Unity Software Inc. (U) Q2 2023 Earnings Call Aug. 02, 2023

Here is a summary of Unity’s earnings call.

John Riccitiello - Chief Executive Officer, President and Chairman

Unity exhibits significant potential, evident from numerous developments:

1. Unity PolySpatial:
   After the joint presentation with Apple at WWDC, PolySpatial has seen immense developer interest.
   This further solidifies Unity as the preferred choice for real-time 3D development.
   Unity's strength lies in its superior coverage of platforms, especially the newly launched ones, like the recent Apple release.

2. Unity Cloud:
   Introduced as a closed beta, it's set to become generally available soon.
   This service seamlessly connects Unity's range of services to its products.
   This new approach shifts the conventional face-to-face business dealings to just a click inside the editor, simplifying processes and potentially increasing adoption.
   The expected outcomes include heightened consumption, ratable revenue, subscription, artist seats, and associated usage.
   Recent partnerships and collaborations like Weta, Ziva, and Speedtree underscore this growth.
   This trajectory suggests a steady rise in new revenue streams.

3. Digital Twins:
   Gaining momentum in the market, Unity's focus shifts towards delivering consistent, high-margin solutions that promise ratable and consumption revenue streams.
   There's a conscious decision to reduce emphasis on Professional Services and opt for high-value partnerships, such as those with Capgemini and Booz.
   This strategic shift is likely to bolster Unity's bottom-line, even if it means slightly subdued growth in Professional Services.

4. ONE Platform:
   Representing Unity's synergy, this platform brings together Unity Create and Unity Grow.
   This integration promises to enhance the advertising, mediation, publishing, and UA tools experience.
   Deeper synergies are in the pipeline, indicating more advancements ahead.
   The benefit of this approach? A consolidated platform where customers can both create and monetize their products.

5. AI Products – Muse and Sentis:
   The recent announcement of these products stirred significant customer interest.
   Muse and Sentis cater to both the creation and operation aspects of applications.
   Drawing parallels with Microsoft's AI products' business model, Unity foresees growth in Software as a Service (SaaS) and consumption-based revenue.
   A key opportunity here is Unity's vast pool of free users.
   By integrating AI, these users can amplify their creative potential, translating their visions into tangible outputs more efficiently.

In essence, Unity's trajectory is marked by innovation, strategic partnerships, and customer-focused solutions, all pointing towards a promising future.

Luis Visoso - Chief Financial Officer

Overview:

• Record Quarter:

  • Achieved outstanding performance and exceeded expectations.

• Innovations:

  • Rolled out several innovative features and tools which position the company favourably for the future.

• Three Major Commitments:

  1. Revenue Growth:
     Achieved an 11% growth this quarter, even amid challenging economic conditions.
     Success noted across gaming and other industries.
     Noted challenges include sluggish China Create market and stable ad industry.

  2. Expanding Margins:
     Significant improvement in profitability:

     • EBITDA reached $99 million.

     • Achieved an 18.5% margin, a remarkable shift from -13% in Q2 the previous year.

     • Achieved this by optimizing the portfolio, reducing hierarchy, enhancing cloud efficiencies, and trimming office space.

     • Reduced dependency on Professional Services to enhance profitability.

  3. Efficient Use of Cash:
     Generated a positive cash flow of $33 million this quarter.
     Foresees sustainable positive cash generation.

• Optimistic Outlook:

  • Initial revenue guidance for the year ranged from $2.1 billion to $5 billion.
    The guidance has since been updated to a midpoint of $2.16 billion, marking steady progress.

• Specific Areas of Focus:

  • Create:

    • Core subscription growth (excluding China) stands at 22%.

    • Industry contributions are 30% of total Create.

    • Numerous innovations have been launched, such as Unity 2022 LTS, Uni PolySpatial, Unity Cloud, and AI.

  • Grow:

    • Welcomed industry leaders such as Supercell and Sega.

    • Supersonic added new titles to its portfolio and has published some of the top downloaded games in key markets.

    • Utilizing AI and machine learning to enhance algorithms and deliver better ROI.

    • Integration with ironSource progressing well.

• Conclusion:

  • Given the achievements in the first half, Unity is poised for a robust Q3 and Q4.

A Q&A session followed.