Aristocrat Leisure (ASX:ALL)

CEO
Market Cap (AUD): 18.58B
Sector: Consumer Discretionary
Last Trade (AUD): 29.19 +0.09 (+0.31%)
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1. About

Aristocrat Leisure Limited is an ASX 100 listed company and one of the world’s leading providers of gaming solutions. The Company is  licensed in 240 gaming jurisdictions and operate in 90 countries around the world, with a team of over 3000 employees who deliver outstanding results by pushing the boundaries of innovation, creativity and technology.

2. Business model

 

The Company operates the following divisions:[1]

 

Divisions

Revenue ($m)

% of Revenue

% of Segment Profit

Profit drivers[2]

The Americas

$1,424.5

58.05%

100%

Strong growth in the Americas business drove a $109 M improvement in post-tax profit compared to the prior period. This growth was driven by an 18% expansion in the Class III premium gaming operations footprint, together with further growth in the Class II gaming operations footprint and average fee per day (‘FPD’). A 9% lift in Class III Outright Sales and an improved average selling price (ASP) further supported this result

Australia and New Zealand

$431.6

17.59%

The ANZ business delivered almost $15 million in incremental profit, driven by the top performing Helix™
cabinet, penetration of the Lightning Link™ and Player’s Choice™ family of games, the recent introduction of Dragon Link™ and continued performance of the broader
Aristocrat game portfolio

Digital

$383.0

15.61%

Digital delivered strong earnings growth of $31.7 M due to the continued success of Heart of Vegas™ and the success of Cashman Casino™ which was launched in the year

International Class III

$214.7

8.75%

International Class III drove a $23.9 M improvement in post-tax profit compared to the prior period mainly
driven by large scale openings in the region. The completion of the 1.1 regulatory churn cycle in Macau in FY2016 was more than offset by the growth across the region

3. Strategy

 

Aristocrat’s consistent focus has been on[3]

 

  • Delivering high quality
  • Sustainable growth
  • Protecting and expanding core business
  • Capturing opportunities in adjacent and new markets and segments
  • Investing in outstanding talent and a high performance culture

4. Markets

 

The Company operates in markets including:[4]

 

Industry (Australia)

Industry Revenue (2017)

Growth Rate (annual 13-18)

Gaming and Vending Machines Manufacturing

$627 million

12.8%

Computer System Design Services

$49 billion

3.7% (annual 12-17)

Data Processing and Web Hosting Services

$1 billion

5.7%

5. Competition

 

Major competitors include:[5]

 

  • Ainsworth Game Technology (ASX:AGI)
  • IBM A/NZ Holdings
  • Hewlett Packard (ASX:HPQ)
  • Macquarie Telecom Group Ltd (ASX: MAQ)
  • Melbourne IT Limited (ASX: MLB)

6. History

 

1953[6]  

The Aristocrat we know today was born

 

1956  

Aristocrat revolutionised the gaming industry with the release of 'The Clubmaster' range

 

1958  

Aristocrat invented the world's first poker machine with fully lit reels and scorecard

 

1960  

A period of global growth for Aristocrat, with a strong portfolio of cabinets and games that allowed the company to expand into Europe

 

1961  

The company released an innovative game design called 'The Aristocrat Nevada' which was an enormous success

 

1963  

Aristocrat released The 'Grosvenor' machine

 

1965  

World's first electronic slot machine, 'Moon Money' was invented

 

1979  

Release the world's first five-reel slot machine and found international success with its revolutionary, all-electronic game called 'Wild West'

 

1980  

Aristocrat opened its London office and also launched Aristocrat Australia Systems, which developed Casino Management Systems

 

1983  

Revenue from slot machines surpassed table revenue in the United States for the first time in history.

 

1986  

Aristocrat opened its New Zealand office in response to growing demand for its games in the Asia Pacific region.

 

1995  

Released the MK Gaming System, which helped the company expand into new markets

 

1997  

Released the Hyperlink Gaming System and listed as a public company on the ASX

 

2000  

Aristocrat secured a licence in what was then the world's largest gaming market

Formed a joint venture with Sammy Corp in Japan and acquired Casino Data Systems (CDS) in Nevada,

 

2002 

Aristocrat made itself at home in its new Las Vegas office

Developed a significant presence in Macau

 

2005  

Aristocrat opened its China office

 

2012  

The 'Play to Win' strategy marked the start of a new era at Aristocrat; with a renewed focus on the United States market and a mandate to recruit top industry talent to develop the world's greatest online, mobile and application-based slot games.

Aristocrat acquired technology assets from Game Account Network to enhance its social, mobile and online games.

 

2013  

Aristocrat acquired mobile, app and online gaming company Product Madness, representing Aristocrat's first move into the free-to-play, non-regulated games market.

 

2014  

Aristocrat presented hundreds of new games across a broader range of segments than ever before

 

2017  

Aristocrat acquired Plarium Global Ltd, a free-to-play mobile, social and web-based game developer

7. Team

 

Board of Directors[7]

 

Ian D Blackburne – Chairman

Trevor Croker – Chief Executive Officer & Managing Director

David C. P. Banks – Non-Executive Director (Resignation effective from 31 March 2018)[8]

Stephen W. Morro – Non-Executive Director

Kathleen Conlon – Non-Executive Director

Arlene Tansey – Non-Executive Director

Sylvia Summers Couder – Non-Executive Director

Pat Ramsay – Non-Executive Director

Neil Chatfield has – Non-Executive Director

 

Management Team

 

Trevor Croker – Chief Executive Officer & Managing Director

Julie Cameron-Doe – Chief Financial Officer

Rich Schneider – Chief Product Officer

Christie Roser – Chief Human Resources Officer

Mark Dunn – Executive Vice President & General Counsel

Jayme (Jay) Sevigny – President, Video Gaming Technologies

Mitchell Bowen – Managing Director - ANZ & International

Matt Wilson – Managing Director, Americas

Victor Blanco – Senior Vice President, Platform Architecture

James Alvarez – Chief Information Officer

Jeff Goldstein – Chief Strategy Officer

Richard Bell – Company Secretary (Appointed on 22 May 2017)[9]


read more

8. Financials

 

2018 Full Year Results Presentation

 

Financial Year 2016/17 (ended 30 September):[10]

 

Divisions

Revenue ($m)

% Change

Profit (before Int & Tax) ($’m)

% Change

The Americas

$1,424.5

13.49%

N/A

N/A

Australia and New Zealand

$431.6

4.58%

N/A

N/A

Digital

$383.0

36.93%

N/A

N/A

International Class III

$214.7

18.55%

N/A

N/A

Total

$2,453.8

15.27%

728.1

43.55%

9. Risk

 

Major risks includes:[11]

 

Changing economic conditions and other factors affecting the gaming industry

Demand for the Company’s products and services are dependent upon favourable conditions in the gaming industry, which is highly sensitive to players’ disposable incomes and gaming preferences. Discretionary spending on entertainment activities could decline for reasons beyond the Group’s control; for example, due to negative economic conditions or natural disasters.

A decline in the relative health of the gaming industry and the difficulty or inability of its customers to obtain adequate levels of capital to finance their ongoing operations might reduce the resources available to purchase products and services, which could affect Group revenues.

To address this the Company is working to develop and deliver new and innovative technologies and products to meet customer needs and working to partner with its customers to provide value adding solutions.

 

Litigation and contingent liabilities

From time to time, the Group may be subject to material litigation, regulatory actions, legal or arbitration proceedings and other contingent liabilities which, if they crystallise, may adversely affect the Group’s results.

 

Increasing competition

Competition in the gaming industry (both land-based and online) has intensified from the consolidation of existing competitors as well as the entry of new competitors. Increasingly, price, reliability and product innovation are among the factors affecting a provider’s success in selling its products.

As traditional land-based markets continue to mature, the Group’s success and profitability is dependent in part on its ability to successfully enter new segments in existing markets and new markets as well as new distribution channels, such as mobile and online gaming.

 

Government gaming regulation

The global gaming industry is subject to extensive governmental regulation. While the regulatory requirements vary by jurisdiction, most require:

  • licences and/or permits;
  • findings of suitability;
  • documentation of qualifications, including evidence of financial stability; and
  • individual suitability of officers, directors, major shareholders and key employees.

 

Changes in laws or regulations or the manner of their interpretation or enforcement could impact the Group’s financial performance and restrict its ability to operate its business or execute its strategies. Difficulties or delays in obtaining or maintaining required licenses or approvals could also have a negative impact on the business.

A material breach of internal processes may result in violation of existing regulations which could also impact its ability to maintain required licenses or approvals.

Gaming laws and regulations serve to protect the public and ensure that gaming related activity is conducted honestly, competitively, and free of corruption. A change in government (or governmental policy towards gaming) may also impact its operations. This political risk increases in jurisdictions where there is significant anti-gaming opposition or vocal minority interests.

 

Tax

The risk that changes in tax law (including goods and services taxes and stamp duties), or changes in the way tax laws are interpreted in the various jurisdictions in which the Group operates, may impact the tax liabilities of the Group and the assets in which it holds an interest.

 

Fluctuations in foreign exchange rates and interest rates

The Group operates internationally and is exposed to foreign exchange risk arising from various currency exposures, primarily with respect to the US dollar and Euro. Foreign exchange risk arises from future commercial transactions and recognised assets and liabilities denominated in a currency that is not the entity’s functional currency. The risk is measured using sensitivity analysis and cash flow forecasting. The Group’s foreign exchange hedging policy is to reduce the foreign exchange risk associated with transactional exposures, primarily over a 12 month horizon. External foreign exchange contracts are designated at the Group level as hedges of foreign exchange risk on specific foreign currency denominated transactions. The debt issue used to partly fund the acquisition of Video Gaming Technologies Inc. resulted in an increase in the Group’s total debt and also resulted in a level of debt which is exposed to a floating rate of interest. The Group is therefore exposed to movements in interest rates. The Group seeks to mitigate this risk with a capital management strategy which examines periodic debt pay down and with the implementation, and continued assessment, of an interest rate hedging strategy.

 

Ability to manage and frequently introduce innovative products on a timely basis

The Group’s success is dependent on its ability to develop and sell new products that are attractive to casino operators and other gaming enterprises and their customers, for both land-based and online gaming operations. If the Group’s land-based or online gaming content does not meet or sustain revenue and profitability expectations, it may be replaced or the Company may experience a reduction in revenue generated and an increased exposure to obsolete inventory. Therefore, success depends upon the Group’s ability to continue to produce technologically sophisticated land based and online products that meet its customers’ needs and achieve high levels of player appeal and sustainability. Further, newer products are generally more sophisticated than those produced in the past and the Group must continually refine design, production and approval capabilities to meet the needs of its product innovation.

The Group has invested, and intends to continue to invest, significant resources into its insights function, research and development efforts and the acquisition of key talent to mitigate this risk.

 

Market risk

Interest rate

Exposure arising from floating rate borrowings drawn under a Term Loan B facility

 

Foreign exchange risk

Exposure arising from Future commercial transactions and recognised assets and liabilities denominated in a currency that is not the entity’s functional currency.

 

Price risk

Exposure arising from the Group’s exposure to commodity price risk is indirect and is not considered likely to be material.

 

Credit risk

Exposure arising from cash and cash equivalents, trade and other receivables, derivative financial instruments and held-to-maturity investments.

 

Liquidity risk

Exposure arising from Borrowings and other liabilities.