ALL reported weak results, but they came in at the high end of their guidance given in April. An intriguing 3-5 year plan was outlined.
THE ARISTOCRAT PLAN
- Double participation share in the US
- Improve ship share in Australia
- Reduce volatility in Japan
- Focus the organization on key markets while exiting the low ROI markets
ALL 1H09 EARNINGS CALL
Commentary on 1H09 results:
- Revenues were down 5.3% in 1H09 vs 1H08 (would be down 20% on a constant dollar basis)
- EBITDA of 129.4MM was down 19% (or 31% on a constant currency basis)
- Operating profit after tax was down 38%
- Operating cash flow was up 15.8%
- Operating results were at the top end of their guidance in April due to better results in rest of the world - especially South America
- North America met expectations
- Japan was the weakest region and performed below expectations
- North American market conditions remain challenging
- Sold 4,264 units into North America vs 5,252 in last yrs 1H
- Decline in unit sales was 18.8%, conversions up 18.8%
- Systems revenue was up 9% and services revenue up 10.3%
- Over 10k Viridian units placed
- Ship share was improved
- Gaming operations
- Expect to benefit in the second half from higher install base and successful JAWS launch
- We saw this product at Mohegan Sun yesterday and heard good things
- Japan units declined from 32k in 1H08 to 5k units 1H09. Overall market volumes continue to be challenged by the weak economic environment
- Japan – absence of major game releases caused poor results – only 5,747 units sold. Australian dollar also weakened, which increased reported results
- Australia is a challenging market but some signs are encouraging
- Recurring revenue was impacted by lower win per day, partially offset by mix
- Asia Pacific was negatively affected by limited openings, tough conditions in Europe
- New Zealand was up 210% (profit)
- South Africa and South America sales decreased by 14.4% and 30.6%, respectively
- They are outsourcing more R&D to India
Outlook:
- Expect market to remain challenged
- Pricing holding up despite low volumes
- North America will continue to roll up JAWS and introduce new games
- Japan will release 2 license titles
- Will focus on Veridian rollout internationally
- 3 to 5 year phase strategy to deliver growth - no quick fixes
- Need to focus more on the US – participation market especially
- Want to double their participation share over the next 5 years
- Games that are player led, technology driver
- “customer centric” model and more strategic approach about managing IP
- Faster, more focused product development – more outsourcing
- Best Games, best system
- Focus on server based
- Grow their presence in US systems
- Build a stepper business
- More strategic market focus in terms of where they want to compete
- World Class Organization
- Right-sizing the business, cost cutting, stream lining the organization
- More of the team based in North America
- Need to focus more on the US – participation market especially
- Australia – need to close the gap between ship share and install base (à la IGT in the US)
- Japan – aiming to achieve 50,000 units sales per year in the future
- Building pipeline of license characters which have more appeal than developed characters
- Aim to exit 30 jurisdictions that aren’t profitable so they can focus on the markets with real opportunities like Spain, Macau, Mexico, etc
- Accordingly, bottom line priorities are
- Double participation share in the US
- Improve the share in Australia
- Reduce volatility in Japan
- Increase focus and resources on key markets while exiting low ROI markets
Q&A:
- Quantify cost savings on overhead?
- 10-15MM in costs related to implementing the strategy (due to restructuring costs)
- Next year they expect the strategy to be break even and then, going forward, CF positive
- Targeting the run rate they achieved 1H09 to 2H09
- Ship share in Australia was 33%
- Moving management and R&D to the US?
- They have three studios in the US and are looking to add more
- They believe they have the best math
- US market is just too important to “export” games to the US - need to develop US centric games
- ALL plans to keep total R&D at current level – need to invest “smarter”
- New markets in the US? Do they want more Class 2 presence?
- ALL has not truly competed heavily in Class 2 before but is looking at it
- The biggest opportunity is class 3 - IL & OH
- Jaws – install base is up by 500 net on the games ops side (900 JAWS installed)
- How will they increase their participation share? Who will they take out per say?
- In 6 months they increased their install base by 10%
- Japan – how confident are they that they can manage the volatility better – timing build out of pipeline of licenses?
- Licensed games do much better than in-house developed games
- There is a need for at least 2 licenses per year to hit their numbers – will take a few years
- Trying to grow the revenue line without growing the cost line by right-sizing and having better focus
- Getting best games out/speed to market – takes 12-18 months (especially for licensed games)… so it will take some time
- Replacement market – still see the next 6-12 months as challenging
- In North America – why did they just have flat prices vs increases at competitors?
- ASP has usually been higher than competitors
- 1H09 had a large # of corporate deals (PA) that have higher than usual discounting
- How many steppers did they ship in 1H09?
- They launched late in the half – so only 300 units
- They don’t yet have enough content on stepper, but a good platform. It is a whole new segment for them
- Discounted the steppers
- Japan – have they procured brands already?
- Yes – have a number of licenses that they have procured – 6 potential launches for next year – 4 are licensed, 1 is a major license
- Need to mature licenses, buy licenses that are more nascent and then develop them over time
- Increased use of licensing is a theme in the slot business, how to quantify the impact on margin?
- Licensing costs are a fee per day on hardware and software
- New Zealand 1H09 results was driven by a regulatory change – so 2H09 won’t be as good
- Mexico strategy?
- Class 3 is now legal, they are in the process of indentifying product for that market
- “Can’t save your way to greatness”
- 1,300 of the games they sold were to new sites/expansions in 1H09
- Have a number of stepper games on trial that they hope will be converted to sales
- They don’t see improvement in North America at this stage