Spotify Podcast Ads, Danaher, Yelp, XPEL, IMCD, Atlas Copco, Becle, XPO Logistics

Content Published Last Week

1. Spotify: Podcast Advertising Value Chain

2. Spotify Podcast Ads: Monetising a Megaphone Show

3. Spotify Podcasting: DSP, Inventory Aggregation & Scaling Programmatic

4. Danaher: M&A Runway, Target Evaluation Process & Valuations

5. Yelp: Local SMB Model

6. XPEL: An Installer's Perspective

7. IMCD Group: APAC Region, M&A Strategy & Management Changes

8. Becle: Agave Market Dynamics

9. Atlas Copco: Pumps and UK Power Technique

10. XPO Logistics & US LTL: Scaling via M&A

Spotify Podcasting Value Chain

In 2022, the podcast market generated ~$1.4bn and is estimated to grow at 15% CAGR until 2025. For context, radio advertising spend is ~$26bn per year. There is also still a gap in the reach of podcasts compared to radio:

Terrestrial radio reaches approximately 90% of the U.S. on a weekly basis. Streaming radio, on the other hand, reaches around 72% or 73% of the U.S. on a monthly basis. This is a significant gap, going from 90% weekly to 72% monthly. - Current Audio Media Buyer

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At the 2022 investor day, Spotify disclosed $200m in podcast advertising revenue at negative $103m gross profit for FY21.

Since last November’s investor day, SPOT has stepped back from buying or licensing as much exclusive content and is focused on monetising Megaphone and third-party shows. This is currently a small business; executives in our network estimate over 80% of SPOT’s podcast revenue is from direct sales on owned and operated (O&O) inventory like JRE or The Ringer.

Podcast advertising is very different to traditional digital advertising on Facebook and Google; audio is cookieless, absent of any programmatic auction-based bidding, and includes powerful hosts who capture a significant % of the economics.

Given SPOT is less focused on acquiring podcast content, the long-run podcast advertising opportunity seems to be driven by the monetisation of 3P shows through Megaphone and the long-tail of podcasts on Spotify.

This analysis walks through how O&O and Megaphone inventory is monetised, the revenue model and sales purchase of direct sales and Spotify Audience Network (SPAN), and the challenge with programmatic ads in audio. We use examples like JRE and top Megaphone shows to illustrate SPOT’s underlying podcast economics across inventory types. This piece aims to help investors handicap the size of the podcast advertising opportunity and the likelihood of SPOT's 50%+ gross margin target.

Danaher

Danaher has completed its split of the Environmental & Applied Solutions segment, now named Veralto. DHR RemainCo is now a Life Science pure-play split into a Biotechnology and Diagnostics Group. This Former VP in Danaher's Life Science Group discusses the potential targets left for Danaher, competition, and Danaher's valuation methods:

Danaher operates on three principles. The first is the attractiveness of the market. The second is to find an asset within that attractive market that is at least among the top three players. The final rule is due diligence, ensuring the asset is healthy and agreeing on its valuation. They are quite strict about these rules. - Former VP, Danaher

The scarcity of assets and competitive intensity from rivals like Thermo Fisher limits the number targets and capital Danaher can put to work.

If you consider Danaher, which is now around 25 billion after the Veralto split, and Thermo Fisher, which is about 40 billion, these two companies almost monopolize half of the Life Sciences market. This indicates that market consolidation has been rapid, with Thermo and Danaher as the primary acquirers. Consequently, there aren't many targets left, as Danaher prefers to acquire billion-dollar companies to make a significant impact. - Former VP, Danaher

This might cause Danaher to look more broadly at strategic acquisitions that wouldn't meet the standalone ROI. Aldevron is an example:

Yes, and also, Aldevron was acquired to address a problem with IDT, a company we acquired seven or eight years ago. IDT lacked an oligonucleotide production site, and their manufacturing was deteriorating. The acquisition of a solid oligonucleotide manufacturing company like Aldevron was crucial not only for its individual performance and growth opportunities but also to prevent IDT from collapsing due to its inability to meet market demand. They were using outdated, inefficient methods, which have now been replaced by Aldevron. - Former VP, Danaher

Yelp

If Google wants to remain the go-to platform for search queries, it will always strive to direct users towards the most relevant search results. Given Yelp’s high-quality reviews on local businesses, it should receive organic direct traffic from Google Search:

Google can prioritize their own content in SEO, but in non-advertising areas, they must display the most relevant content. This is where the quality and quantity of reviews come into play. If Yelp has the highest quantity and quality of reviews, then Google is required to show it. - Former Head of Sales, Yelp

In our journey to understanding why Yelp still exists in the face of Google, we interviewed Yelp’s Former Head of Sales to explore Yelp’s local GTM strategy to compete with Google.

XPEL

XPEL is one of the few microcap mega-success stories of the last decade. Under CEO Ryan Pape, the company narrowly escaped bankruptcy and has grown revenue at >35% CAGR over 10 years to over $300m. In this interview with one of XPEL's largest dealers, we explore how installers operate and why XPEL is the supplier of choice:

The most expensive parts are the labor of the paint protection technician and the product itself. We have significant buying power with manufacturers, similar to Walmart or Amazon. This allows us to get better prices and be more competitive, while still offering a premium service. Regardless of the company, the cost of paint protection film typically accounts for 22% to 27% of the overall cost. - XPEL Installer

Even for this relatively large installer, material costs account for a quarter of the direct costs involved in a PPF installation, labor making up the balance. XPEL helps make the installer more profitable through its DAP software, a database of patterns for each brand make and model.

The database is a game-changer for several reasons. Firstly, it reduces material usage. Secondly, it minimizes company liability. Any paint protection package that's applied to a vehicle requires some razor blade work. However, with an extremely accurate pattern, the use of this tool is significantly reduced. (..) While Eastman now has seven or eight people designing patterns, XPEL employs 30 globally. - XPEL Installer

The company's first product was actually the DAP software and only later started selling film. A focus on the pattern database and quality product has helped them differentiate themselves against competitors for whom the automotive PPF market was an afterthought.

IMCD Group

IMCD Group has benefitted from consolidating local specialty chemicals distributors to spur inorganic growth. This former 25-year IMCD veteran discusses the challenges in continuing on that trajectory given the competitiveness of the M&A market.

The coming years will not be easy for the company. There is increasing competition, a limited number of acquisition targets, and a subdued market. The high interest rates and lack of cheap money will also pose challenges. While we can expect a recovery in due course, the journey will be difficult. - Former VP, IMCD

Atlas Copco: Power Technique

Last week we interviewed an Atlas Copco compressor customer, this week we explore its Pump division within the Power Technique business with a Former Head of Sales at Atlas:

Their quality has been improving. They also have a unique selling point (USP). You can lift and move the pump end from the pump as it's on a hinge bracket. This design allows you to undo the bolts on the wet end and lift it out, making servicing the pump a lot quicker. If you have any breakdowns on site and need to change your mechanical seal, you can do it very quickly. This design, which they adopted from Varisco, is unique to them and a strong USP for Atlas Copco. They've done very well with it. DXB, Dynamic Fluid, and most of the pump manufacturers are similar in quality.

XPO Logistics & US LTL: Scaling via M&A

While a roll-up strategy may help an LTL operator scale quicker, increase network density and gain market share, it introduces lots of inefficiencies in its system. This in turn increases the cost base for the acquirer, leading to less competitive pricing to the end-customers.

On average, XPO was about 15% to 18% more expensive than Old Dominion. - Former Head of M&A, XPO

In this interview, the Former Head of M&A at XPO Logistics walks through the company's acquisition process, highlighting the pitfalls of such a strategy when compared to Old Dominion's organic growth approach.

Becle

A portion of the agave plantations in Mexico are not registered with the CRT (Tequila Regulatory Council). This segment of the market commands lower prices on average and is forcing CRT-registered agave farmers to reduce their prices in order to remain competitive, hurting their margins along the way.

This is speculation, but prices of 8, 10, 12, or 14 pesos are speculative expectations from people who profit as I described earlier (i.e buying cheaper agave from farmers who are not CRT-certified) . They take the reference of stolen agave and agave outside the denomination that don't have CRT documents. They buy these at prices of 8, 10, or 14, at less than maximum. This is the price they offer the producers, the farmers.

This interview with a CRT-registered agave farmer sheds light on the recent trends in the agave market.