Unity Software Inc.

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 investors.unity.com. Today, I'm joined by Matt Bromberg, our CEO, and Luis Visoso, 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 sec.gov website.

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 and our community. Although 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 lifecycle, 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 and Dragons with my friends. 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've 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 gonna 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.

Thank you, Matt. I would start by saying that he 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% year-over-year. This compares favorably to guidance of $420 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. Adjuster 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 to $80 million as we continue to drive savings and expand gross and operating margins. This quarter, we expanded non-GAAP 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-GAAP operating expenses are down 21% year-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 year-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% year-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. Great solutions, strategic revenues down 2% quarter to 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% year over year and now represents 18% of the total Create Solutions revenue, up from 12% in the second quarter of 23 and 15% at the end of 2023. Growth solutions revenue from our strategic portfolio in the second quarter was $296 million, down 9% year-over-year and up 1% quarter-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 year-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% year-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. Unadjusted 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% year-over-year. Consistent with what I just said for the year, we expect our create subscription business to continue to grow double digits year-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 year-over-year dilution will be around 2%. The quarter-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?