Developers holding Aristocrat back

Warning signs despite strong recent performance.

a woman

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It’s a sound reminder than no company is perfect. In comments last week to the Associated PressAristocrat Leisure Limited (ASX: ALL) chief executive Jamie Odell noted the company has hit a phase of stagnant growth in big markets and has failed to actively pursue new growth opportunities.    

In particular he said that the company, which develops and supplies electronic gaming machines for casino operators like Echo Entertainment Group (ASX: EGP) and Crown Limited (ASX: CWN), has failed to compete in the emerging demand for more interactive ‘entertainment’ video slot games which make up around half of the 400,000 gaming machines in the US alone.

While the segment remains a growth opportunity for the company, it will be a challenge to successfully muscle in on the existing machine providers and take market share. The reason provided by Mr Odell was hard to fathom; Aristocrat didn’t pursue the product line because developers found them too “boring”. Never mind the consumer demand, the huge potential the market represented, or even the massive double digit growth in gaming revenues coming out of gambling Mecca Macau;  the company’s developers thought them dreary.

Aristocrat announced a strong profit result for the 9 months to September 2012. Revenue was up 30% to $586 million and earnings before interest and tax (EBIT) was up 76% to $67 million, driven by strong growth in Japan and a dominant market position in the Asia Pacific. However it seems bizarre to ignore an opportunity for the temperament of an internal department. Doing so is not in the best interests of shareholders and allows other game makers such as Ainsworth Game Technology (ASX: AGI) an opportunity to increase dominance and win first mover advantages.

Foolish takeaway

Despite great recent financial performance it’s concerning for investors that Aristocrat has been held back from growing further by the company’s own development team. It is the role of management to consistently identify and chase new opportunities to grow revenue. This requires being nimble and flexible to change. Failure to do so because of resistance from an internal department should not be acceptable and should raise the ire of company owners.

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