Content Published Last Week

1. IP RESEARCH: HEICO: PMA vs OEM Power

2. Waters Corp: Analytical Lab Instruments Market Dynamics

3. CarMax: How a Vehicle Flows through the Network

4. Evolution Gaming: US Regulatory Environment

5. INVESTOR DIALOGUE: Evolution Gaming & Live Casino Competition

6. Cogent Communications: Hyperscaler Dark Fiber Demand & Cloud Optimisation

7. Selling Furniture to Brick & Mortar Retailers: Supplier Perspective

8. INVESTOR DIALOGUE: Wayfair, Temple & Webster, Furniture Logistics, & Structural Advantages

9. Spotify Podcast Advertising

HEICO: PMA vs OEM Power

Over decades, OEMs have used multiple techniques to limit PMA adoption. In 2008, an engine OEM even ran an advertisement showing a second-rate Elvis impersonator with the headline “Let’s face it, lookalikes never perform quite like the original.” This campaign led to an immediate response by the FAA confirming PMA parts are treated equal to OEM parts.

When replacing out-of-warranty parts, airlines have the choice between original parts, PMAs, USM, or DERs. We walk through airline decision making:

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PMA part sales are reported within HEICO’s FSG segment and can earn ~50%+ EBITDA margins, on par with OEM aftermarket margins. Although PMAs are approved on identical fit, form, and function of OEM parts, commercial aftermarket penetration has stagnated at ~3% for the last decade. This is largely due to OEMs increasingly aggressive tactics to prevent PMA growth.

The strategy that Honeywell deployed was multifaceted. One was information, or more appropriately I should say, misinformation…tell the people that PMAs weren't safe, and especially in Asia because of cultural reasons that was very effective. The view in a lot of Asian regions was, if you bought an OEM part and something went wrong, you were fine because everybody bought OEM parts and you couldn't have anticipated that. But if you were to buy a PMA part or an off book DER repaired part and something went wrong, that was on you. You had made that decision and therefore the risk reward was out of balance there. - Former EVP at Honeywell

We’ve been interviewing Former HEI, Wencor, Jet Parts, airline and MRO customers to understand how OEMs actively combat airline adoption of PMAs and how companies like HEI can respond.

How do OEMs react when Delta or United approve a PMA?

How are OEMs tweaking the warranty and repair manuals to prevent shops from understanding expendables in subassemblies?

And what can HEI and other PMA shops do to react to OEM pressure?

This analysis walks through the certification differences between OEM and PMA parts, airline aftermarket decision making, and strategies OEMs like Honeywell and Eaton use to combat PMA adoption.

Waters Corp: Analytical Lab Instruments Market Dynamics

Despite the continuous attempts from competitors in the analytical lab instruments space to simplify their supply chains and lower the switching costs, incumbents like Waters Corp remain difficult to displace. This is potentially due to a highly regulated environment in the end markets they operate.

"I believe most people don't understand the importance and robustness of this sector, which is largely due to regulatory compliance and switching costs. It's a very attractive sector" - Former VP at Waters Corp

In this interview, a former VP of Product Instrument Development at Waters Corp sheds light on the stickiness of Waters Corp's offering and fundamentals of competition in the industry.

CarMax: How a Vehicle Flows through the Network

This interview is part of a wider internal research project comparing how a vehicle flows from auction or customer trade-in to customer sale through Carvana vs KMX network. A Former director of operations a CarMax sheds light on how a unit flows through the CarMax network, from auction to sales.

CarMax has developed a unique approach to car auctions. Traditionally, most people would preview cars on the day of the auction. However, CarMax decided to preview the cars a day or two before the auction. For instance, if there are 2,000 cars for sale at a lot in Dallas this morning, CarMax would have previewed those cars either yesterday or the day before. During the preview, they would evaluate the cars and estimate the cost needed to make the car meet CarMax's standards. Many cars at the auction never cross the block because they get pre-sold or post-sold after the sale to large-scale buyers like CarMax. - Former Director of Operations, KMX

Evolution Gaming: US Regulatory Environment

Evolution Gaming is the leading supplier to the iGaming industry with significant market share on Live Casino games. The legalization of iGaming in the US is progressing slower than expected and forms an important part of the bull case. This former regulator turned industry lawyer discusses which barriers explain this slower adoption by states:

"However, I believe the uptake will be slower due to these reasons. iGaming is a more complex issue than sports betting. There wasn't anyone who was really worried about losing their sports betting business. The most concerned parties were probably the black market or illegal bookies, and they couldn't lobby anyone. Even if your local casino had a sportsbook, it wouldn't significantly impact their revenue. They could partner with an operator to get a piece of it or open up a DraftKings or FanDuel branded sportsbook. They weren't as concerned about the overall impact on their revenue. But iCasino is a different beast."

The interview discusses the anonymous short report that was shared with the NJ regulator, how suppliers are treated by various states and how the industry will evolve in the next 5 years.

We also published a dialogue with multiple EVO shareholders and an investor who doesn't own EVO where we explore the competitive dynamics, potential threat to EVO, and long-run opportunity.

Cogent Communications: Hyperscaler Dark Fiber Demand & Cloud Optimisation

This interview is a must-read for anyone studying the hyperscalers. A Network Acquisition Executive at one of the hyperscalers explores how cloud companies are approaching building capacity from players like Cogent to meet infrastructure demand:

"I believe we will end up entering an arrangement where we test certain circuits or routes. This will likely be a paid exercise, despite our preference for a no-cost solution. The time and effort involved on both sides, ours and Cogent's, to establish new wave circuits is significant. We would have to commit and take the risk." - VP at Hyperscaler

The executive describes how AI has accelerated the hyperscalers' demand for networking capacity.

"To put it succinctly, it has accelerated everything. This is an understatement to say it has been a tailwind. It has expedited our build plans, expansion plans, and timelines. (...) In general, it has been a significant business accelerator for us, our suppliers, and the industry. - VP at Hyperscaler

The interview discusses how Cogent can provide dark fiber to hyperscalers, how the current state of the competition impacts them and how AI contributes to networking demand.

Selling Furniture to Brick & Mortar Retailers: Supplier Perspective

Supplying furniture to brick-and-mortar stores often involves exclusivity agreements for the collection involved. This forces the furniture supplier to make the choice between floor space and working with multiple retailers.

However, brick-and-mortar can be tricky. For example, if Rooms To Go, which is primarily in the Florida region, picks a group of products, we can't sell that group to another store in the same region, like Havertys. - VP, US Furniture Supplier

In this interview, a furniture supplier sheds light on the end-to-end process of supplying brick-and-mortar retail stores.

Wayfair, Temple & Webster, Furniture Logistics, & Structural Advantages

While it's still unclear whether or not CastleGate will turn out to be Wayfair's ultimate competitive advantage, vertical integration seems to be crucial to operating profitably and ensuring an optimal shopping experience in the online furniture retail space.

Analyst 2: I guess I can share my perspective on this, and I think it's honestly quite difficult to precisely quantify the competitive advantage, if there is one, around CastleGate. I do believe that for a large-scale retailer, especially in furniture and large parcel delivery, if you don't control many elements of the logistics chain, it becomes unprofitable very quickly and complicated to deal with FedEx, UPS, and common carriers for large parcels. I had a call with a former employee last year. I was reviewing my notes the other day, actually, and he informed me that the incident rates for parcels carried by UPS or FedEx are 20% higher than anything delivered by WDN (Wayfair Delivery Netwrok), and that in aggregate, they were operating at a negative margin due to the return rates.

Our Wayfair investor dialogue shares the views of different experienced long-term investors with respect to Wayfair's positioning and what the company needs to achieve to grow profitably over the many years to come.

Spotify Podcast Advertising

In this podcast (Apple / Spotify), we discuss our recent research piece on Spotify's push into Podcasting and how it plans to monetise shows via advertising. We explore:

1. How to segment Spotify's podcast inventory and monetisation methods across inventory types

2. Bidding and sales mechanisms across top podcast shows

3. Spotify's take rate across inventory types

4. Spotify Podcast unit economics and outlook