Aristocrat boss isn't perfect but he's learning

On the morning of the release of Aristocrat Leisure's half-year result, boss Des Randall was in an ebullient mood.

He was about to announce the 10th consecutive period of record profit growth for the world's second largest poker machine maker eight of which had occurred under his reign. And he was confident the June result proved Aristocrat had once again cleared every bar set by the market.

The company had managed to withstand increased domestic competition to boost its share of Australian poker machine sales from 63 per cent to 65.

Aristocrat had transformed itself from a gaming company to a technology company (only 35 per cent of revenue now comes from machine sales; the balance is from software and services).

It had successfully completed the integration of its $US180 million ($327 million) acquisition of Las Vegas gaming systems developer CDS, saving the company $22 million a year.

And it was starting to gain a foothold in the big-bucks US market.

Basking in the glory of what he considered ``a great result", a cocky Des Randall was expecting plaudits from the market. He was not prepared for what happened next.

Seemingly ignoring the stunning profit growth, investors dumped Aristocrat shares when the result was released that Tuesday morning in early August. The stock that once breached a high of $7.30 plunged 7 per cent to close at $5.50.

It didn't matter that profits were up 32 per cent, revenue 49 per cent and the company was on track for a $109 million full year profit. Aristocrat had fallen short of one key target the number of pokies sold in the US in the half.

And it had only itself to blame for the savage market reaction.

Three months earlier, in a desperate bid to revive confidence in its US progress and put a floor under its sliding share price, Aristocrat wheeled out its US president Mark Newburg for a rare presentation to analysts. Newburg confidently predicted Aristocrat would account for 15 per cent of US sales by the end of June, which analysts calculated meant 7000 machines. Newburg's promotional tour did the trick Aristocrat shares shot up 5 per cent immediately.

But that quick fix came back to haunt Aristocrat last month, when the interim result revealed just 5200 machines had been sold in the US. The sales shortfall seemed to confirm investors' worst fears that Aristocrat was struggling to make a dent in the US market on which it has pinned its future. Attention was again drawn to the company's high price-earnings multiple.

It was yet another instance of Aristocrat's investor relations gone awry.

And investors were not going to let the company off lightly. Briefing gaming analysts on the result at the company's Lane Cove offices that Tuesday afternoon, a dumbfounded Des Randall found himself being interrogated about the shortfall in US sales. ``Frankly, we didn't think it was an issue," Randall says. ``Surely it's the money that counts, not the unit sales. We weren't prepared for the questions."

Therein lies Randall's major failing.

Critics and supporters alike will tell you what a brilliant chief executive Des Randall is. When he joined Aristocrat from computer company NCR in mid-1998 the company was still reeling from the scandals which had engulfed the Ainsworth family the previous year and almost cost Aristocrat its Colorado gaming licence.

Aristocrat founder Len Ainsworth had to sell his shares in the company to prove to the Colorado authorities who were concerned about his background in the industry that he was no longer associated with Aristocrat.

The stoush also claimed Aristocrat's chief executive. Accused of being influenced by Mr Ainsworth, John Dougall resigned in October 1997. This left a leadership vacuum until Randall's arrival nine months later.

``If I could use a word to describe Des it would be tenacious," one industry insider says. ``Given the problems with the Ainsworth family when he took it over, to sort that out and get the stock to the glamour stage it was at that's an impressive effort."

But despite running a publicly listed company for four years, Randall still hasn't got the hang of managing market expectations. He is often accused of being overly bullish in his statements to the market, accentuating the good and ignoring the bad.

One top-rated gaming analyst describes Randall's investor relations skills as his ``big negative". ``While that doesn't matter when the share price is going up, it does matter when it's going down. You have to manage people's expectations of the downside and surprise on the upside," the analyst says.

Randall himself concedes Aristocrat doesn't have the best track record when it comes to communicating with investors. ``Obviously we have a little bit to learn in that space," he says. And he's taken last month's lesson to heart.

Aristocrat's investor relations strategy has been completely reviewed. Although analysts were warned at the time not to take Newburg's sales targets as official company forecasts, Des acknowledges now that the May briefing did boost expectations ``too high".

Executives are unlikely to be allowed to speak unfettered in public again and Aristocrat will revert to its old policy of not discussing unit sales. ``No-one will make market forecasts other than my office. No-one will be authorised to give new data," Randall says.

After flirting with being more open with the market, Aristocrat has retreated back into its shell. This will only further frustrate analysts, who constantly complain about the company's lack of disclosure.

``They need to be more transparent in their reporting," argues the gaming analyst. ``Compared to their US competitors, Aristocrat is like a black hole. That might have worked 12 months ago but in this post-Enron climate everyone wants to see exactly what is going on within the company."

Aristocrat is notorious for being extremely sensitive to any criticism, freezing out those who don't wholeheartedly agree with its own Pollyanna-ish view.

JP Morgan's Mark Wilson had a nasty taste of what it's like to be on the wrong side of Randall and Co earlier this year when he published research valuing Aristocrat at just $4.05 a share, 30 per cent below where it was trading.

Aristocrat top brass were soon knocking on Wilson's door. It didn't help that Wilson's note preceded a sell-off of Aristocrat shares which culminated in Newburg's visit a month later.

Fund manager Credit Suisse Asset Management also got in on the act, heavying Wilson's superiors at JP Morgan. After Wilson released his damaging research on the same day they bought $33 million worth of Aristocrat shares, Credit Suisse gave him a zero rating in the regular panel review of analysts.

A pugnacious, short man with sandy hair and a ruddy face, Des Randall's outward congeniality masks a steely determination. He has a fierce competitive streak, no doubt honed over the 20 years he spent playing Australian Rules.

Randall is renowned in the gaming industry for being difficult to work for and is regularly referred to as ``aggressive" and ``a dictator".

He prefers to think of himself as demanding rather than dictatorial. ``In the absence of an idea from someone I'll put an idea on the table and I'll even tell them how to do it," he says. Confessing to being impatient and easily frustrated, Randall also asserts he is hard-working, pragmatic and decisive.

Say what you like about Randall's investor relations skills or his personal peccadilloes it is hard to fault his operational nous. He is praised for creating an optimistic, aggressive culture within Aristocrat which has kept it at the forefront of the industry.

``Most people thought Aristocrat was a basket case in 1998," the gaming analyst says. ``Des has managed to build up the Australian business in what is a substantially tougher environment, while ... growing internationally."

Having repeatedly talked up its US prospects, Aristocrat is under pressure to realise that potential, particularly after the sales shortfall. As a measure of how important the US is to Aristocrat's future, Randall is moving to Las Vegas at the end of the year.

While no-one doubts Aristocrat will achieve its goal of becoming the second largest player in the US behind giant IGT, analysts argue it will take the company longer than it expects.

But Randall has at least one industry heavyweight barracking for him. Poker machine king Len Ainsworth, whose family still owns 40 per cent of Aristocrat and who now runs Ainsworth Gaming Technology, has every confidence Randall will be able to crack the US market. ``Des is doing a great job for the company and I think Aristocrat is going to tear a big slice off IGT in the US," he says.