Youbet.Com, Inc. is headquartered in Woodland Hills, California, and is traded on the Nasdaq Small-Cap Market under the symbol UBET. It employs some 325 people.

The Company was founded in 1987 and went public in 1995. It describes itself as “a diversified provider of technology and pari-mutuel horse-racing content for consumers through Internet and telephone platforms, and a leading supplier of totalizator systems, terminals, and other pari-mutuel wagering services and systems to the pari-mutuel industry. Youbet Express is a leading online advance deposit wagering (‘ADW’) company focused on horse racing primarily in the United States.”

The Youbet.com network was America’s first online interactive horse-racing service. Youbet’s totalizator subsidiary is United Tote Company, which it acquired in 2006. Youbet’s business is divided into two segments for accounting purposes. The first segment, Youbet.com, enables people to wager remotely on horse racing at 150-plus worldwide tracks. The second segment, United Tote Company, provides pari-mutuel wagering machines and technology to approximately 100 facilities in North America and to a few in foreign markets. The advance deposit wagering business segment has been profitable while the totalizator business lost money in 2007 and 2008.

Youbet has an extensive customer database and uses data mining software that enables the Company to efficiently and effectively customize offerings and promotions to each customer. Moreover, the Company has a “highly scalable infrastructure” that allows it to handle additional business at a low marginal cost. Its voice-recognition wagering platform permits the Company to substitute machines for human resources.

The Company’s growth strategies encompass the development of wagering products, such as fixed-odds sports betting in countries where it is legal, geographical market extension (the Company derived less than 5% of its revenues in 2008 from races outside the United States and Canada), and offering high-quality wagering platforms and online solutions for track operators and other gaming firms.

Youbet has identified numerous risks associated with its business. Most of them are characteristic of any account wagering firm, such as regulatory changes that would have an adverse effect. In addition, the Company has been impacted by the economic downturn, particularly in light of the fact that it is offering a non-essential, leisure-type of service.

From 2007 to 2008, Youbet revenues declined from $122.5 million to $109.03 million. However, operating losses narrowed from a negative $14.19 million to a negative $5.82 million, as the Company decreased its operating expenses. The Company took non-cash impairment write downs against operating expenses of $8 million in 2007 and $11.2 million in 2008. This was for a write-down of the goodwill in United Tote Company. After adjusting for charges from discontinued operations, the Company incurred total losses of $28.42 million in 2007 and $4.45 million in 2008. Youbet’s charge of $14.23 million in 2007 for discontinued operations was associated with International Racing Group (IRG), the Company’s offshore rebate shop. Following is Youbet’s explanation to shareholders:

“A search warrant was served on the Company on October 4, 2007 at its headquarters in Woodland Hills, California, by federal agents, accompanied by agents of the Nevada Gaming Control Board, for various records including, among other things, business records of IRG related to the wagering activities of certain customers. The investigation is being conducted by the U.S. Attorney’s Office in Las Vegas, Nevada. We were advised that the U.S. Attorney’s Office is investigating a potentially wide net of activities of certain individuals who may have used telephone rebate wagering services, including those offered by IRG, in an allegedly illegal manner. In connection with its investigation, the U.S. government on October 11, 2007, took possession of approximately $1.5 million held in IRG bank accounts by way of civil asset forfeiture.

Following the seizure of the IRG accounts, ORC (Oregon Racing Commission, which has jurisdiction over Youbet’s wagering hub in that state) issued a notice to commence proceedings seeking suspension of IRG’s license based upon IRG’s alleged noncompliance with ORC requirements. IRG contested the ORC’s complaint and requested a hearing. Prior to the scheduling of a hearing date, we shut down IRG operations and entered into a Stipulated Order of License Surrender with the ORC, pursuant to which IRG and the ORC agreed that IRG would voluntarily surrender the license issued by the ORC, IRG would not re-apply for a hub license in Oregon, and the ORC would deem the allegations in their notice to be resolved and not pursue them.”

The Company lost $.34 per share on continuing operations in 2007 ($.68 per share after accounting for discontinued operations) and a negative $.14 per share on continuing operations in 2008 ($.11 per share after income from discontinued operations, the sale of Bruen Productions). In 2009, the Company had diluted earnings per share of .08 for the first six months.

For the first two quarters of 2009, Youbet had revenue of $58.61 million, as compared to $53.75 million for the same period in 2008, and net income of $2.62 million, in contrast to $2.79 in 2008. The declining profit margins were attributable to cost pressures, such as increased incentives to customers.

In the first two quarters of 2009, 82.3 % of YouBet’s revenues came from advance deposit wagering and the rest from United Tote. In 2008, about 78% of Youbet revenues stemmed from wagering services and 22% from United Tote’s equipment sales and contract services. Yet the advance deposit wagering business had a profit from operations of $8.8 million, whereas United Tote lost over $13 million. In 2007, the ADW business made $1.59 million from operations and United Tote lost nearly $12 million.

On June 30, 2009, Youbet had a debt-to-equity ratio of 1.29 and debt comprised 56.3% of the capital structure. The Company’s current ratio was 1.12.

During the past 52 weeks the stock has traded in a range of $.66 – $3.91. At the close of Nasdaq yesterday, Youbet stock was at $2.25 per share. Short-interest has stayed about the same for Youbet stock in the past month, indicating that investor sentiment has not changed pertaining to whether the stock price will rise or fall. This stock has very little short interest activity, only about 3% of the number of shares issued.

Youbet’s major impediment is United Tote. When it acquired the firm, top management made a strategic error.  A company should not enter into a business that puts it in direct competition with its customers. United Tote must try to sell equipment and services to the same racetracks that have advance deposit wagering subsidiaries of their own competing against Youbet for customers. In its first-quarter 2009 10Q filing with the Securities and Exchange Commission, Youbet stated: “The Company is continuing its evaluation of strategic alternatives, including a possible sale of United Tote. However, the Company has not resolved to dispose of United Tote and, accordingly, reports its activities among continuing operations.”

Without United Tote, Youbet would be profitable and would have a stronger balance sheet. Clearly, United Tote is and has been a drag on earnings. The Company’s aforementioned 10Q statement regarding United Tote reflects ambivalence. The opinion here is that keeping United Tote will only serve to compound the strategic error of acquiring it in the first place. Selling United Tote may be easier said than done in the present economic climate. Another possibility would be to spin it off to shareholders, but United Tote’s unprofitability makes that an unlikely course of action. Youbet may have to sell off United Tote for whatever it can get. Otherwise, this subsidiary most likely will continue to be a weight on Youbet’s earnings.

In its current organizational structure and at its present stock price, Youbet is not an attractive stock buy. If Youbet is able to find a buyer for United Tote at a decent price, rather than a fire-sale price, it will improve its competitive position and likely will become more profitable, possibly becoming an attractive merger/acquisition candidate for another account wagering company. If this were to occur, the stock price could appreciate. In conclusion: United Tote is an anchor on Youbet.com and will be until it is sold off.

Disclosure:  Bill Shanklin is not currently a shareholder in Youbet.com.

Copyright © 2009 Horse Racing Business