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spk07: Great. Thank you very much. Welcome, everyone, to this call to discuss our fourth quarter earnings results. With me today is John Riccatello, President, Chief Executive Officer and Executive Chairman. Luis Visoso, Senior Vice President and Chief Financial Officer. And a new participant on our call today is Ingrid Lastillo, Senior Vice President, General Manager of our Operate business. This call will have a similar structure to past calls. John and Luis will provide a business overview. Then we'll answer kind of the three questions that we've received the most from investors and analysts. And then we will open up the call to panelists to open Q&A. And we plan to wrap the call up within an hour. uh now before we start i'll run through our safe harbor statement um as i as you know so we would like to say i'd like to remind participants that during this conference call we will be making forward-looking statements including statements about goals business outlook industry trends market opportunities expectations for future financial performance and similar items all of which are subject to risks uncertainties and assumptions you can find more information about these risks and uncertainties in the risk factors section of our filings at sec.gov. And we remind everyone that our actual results may differ, and we take no obligation to revise or update any forward-looking statements. Now, we will also be discussing non-GAAP financial measures today and reconciliations between our GAAP and non-GAAP financial results. And a discussion of the limitations of our non-GAAP financial measures can be found in our earnings press release, which was issued earlier today and is available on our website under the investor relations tab. So now with that, let me turn the call over to John.
spk06: So thanks, Richard, and good afternoon, everyone. We delivered another really good quarter, October to December, to close out 21 with great momentum. For the quarter, revenue grew 43 percent year over year to $316 million, and our non-GAAP operating margin was minus 3.8 percent, expanding 530 basis points from a year earlier. underpinning our growth our healthy net dollar expansion rate of 140 percent and the addition of 259 customers each generating over a hundred thousand of revenue in the trailing 12 months reaching 1052 customers at that scale at the end of the year up from 793 a year before For the full year, revenue of $1.1 billion grew 44% from a year earlier, and non-GAAP operating margins were minus 4.6%, an improvement of 200 basis points from a year ago. With very healthy gross margins and our largest expense being R&D, ours is inherently a high net margin business. We're committed to continuing to improve operating margins as we continue to gain scale. These results have been and will continue to be driven by excellence and execution by the Unity team. We have built our business on a strong foundation based on very healthy customer metrics and structural economics. We entered 22 with momentum across both create and operate, which gives us confidence in our outlook. For the year, we expect to grow revenue to be between 1.485 billion and 1.505 billion, which represents growth between 34 and 36% from 2021. And we believe Unity is very well positioned in a fast-growing market, which we are expanding even further with internal innovation and strategic acquisitions. As we've said before, we expect to grow revenue above 30% for the long term and expect to expand operating margins sequentially, breaking even on a non-GAAP basis within 2023. With that, let me explain why I'm personally very optimistic about Unity's prospects. First, we participate in a massive market with significant tailwinds. At the time of our IPO, we estimated our total addressable market was $29 billion for create and operate. Our current best estimate is $45 billion. This expansion is driven by growth of markets in which we compete, plus the addition of new markets as we extend our offering to new users and new use cases. We believe that the transitions from 2D to 3D, from non-real time to real time, from non-interactive to interactive, creates a massive growth opportunity for many decades to come. This new world that is emerging is more immersive, more engaging, and opens opportunities for gaming, to e-commerce, automotive, architecture, media and entertainment, and many other sectors. So, point number one, big market, rapidly growing, great tailwinds. Second, Unity is a leader, is the leader in real time 3D, and we're very well positioned to capitalize on these trends. We have a strong and growing market share in all of our sectors and across multiple industries. During 2021, we expanded our market share in the fastest growing segments of the gaming market, mobile, AR, VR. Real-time 3D is growing, and within this large and fast-growing market, Unity is winning. Our non-gaming business is growing even faster as we add customers across multiple industries. We believe there is significant upside as we have embedded structural advantages. With Unity, creators develop once and deploy to many platforms, and unlike other companies, we don't compete with our customers. The Unity platform is designed to help creators through the entire lifecycle of a runtime application, from ideation to launch to monetization, hosting and ongoing analytics to drive growth. So point number two, we think our leadership position is strong and we're growing it and we continue to do that. Third, we're expanding our addressable market with innovation around new products and strategic acquisitions. For north of a decade, we've been innovating and adding capabilities through our own product development and via acquisition to help solve problems our customers share with us. We originally moved from a few platforms to over two dozen in specific response to customer needs. More recently, the addition of Parsec, Weta Digital and the Unity Gaving Services are great examples that address customer pain points and also increase our addressable market. Parsec empowers some of the world's most inspiring and creative companies to freely work and play from anywhere on any device on their own terms. With Weta Digital, Unity creates a pathway for any artist from any industry to create the most powerful tools. Unity Gaming Services unifies existing solutions and introduces new tools and services to simplify launching and operating cross-platform multiplayer games. These initiatives are expected to continue to expand our total addressable and serviceable markets and continue to increase the value of the Unity platform for our customers as we solve more and more of creators' most challenging problems. Now, this takes us to point number four. We believe that we have a unique platform that will endure the test of time. And as I've said earlier, the process of building our platform is at the very center of our strategic process, where we add value to our platform while increasing our total addressable market. We aim to offer significant and increasing value to creators and artists as we reduce their operational complexity and ease their on ramp. Building this platform requires time, focus and commitment. We have devoted tens of thousands of developer hours to deliver speed, scalability, stability and ease of use. We have built trusted relationships with all the major platforms to the point where they share with us their product roadmaps. These partnerships are critical differentiators in the market. In the coming years, we plan to solve more and more of these creators' challenges by offering new features and services. And this shows up and has shown up consistently in a very healthy dollar-based net retention rate. And lastly, across Unity, we have an amazing team of innovators. Unity is an innovation machine. Modernization is a great example. We entered this business in 2014 and have not stopped innovating ever since. We hire the best and brightest product leaders, engineers, data scientists, and focus on improving player experience. We operate with the developer's interest in mind and ensure our products contribute to their long-term success. As a result, we have consistently gained market share, including this last year when we executed with excellence in an IDFA challenge environment. This is one of many examples where Unity's innovation is making a significant difference for creators. Now I'm proud of what we've achieved so far at Unity, and I'm excited about the future that we can and will create. We are executing with excellence in a large and growing market that we are strategically expanding through internal innovation and acquisition. We have a defensible platform that adds significant value to our customers and keeps on getting better. Now, before we turn over the call to Louise, I want to share with you the magic of Ziva and Unity. This is our latest acquisition. I believe it's got huge potential. Let's show them what we want to share.
spk00: Hi, I'm a virtual human created by Ziva Dynamics. I'm powered by state-of-the-art biomechanical simulation and I'm running in real time in Unity. But enough about me. I have some even more amazing news to share with you today. I'm excited to announce that today Ziva, my creators, are now part of the Unity family. Unity and Ziva have a shared vision of making realistic, lifelike character creation accessible and scalable for all artists, regardless of skill level. And it's not just for virtual humans like me, but for any kind of creature, monster, or animal imaginable, realistic or stylised. Ziva's leadership in character simulation, deformation and machine learning, along with Unity's deep knowledge of real-time technology, makes this an effortless and powerful partnership. As we grow together, Unity and Ziva will continue serving the many innovative teams, creators and engines that use our technology. By acquiring Ziva, Unity will further democratise Ziva's best in-class tools to allow artists like you to create digital characters like me. We want to thank you for all of your support over the past seven years. Ziva has learned so much, and we couldn't have done any of it without your passion and dedication to incredible digital art. It's been a whirlwind journey, but I'm certain it's just the start.
spk03: Thank you, John. Back to a normal, real human being here. You know, I've watched this video many, many times and continue to be impressed by the amazing technology. So let's begin with the key financial highlights. Revenue for the fourth quarter of $316 million increased by 43% as compared to the prior year's fourth quarter. These results include $4 million in license fee from Buena FX. Excluding this, revenue for the quarter will have increased 41% year over year. Results for the quarter beat guidance again. As you would expect, every quarter has risk and opportunities. Since we prudently assess risk when constructing guidance, we can beat guidance if things fall our way. In the fourth quarter, create accelerated growth, the WET acquisition closed a month earlier than expected, and OPERATE continued to perform very strongly. Revenue for the full year of 1.1 billion increased 44% year over year behind strong execution by the Unity team. Our performance for the year came in significantly above our initial guidance of revenue growth of 23 to 26%. Importantly, our performance is broad-based. Operate delivered another strong quarter with 45% year-over-year revenue growth, bringing the full year to $709 million, an increase of 51% from the prior year, as we helped our customers in a challenging IDFA environment. Create accelerated again in the fourth quarter and delivered 49% year-over-year revenue growth. This creates total revenue to $327 million for the full year, an increase of 41% from a year earlier. Strategic partnerships revenue grew 12% this quarter and delivered $70 million for the full year, an increase of 7% from a year earlier. We continue to see strong customer success this quarter or dollar based net expansion rate for the fourth quarter was 140% off from 138% in the fourth quarter of 2020. And we continue to grow customers generating more than $100,000 of revenue in the trailing 12 months from 793 year ago to 1052. Revenue from these customers accounted for 85% of our total revenue in the fourth quarter of 2021, up from 80% in the same quarter a year ago, reflecting a closer, more meaningful partnership with our customers. We generated non-GAAP operating loss of $12 million in the fourth quarter, which compares to a non-GAAP operating loss of $20 million in the fourth quarter a year earlier. Our non-GAAP operating margin for the fourth quarter was minus 3.8%, expanded 530 basis points from a year earlier. This brings the full year non-GAAP operating margin to minus 4.6, an improvement of 200 basis points from 2020. Our performance for the year came in significantly above our initial guidance of non-GAAP operating margin of minus 11 to minus 9%. Our margin expansion comes from improvements in non-GAAP gross margin and leverage in sales and marketing and general and administrative costs. Non-GAAP gross margin of 80% for the quarter and the full year are up 160 and 90 basis points from their respective prior year periods. The non-GAAP gross margin improvements are mainly driven by efficiencies in cloud hosting costs. Free cash flow of minus 53 million for the fourth quarter was impacted by timing of payroll taxes and normal quarter-to-quarter working capital fluctuations. Free cash flow margin for the year is minus 14%, including a $50 million one-time charge to terminate a lease agreement in San Francisco, which we recorded in the second quarter. Excluding this charge, free cash flow margin for the year would have been minus 9%. Acquisitions continue to advance our strategic priorities. We added key capabilities and expanded our addressable market with three acquisitions that close this quarter. What a digital and asset purchase, which we closed in December, enables us to put the incredibly exclusive and sophisticated tools in the hands of millions of creators and artists around the world. And once integrated onto the Unity platform, enable the next generation of real-time 3D creativity. SEVA, which we closed in December, democratizes high-quality character creation for all artists by reducing time and cost by leveraging state-of-the-art biomechanical simulation and machine learning. And finally, SynSketch, which we closed in November, enables cloud-based, secure, and effortless collaboration, rapid review, and feedback between remote creators. Last, we increased our financial flexibility by issuing an aggregate of 1.725 billion five-year convertible notes with a 0% coupon and conversion at $308.72 per share. We also entered into a capped call transaction to reduce potential dilution caused by the notes with a cap price of $343.02 per share. The net proceeds from the issuance of the notes were $1.65 billion net of debt issuance cost and cash used to purchase the capital transactions. Let's dig in a little bit deeper before we go into guidance. operate had a terrific year we're passionate about partnering with our customers from the two-person development team who pursue their passion of making games to the large game publishers with millions of players who need to constantly innovate to stay competitive and keep their players engaged over the past year the operate team supported more than 200 000 game launches Our customers are increasingly harnessing the power of our multiplayer suite, enabling them to access cross-platform multiplayer games, which is the experience that almost 60% of gamers are looking for. With our recent launch of Unity Gaming Services, we're making it even easier for developers to tap into this trend in the fast-growing segment of gaming. We also saw strong performance from our sophisticated analytics tools and products such as Audience Pinpointer that deliver strong return on investment to our customers without manual guesswork. To win in a highly competitive market, we're constantly innovating, optimizing our machine learning models, improving our campaign and performance models, and generating actionable insights for our customers' campaigns and enabling them to make informed decisions. As a result, we estimate that our monetization business has been, over each of the last five years, including 2021, consistently growing about twice as fast as the market. In addition, we're focused on providing infrastructure for synchronous multiplayer experiences and community service for vibrant social interactions. I also want to call out Unity Mediation, which we launched last quarter. Our offering includes waterfall and bidding to help developers build strong revenue streams by easily optimizing demand from their best performing ad formats and network partners within the same editor and interface they build and manage their game experience. We're seeing strong initial traction in the market in the short period of time since launch, including some of the top publishers. Now moving on to create unity continues to grow within games increasing our reach with top tier publishers, as well as platform providers. During the fourth quarter top publishers launch key multi platform games built on unity, such as riot forge ruin king. a League of Legends story, developed in collaboration with Airship Syndicate and published simultaneously across Windows PC, Nintendo Switch, Sony PlayStation 4, and Xbox One. Another example is a partnership with Neowiz on their multiplatform AAA MMO games. This and many other partnerships enabled Unity to expand our market share within the top 1,000 mobile games in 2021. Now, the real-time 3D capabilities that game developers love and use every day are also enabling us to win outside of gaming. We continue to make progress across industries and use cases and expect to build long-term partnerships as Unity Software is embedded into our customers' digital strategy. Our non-gaming business grew over 70% year-over-year in 2021 and now represents 25% of our total create revenue. up from 20% in 2020. Let me give you a few examples. Unity is partnering with Hyundai Motors to connect an actual factory with its digital twin to enhance plant management, drive productivity, and innovate in the manufacturing process. Hyundai considers this initiative and partnership with Unity a game changer. Unity is also partnered with eBay to enable sellers to showcase the actual item they are offering with our proprietary interactive 360-degree view. This experience will help buyers shop with greater confidence, starting with sneakers. We believe that this is the next generation of shopping experience and provides a competitive advantage for sellers and retailers. Unity is also partnered with a large car manufacturer in Japan E.J. An electric car manufacturer in China, a global industrial machinery manufacturer, a large technology education institution and many others, and our simulation business is also doing well we're strengthening our partnership with a very large car manufacturer in Germany. Our competitive advantages are our real-time 3D rendering capabilities, our design visualization tools, and our approach to develop what our customers need versus selling them off-the-shelf solutions that may not work for them. I want to give you an update on Wera. The integration is progressing as expected. We closed the deal at the beginning of December and have onboarded most employees. We're working to productize the award-winning tools such as Manuka, Lumberjack, Loki, Squid, Barbershop, Hi-Def, City Builder, and many more. With Unity's deep expertise in real-time 3D, these world-class tools will be available to creators and artists on the cloud. The largest opportunities are within games, film, animation, and advertising. As mentioned, productizing these tools will take approximately two years. Now onto guidance. We're entering 2022 with good business momentum. For the full year, we're guiding revenue to $1.485 to $1.505 billion, or 34% to 36% year-over-year growth. As communicated last quarter, we expect with FX to contribute approximately $70 million in revenue in 2022 or 66 million incremental to 2021. We will report this revenue stream on their create. Our guidance for the first quarter is consistent with the expectation for the full year of 34 to 36% revenue growth or 315 to $320 million. For the full year, at the high end of the range, we expect non-GAAP operating margins to improve by 200 basis points year over year to minus 2.6, which represents a loss of $39 to $41 million. This assumes incremental operating expenses as we return to more normal working operations and travel. For the first quarter, at the high end of the range, we expect non-GAAP operating margins of minus 7%, an improvement of 300 basis points from the first quarter of 2020. Non-GAAP operating loss is expected between 22 and $23 million. We're forecasting 343 million fully diluted shares for Q1. For modeling purposes and in line with our historical performance, we expect the first half of 2022 to account for about 45% of the full year revenue and the second half to account for the balance 55%. We expect CREAT to grow at a faster rate than operating 2022. For the full year, we expect positive free cash flow, which includes WEDA's FX front payment for four years of license fees in the first quarter of 2022. We continue to expect Unity's revenue to rise or above 30% over the long term and to break even on a non-GAAP basis within 2023. With that, let me turn the call back to Richard.
spk07: thanks very much um it's okay we'll open up the call to live questions in just a bit but before uh the call i asked richard you still here we lost your return interesting Richard, are you here? I'm here. You're on mute. It says I'm not on mute. Okay, we can hear you, Richard. All right, yeah, I don't know what happened there. I kept getting muted by the host. In any case, no worries. Okay, we'll open up the call to questions in a bit, but before the call, we asked the analysts to send us some of their most thought-provoking questions. We culled them down to the best three that we will answer now, and right after that, we'll go to live questions from our panelists. So the first question comes from Cash Rangan at Goldman Sachs. It might almost be an understatement to say that there's a lot of transitions happening in the software world, 2D to 3D, across multiple industries, new business models, and so on. And of course, that's probably a two-hour conversation, but we'll keep it much shorter. But this is a good question, I think, for John to just kind of quickly frame kind of the cross-currents, how they're playing out, and where Unity can capitalize on these trends.
spk06: So it is a great question. So headline number one is... My expectation is the use of real-time 3D interactive technology is going to expand manifold. I've said this dozens of times from prior to where I'd be able to now. Some people call it the metaverse. But one part of it is industry after industry, they're going to be launching real-time 3D experiences, interactive experiences. And we're seeing that in so many industries now, it's almost hard to keep track. Second part of that is gaming industries continuing to expand. And of course, with Unity, we're bringing artists onto the platform to substantially increase our revenue take rate as part of that. So headline number one, what's our role? Our role in all of this is first, and I think it's a good analogy to the gold rush, we're Levi's. Lots of people are doing all sorts of things, striking gold in lots of different ways. And we make the underlying technology where most of these real-time 3D experiences are built. We generate subscription revenue, routable revenue from that. The second part of it, and the analogy is a little bit more stretched here if I want to think about it as a steam engine, but every one of these websites needs an engine, that engine for monetization, for analytics, for streaming, for the build process. That's what our operate team does. And so we're not necessarily out there with picks and shovels looking for nuggets of gold. We are serving the entire collection of multiple industry companies that are building and deploying products, both to create those products and to help those products operate. And we generate money in both ways. They also mentioned crypto there's certainly a lot of noise about that within the game industry there's a love hate relationship, you know there's people that. explain how it's wonderful and others that explain why it's a misery I point out that most if not nearly all of the nfc centric games that have been built and deployed today are built on unity within that's really cool. We see many great things around innovation that can come from some of these new NFC centric designs. We also see a lot of problems around energy consumption, schemers, scammers, a lot of things we don't like. And one of the things we think that we have an obligation is when we see innovation like this is to find a smart way to to make sure that the good things happen and the bad things don't. We do that on behalf of our creators and we do that on behalf of their customers. So Unity's role, we're all the things that aren't the gold nugget finders in this new world. Huge wind behind our back for this industry. We are making the tools for creation, for operation, and we will bring them around to support, firstly, every metaverse or Web3 application type you can imagine.
spk07: Great. Thanks very much. And, Louise, Parker Lane at Stiefel had a good question about our financial philosophy, kind of how we think about the economies of scale, growth, and profitability. You touched on it a bit on your prepared remarks, but maybe if you just drill down a smidge more on that, it'd be great.
spk03: Yeah, thank you, Richard. A great question. So I think, you know, if I think at a high level, the framework we use to make investment decisions is very simple, which is we invest in those ideas that create the most value to our creators and to our shareholders. So we've talked a lot about. create or so far in this goal. So let me spend a little bit more time about shareholders or the three shareholder of the three drivers of shareholder value creation. That is revenue growth, margin expansion, and the free cash flow efficiency. The one that will make the biggest difference for us in at this particular point in time is revenue growth just think about it we just crossed 1.1 billion dollars and we operate at a 45 billion dollar market so we are about a two percent of the market the take rate is way too small and we have business momentum so that is the biggest driver just think about the difference of growing at a 20 percent kicker over several years versus 30 versus 40 percent and the cash flow potential of that Now that doesn't mean we're not gonna pay attention to margins and free cash flow, we definitely will. So if you think about what we've done since 2019, so between 2019 and 2021, we doubled our revenue, right? That's what we did. During that same period of time, we improve our non-GAAP operating margins from minus 16.9 to minus 4.6. So significant improvement. And obviously we made similar progress on free cash flow. So we actually have been driving both or all three drivers. Now, how have we done it? Which I think is very important to understand. We've been able to do that because we've been driving efficiencies in gross margin and at the same time, leveraging sales and marketing and GNA. But we've actually invested heavily in R&D. In fact, our R&D budget has doubled between 2019 and 2021, which means that we've held the percentage of revenue flat during that period of time. So what can you expect from Unity going forward? So in terms of revenue growth, as we just said, you can expect us to grow between 34 and 36% in 2022 and then at least 30% thereafter. So we will continue to drive this driver, which is critical for us. At the same time, we'll continue to make progress on non-GAAP operating margin. we expect to improve our margins by 200 basis points in 2022, to break even in 2023, and obviously we'll continue to make progress to become profitable thereafter. And I would expect free cash flow to follow very much in line with our non-GAAP operating margin improvements. The last thing I'll say is that we're very strategic in where we invest our R&D dollars. We basically apply two filters. Filter number one is do the ideas and projects generate value on their own for both creators and shareholders? And we make sure that everybody, every project has the potential of doing that. And then the second thing we do is we look at our portfolio across and we make sure that it's balanced across businesses. And we make sure that it's sustainable in growth. We created a methodology that I think other companies use called H1, H2, H3, which makes sure that we're investing in the short term, in the midterm, and in the long term. So that's overall how I would respond to that question, Richard. I hope that's clear.
spk07: Right, no, that's super helpful. All right, so, and one of the things we like to do here is highlight the depth of our management team. And you'll remember last quarter, we introduced Mark Whitten, who runs Create. So this quarter, we invited Ingrid Lastillo, who's our Senior Vice President and General Manager of the Operate Solutions, to add some context to some of the questions you might have in that area. And so we've had a hand, Ingrid, we've had a handful of questions with a similar theme. Bhavan asked it at William Blair, Matt Cost at Morgan Stanley, Stephen Jewett at... at Credit Suisse, but the question is basically revolves around this is like we're seeing a lot of consolidation on the studio side. And how are you thinking about kind of first party data approach that seems to be an effort as some of these studios versus the contextual dynamics offered by the unity platform.
spk01: Yeah, hi, everyone. Glad to be here. So our contextual approach provides numerous advantages. Even the largest game companies out there have a few hundred million CIUs or so. We reach more than 3 billion devices. And unlike any other ad tech companies, the majority of mobile games out there are made with Unity. Using our engine and our game services, that's not quite the same as an ad tech company claiming a 3 billion reach. We have deep, deep context about gameplay, what the players like to play, when and how they play the game. And in gaming, that has proven to be the most relevant data for advertising. And it's gonna take quite a while for anyone, even to get to a quarter of the context we bring to our developer audiences every day. So let's quickly address first-party data. Let's assume we're talking about first-party games data. First-party data is not bulletproof. First, games are a hit-driven business, and even the best of games have a decay curve. So you really have two choices if you're in that business. Either you create the next hit game, which we all know it's pretty hard to do, or you spend to buy studios that are producing them. And that's hard to sustain. The second thing is being end to end with first party in this ecosystem is nearly impossible. So no matter how many companies anyone acquires, contextual data scales in a much more unlimited way, while first party is limited to users only coming to your own and operated game. So with respect to industry consolidation, what I can say is that we've always had you know competition in this space. You know all varieties of it and from the day we started eight years ago and we've consistently executed and taken and gain market share, including against the largest companies in the space.
spk07: Thank you so much. All right. Well, now we'll open it up to see a bunch of your virtual hands up there. So virtual hand number one, we'll have Cash Rangan at Goldman Sachs. If you have a question, that'd be great.
spk05: Hi, thank you very much, and really enjoyed the presentation. Spectacular results. John, if you could just give us an update on the VEDA acquisition. I know that you were really excited about the expansion into the designer versus the developer audience that you were excited about. Just wanted to follow up on that. How do you think the synergies are playing out since you closed the acquisition? You've had a chance to do even more work. Curious how you gauge the synergy between the core technology and how better can play into synergizing your design business and operate business.
spk04: Thank you very much. All right. Should be on here momentarily. Sure.
spk06: Talking one microphone and a dead camera. So thanks for the question. Great question. So one of these cash I've been really kind of overwhelmed by. And I've had a lot of conversations of late. I'm not going to name the people I'm having conversations with. But if you read the Hollywood rags, these are the names of all the people that matter and similar set of conversations with folks in the game industry. And the first synergy that comes out of this is we just liberated one of the coolest assets that existed in all of art and all of technology and all of content creation, the Weta tool set. The number of companies that are knocking on my door to say, we want to be your pilot customer because we want out those tools is pretty substantial. And so I can't really overstate how much interest there is in engaging now that the tools aren't captive of a single company that's got, if you will, ILM does not want to use tools from, why don't they compete? ILM now wants to use tools from Unity. Now, I'm using ILM as an example. don't want to point to them um so let me take that last part about the naming of them but that the notion of it is pretty clear the the second point i would make is that This exists not just in the film industry, but in the game industry that wants their stuff to look that good and architecture and other digital twin or whatever. They want their stuff to look that good. And so the the liberalization or the democratization of those tools is a winner. The second thing and this is a little bit more subtle, but just as important. The whole metaverse of the real time 3D revolution means that folks that used to work in 2D are now increasingly want to work in 3D and real time. These are gigantic data sets and it is really, really hard to take something from the cloud into your internal system to use it on somebody's individual desktop. move these things around so people can create and deploy the devops problems around that are legion and so um the next part of this is is while we take the the weta tools into improved ui so other people can use them not just the people have been trained on them and we integrate them with Unity and other tools and put it into the cloud, we solve a really huge problem, which is just the entire creation process, making it simple and accessible. This is why you saw things like Parsec. It might not have made as much sense when we did it, but we knew other things were coming. When we put all this together, what's exciting about it is it solves massive pain in the creator community across many industries and it also puts us in harm's way of a yet another new radical business model that i think is going to be um you know unity getting our share of the value of of what problems we solve which is what we've always been doing so great question because it really gets to two huge parts of the value proposition this asset what a dual trend is much more valuable inside of unity that it was as an independent captive part of what affects And then connecting it to Unity and other tools is a super valuable need for people in these industries, and that can accrue back to our shareholders.
spk05: Super compelling. Thank you so much. Congrats.
spk07: Bhavan over at William Blair.
spk09: Great. Thanks, team. And let me echo the congrats. Cash, it was a spectacular quarter. I guess there's a question maybe for John and for Ingrid a little bit. So I know Cash asked an initial question about Metaverse, but I want to delve into that a little bit more. You know, John, you said, OK, we're not the guys who are going to be building those nuggets or finding the nuggets. We're going to provide that platform. But if we fast forward five years, we've got lots of the stuff that's being developed in Unity. I'd love to walk through how you think the data layer, the way you interoperate between consoles and games and different games ends up being a huge strategic value to you from the operating side. So imagine being able to target these people across this multi data layer, multi metaverse, multi 3D experience. Help me think through how you're thinking about that and what that might look like five, six, seven years down the road.
spk06: Well, hopefully sooner than that, but Most all content you consume today, television or any other sort of content other than a game, is basically an artifact by the time you have it. It's a model. It's video. It doesn't change. It is what it is. It is one thing. fixed thing um and the only software that's typically operating on it might be something to stream it and that usually a big part of that is a compression and decompression algorithm so it can go more efficiently over you know whatever transmission technology is being used over the air or you know cable or satellite or whatever that's just the files are too big to move around And so these artifacts are, I think, going to be dead and buried by 2030. That's just not the way it's going to work. The way it's going to work in the future is all of the work that a Peter Jackson, together with the cinematographers, together with the artists and the technologists there, that's going to be data. It's all a giant piece of data. Now what operates on that data are a set of tools that turn that data into the next frame and remember now that frame is being produced in real time in response to user input. Now, that might be you sitting on a couch wanting to compose your Christmas picture, put different clothes on your kids instead of going to like Nike or Everlane or all these websites. You say, I want all of us in whatever color. That'll come to you. That'll be the meta version of shopping. But whatever that is, it's going to be data separated from, it's not an artifact. It's data that gets operated on by tools. And those tools will be things like Lumberjack or things like you know, the Manuka rendering system or Unity to create an outcome that you see as a frame or you see as an immersive experience if you've got an AR or VR device on or if you're consuming, like you might have seen the Metacast stuff that Peter Moore showed, those kinds of things. So massive amounts of data, really sophisticated tools, and these tools create the frame for you to consume in time. So where was Unity going to be? We finally get to be simple and 567 years we've been building and operating this hotel at the same time it's going to be pretty simple, the tools will be there, they will be users will collaborate, they will go to our cloud. Offering they will create what they want to create it's always going to be up there, they connect their user to it, the user consumes it. And we will be able to create, I believe, systems where the most sophisticated high fidelity creators, you know, people making high end film or high end games or high end You know car configurators or digital twins they're going to have access to the finest of tools, you know multiple layers down in an editor. And we're going to over time simplify it so your high school kid can make a simple game or simple movie using the same tools, and you know, maybe not the level of fidelity and the level of complexity. And that puts unity in the same business we're in now, you know, create and operate. That doesn't change. But then there's another business that surrounds, you know, radical business around that cloud instance of what we're describing. And I think we're uniquely positioned to create value for customers in our space, because when these files get to be gigabytes and then petabytes, moving it around is really hard. the way it typically works now and it's a misery for the devops side of content creation is no matter what the the art they're trying to produce whether it's a video or it's a game or it's a digital twin those pieces of that data are moved onto one pc or mac or pc or workstation and another and another and another and they're reassembling it they're pushing it back out again and then moving it into sometimes hosted cloud services and then moving it back so they can operate on it where they create it, it should be where it lives. Just a lot simpler. So the line of sight we have is We've been building something that's got, you know, a lot of complexity as we describe it. You've heard this over the years, been an investor for a while, but now are covering us for a while. You know, the simplicity comes as we get closer to what we've been approaching because it's no longer a disruption of what we're building. It just works. Now, Ingrid, you might want to speak to one major piece of this just to add. to my last question, which is how important in this is the operate side and, in particular, the self serve notion of the operate side.
spk01: yeah thanks so a couple of things you know I think if we think about. John talked about the next rendition of Metaverse Destination. If we think about it, all of those renditions will have one thing that's true, which it will be some form of multiplayer experiences with, at times, millions of concurrent users coming together in an experience. And on the data front, an experience like that there's always going to be some kind of you know bad behavior so you need moderate intelligent moderation tools um all of those experience will need monetization and that requires obviously some intelligence and data to be able to serve the most relevant monetization solution And an engagement in whatever whoever is the creator of that experience would need to engage with with their with their users and and they want to run you know engagement campaigns, etc, that that requires the similar set of data that you know we use today to make sure that our developers are successful in running their games.
spk09: Got it. Got it. Thanks for the detailed response. That was really helpful. Appreciate it, guys. Thank you.
spk07: Matt Cost at Morgan Stanley.
spk08: Great, thanks. I think it says I can't get my video on, but that's all right. I'll do it on audio. So I guess just on the create side, it says that, oh, there goes the video. Can you guys still hear me? Okay, cool. Sorry about that. It froze for a sec. So on the Create side, it looks like you put up the strongest quarter really ever. I mean, even if you back out $4 million for Weta, it was bigger dollar ads than you had last quarter, which I think was already the biggest quarter you had done. It was 1,500 basis points acceleration. I guess, are there any specific drivers that you would point to in Create that drove this strength? And has something changed in the past two quarters?
spk06: I'll give a high level to that, and Luis, you might want to add to this. The first is we've finally gotten to some scale on non-gaming applications, digital twins and verticals. We talked a lot about how we're getting early product traction, and now we're getting more substantive product traction as part of it. The other part is I think we've done a really nice job under Mark Witten's leadership to help simplify and clarify our go to market. And then lastly, we've seen, um, I'd say an increase in productivity out of R and D and in producing products and features that hit, um, the product market fit that you want to see. But it's frankly, it's what the stuff we were talking about, I have to admit took a little longer to just state. Um, and, uh, I'm happy to be here now than looking to wanting to be here as I was a year ago. But we feel really good about the underlying trend lines and create. I mean, I could point to individual customers, but you see the announcements. They're now starting to happen with some level of regularity. And that happens with things like Hyundai, which you see in the non-gaming side. Or you see, like, you didn't used to see major companies like Riot produce multi-platform inclusive of console on third-party tech. And now they do with Unity. So you're seeing it in the market. It took a little while to catch up on the execution side because some of these things take a while to build, but the sales cycle can be a while.
spk03: Yeah, thanks, John. Just to complement and in line with what we said earlier, we're getting good traction both in games and outside of games, which is just terrific. We expanded our market share within games from a pretty healthy base. And as you heard me say earlier, that's coming from AAA games all the way to Indies games, right? So we're covering more and more customers across the board. And I think it was really a good non-gaming quarter. You know, I talked about some of the success stories, you know, a lot of in the auto industry. I mean, from auto industry to education to machine manufacturers. Right. So we're really seeing a lot of traction with digital twins. And we'll continue to drive that. We think that there is a lot more opportunity ahead. Now, not every quarter will be perfect, right? We'll always have a quarter there where we struggle, but we're very happy with where we are today. Very, very happy.
spk06: And for those of you that have seen the sports Metacast stuff that we put out there in some of the videos, that's basically a digital twin. What are we doing? The cameras are IoT. We're consuming the data, you know, 50 to 120 cameras, depending on the sport and the instance. And then we're presenting it back. But when you look at that and imagine that as a digital twin. Look how dynamic it is. If you look at digital twin applications coming out of most companies, they move about as fast as a painting. Nothing's really happening there, whereas some data that's coming off of it, it's a static model. People are starting to see what you can get in the dynamism of their data sets, and they like what they see. Unity has competitive advantage in this space, and I think it's being internalized by folks across multiple industries.
spk03: We don't talk enough about our net expansion rate, 140%, just massive. I mean, very few companies are able to achieve that. And we've been able to sustain it for a pretty long time. And that is both create and operate. So very, very healthy there as we continue to add new customers. We just wanted to add that piece.
spk07: Great. Thanks, guys. Thanks so much. Brent Braceland over at Piper.
spk10: Thank you. Great to see the team here. I'll just go ahead and ask the question here. I want to drill down into the Operate business. Obviously, we spend a lot of time with investors talking about the ad part of Operate. But if I look at the Unity Gaming Services suite, I think there's eight add-on products. They're all in beta. Just trying to think through growth levers for Operate, maybe for Ingrid and you, John, what's the early feedback on some of these new add-ons? Can they become incremental growth drivers to the ad business in 2022, or are those really
spk06: seeds to drive growth in 2023 any more color around how we should think about the levers for operate beyond just ads which obviously you're getting shared so i'm going to take part of it but i do want ingrid to speak to this one she runs all of that and let me just admit it's fun to be in the same room i did my one-on-one with her an hour ago and we spent the last hour with this on a whiteboard um all of the services how they plug in together how they're synergistic how they draw people into revenue services how they solve problems I think one of the less appreciated but more important parts of Unity is just how well this works and how well it's going to allow us to scale. And some of the principal components are just a couple high-level points. One is all those game services, typically they have two, three, four, five vendors to do all of these things, all different data types, different data sets. It's impossible to run that way. um it's a mess and so we solve a mess um all of these things require you know pretty tricky implementation ingrid is maniacally focused on self-serve hit a button and it just works and they all connect magic magic to a revenue producing service that we love called multiplet so um ingrid you might want to take it from there i i'm taking a little break because it's a fun parade to stand in front of
spk01: Oh, thank you, John. So first, let me just, you alluded to aid. Actually, the feat that is Unity Gaming Services combined 14 services into one platform, one dashboard, one login. And to John's point about self-serve, we made it so, so simple for our developers to quickly launch multiplayer cross-platform games with just a few simple clicks from the editor. you know, 59% of all Americans are playing multiplayer games. So we are seeing at Unity that the interest in building these games is there from developers, from studios of all sizes, but it is just too hard, you know, till then for the small to mid-sized studios. They need to hire an army of like network engineers, security engineers, And now they have access to a platform like ours that reduces their resources and the risks to realize their vision. So we've seen thousands of projects started using Unity gaming services in less than three months. And the feedback has been really positive, but also helpful. We still have a lot of work to do to round out the performance and feature sets as they need in the platform. And I think what is really exciting is that we are seeing early some of these smaller studios going further than they've ever had before. And that makes us really excited for this space.
spk10: Sounds exciting. And 14 instead of 8 implies you've been really busy. So great seeing you again. And thanks for taking my question.
spk07: Thank you. Thank you. All right. Well, we have one time for one last question from Martin Yang. There you go. There he is.
spk02: Hi. Thank you for taking my question. My question is around digital avatar. And now you have a lot more creation tools. How do you think about providing direct venues for creators to monetize their digital creation through Unity?
spk06: There's a lot of pieces in that. Let me just have a little bit of fun by throwing water on one idea that I think seems to have gotten a lot more currency in the market than I think it probably deserves, is the idea that we all want one avatar. I really don't want to show up in my swimsuit for an RPG with a sword in my hand. If that's my avatar, I think we're going to want a lot of things that are more dynamic than that. A second thing is with the acquisition of Weta and Ziba and some of the other things we have now in our portfolio, when people are going to try to create avatars, I mean, look at the young lady you just saw, she doesn't truly exist. But, you know, the average creator can do that. Look at the, you know, movies like Avatar and the Marvel stuff created with a wet of tools. You can do anything in unity. So, you know, my sense is that we are going to see a huge amount of creation on that side. You're also going to see something again. You didn't directly ask this, but. I think what's more interesting when it comes to some of these asset creations, most NFTs today are just really JPEGs printed on a blockchain. What's interesting in real time 3D is that these assets have utility, strength and resilience. Anybody who's played a game knows how an asset can have utility. And one of the things that we're hot on the trail for is enabling the assets that a consumer might want to own and setting them up in a smart way so the underlying registries of value can be built upon and traded. And so we see a lot of opportunity. We also see a lot of charlatans out there doing some pretty miserable things. And And it looks like some of them look a little bit like Ponzi schemes. And so our eyes are wide open, huge opportunity filled with landmines. And one of the things that we truly believe is Unity's place in the world is to help our creators realize the good part of something without having to suffer stepping on a landmine. And we started that way when we enabled creators to get to multiple platforms. Before Unity, most content was built with tools from one platform to make the content for that platform and tools for another platform to do it for another platform. it's expensive time consuming and it resulted in things like some of the best game companies in the world like they took you know was it supercell and clash of clans took them like a year to come out on android i mean that is just massive loss opportunity and so um we help our creators solve these problems and the area you're asking one about has lots of problems that we've got our eyes wide open and clear about in ways we think we can help solve them for our customers
spk02: Thank you very much.
spk07: All right. Well, thank you very much. You know, it's good to have a lot of things to talk about. I'll let John kind of conclude. But just so you know, we'll be at the Barenberg, Daiwu, Morgan Stanley and Wolf conferences this quarter. But, John, if you just want to close up, that'd be great.
spk06: All right. Well, hey, everybody, thanks for being with us today. Good evening to those of you on the East Coast. Good afternoon on the West Coast. But we enjoyed it. We hope you did, too. So thanks again.
spk03: Thank you, everyone.
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