Unity Software Inc. (NYSE:U) Q1 2024 Earnings Call Transcript

Unity Software Inc. (NYSE:U) Q1 2024 Earnings Call Transcript May 9, 2024

Unity Software Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Daniel Amir: Welcome to Unity’s First 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 Jim Whitehurst, our Interim CEO, and by Luis Visoso, our CFO. But before we begin, I want to note that today’s discussion contains four 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. 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 shareholder letter and on the sec.gov website. Great. So what we’ll do now is similar like what we have done in previous quarters. We get a number of inbound questions during the quarter, and we will start with kind of two key questions here. The first is to Jim, and then the next is to Luis. So the first question to Jim is, with the recent announcement of the new CEO and your new role as Chairman of the Board, how do you see Unity going forward?

Jim Whitehurst: Well, let me start off just saying I am thrilled to have Matt Bromberg joining us as Unity’s CEO. He starts next Wednesday. We conducted a super thorough search and really am thrilled with him. He has a great combination; he is super strategic; he really has a sense of the industry, what are the trends? What are the subtleties? What are the disruptions happening? So I think he’ll be a great strategic steward of the business. But in addition, he is a down in the weeds operational leader who I think can continue to drive improvements in our execution. And finally, he knows the business extremely well, both the development kind of game development side as well as the monetization side. So I think he will be a great leader for the company going forward.

Secondly, I’m not going anywhere. I’m remaining as Executive Chairman. And what I’m really excited about working on is the industry side of the business. I am obviously in an area where I’ve spent a lot of time and I continue to be super excited about the opportunity we have there. I’m probably biased, but I still think that’s a bigger opportunity in the long run in the gaming business. And I’m looking forward to partnering with Matt to help, however, I can and ensure the success and growth of that business. In terms of how I see the business today, I guess let me address that in the short-term and the long-term. I’d say in the short-term, I am even more confident in our ability to deliver the plan this year. The reason I say that several fold is things have unfolded.

First off, we are seeing customers who were a bit ruffled at the end of last year, feeling much more confident with us. We’ve gone from what and why of runtime fee to I think a recognition that the industry wants to make sure that we invest in the runtime. And so it’s a matter of how and let’s kind of work through that. So we’re having super productive conversations with our large customers. We had a phenomenal GDC, really, really great engagement across the board. So also it makes me feel good about our relationships with developers and where those are moving. On Unity 6, obviously that doesn’t release until later this year, but if we look at the leading metrics, both the downloads and usage, but importantly, our measures around quality and our timelines, it’s the highest quality release at this stage that we’ve ever had.

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Q&A Session

And the timelines have pulled in. We’re not necessarily saying we’re going to pull the release date in yet, but the timelines are coming in. That’s generally a really, really good sign of good execution. And finally, we talked a lot about interventions we’re doing on the data and analytics side on the monetization business. Obviously, those have not manifested in the numbers yet. We’ve done a lot of the work. We’re starting to get the results of the testing. It looks very encouraging. Those will roll out through the quarter and you’ll start to see that in Q3. So you put all that together, I’m highly confident in our plan for the remainder of the year. We obviously were confident last quarter, but all of the indicators over the last three months make me even more confident in our ability to deliver.

In the long run, again, I continue to be super optimistic about the business. We are essential to gaming. There are a number of trends in gaming where I think our position can help our customers be even more successful, which makes us essential and we’ll continue to obsess over our customer success and I feel really great about that piece of the business. And frankly, on the industry side, as I said, it is still a relatively nascent opportunity for us, but the more I’m out talking to customers, the more opportunity I see there. So overall, both the short-term, I feel much more confident in, and the long-term I remain super excited about.

Daniel Amir: Great. Thank you, Jim. So the second question is to Luis. What is your overall take on Q1 and what are the plans to accelerate revenue growth here in the second half of the year?

Luis Visoso: Hey, thank you, Daniel. I believe that we accomplished a lot in Q1. Now, you think about it, we delivered in line with expectations with strategic revenue of 2%, creating particular growth, strategic revenue, 17%, with our core subscriptions of 13%. And we’re making very good progress expanding profitability. EBITDA was up $50 million year-over-year. And if you look at our like-for-like net income improvement, it is close to $100 million year-over-year. So great progress on profitability, as we continue to drive revenue growth. And very importantly, these results were achieved while successfully completing a very large and complex cost and portfolio reset that will position us much stronger going forward. As Jim mentioned, customer engagement with the engine and retention rates are healthy.

Industry continues to be our fastest growing business. And we continue making progress with AI tools, particularly news incentives. So I would say a very good quarter. Now, looking ahead, which is kind of your second part of your question, overall, the plan is unchanged from our conversations last quarter. With a portfolio and cost interventions behind us, we’re now focused on the engine, the cloud, our monetization business, where we believe that we can sustainably create value for our customers and generate a good return for our shareholders. In Create, we expect the second half to continue to come from growth in subscriptions in both games and industries. And in Grow, we expect the second half acceleration to be driven by improvements in performance in our monetization solutions, and better usage of data to train our models and deliver that return on ad spend for our customers.

And very importantly, we continue to make progress on something we talked last quarter, which is to integrate Create and Grow to better serve our game customers more holistically, which is something that Unity can uniquely do better than anybody else. So in summary, I would say that we believe that we’re very well positioned and our focus now is to execute to our full potential. Now before we go to other questions, I would like to remind you that our revenue guide is for our strategic portfolio only. And we’re doing this to help investors really focus on the business that we’re driving while we exit the non-strategic business. So you will see our guide is for strategic revenue. When we report actuals, we’re obviously giving you both numbers, the numbers for our strategic portfolio as well as our non-strategic portfolio.

On Adjusted EBITDA though, we’re guiding for the total company. This is to avoid allocation issues and as we know, the non-strategic portfolio adjusted EBITDA is not meaningful, which is one of the reasons we’re exiting those businesses. So hopefully that is clear and we can go back to the questions.

Daniel Amir: Great. Thanks Luis. So with that, why don’t we open up to questions here. If you’re interested in asking a question, please click on the raise hand at the bottom of your screen. And at this point, we’ll allow you obviously to unmute the microphone. So we’ll take here a couple seconds here for people to raise their hand.

A – Daniel Amir: Okay. So the first question, Andrew Boone from JMP Securities.

Andrew Boone: I wanted to go back in terms of the growth drivers that you just talked about for the second half of the acceleration. I think for Grow, you talked about monetization of solutions and then better usage of data. Can you just unpack that a little bit more in terms of what we should actually expect and from the product perspective, what exactly are you guys doing to be able to drive that growth? Thank you so much.

Luis Visoso: You want to take that, Jim? Or —

Jim Whitehurst: Well, I mean, I can start and you can kind of break that out. So it’s not like you said more on the Grow side of the portfolio. So as we said before, we were operating with, frankly, two different data science departments. So we weren’t fully kind of integrated in what we were doing. This year, as part of kind of completing the iron source merger, we’ve kind of brought those organizations together, whether it’s data engineering or data science. There was, frankly, a lot of data we just weren’t fully using. We are now training our models using substantially more data. We also, by combining forces, were able to kind of roll out incremental analytics against those things. And there are multiple. There’s one for iOS.

There’s one for Android. There’s one around different sets of kind of behavior in these various data sets, data we’re getting from MMPs. And so each one of these, you kind of continue to tweak models and test and compare and run A-B tests, et cetera, et cetera. And then as you see those results and you kind of tweak and you kind of get where you see material uplift, you then do the full training on all your data and you start to roll those things out. So that’s what we’re doing. Obviously, some of those things are competitive. So I don’t want to go into the very, very specifics, but we have, with Luis, about eight or nine kind of, I’d say, major kind of things that we contemplated at the beginning of the year. Literally, I think all of them look pretty good.