Unity Software Inc. (NYSE:U) Q4 2023 Earnings Call Transcript

Unity Software Inc. (NYSE:U) Q4 2023 Earnings Call Transcript February 26, 2024

Unity Software Inc. beats earnings expectations. Reported EPS is $0.23, expectations were $0.19. U 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 Fourth Quarter 2023 and Year-End 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 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 risks, uncertainties and assumptions. And you can find more information about these risks and uncertainties in the Risk Factors section of our filing 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. What we’ll do now is similar like what we’ve done in previous quarters. We get a number of inbound questions during the quarter, and we will start with two key questions. The first to Jim, and then the second one to Luis. So, the first question is to Jim. After five months here, can you give your take on Unity and kind of provide us also an update on the CEO search?

Jim Whitehurst: Sure. Yeah, I can’t believe it’s been almost five months. I have to say I’m even more excited now about the opportunity in front of us than I was when I joined. We’re obviously in the midst of a reset. But let me spend maybe just a minute talking about why I’m so optimistic and then I’ll come back to the CEO search afterwards. So first off, I believe we’re making the right interventions to position us to win for our customers, not just today, but for the long-term. And let me just quickly hit three of those. So first off, we’ve substantially focused our portfolio on products. We’re confident that we have unique value for our customers and therefore, have permission to win and we’re hearing great feedback. From our games customers, they’re seeing the focus in our product roadmaps and our attentiveness to their needs.

And so, we’re hearing great feedback there. Same on the industry side, where not just from what we’ve been doing in the last few months, but in particular, our focus on repeatable software and the partnership we announced with Capgemini has — I’ve heard from several customers, really positive view of that direction around focus. We’ve also instituted a much leaner cost structure that provides us a healthy profile. And then from there, we can scale in a profitable way. And third, we’re in the process of improving our growth performance specifically our user acquisition through better use of data and stronger models, and I’m very confident you’ll see accelerating growth in our Grow business going forward. The second reason I’m optimistic is that while 2023 was obviously a challenging year for us, we saw some key proof points around the durability of our franchise.

So first off, even in the aftermath of the pricing change, our core subscription business, excluding China, grew 18% in Q4. Put it simply, we are essential to the games industry. And then, with industry, it was actually our fastest-growing segment, and I believe we’ve just gotten started, and we have meaningful growth potential there. And the partnership with Capgemini should even further accelerate growth there. And finally, our engagement with our editor continues to be super, super strong. We saw that at Unite in November, and we plan to exceed our customer expectations with our next releases of the editor through the course of this year. And the final reason I’m optimistic is that, obviously, the reset work continues through Q1, it obscures our financial progress, but we expect to see strong financials in the back half of this year.

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Q&A Session

To the second part of the question, I don’t have a super long update. The Board continues to conduct a thorough process to make sure we hire the best leader to write the next chapter of Unity’s story, and I’m very committed to supporting the Board and the Board’s decision.

Daniel Amir: Thank you. Luis, this question is for you. Can you provide additional perspective on the company’s direction following the reset?

Luis Visoso: Hey, Daniel, thank you. Yeah, absolutely. We actually feel very proud of what we’ve accomplished. We’ve accomplished a lot in a short period of time, and we believe that as Jim just said that this intervention positions Unity for success going forward. If you look back at the end of last year, we started a two-phase company reset that we expect will enable us to sustainably win with both customers and shareholders. The good news is that Phase 1 is mostly behind us. This first phase was all about resetting our portfolio, resetting our cost structure so that we can refocus on our core businesses, the engine, the cloud, monetization while narrowing our investments on new businesses. And as a result, we’re focusing on businesses where we believe we can sustainably create value for customers and generate a return for the company.

The unfortunate consequence of this first phase is that we had to let go of about 25% of our colleagues. That’s super hard. These employees made many, many contributions to Unity and helped customers achieve their goals. We thank them for all their work and are really sad to see them go. Now what’s exciting is actually the second phase of the reset. This is about reigniting revenue growth with healthy financials. And the good news is that that starts this year. We expect revenue growth to accelerate in the second half of 2024, and maintain attractive levels of revenue growth thereafter while maintaining and extending our profitability.

A – Daniel Amir: Thank you. So, now we go kind of the second part here for Q&A. So, just for housekeeping, if anybody wants to ask a question, you need to raise — hit the Raise the Hand button on the bottom of your screen. So, we will take a couple of seconds here for people to now put in questions. Okay. So, the first question comes from Jason Bazinet from Citi.

Jason Bazinet: Thanks so much. I was just wondering if you could unpack a bit just sort of the recast 2023 numbers after the portfolio review. I think the revenues came down $450 million, but the EBITDA came down $174 million. And then I tried to read the text to understand if some of the things that you divested were EBITDA loss-making, and it said they were, but then in some of the footnotes, there was no real number in there. So, can you just talk a little bit about the recast 2023 base and those adjustments?

Luis Visoso: Yeah. We know it’s not easy to follow all these numbers so we put up table on our shareholder letter. I think the first thing is, we had this one-time gain from Weta FX, right? We show that as $99 million in revenue, for example. So you’ll see that in the table, which had a $102 million benefit in EBITDA. So, you have to take that into account because that’s a one-time gain. The second thing is the portfolio changes that you alluded to, that’s $283 million in 2023. Most of that is in Grow. A small portion to be precise $15 million is within Grow, which is the Luna business. So, you have to take that into account. That operated at a significant loss, which is why we’re exiting these businesses because we could not create a return for us while providing value to our customers.

We did not quantify that for you because it’s not audited, but it’s a very significant number that we’re getting rid of. And third, you have this customer credits that we explained in the shareholder letter, and which we mentioned in the 10-Q last quarter, which was $72 million in revenue and $72 million in EBITDA. So, if you really look at the comparable base for ’23, you should start with $1.7 billion in revenue and $274 million in EBITDA. And that’s what we’re building from.

Jim Whitehurst: Thank you, Jason.

Jason Bazinet: Yeah. Thank you.

Daniel Amir: Thank you. Next question is Dylan Becker from William Blair.

Dylan Becker: Yeah. Thanks, guys. Two, if I could squeeze in. Maybe first combination for Jim and Luis here. You’re kind of nearing the end-of-the strategic review. Wonder how you’re thinking about to, maybe the earlier point, Luis, on getting rid of some loss-generating businesses, but also kind of catching-up investment as we think about kind of doubling down around the core. Kind of what’s the right way of thinking about some of the trade-offs of the two, and how that layers into kind of the growth and margin outlook in the business over time?

Luis Visoso: Yeah.

Jim Whitehurst: Well, I’ll just start quickly on — look, the core of this and we’ve tried to be consistent all along internally as we’ve been going through the reset is this is all focused on getting a portfolio where we believe we can win and then making sure that we are appropriately resourcing that portfolio to win. And so, I was clear internally that this exercise wasn’t about optimizing 2024 EBITDA. It was about getting us lean and efficient and fully resourcing the areas we expect to win because ultimately, we believe there is a tremendous amount of growth in the company. So, Luis, I think you can talk a little more about this specifically.

Luis Visoso: No, I totally agree, Jim. Dylan, the way to think about it is we fully funded the priorities that we had in mind, and those are funded to the right levels. And those that we just didn’t think we could generate a return for us or for our customer, we totally defunded. Being half pregnant, if you wish, just doesn’t make sense. So that’s why we feel confident about our ability to reaccelerate growth because we’re funding those things that really matter.