Unity Software Inc.

Today, I'm joined by Matt Bromberg, our CEO, and by Jared Yates, our CFO. But 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 risk, uncertainties, and assumptions. And you can find more information about these risks and uncertainties in the risk factors section of our filings at sec.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 press release and on the scc.gov website. Before we begin, please note that starting this quarter, we have made available on our investor relations section of our website a new investor-friendly spreadsheet that includes our quarterly and annual SEC financials, associated non-GAAP bridges, KPIs, as well as new disclosures with incremental details around revenue breakdown that we hope will be helpful. There will be more to come as we endeavor to further help investors understand the Unity investment story. With that, I will pass the call to Matt.

Thanks, Daniel. Good morning, everyone. On behalf of all the good people of Unity, I'd like to thank each of you very, very much for joining us today. On our prior calls, we've talked about the principles powering the transformation of Unity, how we're building a culture of execution and discipline, reestablishing trust with our customers and the community, and accelerating the pace of product innovation and quality. Although it's still early, we can clearly see how these principles are fundamentally changing the company, and our optimism is increasing with each passing day. Uni's results in the fourth quarter reflect real progress, meaningfully exceeding our guidance for both revenues and adjusted EBITDA. Revenue on our strategic portfolio grew at its fastest rate in four quarters, and adjusted EBITDA beat the top end of our guidance by 26%. It's good for the company to get back to competing effectively, and we're proud of the team for delivering financial results in Q4 that demonstrate solid execution. But to be clear, it's not our aspiration merely to compete. We're here to spark rapid, sustained, long-term growth. So I'd like to take a few minutes this morning to detail precisely how we're going about that. Let's start with our advertising business. Q4 results in our growth segment exceeded our expectations and were the best we've seen in the last year, driven by strong holiday demand and improved ROI for our customers. But although the results exceeded our expectations, they are clearly not enough to satisfy our ambitions. We firmly believe that we have the assets and the capabilities to grow much faster. And so today, we're excited to officially announce the migration of the Unity ad network to our new AI platform, which we're calling Unity Vector. The migration begins towards the end of Q1, with this first phase of work slated to be complete by the end of Q2 2025. Ongoing efforts to expand the scale and our quality of our offering will, of course, continue thereafter. Vector is designed to leverage data from across the Unity ecosystem, integrating self-learning, artificial intelligence models that will provide deeper insights, optimize performance, and deliver better results for customers. Vector enhances targeting precision and increases audience scale through a sharper analysis of richer data sets. And it's also able to adapt in real time, helping customers navigate an increasingly competitive mobile marketing landscape. Although our enthusiasm around this plan's transition is very high, we do want to highlight the iterative nature of the work and to caution some patients around the time we'll need to mature the product as it begins to operate at scale. Univector is a significant undertaking, and we won't see the benefits immediately. The caution in our Q1 guide reflects imprudence with respect to this. With that as context, we remain confident that the introduction of vector will establish Unity as a fundamentally stronger competitor in the years ahead. I also do want to know how proud we are that we were able to move Unity Vector in production at this velocity and to thank everyone involved. It speaks to a significant enhancement in our operating capabilities, as well as to the passion and dedication of the team. This same appetite for rapid change, increased growth, and delivering more product value is also very much present in our Create business. So let's turn in there now. Customers have responded immediately to the cancellation of the runtime fee and the launch of Unity 6, and we're now closing new deals and booking renewals at a rapid pace. This is reflected in the 15% year-over-year increase in subscription revenues they've experienced in Q4. Unity 6 is being sampled at a higher volume than our other recent releases, and nearly 38% of our active users have already upgraded. Additionally, Unity 6 has already been downloaded 2.8 million times since launch. In 2024, Unity maintained its position as the top game engine in the world, with more successful games being built in Unity across more platforms than any other engine. Of note, about 70% of the top 1,000 mobile games worldwide were made with Unity, including the top three grossing mobile games. And 30% of the top 1,000 PC games on Steam are made with Unity as well. As new kinds of devices are introduced, Unity continues to show strength and flexibility in its platform. For example, we are leading the way in mixed reality and spatial computing. Arkham Shadow, a made with Unity title, launched exclusively on MetaQuest 3 in October and won the best AR VR game at the 2024 Game Awards. In fact, seven out of the top 10 AR games in 2024 were made with Unity. In Q4, we also announced a significant co-development partnership with Google that provides day one support of the new Android XR platform. This collaboration reinforces Uni's position as the leading real-time 3D development platform and highlights the growing investment in XR for major industry players. As XR grows, Uni will grow with it. and this growth will not just be limited to gaming. Beyond gaming, Unity adoption continues to accelerate across important markets like automotive and retail, where our cross-platform 3D visualization tools are very much in demand. We had a stellar quarter in our industry segment, with revenue growth of 50%, making it once again our fastest-growing subscription business. We also recently announced several significant new customers, including Toyota, who selected Unity to power all its next-generation human-machine interface, enhancing the in-dash driving experience for all its customers, and RTX company Raytheon, who is using Unity to create 3D simulations for facilities planning and factory layouts. In conclusion, I'd like to thank all of our teams for their relentless effort as we continue to transform Unity and earn our customers' trust each day. Together, we're shaping the future of interactive content creation, building a new platform that will enable the next generation of developers to innovate and move from prototype to profitability faster and more efficiently than ever before. Unity is the only company we know of that can deliver value to developers of games and interactive experiences across the entire lifecycle, from prototyping to live service operation, right through user acquisition and monetization. That capability and its connection to the 3 billion monthly downloads of applications created with Unity positions us well to become the global platform of choice for creators of interactive content. As the quality and the integration across our product portfolio continues to improve, AI continues to advance, and true platform advantages begin to manifest, we're confident we'll be able to deliver significantly more value to customers and, in the process, transform our business. Thanks again for your time and attention this morning. I'd like now to extend a warm welcome to Jared Yays, our new CFO. Jared's an outstanding addition to our leadership team, and we're all really looking forward to working closely with him. I'll turn it over to Jared now for an overview of our financial performance. Jared? Thanks, Matt.

...convinced of Unity's extraordinary potential based on our truly global scale and unique end-to-end customer value proposition. taking to our business in terms of how we're allocating capital and delivering returns for shareholders. We plan to focus R&D towards the highest impact initiatives in order to accelerate revenue growth with the joint goal of capitalizing on the largest and fastest growing market opportunities while fulfilling the promise we make to customers and developers who use Unity every day. We intend to complement revenue growth with ongoing margin expansion and drive operating efficiencies over time. And we're committed to driving growth of adjusted EBITDA and free cash flow in order to maximize return for shareholders. Lastly, we expect to be prudent stewards of shareholder capital. We have a robust balance sheet with excess cash and solid free cash flow. Our near-term expected uses of capital will be to focus on organic innovation at the company and gradually de-lever to ensure a conservative balance sheet. Turning to the fourth quarter, I am pleased to report that Unity meaningfully exceeded our guidance for both revenue and adjusted EBITDA. Revenue from our strategic portfolio is $442 million, up 4% year over year, or $15 million above the high end of our guidance. Both businesses outperformed solidly. Create Solutions revenue from our strategic portfolio was $139 million, up 9% year-over-year, and up 6% sequentially. The year-over-year increase was driven by another quarter of strong 15% growth in subscriptions revenue, combined with accelerated growth in industry revenue of 50%. Investors should note that the strong fourth quarter growth in subscription revenues does not yet reflect the positive impact from the recently announced price increases. Those price increases will roll in radibly from our pro and enterprise customer tiers over the course of 2025 and 2026. Grow Solutions' revenue from our strategic portfolio was $303 million, up 2% year-over-year and up 2% sequentially. This is the best quarter we've seen in the past year, and the solid results were driven by better execution combined with seasonal demand. Supporting the strong revenue results, Unity experienced sequential improvements in terms of both dollar-based net expansion, which improved by 2% to 96%, and customers over $100,000, which improved to 1,254 customers. During the fourth quarter, revenue from our non-strategic portfolio was $15 million, down 92% year over year as a result of our portfolio reset. We expect that in 2025, this revenue will be approximately $30 million for the full year and remain stable thereafter. With the hard work of winding down the non-strategic portfolio now behind us, going forward, we will report and guide to total revenues and provide total revenues for each of Create and Grow, simplifying our disclosures for investors. Turning from revenue to non-GAAP profitability, adjusted EBITDA for the quarter was $106 million, representing 23% margins. Adjusted EBITDA exceeded the top end of our guidance by 26%. And for the full year, Unity delivered adjusted EBITDA of $390 million at 21% margins. Adjusted EBITDA benefited from improving gross margins and operating leverage in the platform, combined with solid cost management across expense lines. Adjusted gross margins improved from 82% in 2023 to 83% in 2024, while adjusted G&A, sales and marketing, and R&D expenses were down by a combined $235 million in 2024. There's still untapped operating leverage in the platform, and we are poised to improve profitability as we grow. Unity had exceptional free cash flow in the fourth quarter and for the full year. Free cash flow was 106 million in the fourth quarter, up 74% from 61 million in the prior year. Free cash flow for the full year was 286 million, up 60% from the prior year. Cash at the end of the quarter was $1.5 billion and debt was $2.2 billion. With significant free cash flow generation in the past year, we took the opportunity to delever, repurchasing $415 million of debt while maintaining a robust cash balance. Based on our free cash flow profile and the excess cash on our balance sheet, Unity has a clear opportunity to gradually delever over the next several years. Going forward, as we focus on per share returns, we'll also aim to reduce shareholder dilution from stock-based compensation. Share count dilution from stock-based compensation has gone from just under 3% in 2023 to just under 2% in 2024, and we believe it has the potential to come down further. Stock-based compensation expenses also expected to fall by 30% in 2025 with the lapping of M&A-related vestings and a sharper focus on minimizing dilution. With that, I'd now like to turn to guidance for the first quarter. We're expecting total Q1 revenues of $405 to $415 million and adjusted EBITDA of $60 to $65 million. Revenue guidance takes into account our expectation for reduced revenues from our existing ad models in the first quarter and the gradual nature of our transition to Unity Vector. Our revenue guidance also takes into consideration seasonal demand and additional working days in the fourth quarter as compared to the first quarter. Our adjusted EBITDA guidance factors in our expectations around first quarter revenue, as well as normal increases in payroll-related expenses and incremental cloud costs associated with ongoing investments in Unity Vector. One final note. While we have typically provided annual guidance during our fourth quarter call, we'll be transitioning to quarterly guidance in 2025, given the rapid change and transformation taking place in our ad business. And with that, I'd like to thank you for joining us on Unity's first quarter 2025 conference call. And let me turn the call over to Daniel so that we can take your questions.