I will try not to repeat too much from my previous Straw, but I will be relying on this one below for more of my long-term thoughts about the thesis so have included some info again:
In FY21, Tinybeans boasted overall revenue growth of 102.1%, to now US$8.04m. The company’s losses of $3.05m were ~35% improved on the prior year. Tinybeans has 5.1m registered users, and 4.33m monthly active users (MAU). Currently, 84% of revenues (US$6.75m) are from advertising, as compared to US$2.95m or 74% in FY20. All other revenue segments did grow:
Photobook revenue up 14.5% to $236k
Subscription revenue up 22.7% to $859k
“Other” (mostly e-commerce partnership) revenues up ~57% to $194k
Management updated investors recently by way of company presentation, declaring their intention for ‘consumer revenue streams’ to comprise 50% of total revenues within 1-2 years. Basically, the change that will catalyse this is the introduction of what they are calling their “Beanstalk” subscription, whereby the previous free +/- premium model will be abolished in favour of a paid, subscription-only model (free trials will be offered to new and existing Tinybeans subscribers).
Customer Subscriptions:
Management recognises that there will likely be a reduction in monthly active users based on the changes in billing, however the recent presentation confirms only 24.4k users are currently paid subscribers at end 4Q21 (I do apologise, my math previously in RiskReward was off by a factor of 10). At only 10% uptake from the existing monthly active user base, this direct subscription revenue would be 20x upon implementation. The company presents that early results (on small sample size only) indicate around 23% conversion from app download to paid subscriber. Applying 23% to the existing MAU and multiplying by the US$40/yr offer implies subscription revenues ~US$39.8m per year. Remember, using the AppStore means Apple/Google will usually take their 30% / 20% cut respectively, so perhaps ~$27.9m GP only. To my mind, this forms a hard maximum number over the stated 2 year period though, given that the earliest responses to any change such as this one will more likely be positive responses.
I am seeing a number of concerns raised on the AppStore reviews section, as well as a couple elsewhere that essentially describe the app being outdated, glitchy, slow, frustrating and unreliable (consistent crashing); the customer service team is broadly described as inadequately responsive. A large proportion of these are older reviews but the problem seems to re-emerge after an update in ~June 2020. My core question here is, would the existing user base that have had trouble with basic functionality for years now not be super hesitant to become paid subscribers? My gut feel is that this could be an issue, though if the app has genuinely improved under the new release/rollout, the free trial period for this existing user base should allay some of these fears on the user end.
Following the acquisition of RedTricycle (Feb, 2020), the company states that they have now fully integrated both the original Tinybeans platform and the RedTricycle content into a single, combined product. I had thought about the difference between the previously RedTri users and previously TB users and their experiences and wondered whether there would be a divergence in uptake from those 2 groups, and part of me does wonder whether those who were simply reading articles and other content on RedTri would pay for a subscription to continue accessing this. My hope is that the community focus of the combined offering will offer enough engagement to get some material proportion of users over the line (and again a trial period should help with this). Management have outlined their vision previously for the full functionality of this suite in a presentation to investors from September 2020 (pg 11: September 2020 Investor Presentation)
To my mind, 10% conversion sufficiently proves that TB have a serious offering, if uptake is materially less than this I would start to worry. Any less than this also, and it looks as if it will be difficult for the company to achieve their stated milestone of 50% revenue from customer income streams by end FY23. Strawman user @Shivrak offers some technical points for consideration surrounding the rollout.
You can follow Shivrak here, and I strongly suggest that you do. You can also find their report and like the original content pasted below, where the credit is entirely due.
“One thing I do worry about is the soon to be renamed/rebranded RedTri platform, specifically in terms of how they handle redirects and traffic drop off. In my experience, this can get really ugly if not done right and with proper care. Given Q2 is typically the strongest quarter for Tinybeans, this and other platform changes occurring at the start of the quarter might be their way of masking some of the ugliness in traffic/MAUs, etc., so definitely a risk to watch out for.”
“Having said that, the new combined platform has an overhauled advertiser’s portal, which if built well and properly tested may prove to mitigate some of this risk. We know, for example, that the new app will have a much better content integration and experience – most of it mirroring RedTri content, so some of the traffic they lose on the site should get an uptick up on the app and new Tinybeans web app.”
I am reliably informed by other members that the ‘go-live’ here is October 4th, so hopefully we are able to get some feedback from the implementation relatively quickly.
Marketing:
In terms of UX, when you open your Tinybeans app you are taken to what essentially amounts to a newsfeed. The app will prompt you to update any formative milestones which have not been attended to for a while (including rudimentary data such as height, weight, etc.), offering links to news articles or helpful tips regarding parenting or the health and wellbeing of your child, memories of previously posted content, alerts that help you navigate the app, and of course ads. Much of the content links to a red-tri url and carries the Red Tricycle masthead along with the Tinybeans logo. These articles contain ‘linked articles’ for you to continue reading as well as embedded ads. Many of the articles actually promote products directly, complete with links to Etsy or any number of TB’s other partners… the old ‘ads disguised as news articles’ strategy, nice.
Advertisers with Tinybeans know what they are getting - a community of loving parents with young children who have concern for their safety, privacy and wellbeing. Email updates are often being sent to the real cash cows if you’re selling something for young ones: grandparents, and email marketing remains thought of as the most effective for generating ROI (source: https://www.webstrategiesinc.com/blog/how-much-budget-for-online-marketing-in-2014). The user base should be highly aligned with the target market for certain advertisers (Lego, Huggies etc.) and there is undoubtedly value in the understanding that this spend will be relatively efficient in reaching the intended audience. Linking the advertisements to formative milestones also shows that management have certainly thought about things here, and some of the formative milestones themselves are actually quite clever. For instance, when I opened the app this morning, it asked whether my child (which they are yet to figure out is not a human, rather a red and white heat pack made of rice) has fine motor skills to line up blocks as yet. Extra points with advertisers by TB identifying what toys my child is likely to be playing with.
A core feature of what Tinybeans sells to the user is trust, and any skepticism that users begin to show of this may lead to the withholding of data points that are critical for targeting the audience. The company’s tag line to users is below:
“Share memories, not data. Keep your kids’ identities safe with an app that puts privacy first,” see: here.
Of course the tag line within the advertising partnership reads very differently:
“Hyper-target your message in a trusted environment to engage the right families with your product, exactly when they need it,” / “93% of members will purchase a product or service Tinybeans recommends,” / “Target your message using 30+ first-party data points,” This is based on “robust 1st party data to target the right consumers with the right product at the right time,” see: here.
Notably, consumer trust within the network is a selling point for advertisers as well as being a driver of user engagement. But here is really what I was looking for - strategy and insights for brand partners (appendix attached), or see: here.
“Connect the dots by combining a mix of research, consultancy, and creative thinking to help solve your business challenges and inform go-to-market strategy.”
The core value proposition of digital marketing is the propensity to engage with in-depth data and analytics, offering advertisers information that they might not otherwise have been able to identify about their ideal or target customer. Digital advertising agencies and even the analytical tools offered by Facebook, Google, Apple etc. lead to advertiser discussion of ‘personas,’ or a highly pinpointed picture of who an advertisement is designed to be speaking to including name, age, occupation, income but also things such as hobbies, favourite foods, the type of car they drive and more. This allows advertisers to remain hyper-focused throughout the process of creating content, and encourages more precise methods of analysing the effectiveness of any campaign, in real time.
Armed with this information, existing advertisements can be better targeted to an audience where they are better received, or alternatively, the knowledge that your recent campaign has received better engagement with one segment of customers may lead you to direct your next campaign at a demographic that has poorly responded to the current one. Budgeting for digital marketing campaigns are significantly more flexible, meaning that underperforming marketing spend can be recognised and stopped far more quickly. Likewise, particularly effective campaigns can be extended based on engagement feedback that is available far more quickly than would be the case via traditional methods.
It's hard to tell just yet the extent to which this kind of shift towards digital marketing changes the way that advertisers are allocating their budgets, but certainly throughout the trouble that was being had last year, it was beginning to look as if digital marketing spend might actually be significantly less discretionary or cyclical than traditional marketing spend has always been. If we consider that digital marketing methods form a more rigid or ‘core’ component of marketing budgets for advertisers, with traditional advertising being more variable or discretionary, it is important to be able to identify where on this scale advertisers see their spend with Tinybeans. Digital marketing has been estimated by Forrester at 46% of all marketing spend in 2020.
So what data does Tinybeans have on you, the user? Well, my iPhone tells me that the app has access to my email address, name, user ID, device ID, location and retains user data governing “product interaction, advertising data and other usage data” as well as “other sensitive info.” Tinybeans’ privacy policy states that information will be collected to specifically identify me, including my name, address, date of birth, photos, credit card information, and information from cookies including ISP data, operating system, the type of device I am using etc. This all seems pretty standard, and the policy does offer express confirmation that data (anonymised or otherwise) will not be sold.
The company advised that it currently has 95 $100k+ orders on their books, and as of recently their first $1m+ order. Last year, this number was 13, on which they executed 11 orders in excess of $100k. All up, this looks like confirmation that Tinybeans will do at least $10m in marketing revenues for FY22. It is probable that some of these 'new' orders over $100k were customers in FY21 so this is not necessarily $10m in excess of the $6m the company reported last year, though I think this number a reasonable approximation if the company has the staffing capacity to be signing up smaller advertisers throughout the year.
The new partners that have been flagged in the recent presentations alongside the RedTricycle acquisition seem much more general in nature (Apple, Amazon, eBay etc.) so it's possible we will see some changes to the mechanism of advertising monetisation. My initial thought was that articles and other RedTri content would show ads that are far less targeted than those within the TB homepage feed (and this confirmed looking around the site), though these articles I would guess will be the key driver of engagement with direct e-commerce as well.
The results released recently are well in line with expectations ($2.6m total revenue for 1Q22), right ahead of the change in customer model but it seems to confirm that marketing revenues for the full year will be coming in well ahead of $10m or at least 30% higher than FY21.
Direct e-Commerce and Photobook:
Certainly the company’s privacy policy indicates to me that the app is able to use clickstream to identify when web traffic generated by Tinybeans via an article or advertisement leads to purchase on an advertiser’s site. Direct e-commerce revenues have increased from around $30k last year, to $194k this year. This is broken down further, the 4Q21 amount being around $50k compared to 4Q20 at $20k (or $0, 4Q19) - I assume this segment launched around Q3 of FY20. If this revenue is linked to product purchases from RedTri recommendations/articles, I think we can assume the same seasonality as Photobooks revenue, peaking in Q2 of every year for Christmas. For this reason, I don’t think 4Q21 revs being approximately ¼ of the FY number indicates that segment growth has stalled.
I still see this in conjunction with marketing revenues as the core value proposition to advertisers which I argue will generate most of the margin for the business going forward. Firstly, CAC is lower for marketing than it is selling services, and no pesky take rate from the app stores! Secondly, the recent update defined 'customer revenue streams' as being inclusive of direct e-commerce partnerships. Even management's most optimistic showing of the new sub-only model has partnerships through advertising / direct e-commerce at well over 50% of revs.
Photobook revenues, it can be seen, are becoming increasingly of less significance to Tinybeans. I assume that they will continue with this offering as it is such a low friction addition to the product suite, though sales are heavily skewed to Q2 and are historically quite lumpy.
Competitors:
Mixi FamilyAlbum (see: here) is the first (promoted) option available on the Apple app store and has 12k reviews, compared to Tinybeans 19k. It is free, and includes much of the same basic functionality as Tinybeans including enabling purchases of the same Photobooks, as well as personalised prints or DVDs. Grandparents and other family and friends can be added to an email list for all updates and everything that you want to share with them. FamilyAlbum does not have functionality to record formative milestones or share any of the articles offered by TB’s acquisition of RedTri, though it does have functionality for comments and direct interaction from family.
Mixi, inc. (TYO: 2121) is a Japanese social media company that in 2021 recorded Y119B in revenue (or US$1.08b), currently holding Y131b (~US$1.19b) in cash. Group revenue and active user base at Mixi has been declining since 2017 when it was Y200b, though the FamilyAlbum segment seems still to be growing, recently celebrating over 8m registered users (some 60% more than TB) by 2020. At least 70% of these are monthly active users, reportedly using the site at least once per week (read: here). I can’t help but shudder at the cash warchest Mixi have available if they were to decide that TinyBeans is a direct threat to their fast-growing FamilyAlbum segment.
The existing library content that is held within the TinyBeans platform should prove some barrier to switching, however it’s worth pointing out that the free +/- premium model existing TB users have grown accustomed to can be accessed by those willing to make the switch. If Tinybeans can retain its feel of a more diversified and extensive product offering this may be enough to hold off competition for the most part, though I assume that there will be some not insignificant churn to FamilyBook at the point of premium-only implementation.
It may be noteworthy that Mixi in 2008, tried updating its terms of service to grant Mixi unrestricted ownership of all user generated content, though it seems this policy was never implemented due to customer protest (read about Mixi: here). Again, we are back to the importance of privacy and trust.
In addition to the direct competition from FamilyAlbum, other competition will come from indirect sources such as features of other social media or content sharing applications. For instance, you can make Instagram posts private. Google Photos, Amazon Photos, Flickr all have the same sort of ‘private’ photo sharing functionality but are they all super reputable re: privacy? Perhaps not. Dropbox can be used, though this seems significantly impersonal and there is a level of computer literacy required for family members then looking to access files. All these tend to lack functionality around specifically emailing updates to family members, as well as formative milestones, additional content etc.
General photo sharing apps that could be used include Cluster, Memories, PhotoCircle, Mypics or Photomyne. 23Snaps, Nana, Backthen, Notabli, Wonder Years all focus on family photo sharing though seem to have minimal engagement on the app store. Camera and imaging equipment company, Canon, inc. (TYO: 7751) had a subsidiary named LifeCake offering similar services in the UK as a way of capturing data regarding user device preference. This service did at one point reportedly reach 1m users, though closed June 2020. Read about Tinybeans, Mixi and Lifecake: here, the idiosyncrasies in revenue model is touched upon also.
Now that we are moving to a subscription only model for Tinybeans, as investors we need to accept that either privacy or the additional Red Tricycle content make the app sufficiently better than competition that users will pay for it. I am undecided as to what extent I believe this is the case, but the users will decide and I eagerly await update from the company.
Management and Remuneration:
The company’s managing director and CEO is technology and seed investor Edward (Eddie) Geller. The story goes that through his involvement with Australian technology sector accelerator program, PushStart, Eddie came across the origins of the Tinybeans project and instantly fell in love with it, initially in his capacity as mentor and investor before taking the opportunity to lead the company from March 2014. Eddie previously founded a software and management consulting business called UniqueWorld in 1999, serving as CEO for 12 years prior to the business being sold in 2011 to Jacobs Engineering Group. It seems he is the only executive director of the business currently, in addition to 4 non-Executive directors currently serving on the board.
Eddie in some places is listed or recognised as a co-founder of Tinybeans (including his own LinkedIn profile), however he is not mentioned as such within the last annual report and it does seem slightly at odds with the story on Tinybeans’ website that he met the co-founders in 2012. The ‘other’ 2 co-founders both have their ‘start dates’ on LinkedIn as November 2011.
The story of the company’s origins as explained by co-founder and former Chief Technical Officer, Stephen O’Young can be found: here. Essentially, the web dashboard in 2011 was developed as a way of tracking formative milestones for children, this went live as it was at the time, gained a few hundred users and then ‘gathered dust,’ not given much more thought than that for a little while. In around 2014, a photo-sharing app was written and launched at the same time as Eddie took over as CEO - I guess this is the point at where Tinybeans really became recognisable as a business, despite earlier existing in some form.
The third co-founder and former Head of Marketing is Sarah-Jane Kurtini, whose background is mostly in marketing and social media strategy consultancy. Kurtini left Tinybeans in February 2020 before co-founding remote team-building startup, Ketchup with Stephen O’Young. O’Young had also resigned from the board and left the company as of May 2020.
Information regarding the board and other key management personnel can be found on the Tinybeans website. The team includes Chief Marketing Officer, Allison Musmand who was formerly head of Marketing for Amazon Prime. Chief Financial Officer, Chris Motsay has previous experience as Senior VP (Financial Planning and Analysis) at Viacom and CFO of El Rey Holdings. Chief Product Officer, Kyle Martin, was previously Chief Product Officer of image recognition software company, Slyce. This might explain the observation made on here earlier that an administrator of the community page was listed as a Slyce employee, it does not appear from Martin's LinkedIn page that there has been any overlap in employment.
Remuneration for Eddie Geller in 2020 came to a total of A$527k, or around 1% of the company’s total market cap. This is just under 5% of FY21 revenue, though the growth of the company is fast scaling this down. With the second executive position (previously Stephen O’Young) no longer occupied, it seems the cost of the board including options is around A$1m per year ongoing, or around 9% of FY21 revs. Bonuses for the last 2 years have formed only a small component of total board remuneration, and are applied to executives at the discretion of the board.
Apple Guides, Miscellaneous and Valuation:
Tinybeans is also using the newly released Apple Guides as a way to interact with customers and potential subscribers outside of the core application. Apple Guides is a recent addition (from iOS14 and onwards) to the functionality of Apple Maps, designed to help users explore and experience a location that they may not be familiar with. The functionality provides ‘recommendations’ for the best places to visit in a city, offering up suggestions on places to eat, shop, and explore. Tinybeans boasts over 80 partners and 1000 guides, being the 5th most read on the platform by total views. It is unclear if this is driving direct e-commerce revenues for Tinybeans or whether it is a ploy to increase engagement, web traffic and exposure for the core offering, however it does seem to be reaching the intended user base with the desired effect.
Tinybeans has recently added pets to the app as pets increasingly become considered almost equal to humans in most families. This should overall increase user engagement with the app, and gives an opportunity to onboard a slightly different advertising customer but I doubt very much this will drive new subscriptions as people simply do not have the same privacy concerns for their pets. The company has already onboarded Hill’s Pet Nutrition in line with this offering, Hill's seems to be the sole partner currently, and I note the phrase that this section is "powered by" Hill's. I wonder if this implies some exclusivity as part of the arrangement, for instance no other advertisers can be shown on the 'home' screen for pets? Extension of this partnership beyond the trial period was announced to market just last Monday.
The company changed its auditor in June, claiming that they needed a better qualified one to pursue an uplisting from US OTC markets to the NASDAQ. The company would need to be around 15x larger in terms of Market Cap, and around 13x larger in terms of revenue to meet minimum requirements for NASDAQ listing.
Changing auditor can be a red flag, but I wouldn’t consider it as such if a company is changing to a larger, more recognised auditor as it grows - the reason management have given here though is weirdly optimistic.
Valuation:
At 10% uptake of MAU by FY23, 433k users @US$40 per user per year = $17.32m
Marketing revs by FY23 assumed at $25m
Photobook revs I will place at $500k
This implies somewhere around $7m from the fast-growing direct e-commerce revenue segment if management’s 50% user/ads breakdown is to be achieved.
With this sort of revenue coming in the company should start to achieve somewhere in the order of their at-scale margins. For now, I am comfortable assuming operating margin in the mid-high teens and probably 10% net margin. I would point out though, I really think the R&D effort (and the associated expenditure) needs to increase from where it has been in recent years. Any significant ramping up of this may place some pressure on the above-stated margins.
At US$50m revs on 10%, multiplied by a P/E of 50x (given growth rates and possibility of further margin expansion) this implies total market cap of $250m + $2m cash, no debt = $252m / 46.29m shares on issue = US$5.44 or A$7.50 per share. Discount back the 2 years at 15% = .7225 x $7.5 = A$5.42 per share current valuation.
I am as yet undecided whether this can be achieved within the stated timeframes, though I am thinking that these might be the types of numbers that start to get baked in by brokers and analysts excited by the new model. If shares do reach $5, I will be an enthusiastic seller (perhaps even before then).
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Another way to value Tinybeans that was proposed on Strawman a few years ago (approx. 2018) was to simply use the MAU. From memory, I think the user settled on a valuation of US$25/MAU (currently implying A$3.26 per share - including cash of 4.3cps) but since then the market valuation of US/overseas comps have exploded, I think in part due to the developed understanding of targeted advertising and the critical feedback that can be generated to advertisers as I point to above. I can’t remember who has posted this and I would love to credit, but I also can’t find the straw - I assume it has been deleted by the member once stale.
Facebook, inc. (NASDAQ: FB) has a current market cap of US$995b in comparison to 2.89b MAUs, indicating valuation @ $344/MAU. Facebook sells its customers data, a superior operating model, though one that competitors including Tinybeans would likely be unwilling to replicate. In return, it boasts operating margins of 42.52% and net margins 37.18%.
Twitter, inc. (NYSE: TWTR) has a current market cap of US$53.6b in comparison to 206m MAUs. Twitter has had noted difficulty monetising its user base given relentless focus on user experience over the years, currently valued at $260/MAU. Twitter has a current operating margin of 8.77% / net margin 8.64%.
Mixi, inc. (TYO: 2121) has a current market capitalisation of Y210b, in comparison to 26m MAUs at its peak. These are peak MAUs from roughly 2017, not current MAUs so we can expect that the figures will be a little different to those posted above, though the company remains valued at US$72.44/MAU(peak) despite revenues now over 40% lower than 2017 and margins also declining. Mixi carries operating margins currently of 18.14% and net margins 12.55%.
The simplest and worst calculation would be to take the current MAU base of 4.33m and multiply by Facebook’s valuation of US$344/MAU. This implies $TNY worth US$1.49b or A$44.27 per share. Tinybeans will never replicate the margins (or even close to it) and will be unable to monetise the entirety of its base, particularly in the context of the new operating model.
If we consider that moving away from (free +/- premium) causes instantaneous churn of 20% as discussed above we can say that as of today, TB has a monetisable, active user base of 3.5m. If we use the Mixi valuation of US$72.44/MAU(peak) over this base we have an implied valuation of A$7.58 per share. This is an aggressive valuation as we need to assume that the initial hit of capturing subscription revs directly from only a small portion of the most monetisable users is geometrically similar to having a consistently declining and less engaged user base. Mixi, like Facebook, also seems to be a little more aggressive with directly monetising user data.
If we consider only the paid subs as currently monetisable and consider an average level of engagement somewhere in the order of Twitter, 433k @ US$260/MAU implies valuation of A$3.39 per share. This is conservative as the simple (undiscounted) LTV implied by ARPU = $40, gross margin of 70%, user retention of 88% = $233/MAU, this before the users are even marketed to. If we use the LTV discounted @ 15% = $111/MAU; assuming as above that subscription revs are around 35% of revs, and at my rough calculation 29% of gross profit, the current LTV(total) = US$383/MAU.
