Not that impressive: Investors shy away from Aristocrat’s results

The COVID-19 pandemic has made a deep impact on the hospitality sector, including the casino and gaming industry, with operators forced to shutter down businesses to follow government rules and maintain social distancing. So when global gaming provider Aristocrat Leisure Limited (AXS:ALL) reported an increased top line with all other vitals in red, Aristocrat's shares made a bearish movement, closing at $25.97, down 5.01% (as on 21 May 2020). On 22 May 2020, ALL by the end of the trading session was at $25.52, down by 1.733% from its last close.

What looked little unusual was a decrease in earnings per share and NPATA despite uptick in Revenue and Profit after tax. Let's find out what happened.

Decoding Numbers

In its half yearly financial results for the six months ending 31 March 2020, Aristocrat’s Group revenue increased 7% to $2.25 billion, driven largely by its growth in digital revenue that rose by 19% in H1’20 over H1’19. The growth was offset because a 6% decrease in land-based revenues with reasons attributed to global shut-down of land-based customers impacted by the COVID-19 related measures.

Aristocrat's statutory profit after tax jumped from $346 million to $1.3 billion because of an inclusion of a $1 billion deferred tax asset. However, Aristocrat’s normalised profit after tax and before amortization of acquired intangibles (NPATA) earnings hit $368.1 million in H1’ 20, representing a decrease of 12.8% from $422.3 million, H1’ 19. The fall in earnings was because of reduced Australian revenues and weak US machine sales and with the pandemic lockdowns causing most of the damage.

Operating cash flow reached $620 million, up by 42% due to strong cash generating fundamentals drive. The Group’s balance sheet got fortified with net leverage reducing from 1.6x to 1.4x as at 31 March 2020, compared to the prior corresponding period

Also Read: Aristocrat Leisure Limited’s HY20 Results: No Dividend; Revenue up 7%

Declining revenues across segments but Digital

By Business Line

Aristocrat's strategy of adding digital business acted as a boon during the pandemic. Digital Segment hit a revenue of US$695.5 million in H1’ 20, up by 19% from H1 2019, contributing 46.4% to the company's sales.

The rise in digital business was attributed to existing customers playing more video games as stay at home orders prompted an increase in content consumption. RAID: Shadow Legends^TM contributed majorly to the Digital Revenues, generating US$160 million in bookings driven by additional targeted User Acquisition (UA) investment.

Revenues from Class III Outright Sales & Other Sales contributed to 26.3% to the overall revenues and gaming accounted for 27.3% of the total revenues. Revenue across all Land-based businesses fell due to customer venue closures as a result of COVID-19.

Source: Company’s report

In Gaming Operations, revenue declined 0.8% with pre-COVID-19 growth in the Premium Class III and Class II footprints of 9.4% and 1.8% respectively.

Geographic Break-up

In Americas, revenues and profit declined to US$610 million and US$ 303.3 million, because of negative COVID-19 impacts that decreased machine sales by 29%. Margin declined to 49.7% because of product mix, rises in bad debt provisioning and reduced operating leverage related to COVID-19. On a positive note, the Class III Premium Gaming Operations installed base grew 9.4% propelled by strong marketing content.  

• Under North America Gaming Operations, Class II Gaming Operations, placements increased by 1.8%.  Pre-COVID-19 average fee per day across both Class II and Class III Gaming Operations remained at market-leading levels above US$50.
• North America Outright Sales revenue decreased by 30% in H1’ 20 when compared to H1’ 19 because of the impacts of COVID-19 related customer venue closures.
  • Aristocrat continued to focus on its expansion into adjacent markets including VLT, Washington CDS and Bartop segments.
• Latin America revenue decreased 35% in H1’ 20 when compared to H1’ 19 due to economic and political impacts coupled with COVID-19 lockdown.

In Australia and New Zealand, company earned revenue of $205.3 million with profits reaching US$77 million (a decrease of 29.4% from corresponding period of previous year.  Impact of droughts, bushfires and COVID-19 coupled with the timing of product releases scheduled for the second half were attributed as the reasons behind the decline.

• International Class III revenue and profit declined 11.3% and 26.4% respectively to $85.9 million and $31.3 million due to COVID-19 related lockdown across all regions.

Strong Balance Sheet, a silver lining

Aristocrat managed a $1.8 billion of liquidity availability on a pro-forma basis in H1’ 20. This liquidity signifies a decrease in net leverage from the earlier 1.6x to 1.4x.

Liquidity management

Aristocrat continued to take a holistic approach to optimise liquidity for long-term investments and growth. Currently it has more than $1 billion of liquidity comprising cash from operations and through credit facilities, which are

• US$1,850 million fully underwritten US Term Loan B debt facility maturing 19 October 2024.
• A$150 million 5-year Revolving facility maturing 22 July 2024.
  • $142 million has been drawn down on the existing revolving credit facility in March 2020
  • Securing a further $136 million upsize on the existing revolving credit facility on 24 April 2020
• Securing a US$500 million Term Loan B incremental facility in May 2020, maturing in October 2024

Other measures

• A $100 million reduction in second half operating expenses compared to the prior period
• Suspension of the FY2020 interim dividend
• Additionally, the Group has a deferred tax asset of approximately $1 billion which is expected to generate significant cash tax savings over the long-term

The COVID-19 Impact

The pandemic has affected the hospitality sector badly and have caused job loss to millions across the globe and in Australia. Both Crown Resorts Limited (ASX:CWN), which is an entertainment Group  and The Star Entertainment Group (ASX:SGR), gambling and entertainment entity have stood down 11,500 and 8,500 people, respectively.

Aristocrat has also taken cost-cutting steps to sail through the negative pandemic impacts. With more than 70 percent of ALL’s operating expenses involving people costs, major workforce changes were planned to affect nearly 4k staff. Aristocrat Leisure has stood-down 1,000 staff from May 1 until June, principally in land-based sales, service and manufacturing operations.

• Aristocrat has reduced a further two hundred roles and transitioning further two hundred jobs to part-time until September, to cut its costs during the COVID-19 downturn.
  • However, design and development teams continue to operate with the company committed to keep investing in new digital and physical gaming products.
• 1,500 staff will experience cuts of 10 – 20% to base salaries.
• 20% reduction in fees payable to Aristocrat’s Board of Directors and 30% reduction in the base salary of Aristocrat’s Managing Director & CEO, Trevor Croker.

The cost reduction initiatives are expected to save $100 million over the remainder of the financial year ending 30 September 2020

What future holds?

According to Aristocrat’s Managing Director & CEO, Trevor Croker, the Company will remain focused in leveraging through Design & Development and effective User Acquisition investment.

In land-based business, the Company will ensure to keep partnering with customers to support reopening and recovery plans. The Company will re-open the land-based venues in phases, a steady increase of gaming floors with enhanced conditions with respect to social distancing and travel restrictions.

Mr Croker did not provide any profit guidance from the Company and emphasised prevailing uncertainties to play a pivotal role in business uptick post casinos reopen.

Disclaimer: All the currencies mentioned are in AUD unless specified