In Practise on Spotify, AMZN Advertising, Kelly Partners Group, United Rentals, 10x Genomics, Grenke

In Practise on Spotify

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You can now listen to our full library of interviews on Spotify!

All our free and paid content is available on Spotify via our show link. Paid members can use this link to login to your IP account which then redirects you to Spotify where you can view our full library in one feed. Alternatively, members can link their In Practise account to Spotify by opening our show page and clicking on the link in the "About section" to authenticate your account.

We're also in the process of converting all our text interviews conducted by our hedge fund clients into automated audio. All future interviews by clients will include an automated audio available on your podcast player. We currently have ~60% of our library in audio form and plan to have the full backlog in audio in Q1.

We're pretty excited about this move. It also reminded us of the potential for SPOT's equity. Spotify is prime digital real estate. It owns audio demand and any audio creator has to be on there. Unlike other prime digital real estate assets that own demand (GOOG, FB, AMZN), SPOT has struggled to monetise effectively. Partly because it pays too much to suppliers but also because audio advertising formats and attribution are in its infancy. This got us thinking about SPOT's opportunity even in sponsored ads: we'd certainly consider effective paid advertising on SPOT platform to drive discoverability. We will be closely tracking SPOT's equity and now its product development as a creator!

Content Published Last Week

1. Amazon Advertising: Endemic & Non-Endemic Ads

2. Kelly Partners Group & Accountancy Practice M&A

3. Supplying RH & Wayfair

4. 10x Genomics, Azenta & Next-Gen Sequencing

5. United Rentals, Ahern, & Equipment Rental M&A

6. Grenke: UK Equipment Leasing Market

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Visible Alpha is the market benchmark for deep, granular consensus estimates data, seamlessly blended with rich historicals to provide a comprehensive financial and operating metrics dataset on over 6,400+ companies globally. Professional investors are invited to request a free trial.

Amazon Advertising

AMZN's ad sales / GMV has exploded over the last 5 years.

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It seems like the traditional marketplace target of ad sales being 5% of GMV driven may not apply for AMZN.

We interviewed a Former Head of Sales at Amazon Advertising who spent over 7 years building the division globally to explore how AMZN approaches endemic (AMZN merchants who advertise on amazon.com) and non-endemic (advertisers who don't sell on Amazon.com).

The penny dropped after this interview: ads is the third pillar of AMZN on top of AWS and Retail. And we're potentially still in the second innings. This is mainly due to AMZN's truly unique 1P data set. Purchase data is superior to all other data sets for advertisers. Comparing AMZN actual sales data with FB's audience lookalike data is apples and oranges.

Traditionally, the company was winning ad dollars from physical trade marketing budgets but now it's breaking into both TV (Prime OTT) and digital advertising budgets (AMZN DSP).

It started with the trade marketing budget, so that was the early days of Amazon ads. Then, Amazon launched new products, features, solutions, and also just changed the perception of brands. So now, obviously, Amazon is tapping into the digital advertising budgets. But now, what is interesting, is that Amazon is also trying to tap into the TV advertising budgets, with their OTT inventory. It's Fire TV; it's also IMDB. But now they have Twitch, which is actually a very big platform for video. They're trying to tap into this budget now. Also, there's a third category of budget, which is the ad technology budget. It's a market which is, basically, all the technologies. It's this budget that brands spend for their marketing technologies. I'm thinking of the ad server, Cloud Analytics solutions. This is also a new budget that Amazon has started now tapping into. It's a market estimated to be currently around $20 billion and it's growing by 15%. - Former Head of Sales at Amazon Advertising

The global digital ad market excluding China is ~$550bn plus an estimated $650bn in trade marketing. AMZN has arguably the most powerful data set globally for Western advertisers and we're in the early innings of non-endemic brands advertising. In January, we will be publishing our full analysis of AMZN advertising and how we think about the opportunity.

Kelly Partners Group

We interviewed Brett Kelly, founder and CEO of KPG, the Aussie-listed accountancy serial acquirer. This was a 2-hour interview that explored KPG's business model but also Brett's unique character.

On the surface, the model is very interesting. KPG uses debt financing to buy half an accountancy practice at 5x earnings whilst the opco guarantees the debt. Over 3 years, operational improvements means the partners earn more cash from their 49% share under KPG than when they owned 100% standalone. Seems like it's a huge win-win for all involved.

we will buy 51% of £2 million, and pay 60% to 80% of that up front. We will borrow that and pay it off over three or four years, maybe faster if we're any good, depending on the growth profile of the firm, or five years if we're slightly slow. We will strengthen that business and find the next two partners, who we will train and step up, then find additional revenue and grow organically at 5% to 10%. I will do several tuck-ins and try get that firm to £4 or £5 million. We will try do that hundreds of times. We've already done it 63 times and think we can do it in Australia, New Zealand, Canada, US, UK and Europe. ETL and Constellation have proven that is possible. - Brett Kelly, CEO of KPG

Supplying RH and Wayfair

This interview is with the President of the largest supplier of case goods to RH and a supplier of Wayfair. This comment particularly stood out:

I’ve worked with Amazon in the past. I won’t work with them, they don’t understand furniture which makes it hard to make money, so until they figure out that furniture is very different to towels, sheets and so on, it’s not worth it. - President of RH and W supplier

AMZN is not setup to kill all e-commerce categories. It's organised to ship small parcels, not large and bulky items. This matters to furniture suppliers. We previously explored how Wayfair is effectively building out FBA for large and bulky items. Wayfair's Castlegate is the rails of furniture e-commerce. It doesn't matter today when consumer discretionary spend is at lows, but in the long-run it will define W vs other furniture retailers.

United Rentals, Ahern, & US Equipment Rental

We interviewed a Former URI executive on the recent Ahern acquisition and equipment rental M&A. This comment is incredible:

General rental such as forklifts, material handling, earth moving, compaction, welders and air compressors, has an annual ROI between 30% and 40%, and specialty operations such as trench, pump and power are 70% to 100% or even higher. - Former VP at URI

Over the last 10 years, Ashtead's EBIT margins have increased from 10% to over 25% as the specialty revenue mix has increased from zero to over 20%. At 70-100% cash ROI for specialty equipment, as the specialty mix continues to grow, AHT's margins could improve even further.

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10x Genomics, Azenta & Next-Gen Sequencing

10x Genomics is seeing competitive pressures from Parse Biosciences, which offers significantly cheaper sequencing costs. This raises the question if 10x Genomics is currently overearning.

"To drive Parse out they need to reduce their price. Customers tell me their ideal per sample price is below $1,000, but their current price is $3,000 per sample." - Former Field Application Scientist at GENEWIZ, Azenta

While 10x's workflow is simpler, academic researchers still care about price. Arguably, with gross margins almost 10% higher than Illumina, 10x Genomics has room to reduce prices to fend off Parse but it may be difficult to escape margin degradation.

Grenke: UK Equipment Leasing

in 2020, Grenke was the target of a short report. However, throughout the fiasco, Grenke didn't lose many dealers in the UK...

I don’t think we lost a dealer through it all. They respected what we did and the position that we took. There was one guy who said, I’ll never deal with you again. But actually, he was a dealer with a target on his back because he was so difficult to work with, and I had already made the decision that I wasn’t going to work with him, and I got the backing of the management team to do that. He’s now back, incidentally. - Former Director of Grenke UK