Unity Software Inc.

Q1 2021 Earnings Conference Call

5/11/2021

spk02: and we're live. Great. Hey, thank you very much. My name is Richard Davis, and welcome everyone to Unity's Financial Results Webcast. Today, we'll be highlighting our results for the March first quarter. So with me on the call today is John Riccatello, President, Chief Executive Officer, and Executive Chairman, and Luis Visoso, Senior Vice President and Chief Financial Officer. So as we did last quarter, we will open up with introductory remarks by John and Louise. And then we've collected and sorted questions from our analysts. And the goal, as before, was to help investors understand our business model and outlook in the most efficient way possible. And then finally, time permitting, we will have the last 10 minutes or so for panelists to ask additional questions. So let's go on with the safe harbor statement. I'd like to remind everyone, the participants, that during this conference call, We were making forward-looking statements, including our financial outlook for the second quarter and full year of 2021, as well as statements about goals and business outlooks. and industry trends and market opportunities, expectations for future financial performance, and similar items, all of which are subject to risks, uncertainties, and assumptions. Now, you can find more information about these risks and uncertainties in the risk factors section of our filings at the SEC at sec.gov. We remind everyone that our actual results may differ and we undertake no obligation to revise or update any forward-looking statements. And finally, we will be discussing non-GAAP financial measures today and reconciliations between our GAAP and non-GAAP financial results and discussions of the limitations of our non-GAAP financial measures can be found in our earnings press release, which was issued earlier today. So with that, let me turn this over to John for some introductory remarks.
spk14: Thank you, Richard, and thank you, everyone, for joining us tonight for our fiscal quarter 2021 earnings call. Now, while society has and likely always will face many challenges, it's reassuring, at least in a large part of the world, to see some light at the end of the tunnel with regard to the COVID pandemic. At Unity, we remain focused on our North Star, our guiding principle, which is that we believe the world is a better place with more creators. Our focus, as always, is to enable these creators and to help them succeed. Our financial results reflect the power of this theme. In Q1, we grew revenue 41% year over year to $235 million. This is the 10th consecutive quarter of 30% plus revenue growth. We believe the transition from linear 2D to real-time 3D is a transformative theme and one of the most important changes in how creators will tell their stories and bring their visions to life. It's also one of the most important changes in how people interact with technology in many years. We support our customers on many platforms and in numerous geographies and today are the only high-scale solution for creating and operating real-time 3D globally. We believe it's inevitable that a large portion of the world's creators will over time become primarily real time 3D creators. The role of interactivity through 3D in real time is so much greater than with alternative forms of media. Our goal is to enable these real time 3D creators, or to use a popular phrase, enable, empower much of the metaphors. We intend to enable this at extreme scale. Unity seeks to enable millions of endpoint locations, both with our create tools and our operate solutions. Now, we recognize that we are in a privileged position relative to under other content creation tools. Content built with Unity gives end users agency over what they see. The distinctive characteristic is a fundamentally different, more engaging, and we believe, better way to interact with content. And I think it's worth noting that there are many thousands of developers that transitioned into productive 21st century jobs in part as a result of learning and using Unity. One of our key competitive advantages is we've built Unity platform to be relevant for a developer throughout their career, from a high school hobbyist to their first job and beyond. We will continue to invest to enable more creators to join this 21st century economy. Now, what do I mean when I say scale the creator throughout their career? Well, we believe that our commitment to R&D competitively differentiates us from less sophisticated platforms that aspire to catch up with us in terms of technology or market share. For example, with Unity, you only write once and you can publish anywhere. We built our editor so it A full range of users, from beginners to advanced developers, can build real-time 3D applications. This means you can start with visual scripting, move to C-sharp programming, and for more advanced developers, you can work directly with Unity source code if needed. With these on-ramps to Unity, we enable creators to develop and operate many application types, from games to car configurators, or run high-scale AI simulation. It's not easy to make the complexity of this easy. This is our role and our strategy to enable more and more creators to be successful. Technologies that support the successful growth in real-time 3D applications are quickly reaching scale. Massive bandwidth with 5G, multi-core processors, scalable AI, AR, VR devices, cloud compute, and more. Now is the time for real-time 3D to scale across games, across industries, and across user types. What was once 2D will become 3D. That which was linear becomes interactive. And what was not real-time becomes real-time. As we saw when the cloud displaced on-premises, the crypt can replace perpetual license. The shift to real-time 3D has the potential to create multi-billion dollar opportunities. Our vision is to ensure Unity is a once-in-a-generation company, a true platform that enables creation and operation of real-time 3D applications at extreme scale. We envision a world where we have hundreds of millions of creators on our platform, from consumer creators to professionals in gaming and dozens of industries. By executing on this vision, we believe we can build a company that delivers revenue growth of approximately 30% over the long run. Of course, businesses like life are not linear, so it is likely that some quarters in years will be higher or lower than we expect. But even so, we believe the opportunities in front of us make such a goal achievable. Let's move on to financials. First off, I want to thank Kim Jamal for all her contributions to Unity. I believe many of you know our new CFO, Luis Visoso, from his time at Palo Alto Networks, Amazon, and AWS, where he oversaw significant growth and scale. I am thrilled that Luis agreed to step into the CFO role at Unity. Luis served on our board and joined us from a position of knowledge with energy and passion to drive the business. I know Luis will have a great impact on Unity and look forward to working together to continue to build this great company. With that, I'll turn the call over to Luis.
spk12: Thank you, John. And thanks to everyone at Unity for the very warm welcome. I'm very happy to be here. I believe that the opportunity in front of us is almost limitless as Unity enables the transition from 2D to real-time 3D in games and across industries. We deliver another strong quarter with excellent execution by the Unity team, beating guidance and sweet expectations. Q1-21 revenue of $235 million grew 41% year-over-year, with strong performance across the board. CRE revenue of $70 million was up 51% year-over-year. Operating revenue of $147 million was up 40% year-over-year. And strategic partnership revenue of $18 million was up 12% year-over-year.
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spk12: I'm particularly encouraged by the continued customer success. We had 837 customers each generate more than $100,000 of revenue in the trading 12 months as of March 31st, 2021, up from 668 a year earlier. And our dollar-based net expansion rate as of March 31st, 2021 was 140% up from 133% a year earlier as customers expand their business with Unity. Our platform is a competitive advantage. Unity enables creators to develop and operate real-time 3D content, providing them the right infrastructure and tools to create and monetize their work. This platform enables us to attract new customers and expand our business with existing ones. Unity's customer base is becoming more diverse as we expand from games into other verticals. A good illustration this quarter is in our simulations product, which we show under Create, where we added customers in household appliances, home improvement, healthcare, aerospace, and government. Q121 non-GAAP operating loss was $23.4 million compared to $13.4 million last year as we increased our investments in R&D and vertical expansion that we expect will enable future growth. Q121 non-GAAP gross margin dropped from 81% a year earlier to 78% due to mix and higher cloud hosting costs. We expect to break even on a non-GAAP operating income basis within fiscal year 2023 and expect gross margins to fluctuate in this high 70%. Q1 2021 free cash flow margin of minus 43% was particularly impacted by the payment of our fiscal year 2020 bonus, higher payroll taxes, mostly related to employee stock vesting, prepayments for software licenses, and increasing working capital as our business grows, and a one-time payment related to our real estate. We expect free cash flow margins to improve significantly in the second half of the year. We had 4,389 employees at the end of the quarter, of 50% from last year's March quarter. This brings me to guidance. Given the strong momentum, we're raising our revenue guidance for the full year 2021 from $950 to $970 million, to now 1.0 billion to 1.015 billion, which represents 29 to 31% revenue growth year over year. This is an important milestone for Unity as few software companies scale to the billion dollar mark. And finally, as a reminder, our revenue guidance still assumes approximately $30 million of headwind related to Apple IDFA, which was implemented on the end of April. We're also narrowing our non-GAAP operating loss guidance for the year to 90 to $100 million. We continue to see significant opportunities to drive long-term growth by investing in R&D and vertical markets. For Q2, we expect revenue of 240 to $245 million, which includes two months of IDFA and represents 30 to 33% revenue growth year over year. We expect non-GAAP operating loss for the quarter to be between 30 and $40 million as we continue to invest in the business. In terms of share count, we're forecasting 329 million fully diluted shares outstanding for the quarter and 334 million for the full year. You know, in summary, we are encouraged by a strong start to the year with Q1 results above expectations. This strong start gives us confidence to raise our guidance for the year as we continue to lead the 2D to real-time 3D transformation. We're well positioned in the industry and continue to invest to capture new opportunities. With that, I will turn the call back to Richard who will run through questions.
spk02: Great. Thanks very much. So, okay, we're going to move into the Q&A section of the call. So, and as at Unity, you know, we try to be innovative. And so what we've done, as I've said, is we've collected all the questions and sorted them out in a kind of a logical fashion. So instead of using 20-year-old methodologies, we're actually going into the late 2020, mid 2020s. In any case, let's start with this. Let's start with some of the financials questions. So let's begin with our newest member of the Unity team, Louise. who joined us, as you know, last month. So Bhavan Siri of William Blair asks, can you remind us of how you think about allocating operating expenses, sales and marketing, R&D, G&A, and kind of between enhancing your existing portfolio and new products and whether this is going into gaming or verticals? So how do we kind of allocate those things out and how do we think about it?
spk12: Thank you, Baban. You know, we're very fortunate to have many opportunities in front of us that it's good to have choices, right? You know, we actually prioritize investments in R&D as we continue to strengthen capabilities to capture the very significant opportunity in front of us, resulting from this 2D to real-time 3D transition that both John and I have been talking about. But overall, we invest behind ideas that have the potential to build large solutions with attractive financials. We're always looking at the long term. We want to create value long term. As a result, we strive to do both, enhance our existing portfolio and invest in new products in gaming and verticals. And we will do that, creating leverage as we improve margins over time. Great.
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spk02: Great. So another finance question for Luis. Gal Munda of Barenberg asks, you know, when thinking about the vectors of growth in the midterm, if you kind of had to stack rank kind of the components, say, of monetization of freemium create customers, so new seats and gaming, things like that, cross selling new industries. How should we think about kind of the underlying metrics and how they grow and those kind of things and how we think about that?
spk12: Thanks for the question, Gal. And I think of these vectors as and, not as or. Keep in mind that many of the capabilities that are required to win in games also enable us to win in other verticals. This means that while the customer use cases are very different, we have already built out that platform that is the foundation for real-time 3D content creation or application builds. So we believe when you combine the head start that our platform gives us with a leading market share in several segments, you get this virtuous cycle that helps us build our growth across gaming and verticals. And the intent result is that we were able to cost effectively meet our customers wherever they are in their journey from basic workflows to full-blown applications.
spk02: Okay. A favorite topic for a lot of people, IDFA. It's been on the mind of analysts for a while and investors. So let's dig into this. So Chris Merwin at Goldman Sachs asked, on our February call, you suggested that IDFA would begin in the spring and would be about a $30 million headwind to your revenue growth this year. iOS 14.5 came out April 26. So did that help your March quarter? And more importantly, kind of what are the implications of early indications in terms of your opinion on that impact and what the play of land looks like. Luis, why don't you run with that one?
spk12: Thanks, Chris. This is a very important question, so let me try to provide you a little bit more details. The team has been preparing for IDFA for at least the last two years. I was part of several of these conversations as a board member before joining Unity, and I was always very impressed by the quality of the thinking. But now that I'm on the other side, I've been even more impressed and see the plans in detail. Let me try to dimensionalize this for you. Our operator organization captures and analyzes 50 billion in-app events each day. If you do the math, that's about 35 million in-app events every minute. And we do this across 20 platforms. This includes roughly 1 billion in-app events in iOS 14.5 each day. We believe that the ability to analyze this data positions us very well in the industry. So as we talk to the teams, there are probably five key takeaways that I would like to leave you with. First, spending on our platform is very strong. You know, there is a shift towards ROI-based campaigns on our platform through audience pinpointer, which, you know, this is when advertisers determine the outcome that they want from the campaign, and we determine the right channels and price for them to achieve their KPIs. So that's point number one. Point number two, our contextual model, which very importantly does not rely on IDFA, is working well. We need to perform for our customers, even in a more privacy aware environment. Unity's game engine leadership is a strength and it provides us with deep context for our ads business. Third point, our scale and depth provides us access to a vast amount of end user engagement and platform performance data, which is the point I was mentioning earlier. It's about this 50 billion in app events every day and across these 20 platforms. The fourth point, which is probably one of my favorite, is the customer feedback we're getting is very strong, Chris. Let me read to you three quotes that I got from the team, which are coming from our customers. Quote number one, out of all our partners, we're most happy with Unity, as we're having a lot of problems with others. Quote number two, We partner with every single network available and Unity's readiness and guidance are far above the rest. Quote number three, we work with every network and none of them are able to compete with Unity when it comes to iOS 14.5 readiness and reactiveness. So if I look at everything with this customer feedback, I'm fairly confident that we're in a very strong competitive position. And the last point I wanted to make on this is, you know, we're raising our guidance by $50 million and the driver of that increase is the operating business. So we have momentum, we beat Q1 expectations and are raising our focus for the year. So IDFA will most likely impact the ads industry, but we believe that our data and analytics advantage, plus this advanced preparation that I was mentioning, position us very well to manage the IDFA. And we'll obviously keep you informed as we learn more. Great.
spk02: Thanks very much. And then Bhavan Suri at William Blair asked an interesting question about what IDFA means to our customers, especially in terms of how user acquisition teams will evolve and what role does Unity play in that transition? So I'll take that one, and it's kind of in addition to what Luis just said. But basically, look, there's no question that IDFA is a challenge for a lot of creators. And while Luis outlined a lot of the levers, and ways that we can help our customers navigate, we're not underestimating the challenges that our customers and others in the ecosystem, including some competitors, are facing. So in the short run, there's no question that it'll be a challenge for some of our customers. But in the long run, we believe the more innovative and nimble studios will come out ahead. And in that case, that's a good thing for the industry because it'll make it stronger and more durable. All right, let's rotate over to a macro question and zoom out a bit. And another question from Chris Merwin at Goldman Sachs. Quote, as we start to see a broader reopening of the economy, can you speak to the engagement trends of your customer base? How should we think about those trends impacting operate revenues as we move through the rest of 2021? John, why don't we have you take that one?
spk14: So it's clear that you're speaking about end users, Chris. And what I would say is, look, there's no question 2020 was a watershed year. Consumers are enjoying gaming at levels that I might well have expected by the year 2025, and they visited us in 2020. So it's clear that certain behaviors have moved forward several years. Now, earlier, Luis mentioned all those data points we adjust. We understand engagement, LTV, cost to acquire. Literally, in every country in the world, minute to minute, our data understanding is huge. And everything I see makes me feel like a big part of the lift is permanent. People have changed their behaviors. They've changed the way they game. They've changed the way they look at gaming. People have come into the industry. Now, there's going to be some changes. And the balance of our guidance this year does reflect some reduction in engagement in the activity associated with it. It wouldn't be prudent not to include that. But I think the other thing that's going to be really interesting this year is going to be exact seasonality. Normally, we would see a sharp lift as we go from, say, October, November through to the Thanksgiving holiday and the Christmas holiday. Kids going home from school and that pattern. We'll start to see that, but we're indexing a year ago to a period where they were already at home for the entire quarter. The point that I'm making is I do think that not only was COVID and the work-from-home aspects of this really, you know, unprecedented and driving engagement. Point number one, if it's permanent, and some of the year-over-year lookbacks are going to be interesting because it won't be the normal comparative seasonality that we would otherwise expect.
spk02: Great. We have a question from Bhavan Siri at William Blair about data. So, you know, given that we have a large population of using unit using the unity platform you know this gives us deep insights into the into customer kind of behavior and preferences so as we kind of get these network effects up and running you know how are we thinking about the opportunity to introduce you know even a marketplace for consumers kind of drive recommendations based on friends that are playing etc so maybe john if you want to run with that
spk14: Well, thanks for that question. It's one of my favorites and one I've been talking about inside the Unity boardroom for seven years. First off, we're proud to say that over a third of the world's population is on our platform. And that's a substantial differentiator for our customers. It really helps us understand our marketplace. It allows us to leverage network effects with game developers, better and more relevant marketing, contextual messaging, and the rest of it that supports the monetization. This was the thesis upon which we began our Operate Solutions business. We didn't want to be another buy low, sell high arbitrage and monetization network. And those who follow this market have seen many of those undifferentiated companies fall to the wayside. What we've done well in this market is take our data advantage to better understand and build a network around the optimization of LTV versus CAC. So we understand the cost to acquire. We understand the LTV of our customers. We understand the interplay. At a level of nuance, it really helps us do a better job for our customers. And that's what our network really is. So it is a network effect. We count our MAUs to 3 billion. Even our largest customers are rarely at a great month 10% of that. It's a massive advantage. Now, to amplify on some of the data that Louis highlighted, we had 50 billion in-app events on over 20 platforms. And that's the important reason why we're able to develop these deep insights into customer behavior. we work behind the scenes to recommend what would be interesting or new to an existing customer based on multiple factors and that's the core tenet in how we built our marketplace for consumers to drive recommendations
spk02: Great. All right. Well, let's switch over to another part of operate. So operate beyond monetization. So Tom Roderick over at Stiefel asks, you know, so while monetization is a very good business, you also have several other operations or offerings under the operate umbrella. You know, so how are we thinking about operate solutions beyond monetization and kind of which areas are we most excited about in the near and long term? John, if you want to run with that.
spk14: Sure. I'm particularly excited about Multiply. We plan to grow this faster than it will operate, becoming a larger portion of the Operate revenue mix. I believe it's a multi-million, more, let me say again in time, a multi-billion dollar opportunity. It's cloud orchestration for real-time 3D. We put this business, I put this business under Ingrid and her team, who continues to do a great job running Operate. They're making it easier to self-position, to streamline the pricing models. There's a concerted sales effort. It looks like it's paying off. Several large deals in the pipeline. And seeing the trend to move consumer is really resonating with multiplayer games. Social is playing huge. They want to get more success. We feel great about the multiplayer business and the long-term prospects. Vivox is smaller and it will scale faster and better. It's a best in class scalable voice service used in gaming. It's been used by some of the world's best known games. New features and functionality are coming and going live in the second half of the year. And then we've got our cloud delivery network. I think we're really on the right side of history here. A lot coming. I really feel confident that more user-generated content, more content updates is going to drive increasing uptake there. I will admit that there's more features coming, and that's an important part of how we're going to scale it. So we continue to work new features internally. We look for tuck-in acquisitions to accelerate our growth in the space. But we really feel great about operator overall.
spk02: Great. Let's go over to Create for Games. So Franco Granda at DA Davidson asks, as large AAA video game developers renew their focus on mobile gaming, number one, has there been a tangible uptick in engagements? Number two, how has Unity engaged with them as they look to maximize not only the efficiencies of game development process, but also the monetization aspect? So John, if you want to run with that.
spk14: So the first point is we have seen more engagement from AAA studios, both for AAA games and for the mobile games that they're building on the AAA intellectual property. We've seen an interesting dynamic over the last few years. First, a lot of AAA studios are increasingly realizing they need something different as they get into mobile. And they think about bespoke engines, but find it's time consuming, costly, and often a bit of a challenge, if not disastrously error prone. The path to commercializing a successful game has changed. For example, when highly successful AAA franchises like Call of Duty come to Unity to use our development platform to build from mobile, they're getting there faster, quicker, better. And if you look at the charts, you'll see many of the world's largest, most successful mobile games are built on Unity. Secondly, we've begun to see some games start in mobile or in AA and then move to AAA. And sometimes we have Obsidio launch a successful game on Nintendo Switch, then move that title to other platforms, whether it's a mobile or a console title. And finally, with the rise of cross-platform play, we've seen PC games cross over to consoles and vice versa. The value of using Unity's platform becomes even more obvious in these circumstances. Cross-play, multi-platform, write ones, publish all platforms. That's our bread and butter. That's what we bring to the table. And we keep up to speed on these platforms minute to minute, or day to day, maybe it's not minute to minute, as they make changes in the technology stack. We're always there and ready. Big publishers sometimes don't have the time to keep up with us. Smaller ones never do. They're playing catch up. With Unity, they're ahead of the game.
spk02: So Bhavan asked another question. On the Create side, your addressable market for game artists is multiples of that of the programmer opportunity due to the shifting trends involving more artists at game studios. Could you update us on the progress you're making with penetration into the artist market, and what differentiates ArtEngine relative to what is currently being used in the market today? John?
spk14: Thanks for that question. It's an important one. And a scenario where we've made the most progress and realistically also still have a lot of progress in front of us. Investments we've made in visual scripting, new rendering pipelines, and overall workflows have brought many artists onto the Unity platform. And the early work done with AI augmentation for artistry, including what we provide with Art Engine, also is bringing artists on the platform. And for those of you that don't know exactly what I'm talking about, AI augmentation means that we're using the power of AI to essentially make an artist 10 times more productive or 20 times more productive because it completes a lot of the task and it finishes a lot of the work or enhances the work they would otherwise be doing by hand. Now, if you want more context on this, you might want to look at a case study that's on our website, one of our AAA studios. It was featured for the GDC showcase. Insomniac, you'll see them there. It's a good read. It gets exactly to the question you're asking about. But here's the thesis. Artists are the most numerous creators of content in real-time 3D, and every day we seek to serve them better, more tools, better tools.
spk02: Great. Okay, let's pivot over to kind of create for verticals. So Brent Braceland over at Piper Sandler asks, to what extent has the recovery and construction market been a tailwind for you? And how does VisualEye fit into that kind of go-to-market strategy? John?
spk14: So look, I... I guess I can say that, you know, the construction market recovery has been a tailwind and it likely will be for some time. But realistically, we're relatively nascent in these industries with low customers. So it's more the macro trend is really interesting and helpful. But it's really at this point, growth is driven by case by case penetration with our tools, with architecture and construction companies. For example, we continue to work closely with innovators like Sweden-based Skanska, the fifth largest construction company in the world. We recently signed JE Dunn for site license for Visual Live. JE Dunn is a $5 billion top 25 construction company. And we have other wins at AEC that we're not allowed to release. I wish I could. The point here is that we've begun to see the who's who of prospective customers in architecture, engineering, construction. And what's driving us right now is penetration into existing business. And I guess they're in a better mood when they see their market growing. So maybe that makes it a little bit easier.
spk02: Great. Continuing on with another question from Brent Braceland at Piper Sandler. He asks, there's been a handful of new product releases in the last quarter tied to enabling AI, machine learning, robotic applications in manufacturing and industrial markets via models, computer vision, simulation, synthetic data. Could you frame the broader opportunity in manufacturing and industrial market for these tools and others? John?
spk14: I'm going to slightly reframe your question, but it could be held specifically to manufacturing or the industrial market. Our goal at Unity is to build a product portfolio that gives us really an unbounded opportunity to expand beyond gaming. The key thesis is, as we move from industry to industry, their needs are incredibly similar. They need what is core to our gaming engine, but there's a handful of additional needs that solve for use case after use case across industries. One way to think about it, computer vision use cases, content for simulation and extreme scale for the training of AI models, streaming with the particulars right for real-time 3D versus linear, which is quite different. The ability to resolve LEDs, that's level of detail on the fly. These are capabilities near inherent to Unity were fairly easy to address and they open massive opportunities in gaming and in many other industries there's a few additional building blocks you know think of them as legos in our toy box of capabilities like our tools for larger team collaboration for version control through large amount of data that go with real-time 3d that have us believe we are truly unbound in opportunity And at Unity, just the last few years, we've expanded our market presence and product portfolio pretty substantially. Today, many well-known brands use Unity technology in AEC, automotive, manufacturing, media, and entertainment. And as you saw in our press release, we announced new customers in health care, government, retail, and look to bring real-time 3D to their customers and employees. We plan to keep investing in new features and functionality. Today, our portfolio encompasses our core Unity editor, but also Forma for easy production of 3D content, Reflect for AR, VR for BIM models, Furios for streaming and real-time 3D experiences, HMI for heads-up displays, Mars for XR creation. But here's the thesis. There's a handful of additional tools, capabilities on top of Unity that will essentially make us relevant for virtually any use case in and outside of gaming. And it's getting to this unbound opportunity that has me so optimistic.
spk02: There you go. OK, we'll make this a trifecta. We'll have Red Bracelet ask a question about how are you thinking about partnerships as you expand into other verticals? And I can take this. It's basically in addition to what John just said. Look, up to this point, we've been seeding the market mostly through ourselves, but also working closely with our verified service providers. However, as John just referenced, we have a strong and kind of growing foundation in gaming that makes sense for us. beyond or beyond gaming it makes sense for us to kind of partner with a handful of global professional services firms so stay tuned on that front we don't have anything to say now but hopefully if we keep working hard on that we'll do well in that regard And then last, but not least, Gal Munda of Berenberg gets the most interesting question award this quarter. We do that every quarter. Anyways, with NVIDIA becoming, quote, a new software company, how does the metaverse strategy affect Unity? And of course, NVIDIA isn't the only company talking metaverse. Epic, Roblox, even big platforms like Apple and Google, Facebook and Microsoft have suggested that they too are metaverses. So could you help investors sort this thing out? And how does Unity fit into this? John, this is one of your favorite topics, so I'll let you run with it.
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spk14: It's become a favorite topic for me because I think that we have a problem with terminology where I'm not sure we're all talking about the same thing. And I'm going to try to define it in such a way that maybe can hold sway on our marketplace. Let me start by saying that I think of Jensen as a friend and I don't see NVIDIA as a competitor. They're a great company and we collaborate with them on a lot of things. So let me frame out some ideas. The first one's going to sound a little upside down, but I'd argue the metaverse is already here, as it's really just another word for the internet, but better. And let me draw the clear distinction between them. And I want to be clear in spelling this out. You know, I'd argue that, you know, say, for example, if I go online to buy a shirt like this, and the seller shows me a picture of a, you know, black or dark green button down, and I see a picture of that, I'm on the internet. I'm not really in the metaverse. But when I see... a model in the scene walking and turning in my direction. That model is me wearing this shirt. And I can invite my family to the same environment to help me decide whether this shirt looks good on me or not, goes well with the blue suit that I might be wearing. And I can invite family and they can be looking at me and laughing at me and laughing with me. Then I'm in the metaverse. And let me define this exactly. What changed? You've heard this from me before. 2D became 3D. Linear contents changed to real time. My solo experience became social and interactive. In a phrase, it became real time 3D. So what I think so many get wrong when they think of the metaverse is they see it as a competition as to whether Roblox or Fortnite will win. I see it very differently. There'll be millions of endpoints in the metaverse, and these will include shopping sites, games, social networks, messaging apps, 3D conferencing, and job sites and constructions augmented by real-time 3D in the form of Unity Reflect. We can get all these websites going. Millions of endpoints or destinations are the metaverse. And it will expand in huge ways in years to come. and what we're doing at providing a lot of the underlying infrastructure to make this happen. Now, before I get into that, let me make this point even a little bit more clear. So back to the point I made about the metaverse. Today, just today, I played a few games, made three online purchases with two online shopping sites. I participated in several Zoom meetings. I connected with my family on FaceTime. I jointly edited a document online. I visited an OMB website to get some data for a presentation I'm making. I interacted with other people and businesses in six of the seven Earth's continents. No one in Antarctica yet today. This is using the internet on full tilt. But more and more of these endpoints and destinations are changing from static 2D content to real-time 3D content. And as they do, I believe they become part of the metaverse. The metaverse is, in other words, the more engaging, more interactive, more 3D, more real-time version of the internet. And it is happening now. So how will this metaverse come into existence at huge scale, as I predict? I see four major enablers, and one of them is physical. These are the fiber optic lines, the faster GPUs, the stuff that Jensen and Rydia make, the provision of 5G, the satellite GPS systems getting better and stronger, the underlying infrastructure that it all relies on. Second is the underlying operating services that enable real-time 3D, hosting like multiplayer, streaming, computer vision, monetization services. Third, there are the content creation tools, the real-time 3D tools. And lastly, there are those millions of endpoints. And these will include all of the examples I've mentioned and more. So today, Unity has the substantial majority of all the real time 3D content created in gaming and in industry. We're the tool of choice for these endpoints. Unity is a substantial player also in operate services. And as you know, we don't provide hardware and we don't make games. But if the metaverse has music, it's really playing our song. And so with this, we don't see NVIDIA as competition. We view them as a partner and co-conspirator where we couldn't do it without them. The same with Autodesk and Microsoft and Google. We're in it together building the future of the metaverse. Epic's Fortnite, Roblox, Microsoft's Minecraft are endpoints or destinations in the metaverse. And we'd love to see them grow, proving the point. And if I were to reference the most recent presentations of the metaverse, the Oasis and Ready Player One, a movie that used Unity in part of its production, I'd see these as important rides in the theme park that will take us and make up the entirety of the metaverse. So thank you all. Back to you, Richard.
spk02: Okay, great. Well, now we have open mic. It's like open mic Friday or whatever. But if you all have questions that you want to ask live, feel free to pop your hand up or whatever.
spk03: so otherwise i'll just call on you so see if we have any questions just hit the raise hand button maybe our question there we go hi this is kenny hey i just wanted to know i i had two questions you could address either one of them right uh the first
spk04: The first was, which of the services in Create or Operate do you think has the most room for growth right now that investors aren't paying attention to? And the second is, does Unity ever plan to produce games like Epic and Unreal do? So yeah, those are my questions.
spk14: I think the first one, I'll take the second.
spk12: Yeah, John. Yeah, I think in terms of the growth that we expect, I think John referred to a little bit about it. I think Multiplay is an area where we see significant opportunity for growth. But frankly, I'm optimistic across the board. As I said in my prepared remarks, we've seen very strong growth across the company, and there is no reason why That's going to change in my view after being here for a month. But I'm optimistic across the board, actually.
spk14: So in terms of making games, it's come up a lot of times in the past. And the answer is no. Look, I don't think competing with your customers is the easiest way to win conversion. And honestly, I think it's one of the reasons why, particularly in mobile, where I think we have advantages over other engines that that have competitive products out there. People don't necessarily want to trust the operation or the creation of their content to someone they compete with. It's one of the reasons we've grown from, you know, I don't know, low double digits, low teens five years ago in market share. It wasn't measurable back then. It's our best estimate to 71% in the Christmas quarter of this last year. We've been steadily increasing market share across the board. I think one of the reasons is our customers trust us inside their building with their deepest secrets, not worried that we're going to pop up and compete with them.
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spk02: All right. So I see a couple of hands up. Uh, Mario, are you able to unmute?
spk06: Great. Uh, thanks for taking the question. Um, so just have a couple of one on the, the full year guide. Um, You guys beat by roughly 20 million in the first quarter in terms of revenue and raised the full year by close to 50. So just wondering any positive trends to kind of call out thus far in April and May to kind of that gives you this additional confidence?
spk12: Yeah, I think overall we're feeling good about the business. It's a little bit premature to talk about Q2, but we are confident enough based on the factors that we discussed, right? Very strong Q1, very, very strong business. It's broad based, as I just mentioned, and our projections for the year look very healthy. So we are comfortable raising the guy by about the 50 million that you mentioned. So that's where we are, Mario. We're very encouraged with the health of the business, particularly given the environment we're in.
spk06: Great. And then just one on a high level question. So I think last week we were able to see the financials of one of your competitors in the 3D game engine space. So I think the two of you combined comprise less than 2% of total gaming revenue in 2019. So just wondering at a high level, what percentage do you think would be fair economics for a game engine over time.
spk14: And that's a tough question and I think it's almost in a way, self limiting. So, um, I believe that it's pretty obvious that if we do a billion dollars this year and you've got an industry approaching a couple hundred billion dollars, our take rate is under 1% in gaming, pretty straightforward. But as we expand the number of services and capabilities, some of which we charge for incrementally as we do in verticals and some in gaming as well, we can increase our take rate led by the simple thesis that we add more value first. So it's not leveraging some sort of advantage on our customers to raise prices, although that's possible to raise prices. I think we're going to expand our take rate in a growing industry as we have and will continue to do as a consequence of adding more services, more capability. There was a question earlier about AI and Art Engine. if we can help make artists 10 times more productive, there's no reason developers won't pay for that in one of two ways. Artists coming to the platform, which in and of itself increases our take rate. And there's premium products and services we can provide around data, training data, and AI, which we also charge for. And so we have the ability to increase our take rate in proportion to the way that we add value. And we're increasing that value that we add across industries, but particularly in gaming every day.
spk03: Right. Got it. Thanks. Super helpful.
spk02: Okay. Tom Roderick, did you have a question?
spk13: Sure. I'd love to. Can you hear me okay?
spk05: Yep. All right.
spk13: I'm even giving you a video here. We'll dive right in. Hey, John, can you, I know this is a small deal and I know they're not directly competitive, but it was interesting seeing Zynga make its own acquisition of, you know, a digital advertising marketplace. Would love your thoughts on, you know, other players out there that directly own, operate, build game title as opposed to having a development platform. What you see as a response from those game developers, maybe it's a response to IDFA, but how you feel about that and new emerging competitive, you know, marketing or digital advertising marketplaces.
spk14: So first off, I have to say, Frank Giobbo is one of my favorite people in the world. You can quote me on that. So anything that he does with Zynga, I'm sure he's been thoughtful and smart. The second thing is, you know, the situation with Unity is just really unique. We've got a bead on 3 billion users. We're increasing our ability to understand that user base dramatically every quarter. That leads to competitive advantage for our customers. They come to us with their supply and or to drive their demand, you know, to make their brand, you know, yield more installs. We're really good at that. You know, there was a time four or five years ago where we were smaller than ChartBoost. um, well, four years ago, even there was a time not that long ago where we couldn't possibly imagine competing with the major mega cap, you know, players in our space. And we've made up a lot of ground and gained a lot of market share driven by competitive advantage in the way we do it. So, you know, we're never really worried about competition. You know, the more amusing things I find is, you know, when I talk to journalists, they keep waiting for me to say something nasty about Tim over at, um, over at Epic. I liked him. I think they do really important things. I'm glad that they're out there innovating. I am sure that our business is bigger because of the innovation they've done that bring us to our best competitive spirit and execution. I love competition. I also like winning. And so I like 41% quarters, and I'd like to string a lot of them together for you. It's on the basis of being competitive in the marketplace that we're going to succeed. And I was answering the last question. I said, we increase our take right by increasing the value we add. We're constantly focused on that. You know, short term, we can always maybe eke out a few dollars by messing around with pricing or messing around with other things that are hard to lap. Value add is easy to scale. And that's what we're investing in. And I'm highly confident in our monetization platform as part of Opera. It's going to continue to win.
spk13: Outstanding. That's it for me. Thanks, John.
spk02: Thanks, man. Hey, Franco, Granda, you have your hand raised. Love to talk to you. Thanks for being right here.
spk11: Hey, how's it going? Good to see the team. First, welcome, Luis. I've got a couple of questions for you. So now you've had about a month to settle in. I guess, what are your first takeaways of not only the finance platform, but Unity in general? And what are your main areas of focus as you embark on this next stage of growth?
spk12: yeah great question so you know the good thing is i knew what i was getting into right because i was i spent some time at the board it seemed like a long time but it was like only nine months and and i had a blast and every meeting i was in i was like why am i sitting on the other side they seem to be having more fun than i was so decided to join i think in terms of um surprises is people are so passionate about winning here. Nothing is impossible. You have a problem and everybody's smiling, which is not happening in every other company I've been part of. And they see problems and solutions that we can bring to the table. And it's great. The other thing that's very unique, and you see it when you're sitting at the board, but you can really see it when you're part of the company is the culture. it's a company where you can agree and disagree and everybody expects that expect you to be honest and and it's just it's just a fun place to be i think in terms of priorities to the other part of your question i think it's about long-term shareholder value creation And we do it by driving strong top line growth. I think that is the fundamental piece of that. But we also want to make progress in our margins. We want to make progress in our free cash flow. And we do want to do it in a way where we're always growing as fast as we possibly can. And to John's point earlier, we want growth to come from new customers and expanding business with existing customers. And if we can get all those flywheels moving in the right direction, I think the possibilities are really limitless.
spk11: Thank you. So looking forward to seeing how that involves. And then one last one. So you've got over $1.6 billion in cash. How should we think about capital deployments over the next year or two?
spk12: Yeah, great question. I mean, as you know, we've always been acquiring a few companies here and there as we continue to find technologies that will accelerate our growth and which we can get at the reasonable price. And we'll continue to do that. And we'll continue to look at best ways of creating shareholder value. I don't think I can give you much more than that. But we're always looking at the best opportunities out there in the market, for sure.
spk02: Fair enough. Thank you. Great. I may have run through all the people. Brent, Gracelyn, did you have any questions? I didn't know if you had any or not.
spk10: Yes, I did. We still have time for one more, John.
spk05: Of course we do.
spk10: Of course we do. But I had a question really around King. You called out King as the first time they're actually building a platform here and so my first question is why now why did it take so long and what's unique about that relationship with king and and how meaningful is it who did you displace and then two uh lewis could you just talk about r d and john maybe weigh in that as well you are aggressively investing in r d i think it's 47 of sales this quarter versus 40 last year um share with us where are you putting those dollars at work
spk14: So on King, first I'll tell you a tad of an insider story. We had their CTO join us on our most two ago global town halls. And so describing how and why they got to the Unity platform. And it's interesting if you look at King. First off, they're one of the most innovative, creative organizations on the planet, and they're really good at business. So they make their decisions thoughtfully. And so when we get a quote from or get support from King, it makes us proud. They didn't get there by accident. and i think that also it's sort of a little known little bit of history here with king aside from being one of the most successful developers in the world in mobile it was probably six could have been seven years ago but in that time frame i think it was six uh they announced that they were taking their mobile game engine making it free to the universe of developers around the world in direct competition with unity it's time they didn't use unity at all but I have to say that was a bad day for me. I didn't particularly like the idea. I was trying to win their business and not only did I lose it, I lost every opportunity to get there given that announcement. In the time that passed, they obviously gave it deep scrutiny. They learned what they needed to learn. They ultimately booted that strategy and started to use Unity on test products. And from there, more and more, they started using our products and services. And today, we have a deeply respectful relationship and a powerful one that we feel really good about.
spk12: I think to your R&D question, yes, we're committed to continue to innovation, right? Because we're committed to growth. And we think that that's what it takes. So as you were saying, about 53% of our OPEX goes to R&D. And if you look at how much we're investing relative to our growth, obviously we're generating leverage in sales and marketing. We're generating significant leverage in GNA, but we are investing in R&D. And that's particularly to drive more of, you know, as you know, we're expanding from games and now including more and more verticals. And although there is a lot of synergy, as I mentioned in my prepared remarks, there are some areas where we do need to continue to invest. So that's what's driving our investments in R&D. As I look forward, I think we will continue to invest most of the incremental dollars in R&D, but we do expect to generate leverage, of course.
spk14: One thing just to add on that question, because I think as an outsider looking at any organization that invests in R&D, it always seems kind of opaque. R&D is a generic thing. Understand here at Unity that we have a really clear understanding of things. For example, the question came earlier about ArtEngine. Across Unity, we've got a lot of AI people and a lot of artists in R&D focused on building tools to make artists more productive. I see a day, not in the distant future, where This isn't a feature I'm promising. So developers out there, this is not happening today, but it's where we're going intellectually and we're building towards. Maybe they've designed a redwood forest, an elm forest. And so, you know, you take training data of a couple hundred thousand or a couple of 10,000 photos of an elm forest and you don't have to do any work. The AI transforms redwoods to elm and all of the surrounding infrastructure of a forest of that type. Or, you know, you start a river, it finishes a river. The point of it is, The computers today are powerful enough to do so much more for artists than they're doing now. Now, some of the things I've described are already possible. I could dazzle you if you came into the office and show you some of the things that are happening with some of the smartest engineers and AI technologists in the company. But we want to package those in such a way that they dazzle the artist so they can feel 10 times more productive. Across a half a dozen priorities like that, we are very clear about what we're building, why we build it, how it connects to a community of users, and putting dollars and cents on it, how many of them there are and what they might pay for it. So we're really thoughtful about that. And it's what occupies a great part of my time and that of senior leaders like You know, Ralph on the R&D side, Mark on Create, Ingrid, you know, leading our operate teams, and Jeff, her R&D leader. A lot of focus on just this question.
spk02: Great. I think that's a good wrap-up. It kind of explains and encapsulates what we do. John, if you have any follow-up, or did you have any other questions, Brad? Are you good?
spk10: I'm good. Super helpful color there and appreciate it. Thank you.
spk02: Thanks, man. So, John, if you have any wrap-up questions, otherwise we can stop here, whatever you'd like.
spk14: Well, I think, thank you, everyone. Unless there's more questions, we're ready to go and we'll see some of you on callbacks.
spk02: Thank you so much, everyone. Appreciate it.
Disclaimer

This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.

Q1U 2021

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