Unity Software Inc.

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Thank you and welcome to Unity's third quarter 2022 earnings call. After the close of the market today, we issued our earnings press release and earnings presentation. These materials are available on our investor website at investors.unity.com. Today, I'm joined by John Riccatello, our CEO, President and Chairman, and by Luis Visoso, our CFO. Before we begin, I want to note that today's discussion contains 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. Actual results may vary, and we take no obligation to revise or update any forward-looking statements. As in prior quarters, we are providing both GAAP and non-GAAP financial measures. Unless otherwise noted, we will be speaking to non-GAAP financial measures when describing our results. The earnings presentation and press release are available on Unity Investor Relations tab as well as SEC.gov, and they include full GAAP and non-GAAP reconciliations. And in the fourth quarter, we plan to present at investor conferences with BTIG, Credit Suisse, and Barclays. Full details are also available on our website. With that, I will turn the call over to John.

Thank you, Richard. I want to start the call welcoming everyone at Ironsworth to Unity. The merger closed on Monday, as expected. We will report consolidated results starting in the fourth quarter of 2022. Together, Unity and the Iron Source will write the next chapter of Unity's journey as we capture the large real-time 3D opportunity in front of us. In fact, we feel more positive about the merger now than we did when we announced the deal on July 13th. Today, only a fraction of creators succeed in the creator economy. We are passionate about changing this reality because we believe the world is a better place with more creators in it. By combining forces, we believe Unity and IronSource will transform the industry and increase creator success by replacing luck with science. We expect to achieve this through an end-to-end platform that enables creators to build better games and better user acquisition and everything in between by solving our customers' toughest problems. And as a result, we expect to be a highly profitable company operating with positive cash flows. Moving on to the financial performance of the third quarter. Unilever delivered a good quarter with revenue and non-GAAP operating income in line with guidance. Create posted a strong quarter and our internal performance challenges in Operate are behind us. Total revenue for the third quarter was $323 million, up 13% year over year. Create delivered $129 million in revenue this quarter, an increase of 54% year over year. Operate delivered $172 million, down 7% year on year, and up 8% as compared to the previous quarter. Strategic partnership revenue of $23 million this quarter is up 28% year over year. Non-gap loss from operations of a negative $37 million came in at the better end of the guidance range as we continue to make progress with our cost structure on our way towards break-even by the end of the year. Now let's dive into Create. Q3 was another strong quarter for Create Solutions. We continue to have strong customer pull in our core Unity engine and our newer segments of digital twins and artistry. We're enabling our customers to create extraordinary real-time 3D experiences in games and across industries, which we believe will accelerate our growth. Innovation is the foundation of everything we do at Unity. A great example of this is our data-oriented technology stack, or for short, DOTS. DOTS allows creators to get more performance and more scene density on any device they target by optimizing real-time 3D experiences in ways that take better advantage of modern chip architecture. This quarter, we released our Entities 1.0 experimental release. This release includes critical functionality to allow creators achieve native code performance with the ease of C-sharp development, support massive data streaming through all Unity rendering pipelines with significant improvements in rendering performance with our updated occlusion culling system. It's an encouraging thing to see compelling examples of creators using these tools to deliver spectacular games of all types, from open world MMOs to strategy to racing. Some recent games that use DOTS include V Rising by Stunlock Studios, Zenith, The Last City by Ramen VR, Exion by Casado Games, and Detonation Racing by Electric Square. Another good example of the end-to-end focus on enabling creators to build, launch, and scale terrific games is our work with Marvel's Snap, developed by Second Dinner. Second Dinner developed their game using Unity and are also using a Unity game services customer. We love the success they're seeing with their new launch, currently number one on iOS and Android app stores in their category. As Aaron Brunstetter said, the senior director of software engineering at Second Dinner, Unity is a very close relationship for us. It feels like we're one team with a shared purpose, taking on challenges together. That's thanks to everyone here who has joined us on this journey, which in all reality is only just getting started. We couldn't agree more. Outside of games, we are seeing similar results. This quarter has continued our strong momentum in Digital Twins. A few examples. Taylor-Willard Douglas just launched their Connect Configurator. This enables them to bring forward insights and better decision-making with their clients earlier in the construction process, eliminating delays, material waste, and rework. The Orlando Economic Partnership is working on the initial phase of the world's first immersive 3D regional digital twin. This project combines 80 different existing data sources over an 800 square mile region to provide an immersive 3D experience and provides companies looking to expand their businesses to the Orlando region with a much more effective and engaging way to understand the region, infrastructure, and demographics. I also want to talk about our progress with Parsec and SyncSketch, which together make up our Create Interware business. We continue to see very strong demand as companies around the world reconfigure and make permanent investments to support creators collaborating and creating in hybrid work scenarios. The combined ARR of the businesses in Create Interware grew north of 100% year over year through product innovations that continue to help scale our product-led growth and accelerate our enterprise sales. In fact, in the third quarter, we closed our largest Parsec enterprise deal to date, which was over $1 million in ARR. In Create Anywhere, we now have 25 customers contributing over $100,000 in annual recurring revenue. SyncSketch has become the go-to collaboration tool for creators in the media and entertainment industry. Recently, Raised by Wolves, an HBO Max show from executive producer Bridget Scott, who has a very high bar for visual quality in their futuristic sci-fi world, relied on SyncSketch to collaborate on nearly 3,000 complex visual effects shots with a geographically distributed team. The Raised by Wolves team was able to work with executives, vendors, and the production team for reviewing sessions throughout pre- and post-production. Putting all of this collaboration online made it easy to meet deadlines and deliver a world-class production. Last quarter, we announced and launched a significant pricing and packaging change within our Unity Pro, Unity Enterprise, and Unity Industrial Collection offerings. We raised the price between 13% and 25% across these offerings, the first significant price change in three years. More importantly, we aligned these offerings to better fit the needs of sub-segments and creators. This means adding functionality like Mars, our XR authoring environment, and Havok, a high-performance physics engine often used in the creation of advanced games, as well as optimizing support and customer success for Unity Pro, Unity Industrial Collection, and Unity Enterprise offerings. Unity Enterprise customers also receive read-only source code to enable more rapid debugging and optimization and an extra year of long-term support for enhanced stability, both highly demanded by these customers. These are foundational changes that will continue to build to improve our take rate significantly by adding value our customers are happy to pay for. We also continue our shift towards the cloud, enabling radical revenue. This quarter, we released a private alpha of our cloud-based digital twin solution. This platform is designed to enable the end-to-end creation and use of real-time interactive and 3D digital twins with capabilities across any industry, all powered by cloud services. The platform is in private preview internally and with select customers in information technology, energy, and construction. We'll have more details on this platform as we move beyond our alpha stage. Across artistry, digital twins, and games, we are encouraged in the momentum we see, the customer demand, and the large market opportunity across short, medium, and long term with Create. Moving on to Operate. Again, I want to welcome Team IronSource to Unity. From here, we're merging IronSource and Unity, and the combined teams will come together under Tomer's leadership. We will refer to this larger combined business as Grow Solutions. Ingrid and her team will form a key part of the new team, as will the founders and teams at IronSource. With that, I will now speak to Unity Operate in Q3. Operate delivered sequential progress in the third quarter with 8% quarter-on-quarter growth. This quarter, we increased competitiveness in our core product, and as a result, we are growing our share of wallet with several of our largest customers. With increased trust comes increased spend on our platform. We continue to improve our models and have a healthy pipeline of ongoing initiatives. We also saw an increase in new publishers partnering to integrate advertising placements with Unity. Looking at 2022 as a whole, there's no doubt that the ad side of Unity Operate has experienced a challenging year. Between 2019 and 2021, the team navigated essentially flawlessly through complexities that have tripped up many others, and they grew revenues at a 55% CAGR. We undoubtedly benefited from COVID stay-at-home mandates, but in 2022, we experienced the operational challenges we have well described in prior calls. These problems have been addressed and are now in our rearview mirror. Our teams have rallied and executed well to begin the process of regaining market share and position. Moving on to Unity Game Services, or UGS. We are pleased with the uptake for UGS since going general availability this summer. UGS unifies, in a single suite, more than a dozen analytics tools, cloud orchestration, and embedded voice and multiplayer functionality. UGS is an example of how we address acute needs, reduce complexity for our customers. We price these services on a consumption basis, so studios only play for what they use and we scale as they succeed. UGS also unlocks added synergy in our model. Create, operate, and UGS working together solve more of our customers' key challenges. A great example is how developers at Second Dinner use our editor to build Marvel Snap. Our editor seamlessly connects to our UGS services, which made it a simple decision for Second for second dinner to self-provision our cloud content delivery and cloud build modules that are part of UGS. The result was a blockbuster game as brilliant design combined with exceptional user experience delivered by UGS. This is our mission for every creator. In September, we introduced multiplayer and matchmaker self-serve. The mobile game market is evolving and will evolve to player versus player, much in the way that the market for console games and PC games have evolved. Multiplayer games have proven to realize much greater player engagement. Players enjoy them more. And with more engagement comes more opportunity for revenue. But until now, building multiplayer functionality for mobile games was just too complex. With the launch of these two self-serve products, we solved this difficult networking challenge and made the technology easy to provision and manage at scale for developers and studios of all sizes. With that, I'll step back and look at the games ad market overall. The current softness in the ad market weighs on my mind. I want to address this with you to put future performance and plans into context. One key question, what has happened in the games ads market overall in recent years in light of Apple's changes in privacy programs, which began in Q2 2021? While we did see some change in spend between iOS and Android, the overall ad market had an incredible year in 2021, partly fueled by higher player engagement due to players being at home during COVID. Looking at 2022, Q1 2022 was strong for in-games ad sector with year-on-year growth in the teens. We estimate overall in-game ads growth was up approximately 10% year-on-year in Q2 and slowed to low single digits in Q3. We currently expect the sector will be flat year-on-year in Q4. In terms of player engagement, as the first half of 2022 unfolded, we began to see some softness in overall player engagement versus the elevated COVID levels of 2020 and 2021. But it's important to note that engagement was up cumulatively a full three years' worth versus pre-COVID. And when we look at daily active users, or DAUs, we're actually seeing an increase in Q3 this year versus Q3 of last year. Despite market conditions, users continue downloading and playing games, proving the sticking power of this entertainment segment. This speaks to the long-term resilience of the game business. What is new starting in late Q3 is that CPMs have declined on both mobile operating systems. The timing here is clear. The declines take place as the world's banks increased interest rates and the specter of recession was everywhere in the press, not earlier when privacy changes took place. When we talk with our advertisers, the sense we get is clearly one of caution and reticence to commit to the aggressive campaign spends that would crowd out competition at the bed and elevate CPMs. In this context, we remain confident. The market for ads is experiencing recession sentiment. And while we don't know when it will end, strong consumer engagement will ultimately bring back growth in this dynamic ads market. With IronSource, we become the leading end-to-end platform in the market, supporting the developer throughout the entire development cycle, from opening a project in Unity Editor all the way through making it a successful business and supported by our data science. As such, we are positioned to lead the market and be the main beneficiaries of a market recovery. While market conditions are challenging, we have a unique opportunity to gain market share and invest in positioning ourselves to grow rapidly once macro conditions improve. Our end-to-end platform will be a critical enabler in helping creators thrive, even in a challenging market. By enabling more great creators to build successful businesses, ultimately, we'll be growing the market overall. Level Play becomes Unity's mediation offering, delivering unparalleled reach to creators to help tap into a combined global network of players of more than 3 billion monthly active users. Unity Level Play will have plug-in integration to the Unity Editor and deliver superior performance for the Unity Ads and IronSource Ads networks, while Supersonic will add critical publishing capabilities to our offering, helping even more developers successfully launch and scale their games. We believe the new UnityGrowth platform can and will maturely outperform the industry, gaining share to our ability to drive success for our customers. Before turning the call over to Luis, I want to reinforce a few points that we've made before. First, Unity is well-positioned to capture what we believe is a very large opportunity as the world moves from linear 2D to real-time 3D. We have a strong position in games and are making strong progress across industries. Second, we believe that Unity with IronSource provides a unique end-to-end platform that solves more of our customers' toughest challenges, enabling us to accelerate our revenue growth, making Unity cash flow positive, and adding new capabilities and amazing leaders. We believe the new Unity growth platform can and will materially outperform the industry, gaining share due to our ability to drive success for our customers. Third, advertising is an integral part of the game's business model. Gamers are highly engaged, and only a small minority pay directly for the games they play. Advertising and in-app purchases are the ways creators monetize their games, and most players welcome ads as a way to discover new games to play. And while we are in an advertiser sentiment recession, we believe that the ads market will remain resilient, even with last year's changes to privacy. We expect Unity to sustainably grow at a 30% growth rate. As we have said in the past, this will not be the case every single year, but is the compounded growth rate that we expect to deliver. We will guide 2023 on our year-end earnings call. when we have a better view on the economy, and in particular, the in-games ad spend trends. At that point, we have a much better handle on advertiser sentiment. We have clear plans for Create to continue to deliver strong growth and for growth to outpace any ad market we experience. Finally, a word about profitability and cash flow. Luis will drive into this in more detail, but in the fourth quarter, we will be positive. This has always been important to us. It's even more important in challenging times. This strong financial position is further testament to our ability to capitalize on the opportunity ahead of us. With that, let me turn the call over to Luis.