Great write-up Spencer. I think you covered the company and investment thesis very well. Only thing I'd mention is that I don't think they're looking to use micro-transactions as part of their GaaS model - these are pretty widely hated by gamers. Instead, their focus is on making games that can be played for >100 hours, with ongoing updates that bring in new players for many years.
I really appreciate the kind words James. The point I was trying to get across is exactly what you said - more towards the longevity of the games and ability to continue monetize with low incremental cost to the company. In (very quick) hindsight probably not the best example on my part. Thank you for clarifying for readers!
In this case they are more comparable to Paradox Interactive where longevity of their games is core to less volatility and a long earning streams ( sometimes over 10 years)
From there IBKR has some weird rules about putting in bids so you will probably have to call to get restrictions removed (which they’ll do pretty painlessly but you have to get on the phone)
1) acqui-hire dilution? their acquisitions are done on a fixed monetary amount. thus as their stock price falls their dilution becomes heavier and heavier. you can see it clearly in the explosion of their outstanding share's.
2) related party transactions between founder and wife?
The acquihire dilution was initially my biggest concern. Clearly that structure misaligns incentives. The CEO realized this and changed it. Going forward acquihires will not use this structure
The RPTs are related to DevGAMM. The CEO’s wife (Lerika) owns 51% of DevGAMM with tinyBuild owning the other 49%. Everything is above board and well documented. It’s also worth noting that if Lerika were to depart from DevGAMM for whatever reason there is a mechanism that transfers ownership back to tinyBuild
From my understanding dilution from the already completed deals is done and management took steps (of which I do not have details at the moment) to decrease the dilution from them
There have not been any more acquhires recently so there is no imminent dilution at the moment
That said new acquihires will still be done with an equity component - not contingent on a set dollar amount. This will be in order to align incentives with the new development teams coming in. Like with any rollup-style strategy you have to trust management’s ability to create more value than they dilute with these deal
Thanks for the write-up. What's your view on the 35m internally generated software asset? If I were the founder I will probably expense those and save some tax expense.
Thanks for reading! The company initially recognizes these as assets before they are monetized and proceeds to expense them as the games are released and monetized. I think this is probably the best/right way to do it. Most importantly they lay it out very clearly and are consistent in how they apply it
Thanks for the comment. There are lots of things I like about the company (honest / fun / young management, buy-and-build stype, good potential, profitable, no debt). Basically the only two things I feel slightly uncomfortable is:
1. The internally generated software, They also changed accounting rule from 1-2 year amortisation to 3 year 40/35/25. I find it slightly aggressive and would prefer to expense that and save the 4m tax.
2. Back in IPO time, founder decided to sell quite some shares, though still holding ~35%. Tinybuild can be better capitalised if the founder can sell less.
Happy to get your view in case you have more information. Nice write-up!
Management believes the new amortization policy more accurately reflects the economic reality of the monetization of the software. This is obviously subjective but seems to be fair. As long as it stays consistent from here I personally don’t have a problem with it. I believe honesty (which is again subjective in this case) is more important than saving a few dollars on taxes
As I addressed, the CEO intends to buy more shares (after a vote at the AGM allows him to) and up his ~38% stake to over 40%. On the subject of seeking shares at the IPO I encourage you (or anyone else) to consider this quote from the book Lessons from the Titans: “My aha moment came during a meeting with former CEO Nicholas Howley and a Trans Digm investor. In an effort to knock Howley off balance, the investor forcefully asked him why he should believe in the company following Howley's recent sale of millions of dollars of stock. Howley stunned me when he sat up in his chair, put his elbows on the boardroom table, looked the guy in the eye, and said: `This may come as a surprise to you, but I'm in this for the money. I haven't had many chances to sell stock under private equity ownership, and now I do. My wife wants a beach house. So we're gonna get a beach house. You can believe what you want, but I'm not going anywhere. I've got more money to make, and if you choose to, you can make it with me.’”
Loved the write-up. Keen to market-test the product (for investing purposes of course!). What do you make of the the price drop yesterday and the CFO change?
Thank you for reading and the kind words! My biggest concern is why the CFO wasn’t dropped earlier (though the new CFO, Jaz, is excellent) - he seemed to be the least engaged manner of the executive team and was clearly in over his head to an extent. That said, the other issues all seem to be short term. The company still has more than enough cash to operate for a long time, a credit facility that can be drawn upon if needed, and otherwise no outstanding debt. The issues seem to be short term and should subside within a year. The company will still grow this year and yet is trading at a negative EV and a $14M market cap. Last year the company did $17.5M in OCF (after adjusting out software development costs and SBC) and I believe they still expect to grow this number. If it was trading at a 25x+ cash flow multiple I would be concerned. Also worth noting that the new release slate seems to be taking very well as it’s floated on social media. Given the overreaction in the price (and the fact that I have a time horizon longer than 1 year) I’m much more bullish than I was before
Definitely understand your bullishness considering you liked the company at multiples of the current price. But what do you make of their trading update suggesting possible earnings compression from a "lower contribution from platform deals" - do you know how those deals work? The wording seems to suggest that the platforms are squeezing tinyBuild on price... where does the power dynamic lie here?
What I'm trying to get to is what the sustainable earnings are here, after this trading update. They mention that cash will be between $10m and $20m by year-end, suggesting some combination of lower earnings and higher development spend / acquisitions. Now the future investments don't worry me considering that's their business, but the potential revenue / earnings decline does.
And one more question... if 77% of revenue comes from owned-IP, how does that tie to the revenue breakdown showing $26.9m owned IP, $13.1m third-party IP and $22.7m development services? Is the right way to look at that by assigning a portion of the development services to own-IP? I wasn't quite clear how those two revenue definitions tie together.
The actual economics of the platform deals are pretty opaque (from what I could find). That said, the lower contribution is not from a worsening of terms, but rather the large console makers shifting their focus (at least for now) towards AAA games and their own content
It’s hard to say exactly where sustainable earnings will shake out, but at 1x EV/FCF even if they are cut by 75% you’re still only pay on f 4x EV/FCF - price is key. The upcoming release cadence also skews towards the back half of 2023 and early 2024. This could very well lead to positive (even if modest) growth depending on the success of the releases
Yes, development services is incorporated into the 77% owned-IP figure. At this point nearly all of the development services revenue is owned-IP. Over time this figure as a percentage of total revenue should continue to increase as the company focuses more and more on owning the IP
Yeah totally agree the price makes a massive difference. Just trying to get a feel for the power dynamic and what a shift towards AAA games means exactly... does that mean they won't list tinyBuild's new titles, market them less, not include them in bundles...?
Thanks for the confirmation on the development services, and as you say in your write-up the shift to owned-IP is certainly the sensible (albeit more capital intensive) approach.
Aah now it makes sense, so its more like EV/OCF ( with some adjustments). Maintenance Capex is hard to calculate here. I would always add SBC in any Cash Flow calculation because its a necessary capex.
Interesting write up. I'm coming at this from a slightly different angle as my entry point was my best guess at cash in the bank- about 9-9.5p per share.
There's obviously some dysfunction in the senior leadership here and the accounting is on the aggressive side for my tastes and quite poorly communicated, but my best guess is that there's actually a business in here worth perhaps 1-1.5x sales so I like the upside on what's basically a coin flip at the price I got in at.
My only concern here is fraud- the CEO fits the profile, the accounting hygiene doesn't inspire confidence and the CFO just left abruptly. Do you have a view here? I'm optimistic that this is just incompetence/exuberance but ideally you'd like to see a grown up in the room.
Thank you for reading! I’ve followed the company for a little while now and the CFO was noticeably the least engaged member of the executive team. My biggest concern coming out of the recent announcements would be why they didn’t part ways. I have no reason to believe that the CEO is acting nefarious in any way. Obviously don’t love the accounting change but the company has been very clear and communicative in what they’re doing, though worth watching going forward
Not a pretty trading update today! Thanking my lucky stars I got out of this a few weeks ago after working out what they were doing with capitalised R&D spend and extending amortisation lives. Not fraud per se but pretty egregious accounting chicanery. High probability of a donut here.
This has historically been for acquihires. It was done in a way that was problematic but has since been corrected. They will still dilute when doing acquihires in order to align incentives but will not otherwise
A little over a year on, what is your assessment (is post-mortem too strong a term?) of what went wrong here and how you might have figured out this was coming?
Great write-up Spencer. I think you covered the company and investment thesis very well. Only thing I'd mention is that I don't think they're looking to use micro-transactions as part of their GaaS model - these are pretty widely hated by gamers. Instead, their focus is on making games that can be played for >100 hours, with ongoing updates that bring in new players for many years.
I really appreciate the kind words James. The point I was trying to get across is exactly what you said - more towards the longevity of the games and ability to continue monetize with low incremental cost to the company. In (very quick) hindsight probably not the best example on my part. Thank you for clarifying for readers!
In this case they are more comparable to Paradox Interactive where longevity of their games is core to less volatility and a long earning streams ( sometimes over 10 years)
Great structure of the writeup, appreciate it and cant wait to hear more from you.
Thank you for reading and the kind words Miłosz- they’re greatly appreciated!
Where do you go about buying this stock? I can't seem access to it on interactive brokers.
It’s under the ticker 8Z3 on the Borse Frankfurt exchange (which shows up as the FWB2 option on IBKR)
To see the bid/ask you have to go to the exchange website: https://www.boerse-frankfurt.de/equity/tinybuild-regscat3-dl-001
From there IBKR has some weird rules about putting in bids so you will probably have to call to get restrictions removed (which they’ll do pretty painlessly but you have to get on the phone)
Much appreciated! Btw, I’m really a fan of all the work you put together so far!
No problem. Thank you for reading and the kind words! Very much appreciated!
Thanks for the writeup. how do you think about
1) acqui-hire dilution? their acquisitions are done on a fixed monetary amount. thus as their stock price falls their dilution becomes heavier and heavier. you can see it clearly in the explosion of their outstanding share's.
2) related party transactions between founder and wife?
Happy it was of interest. Thank you for reading!
The acquihire dilution was initially my biggest concern. Clearly that structure misaligns incentives. The CEO realized this and changed it. Going forward acquihires will not use this structure
The RPTs are related to DevGAMM. The CEO’s wife (Lerika) owns 51% of DevGAMM with tinyBuild owning the other 49%. Everything is above board and well documented. It’s also worth noting that if Lerika were to depart from DevGAMM for whatever reason there is a mechanism that transfers ownership back to tinyBuild
would you know if the dilution is done though? is any thing else coming down the pipe?
From my understanding dilution from the already completed deals is done and management took steps (of which I do not have details at the moment) to decrease the dilution from them
There have not been any more acquhires recently so there is no imminent dilution at the moment
That said new acquihires will still be done with an equity component - not contingent on a set dollar amount. This will be in order to align incentives with the new development teams coming in. Like with any rollup-style strategy you have to trust management’s ability to create more value than they dilute with these deal
Thanks for the write-up. What's your view on the 35m internally generated software asset? If I were the founder I will probably expense those and save some tax expense.
Thanks for reading! The company initially recognizes these as assets before they are monetized and proceeds to expense them as the games are released and monetized. I think this is probably the best/right way to do it. Most importantly they lay it out very clearly and are consistent in how they apply it
Thanks for the comment. There are lots of things I like about the company (honest / fun / young management, buy-and-build stype, good potential, profitable, no debt). Basically the only two things I feel slightly uncomfortable is:
1. The internally generated software, They also changed accounting rule from 1-2 year amortisation to 3 year 40/35/25. I find it slightly aggressive and would prefer to expense that and save the 4m tax.
2. Back in IPO time, founder decided to sell quite some shares, though still holding ~35%. Tinybuild can be better capitalised if the founder can sell less.
Happy to get your view in case you have more information. Nice write-up!
No problem! Happy to help with any questions
Management believes the new amortization policy more accurately reflects the economic reality of the monetization of the software. This is obviously subjective but seems to be fair. As long as it stays consistent from here I personally don’t have a problem with it. I believe honesty (which is again subjective in this case) is more important than saving a few dollars on taxes
As I addressed, the CEO intends to buy more shares (after a vote at the AGM allows him to) and up his ~38% stake to over 40%. On the subject of seeking shares at the IPO I encourage you (or anyone else) to consider this quote from the book Lessons from the Titans: “My aha moment came during a meeting with former CEO Nicholas Howley and a Trans Digm investor. In an effort to knock Howley off balance, the investor forcefully asked him why he should believe in the company following Howley's recent sale of millions of dollars of stock. Howley stunned me when he sat up in his chair, put his elbows on the boardroom table, looked the guy in the eye, and said: `This may come as a surprise to you, but I'm in this for the money. I haven't had many chances to sell stock under private equity ownership, and now I do. My wife wants a beach house. So we're gonna get a beach house. You can believe what you want, but I'm not going anywhere. I've got more money to make, and if you choose to, you can make it with me.’”
Loved the write-up. Keen to market-test the product (for investing purposes of course!). What do you make of the the price drop yesterday and the CFO change?
Thank you for reading and the kind words! My biggest concern is why the CFO wasn’t dropped earlier (though the new CFO, Jaz, is excellent) - he seemed to be the least engaged manner of the executive team and was clearly in over his head to an extent. That said, the other issues all seem to be short term. The company still has more than enough cash to operate for a long time, a credit facility that can be drawn upon if needed, and otherwise no outstanding debt. The issues seem to be short term and should subside within a year. The company will still grow this year and yet is trading at a negative EV and a $14M market cap. Last year the company did $17.5M in OCF (after adjusting out software development costs and SBC) and I believe they still expect to grow this number. If it was trading at a 25x+ cash flow multiple I would be concerned. Also worth noting that the new release slate seems to be taking very well as it’s floated on social media. Given the overreaction in the price (and the fact that I have a time horizon longer than 1 year) I’m much more bullish than I was before
Definitely understand your bullishness considering you liked the company at multiples of the current price. But what do you make of their trading update suggesting possible earnings compression from a "lower contribution from platform deals" - do you know how those deals work? The wording seems to suggest that the platforms are squeezing tinyBuild on price... where does the power dynamic lie here?
What I'm trying to get to is what the sustainable earnings are here, after this trading update. They mention that cash will be between $10m and $20m by year-end, suggesting some combination of lower earnings and higher development spend / acquisitions. Now the future investments don't worry me considering that's their business, but the potential revenue / earnings decline does.
And one more question... if 77% of revenue comes from owned-IP, how does that tie to the revenue breakdown showing $26.9m owned IP, $13.1m third-party IP and $22.7m development services? Is the right way to look at that by assigning a portion of the development services to own-IP? I wasn't quite clear how those two revenue definitions tie together.
The actual economics of the platform deals are pretty opaque (from what I could find). That said, the lower contribution is not from a worsening of terms, but rather the large console makers shifting their focus (at least for now) towards AAA games and their own content
It’s hard to say exactly where sustainable earnings will shake out, but at 1x EV/FCF even if they are cut by 75% you’re still only pay on f 4x EV/FCF - price is key. The upcoming release cadence also skews towards the back half of 2023 and early 2024. This could very well lead to positive (even if modest) growth depending on the success of the releases
Yes, development services is incorporated into the 77% owned-IP figure. At this point nearly all of the development services revenue is owned-IP. Over time this figure as a percentage of total revenue should continue to increase as the company focuses more and more on owning the IP
Yeah totally agree the price makes a massive difference. Just trying to get a feel for the power dynamic and what a shift towards AAA games means exactly... does that mean they won't list tinyBuild's new titles, market them less, not include them in bundles...?
Thanks for the confirmation on the development services, and as you say in your write-up the shift to owned-IP is certainly the sensible (albeit more capital intensive) approach.
It’s hard to say exactly. We’ll have to see how it plays out over the next year or so
I agree - definitely more capital intensive but the right decision in the long-term. It also creates a greater runway for reinvestment
How is your FCF calculated? Did you include SBC and development capex?
Hey,
I add back bot development costs and SBC in the calculation
Aah now it makes sense, so its more like EV/OCF ( with some adjustments). Maintenance Capex is hard to calculate here. I would always add SBC in any Cash Flow calculation because its a necessary capex.
Thank you for an interesting read. The stock performance over the last two years is a shocker.
Thank you for reading. The stock price has performed awfully. I believe it is greatly out of line with the performance of the actual company
Interesting write up. I'm coming at this from a slightly different angle as my entry point was my best guess at cash in the bank- about 9-9.5p per share.
There's obviously some dysfunction in the senior leadership here and the accounting is on the aggressive side for my tastes and quite poorly communicated, but my best guess is that there's actually a business in here worth perhaps 1-1.5x sales so I like the upside on what's basically a coin flip at the price I got in at.
My only concern here is fraud- the CEO fits the profile, the accounting hygiene doesn't inspire confidence and the CFO just left abruptly. Do you have a view here? I'm optimistic that this is just incompetence/exuberance but ideally you'd like to see a grown up in the room.
Thank you for reading! I’ve followed the company for a little while now and the CFO was noticeably the least engaged member of the executive team. My biggest concern coming out of the recent announcements would be why they didn’t part ways. I have no reason to believe that the CEO is acting nefarious in any way. Obviously don’t love the accounting change but the company has been very clear and communicative in what they’re doing, though worth watching going forward
Not a pretty trading update today! Thanking my lucky stars I got out of this a few weeks ago after working out what they were doing with capitalised R&D spend and extending amortisation lives. Not fraud per se but pretty egregious accounting chicanery. High probability of a donut here.
Looks like they have track record of dilution
This has historically been for acquihires. It was done in a way that was problematic but has since been corrected. They will still dilute when doing acquihires in order to align incentives but will not otherwise
A little over a year on, what is your assessment (is post-mortem too strong a term?) of what went wrong here and how you might have figured out this was coming?