Unity’s interim CEO, Jim Whitehurst, expresses enthusiasm for Matt Bromberg’s upcoming role as CEO, highlighting his strategic insight and operational expertise.
Whitehurst will remain as Executive Chairman, focusing on the Industry side of the business, which he views as having greater long-term potential than Gaming.
In the short term, Whitehurst is confident in Unity’s ability to deliver on its plan for the year, citing improved customer confidence, successful engagement at GDC, promising indicators from Unity 6, and positive testing results from monetization interventions.
Long term, Whitehurst remains optimistic about Unity’s essential role in gaming and sees significant opportunity in the Industry segment.
Q1 2024 Performance and Outlook
CFO Luis Visoso reports Q1 results aligned with expectations, with strategic revenue up 2%, and a notable 17% growth in Create’s strategic revenue. Core subscriptions increased by 13%.
EBITDA improved by $50 million year-over-year, with net income improvement nearly $100 million year-over-year.
The quarter’s success attributed to a comprehensive cost and portfolio reset, healthy customer engagement and retention, and progress in AI tools like Muse and Sentis.
For the second half of the year, Unity plans to focus on Engine, Cloud, and Monetization businesses, expecting growth in subscriptions and improvements in Monetization solutions to drive acceleration.
Unity aims to integrate Create and Grow to serve customers more holistically.
Financial Guidance Clarification
Revenue guidance is specifically for Unity’s strategic portfolio to emphasize focus while transitioning away from nonstrategic business.
Adjusted EBITDA guidance will cover the total company to avoid allocation issues, noting the nonstrategic portfolio’s EBITDA is not meaningful.
Question and Answer
Grow Segment Growth Drivers
Question
What are the specific growth drivers for the Grow segment, particularly in terms of monetization of solutions and better usage of data, and what product initiatives are being undertaken to drive this growth?
Answer
The growth in the Grow segment is expected to be driven by the integration of two data science departments, leading to better utilization of data and improved machine learning models.
The company is working on several data-driven initiatives, with around 8 or 9 major projects identified, and initial results from 6 or 7 of them showing positive outcomes.
These initiatives involve A/B testing, model tweaking, and data analysis to optimize ad performance and improve return on ad spend (ROAS), with some tests suggesting a significant reduction in the gap compared to competitors.
Share Count Guidance Clarification
Question
Can you clarify the share count guidance for the full year, as there seems to be a discrepancy in the numbers?
Answer
The share count guidance for the full year has increased slightly by a few million shares, driven by the ongoing restructuring efforts within the company.
Monetization and Return on Ad Spend
Question
Can you provide more details and quantification on the interventions being implemented in the Monetization side and their expected impact on return on ad spend (ROAS) relative to industry standards, particularly in comparison to AppLovin’s claims of having an insurmountable advantage?
Answer
The company has observed positive results from its interventions on the Monetization side, with some large customers expressing excitement and willingness to shift more spending towards Unity.
While it is challenging to provide an exact comparison with industry benchmarks, the company believes that the interventions are closing the gap with competitors and will lead to a positive trajectory in ad spend from advertisers.
Plus to Pro Transition and Q2 Segment Performance
Question
Can you provide any early signals or observations regarding customer migration from Plus to Pro plans, and can you offer directional commentary on the expected performance of the Create and Grow segments in Q2?
Answer
The company is pleased with the customer migration from Plus to Pro plans, with some customers even upgrading to the Enterprise tier, which is expected to have a positive impact on the bottom line.
While specific guidance on segment performance is not provided, the Create segment is expected to outperform the Grow segment in both Q2 and the full year, with the latter showing sequential improvement in the second half.
Capgemini Partnership and Industry Solutions
Question
How significant is the Capgemini partnership in delivering successful projects around Industries, and is it expected to shorten deployment times or improve the scope of projects?
Answer
While it is still early days since the partnership was finalized, the company expresses confidence in the potential of working with system integrators (SIs) to accelerate the adoption of its Industries solutions.
The company believes that having SI partners who can deliver custom applications and bespoke solutions based on Unity’s real-time 3D visualization technology will be a key driver of growth in the Industries segment.
Customer Behavior and Impact of Improvements
Question
Is the confidence in the second-half acceleration of growth solely based on the expected impact of the improvements being made, or are there already observable changes in customer behavior as a result of these improvements? If the latter, can you provide examples of how these improvements are influencing customer behavior?
Answer
The confidence in the second-half acceleration is primarily driven by the expected impact of the ongoing improvements, as these changes are not yet reflected in revenue and will take time to scale.
However, there are some early positive signs, such as improvements in the performance of playable ads leading to increased interest and potential for broader adoption among customers.
Customer Conversations and Pricing
Question
How are customer conversations evolving regarding pricing and the value exchange, particularly in light of Unity’s historically low take rate and the potential for increased customer payments?
Answer
The company is shifting the focus of conversations with customers from fixed pie discussions about take rates to a more collaborative approach centered on driving customer success and industry profitability.
By emphasizing the value Unity can bring in terms of building better and more profitable games, the company believes it can create a more positive and productive dialogue with customers.
Data Sharing and CoreStats Product
Question
How are conversations with customers regarding data sharing progressing, and are there any early signs of uptake or testing in this area?
Answer
The company is launching a product called CoreStats over the summer, which will provide customers with insights into how users are engaging with their games.
While specific details on customer conversations are not provided, the company believes that data sharing discussions can be productive when framed in the context of mutual benefit and improving ad spend or monetization.
Runtime Fee and Cap Allocation
Question
Will the runtime fee still be used to offset advertising expenses in the Grow segment, and how is the company evaluating investment opportunities and capital allocation across its various initiatives and business lines?
Answer
The runtime fee is intended to ensure the sustainability of the runtime, and the company is open to different revenue models, whether through direct payments or indirect contributions via the ad stack.
The company is being thoughtful in its investment decisions, focusing on areas such as data and data scientists to drive growth, while also considering share buybacks, debt reduction, and other capital allocation strategies based on market conditions.
Customer Sentiment and Runtime Fee
Question
Can you elaborate on why customer sentiment regarding the runtime fee has improved, and are there any thoughts on the potential macroeconomic impacts on the business throughout the year?
Answer
Customer sentiment has improved as a result of more transparent and rational discussions about the fee’s implementation, its actual impact on customer costs, and the value provided by Unity’s runtime and engine.
While some initial concerns were driven by market conditions and the timing of the fee introduction, the company’s proactive and collaborative approach to addressing customer feedback has contributed to a more positive outlook.
