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spk06: and we are live.
spk03: Great. Well, thank you very much, everyone, and welcome to Unity's Financial Results Webcast. Today, we'll be highlighting our results for the second quarter. 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 with introductory remarks by John and Luis, and then we have collected and sorted questions from our analysts and investors. And the goal here, as you know, is to really help investors understand our business model and outlook in the most efficient way possible. And finally, time permitting, we'll have the last 10 minutes or so for panelists to ask additional questions. So on to the always popular safe harbor statement, I'd like to remind participants that during this conference call, we will be making forward looking statements, including our financial outlook for the third quarter and full year of fiscal twenty one, as well as statements about goals, business outlooks, industry trends, 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 factor section of our filings 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. We'll also be discussing non-GAAP financial measures today and reconciliations between our GAAP and non-GAAP financial results and a discussion of the limitations to our non-GAAP financial measures can be found in our earnings press release, which was issued earlier today and is available on our investor relations website. And then finally, we will continue our investor conference schedule for the balance of the year. Tomorrow we will present at Oppenheimer's virtual conference, and we will also present and attend dinners at Piper Sandler's conference on September 14th in San Francisco and Boston. And then in December, we will present at Credit Suisse and Barclays. Now with that, let me turn it over to John for some introductory remarks.
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spk11: It's a pleasure to have you on this call with us today. Unity reported a 48% year-over-year increase in revenue to $274 million for the quarter. This quarter was the first in Unity's history as we crossed a $1 billion revenue runway. We also raised our revenue guidance for the year by another $45 million to a range between $1.4 billion and $1.6 billion. We generated strong growth across all our product logic geographies with important growth in both Operate and Create. Within Operate, both monetization and multi-play services posted strong growth. And within Create, we saw strong growth both in games and non-game verticals. As I've said before, we believe in the emergence of the metaverse and that Unity will be a major player in defining and help lead its creation and operation. We believe the adoption of real-time 3D will change the way people interact with digital content and entertainment. Just as digital replaced analog, HD replaced standard definition, in the coming years, 5G will replace 3G or 4G, and real-time 3D will replace linear and flat 2D digital content. We expect more of the world's content to be 3D, real-time, and interactive. We believe this cycle will create an addressable market that presents us with decades of opportunity at Unity. Now, for me, the word metaverse is plural. When I say this, I'm trying to make an important point. We don't think that one company will represent the metaverse as, say, for example, it was imagined in Ready Player One. We believe there's going to be hundreds of thousands of destinations in the metaverse. Games like Roblox, creation destinations from companies like NVIDIA, Unity, and Adobe, social communication destinations from companies like Snap, Facebook, and some new companies. At Unity, we believe in interoperability and an open internet, even as the internet becomes more 3D, more real-time, more interactive, and more like the metaverse we imagine. Unity's mission and worldview centers on a belief that the world is a better place with more creators. At Unity, we intend to support and shape the metaverse. We will emphasize content creation, cross-platform access, and narrowing the distance and reducing the friction between creators and consumers. Now let's scroll down on the quarter. In gaming, on the create side, we enjoy a share exceeding 50% overall of the year ending 2020. And as you know, our market share is even higher in the fastest growing sub-segments of mobile gaming and VRAR. Each month, people in more than 190 countries around the world download over 5 billion applications built with Unity. We're going faster than the industries in which we compete, and we're gaining share in our key markets. We sometimes get the question that if more than 50% of all games are built using Unity, isn't our growth prospect limited? Well, No. We believe we can 5x our penetration in games. Growing our penetration with artists is key to this effort. Let me pause and explain. When I worked in gaming, the ratio of artists to technical personnel on game teams was about 1 to 1. Today, artists outnumber technologists at least 2 to 1, and it's quickly heading to 5 to 1 or more. As gaming devices become more powerful, more powerful GPUs, more memory, 5G networks, developers compete by making bigger, richer, more art-filled games. The war among developers and publishers to win with consumers is over the best content. And in this war, the ammunition is art. This quarter, we won new customers in non-gaming industries. We added three new automotive manufacturers and three leading consumer product companies. And this quarter, we also added three leading aerospace and defense manufacturers. Looking at this from a geo basis, we had some nice wins in Asia, one in Singapore, and another in Korea. As we look forward to the future with Create, our view is that the creative process will evolve from on-premise devices to flexible and cost-effective cloud architectures. There are three major trends driving this change. The workplace is becoming more flexible. Teams are getting larger. Creators bring a myriad of new devices to the creation process, including tablets, Chromebooks, and even smartphones. This is why we're investing in collaboration and moving more of our capabilities to the cloud. Now let's turn our side to the operating business. If I had to distill the business challenge most game developers face every day, it's one equation. It would be how to ensure that the cost of a user, the cost of user acquisition, is less than his or her lifetime value to the game. Cost acquirer has got to be below LTV. This is not an easy equation to master. Our operations solutions help developers solve this equation. We offer an end-to-end platform for content creators to deliver the best player experience and build robust and profitable businesses. We provide a growing suite of services that content creators can use to acquire new users, optimize user engagement, and LTV via a monetization platform. Additionally, our multi-play services continue to reliably support some of the most notable cross-platform game locks, including Knockout City and Valen. What is most important in our operating solutions are the connections between these components. Foundational elements such as privacy controls, identity, payments, billing, security are embedded in our offerings to make sure that each of these products work seamlessly with each other. Another critical part of this integrated system has been our ability to leverage context and data insights effectively through ML-driven optimization from our reach of 3.4 billion monthly active users as of June 21 to deliver the best ROI for our customers. This combined with the tight linkage to our Create platform have enabled us to gain share across these important markets. At Unity, we have a durable business designed to deliver many years of exceptional growth. We enjoy fundamental advantages on our scale in gaming, our ease of use, and our extensibility for non-game verticals, our massive scale of our data footprint, and the linkage between our create and operate platforms. These advantages have led to 11 consecutive quarters of greater than 30% growth, and as of late, growth exceeding 40%. We're proud of our performance this year and the years prior. And I want to thank all of our customers for helping us get where we are today. We look forward to our journey together. And I very much want to thank Unity's 4,600 plus employees. It's an honor to work with such a dedicated, talented, and amazing team.
spk05: Are you tired of not being able to read the market accurately? Missing out on losing trades and experiencing inconsistent results? In this video, I'm going to be breaking down the most crucial concept that most traders overlook when it comes to creating consistency and lucrative income from their trades. Hi, I'm Corbs, and I help traders create consistency inside their trading routines so they can experience more winning days by minimizing their losses and maximizing their profits. And right now, I want to shift the way that you look at your trading forever by sharing with you a tool that has helped me, it's helped the clients at Trade Act reach full potential. We're going to jump into a screen right now, and I'm going to show you. Okay, looking at the charts, we have just a specific day that we're looking at. Now this is a day from this week. This is a day that happened yesterday. I don't have to go back in time and try to cherry pick out perfect examples. These things happen repeatedly day after day. Now what we have going on is a session that opened and we started dropping down. We had a very deep pullback, a period of consolidation, and then we continued lower. Right in here, we turned around, putting in a new high of day and going coast to coast. So the question is, and a good thing to get right, is, is there a way to know that the market was turning around right here and not here or not here? What I'm going to do now is put on my volume profile tool so we can start to see what's going on behind these candles. I'm going to unhide the volume profile and now we have the volume profile on the charts. Now, if this is the first time you're seeing a volume profile, I don't want you to get caught up in the minutia of this or to get too bogged down with the details. The only thing I'm doing here is giving you a very simple example and the particulars of everything that we're seeing. Just don't worry about that for now. I'll be explaining all of that later and all of that will be to come. But just know this, what you're seeing here with this volume profile is it's showing us at every single price how much buying and how much selling occurred. Or another way to think about it is it's showing us what prices are popular and what prices are very unpopular. Now, knowing that we have a volume profile here, let's see what this is showing us. This market is dropping down, and as it's dropping down, we're trading a lot of volume, a lot of transactions are happening. But as we put in this last low, the volume dries up. It is completely anemic. You can see from the rest of this profile, this is a very different look than everything else. The reason being is there is no volume down here. Now, what this is telling us is that these lower prices are not being accepted. The market is not interested. The market does not like these prices. And if we're not interested in lower prices, the next most likely thing for us to do is to auction higher. Now, is this actionable information and can we do something with this? I wanna show you, and by turning on my order fills, this is gonna show you the trades that I've placed. Because this isn't just random theory, this is actionable information that I trade on day in and day out. What we have going on is identifying that we were not liking these lower prices. The market came up slightly. We started putting in a little consolidation, and then we broke out to the upside, waiting for this breakout to happen, waiting for some volume to support it, entering in on a long, taking this off as we entered the value area, and then scaling out in front of VWAP. Now, don't get bogged down again with the details of what we're talking about here. But what's important and what I want to show you is the trade activity log here. And what you can see is this was the first trade that I took of the day. This long that was placed right here. Now, the second trade that I took was right here. This long brought in $925 of the just over $2,000 that happened this day. $925 of it happened on this trade right here. An actionable trade that was taken on information based on the volume profile. letting the market show me its hand, showing me what it's doing, being able to take that information, put together a high quality trade idea that has an edge and that I can trade with confidence. Now we've obviously just scratched the surface here, but if you wanna dive deeper and learn more about this model and how you can implement this in your trading so that you can start consistently placing profitable trades with real confidence, I want to invite you to click the link below this video. You'll get taken to a page where you can get all the information you need about the volume profile formula. And remember, if you want to be in more control of your winning and your losing trades, and if you want to have that laser-like, dialed-in focus decision-making so that you can know with confidence you are on the right path to success, This is the first step. So just click the link below this page and go on to the next step. Now listen, it's no secret that in trading this can be very overwhelming and frustrating and scary. And most traders are just rushing in blind. They don't understand the market. They're trying to just pinpoint these perfect entries, but they're never going to get the results they really want. You can skip all of this and you can put yourself on the fast track to rapid and consistent winning trades. So I want to invite you once again to click the link below this video and check out the volume profile formula. I'll be very excited to share with you this model and these systems that have helped traders just like me and just like you begin to produce consistent winning days.
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spk00: Yeah, I did. And every single month, he sends me a check in the mail. If you don't know what Audible is, it's actually owned by Amazon, which is one of the biggest marketplaces in the world. But instead, Audible is where you can buy podcasts or audiobooks. The first time I heard about this was actually three years ago when I met Christian. Christian showed me how he was using audible and how he was replacing his full time income by just putting up these audio files on audible. So he showed it to me and then pretty much in a few months I started doing the same thing and it allowed me to quit my full time job. Then I taught the same process to my mom and my mom is making about $900 a month right now and I'm even teaching it to my little brother so that he can pay for college. I want to show you how I was able to do this, but obviously this is an ad. If you click the link below, you'll be able to attend a free training where we walk through a very simple four-step process on how you can do the same thing for yourself. And the best part is it's very beginner friendly. I knew nothing about online business or even that you could sell things online. and I was able to make it work. My mom has no business experience. She doesn't even speak perfect English, and she was able to make this happen. And my brother is 18, and he's doing this. So this really is for anybody, no matter where you are in the walk of life. So click the link below. You'll see a link to attend a free training. All you have to do is put your email in and you will have immediate access to this free training. It's very short, no strings attached. And if you stay until the end of this free training, we actually have a lot of free bonuses that you can take and start acting on right away so that you can start putting up some of these things on Audible yourself. Okay, so remember, just this little app on your phone could really, really have the power to change your life, replace your income, or even allow you to quit your job. So just click the link below before this ad ends because I want you to start taking advantage of this right now while not many people know about it, okay? So this is an opportunity of a lifetime. Grab it while you can. All right, I'll see you on the inside.
spk11: And speaking of teams, today we'll take great pleasure in announcing the addition to Unity, Keisha Smith-Jeremy is a new board member. Keisha brings decades of experience in human resources and talent management to our board. She is the chief people officer of Tory Burch, the iconic American lifestyle brand, and previously served as the chief human resource officer at News Corp and the global co-head of talent management at Morgan Stanley. She will serve on our compensation committee. Having Keisha on our board is a reflection of our understanding that Unity's innovative, hardworking, problem-solving people are, in fact, our most important competitive advantage. Keisha, welcome to Team Unity. Now let me turn the call over to Luis, who will briefly run through our financial results.
spk08: Thank you, Jan. We deliver another strong quarter with excellent execution by the Unity team, beating both guidance and street expectations. The strong momentum and health of our business is enabling us to raise revenue guidance for the full year by another $45 million. Q2 21 revenue of $274 million increased by 48% year over year. While we saw strong performance across the board, I want to especially call out the outstanding work from the operate team. As I mentioned last quarter, we were well prepared for the Apple's privacy changes, and as a result of excellence in execution, we built market share this quarter. We're proud to help customers thrive during the uncertainties of our platform change. Our advanced analytics, context, and insights are proving to be a competitive advantage. CREAT also had a strong quarter with revenue of $72 million, up 31% year-over-year. Operating revenue of $183 million was up 63% year-on-year. And strategic partnerships revenue of $18 million was up 9% year-over-year. We continue to add new customers during the quarter, with 888 customers each generating more than $100,000 of revenue in the trailing 12 months as of June 30, 2021, up from 716 a year earlier. And our dollar-based net expansion rate as of June 30, 2021, was 142% equal to last year. Unity's customer base is becoming more diverse as we expand from games into other verticals at a fast pace. We expect to continue to see good progress in bringing real-time 3D to new industries. Non-GAAP gross margin of 81% was up 300 basis points on a sequential basis and on a year-on-year basis as we operate more efficiently and benefit from product mix. We remain confident that we can sustain gross margins above 70% for the long term. Q2 2021 non-GAAP operating loss was $3.2 million compared to $8.7 million last year as we benefited from strong revenue growth. We will continue to invest in our business with emphasis on R&D as we have many attractive opportunities to go after. We generated Q2 21 free cashflow margin of minus 12% compared to minus 43% in Q1. This quarter includes a one-time cash outlay for determination of a lease agreement for previously planned occupancy of new office space. We had 4,613 employees at the end of the quarter or from 3,379 a year ago. This brings me to guidance. Given the strong business momentum, we are again raising revenue guidance for the full year from a range of a billion dollars to 1.015 billion to a range of 1.045 to 1.060 billion, which represents 35 to 37% revenue growth year on year. This is a 45 million increase from prior guidance. With the upside in revenue, we are also increasing our non-GAAP income as we're reducing our fiscal year loss guidance from a range of 90 to 100 million to a range of 55 to 65 million. We will continue to invest in driving the business with a focus on long-term value creation. For Q3, we expect revenue of 260 to 265 million, which represents 29 to 32% revenue growth year over year. This year's Q3 compares against the 2020 quarter during which shelter-in-place orders boosted engagement more than in prior years. For Q3, we expect non-GAAP operating loss for the quarter to be between 15 and 20 million. We remain committed to reaching non-GAAP profitability in 2023 while we continue to invest to extend our technological lead and reach more customers. In terms of share count, we're forecasting 327 million fully diluted shares outstanding for the quarter and 328 million for the full year. With that, I want to welcome Pixis and SpeedTree to Unity. We closed the acquisition of Metaverse Technologies, providers of Pixis, a 3D data preparation and optimization software in Q2. The acquisition means professional creators can more easily and quickly import 3D data into Unity and optimize models for real-time development. And we closed the acquisition of Interactive Data Visualization Inc., the popular SpeedTree environment creation suite in July. The acquisition enables a deeper integration of SpeedTree to the Unity ecosystem, enhancing artists' authoring workflows and environment creation capabilities. This is another great step to enable artists with Unity. In summary, we're very pleased with our performance and prospects. We're building a sustainable business with massive scale opportunities. The strong first half gives us confidence to raise our guidance for the year and make us optimistic about 2022.
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spk08: With that, let me turn it back to john who will announce another addition to the unity family to enable creators, which is now pending customer closing conditions that we expect to close in Q3 this acquisition will not have a material impact to our fiscal year results. john.
spk11: Thanks, Louise. I'm excited to announce that we have reached a definitive agreement with the intent to acquire Parsec. I'll fill you on what Parsec does in just a minute. But an important reason we're optimistic and confident about the combination with Parsec is that it had become truly viral inside of our development organization. And when we looked at some of our largest customers and saw the same rapid adoption curve with Parsec, we knew we had found something special. Now, for those of you who are not familiar with Parsec, they are a remote desktop and streaming company that allows individuals and companies to work together from anywhere. What Parsec has done is deeply innovative because they have built a platform that can support the rigorous requirements of creative professional applications. As you likely can imagine, the work of game development and creative professionals is incredibly complex. It's high fidelity, it's immersive, rich in detail, it's interactive, and it's only going to get more complex as creators shift more and more to real-time 3D. Creators need low latency, ultra high definition desktop streaming, and Parsec delivers this in spades, delivering very low latency streaming at 4K 60 frames per second. But they also need more. Parsec provides rich detail with the same sampling rate for all images like 444 color space and the privacy security quality of life management tools needed for companies to support fleets of computer resources for all of their creators. And with companies and their employees collaborating and working in fundamentally different ways, whether it's hybrid, remote, or distributed work environments, Parsec has addressed the unique requirements to support this top of high performance processing, no matter where they are. So Parsec and their founders and leaders, Benji Boxer and Chris Dixon, have been both highly innovative and prescient with their technology. Parsec also focuses on simplicity and access. You can get started with a full professional grade creator class remote desktop link with just a push of a button. And as individuals and companies use Parsec, they can drive a sort of incremental virality and further adoption with coworkers, peers, and partners. As a result of their unique capabilities and the shift to new ways of working, Parsec's for Teams subscription business is growing over 150% year over year, with aggressive plans to accelerate even further next year. Subscription growth is driven by strong net dollar expansion rate of nearly 200%. They have a loyal customer base. Even before we entered into this agreement with Mark Parsec, as I mentioned, our own internal developers were adopting Parsec, but we're hardly alone. Parsec has strong relationships with gaming companies like EA, Ubisoft, Square Enix, and many of the industry verticals where we sell solutions, including media and entertainment, architecture, design, and more. We see an opportunity to drive shared momentum with these customers through targeted cross-selling and bundled solutions. Parsec is a key step towards Unity's expanded cloud vision. Based on our shared understanding that creators expect to be able to work from anywhere on any device and will require rich and powerful tools and cloud infrastructure to deliver real-time 3D experiences of the future. um when we think about the future through the lens of create our view is that creative process will evolve from on-premise devices to flexible and cross cost-effective cloud architectures this is why we're investing in collaboration and moving more of our capabilities to the cloud we'll share more details after we close the transaction and with that i'll turn the call over to richard who will run us through our questions
spk03: Great. Thanks very much. So we'll move on to the Q&A section. And so as we did in the last call, we collected and sorted questions from analysts. And this allows us to get through almost twice as many questions as you get on normal telephone call-ups. Then at the end, we're going to open it up for open questions and stuff that you guys might have for us as well. So as we approach the open question section, just raise your hand on the virtual screen. And we'll call on you guys. So first question, we'll start with financials. So this call is about earnings. So let's do some financials to start with. So we we've remained, as you've just heard, active on the M&A front during the quarter. And Mario Liu at Barclays honed in on this with a couple of good questions. Specifically, you know, do you see potential for further M&A to drive growth? We've just announced some. Any updates on recent acquisitions with regard to REST-AR and Artomatix? And then also he asked about Pixies, the software partnership with NVIDIA and Microsoft. Is there a possibility to expand there? And then finally, Brent Braceland at Piper asked with regard to kind of how we're doing on Pixies as well. So how are we doing cross-sell and things like that? So Louise, if you want to roll with the M&A questions, that'd be great.
spk08: Yeah, thank you, Richard, and thanks for the question, Mario, Lou, and Brent. You know, we believe that M&A will continue to play a role in our future. We use a disciplined approach to evaluate opportunities through, what I would say, three lenses. First, does the acquisition significantly accelerate our capabilities and our key strategic focus areas to strengthen our position in the market? Second, can we generate an attractive return on our investment? And third, can we execute with excellence? We track the performance of our acquisitions. In fact, we completed the last update about a month ago. Overall, our acquisitions are in aggregate, performing in line with the expectations we set when we signed the deals. And we believe that many of these acquisitions have potential to accelerate our growth even further. As you would expect, there are some opportunities where we can do better, and we have plans to do so. You know, on the point on Pixis, Pixis has been part of our offering for many years. And as I mentioned in my prepared remarks, Pixis enables professional creators to more easily and quickly import 3D data into Unity and optimize models for real-time development. You know, said differently, Pixis offers best-in-class tools to digest and optimize 3D data for real life. This is a great capability that enables creators both in games and other verticals with strong customers across several industries. And to your point, we look forward to strengthening our partnership with Microsoft and NVIDIA.
spk03: Great. And then another question for Luis. Gal Munda at Barenberg has a good question. It says, quote, now that you've been in the job for more than a quarter, what are some of the early observations of the low-hanging fruit that you've seen and that you can focus on in the near term, either from a purely financial or strategic perspective?
spk08: Yeah, thank you, Gal. It seems like I've been here for a little bit longer than that, but it's been a lot of fun. I'm very happy to be at Unity. As I've said before, I believe that this is what I would call a once-in-a-lifetime opportunity. The team is outstanding with technical debt mastery, deep business expertise. The culture is really unique and fantastic. And the passion for winning is as high as I have ever seen. Success for Unity is to enable more creators as the metaverse evolves. And as a result, we believe that we can sustain revenue growth at or above 30% per year for the long term. And we will do so while creating leverage to improve our operating margins and free cash flow over time. This requires us to operate with clear strategies and discipline and allocate resources to those ideas and projects that can generate businesses at scale.
spk03: Great. So now we're on to monetization. And as usual, we have several questions on IDFA. So we're going to hand these over to John. So we have a handful of questions. So we'll start with Stephen Jew over at Credit Suisse asks the following. What is Unity's relative advantage in making sure that publishers are well and or better compensated over time versus other networks?
spk11: So thanks, Steven. Look, we started a monetization business seven years ago with a thesis that the whole legacy buy low, sell high model in advertising at best delivered short-term success and was in reality kind of a broken business model. Our monetization program is based on a deep, deep understanding of user level LTV and engagement. And we succeed when we deliver superior ROI for customers. This means it's really about data. We leverage 3 billion, you heard me announce earlier, it's 3.4 billion at the end of last quarter, 3 billion MAUs producing petabytes of data from Unity's SDKs and integration with our engine. And we apply advanced analytics and machine learning algorithms to create and manage a true ROI on behalf of our customers. So what we're optimizing for is engagement and LTV, not spread. It's a really different business. Now, there's more going on out there. It's complicated. And reading the media lately, it seems like the world may be moving into more of a closed and silent platform based on first party data. Here we have advantage. We've got our own proprietary data. But I believe creators want options so they can choose the tools, services, and monetization partners that are best for them. It's important to note that our monetization tools are open. We have over 50 partners in our unified auction, and we have the goal of maximizing revenue for publishers. That's our North Star. And at Unity, we believe more choices are better than less, better than fewer. And ultimately, if we optimize for the success of our creators, our publishers, we'll be rewarded with their business and growth. We saw that this last quarter and the last several years. Our near and long-term results are proof that it's true so far, and we continue down that path.
spk03: All right. Another question, John. This one comes from Matt Cost over at Morgan Stanley, who asked about industry-wide trends in ad spending. Because if you listen to different conversations and press releases and things, some people say it was pulled forward, while other people say that it was reduced because of difficulty over attribution. So what's going on there? It seems like there's a lot of cross-currents.
spk11: Well, we're definitely hearing some confusing stories from individual publishers. Each has their own truth, and I'm sure they're living their own truth. Look, if there's anything that's constant in gaming or constant in monetization, it's change. Sometimes the changes are small, sometimes they're big, but they happen every quarter, every year. What I would say really on this is longer term investment in advertising can't go a different direction than revenue in the industry attrition is a reality in the video game world and people need to invest in user acquisition in order to continue to have successful thriving game businesses and of all the things i'm confident of it's the gaming is going to continue to be a successful thriving businesses for companies based in North America, Europe, and Asia. Now, our view is advertisers, publishers are going to continue to spend as long as they're getting quality payers at a positive ROI. That's what we do. In fact, we've got tools like audience pinpointer that allows advertisers to find what ROAS they'd like to target or based on retention or IAP or ad revenues so they can get a guaranteed return regardless of what's happening or changes in attribution. That's what we're delivering. Our results reflect continued increase in end spending on the Unity network, something we've been consistent with. But again, I don't think there can be maybe a quarter or two at a time, but there can't be material divergence between user acquisition spend and industry growth. They go hand in hand.
spk03: And then one last question on monetization. So Bhavan Siri at William Blair asks, how big of a factor is conversion postbacks now that advertising level with the iOS 15 update this fall? And to what extent does that impact companies like Facebook? It seems to have a big impact on them, but how does that play out for firms like Unity?
spk11: Well, look, I wouldn't want to get so specific as to try to step into the Facebook executive team's view as to how this affects them. But it's a good question. I'll give you my point of view. We've always been a proponent of open attribution ecosystem and supported all attribution providers from day one in modernization. For Unity, adding another provider or protocol is a normal course of business. And when it comes to SCAD, Postbox, or other systems, we're there and ready to implement. And we're pleased to see a more level playing field and the move away of self-attributing networks. we believe content creators and advertisers should have choices in what services they use. And that includes having an open ecosystem of attribution providers rather than a single standard or attribution authority. But that's consistent with who we are. We believe in open systems, competition, choice. And no surprise, we believe that here too.
spk03: And we'll now move on to kind of some macro discussions and kind of return to normalcy. So we got similar questions, or at least thematically, from Afir Gottlieb and from Capital Markets Laboratories and Bhavan over at William Blair. And it was basically the comment was, can you talk about overall engagement trends that you see. Some people have expressed concerns about how reopening might impact gaming. Other anecdotal people say the shift is sustainable. Maybe you could just give some color on what you're seeing and what you expect over the next few quarters. And maybe, Luis, if you could run with that one.
spk08: Sure, thank you Ophir and Bhavan for the question. You know, we're actually very pleased with engagement metrics that we see. Globally, we're seeing more unique active users than ever before. And if I look back and look at 2020, the pandemic spike that started to decline a little bit in the fall of 2020, but then quickly ramped back up over the winter time. and led to 2021 having all time high unique user count globally. And what we're seeing here today, these monthly active users have continued to grow somewhere in the excess of 20% year on year. We're seeing particularly growth in APAC, Japan, Korea during 2021. Europe is also doing great. America is a little bit behind, but also growing very nicely. So we're seeing good growth across the board.
spk03: Great. We have a question on ESG. ESG has become an important topic of late. In fact, William Blair has a section on every report about ESG. And asked about kind of what we're doing on the ESG front. So maybe, Luis, if you want to run with that one.
spk08: Sure. We're committed to ESG to have a positive impact on the communities, employees, creators, customers, the environment, our shareholders. And we have to recognize we're in the early stages of building our ESG program. We're conducting our materiality assessment and aligning with the global reporting initiative and sustainability accounting board frameworks so that we can better understand our current position and opportunities to reach our goals. We have an internal team dedicated to measuring and coordinating our efforts. And we have a full list of programs listed on our investor page. But let me highlight a few just for this call. So on the environmental side, we're currently conducting our greenhouse gas assessment. We're also supporting Unity customers to become more sustainable and thus make the world more sustainable with the power of our technology. On social impact, we empower employees and creators of all backgrounds to foster a more inclusive, sustainable world. In fact, we have donated time, technology and shares now valued at over $75 million to enable positive change in education and economic opportunities, sustainability and health. On governance, we're committed to an inclusive workplace and governance approach grounded in our values of empathy, respect and opportunity. We know that there is a lot more work to be done, but we continue to be committed on this front and we'll be sharing more details at a later date.
spk03: Great. Well, why don't we move on to operate beyond monetization? So I'll fear Godly, but Capital Markets Labs picked up on the theme of social gaming and how that might play out in the broader addressable market. His question is, is can you comment on the progress of social games as it relates to multiplayer, Vivox and Delta DNA? And more broadly, how should we think about the opportunity? as you involve and extend multi-play so that that becomes a backbone of a broader cloud product offering for both games and industry verticals. John, why don't you take that one?
spk11: So first off, just a little, you know, sort of background. If you go back, you know, on the order of, uh, 20 years, you'd see that most PC and console games were single player games. You played against the machine and you later played socially on the couch sports games with the forefront of that. But gaming was largely a solo activity. As console and PC games got ready for, had the capability to get into the multiplayer products, That took over, and it's the dominant form of gameplay for most games out there in the world of PC and console. Mobile has lagged that, partly because they're not on broadband networks and they haven't had the CPU, GPU, or the technology to support it. That's changing. Social games and mobile games are becoming multiplayer. And with that, we see very substantial opportunity for Unity because we're a leading provider of the backend resources, the operating resources enable multiplayer and multi-user gaming. These services, as you mentioned, they include Multiplay, Wevox, Matchmaker, and we're seeing healthy growth on this front with more casual games, Knockout City, Konami, Super Bomberman, and many, many others, and they tend to use hosting, matchmaking, voice services. um but there's also a lot of you know tricky bits to this um you know one one area in particular is networking code it's a very difficult thing to master for many mobile game developers um sudden traffic spikes and they get they find themselves to have a hit um and they need 10 15 20 x the hosting capacity than they plan for and then there's management of toxicity and we see that everywhere in our environment but it's also true in chat in gaming as people come together. And so we're building new tools on top of what we have at Multiplay to make it just as easy for two person teams to create these types of games and succeed as it is with 100 person studios. So it's a great question because social and mobile are becoming a much bigger multiplayer experience than they've ever been before. I think it's an unstoppable trend and it speaks to opportunity on the operate side.
spk03: Great. we've got to pivot over to create for games. So we have another question from Matt Cost over at Morgan Stanley. And he asked, quote, a large competitor recently took their game engine open source. How is the competitive landscape with other engines changing in gaming? And do you believe the market will continue to consolidate to a small number of players? John, you have some obvious good perspective on this one. So maybe if you could play this one out.
spk11: Well, I'll start by saying, what do you mean by large? The company that owned them or both of the games that were using that game engine? So I'm not sure that I'd call that a large competitor, but I appreciate the opportunity for humor. I hope you take it that way. But open source has been a business model and technology, and it's always going to be around. Godot has been around forever, and that's an open source engine. The reality is game engines are really hard. Scalability, stability requires ongoing investment, commitment to QA. Another key bit is We're often working with builders of new platforms or existing platforms on hardware innovations that are going to take place next year, the year after and the year after that. We master those now so that when software creators or game developers show up with a product that's supposed to be optimal for the new hardware, it works on the new hardware. That's really hard for an open source player to really get in front of that. We're embedded in these companies, and it's nearly impossible for folks on the open source side to do that. They have a role to play, but I think it's really tough. And then the competitive context, you know, the landscape in gaming has been tough. We saw King externalize their engines several years ago. Autodesk used to be a direct competitor. I believe you're referring to Amazon a little while ago with Lumberyard. It's not an easy industry. And we think that our investment is such that we believe we can continue to gain. We told you we got a 71 share of the top thousand games in mobile. Our next voices are far behind. We have a very strong position in Nintendo, on all the consoles, PC, AR, VR, and we keep upping our R&D efforts. So we think we're in a really good position to deal competitively in the market. I believe we're going to see continued market share growth.
spk03: We have a question from Brett Braceland at Piper Sandler, and he's done some good fundamental work and asks, quote, based on new hiring intentions for Unity developers at Apple, Facebook, and Walmart to build new AR, VR applications that we've picked up on, could you spend some time articulating the opportunity for Unity within the AR, VR space and the pace of adoption you're seeing? John, if you could run with that one.
spk11: Yeah, I mean, look, I... I'm going to step back in time a little bit.
spk04: An all time classic. Like Capital Group's new ETFs, there's so much behind it. Like thinking long term. Can I find an ETF with a whole lot behind it? With Capital Group, I can.
spk11: Several years ago, I gave a presentation on, you know, called The Gap of Disappointment, which basically said that analysts were projecting staggering growth in the world of AR and VR, particularly on the consumer side. I didn't think that was going to happen then because we didn't really have the right combination of hardware, ease of use, content library, killer apps. I see that starting to change and you see that starting to change as well in the confidence that companies like Facebook and others, you mentioned Walmart, all sorts of companies across many of our verticals are getting really excited about AR VR because they're starting to see traction on the selling of hardware. Facebook has announced some great numbers around Quest 2. I know there's been some setbacks at different points in time. But based on what I see coming from hardware players, I think this is about to happen. I mean, not tomorrow, but over the course of the next three to four years, we're going to see a sizable market in ARVR. And there's nothing that makes me happier is a sizable market emerging around an area where we have a very, very, very strong position.
spk03: so um people are hiring um this time it's real um i think the next four years great uh we have a question um on new entrance and cloud opportunities um bhavan siri asked microsoft cloud gaming microsoft recently announced the extension of their xcloud offering we'd love to get your thoughts on the cloud gaming opportunity especially because there's been several attempts in the past with mixed levels of success and what that could mean for Unity with Project Tiny, et cetera. And in a similar vein, Mario Liu asked, how do we look at the entry of Netflix into the market? So maybe I'll run with this one. So thank you both, Bhavan and Mario. These are two good questions. So look, first at a high level, we'll start, then we'll drill down into the context. First off, we benefit when new forms of connectivity to games emerge. More people come into the market. That means more games need to be built to fill the new entertainment needs. And so that's generally good for Unity because they build games, we do better. So when we see a company like Netflix enter the market, we view that as a good thing. Now, double clicking down on the subscription question, game subscriptions have scaled out slower than we've seen in music and streaming services. So let's think about why that would be the case. you know, without going too far into the weeds, we believe there's really technical hurdles that have made it difficult to cost effectively deliver great user experience to consumers that evolve their consumption patterns. So as opposed to right now, what you have is basically delivering the same games David Wiltshire- To play in the same way, so think about how the way you consume movies and music differently now than the days when you had bought a CD at a store. David Wiltshire- and went to the movie so far, we just have not seen that evolution and game consumption, but at unity. David Wiltshire- We believe we have a lot of the technological tools that solve those challenges and subsequently we will give game developers opportunities to change. how games are consumed. And if we do that, we will unlock new business models and consumption patterns for millions of more people. So for example, our portfolio, as you know, includes U-Tiny, Furios, Dots, and several other modules that, among other things, make streaming a game less CPU and GPU intensive. So the big answer to the question is basically, the takeaway is that we're broadly optimistic about the rise in gaming subscription services and the ability for Unity to help in that area. And then create for verticals. And as always, we save the best question for last. And that comes from the team of Tom Roderick and Max Osnowitz at Stiefel. Quote, you often get asked about when verticals are going to be bigger than gaming. If you have an update on that trend line, this would be great. But maybe a more interesting question is what revenue model will get you there right now? Because you have CREAT, which is seat count based growth subscriptions, but you also have OPERATE, which is chugging along with a usage based model like we see from Snowflake, Stripe and others. John, that's kind of, I think, a good question right up your alley. That'll be our last question before open mic.
spk11: Sure. So it's a great question because it really speaks to a lot of what we're working on internally with several of our initiatives. So you heard me earlier announce several new customer ads, significant number of major new customers on the vertical side. So we're seeing the uptake. And today we generate outside gaming primarily a SaaS business and professional services business. You're right. We sell seat licenses and we sell runtime applications like Forma and Reflect to our customers. These companies also typically need help getting up and running with their new applications. And so with companies like Walgreens and Lowe's and The Nature Conservancy and many, many others, we offer professional services. In the prior question, we talked about how they're hiring Unity developers. A lot of these companies, they are, but they often need professional services from Unity to augment a smaller scale team than they have internally to build what it is they want. Hence, they engage with us on professional services. But I do think you hit on a really important thing. When it comes to these verticals, they're not likely to scale in the same way that game companies are with thousands and thousands of developers. And here you'll see more usage-based models. We already work on a consumption model with Furious. Pretty much all of our operating services are based on a consumption model. um you know when we um price and this is early stages around simulation um or visual twin parts of our business we we tend to focus up thinking about an individual server as a seed that makes it a consumption model on the basis of compute apply to the problem so i would say that as we continue to evolve and grow and scale um we're going to continue to see you know strong growth on the vertical side and we'll see a shift over time um from professional services and seat licenses to consumption models it'll be based on a variety of metrics sometimes how many servers are being used for something um another will be for streaming and and you know there'll be a series of others but think of consumption models being significantly additive to verticals in time that's great
spk03: Okay, now we'll open it up to direct questions. I mean, I guess we can start with Matt Cost at Morgan Stanley. If you want to open up your video, ask a question, then we'll roll through the other folks as well, too.
spk10: Great.
spk12: Thanks a lot for the question, guys. So I guess operate obviously came in very strong for the quarter. You mentioned share gains that you picked up on that side of the business to do with monetization. I was just curious, what were the drivers, in your opinion, of those share gains? And what trends did you see over 2Q? And can you give an update kind of quarter to date in Q3 on how those trends in the monetization side are going? Thanks.
spk11: So I'm going to reset my speakers and Luis, you want to take that because that came across pretty jumbled for me. So, Luis, can you pick that up and I'll open and close my audio driver and see if that helps.
spk08: Sounds good. Yeah, Matt, great question. And we talked about IDFA last quarter. And if you if you remember what I said back then is that we prepare for IDFA for over two years. And I also mentioned that our operator organization captures and analyzes 50 billion in-app events each day. And that's whatever, 35 million every single minute. So that's pretty amazing. And we do that across these 20 platforms. And I mentioned that our spending across our platform was really strong, and I expected some market growth. And really, the reason for that is our contextual models, which actually do not rely on IDFA, were working very well. Our scale and depth provides us access to vast amounts of data, which is really based on end users engagement and platform performance data. And the feedback we were getting even back then was very strong from our customers. I think some of our customers were saying things like, hey, we partnered with every single network out there and Unity's readiness and guidance are far above anybody else. And that allowed us a quarter ago to raise our guidance by about $50 million. And really what we continue to see is exactly the same things as we saw last quarter, the same advantages. And as John mentioned, IDFA is clearly having an impact in the industry, but it's impacting different players in different way. Some of them are accelerating, some of them are decelerating. we are fortunate to be prepared and to have the data and all this analytics audience being pointed, being a key one, where we're actually accelerating. And that is, again, allowing us to raise our guidance by this $45 million that we talked earlier. So it's the same message that we talked about a quarter ago. We just continue to see it play out. And we're performing very strongly in this environment.
spk11: It's just to build on Louisa's point, I now better understand the question. Earlier, we got this question about, you know, on the advertising business, and I connected advertising revenues to the industry, the gaming industry. I really think the best way to think about this, and we have deep experience from what happened in Europe around GDPR, is Disruptions affect relative market share. They affect one publisher different than another. We're a proxy on an industry while gaining market share. So I think at the aggregate level, it's doubtless in my mind that we're going to see growth in the ads market. Will it affect every publisher the same? No, because the CAC to LTV calculation is different, not just for every publisher, but for every game within every publisher, and often in every major geography for every game and every publisher. The aggregate is there. The harsh realities is when you change some of the monetization mechanisms that are out there, as IDFA did. as GDPR did before, it affects the relative fortunes. Who's at the top of the stack? Who's second? Who's third? I'm happy to say through this, whether it was GDPR or IDFA, we've anticipated well enough to be net winners in those equations. But I do expect to see some shuffling on some other networks or some own networks having more difficulty adapting to these rules. And on a relative basis, different publishers are going to end up with different stories.
spk12: Great. Great. Thanks, guys. And sorry for any audio issues. No, it's fine.
spk08: If I can just add, Matt, just to compliment, you know, our unique context and insight are really the competitive advantage for us. Developers come to Unity first when they are making their games, not to other platforms. Our runtime is in the app, in addition to many of other operating services. So we have this scale, and that's all coming together very nicely. Great.
spk03: Hey, Tom, Roderick, do you want to pop in?
spk10: Outstanding. Okay, can you hear me okay?
spk11: Hey, Tom, I can hear you perfectly.
spk10: Wonderful. All right, away we go. So, John, Luis, and Richard, you know, I think maybe I'll try to put an even finer point on Matt's question, because I think it's a great question. And there's all these cross currents that everybody's trying to figure out. And when I weigh, you know, what's clearly a monster quarter that you just put up, you know, really just tremendous trends there. And then sort of measure that against the forward guidance where you're looking at a sequential down number. And so I guess the question you're going to undoubtedly get, you know, with a finer point on it from a lot of people is, should we be nervous about that? Is that, you know, a reflection of sequential trends on engagement that are tougher? Is it a reflection of just uncertainty around the advertising ecosystem? Or is it just, hey, we just put up a monster quarter, don't kill us. we're going to be a little bit conservative and keep the horse in the barn a little bit.
spk11: So I'm going to waste 30 seconds of an answer to give Luis time to prepare one, but I can assure you, Tom, we are not nervous. And if we're not nervous, I would not encourage you to be nervous. We feel great about our business. There's nothing about sequential guidance that has us feel any less good about where we are, where we're going and our long-term growth trends and our short-term growth opportunity. So with that pre-mumble, Luis might want to speak to seasonality and sequential quartering and how guidance works.
spk08: yeah i mean if we were nervous tom we would not be raising 45 million again after doing that just a quarter ago so we're not nervous we are very bullish in the business you know if you look at two years ago and you look at q3 relative to q2 you'll see that the other real seasonality last year seasonality was obviously impacted by COVID. So it's a little bit misleading. So we just we know that that's how the business operates. You know, summer and holiday seasons have traditionally been peak months for us, particularly in the operate business, which is more of a consumption based model. So that's what's impacting us. But but we're very we feel very good about the health of the business, as we've said many times in the call.
spk11: Yeah, so specifically, Tom, the lower months for summer vacation months for a bunch of different reasons. But it's we've seen such dramatic growth that it's sometimes hard to parse seasonality from sequential growth.
spk10: Very fair. OK. And then a really quick one, Luis, you touched on it. uh just on parsec there's probably a millennium falcon joke to make in there i'll let richard make it later but uh you know you mentioned it's not material which i get but that materiality has a lot of different levels is there any revenue associated with it at all inside of the guidance itself can you just kind of give us a sense of that or is this strictly a product company that you're bolting onto the vision here
spk08: Yeah, there is very, very little revenue this year, Tom, nothing, nothing material in any way. So no, I wouldn't, it's that if the question is, is that why you were raising our guidance? Absolutely. No, no, it is. It's a great company. We love it. The technology is amazing. As John explained, we think that the future is, is very, is great, but the impact of this year is very, very small.
spk11: To put a point on it, at least I never discussed PARSEC as we were working on our guidance. Also, we don't, you know, we try not to include in the guidance anything that's not closed.
spk10: Very fair. Excellent. Thank you all. Appreciate it.
spk03: Hey, Brent Braceland, are you up?
spk09: Thomas Greene, guys so good afternoon, thank you for the question too quick ones here you got to start with operate obviously crushing numbers here for three consecutive quarters in the face of IDF a pretty impressive I just wanted to ask, given the guide which. is pretty consistent here the last three quarters over 30% and actuals are much stronger. But what was linearity, monthly linearity in the quarter? Did you see kind of the operate business start to trend on a year-over-year basis down in month three or was it kind of stronger in month three? Any sort of color on operate linearity as we just think about kind of how it performed in the quarter and as IDFA kind of started to be implemented?
spk08: Yeah, what I would say, Brent, is while we don't disclose that we are very, you know, the linearity was good during the quarter. I mean, we feel very good about the linearity. And again, if it was not, we would not have raised um guidance for the year by by as much as we did right so we feel good about the health of the business we looked at it by geo by business by month you know any way you look at it and we feel good about it so not not a concern there brent
spk09: Scott Scheer, Got it well you're clear to clear the game share kind of post, if I guess my last question for you john on parsec because you think about that opportunity. Scott Scheer, Do you think that's going to be like part of the subscription offering and functionality of. Scott Scheer, Of the base package, do you plan to kind of operate that as a as a separate kind of subscription offering, what are your initial thoughts i'm sure that will change over time, but what are the initial thoughts on. packaging and bundling of Parsec? Well, first off, both.
spk11: And let me trace back to that question. You remember, Brad, about half hour ago, I'd mentioned we said we can 5X our cover inside of the gaming industry to pick up artists. There's a boatload of artists that are using Parsec now. Weirdly enough, I think with a lot of customers, they can draw Unity into the seat more than the other way around. Because they're $30 a month, it's an easy and essential component for a game developer to have a remote system. The other thing is, a lot of developers at Onister, they need something like Parsec to be able to come in and use their tablet to do any sort of creation, and Parsec provides for that. And so my sense is that it's just one of those Goldilocks deals where we can pull them into customers, they can pull us into customers and we can bundle and gain penetration with customers that we both share with significant penetration. And, you know, with Benji and Chris, I met, I mean, I wish I was half as smart as they are when I was their age. They're just killing it with deep insight and just execution that, you know, I stand back and marvel at. I feel really, really good about this one.
spk09: Well, sounds encouraging. Thank you so much.
spk03: Hey, Stephen Jew, are you available?
spk02: Yes, sir. All right. Hi. So I guess following up on the questions around the advertising business, there's the marketing spend from the video game developers, but there's also the larger opportunity from a broader set of advertisers across more verticals. So can you talk about what you're doing to onboard more of the non-endemic, non-video game advertisers?
spk11: Yeah, sure. So, you know, first off, we're experimenting at the margins on the supply side for non game advertisers. Think of us as being supply side game industry and demand side anybody, but mostly on the game side and then we've got, you know, big partnerships with a number of aggregators that buy into our network, most notably Google, and they bring a lot of brand advertising among other things. So I frankly expect, and based on what I see out there, is that we're seeing more and more sophistication. on non-game advertising is buying into game industry networks. And so we'll probably see more there, but it's still, you know, the lion's share of this is still game advertising on both sides of the equation. But again, we're open to both sides. Does that get to your question, Steven? You went mute on me. Okay.
spk02: Sorry. Yeah, I'm just thinking about the longer-term opportunity because... I think the longer-term... Let me be really clear.
spk11: I think the longer-term for Unity is a bigger box than we're operating with in monetization. We're experimenting constantly. We have... A more data-centric play in advertising that all but a few of the players you learn to love and admire like a Google and a Facebook. There are precious few companies anywhere with our sophistication around advertising and data. And those are skills that we want to apply more broadly and will. But when you're posting 60% quarters, you're focused on the core. And that's what we're doing now outside of our business. Gotcha. Thanks, John.
spk03: Great. And then Afir Gottlieb.
spk06: Hey there. Thanks for taking my question and thanks for the format, Richard.
spk03: You're welcome.
spk06: I was hoping you guys could talk about DBNER, and I ask because in Q2 and Q3 of last year, the COVID quarters, we saw this, you already saw the spike, right? Low 140s, mid 140s, and it didn't seem sustainable per se. Yet here we are, Q2 2021, and it's 142% again. Can you talk a little bit about what's driving that? Maybe an update on Q3 or even longer-term guardrails on that metric? Thanks.
spk11: Luis, you or me? Do you want to go, John? Sure. Look, one of the things that helps with our dollar-based net, so look, dollar-based net expansion, we look at these things a little bit like whenever there's more than two numbers involved and you're doing multiplication and division, you have to understand what some of the underlying trend lines are. What's helping us keep that number up is we keep graduating customers from below the 100 threshold, above the 100 threshold, and then they can bring a lot of growth. And then the second thing that's happening is we are taking our larger customers and continuing to grow them. So we're seeing growth at the bottom of the stack, the top of the stack, and then we keep bringing people into the stack. um to be honest with you um when when we set up the guide for this year we were guiding materially lower than we're currently realizing in our revenue number and a lot of that is our continued success with our customers above our plan above our expectations and so um it's what you want to see as a ceo you know it's it's kind of pleasant to wake up in the morning and you see something and it's usually good news almost always could move. And we're bringing new customers on the platform rapidly. And when they get to the platform, we're growing them rapidly. It's a good time to be at Unity. It's why we're as bullish as we are.
spk06: All right. Thank you.
spk03: Great. And then we're just about done. Cash, did you have a question or do you want to chat when we do the callbacks? What's better for you?
spk12: I'll chat on the callback. Thank you so much for the offer. Perfect.
spk03: All right, great. Well, that wraps it up. We did it in 61 minutes, so that's not too bad. So we appreciate everyone being on the call, and we definitely look forward to seeing you either at conferences or on our next earnings call. But thank you very much, and we appreciate your interest and support. Thank you.
spk11: Thanks, everyone.
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