Tiny: Will New Management Be Able to Turn Things Around? (TSXV:TINY:CA)

I discussed Tiny (TSXV:TINY:CA) (OTCQX:TNYZF) once already:

At the time, Tina’s stock was trading at around $2.70 per share (all numbers will be discussed in Canadian dollars, as reported by Tina). Today, the stock fell over 40% to ~$1.60.

As part of my analysis, I gave the stock a “Hold” rating. I cited its shrinking margins and lack of catalysts as reasons for hesitating to buy the stock.

As a reminder, Tiny operates as a majority acquirer of niche, profitable businesses. The company initially started as a design agency called Metalab, which is still part of Tiny’s portfolio. The founders used the cash flow generated by the design agency to go out and acquire other businesses to add to their growing portfolio.

In this analysis, I’ll discuss my key takeaways from Tina’s second-quarter financial results, including management changes and adjusted focus. Ultimately, I’ll recommend another “Hold” rating on the stock.

New management

The most significant change for Tiny over the past few months has been a change in leadership. Historically, the company has been led by co-founder Andrew Wilkinson. Wilkinson’s tenure as CEO, at least when the company was publicly traded, was disappointing to say the least. Tiny went public on the TSX Venture Exchange in Canada in April 2023 as part of a merger with WeCommerce. At the time, shares were trading at ~$4.50, before falling to ~$2.60 in June. At the time, Tiny announced that Wilkinson would be stepping down as CEO.

Wilkinson was replaced by Jordan Taub, a former WeCommerce executive. While Wilkinson’s career was largely based on his time at Tiny, Taub’s experience is multifaceted. Before WeCommerce, Taub worked at Constellation Software (OTCPK:CNSWF) and KPMG. Taub’s time at Constellation Software is particularly notable given that Constellation is arguably the most widely viewed serial acquirer of vertical software companies in the world. I think it’s no coincidence that Tiny chose someone with such experience to lead the company in its latest chapter of rebuilding.

In addition to the CEO change, Tiny has also named Mike McKenna the company’s new CFO. McKenna joins with a background in M&A and capital raising, including as head of technology, media and telecommunications at ScotiaBank. Once again, it’s no coincidence that Tiny has chosen to appoint a leader with a strong M&A background.

Focus on paying off debt

Despite the appointment of two new executives with M&A experience, it looks like M&A activity will be on the back burner for now. Taub made it clear on his recent earnings conference call that paying down debt will be his top priority going forward. I’ve highlighted a few of his statements from the conference call below to highlight their clear importance to the new management team.

• “I would also like to highlight that we paid down approximately $16 million of debt this quarter, and our net debt is just under $100 million.”

• “You will see our commitment to debt reduction and balance sheet management in the coming quarters, which will give us greater flexibility to operate and execute our acquisition strategy.”

• “Ultimately, EBITDA and cash flow are very important to this company as we think about servicing debt and finding opportunities to reinvest capital.”

• “Certainly, having heard from many investors and analysts who cover the stock, there was a desire and hope that we would provide more information on our ability to service our debt. That’s important both from the perspective of our own operations and to ensure that we’re providing investors with good quality information.”

• “We want to make sure we are appropriately servicing the debt that we had and making meaningful principal payments.”

• “We want to make sure that we’re paying down our debts, you know, both on a planned basis and voluntarily. Now that we have that, that’s kind of a long-term key metric at North Star that we’re focused on.”

• “I simply wanted to underscore our commitment to balance sheet management, showing that we pay attention to our debt levels.”

• “We paid down $16 million of total debt this quarter. And that’s generating significant interest savings for us. We’re committed to continuing to do that. We have both scheduled and voluntary payments, and I’m looking forward to just continuing to report on that.”

• “I will emphasize again that we have already mentioned this several times in the presentation, but our focus is on managing and reducing the level of debt.”

• “Right now, our focus is on paying off debt.”

I mention all these different cases not for repetition but for emphasis. It is clear that Tina’s debt levels are top of mind for the new management team and will be their top priority going forward. This is the main theme I took away from their earnings conference call.

For equity investors, this pressure may seem daunting. Tiny has reached a point where it is burdened with too much debt to maintain optionality for strategic acquisitions. Given that they describe themselves as strategic acquirers, it is disappointing to hear that acquisitions will be on the back burner, at least for now. And when you consider that they generated only $14 million in cash from operations over the past year, I fear that this could be a very long way down the road.

Priority for recurring revenue

During the earnings call, Taub and McKenna also made sure to emphasize their focus on recurring revenue across their business, noting that they had $9.6 million in annualized recurring revenue in Q2. That’s about 20% of their $50 million in total revenue for the quarter.

It’s no wonder that the new management team wants to focus on growth and recurring revenue. After all, those are typically valued at the highest multiples. However, I have to point out that Tiny has still taken a somewhat unconventional path to get to where it is today. As I mentioned earlier, they started out as a design agency. It wasn’t until the design agency became successful that they moved into the software industry. In many ways, I feel like Tiny is just looking for the next shiny ARR object to catch their eye—regardless of whether it fits their expertise. Plus, given that recurring revenue still only makes up 20% of their total revenue, it could be a long time before Tiny shares see any tangible expansion in multiples due to the larger share of recurring revenue.

Also, I find it interesting that they brought this up as a priority during the earnings call. How do they expect to capture more ARR when they are clearly focused on paying down debt?

Finances

Tina’s latest financials continue to tell an interesting story. Their second-quarter revenue grew 7.4% year-over-year. That’s significantly lower than the year-over-year growth in the previous quarters, which were 34.7%, 31.8%, 23.5%, and 41.6%, respectively. Over the last four quarters, the company generated $201.6 million in revenue—topping the $200 million mark for the first time.

On a GAAP basis, they generated a $2.1 million net loss in Q2. Their results weren’t much better on a cash basis, as they only generated $700k in cash from operations. One of the largest items on their financial statements is a $20.1 million debt paydown in the quarter. However, when a company is barely generating cash, paying down debt at that rate is unsustainable. Add to that the fact that they only have $22.4 million in cash and marketable securities on their balance sheet, and a grim picture of Tina’s financial health is being painted.

When I look at Tina’s financials, I’m bewildered by what I see. If you asked me what kind of company this is, I doubt I would ever suggest that they are serial buyers of niche, profitable businesses. Of course, you would expect that such a company would actually have free cash flow, or at least cash on the balance sheet to show for its work, right? Unfortunately, that’s not the case with Tina. At this point, they’re in a tough spot—one that I, as an investor, would be hesitant to touch.

Quotation

Tiny is currently trading at an EV/Revenue multiple of 1.9x, which is close to an all-time low.

As I mentioned in my last analysis , this may sound cheap, especially given their self-proclaimed brand as buyers of software companies – an area that typically yields much higher multiples. But when you look under the hood and realize that only ~20% of their revenue is recurring, you start to understand that they shouldn’t be valued like a software company. Add to that the fact that Tiny’s growth has stalled, and I start to wonder what investors are actually paying for at this point.

As part of my latest analysis, I also compared Tina’s valuation to Constellation Software’s valuation. Constellation currently trades at an EV/Revenue multiple of 7.5x. However, I used Constellation’s multiples more as a valuation ceiling for Tina than anything else. Of course, it goes without saying that Constellation’s business is much more valuable on an absolute and relative basis, and it’s to be expected that Tina’s multiples are much lower than Constellation’s.

Two Wall Street analysts covering the stock have given the company a “Hold” rating. Together, they set an average price target for Tina of $2.13.

That price target implies significant upside potential, but I’d be hesitant to take it at face value. Tina’s stock is down almost 30% in the past month. In fact, a month ago, the stock was trading at ~$2.20 per share, which is actually higher than the average analyst price target. The question is whether the analysts have recently updated their price targets, or if they haven’t updated their current targets yet.

Markets reacted poorly to Tina’s second-quarter earnings release. Given that year-over-year revenue growth jumped from over 30% to 7% in a single quarter, I believe the reaction was appropriate. As such, I believe Tina stock is currently fairly valued.

Application

Tiny’s business model sounds simple on paper: acquire niche, cash-flowing companies and reinvest the cash to acquire more of those companies. But Tiny has found that in practice, that’s much harder.

Investors should keep an eye on Tina’s ability to pay down its debt in the coming quarters. Management’s ability to achieve this goal will be their first real test in the public markets. Depending on how well they can execute their plan, that will likely dictate the stock’s future trajectory. In the meantime, I recommend waiting on the sidelines, hence my “Hold” rating.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.