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FTAI Aviation & CFM56 Module Swaps

In the last 12 months, FTAIs revenue from its aerospace products division has increased ~160%. Its ~30%+ net margins are also significantly higher than MRO competitors. This growth is driven by FTAIs CFM56 module exchange offering, a cheaper and more efficient way to repair engines than a full overhaul.

Most FTAI long theses claim FTAI currently has <5% market share of a total addressable 9,000 modules per year. Our research has focused on understanding exactly when and how customers use module swaps. It's not so clear from analysing FTAIs filings.

For example, in its 2023 investor day, FTAI uses this example to explain how their modular offering is cheaper and faster relative to traditional SVs:

But this isn't representative of all shop visits. In the example above, the core module of the CFM56 isn't exposed. And ~50% of shop visits typically require the core to be disassembled to replace the blades or LLPs. FTAIs example seems to be a particular type of shop visit.

This research explores the module swap in more detail to understand which shop visits FTAI is best positioned to serve and where it may be differentiated from competitors.

Constellation Software & VMS Acquirer Research Roundup

We’ve been studying Constellation Software and vertical market software acquisition platforms for over 8 years. The company acquires mission critical software companies for ~5-7x EBIT and has decades of operational experience and data to drive superior returns. CSI has compounded FCF at over 25% for 23 years.

Our research on Constellation Software has aimed to understand how it operates the assets, how smaller CSI replicas can scale and compete, and the long-term VMS M&A runway. This is a roundup of some of our CSI research with details on how we covered each topic:

  1. Constellation Software: A Competitive Analysis: why and how there are over 30 CSI replicas and how it may impact CSI organic growth and ROIIC
  2. Constellation Software: Operating KPIs: the 5 internal KPIs CSI uses to measure subsidiary operating performance. 
  3. Halma, Danaher, CSU & Serial Acquirer Org Structures: comparison of serial acquirer org structures and why CSI is unique. 
  4. Topicus, Transdigm and Value-Based Pricing: how Topicus vs TDG deploy value-based pricing 
  5. Constellation Software: Altera Acquisition Analysis: evaluation of how CSI can add value with large acquisitions and potential customer churn issues at Altera 
  6. Constellation Software Company Learning Journey: a curation of all our work on CSI including M&A, organic growth, org structure, runway, and culture. 
  7. Topicus vs TSS: Culture and Organic Growth: how TOI drives organic growth and why it is unique vs TSS / CSI
  8. Investor Dialogue: Valuing Constellation Software & Lumine Spin: how to value Lumine and other CSI spins 
  9. Vitec Software: History, Culture, & Operating Strategy: how Vitec organizes its subsidiaries vs CSI and differences in operating strategy 
  10. M&A Accounting: Constellation Software, Vitec, Lifco, Lagercrantz, & Teqnion: how different acquirers account for goodwill and intangibles and impact on the balance sheet and income statement

Intuitive Surgical: General Surgery Penetration

Last month, we published a piece of research walking through Intuitive's Sales and Training Process. This week, we interviewed a General Surgeon with 10 years of Da Vinci to explore the main reasons and barriers to adopt RAS. 

One key barrier to adoption from surgeons is the time RAS takes compared to lap:

" But for the majority of complex cases, if it extends the OR time just a few minutes to set things up, it saves time during the procedure by making certain tasks easier. A lot of questions about time come down to where people are on their learning curve. Robotics is being embraced more widely today than in the past, but the data comes from years ago. If you look at database data from 2010 to 2015 or 2015 to 2020, it's like a history report. It's a different era with people at different points in their learning curve. Early in the learning curve, less skilled and less efficient surgeons skew the data, which doesn't reflect what's possible. - a General Surgeon and Da Vinci user

This General Surgeon's comments highlight the importance of quickly progressing up the learning curve as it impacts both the hospital's and the surgeon's economics.  

"To adopt a Da Vinci, surgeons need to believe it will provide equivalent or better clinical outcomes, and equivalent or better volumes. This is why the most common objection from surgeons is the time it takes to perform a procedure vs laparoscopic surgery. Many studies point to robotic surgery taking longer than lap. - a General Surgeon and Da Vinci user

The interview goes on to explore how Intuitive drives adoption and challenges new entrants Medtronic and J&J may face.

Tesla vs Toyota: EV vs ICE Repair Process

In this interview, a former Collision Repair Manager at Tesla takes us through a head-to-head comparison of the repair process between a Tesla and an ICE Toyota - from towing the vehicle to the nearest body shop to the post-repair calibration -.

He highlights the different areas causing Tesla's average repair to be 2x more expensive and time-consuming than Toyota's, highlighting the reasons why this is the case.

"As far as the average time [for the average Tesla car], like key to key time, meaning from drop-off to pickup. I think the average, last I saw, was around 22 to 24 days versus, in my case here, at Toyota, I'm probably running around 12 to 13 days. - Former Collision Repair Manager at Tesla

TransDigm: SEI Industries & Wildfire Products

Last quarter, TransDigm acquired a small, niche company in a slightly adjacent field to its traditional aero components. SEI Industries manufactures Bambi Buckets, a collapsable firefighting bucket to prevent wildfires.

It's interesting how this company is also in a similar field as the fire retardants that Perimeter Solutions sells, another public company chaired by Nick Howley. Why didn't Perimeter acquire this asset?

Bambi Buckets are used mainly by helicopters to reach trickier terrains or smaller fires where there is water access. PHOS-CHEK, Perimeter's leading fire retardant, is dropped from airtankers to prevent larger fires from growing.

This interview explores the history of SEI, a comparison between water-dropping products and fire retardants, the US wildfire market, and the certifications of Bambi Bucket.

You see those tanks on the bottom of it? They carry retardants, they can carry water as well. But traditionally, for big tankers, they use retardant to create a wall to prevent the fire from spreading. Then, smaller fixed-wing tankers or helicopters with buckets drop water. Generally, to answer your question, solicitations for aircraft go out in January or February, and they need to be ready to fly by April 1. We stagger the start dates, some would start May 1, some would start June 1 and June 30. By the end of June, you got pretty much everything you wanted on contract. Those were exclusive use contracts where the operator is guaranteed revenue whether they fly or not. This helps them secure financing. - Former Director at SEI Industries & Wildfire Officer, British Columbia

Computer Modelling Group: Customer Perspective

We published interviews with the former CEO of Computer Modelling Group, a smallcap reservoir simulation provider from Canada. This interview with a Reservoir Services consultant and user of CMG products explores how reservoir simulation is used and how competitor Schlumberger views the product as part of their portfolio.

For Schlumberger, the software business is big, but it's just an enabler. It gets them in the door, speaking with the customers, speaking the same language, and understanding what sort of solutions they then need to execute in the field, which is where they make all the money. You sell a piece of software for $250,000 per year, you could throw in an account officer or account manager who sits in the office and costs you $100,000. But the big prize is doing some drilling for them at $25 to $50 million. - a Computer Modelling Group Customer

Ryan Specialty, All Risks, & Wholesale Casualty Insurance Broking

This interview with a 15-year Casualty insurance broker who worked at All Risks pre and post-acquisition by Ryan. The interview explores differences in culture, the value of MGAs at RT Specialty, and the value of technology in insurance broking:

I always did a write-up to make it easy for the underwriter. It would include the named insured, the mailing address, a summary of what they do, their exposure details, revenue, payroll breakout, and any pertinent financial information. If there were losses on the loss runs, anything over $15,000 or $25,000, I would summarize what happened and what they were doing to mitigate future losses. By taking that extra time to do the write-up, the underwriters would want to work on my submissions because they were organized and easy to read. The underwriter didn't have to play a guessing game or find all the information themselves. Then, I would send it out to market. It was basically an email platform within our software that would send everything out at once. - Former Casualty Wholesale Broker at Ryan Specialty

Green Landscaping Group: Contracts Quality, Decentralization & Local Competition

In this interview, a fformer Project Manager at Green Landscaping sheds light on how local competition, born out of consolidation, puts constant pricing pressure on landscaping contract bidders.

Every time a big company purchases a small company, a new small company often starts to take its place. Often, it's the former owners of the purchased company who start a new business. It's a risky business model for Green Landscaping because they should try to retain key personnel from the acquired companies to keep their knowledge within Green Landscaping and prevent them from starting new businesses. - Former Project Manager at Green Landscaping

MongoDB: Atlas vs Self-Hosted, Competition & Postgres

This interview explores a customer's perspective of MongoDB. A VP of Applications spending >$1m a year explains how the labor pool affects customers' decisions around moving to Atlas:

"Risk was the biggest factor, actually. One thing I'll say is that getting a MongoDB dedicated administrator is both expensive and hard. They are not exactly growing on trees. You can't find an Oracle DBA and bring them in as a MongoDB DBA. That transition involves a significant skill gap. - Former VP Applications at Xylem

Sky Harbour: Culture, FBO Service Agreements, Staffing & Privacy Challenges

In this interview, a former Director of Revenue at SkyHarbour Group highlights the challenges fixed-base operators face when catering to the needs of their demanding clientele and how the company differentiates itself from the competition.

"Every market has different pain points, depending on where the market is. In the top 25 or top 50 fueling locations, fueling delays are more prone to happen in a transient environment than in a tenant-prioritized campus. SkyHarbour eliminates the potential for those types of service failures entirely for their tenants. The difference is that, in most cases, an FBO will get the plane moved out on time on a normal day when there's not a lot going on. With SkyHarbour, the plane will always get moved and fueled on time, and the tenant is their only service priority. It eliminates those situations entirely, whether it's an hour before or 20 minutes before. You are always secured as a priority service. That is the SkyHarbour difference. - Former Director of Revenue at SkyHarbour Group