Content Published Last Week

1. Trupanion & TRUP Express: Vet Practice Owners

2. Danaher's Culture, Pall Industrial, & Deploying DBS

3. Microsoft Gaming: Xbox Cloud & Game Pass

4. Warner Music Group: Driving Value From The Catalog

5. A&O Johansen & Danish Plumbing Wholesale Distribution

IP Surveys

Over the last few months, we’ve introduced a new format: IP Surveys. This format aims to save you time and money to gain perspective on 1-2 key questions surrounding a company. For example, we just published a survey of vet practice owners to understand why Trupanion has low penetration and how owners use and value Trupanion Express. We’re also surveying auto dealers to understand why they use or don’t use ACV Auctions and HVAC contractors on why they may choose Watsco vs Ferguson.

In some cases, we've found surveys to be more robust than interviews in building conviction on the perspective of customers, suppliers, or partners of the companies we study. An interview provides one person’s perspective of a business; a well-structured survey can provide 10-20 perspectives. We also don't focus on short-term drivers of a company but to provide timeless insights; for example, our questions will focus on understanding how customers may calculate the value of a product or service of a company we’re studying.

The challenge is structuring and executing the survey whilst not diluting the responses. It’s easy to drift into collecting Yes / No or one-word answers without context which adds little value. It’s our job to provide answers with depth from a range of relevant executives.

Each survey costs us ~$10-15,000 in executive costs, sourcing costs, and analyst time to complete. We not only hope to save you time and money but, more importantly, help you build conviction in businesses you’re studying. Given this is a new format, please let us know how we can improve and feel free to suggest any survey ideas you'd like to see us explore.

Trupanion & TRUP Express: Vet Practice Owners

In the US, representing over 80% of TRUP's revenue, the penetration rate for pet insurance is ~2%. One potential reason for the low penetration is that congenital and hereditary diseases, the conditions most likely to happen to a pet, were historically excluded from the insurance contract. This rendered insurance of limited added value to pet owners.

Not only did Trupanion decide to cover such conditions, it also offers Trupanion Express, a free software installed at the vet hospital that helps pay 90% of claims, directly to the vet at the time of checkout. This differs from the industry which requires the pet owner to pay out-of-pocket at the time of checkout, complete paperwork related to the veterinary procedure, and receive confirmation of coverage and the reimbursement value.

In FY22, Trupanion reported ~75% penetration across NA vet hospitals but only ~50% penetration of Trupanion Express.

"In 2022 we averaged 16,000 hospitals with at least one new pet enrollment in the prior three-month period. That equates to nearly two-thirds of North American veterinary hospitals...The number of partnered hospitals with software installed, allowing us to pay them directly at the time of check-out and eliminating the need for reimbursement, grew 24% year-over-year from approximately 6,400 hospitals to nearly 8,000 hospitals" - TRUP CEO, 2022 Letter to Shareholders

Despite Trupanion's notable efforts to cater to the needs of both pet owners and veterinarians for more than two decades:

1. The company's product is still under-penetrated among pet owners

2. Trupanion Express is not installed in all partner hospitals

In an attempt to understand the barriers to adoption of both TRUP insurance and Trupanion Express, we surveyed 10 veterinarians/practice managers and share our learnings in this IP Survey.

Danaher's Culture, Pall Industrial, & Deploying DBS

As part of our series, this interview focuses on how Danaher deployed DBS at Pall’s industrial business post-acquisition. In 2015, when Danaher acquired Pall, its revenue was ~$2.8bn split ~60/40 between biotech and industrial end markets. The industrial markets include filtration systems across O&G, food and bev, aerospace, microelectronics, and fluid technology products for heavy machinery OEMs.

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This interview walks through how DBS was deployed at Pall Industrial, the quality of the industrial assets relative to biotech, and we provide a lens into how certain DBS tools are applied post-acquisition:

I'd estimate that about 60% of the fluid technology business was recurring revenue. Once you're specified in, the advantage for manufacturers is that you have to redesign a system if you want to put a different filter in, because the filters are physically different. They're not just a one-for-one swap…Pall had been around for a while, so we were specified on many machines. Whenever there was a new machine design, we ensured our filtration design was specified. We focused on product innovation, new technologies, and different materials in filters for longevity and easy replacement. The goal was to minimize machine downtime. On the industrial side, we worked with procurement, engineering, and design - Former VP at Danaher

Microsoft Gaming: Xbox Cloud & Game Pass

After the completion of Microsoft’s acquisition of Activision, this interview with a former Xbox Product Manager focuses on MSFT’s Gaming business and the strategic value of Game Pass:

Xbox's challenge has always been a lack of single-player experiences, which is why they've acquired great studios. The value in the Activision acquisition wasn't in Call of Duty, despite its revenue generation. The real value was in the other intellectual properties (IPs) that Activision had, which were ripe for development. The Activision acquisition wasn't just about Activision, Blizzard, or King. - Former Product Manager, Xbox

Microsoft seems focused on offering value through Game Pass rather than competing with PlayStation for every new console generation:

The key aspect of Microsoft's strategy in the gaming division is their goal to never have to take a loss on the console again. There are technical constraints currently preventing them from achieving this, such as the issues with streaming and the need for client-side computing. However, they anticipate these problems will be resolved in the future, possibly in 10, 15, or 20 years. - Former Product Manager, Xbox

A&O Johansen & Danish Plumbing Wholesale Distribution

As part of our interest in B2B distributors such as Fastenal, Watsco, POOL, and Ferguson, we’re continuously searching for similar but smaller, family-owned businesses across Europe. A&O Johansen, the Danish-listed B2B distributor of plumbing, heating, and installation products for tradesmen, is one recent example we’ve been studying.

AO is over 100 years old and family-owned and operated. The company is a market leader alongside Saint-Gobain with 57 branches across Denmark. Given its heritage, AO has prime branch locations in the center of the city. It was acquiring buildings before the city expanded out into the suburbs. This real estate not only underpins the equity value of the company but provides a superior service in distributing products to contractors faster and cheaper than competitors:

The majority of A&O Johansen's balance sheet value is in properties. Out of their 50 locations, I believe they own around 40 to 45. They have prime locations because they've been around for a long time. It's a 100-year-old company. They have locations in the heart of Copenhagen, which would be worth a fortune if they decided to sell and develop it for residential buildings or the like. Generally, they have excellent locations. A&O Johansen is a Copenhagen company. It's strong in Zealand, but not as strong in Jutland. There's a distinction here. And now they're in the middle of the city. It wasn't like that when they bought them. - Former Executive at AO Johansen

The challenge with sub-scale distributors is that we don’t see the operating leverage the scaled-US players seem to enjoy. AO targets a ~10% cash flow yield, a target it hasn’t hit in the last 20 years. Although the gross margin has decayed largely due to accounting changes, the financials below show a lack of operating leverage:

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We interviewed an executive who worked closely with the CEO to learn more about the history of AO, the structure of the Danish market, and the opportunity to grow revenue and operating margins over the next decade.

Warner Music Group: Driving Value From The Catalog

Last week, we published an interview discussing how artist deals have changed. In this interview with a former Warner Music UK CFO, we walk through how catalog acquisitions have evolved since streaming has taken share:

A few years ago, our back catalog strategy was rather weak. It was primarily based on anniversaries, where we would reissue an album that came out 50 years ago with extra tracks in a box set. That was pretty much the extent of our catalog strategy. With the advent of streaming platforms, we now have more opportunities to curate specific playlists of catalog-specific artists and promote them, especially during events. - Former Regional CFO, Warner Music

The interview goes on to explore how labels scout, acquire, and monetise catalogs in a world where streaming can extend the lifetime of such music assets. We also explore the risks inherent in direct artist-fan interaction and how this may impact label catalog economics in the long-run.