Unity Software (U) 10 Nov 222022 Q3 Earnings call transcript

Thank you, and welcome to Unity's Third Quarter 2022 Earnings Call. After the close of the market today, we issued our earnings press release and earnings presentation. These materials are available on our investor website at investors.unity.com. Today, I'm joined by John Riccitiello, our CEO, President and Chairman; and by Luis Visoso, our CFO.

Now 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.

information section risks sec.gov. of more the uncertainties find Factors Risk our can about and these in You filings at results statements. we or and may obligation Actual revise to take update no forward-looking any vary

full conferences include reconciliations. Barclays. in Credit as non-GAAP tab they As in are measures will available non-GAAP speaking Unless and are GAAP to we the I sec.gov And and that, also prior when be and turn the on John. and plan as describing on noted, call will we Investor present non-GAAP The available financial Suisse With earnings to our press GAAP we Full are presentation providing otherwise fourth to measures. with quarter, both quarters, well details and at website. Relations financial our investor BTIG, Unity results. over release

want Thank ironSource merger Unity. The at you, the Richard. everyone Monday I call welcoming to expected. on to closed start as

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continue ongoing We and have a healthy our of improve initiatives. pipeline models to

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at QX, approximately estimate in will the We up QX. teens. XX% in-game with be strong growth single ads overall We was was expect in currently digits for and sector QX. ad year-on-year in year-on-year sector, XXXX, XXXX slowed QX low to the Looking flat year-on-year in-game growth in

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to lead be As are recovery. market the such, beneficiaries positioned a main market we the and of

to market rapidly, invest conditions once in share we unique to challenging, conditions and improve. a positioning gain have While macro opportunity are ourselves grow market

capabilities businesses delivering the billion tap and SuperSonic the By our ultimately a customers. their end-to-end more active combined drive can integration even growing help and offering, to Unity helping new monthly to outperform Unity a like industry, the becomes success offering, to plug-in our creators network in games. while materially than superior believe Ads We gaining Unity and share mediation successful LevelPlay will Editor, users. scale X reach Unity's more critical creators, challenging publishing be deliver platform more developers our Growth a be enabler Unity build unparalleled ads Our performance market. have for players overall. thrive, will networks, to creators even of game ironSource LevelPlay platform launch helping market the will in to global enabling into for will critical and through successfully ability the of

that we've Luis, few the made turning want to over Before call before. I to a reinforce points

linear what capture world the First, large is XD. Unity is XD believe as real-time to a to very well-positioned we opportunity moves from

games and are have strong making We position across a industries. in progress strong

us add will can believe new ironSource more we gaining believe Second, unique share our that ability a to industry, outperform the and customers' Unity with customers. our and challenges, revenue of Growth new cash leaders. Unity provides end-to-end solves enabling amazing platform Unity our growth, accelerate positive our and toughest success drive to the We to making that materially platform capabilities for due flow

apply. Gamers and a ads directly sentiment are remain games Third, monetize believe And in they play. Advertising recession, business minority advertising the market way the games. model. to their the and small even are we are a privacy. way only part highly changes welcome creators to is an with will we games an to pay integral discover for of purchases engaged, new year's as advertiser players last And resilient, games the that most while ads in-app

growth to a expect XX% grow sustainably Unity We rate. at

single year, the deliver. As but to growth this not that we compounded we rate expect have will every the the past, be case in said is

point, on advertiser year-end At a We much in we we will better economy, trends. when guide earnings handle XXXX ad better on in spend the sentiment. a particular, in-games have have our call the and view that

to we create experienced. to outpace growth, clear any deliver for to market strong and have for ad growth We continue plans

profitability be over turn But challenging more flow. to about in further is this what Luis opportunity quarter, on we times. let of us. our to financial detail. that, the us. important more the important in drive testament capitalize been This me and ability With call will into in position Finally, strong the This fourth Luis. ahead always to even cash will positive. to has It's

you, Thank John.

with strongly, continues quarter year perform third million, guidance, from In the our for to delivered quarter third end X,XXX well quarter-on-quarter the our and from of us. XX% came earlier. X% revenue, operating below X% guidance year had in $XX and the beginning million This in a Operate Operate, Create above the to are we compares up Operate. XXXX. of up or year Create revenue, in income. $XXX,XXX ago. the million revenue delivered The continue range. $XXX of of XX% the the with third of At up the to of XXX non-GAAP $XXX,XXX. customer XXXX, driven our behind is and and XX% count the rate revenue of a months from $XXX line ago. quarter, Strategic and environment, The Despite million lower in of above with customers XX a of revenue in middle year-over-year partnerships customers other $XXX end we economic revenue quarter trailing execute delivered year challenges by at growth third challenging

net operating at our success rate last XX-month driven to drive by in down came from net expansion expansion trailing business. year. is in dollar The drop rate Our dollar our XXX%, XXX%

versus quarter, cost impact charged sequential to to continue operating as engineers of take our supporting as increased X% of lower Non-GAAP average, third gross margin margin ago. year mix mainly monetization, from The XX% gross gross has XX%, from quarter a decline well was non-GAAP which expenses are year-on-year hold. as sold. than due Our a business last efforts margin down as third is XX% and containment the cost to net Weta, the goods the that higher year's

employees, Non-GAAP against discussed million of $XX We second income $XX Cash the the the an XX% at end $XX was million. third the million We second flow at savings closed our revenue. X,XXX negative that employees of which negative guide payment Unity for million $XX the from of years $XX significantly several to operating This negative or compared XXX to end their million outstanding and to the diluted XXX the payment quarter. to fully a of to quarter. to a million, plan operating convertible shares quarter expect impacts is X,XXX in with end driven quarter $XXX $XX was as The million our cost at over that of million negative compares operations from includes for cash of which not had is non-GAAP share price, basic lower QX compared to the income. shares the conversion quarter. entirely difference collected had M&A million shares excluded $XXX and the guidance payout fully third of notes. diluted million publisher the deliver

fourth guide financial ironSource this the to on our includes Moving of economic and of impact the as quarter, of best our week Monday environment. estimate results

of increase For the between million, $XXX million XX% year-on-year. $XXX fourth we expect an to XX% quarter, to revenue

year XX% We expect million revenue full XX% year-on-year. of an between million, and increase to $X,XXX $X,XXX

details. Let me break down the

guide First, this down the from $XX is approximately time-adjusted companies. combined for prior the million

we this this, view taken CPMs have happens With typically perform and quarter ads, during a expect the conservative holidays. to regards to the seasonal we we in within rise Create to continue yet have not strongly. Second, given that seen that

the reasons mediation result expectation recent have share be gains optimistic our this to that and gains. in can We given in

between quarter, $XX non-GAAP operating operating million. $XX and the between year is million. For million $XX full guiding fourth negative million income we're Implied income and non-GAAP $X

the flow For break end at of year. this even positive expect be we cash perspective, and Unity to

will build base from XXXX. We that in

million With merger, approximately ironSource issued XXX the we shares.

and conversion issued notes X% with addition, of billion a $XX.XX price. In convertible interest we a rate $X

shares million and of We XXX diluted to PIPE end shares convertible XX to million the shares notes includes million XX shares expect QX, basic and which convert convert a outstanding at to have the XXX million investment. fully

year full XXXX will We for with provide QX guidance earnings.

impact of us, in factor committed goal progress cash to deliver and recession. cautious economic of flow run EBITDA guidance potential the large Near-term, in for will the rate opportunity billion given near-term by Our remain from recession. the the ironSource to very significant and we're XXXX $X EBITDA XXXX. synergies end potential the in our We and the front the merger of free

in large, as sentiment believe to While remains target. close, our lower we than as sustainable market long recession, growth to ad capture XD real-time XXXX, market we To and games. expect in in expect share we very revenue are leading strong we and market to it, Create, we one-off is position expand the share the guide growth that given opportunity capabilities a growing well-positioned enjoy Operate. and very Create our In

the partner would LevelPlay. Q&A. SpeedTree expectations. Ads, part and with cloud-based over best ability will artist as a industry. Within evolving generated share, automate launch within optimistic our identity, best-in-class data business with business business. scale coordinate that, such optimistic We're tools Aura. presence to pool data. game our SIGGRAPH. the our making let notations, by Unity the live Unity platforms The the with leading tempered out who to there, strong over me With and market strong management Tapjoy stream ads we're this XXX Digital and Richard, game build have and device Create turn call of of and Twin the we're the about ironSource We platform Supersonic, at our merger with leads -- three We're Weta, to models services to XD and the networks position be And critical customer progress yet ad and market very that data, Grow, with strengthens and publisher, business ratable, ironSource The on mediation workflows and the with remains Ziva leading

minutes. Great. so and and everyone, XX, know XX guess, raise questions we'll the question -- answers are your Well, our you hands, answer the much, I for thanks very all good. plan our virtual next

a by, Nollen. is raised there Tim And hand

You see it, Tim.

Yes. Okay.

Thanks. Tim. go, you Here

the kind a results of growth to of indication of at lot us this, you gains here. market ironSource could multipart give then revenue quarter have the more the you a a completely share maybe could what platform digest. missed And Well, -- mediation Could may and speak but information you least and about guys. I was. question Hey, bit Thanks. some

you and that can that in Given year problems saying you, that are you that the brings ironSource with indicating or regaining already in? mediation that, share you market Thanks. you see were behind market now are platform earlier from are the gain share the you had issues you

take ask add and that, a to I'll Luis little Look, bit to of it.

to didn't provide to we off, explanation separate and results. first the independent speak want that. on ironSource may why and So Luis

what would Secondly, say growth is, side, we on point, combined. side. this from And strong the on really really, we're Create network the

XX% well portfolio and And have I think and just all the third going recent with we reported gaming the in Twin been for launch ratable growth us year Twins. the quarter, things the revenue. Digital strong gains platform in of across adds Digital

but In year-over-year flat way terms expectation share and network do things because of coming we're gains. in a QX our a of -- are the the very customers market up the ad market, market we're implies mix we work large of together, Unity side, seeing combined it slightly -- is be to these in combination in network What and them goes ironSource expectation by so now in our bit little excited of number a -- our

Yes.

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Yes. -- the we Tim, just Monday. transaction this -- last closed

reporting as together are companies. we So not QX

guided we QX a combined we will QX, We together and report will company. as for

Okay.

no to share? number revenue stand-alone So QX ironSource

is That correct, Tim..

got owned that tell or only the Anything or you've it know us can new cover it I actually you whatever now? for three And off is merger days two Okay. now. days the you

you, Yes. super tell super I'll excited. I'm Super, excited.

on create and value going helpful customers us, can and is be I to super optimistic our for think shareholders. we that for very our two together the the companies I'm getting

Yes.

synergy the super together come Just management well. the excited on executive at to energy, organization. I'm build way The through teams that, really level positive super well, as have and all the

complementary a The just offering reminder how thing is the second is.

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a Thanks lot.

Jason? Great.

I Luis. a just question for had

wasn't slowed looked down in at ad $X if the ironSource of sort that the consensus market, for and numbers for just Street and the billion you're I you accurate? And Street was of for Is and heard Before mobile everything by correctly, EBITDA year I if the the Unity XXXX. by in XXXX. sort yet, at that next, of synergies, outlook on where standing add the after

full of clear, Yes. to forecast And just not end at the be billion the super Jason, for a year. the XXXX $X is is our run rate

we're the at that we'll So of year, rate. end the saying at what be

talked the we'll be cost that's we and We create and believe. back opportunity companies right that, continue and them believe revenue there us. is place lot And Okay. will value, a believe to two the opportunity there to be between a is of we've for significant July, a in driving significant we as

by billion $X So yes, the by we're end the standing XXXX.

about a keep in And getting in in I gaming our we're What the think and And to really there. hybrid confident So our gap then sector, really customers gain important really good. locking mentioned share on ProArt big to just feel we mediation growth new is the that and with that across model what drivers on is business any strong of comments, Create, the well. upside we're yields we -- Twins prepared part our network strategy, network us in a combination makes it. virtually our combination data us or The and the as Digital everywhere good ad in got side strong. are seeing is very in remote customers. can them also feel We've mind, market rapid very and for combination. we The a really

to reason quite combination good So of see we the any sort now. and about feel don't walk away I

the will on to we'll Of better course, that part the have we'll the point, of to. in be year, talk fix we a much economy be ready at guidance giving early and

Thank you. helpful. super Okay,

Clark Lampen. Great.

can guys, you me? hear Hey,

Yes.

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will I that best XX-part to question. as it our Do along. and we Luis, go take remember

you So the first synergies, Create. off, combined Grow if will, from to

what on the We've with So, layers that The we front. exceptionally isn't looked to team of of time is there. there's vision multiple investigated us. there's the think part in and but out between coincidence the talking an later. long key Grow team Create is sooner where into It when been this, effort ironSource. than merger high, long of a opinion with and about front area It's our we

today is, top portfolio but an I of ironSource is, thing but the a that the with game, mention also something of second I'd but as chart the gave doing in they what not the doing as across yet Marvel that just fact, we're portfolio, will. new plug-in. you Unity The simple example just

than us multiplay They're know the well example, lot why a and a doing So coming figure we of And we into mediation the we often There tools to what living a It and with LevelPlay everybody for of trying is up out can this XX% things a do times, with not time and more editor. like what customer may north obvious with When be of is they're SDKs. and test UGS as choices do have our and game then are to multiple a most advantages a aisle full commercial share. they takes plug-in but with when indicated will we're grocery for not what they application. feels made we've community, mobile. makes why to massive in these help What course, better, faced of creator on the the isn't like Unity a want they're of Unity. building they're And place mediation, is and on And prelaunch. potential integrate? in One in things. suddenly, this investment do a SDKs. of testing

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in literally we're much make going our imagine mediation. gap how make There across think to I to synergy more easy we about ecosystem and we the it's is a it. merger did realize up talk is talk this. up that all the the -- so When we exactly board, to to to this to for

December. sharing board in that a on meeting hitting lot We'll be be you with point the We'll again. a next have call. We more in

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Yes.

-- think that On And is the pricing will this question, have right impact move. financial seen the any in we we we QX. not

we pricing end the bit of and a new ramp contracts announced may you little take at remember, into pricing. the QX, we time get it of we until the and new As will

should you XXXX, XXXX. an not in So really expect in impact

we've Twin for the and scale needs. better to Digital enterprise Now including them cloud and on Digital our How is how means game them, offering that for more meet Essentially, developers, solutions Twin, enterprise explained platform. refined others, solutions this, customers. had what their we for really customers more

take unbundled, processes, price Digital on are But developed approaches to customers hosting either their revenue our on costly There saving while both expensive from process resistance build generate to Now save can customers data big manipulation the bring to SaaS ratable the they and or all connecting in Unity their customers, example, there. value by literally calculation our the have was model. platform, through really and of together a felt cetera. parties like them headaches third things things The for work, was and other money. the more pattern money from here, is our out own. They no number and for solutions increases. we own, them of the mold sort to supports our Twin that from et These big here

as for get Yes. of therefore, they can gain and to alluded differently, as and that you and so that going we're be And customer gain charge groups they we value well. price, to, Clark, so a more fair our innovating we each

do, his of we are as trying mentioned remarks. that's to So prepared in John what kind

a lot. Thanks

Brent. Anyone else? Next question up,

But probably business ad controversy, quarter I got year. lot parts little in be And then, strong, this Thanks. pipeline the Create durable I I'm Create bit first on potential, of into it But crossed recession, the for the of like time strength? Talk the that for going heading rate will over segment. over is the lot this markets business. the continue growth well $X.X like? things the a a get business opportunity Create kind like into about into moving little how XX% you. wanted run bit growth. to controversial games looks a where I obviously, are next Thank of durability billion a triple-digit particularly organic noise, airport background the but it basis, recession? here. What's to talk a look apologize of in a the Anywhere looks really about What's little a great

Luis and not add. a dollar strong I'll just conviction it's that, Brent, start we dollar may this billion is multibillion But take that to a probably have want opportunity, opportunity. single-digit look, of the and

of the out equal or business possibly Second is than are there sectors point multiple greater is, that while look now, the the majority gaming there like have gaming. opportunity they

are So, application gaming soul, love we'd heart while gaming. outside we the of and

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Thanks very much. Great.

go. Thank very you are Dylan much. you Becker, we on? There

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Hi. that you guess, the starting is hearing, shifts? return maybe Cool. sentiment long-term as and importance you mobile within piece John, you're confidence this your a made with in speaking around comment engagements spend broader elevated And the in download to that on trends think monetization how Maybe about once still seeing ad ecosystem? the the maybe I of

Sure.

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and we're We I don't strength bounces share. there's bit how picking in up I that. a XXXX, on QX? I in are wouldn't of the think it Is mediation. think think no long of We and smart on sometime lasts? But know Luis that I bet things is lull, a We of level have that temporary recovery. that is we model or expect QX now, But of very expenses right to one some think recovery. that trying I do

when we exceptional bottom So see and should line we see a better do recovery, even revenue performance.

That's it. Got then super could. I helpful. And one if more maybe

mean end thinking dealing address are and think should of live positioning talked obviously, that companies these How well what headwinds? and How you about macro that to adoption business can incremental about there some from functionality and customer as here, their as of takes reliance macro across of some for the complexity puts As we from have base as there? maybe the guys perspective and a those cross-sell services. data, Thanks. the and out self-service about challenges enabler the view, kind ongoing called with Unity capability increased you

about with customers Dylan, you thinking So question? your are more non-game or customers game

from the adoption, platform maybe of self-service Within channel. both, The ease right? more so

Okay.

that So lost not players And gaming. remember to their PVP setting seeing on if That because companies multiplayer engagement in of deemphasized. the console the campaigns is and the is had when matchmaking today. were content what 'XXs, in they late is increase experiences. not is really I games and pull industry up ongoing were games to it the XXX%, XXX% single-player and they thing side too just multiplayer big by off, That was games business. was sort I for a multiplayer It against this we lunch a were PC self-serve they competition happening the their XXX%, mean, have a went getting shift to eaten do complex. couldn't A on mobile and can on developer. hard back was gaming lot of side the then, on

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revenue. more engagement, more so And

UGS I big, So really think, service with -- we these making hit these products by self-serve. something

of months I a It to. get ago, could something lot know, was it As people with process. support, wasn't six don't recently our most a multi-month just as, even

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about So of we're our part that excited business.

office, kinds the is across a but than are companies. the literally, I up world's people and brands obviously, moving is company So Board owning Digital of right boardroom There the Stephen come we our sit different pretty on. And some marketplace that brand I stage most there's is Ju, day, every you end important you would the think Twin quick. the at gaming where go. Digital of Twin around? tripping a and literally into I marketplace, And name

Sorry. All right.

Unity almost this ad there be talking I about of is a but of -- think the the the from wider can talking game for we've group the So spend to. entirety been sector, call, advertisers,

characterize what you to your do non-gaming customers to is there say, Thanks. the large or coming need CPG advertisers on a your is what So to say, onboard, to other platform? of the become companies, from, percentage large performance-oriented way ad and dollars may

business our Stephen, as non-performance-based advertising. it's really minority question. And of small still that's great a a

these for advertising. more forward pure to of way, as the You're we a context just Unity, X consumers. look And major to of can realized MAUs two us of the audience the well no to are in brand one combined in is We get within larger month. north the that There companies engaged is brand fulsome behind we a know, through priorities paid billion speaking advertising And be gaming. very typically of track resources media.

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you. Thank

Great. Matt is go. Cost, Here Matt on? off. are you we

follow-up There other questions? Any Munda? you Gal go. Okay.

you Can hear me?

Thanks. you. Got Yes.

how the all to twin, business what the monetization beta different about line what is and real follow the thinking or models figuring like, which for could you to the be are digital potentially today? industries to wanted out then And have perspective, maybe first you light up time when test a you out that looks ability of monetize the due just the industry digital Just of twin GA? coming from like on alpha to in the

we call, every the don't last – statistics quarter. on and So we update the

if license we out will revenue segments, pointed our services continue and was digital update. now XX that but We like across but twin have to reporting professional did we side business of the XX%. We –

obviously the almost not two a been that we of within moving schedule. that to years. growing that long number. get it's the IPO, We're a to five over of little time year, years XX% ago, So and At really said ahead rapidly

a a platform. digital process And there's second point so the of twin is

availability bringing general and First, then it there's beta sort of private broader availability. before

I'd in complete. all first year And tell of roughly call XXXX, that on probably, for that's a and of update the that that hard you people place – I next half place that lastly, And guess, allowing the before it's I'll The fully so it. will will so -- to And platform. take general-purpose next has then take and doing it's with moving everyone data. basically, one compute another. that, things interact

give a seeing sector, industry, but current the the back to user. not a specific first are said, you captive So necessarily as same I traction to industry it's I be would and we're likely

cities up some to fashion that's really around to going simulation visualization, the to lines, something those do compositing supply going is, think that complex, and need the I verticals our is this, So really in same and are they're because such, have do is to seeing make construction, those adjourn your that pipeline now. where architecture images work and show manufacturing we're to

Thank you.

That's great. Go ahead.

had You another question, Gal?

okay. if one, had I another Yeah, that's

How the is tie-up go I'm Just again. kind and there just with mentioned yourself is how ironSource very you have Operate, the back? win heritage John, powerful backed out thinking that there this that even is out much to of it, the it if of on because Operate. ironSource? of very, going own, let's didn't share core call you core, machine its thinking business of and versus you pure grabbing much share on just now today about some

But and that and garbled Tomer, all, a much team our Look, it a us of team in It's from adds great strengthening with ironSource wonderful question. a is it little puts on led with us sure got definite I'm planning my deal spot. a a end. better Ingrid, not great that portfolio, a by to

now deeply announced of It not integrate level, help ironSource, tools is talked as just realize into you helping the which we the deal time performance thought grow, can it's from that literally we more us, to what vision, we've applications. and people is build every what first you other. ironSource the just also So us that about games with can Operate, has additive thought as at of call which on

don't servers help product. don't of better don't for it rest products don't multiplayer of example. have they helps then an that People substantially better as not that people advertise will the them So products much user our And a be there. will a product, make enough high also will rent a it increased make -- if it them services But get have high there's engagement base engagement, because uptake.

self -- So use successful there's be they when obviously, interest in our helping services customers they because more. our are,

because that question even integrating more plan will And we difficult where right? businesses, that's value. a on answer two Gal, see going lot forward, to we And the be of

a... it's So

question, my was that does the How check… tie-up ability and think kind go I right? to the much of

of a together, in said. lot see as value We Totally, getting totally. we've

I So mean, Gal, a good point.

would consolidating Let one supports LevelPlay from this teams. benefit full networks want me -- ire example. both supports love one that's from the the number? wan is Gal. drove do. see sounds The and like see And And to be know What data circle given to win but now. We data The of that singular it We we in from LevelPlay we -- know what people integration now. intend all to integration I we're the to It the just independent those I win, networks market. example. to both would reporting, give data it do

Thank you.

Gal. Thank you,

really the seeing years. we lot. much. you months you support. appreciate at or Thanks over interest various Well, very appreciate coming either and But it. And your all conferences we thank look We and to a forward

you. Thank

all. Thanks,