This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk01: Welcome to Unity's second quarter 2024 earnings call. My name is Daniel Amir, VP and head of investor relations. After the closing of the market today, we issued our shareholder letter. That material is now available on our website at .unity.com. Today, I'm joined by Matt Bromberg, our CEO, and Luis Vizoso, our CFO. But before we begin, I wanted 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 risk, uncertainties, and assumptions. And you can find more information about these risks and uncertainties in the risk factors section of our filings at scc.gov. Actual results may differ, and we take no obligation to revise or update any forward-looking statements. Finally, during today's meeting, we will discuss non-GAAP financial measures. These non-GAAP financial measures are in addition to and not a substitute for or superior to measures of financial performance prepared in accordance with GAAP. A full reconciliation of GAAP to non-GAAP is available in our shareholder letter and on the scc.gov website.
spk03: Thank you, Daniel. Good afternoon, everyone, and thank you for joining today's call. It's a true privilege for me to be here representing Unity as its new chief executive officer. I'd like to begin by sharing some initial observations. Since joining the company a few months ago, I've had the opportunity to visit and learn from our teams around the world, and I've relished the time spent connecting with our customers in our community. Although not one of us has ever been able to do that, and not one of us believes that Unity is currently performing to its potential, I can tell you with complete confidence that we have everything we need to achieve healthy, sustainable, and profitable growth. Our vision for Unity is clear. We believe we can become the only company truly capable of supporting game developers through the entire product life cycle, from the prototyping of a new game to that magic moment where a creation meets its players. Our technology, our people, our deep partnerships provide an incredibly strong foundation, and we're operating in large and vibrant markets. The focus now is on fostering a culture of execution, of discipline and accountability. We plan to accelerate the pace of our product innovation, strengthen the bond we have with our customers and community, and rapidly add new world-class talent to the team. We understand what needs to be improved, and we're making the necessary changes to our leadership, our products, and our processes with a real sense of urgency. Video games are my passion. I started out as a kid playing Dungeons & Dragons with my friends, and I never believed that I'd be lucky enough to be running companies in this industry. I've spent the last 10 years or so working with some of the best game teams in the world, building games in every genre, using at least five different engines, and publishing across every platform. I have also been responsible for helping those games find a global audience and build sustainable growth as live services. During most of that time, I've been a Unity customer on both the Engine and the advertising sides, and while I was at Zynga, quite a significant customer. So I understand deeply the power and promise of the Unity ecosystem. The challenges we currently face at Unity and the solutions to those challenges, they're not an abstraction to me. And sitting down with our exceptional teams to implement change is why I'm here. From experience, I can tell you that there's nothing more inspiring and rewarding than helping to bring a great company to its fullest potential. Unity is at its best when we're working hard, sitting side by side with the developers that we've known for nearly 20 years, helping make and market exceptional entertainment. And so we're rededicating ourselves to that original vision. In this next chapter of Unity's history, we're going to become the partners we once were, only better. More focused on initiatives that make a tangible difference to our customers and our community every day. Unity 6, the latest update to our game engine, is a great example of this commitment to customer needs. It's on track for release this fall, and we believe it will be the most stable, best performing version we've ever delivered. The preview released in May has already seen significant traction with developers, and Unity 6 is going to be the bedrock of our offering for years to come. In our advertising business, we're encouraged by what our customers are telling us about the recent improvements we've made to both our ad networks and our mediation platform. And we're going to complement that good work with a comprehensive rebuild of our machine learning stack and our data infrastructure. We're designing a more agile environment, one more conducive to continuous innovation, and this is going to enable us to lower the cost of experimentation, pursue more ambitious and innovative modeling approaches, and integrate data from across our product portfolio, which is going to unlock enormous value for our customers. We're also adding world-class talent to help accelerate this transformation in our ad business. We're pleased today to announce the hiring of Jim Payne as our new Chief Product Officer for advertising. He's a proven product innovator and a luminary in the ad tech business, and he understands better than anyone how publishers create more revenue for their games. And in July, Alex Blum, another experienced ad exec, joined the team as a Senior Vice President of Corporate Development. There's a significant opportunity for growth in our mobile ad business, and these two additions will help us realize that opportunity. The entire team is inspired by the challenge of taking its place among the best-performing technology companies in the world. We play a unique role in the ecosystem, sitting at the intersection of mobile, 3D, gaming, AI, data, and digital advertising. With better execution, accelerated product innovation, and a renewed focus on delivering for our customers and our community, we will create meaningful long-term value. Before I turn the call over to Luis, I'd like to take a moment to thank him for his contributions over the past three years, and wish him well in the next chapter of his career. We have appointed Mark Barry Smith, our current Chief Accounting Officer, as our interim CFO. Mark has been with us for more than two years and brings a wealth and depth of experience, and I'm confident he'll lead the team through a successful transition. As always, I'd like to thank our customers, our partners, and our employees for their ongoing support. I look forward to updating you more on our progress in the time ahead. Luis, over to you.
spk08: Thank you, Matt. I would start by saying that it has been a privilege to be Unity CFO for over three years. I believe that we have accomplished a lot together as we expanded margins and fixed the portfolio. I want to thank all Unity employees, and particularly those in my organization, for supporting me. It has been great to spend the last three months with Matt. I have full confidence that he will lead Unity into stronger performance for customers, shareholders, and employees. As he said, we have everything we need to achieve healthy, sustainable, and profitable growth. I'm very happy to pass the baton on to Mark. Mark and I have worked together for many years, and he knows Unity well. I have full confidence in his ability to lead. With that, let me turn on to our results. We're pleased that the second quarter results exceeded guidance for both revenue and adjusted EBITDA, and our continued progress on profitability. Revenue from our strategic portfolio was $426 million, down 6% -over-year. This compares favorably to guidance of $420 million to $425 million. Our gap net loss for the quarter was $126 million, a 35% improvement from a net loss of $193 million in the second quarter of 2023. Adjusted EBITDA for the total company for the quarter was $113 million, a 29% improvement from the $88 million delivered in the same quarter last year, excluding customer credits in the prior year. This also compares favorably to guidance of $75 million to $80 million as we continue to drive savings and expand gross and operating margins. This quarter, we expanded non-gap gross margin to 84%, as compared to 81% in the same quarter of the prior year. The gross margin expansion is driven by cost control and better mix, while increasing our cloud consumption to train our ML models. We continue to manage operating expenses strategically, making choices where to increase spending, where to keep spending stable, and where to continue to drive efficiencies. As a result, non-gap operating expenses are down 21% -over-year and down to 59% of revenue from 63% of revenue in the same quarter of the prior year. Proportionately, the largest reductions come from G&A, followed by sales and marketing. These efforts enabled us to reach adjusted EBITDA margins of 25% for the quarter, an 850 basis point -over-year increase, excluding one-time customer credits in the prior year. We delivered $80 million in free cash flow in the second quarter, up 137% from $34 million in the prior year. Cash and cash equivalents at the end of the quarter were $1.3 billion. We closed the quarter with 476.5 million fully diluted shares, slightly down from the prior quarter. This compares favorably to 478 million fully diluted shares in our guidance in the second quarter. I will now provide additional perspective on revenue. Create Solutions revenue from our strategic portfolio in the second quarter was $129 million, up 4% -over-year. Growth is driven by a 14% increase in subscriptions revenue, as we continue to benefit from our price increase and our customer upgrade to higher price subscriptions. Create Solutions strategic revenue is down 2% -over-quarter from reductions in strategic partnerships and professional services following a very strong first quarter in these non-subscription businesses. Industries continues to be our fastest growing business. In the second quarter, industries grew 59% -over-year and now represents 18% of the total Create Solutions revenue, up from 12% in the second quarter of 2023 and 15% at the end of 2023. Growth Solutions revenue from our strategic portfolio in the second quarter was $296 million, down 9% -over-year and up 1% -over-quarter. We're pleased with the sequential growth after two quarters of sequential revenue declines, which was driven by product improvements and seasonality. On a -over-year basis, the decline is mainly due to pressures in our monetization business, partially offset by very strong performance from Aura. With that, let me turn to guidance. For the full year, we're adjusting our guidance down. While we're seeing positive impacts from the improvements being made to our ad network and level play products, we now believe that it will take us longer to see the full impact in revenue growth. Our updated revenue guidance for our strategic portfolio is $1,680 to $1,690 million compared to $1,760 to $1,800 million previously. This represents a decrease of 2% to 3% -over-year and a more cautious view of the expected recovery in our growth business. We expect continued double-digit growth in our create subscription business. On adjusted EBITDA guidance for the year is $340 to $350 million compared to $400 to $425 million in the previous guidance. To reduce the impact of the revenue reduction, we're driving further cost savings in the $5 to $15 million range, which is included in the guidance. We believe that there are greater efficiencies to be gained over time through a more disciplined execution. For the third quarter, we're guiding revenue to $415 to $420 million in strategic revenue, down 4% to 6% -over-year. Consistent with what I just said for the year, we expect our create subscription business to continue to grow double digits -over-year and that the growth turnaround will take longer to materialize. Our adjusted EBITDA guidance for the third quarter is $75 to $80 million, which includes investments needed to strengthen our growth business, in addition to the impact of the annual merit increases. Last, we expect 488 million fully diluted shares at the end of the third and fourth quarters. This is a reduction from our prior year-end estimate of 492 million fully diluted shares. As a result, our net -over-year dilution will be around 2%. The -over-quarter increase in fully diluted share count in the third quarter is entirely driven by our annual equity grants. With that, let me turn the call to Daniel so that we can take your questions. Daniel?
spk01: Thank you. So with that, we'll open up to questions here. If you're interested in asking any questions, please click on the raise hand button and unmute your microphone and we'll call on you. So the first question comes from Clark Lampen at PTIG.
spk06: Thank you very much. Can you guys hear me okay? Very well, Clark. Great. Matt, I want to start on the ad business. You mentioned sort of in the shareholder letter that you started the process of rebuilding the ML and data stacks. As we think about sort of the roadmap from here in terms of releases and general turnarounds, could you give us a framework for growth? Is this sort of a quarter-long process? Is this a potentially longer process? What sort of front and center right now in terms of priorities?
spk03: Thanks for the question, Clark. Yeah, we've been really upping the pace of our product releases on our ad business, and that began before I arrived. We've introduced support for multiple ad units. We've eased integration into our mediation platform. We've made countless improvements to our models. As Luis mentioned, we are seeing positive reactions from customers. We're encouraged by those updates, and we're going to continue that pace. At the same time, we do feel like we need to do some more fundamental work, as I mentioned in the letter around our machine learning and data infrastructure stack, because at the end of the day, while you can make incremental improvements and you've got to compete in this market every day, when you have fundamental capabilities that are differential, that's how you win over the long term. And so we're really excited about the opportunity for that. We have the pieces and we have the data and we have everything we need to do this. We're just going to execute through that activity relatively quickly, and we're excited about the impact that we think we'll see from that.
spk06: Understood. That's helpful. Luis, if I can follow up quickly on the guidance. I think just to clarify, you said sort of bridging from the old to sort of current guidance, we should still expect to create growth of double digits, I think, this year. Is that the right way of thinking about maybe medium term growth for that business also, or is there a general, I guess, sort of framework for growth, I guess, beyond sort of 24 that we can think about at this stage?
spk08: Yeah, two parts to your answer. One is what I said is that we expect strong double digit growth from our subscription business within Create. As you know, there are three components within Create overall. There is a subscription business, there is professional services and strategic partnerships. Professional services and strategic partnerships will be lumpy as it has always been. Remember, we had a very strong Q1, less strong Q2, and it will continue to fluctuate based on our agreement. So you should continue to expect strong growth on the subscription side. I think on your 25 questions, a little bit premature for us. I mean, I think we need to give Matt a little bit more time. Let us continue to evaluate things, and we'll come back to you and share expectations for next year soon.
spk01: I understand. Thank
spk06: you, guys.
spk01: Thank you. Thank you, Clark. The next question will come from Matt Cost from Morgan Stanley.
spk07: Hi, everybody. Can you hear me?
spk01: Yeah.
spk07: Yep. Great. Thanks for taking the question. I guess, you know, on the growth drivers within Create, I guess, just following up on Clark's question, there's a couple of things that are changing. You've got run-time fees coming in with Unity 6. There's the plus to pro transition, you know, potentially any price increases for the subscription peers. I guess, how should we think about when those things layer in and the magnitude of the tailwind to create results either end of this year or is that something that starts to flow in next year? And then I have one follow-up. Thank you.
spk03: Yeah, I'll make an initial observation, and then, Luis, we'll pick up the second half of the question. You know, the first order of business I had when I joined the company was to get out on the road and speak and meet with customers. And I met with individual customers at small groups in New York and also some of our largest customers in the Middle East and Europe. And what I was just really pleased to learn is that there's a real understanding of the important role that we play in the ecosystem and a real excitement around keeping Unity healthy and growing and a real willingness, especially around some of our larger customers, to pay fairly for the value we deliver. So that's really great news, and it's a testament to the work everybody does here at Unity every day to keep the company strong. There has been a lot coming in on pricing, and one of the things I'll just observe, and Luis will take you more into it, is that these price increases tend to take time to flow through the system. So they're not something that you see. They're related both to the upgrade cycle, for example, of Unity 6 and other things. So we don't expect to see them right away, but we do see them coming in over time as you begin to see already with the subscription growth we have.
spk08: Yeah, Matt, not a lot to add to what Matt already mentioned. I think we continue to benefit from the price increase we took about two years ago, and what we're seeing very helpful is customers moving to higher price SKUs. The industry SKU, as we've talked before, has been a great success and has been one of our fastest growing business, and that is, as we've talked before, significantly higher priced, and that's helping us bring in more revenue to drive the business.
spk07: Great, thank you. And then just quickly, I guess on the outlook farther out, does the Rule of 40 sort of expectation that you laid out a couple of quarters ago, does that still apply or is that something that you're reevaluating right now?
spk03: You know, for us, the Rule of 40 is the right kind of goal, right? It's a goal that's focused on building a business with attractive revenue growth and meaningful profitability, and that is what we're focused on. We're focused on delivering long-term sustainable growth, both on the top and the bottom line. You know, it's a little bit too soon for us to be able to forecast exactly when we're going to get there, but it's definitely something we're focused on, and it's important. Great, thank you.
spk01: Great, so the next question is from Ross Sandler at Barclays.
spk04: Great, guys, just two questions. Matt, so having used five gaming engines, as you said earlier in your prepared remarks, any fresh view on beyond the Create Unity 6 product rollout that's happening later this year, any other kind of alterations or tweaks to the product that would help the -to-market there? And then similarly on the ad side, so Jim obviously knows a lot about what made Apploven competitive. Do you think that you just kind of need to tinker with these models to get Grow to be more competitive, or are there assets that are out there that are missing from your portfolio that would kind of supercharge the ad business and get you back to the table and competitive? Thank you.
spk03: Yes, my pleasure. Thanks for the question. Let's take Create first. What is really important to understand is we really believe that we're in a unique position with Create, with our engine, not just because it's the best, most performing engine, particularly on mobile, and not just because we have such a dominant market share, but because we're the only company in the world capable of supporting the entire game development cycle. And customers want to see those pieces integrated. They want to see both the ad and marketing side, acquiring players and monetizing them. They want to have one place where they can leverage the data that we provide to maximize their business, both in the building and the releasing of games. So we're in a unique position, and we need to execute better to get there, but it's something that nobody else is capable of doing, so it's something we're really focused on. And really excited about. On the ad side of our business, you need to do both. So what we have been doing, we're going to continue to do. We're constantly updating our models. We're constantly releasing new products, and that's the -to-day work. But at the same time, we need to be sure that we have the most modern, most performant data and machine learning stack, because being able to respond in real time and to be able to leverage the data advantages we have across not just the engine, not just both of our ad networks and three or four other ad products. We have got to have the largest database and the most knowledge of video and customers, among the most knowledge of anybody in the world. Having the right stack is going to enable us to leverage that value for our customers, and that's going to be really important for the long term. And it's an incredibly important asset and a great opportunity for us.
spk01: Thank you, Rasa. The next question comes from Gilly from Goldman Sachs. Hey, Gilly.
spk00: Hey, everyone. Thanks for taking the question. And first off, congratulations to you, Matt. I appreciate the color in the letter. And given your industry experience, I'm curious to hear what your assessment is of Unity's positioning in the broader industry landscape, and how is that influencing the prioritization of initiatives you're putting into place? Can you give us examples of the short-term operational improvements you're taking?
spk03: Yeah, as I was saying, I think maybe the piece that's least well understood about Unity broadly is just how central we are to the ecosystem and how large that ecosystem is. Some of the things I talked about in the letter. You know, the game economy is most of the app economy, right? It's 60% of the app economy. You know, we are touching billions of players through our engine and our ad products. There are, you know, hundreds of thousands of Unity developers that a game developer can choose from when they decide to build a game. So these ecosystem questions are really, really important and are going to provide a real foundation for us to grow. On the execution side, for us it's mostly about rapidly creating a culture of execution and accountability. That's most important for us. We're going out and adding world-class talent to add to that culture of execution, and Jim is a great example of that. And then we've got to lean into that execution to accelerate the product innovation we're seeing. And if we can do that alongside recreating and deepening bonds with our customers, some of that has gotten a little frayed in the past. We want to listen better and be better partners and better customers across our business. If we can do all those things, we are in a very, very nice position.
spk00: I appreciate that. And if I can, one more for you, Luis. Can you talk through just the guidance reset and if there was any change to like the linearity in the quarter, I think the change was mostly driven off of growth solutions and added caution. Is that based on the way you're accounting for the timing of your new models to be deployed or was there just something in the trends that led you guys to make this change?
spk08: Yeah, we're just being more cautious, as you said. And I mean, when you guide for the full year and you already have two quarters, you can see Q3 and Q4 and we're guiding kind of stable Q3 to Q4, mostly right plus minus a few million. So it's pretty stable. So we're not counting with a lot of seasonality in the last quarter. And if it comes, that would be great. But that's just being more cautious on the growth side.
spk03: That's
spk08: really
spk03: the
spk08: driver.
spk03: I just want to add that we're really focused on restoring credibility within our ecosystem, with everybody in our ecosystem and taking a prudent approach to forecasting and is important for us. Mostly because we're so confident that we're well positioned in the long term and that we've got a real differentiated offering. But being prudent now is the right approach.
spk00: Great.
spk01: Thanks. Thank you, Gail. The next question comes from Dylan Becker at William Blair.
spk05: Hey, gentlemen. Just one here for the sake of time. Matt, great to speak with you and congrats on the next endeavor. Louise here. You guys did call out industry's growth of 60% here. Obviously pretty impressive becoming a larger share of Create. I know Jim had talked a lot about the opportunity there. But wondering as you're seeing kind of incremental traction with partners, scalability, you'd sold off the piece to Cap, Jim and I have of establishing kind of that broader ecosystem, maybe leveraging more more SIs, any kind of additional color there would be great. Thank you.
spk03: Thank you for the question. We're really excited about the opportunity in industry and we're continuing to see real progress there, focus on specific end markets like auto, retail and manufacturing, but also really more broadly anywhere where visualization of 3D assets across devices and platforms is of most value. And those are very broad applications. So we're seeing that demand is really strong. We had a bunch of new customers in Q2, including Audi and Diageo, as well as Bosch Rexroth, the German engineering firm. So we are continuing to see growth and velocity there. I'm very, very excited about this, you know, as I came in and looked just at the logos we have and the way this business is expanding there. You know, I know Jim was really bullish on it and we're really lucky to be able to leverage his expertise and continue to do that. But there's real opportunity in this business for us and we're leaning into it. Great. Thanks, Matt.
spk01: Great. The next question is Parker Lane from CEPL.
spk02: Parker? Parker, we can't hear you.
spk09: Can you hear me now? Yeah,
spk02: we can
spk09: hear you. Sorry about that, guys. Thanks for taking the question. Matt, just to piggyback on Dylan's question there, I was wondering when you look at the opportunity in industry, is there any significant change in the -to-market approach or the opportunity set that you guys have historically gone after? I know you've made this shift that Dylan has alluded to in the delivery mechanism. But as far as what you want to go after, is it largely business as usual there?
spk03: I think to Dylan's point, historically this business for us has been a lot of pull. So the market demand is there and we'll become aware of customers using Unity to prototype things. And then our sales motion will start and we add customers. So that's a spectacular, that's spectacular. But we can complement that -to-market by building out the motion in a much larger way through SIs, through other partnerships. We're still really at the relative beginning of that process, which is frankly what's so exciting about it. And we can find the right mix between our own direct sales and going to market with key partners. And again, that's just beginning. So that's what gives us so much confidence. There's a lot of runway here.
spk09: Got it. Appreciate the call. Thank you.
spk01: Thank you. And the last question will come from Josh Hilton from Wolf.
spk10: Thank you so much for squeezing me in. Can you guys hear me?
spk08: Yeah, very well, Joshua.
spk10: Two questions for me. First of all, Matt, congratulations. I guess what I'm just trying to understand is if I take a lot of the questions that were asked on this call today is I kind of left the shareholder letter feeling like we have a new starting lineup, but I'm not exactly sure what the playbook is going forward. And I guess if you were just like summarize, you know, broadly in a few sentences, what is the playbook to getting Unity back to greatness? And like, what can you tell us to give us some confidence to investors that you guys can actually execute on that strategy? And again, just a follow up from that question.
spk03: Yeah, thanks for the question. So really simply, what we're going to do is we're going to create a culture of execution and accountability and drive forward in a way that is is highly differentiated from from how we've gone gone to market in the past. We're going to add world class talent really quickly. We are bringing new leadership into the company. We're going to listen to our customers better and be more responsive. You're going to see much more product innovation much more quickly. And we're going to share progress with you and as we go. So it's it's it's been 90 days. We don't want to get too far out in front of the process. But look, it's our strong belief, as I said in the letter, and I said at the top that we are the only company in the world capable of being this really important space in a very, very large market. So we're well positioned. I can tell you that I, you know, today I'm even more excited than the day I started because I can see that the pieces are here. The people are here. The technology is here. The assets are here. Our partners want us to win in both, you know, both parts of our business. The ad or ad business. People want us to be a strong competitor in our engine business. Same thing. So everybody's rooting for us. We have a vision. We've got customers that are rooting for us and we have all the pieces and parts. All we have to do is execute. And that's a position I want to be in because we can execute and we will. And that's why you should have confidence. And you're going to have you're going to have to stick with us a little bit here to see how that turns out. But we're really, really confident.
spk10: Super helpful. Maybe just a quick follow up for me. You know, it feels like there used to be a lot of excitement around the non-gaming create business. I may be making this up, but I feel like you guys used to talk to the potential for it to be larger than the gaming create business. You're obviously coming from a gaming background. You seem very focused on fixing the relationship with those gaming customers and improving kind of the ad side of the business as well. So how do we think about, you know, investments in the forward trajectory of that non-gaming create business as you kind of come and sit in this new role?
spk03: Yeah, it's a great question. I think we see our industry business as a natural extension of the capabilities that we develop in the core customer segment in gaming. So I don't see them as at odds. All the technology investments and the product and the product development we do tends to benefit us in industry as well. So there's no lack of enthusiasm from our perspective. I do think that over the years we have talked a lot about it, and this goes back to the question on execution. I have full cons that this is going to grow, but we also need to be super clear about our prioritization. And so getting right in our existing customer segment and executing there is job one. We have more than enough to go into job two around building our own industry again, which is we see as a natural outgrowth. So if we can execute better on our go to market motion there, which we can, and strengthen our core, we can do both at the same time.
spk01: Super helpful. Thank you so much.
spk03: My pleasure.
spk01: Thank you. So before we wrap up, I wanted to provide Matt some final words.
spk03: Yeah, I just want to thank you all for spending the time with us today. And as I've shared with you, we believe we have the clarity of vision and all the pieces that we need. And we look forward to telling you more about this as we go. And we really appreciate your support. And we'll look forward to seeing you again soon.
spk02: Thank you. Thank you. Thank
spk03: you, everybody.
Disclaimer