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| UBET > SEC Filings for UBET > Form 10-Q on 13-Nov-2009 | All Recent SEC Filings |
13-Nov-2009
Quarterly Report
Critical accounting estimates and policies
Critical accounting policies are those that are important to the portrayal of
our financial condition and results, and which require management to make
difficult, subjective or complex estimates and judgments. Critical accounting
estimates cover accounting matters that are inherently uncertain because the
future resolution of such matters is unknown. Our critical accounting estimates
and policies are set forth in management's discussion and analysis of financial
condition and results of operations in annual report on Form 10-K for the year
ended December 31, 2008. There have been no material changes to our critical
accounting policies or estimates.
Recent Accounting Pronouncements
There have been no recent accounting pronouncements or changes in accounting
pronouncements issued, but not yet effective or early adopted, that management
believes are of significance, or potential significance to the Company.
Results of continuing operations for the three months ended September 30, 2009
compared to the three months ended September 30, 2008
The segment discussions below are based upon the following table, which sets
forth, for the periods indicated, certain operating data for each of our
operating segments prior to the elimination of intersegment revenues of
$0.2 million and $0.3 million in the third quarter of 2009 and 2008,
respectively. Additionally, in the second quarter of 2009, the ADW segment began
charging the totalizator segment for its share of executive management services
approximating $0.2 million per quarter. The data for the 2008 period in the
table below has been adjusted to include a similiar $0.2 million charge for
comparability purposes:
ADW Segment Totalizator Segment
Three months ended September 30, Three months ended September 30,
Increase % Increase %
2009 2008 (Decrease) Change 2009 2008 (Decrease) Change
(in thousands)
Revenues $ 22,485 $ 23,365 $ (880 ) -3.8 % $ 5,563 $ 6,297 $ (734 ) -11.7 %
Gross profit 7,802 8,956 (1,154 ) -12.9 % 1,497 2,231 (734 ) -32.9 %
As % of revenues 34.7 % 38.3 % 26.9 % 35.4 %
Operating expenses 5,962 5,109 853 16.7 % 2,417 2,868 (451 ) -15.7 %
As % of revenues 26.5 % 21.9 % 43.4 % 45.5 %
Income from
continuing
operations before
other income
(expense) and
income tax $ 1,840 $ 3,847 $ (2,007 ) -52.2 % $ (920 ) $ (637 ) $ (283 ) -44.4 %
As % of revenues 8.2 % 16.5 % -16.5 % -10.1 %
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Revenues
Total revenues decreased $1.4 million, or approximately 5%, for the third
quarter of 2009 when compared with the third quarter of 2008. Excluding the
impact of intersegment eliminations, the revenue decrease was the result of a
decrease in our ADW segment revenues of $0.9 million, or approximately 4%, and a
decrease in our totalizator segment revenues of $0.7 million, or approximately
12%, over those periods. Set forth below is a quantitative and qualitative
analysis of the effects of the various factors affecting our revenues on an
operating segment basis.
ADW Segment Revenues
ADW segment revenues, which consist primarily of commissions on wagers placed by
our customers, net of player incentives, decreased by approximately
$0.9 million, or 4%, in the third quarter of 2009 compared to the third quarter
of 2008. Gross commissions revenues, before deduction of player incentives,
during the third quarter of 2009 increased $0.3 million compared to the same
period in 2008 due to changes in track mix favoring higher commission tracks.
Changes in track mix are driven by player track preferences due to such things
as race type, time of day and wagering pool size. However, the increase in gross
commissions was more than offset by an increase in player incentives during the
third quarter of 2009. Player incentives increased $1.0 million or approximately
41% when compared with the third quarter of 2008 due to an increase in player
promotions and a $0.3 million prospective change in estimate relating to the
value of player reward points.
Total handle for the three months ended September 30, 2009 was $121.3 million
versus handle for the comparative period of 2008 of $121.7 million. The
$0.4 million or approximately 0.3% decline, despite a general industry wagering
decline of approximately 10% during the quarter due to the effects of the
current economy, was minimized by our efforts to attract handle via our
incentive and marketing activities.
Youbet Express yield, defined as "commission revenue less track and licensing
fees as a percentage of handle" (each calculated in accordance with generally
accepted accounting principles), decreased 0.9% to 6.9% in the third quarter of
2009 versus 7.8% in the third quarter of 2008. The lower yield reflects the
impact of an increase in player incentives and track fees.
The following table sets forth our calculation of Youbet Express yield for the
periods indicated:
Three months ended September 30, 2009
Favor
2009 2008 (Unfavor) %
(in thousands)
Handle $ 121,254 $ 121,675 $ (421 ) -0.3 %
Commissions 21,842 22,570 (728 ) -3.2 %
Less:
Track fees 12,807 10,599 2,208 20.8 %
License fees 705 2,482 (1,777 ) -71.6 %
Net revenue $ 8,330 $ 9,489 $ (1,159 ) -12.2 %
Yield % 6.9 % 7.8 %
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We believe that yield is a useful measure to evaluate our operating results and
profitability. Yield, however, should not be considered an alternative to
operating income or net income as indicators of Youbet's financial performance
and may not be comparable to similarly titled measures used by other companies.
Totalizator Segment Revenues
Totalizator segment revenues, which consist of contract revenues associated with
the service of totalizator systems and equipment sales, decreased $0.7 million,
or approximately 12%, in the third quarter of 2009 when compared to the third
quarter of 2008 due to a decrease in service revenues and a significant
reduction in equipment sales, as described below. Contract revenues from the
service of totalizator systems, which is driven by wagering handle at tracks
serviced, were $5.5 million in the third quarter of 2009, representing a
decrease of $0.4 million, or approximately 7%, compared to the third quarter of
2008, primarily as a result of track closures, a general industry decline in
wagering and reduced racing days. Equipment sales in the third quarter of 2009
were $26,000, representing a decrease of $0.3 million, or approximately 92%,
compared to the third quarter of 2008 due to reluctance of track owners to
invest in new equipment in the current world economy.
Costs and Expenses
Consolidated costs and expenses increased $0.5 million, or approximately 3%, in
the third quarter of 2009 compared to the third quarter of 2008 primarily as a
result of increased track fees and contract costs, which were partially offset
by decreases in licensing fees and totalizator equipment costs, as discussed
below. As a percentage of revenues, consolidated costs and expenses increased
from approximately 62% in the third quarter of 2008 to 67% in the third quarter
of 2009. Set forth below is a quantitative and qualitative analysis of the
effects of the various factors affecting our costs and expenses on an operating
segment basis.
ADW Segment Costs and Expenses
Costs and expenses in our ADW segment consist of track fees, licensing fees and
network operations, each as described below.
Track fees: Track fees, which primarily consist of host and market access fees
paid and payable to various tracks increased $2.2 million or approximately 21%
in the third quarter of 2009 compared to the third quarter of 2008. The
quarter-over-quarter increase is primarily attributable to a shift of costs from
license fees to tracks fees resulting from a reduced number of TVG exclusive
tracks. Expense increases were experienced in television fees ($0.8 million);
host fees ($0.8 million); source market fees ($0.5 million). These increases
were supplemented by $0.8 million in revenue share payments relating to our
co-branding agreement with tracks in Illinois that did not exist in the third
quarter of 2008. These increases were partially offset by a $0.6 million
reduction in California market access fees, due to reduced wagering at
California tracks.
Licensing fees: Licensing fees, which represent amounts paid and payable under
our licensing agreement with TVG, decreased $1.8 million, or approximately 72%,
in the third quarter of 2009 compared to the third quarter of 2008, primarily
due to fewer TVG exclusive tracks.
Network operations: Network operations expense, which consists of costs for
salaries, data center management, telecommunications and various totalizator
fees in the third quarter of 2009 remained flat when compared to third quarter
of 2008.
As a percentage of ADW segment revenues, costs and expenses in our ADW segment
increased from approximately 62% in the third quarter of 2008 to 65% in the
third quarter of 2009.
Totalizator Segment Costs and Expenses
Costs and expenses in our totalizator segment consist of contract costs and
equipment costs, each as described below.
Contract costs: Contract costs, which represent costs of United Tote associated
with providing totalizator services at racetracks, increased $0.1 million , in
the third quarter of 2009 when compared to the third quarter of 2008, due to a
$0.2 million inventory write-down, $0.1 increase in ticket paper expense, offset
by reductions in freight, maintenance expense, supplies and outside labor
expenses.
Equipment Costs: Equipment costs, which represent costs of United Tote that are
associated with earning equipment sales revenue, declined significantly, from
$0.2 million in the third quarter of 2008 to $14 thousand in third quarter of
2009, due to a significant decrease in equipment sales.
As a percentage of totalizator segment revenues, costs and expenses in our
totalizator segment increased from approximately 65% in the third quarter of
2008 to 73% in the third quarter of 2009.
Gross Profit
Consolidated gross profit decreased $1.9 million, or approximately 17%, in the
third quarter of 2009 compared to the third quarter of 2008 primarily due to
changes in wagering track mix to tracks on which we pay higher fees, revenue
share expense associated with our co-branding agreement with tracks in Illinois,
increased player incentives and revenue decline experienced by the Totalizator
segment. As a percentage of revenues, consolidated gross profit decreased from
approximately 38% in the third quarter of 2008 to 33% in the third quarter of
2009. Set forth below is a quantitative and qualitative analysis of the effects
of the various factors affecting our gross profit on an operating segment basis.
ADW Segment Gross Profit
Gross profit in our ADW segment was $7.8 million for the three month period
ended September 30, 2009, as compared to $9.0 million for the same period in
2008, a $1.2 million or 13% decline. The decline was primarily due to the
increased player incentives and track fees described above. As a percentage of
ADW segment revenues, gross profit in our ADW segment decreased from
approximately 38% in the third quarter of 2008 to 35% in the third quarter of
2009.
Totalizator Segment Gross Profit
Gross profit in our totalizator segment was $1.5 million for the three month
period ended September 30, 2009, representing a decrease of $0.7 million, or
approximately 33%, compared to the same period in 2008. This decline is
primarily attributable to the 12% decline in revenue, coupled with increases in
ticket paper expense and increases to inventory obsolescence reserves. Due to
the nature of the totalizator business and contractual obligation to provide
equipment and totalizator services, its cost structure is fairly rigid and less
variable to fluctuations in handle processed and reduction in race days. As a
percentage of totalizator segment revenues, gross profit in our totalizator
segment decreased from approximately 35% in the third quarter of 2008 to 27% in
the third quarter of 2009.
Operating Expenses
Research and development: Research and development expense of $0.8 million
remained flat when compared with the third quarter of 2008.
Sales and marketing: Sales and marketing expense of $1.5 million in the third
quarter of 2009 increased $0.2 million, or approximately 15%, compared to the
third quarter of 2008. This increase was primarily in the Youbet Express
business and resulted from an increase in sales and marketing personnel and
management's priority to develop and target marketing efforts to specific
initiatives including online customer acquisition, conversion and retention.
General and administrative: General and administrative expense of $4.3 million
in the third quarter of 2009 increased $0.6 million or approximately 17%, when
compared to the third quarter of 2008 and represented 15% of total revenue for
the third quarter of 2009 versus 12% of total revenue in the third quarter of
2008. The increase is primarily due to increased legal fees and other costs
associated with the investigation of various strategic opportunities of
$0.4 million; increased bad debt associated with our Totalizator segment of
$0.1 million and travel costs.
Depreciation and amortization: Depreciation and amortization in the third
quarter of 2009 decreased $0.4 million when compared to the third quarter of
2008, primarily due to the continued aging of totalizator assets and reduced
capital investment in our totalizator segment.
Interest expense (income): Interest expense of $0.2 million in the third quarter
of 2009, decreased $0.1 million compared to $0.3 million in the third quarter of
2008. This decrease is primarily due to lower interest rates and lower debt
levels. Interest income decreased slightly when compared to the three months
ended September 30, 2008.
Other income: Other income increased $0.1 million when compared to the three
months ended September 30, 2008, due to the recovery by United Tote of
pre-acquisition receivables previously written off to expense.
Income Taxes: The combined estimated annual effective income tax rate used for
the quarter ended September 30, 2009, was lower than in the comparable prior
year period due to a retroactive tax adjustment relating to State of California
in 2008. In the third quarter of 2008, the State of California suspended the use
of net operating loss carry forwards, resulting in additional tax of
$0.3 million being recognized in the third quarter of 2008.
Results of continuing operations for the nine months ended September 30, 2009 compared to the nine months ended September 30, 2008 The segment discussions below are based upon the following table, which sets forth, for the periods indicated, certain operating data for each of our operating segments prior to the elimination of intersegment revenues of $0.7 million and $0.9 million in the first nine months of 2009 and 2008, respectively. Additionally, in the second quarter of 2009, the ADW segment began charging the totalizator segment for its share of executive management services approximating $0.2 million per quarter. The data for the 2008 period in the table below, has been adjusted to include a charge of $0.5 million for comparability purposes:
ADW Segment Totalizator Segment
Nine months ended September 30, Nine months ended September 30,
Increase % Increase %
2009 2008 (Decrease) Change 2009 2008 (Decrease) Change
(in thousands)
Revenues $ 70,784 $ 65,154 $ 5,630 8.6 % $ 15,991 $ 18,861 $ (2,870 ) -15.2 %
Gross profit 24,110 25,281 (1,171 ) -4.6 % 4,745 7,170 (2,425 ) -33.8 %
As % of revenues 34.1 % 38.8 % 29.7 % 38.0 %
Operating expenses 17,444 16,211 1,233 7.6 % 7,596 8,922 (1,326 ) -14.9 %
As % of revenues 24.6 % 24.9 % 47.5 % 47.3 %
Income from continuing operations
before other income (expense) and
income tax $ 6,666 $ 9,070 $ (2,404 ) -26.5 % $ (2,851 ) $ (1,752 ) $ (1,099 ) -62.7 %
As % of revenues 9.4 % 13.9 % -17.8 % -9.3 %
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Note: Revenues exclude intersegment eliminations of $0.7 million in 2009 and $0.9 million in 2008, respectively.
Revenues
Total revenues increased $3.0 million, or 4%, for the nine months ended
September 30, 2009 when compared with the comparable period of 2008. Excluding
the impact of intersegment eliminations, the revenue increase was the result of
an increase in our ADW segment revenues of $5.6 million, or approximately 9%,
and a decrease in our totalizator segment revenues of $2.9 million, or
approximately 15%, over those periods. Set forth below is a quantitative and
qualitative analysis of the effects of the various factors affecting our
revenues on an operating segment basis.
ADW Segment Revenues
ADW segment revenue, which consists primarily of commissions on wagers placed by
our customers, net of player incentives, increased approximately $5.6 million,
or 9% in the nine month period ended September 30, 2009, when compared to the
same period in 2008. Gross commissions, before deduction of player incentives,
during the first nine months of 2009 increased $9.3 million compared to the same
period of 2008 due primarily to a 13% improvement in handle resulting from
increased track content. However, the increase in gross commissions was
partially offset by higher customer incentives in the first nine months of 2009
of $3.2 million, a 57% increase compared to the first nine months of 2008.
Approximately $0.4 million of the increase relates to the redemption of expired
player reward points in the first quarter of 2009, $0.3 million relates to a
prospective change in estimate of the value of outstanding reward points and the
remainder is associated with the impact of our more aggressive incentive
marketing efforts.
Total handle for the nine months ended September 30, 2009 was $373.7 million, an
increase of $42.8 million, or 13%, compared to the first nine months of 2008
primarily due to the return of all TrackNet content and aggressive marketing.
Youbet Express yield, defined as "commission revenue less track and licensing
fees as a percentage of handle" (each calculated in accordance with generally
accepted accounting principles), decreased 1.2% to 6.9% in the first nine months
of 2009 versus 8.1% in the first nine months of 2008. The lower yield reflects
the impact of increased track fees due to changes in track mix resulting from
the return of certain lower yielding TrackNet content, revenue sharing expense
associated with our co-branding agreement with tracks in Illinois and the
increase in player incentives.
The following table sets forth our calculation of Youbet Express yield for the periods indicated:
Nine months ended September 30, 2009
. . .
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