Business Breakdowns
· Matt Reustle
[00:00:00] S0: This is Matt Reustle and today we are breaking down Agilent. If you aren't familiar with Agilent, it is a $30 billion market cap company at the time of this recording and they focus on one of the more interesting niches: equipment and instruments sold into laboratories. So you can think of this equipment being sold to the life sciences sector, diagnostics, applied chemical markets, some very unique R&D work. My guest is Mark de Vos, fund manager at Troy Asset Management, and Mark brings us through the story of Agilent. This is something that was born within Hewlett Packard, spun off a little more than 25 years ago, and Mark helps break down what can be a very complicated concept around things like chromatography and some of the other things that Agilent's involved in. But this is a deeply ingrained industry player with a unique razor and razor blade model and a business that has evolved over time. These episodes tend to be my favorite and this one lives up to the others. Please enjoy this breakdown of Agilent. All right, Mark, I am excited to have you here to talk Agilent. We were laughing a bit last week before the episode. One of the key things is just going to be establishing what Agilent actually is, what they do. I love these niche industries and the niche businesses that don't get as much airtime or coverage. Let's just start there. Do your best simple overview of what Agilent does as a business.
· Mark de Vos, Matt Reustle
[00:00:00] S1: Agilent is a leading provider of instruments, services and consumables for labs. Sounds simple. You can picture one of their typical Agilent instruments to be about the size of a small fridge, maybe on a lab bench, something like that. And its core use case is to tell you what molecules are in a sample that you're testing. A real world use case of this might be you've got a pharmaceutical company producing a drug, let's say they're making aspirin and they take one tablet off the production line for every thousand tablets that they make, or something like that. Those samples could be run through an Agilent piece of equipment and they would be testing to check they have the right amount of the active ingredient in them and importantly that there are no contaminants in them as well. Agilent will sell them the instrument that can analyze that sample and also provide the ongoing service, support and consumables needed to run the instrument. [00:00:00] S0: If I'm thinking about this right, it's mostly biomedical type work that they're operating around and specifically in the labs of those businesses. Is that a fair way to categorize their end market?
· Matt Reustle, Mark de Vos
[00:00:00] S0: If I'm thinking about this right, it's mostly biomedical type work that they're operating around and specifically in the labs of those businesses. Is that a fair way to categorize their end market? [00:00:00] S1: Yes, the business itself is actually pretty broad today. They're in 110 countries today, 285,000 labs. So it's pretty broad split between, you know, Americas, Europe and APAC in terms of the actual markets. The kind of end customers - pharmaceutical customers are the largest end market for them. So that's about a third of their sales or so. Academia and government, you can imagine universities use the stuff. That's another 10% or so. About 20% of the business is chemicals or advanced materials, which is interesting. So you could think of battery testing for EVs or semiconductor production and another 20% is actually food and environmental testing. So this would be for contaminants, perhaps in your water supply, something like that. [00:00:00] S0: Is there any way to measure how big of a market this actually is? I'm always curious with these niche industries that revolve around very big end markets as it relates to drugs or anything along those lines. How do you categorize just overall market size for an Agilent?
· Matt Reustle, Mark de Vos
[00:00:00] S0: Is there any way to measure how big of a market this actually is? I'm always curious with these niche industries that revolve around very big end markets as it relates to drugs or anything along those lines. How do you categorize just overall market size for an Agilent? [00:00:00] S1: Agilent do publish a sort of total addressable market stat and it's $160 billion, which is unsurprisingly a really big number when you think about all the companies and businesses in the world that need to test samples. Agilent's revenue today is about six and a half billion dollars, much smaller than that TAM number in reality. Actually when you dig into those niche end markets, they generally have a number one or two position in most of their key markets. It's generally a pretty stable competitor set. [00:00:00] S0: If a company publishes a TAM number, it's probably going to be a big one. That's a fair way, but interesting to get that context of six and a half versus 150. Just for perspective, let's go back to the origin of the business or where did Agilent come from? What is the origin story? How long has it been around? Anything that's key to its history that you would include.
· Mark de Vos
[00:00:00] S1: I think Agilent has a really interesting history. It actually starts way back in 1938. Hewlett Packard, or HP, started by two electrical engineers, so Bill Hewlett and Dave Packard working in a garage. Pretty well known story. And the first product they developed of course was actually a testing instrument. It was used to test audio equipment used by Disney in the production of Fantasia, the movie way back then. Over the years, HP built out their testing and measurement business, both electrical testing, but also over time for molecular analysis. And this included the acquisition of a small business called F and M Scientific in 1965. That business had quickly become the leader in what's called gas chromatography instruments. Their instruments were used for the first full-scale testing for steroids in the 1972 Munich Summer Olympics. The business continued to grow over the years that followed. In 1999, HP focused more on its computer business and they spun out several businesses, including testing and measurement into a new business called Agilent. HP kept their computing and imaging business with everything else going into Agilent. It was a bit of a mixture of assets that they inherited, but there was also some real gems in there, obviously years or decades of R&D, particularly in chromatography. In the years that followed, the Agilent management team refocused on its molecular testing business. So they sold their medical business to Philips in 2001. They actually had a pretty successful semiconductor component business that they sold in 2005 to KKR and Silver Lake. This would go on to become Avago, which then became Broadcom after they bought it. So it's been tremendously successful on its own. In 2014, that's the most recent significant change. So Agilent spun out their electronic measurement business into a separately listed company called Keysight Technologies. It's still listed today. It's doing well, that's really important. At the time it was about 40% of sales. They were spinning out. And Keysight, whilst it was a great business, was selling equipment predominantly used for testing electronic devices during manufacture. So this was a really cyclical business and didn't really closely align with the rest of what Agilent was doing.
· Mark de Vos, Matt Reustle
The business that remained was entirely focused on analytical equipment for the life sciences, diagnostics and chemicals market. So much more focused. What the management team was trying to do was have a much more clean, predictable, less volatile business, still have those long-term growth drivers. [00:00:00] S0: It's very interesting when you find these family trees, Standard Oil being one that broke up, but all essentially in the oil business. In various forms HP being a new one that prior to this episode I didn't appreciate just how much had been born out of that family. Quite some impressive market caps on those businesses that you reference. You mentioned the electrical testing versus molecular testing feels very different to me in terms of yes, they're both testing something at the surface level, but molecular versus electrical feels like it's very wide gap. Was there a certain cultural DNA or recruiting mechanism that they got people attracted to the overall HP brand that allowed them to do that? This is a bit of a segue, but I am curious how they were able to foster innovation in two relatively different categories, at least to my brain.