• Churchill Downs, which owns the Kentucky Derby, is moving away from online sports betting to focus on horse race betting.
• The company says it is switching its strategy because sports betting became too costly.
• Churchill Downs is also looking internationally for its next big growth area.

Churchill Downs, which owns the Kentucky Derby, is changing its strategy when it comes to sports wagering.

The company is doubling down on horse race betting and moving away from online sports betting and iGaming digital casino games, CEO Bill Carstanjen told CNBC.

"We saw an environment for our company where we didn't see positive margins on the horizon. So we switched strategies we we are focused on running our horse racing business," Carstanjen tells CNBC.

Following a Supreme Court decision in 2018 that allowed states to legalize sports betting, Churchill Downs entered the crowded and competitive field. Carstanjen said the company discovered online sports betting profit margins are unattractively small. Expenses too high, according to the CEO, especially the massive costs for the technical infrastructure and the costs to attract and retain players. Other sportsbook companies are dealing with similar issues.

Churchill Downs, which is behind the Twinspires racing app, is looking for potential partners for its iGaming content and customer database, Carstanjen said.

"Our approach is to to be in a position to partner with those long-term winners who are willing to spend the hundreds of millions of dollars to build out that business unprofitably in the in the near and midterm," he said.

Carstanjen said wagering on horse racing online has been great business for his company, with margins of around 30% historically. "We remain absolutely committed and excited about TwinSpires Horse Racing as its top line, bottom line and margins to continue to demonstrate that this is a special online business with a sustainable, scalable and unique business model," he said during the company's recent earnings call.

Nonetheless, the pandemic caused major disruption to the horse racing industry, exacerbating recent declines. This year's "Run for the Roses" will be the first normal Derby with a full capacity crowd since 2019. Carstanjen said they are expecting record Derby results based on advance reserve-ticket sales.

He expects this year's Derby, which is scheduled for Saturday, could break records when it comes to the total amount wagered, also known as the handle, as long as the weather stays dry. Rainy weather often means horses get scratched from the race and bets get refunded.

The Churchill Downs boss also shared with CNBC his strategy for international growth which is being helped in part by a horse from Japan, Crown Pride, running in this year's Derby.

Traditionally, Japanese laws prevent locals from placing bets on the Derby, but betting is permitted this year because a Japanese-bred horse is running.

"The horse racing business in Japan is huge. It's approximately three times the size of what it is in the United States," Carstanjen says.

He said connecting with the horse racing communities internationally helps Churchill Downs build new revenue streams through gambling, ticket sales, sponsorships and content deals.

"It's just building a specific connection to our race and to our brand and giving them access to come to our event," the CEO said.