Boeing's Partnering for Success, TDG, Surgical Science & Intuitive Surgical, CarMax, Atlassian

Content Published Last Week

1. Boeing Global Services, TransDigm & Supplier Relationships

2. Surgical Science, Simbionix, Intuitive & Surgical Simulation Market

3. CarMax: Omni-channel Strategy

4. Atlassian: Work Management Positioning & Monetizing Trello

Sponsor

close

Zoom InZoom OutReset

Visible Alpha built a platform to analyze consensus data for financial and operating metrics on over 6,400 publicly traded companies. Rather than digging through models one by one, Visible Alpha creates consensus data for every line item included in sell-side models so institutional investors can better understand expectations on metrics beyond just revenue and earnings. Try Visible Alpha for free here.

Enterprise Research Coverage

Over the last month, we've received many questions on how we approach coverage for our new Enterprise Research Tier.

We have a small internal rolling coverage list of large and midcaps built over many years that we choose from. Exactly what and when we cover a company on our enterprise tier depends on the quality of executives available to interview and the insight gathered from our research.

Ultimately, we focus on quality, not volume. We’re also catering to the highest denominator: each piece of research aims to add value to existing long-term shareholders. Although this is a high bar, we will not publish anything that we believe isn’t incremental to those shareholders who know the company best.

For large caps, we believe nobody needs another 10-K teardown-type format. Our Enterprise Research focuses on answering 1-2 specific questions that drive the investment case. As an example, we interviewed many Constellation Software 'competitors' to understand how private VMS acquirers are impacting CSI's ROIIC and deployment runway. We're currently working on pieces from the following list of large caps:

close

Zoom InZoom OutReset

We constantly remove and add companies to each list based on our own interest and research progress.

Given the lack of quality research on <$10bn midcaps, we are focused on covering a select number of companies through published and private executive interviews which we use produce a Midcap Company Profile. Our profiles will focus on 1-2 variables are crucial to the long-term investment case:

close

Zoom InZoom OutReset

Boeing Global Services, TransDigm & Supplier Relationships

We've long been studying the underlying bargaining power between Boeing and TransDigm to deeper understand the durability of aftermarket cash flows.

This Former Boeing Director not only highlights how TDG's mission critical parts are costly and timely to replace, but how Boeing's bureaucracy makes it very difficult for the airframer to take back ownership of the aftermarket. Boeing's 'Partnering for Success' program was a step in the right direction, but executed poorly:

It was like, here, we've got this thing for you to figure out. We have an executive willing to go with us into Boeing suppliers and talk about Aviall's distribution; that's pretty cool. Ultimately, a more practical way to do that would be to change the procurement process to what you were saying; we're renewing your contract on the 737 MAX, and we now want to fold distribution rights into this. They came out with Partnering for Success, if you're familiar with that program. They came out with that where they said, you suppliers are making too much money in the aftermarket, so we want you to give us some of that back to stay on the airplane. That was a hated program. - Former Boeing Director

In short, Boeing doesn't seem to deeply understand the aftermarket. It's an airframer after all: it cares about producing new planes and outselling Airbus, not capturing aftermarket part sales on older planes.

there's a disconnect between the aftermarket side of the business and the people negotiating those. They're not thinking. They don't understand what good looks like for the aftermarket any more than the aftermarket understands what you are trying to accomplish on the production side. - Former Boeing Director

We will be exploring Boeing's history with TransDigm and the bargaining power in the aerospace value chain more on our Enterprise Tier next month.

Surgical Science, Simbionix, Intuitive & Surgical Simulation Market

Surgical Science (SUS) is a 1B EUR company listed in Sweden that provides surgical simulation software to Intuitive Surgical's da Vinci, hospital training centers and medical device companies.

Surgical Science has acquired 3 companies since 2019, including its largest competitor Simbionix. This series of acquisitions had the explicit purpose of consolidating its market position in Robotic Surgery simulation. In this interview, a former Simbionix Product Manager discusses the opportunities and risks in robotic surgery for the combined company:

I think Intuitive is a significant risk because a lot of their revenue or cash flow is based on them. I don't know the current situation, but I heard rumors two years ago that Intuitive was looking at building their own simulation program and developing something that would make using the Simbionix or Mimic simulator redundant. That's a big risk. - Former Product Manager at Simbionix

Surgical Science's largest customer is Intuitive Surgical and is responsible for the majority of SUS' revenue and a significant part of profits.

Intuitive's simulation efforts to develop simulation content in-house is a big risk to the investment thesis. Surgical Science has also struck agreements with Medtronic, CMR Surgical, J&J and Medicaroid to provide simulation for their newest robotic surgery systems. Over time, this will diversify SUS' revenue and profit base.

First, it's a matter of time. When Medtronic and Johnson & Johnson enter the market, they bring a lot of firepower. I saw it happening in the aortic valve market, for example. Other companies invested a lot of money to capture a decent market share. I would say, eventually, these companies will take some market share from Intuitive. - Former Product Manager at Simbionix

Another major question is how difficult could it be for ISRG to in-house simulation content:

Developing simulator software is challenging and requires a lot of know-how. There’s a technological gap in building, modeling, and creating realistic experiences for users, in terms of tool behavior and human organ simulation. The challenge lies in creating high-performing, high-quality simulation software. Intuitive may eventually catch up, but it will take years to close the technological gap. They have the resources and capabilities, but I'm unsure if they consider it worth the investment. - Former Product Manager at Simbionix

CarMax: Omni-channel Strategy

A Former Director of Carmax walks through the challenges of shifting from in-store to an omni-channel used auto dealer:

I think this is still going on today, and it's part of the reason why I'm not there anymore. When I was there, everything was focused around the customer. We had one experience for the customer, one goal for them, and every team rallied around that to solve that specific problem. However, now there's a lot of spending happening, and everyone is still trying to do things for the customer, but they're not doing it cohesively. Each team is solving their own problem or what they think is their own problem for the customer, and they're not working together to build a cohesive solution. I think there's a bit too much of teams thinking that whatever they're building is the most important thing, without considering the overall vision...I think the big miss was when they moved from the in-store world to the omnichannel world. They needed to rebuild all the technology because it didn't work for offering that stuff online. - Former Director at CarMax

Atlassian: Work Management Positioning & Monetizing Trello

In this interview, a former Product Management Director at Atlassian discusses the opportunities remaining in work management, its product position compared to all-in-one solutions and how Atlassian could monetize Trello in the enterprise:

I think Trello went through quite an identity crisis at one point. They were like, do we chase revenue? Trello is the most beloved product in the Atlassian portfolio. Everyone still loves it to this day. I think they just have a very public offering or public love offering. I don't think Atlassian truly figured out how to leverage all the users that are on Trello. They were going through this identity crisis of, are we just an add-on to a product or do we monetize? My belief is that they are on the monetization train. I don't know what their current roadmap is. I believe they need to move on the monetization train now, and if so, their focus needs to be on enterprise. - Former Product Management Director at Atlassian