been an advantage to us, where we have been able to use it.
In California our margins are extremely thin, as I have said before, in certain cases on TVG content they literally are non-existent. So while losing the exclusivity could in fact have an impact on us in California, from a customer acquisition standpoint it would probably have a minimum impact on us from a profitability standpoint.
Whether the CHRD truly does have jurisdiction and the right to try to break those up, there are strong arguments on both sides. Obviously, TVG says they don't and the horsemen of California believe they most certainly do.
There was a California horse racing meeting today where the topic was to be covered. Unfortunately, I had to leave in order to cover off this conference call so that piece of the agenda kept moving back further and further because the two parties who were trying to resolve their differences and in fact had state legislators involved in that process to try to broker a deal.
So I don't know what happened but we should have some news tomorrow to see if it was brought to some kind of successful conclusion or if the debate rages on between the two parties. I can tell you that these kind of exclusivities don't help the industry as a whole, because it doesn't allow the tracks to disseminate their products as widely as they could or should. Frankly, the $80 million that we pay to TVG could have been paid directly to the tracks or paid directly to the horsemen, which would have improved the purses, improved the fields and would have resulted in probably a net benefit to the industry as a whole.
Chuck, just to remind us, as a percentage of your entire business in rough estimates, what is that business there? How much is that of TVG or TVG exclusive tracks?
Well California is about $120 million of our handle. Gary, TVG as a percentage of total is?
About 35% of our total handle is probably TVG, in that area.
That is very helpful, thanks guys.
Operator Your next question comes from the line of Kevin Foll with NGER.
Hi guys, congratulations on getting the deal closed. It looks like an interesting one. Can you just give me a little color for my model, I am just trying to get to some of the assumptions for your guidance for the year. I guess in terms of yield and handle, broken out between Youbet and IRG for the year, do you have ballpark what you are expecting there?
Well as we said earlier in the call, we are expecting somewhere around at least 17% out of Youbet and between 15% and 20% out of IRG. So again, blending both, probably comparable in the 17% range. We have been able to have growth rates in excess of that over the last couple of years, but we are pretty comfortable with saying that we are going to be around the 17% number.
So the IRG, what would that translate to on a dollar basis in the annualized for IRG?
You take $120 million and you add, at the low end, 15%.
And at the high end, 20% obviously.
Great. What should we think about in terms of yield percentage then, going forward and some of the drivers there?
Yields on Youbet should be comparable and stable for the year, somewhere in the 6% to 7% range.
I think that the rates that we show for the year 2005, both IRG and Youbet are probably good assumptions going forward.
Operator Your next question comes from the line of Craig Behnke with Founders Asset Management.
Good afternoon, gentlemen. I apologize if you have already said this, I jumped on the call a bit late. Looking at the 8-K that you guys put out on January 12th, I am talking about the first 11 days of '06, Youbet handle up 24% over '05. I thought you gave a little update on that, but I don't know if I heard it clearly. Did you say that February wasn't as strong as that, or did you give an actual number or any type of update on that stat?
In the question and answer session I did say that January, from a Youbet perspective, stayed strong and IRG weakened slightly based on February versus January.
Okay. Willing to provide any type of hard number like you did in the 8-K in January on that January 12 8-K?
No. Again, the numbers are pretty consistent with what we have been saying here today. They are in excess of 17%, January was 24%. What we are seeing is those numbers being consistent through the remainder of January and into February. At this point right now, I am not able to predict weather or other unknown events. Tough to say where we will end out the quarter because we are only two-thirds through and still have six weeks left.
No, I was just looking for more of an update as of now and I understand weather can affect that.
Right now, like I said, it has been pretty consistent. January came back strong, stayed strong; February is strong at Youbet; a little light at IRG, but we are working hard to get the content that IRG is missing. We are optimistic. I can't guarantee it, but we are optimistic. We think we have the models that make sense to the industry. I think once they better understand them and realize how we can effectively compete against international bookmakers, then we hope that they will embrace us.
We also hope that others, again -- don't misunderstand us. We think that other relay providers can follow the same path of compliance, regulation and oversight and get to the same place to help the industry and themselves overall. So we won't be the only people in this space, but we think that we have first mover advantage. We should benefit the most once we break the log jam.
Thanks for the call, guys. I appreciate it.
You are welcome, thank you very much for joining us today.
Operator Your next question comes from the line of Sean McMahon with Kennedy Capital Management.
Hi, guys. Good job this quarter under the circumstances. I just had two quick questions. One, Can you talk to me a little bit on the international front, what you are seeing out there? If you can take some advantages of what is going on? Two, out of the 300 races that you guys lost, how many of those do you expect to come back this year?
Well let me take your last question first. It is really difficult to predict again, 12 months from now, or actually nine months from now what weather conditions are going to be. If you take Turfway Park, for example, just citing an isolated example, Turfway Park in January is up nearly 100% year-over-year from where they were in 2005 because in January of 2005 they were decimated by weather in the Midwest. So they showed just astronomical increases year-over-year because they had lost so much of their race calendar the year before.
It is difficult to predict. I mean, the races themselves should come back. Hollywood Park should in fact gets its turf straightened out for the fall meet which is really critical for California racing as well as racing across the country. So we would expect that we are going to get some benefits from that, and those aren't weather related. Those had to do with some unfortunate decisions and implementation of the turf at Hollywood just didn't take, so they couldn't run on it. We don't expect that is going to be the case.
Also, again, this is just for color and a tidbit, more and more racetracks now are considering polymer surfaces, poly tracks which aren't as susceptible to weather and flooding and the like; are less expensive to maintain and are in fact easier on the horses so there is not catastrophic failure and more breakdowns. It has been very successful at Keeneland and at Turfway Park; Delmar is looking at it, California just adopted a rule today that said by the end of 2007 anyone running a four-week meet, consecutive meet, needs to have a polymer surface.
So if that is adopted across the country with any speed, we should see not only race conditions improved, biases eliminated, more horses in the fields, but we also should see weather-related types of things being less impacting on the business.
Okay, so providing weather is not an issue, you would expect to get most of those races back?
That is correct, unless the race schedule is changed for reasons that we wouldn't be aware of at this moment right now. But yes, we expect them to be similar.
As far as international is concerned, United Tote has a number of contracts around the world. In the Philippines they have contracts, in Canada they are pitching business. In Asia, they are even pitching business as far as Mongolia. We think that those relationships will help us, they have South American interests and so we are developing that quickly and we think with an integrated platform that allows a customer to use their own brands and our technology, that should accelerate that process fairly quickly.
Can you give me any color, isn't Asia -- is that a billion dollar market? I think I read that in one of the reports.
No, actually it is -- I think the Hong Kong Jockey Club does twice what the United States does. They are about a $35 billion handle business. Very difficult contract to secure, but it is probably with the Hong Kong Jockey Club, it is more likely going to be an equipment sales type of arrangement as opposed to an actual tote contract initially. But then we can introduce the ADW platform through these relationships. And then the fast card and the games and all of the rest of this stuff to really provide a kind of unique and integrated solution to the track.
Great. Thanks, guys.
Thank you very much.
Operator I will now turn the conference back to Mr. Champion for closing remarks.
I would like to thank all of you for joining in this call today, and for your continued interest in Youbet. I hope it is evident from the comments today that we remain very focused on achieving further growth and generating significant improvements in our overall bottom line through growth in core operations, extracting the full benefits and financial and operational synergies of IRG and United Tote acquisitions; and identifying and completing other transactions that can further strengthen our industry's role and provide returns for our shareholders.
I look forward to reporting additional progress on our first quarter conference call in April and seeing some of you, or hopefully many of you, at our inaugural analyst day on March 23rd at our offices in Woodland Hills. So until then, thank you very much for joining us today.
Operator Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.
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