• It's Here!

    Etf Pro

    Get the big financial market moves right, bullish or bearish with Hedgeye’s ETF Pro.

  • It's Here

    MARKET EDGES

    Identify global risks and opportunities with essential macro intel using Hedgeye’s Market Edges.

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
  • 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