Unity Software Inc. (NYSE:U) Q4 2022 Earnings Call Transcript

Unity Software Inc. (NYSE:U) Q4 2022 Earnings Call Transcript February 22, 2023

Richard Davis: game market in industries and digital twins side of our business. So again, before we go into broader Q&A, maybe you could explain how you kind of see the macro environment playing out for Unity. And then I’ll have one quick question for Luis as well.

Luis Visoso: Sure. So broadly, the macro environment remains surprisingly resilient. If you look at the gaming industry, we’re seeing €“ our developers are as productive as they’ve been before. They’re producing a huge number of games. Their investment against game development is holding up well. We’re seeing strong DAUs or users in our network suggestive of overall game play that remains strong. And then within the industry side where we reported over 100% growth last year in digital twins, there continues to be very robust demand. And so maybe some elongated sales cycles where people take a little bit longer to decide, but when you’ve got demand far in excess of our ability to supply, we’re in a pretty good spot and we’re not feeling a pinch.

So all in, the market seems stronger. And I’d offer than you might expect, especially when we’re indexing against such unusual years to work from home or learn from home era, but a couple of very specific points. The ads market has stabilized as of the middle of 2022 and continues to be stable now. What’s actually happening is strong user engagement offset by weaker eCPMs than we historically see, but again it’s been stable. At some point, that flips and we’re not expecting it to flip. We’re using that in our models looking forward. We want to be conservative. But all in, the markets are solid. There is not a lot of concern here.

Richard Davis: Great. Thanks very much. And Luis, the question that we get oftentimes for you would be how are you thinking about balancing growth and profitability? And kind of how does that fit into the guidance that we issued today?

Luis Visoso: Yes. Thank you, Richard. So what I would say is on the revenue side, just like John just mentioned, we’re taking a prudent assumption on the market and that is reflected in our revenue guide. It is clearly better to plan this way in this environment. Now on the cost side, we’re taking very clear actions to improve profitability. And this includes things like the elimination of close to 300 roles that we announced before being very selective in any future new hires that we add to the company being more focused in our investments and reducing the number of beds that we make at Unity, raising the bar on cost, and we’ve been turning every stone once or twice and finding new opportunities in a few places. And that frankly includes reducing the number of shares that we grant as part of compensation.

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So we’re taking a very holistic view on cost and making sure that costs are adding value. And as a result, you should expect to see costs relatively flat during the year as revenue growth quarter-over-quarter. Now what happens then is that we expect to significantly improve profitability in 2023. If you look at €“ we had a loss of $90 million non-GAAP in 2022 and we expect adjusted EBITDA to be about somewhere in the range of $230 million to $300 million in 2023, so very significant swing from one year to another. Now what’s interesting is in 2022, we were only profitable in Q4. In 2023, we expect obviously to be profitable every single quarter. And one more point I would like to make is that the profitability improvement that you see year-over-year comes about 50:50 from create and grow.

So we’re making progress across the board. We’re taking, as John said, more conservative assumptions on the market and being very proactive on cost with decisive actions to improve profitability in this environment.

A – Richard Davis: Great. Thank you very much. Well, now we can open it up to questions from the analysts on the call. Here we go. First question from Matt Cost at Morgan Stanley.

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Q&A Session

Matt Cost: Hi, everybody. Can you hear me?

Richard Davis: Yes.

John Riccitiello: Yes.

Matt Cost: Great. Thanks for taking the question. So maybe just one thing in the letter. You mentioned the drivers that create revenue growth being pricing, China and digital twins. Should we assume that that seat growth is kind of going to be under pressure or stable this year because of some of the issues going on just in your customer base in the mobile gaming market? That’s the first question. The second question is just when we look at the ramp in EBITDA, I think, the guidance for the first quarter is $7 million to $12 million, the full year number is $230 million to $300 million. So that’s pretty significant step-up in just dollars of EBITDA as we move through the year. What should we think about as the drivers of that? Thank you.

John Riccitiello: Luis, do you want to start with this one?

Luis Visoso: Yes. On the second part of your question, Matt, as I just said, we expect cost to be relatively flat during the year. As you know, we have a very healthy gross margin. And as you get the revenue growth quarter-over-quarter, you get into those profitability levels. So, that is basically the assumption and where we’re working against. Very importantly, Matt, some of the actions that we’ve taken on costs don’t fully impact Q1. They only impact Q1 partially. And they obviously have a full quarter impact in Q2, Q3 and Q4.

John Riccitiello: In terms of seats, we don’t normally and haven’t been guiding the seats. So we don’t call it out in particular. But what we’re €“ our intent going forward, obviously has increased the number of users, game industry and continue to be strong and our shares across every platform continued to be very strong. We called out, in particular, pricing in China because those are important drivers of our sequential growth, Matt. One of the areas I expect to see strong growth over time around seats is professional artistry. And we can talk a little bit more about that, but how tools like Weta and Ziva, and the things that we’ve acquired are coming to market in the coming year. And with that new customers, new seats, et cetera, so we don’t feel like there’s any issue are on the seat side. It’s really, we’re calling out particular growth drivers. .

Matt Cost: Great. Thank you.

Richard Davis : And Jason Bazinet from Citi.

Jason Bazinet: I just had a simple question. Just maybe this is for Luis. Sequentially, new Create grew about $9 million and, I think, old Create grew about $13 million, which implies either strategic partnerships or UGS may be contracted a bit. Is there anything that is noteworthy there or anything that you’d call out?

Luis Visoso: Yes. Jason, good point. You may remember, in Q3, we had a very strong strategic partnerships business. We actually commented on that in this call. And that is a business that will have ups and downs just based on when deals are signed. That’s why, I think, it’s super important to look at the Create numbers on a stand-alone basis where you actually see, as you just mentioned, an acceleration from Q3 to Q4 in terms of number of dollars added Q-over-Q.

Jason Bazinet: Okay.

Luis Visoso: So that’s the way I would think about it, Jason. Just take the €“ that’s the view, the clean view apples to apples. .

Jason Bazinet: Okay. And do you mind if I ask 1 follow-up?

Luis Visoso: Go ahead.

Jason Bazinet: It just seems like the tensions with China, whether it’s been sort of advising not to use the big four accounting firms or some of the changes that we made related to chip exports are sort of increasing. And I know China isn’t the biggest business geographically for you, but is that a concern investors should have? Or do you think it’s sort of ring-fenced to manufacturing and big four accounting firms.

John Riccitiello: Let me take the top of that one, Luis.

Luis Visoso: Yes.