Disclaimer: This interview is for informational purposes only and should not be relied upon as a basis for investment decisions. In Practise is an independent publisher and all opinions expressed by guests are solely their own opinions and do not reflect the opinion of In Practise.

{audio:0:00:23} Could you briefly explain the types of products GDS sells?

{audio:0:00:29} GDS specializes in geotechnical instrumentation for labs. They make a range of systems which perform standardized tests that target the soil and rock mechanics industries. These tests determine the strength of the soil or rock, either for construction purposes or when academic institutions or R&D analyze the performance under certain circumstances. This may sound generic but it is governed by standards like ASTM or ISO which specify how a range of specialized instruments or systems take samples of soil or rock and subject them to particular loads and forces.

{audio:0:02:01} Many machines fall under the general category of loading frames, but what goes inside the frame changes. In materials testing you have tensile grips or compression plates which test the standard metal or plastic specimens. GDS uses a cell to emulate true conditions of the specimen in the ground, because it is not enough to simply pull a specimen out of the ground and break it. The materials will be put under tight pressure or inside water, and everything is controlled by a PC running software. 

{audio:0:03:09} GDS was started decades ago by two professors with extensive industry knowledge. They created one of the first systems to be operated by a PC rather than manually. These tests used to be manual and you would have to open and close several valves to regulate the pressure inside the cell. You had to take loggings by hand on an hourly basis by looking at displacement gauges. Most basic tests like the triaxial test have been around for a long time. GDS made a difference with the evolution of modern technology and pressures are now controlled by a pressure controller connected to a PC, which takes electronic commands rather than manual ones, and regulates the pressures inside the cell. Output from pressure transducers is fed back into the PC, which controls the loop.

{audio:0:04:54} Why are GDS’s computer-controlled tests more effective than manual?

{audio:0:05:01} You no longer need user intervention to log or adjust pressures manually. You can simply set up the duration of the test and other parameters on your PC, press start and when it finishes, the results are automatically fed back to your PC. The process requires minimal manpower and if you multiply that by the number of machines most labs have, it equates to massive savings for the organization.

{audio:0:05:43} Does GDS sell their hardware and software separately or together?

{audio:0:05:51} It can be sold separately, but most customers prefer to buy the whole system because then they have a vendor who is also responsible for the support. A great selling point for GDS is that service is support is free. Today, PCs are the exception as they can be purchased anywhere.

{audio:0:06:37} Is there maintenance or support revenue post-sale?

{audio:0:06:44} Technical support involves solving issues which occur mainly during use. A component could stop working or the software could prevent a user from performing a particular task, but GDS are notorious for having reliable systems which operate for decades and never break down. Support is only required once in a while.

{audio:0:07:30} What is the average life time of a system?

{audio:0:07:31} The average life time is literally decades. Support is not restricted to components but also extends to applications. When a user wants to perform a test and has questions, they usually call GDS and get support on how to perform the test on GDS machines.

{audio:0:08:01} This was a company decision made a long time ago. All three GDS directors are very experienced, understand the intricacies of this industry and are passionate about the job. They believe support is essential for establishing a community around GDS systems.

{audio:0:08:49} What is the average price of these systems?

{audio:0:08:52} This has changed a lot over the past two decades, because the trend has moved towards more specialized tests. Triaxial, consolidation and shear tests are the basic ones every lab start with, and these are relatively complex but several suppliers provide them at a lower price. These tests are relatively more commonplace and are not massively expensive. They cost between £15,000 and £30,000 for a complete system. Newer dynamic tests require advanced equipment and those cost between £100,000 and £300,000.

{audio:0:10:38} What type of labs perform these basic tests?

{audio:0:10:45} The two types of geotechnical instrumentation labs are commercial and academic. Research labs have a range of equipment but do more advanced testing, whereas commercial labs perform tests for institutions. If you want to build a dam or offshore platform, you need to test the ground before and during construction. Sometimes the construction company do a few tests, but the bulk of them are usually performed by individual private organizations who do the tests for other people. They are equipped with standard testing equipment for triaxial and consolidation testing. They have a large array of machines to perform bulk testing. Recently, private test labs are getting into the more advanced tests because they charge large sums of money for them. We are seeing new labs equipped with more specialist equipment.

{audio:0:12:45} Is it purely a system sale or is there any consumable recurring revenue?

{audio:0:12:56} No, the consumables are membranes, o-rings and filters which are very cheap and made by other companies. GDS makes its revenue by selling the machines.

{audio:0:13:16} Do commercial and academic customers acquire systems differently?

{audio:0:13:25} Commercial customers behave in the same way any private organizations do. Generally, there is a requirement and a purchasing procedure and once they decide internally a purchase order is released. In academia and public research organizations, it depends on the territory. In the European Union, purchases above a certain threshold are governed by laws, so there are usually closed tenders with three participants or tenders open to EU members. The nature of those tenders is dictated by thresholds. The US are a lot freer and often have a three-supplier requirement but could choose a sole-source for unique instruments in the market, which is often the case with GDS. In that case, they can purchase directly from a manufacturer without going through a tender.

{audio:0:15:06} What is the revenue split in GDS between universities and corporates?

{audio:0:15:13} Historically, over 80% were academic and public research organizations, but recently there has been an increase in private labs purchasing high end equipment to perform more advanced tests. Offshore testing is responsible for a lot of advancements in this field, which results in many private sales for GDS and the industry in general.

{audio:0:16:08} Can we walk through a typical sales process?  

{audio:0:16:19} GDS is renowned in the industry for having the top equipment for particular tests. Imagine you have to develop a new system for a particular application, versus systems that have been around forever and which everybody makes. In the latter, you are dealing with a much more competitive area and a known technology so it's difficult to make a difference. Triaxial and consolidation tests have been around for a long time so this is more of a bulk sales of smaller value systems in a more competitive market. The biggest product split in GDS is the more advanced systems, which are low volume and few people know how to make them. This differs from the car industry where it is all mass produced and everybody can make cars. There are very specialist tools sold in small numbers, two to five system per year, or even one. For such expensive systems, the buyers know that GDS is their best chance to get the right results. Whenever GDS brings a system to the market, users are sure they have done the best possible to make a great system that works and gives precise results, with all the support they need. They won't be left on their own because GDS excels at both high-end engineering and support.

{audio:0:19:04} How do public buyers of these instruments plan their purchases?

{audio:0:19:32} University procurement procedures involve applying for several sources of funding which depend on the country and overall health of their market. The more challenged countries don't have enough public spending for universities, whereas healthier economies have a lot of money through funding sources in academia and research universities. The process is that the professor has to plan well in advance because they know instrumentation is a vital tool for their research. The only way they can progress in their field is by using the test results to analyze and present their studies, so they monitor the market very closely. 

{audio:0:20:43} They are in close contact with GDS and other companies, but few companies are as precise in their work. They apply for funding, which they may not get the first time if it is distributed elsewhere, but second or third time they may get several hundred thousand euros or pounds to buy the machine. At that point, if it's a big machine, there is a tender. If they buy an inferior system only based on price, they may not be able to do their job at all. It is important they work with GDS to spec the system as they like, so that when the tender comes, they can use the technical grading to purchase the best system, which is invariably GDS for the high-end systems.

{audio:0:22:07} What is the replenishment cycle of those machines?

{audio:0:22:23} Several decades, but during this lifetime, automated testing based on PCs has only been around for three decades, so this is the current known life span. The hardware doesn't require maintenance or replacement; usually only the software is upgraded when new Windows or GDS versions are released. Customers can continue upgrading their older systems, because the has a long lifespan and doesn't break down, so it's a lot more than a decade.

{audio:0:23:21} GDS did not charge for software upgrades, as far as I recall.

{audio:0:23:31} Could there be only one system sale for 20 years for that customer?

{audio:0:23:40} Yes, but they may need some ancillaries. Older systems need their interfaces changed from RS232 which was the old serial protocol, to USB.

{audio:0:24:24} So the hardware doesn't really change?

{audio:0:24:26} The pressure controllers and frame have changed very little over the last decades. The changes are to adapt to the new communication protocols, like USB.

{audio:0:24:46} How much visibility do you have into future sales of the order book?

{audio:0:24:53} The geotechnical industry is currently following a very healthy growth pattern, which is expected to continue over the next decade. The global trend is towards advanced tests which more private and public labs are looking to get into, if they're not already there. GDS is uniquely positioned to take advantage of and support this growth with their advanced systems, and their annual growth shows that they do that very effectively. It is a great opportunity for a very skilled engineering company like GDS whose directors have a head on their shoulders and understand the growth process well. They avoid pitfalls and growth is always incremental but on a very positive track. Over the next decade the sales of GDS are expected to keep on growing, along with the growth of geotechnical industry requirements.

{audio:0:26:25} Because the machines last so long, it's hard to know when a customer will replace or buy new ones, or go with a competitor. How do you improve your visibility as a sales guy in that space to ensure you get the next customer sale?

{audio:0:26:50} The key driver is networking and word of mouth. This is where it pays off to have excellent engineering and great support, because although large, the community is closed. They talk to each other and recommend when they are happy. With the continuous growth of the requirements of the industry, they have new users coming in, who have invariably been through universities and have used GDS. They have spoken to the professors and meet each other in conferences, symposiums and trade shows. It is vital for their job to have good testing tools so they value the high-end product and support GDS offers.

{audio:0:28:10} What is the biggest challenge for future order growth at GDS?

{audio:0:28:23} Ignoring temporary challenges like the chip shortages of the East, which currently impacts all industries, one challenge is physical because, as GDS grows, they employ more people and need more manufacturing space. They remain in their quarters where everybody is together, which is central to the company philosophy, to work close to your colleagues and get their help and support. It’s very much a team effort and as they grow, it is a challenge to keep this going. As organizations get bigger, there are some steps in their evolution where they have to change in form; they have to move to larger premises and adopt new procedures so they become more distant and the teams and groups start operating differently. 

{audio:0:29:54} You can do a great job when you are two, three, 10 or even 50 people, but once you reach 100 it becomes challenging to continue working the same way. I don't see any real challenges because GDS know what they are doing and have top technology. They keep hiring top people, so they keep evolving the right products. They have a great sense of the industry because they get feedback from professors and are extremely well-connected, so they are on a good path to keep growing for many years.

{audio:0:30:42} How do you look at the competition in the cheaper systems versus the more advanced systems at GDS?

{audio:0:30:52} As this industry has grown, there has been growth in all segments, including the bulk tests like consolidation, shear and triaxial. Many competitors make adequate systems, maybe not of the highest quality, but they certainly do the job well. GDS has never competed on price with these bulk competitors. GDS sells standard testing equipment to organizations who value the quality and support they offer. Their equipment does standard and advanced tests but they want a supplier who can cover all their needs, so they buy everything from GDS. The triaxial system may cost £5,000 more than the competitor, but they are buying into a complete solution.

{audio:0:32:46} Is that a risk to growth if more competitors offer standard tests?

{audio:0:32:54} No, because GDS know that the industry is moving into the more specialized tests and are ideally positioned to take advantage of this. It is more protected because a competitor doesn't have the know-how and needs to make a big jump to get into the advanced segment. That knowledge gap is a barrier to entry for many competitors who don't have the engineers, experience and knowledge and cannot make a good dynamic simple shear system. For GDS, this is their bread and butter. They don't need to worry about the tons of labs popping up and doing consolidation and triaxial tests. It is okay if they don't buy GDS because there are many customers in academia and private labs who are interested in more advanced tests. They can invest a lot of money there because that is where the cream is.

{audio:0:34:28} Does that make the revenue growth more volatile? It has doubled over the last ten years from 2012, but 2014 declined and it also slowed down in 2016/17, then grew again?

{audio:0:34:52} I don't have a picture of what happened in 2014 but there may have been occasional blips in particular years for various reasons. But in general, growth is upwards. You may have one or two bad months and then sales could go through the roof because two or three large projects come in simultaneously. With the small number of projects, it is more likely something like that happened.

{audio:0:35:59} What makes it difficult to compete with GDS in the specialized segment?

{audio:0:36:19} Developing tests and find professors who are willing to support and work with you is hard. Some competitors are doing that well and get support, especially in some areas. Companies that are very strong in particular geographical areas can develop their know-how accordingly. I am not saying it cannot be done, but you're talking about small companies, and more often than not, it's down to the individual manager or director, to understand the route and be willing to work towards this direction. They do have some great standard stuff which they are selling in bulk, so are they willing to take the plunge and go in the higher end to invest in and acquire the know-how to excel there, or do they simply concentrate on their core business which is triaxial and consolidation testing, which is growing? 

{audio:0:38:02} Those decisions need to be made and there are many companies older than GDS who don't care about the high-end equipment. They may occasionally sell a system when there is a single tender and they can win, but they are not a threat to GDS. They will not move into this segment but they will sell tons of equipment to construction and private labs who do all the bulk testing for construction.

{audio:0:38:34} What is the biggest threat to GDS over the next 10 years if you think some of the competitors will continue doing standard testing?

{audio:0:38:45} You cannot rule out the competitive threat because, even though GDS are leaders in what they do in that particular segment, this has become a lucrative segment and people are ready to make an investment. They may at some point be acquired by a holding company like GDS was a few years ago, and get a new infusion of money for a good three-year plan to develop great products with strategic partnerships. It is quite likely that will happen, but I don't think that would be a threat to GDS. The way things are going there is room for both GDS and one or two competitors in the higher end segments over the next decade.

{audio:0:39:57} GDS has a computer-based element but there is also a core mechanical system which lasts for years and requires lots of know-how. Can there be a potential disruption in the advanced testing space or what could disrupt GDS there?

{audio:0:40:23} I'm not sure one can forecast a disruption.

{audio:0:40:29} You cannot do these tests only with software, so is there any technological risk to this business over the next 10 to 15 years?

{audio:0:40:39} The software controls it but the magic is in the engineering of the hardware. GDS hire and train top talent and have a strong corps of engineers who develop new products. Where there's a strong requirement, they evolve the existing products so they get better.

{audio:0:41:51} Is there a risk if the three managers who have been there for a while leave?

{audio:0:41:57} If you asked me this question a few years ago I would be more concerned but I know there are extremely capable people working alongside each of those three managers. The managing director is critical and he is an amazing guy and a good friend of mine. GDS has very talented and charismatic directors, who understand they are not alone and have teams who work alongside them. Inside GDS ranks, there are people who can cover managers, especially in technical know-how, which has already been implemented in some departments.

{audio:0:43:11} Looking at the acquisition of GDS by Judges, what attracted them to GDS?

{audio:0:43:24} Judges Scientific have a model based on scientific know-how and they transfer this scientific know-how in the industry in various different applications, which invariably are quite specialized and GDS is a classic example. It's low volume and usually a group of scientists who know a particular requirement for a particular industry, so they form a company and go with the flow requirements of that industry. That can be spectrum analyzers or microscopes but there are little segments which exist in many markets which will never be high volume. The companies range from 10 to 100 people but are unlikely to get much larger. They are specialists in their field and this is a typical model in the British industry, with small and medium enterprise specializing in goods like that. 

{audio:0:44:55} Judges Scientific saw a great team with great know-how who knew their market well, knew what they were doing and had their head on their shoulders, so they felt the confidence to invest in GDS. They didn't need to change any of the management because you don't change a winning team. They manage most of their businesses by helping where required but don't intervene or dictate how the company should be run. Judges work on the side of, as opposed to on top of, GDS.

{audio:0:45:51} When they did acquire the business, were any major changes made in terms of cutting costs or providing capital for capex?

{audio:0:46:03} I wasn't in GDS then but there must have been infusion of capital where required. I don't know how much there was or where it went to, but they bought the company from the previous owners who were professors and sold it off to retire. That was the only change but that was part of the plan.

{audio:0:46:34} Were the current managers part of the succession plan of those professors?

{audio:0:46:41} Yes, the three directors have been in GDS since the 90s, so they didn't touch that.

{audio:0:46:57} Given Judges invest in niche areas with specific scientific knowledge, are there potential synergies in sharing learnings with other Judges portfolio companies?

{audio:0:47:15} There are not great synergies in GDS. There is probably some cooperation in top management but not in the daily business and the drivers which affect running GDS. If there is a subcontractor that can be sourced within the Judges groups of companies, that's fine, but it wouldn't change anything because GDS source subcontractors via internal procedures anyway. If that Judges company didn't meet GDS requirements, they wouldn't go with them. From my experience, the companies are run independently.

{audio:0:48:10} Did they try foster innovation between subsidiaries during your time?

{audio:0:48:15} If it happened, I don't know about it.

{audio:0:48:18} They are different end markets with different products and segments.

{audio:0:48:25} There wasn't anything visible which came from one of the other subsidiaries.

{audio:0:48:31} Most Judges companies manufacture and assemble in the UK then export their products globally. What challenges did you face selling instruments to Europe, the US and Asia who all have different procurement processes of academic research labs?

{audio:0:49:05} The actual procurement procedures are not a problem; you adapt and operate according to the procedures in each territory. What is more challenging is the intricacies of each market. For example, you need a different strategy to be successful in China, in India or in the US. In the US, at some point, GDS had a partnership with another Judges company who operated in all states, on different equipment. There was an attempt to represent GDS as well, based on their coverage. The challenge in the US is geographical coverage and all the states are very different. 

{audio:0:49:59} There was a Judges company that had representation in all these states, sending different equipment to similar markets. At that point, it seemed like a good fit. However, this didn’t go very well because they didn’t know how to sell GDS. Now, in the US, GDS operates directly because they don’t worry about the triaxial tests and the consolidation tests at all, because there are great US companies that make good tests, but they don’t know how to make the more advanced testing machines. All the professionals in the US, who are in this field, in a serious way, they know GDS and they come and buy directly from GDS.

{audio:0:50:46} GDS is doing very well in the US, just with direct sales, exactly because the product is so good. You don’t need people to go to the labs and knock on the doors in all 52 states. It has been advertised by word of mouth, by professionals who are top in their fields speaking to other professionals who are top in their fields. Of course, the challenge there is technically supporting this process, from a distance, with great technical know-how and ability, so you can do so without even physically being there. 

{audio:0:51:34} In a nutshell, these are the challenges of adapting to different areas. In China, for example, GDS has a great agent, who knows the business very well. They have dedicated engineers, who are trained by GDS, and they know the product just as well as GDS engineers do. Every country is different; every territory is different. For the more specialized systems, the more difficult it gets.

Judges Scientific: GDS Instruments

GDS is the global leader for high-end geotechnical instruments

It's unlikely another company with the know-how would enter the market given the size and lumpy cash flows

Order volume is lumpy given over 80% of revenue is from academic research and there is no maintenance or support revenue 

Judges Scientific: GDS Instruments

Former Sales Manager at GDS Instruments, Judges Scientific PLC

inpractise.com/articles/judges-scientific-gds-instruments

Why is this interview interesting?

Judges Scientific: GDS Instruments(May 16, 2022)

Takis Halkidis

Former Sales Manager at GDS Instruments, Judges Scientific PLC

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