Q3 2020 Unity Software Inc Earnings Call
The measures. These non-GAAP financial measures are in addition to and not substitute for or superior to measures of financial performance prepared in accordance with GAAP reconciliation between GAAP and non-GAAP financial measures and a discussion of the limitations of using non-GAAP measures can be found in today's earnings release, which is available on our website.
Right and as an exhibit to our filings furnished to the SEC with that thank you for joining us and I'll turn it over to John.
Thank you Richard Hello, and good afternoon.
Thank you for joining us today for our first public company earnings call I Hope you and your loved ones are safe and in good health.
It's difficult and turbulent times.
I want to begin by thanking the amazing team that got us to this point from our founders 14 years ago to our employees around the world Our advisors and our new investors and we would not be here today without our customers the creators to developers the artist and the dreamers.
We're looking forward to.
For more details about unity and our third quarter results with you today.
As many of you are aware, we kept our third quarter with a successful IPO that we conducted virtually.
The IPO or as we like to call. It. The USIO was the second largest software IP out in the last decade and was executed under an innovative structure.
Which gave us better visibility and demand for optimal pricing and allocation and also gave our employees the opportunity to sell a portion of their shares invested options on day one of trading.
We welcome all of our new shareholders here today.
Tim you evolve our chief financial Officer will detail financials in a few minutes, but before we dive in.
I want to highlight three key points on our Q3 performance first despite several macro crosscurrents, we grew revenue, 53% compared to Q3 of last year, and we generated a 79% non-GAAP gross margin and our non-GAAP loss from operations was 8 million versus $28 million last year.
Second the metrics that drove those numbers were good as well.
One of the Capesize, we focus on as dollar based net expansion rate and for the third quarter that ratio hit a 144%. Thanks to a combination of strong execution and some tailwinds from Covenant goes work from home policies.
And third we can't deliver good financials without a strong foundation of innovative products and services as well as tune go to market strategy here are some of the interesting statistics.
And the first nine months of 2020, we seen an average of more than 5 billion downloads per.
A month of applications built on unity and as of the end of Q3, we had approximately 2.5 billion monthly active end users who consume content created or operated with our solutions 94 of the top 100 game development companies by global revenue, our unity customers and as of the end of Q3.
10 of the top 10 auto manufacturers are using unity unity is the world's leading platform for creating and operating interactive real time threed content costs.
Creators and developers usually to build to Ron and monetize interactive real time today and threed content for more than 20 different plot.
Excellent, including mobile phones tablets, Pcs console and augmented and virtual reality devices much.
Much of the content consumed today like TV and movies website, social media, you tube and tick tock is static or non interactive and our two digital content.
Real time Treaty interactive.
Of content allows end users to connect with the contract and with each other media built on unity is real time Threed platform gives users agency over their content alignment to control what they experienced NACS rather than being passive consumers of contract. This interactivity together with a full of Threed perspective allows.
We're fundamentally more engaging and immersive experience than traditional contact us we believe that most of the world's content will in time be real time period and it is our intent to be the driver towards this future.
That was a bold idea some years ago that a third party and you're like unity could grow and ultimately be the text.
Algae under most of the world's gains and it is a bold idea today that industry. After industry will convert from their twentyth century dependence on non interactive low engagement trudi tools to embrace real time treaty.
Technologically we build a single platform enables our customers to build operate.
<unk> and monetize applications with unity, you build an application wants and that applications. Just works seamlessly on more than 20 platforms instead of mastering importing their content to additional platforms develop bricks and focus on creating great content and on multiple paths to success.
And while there are.
Our blockbuster AAA games across $60 or more upfront today far more games are initially free to play and that's great for consumers, but game developers need some revenue to pay the bills and they do this through in game advertising and in App purchases that make the gain more engaging and more enjoyable.
And Thats where operate service.
Races from unity come into the picture.
Five years ago, we launched our monetization products. Unlike traditional AD works and optimize exclusively for each cpms. We designed our platform to help our customers maximize engagement enjoyment and the lifetime value or LTV of their users by leveraging unique data and proprietary.
Prior to our AI tools.
This might sound like a relatively easy task, but it was not we started with a few hundred thousand player behavior data points, but with a lot of work. We gradually built one of the leading data networks for gaming we've reached the scale, where we ingest 60 billion and App events per day. This data helps us dollars.
Serves are better LTV and lower cost to acquire for our customers and this has helped US build one of the largest monetization platforms focused on the games market. We also offer additional operate solutions, including Delta DNA and user engagement multi play cloud hosting and orchestration and endgame communications to be box today. These.
Analytic knowledge he is mostly applied a gaming, but we see many opportunities to extend our platform and to other industry verticals in the future. We are a market share leader and have strong healthy growth opportunities across the board both in create and our operate businesses. We're not resting on our laurels, we have big ambitions first we continue to focus on.
On our core gaming market and believe we can increase our business in this sector significantly in the coming years by continuing to innovate and leverage our data advantage and adding new create and operate tools and services.
Beyond gaming, we began to focused on new verticals, just a few years ago, we're growing into new verticals like industrial.
These sort of motive architectural engineering and entertainment rapidly solving more and more customer problems and identifying more and more use cases and.
And while we are gaining rapidly in these sectors were also examining new industries to enter and expand let me give you a few examples turning into worked with unity to create a mixed reality system for diagnostics.
100 pairs for their dealerships and service networks. This was a high stakes decision because repairs have a big impact on brand perception.
Toyota used to manually tag 20000 pictures to adjust them into a learning algorithm a process. It took about 200 hours to turn to uniti to build accurate threed.
Examples of the body and engine compartment. This reduced toyota's workflow time to 30 minutes, a 400 times reduction.
Valero default train is invited to bid on the design of a 36 story 390 foot tall Bell Tower and Bell Park Office building in Denver, Colorado.
This was a complicated project.
Because the location and the size of the tower mattered This headquarters.
The layer deployed our architecture product unity reflect to Geo locate the building on site and develop an augmented reality digital twin by.
By using reflect Valero default train built a prototype and less than four weeks and won the bid with.
Marty.
Now I want to wrap with a discussion of what we hope to turn into a tradition on these earnings calls.
Brief highlight some of the new innovative products at our development teams have built in September we launched the Lego microgram, a free to use set of modules that allows entry level users to build and share their first threed game.
In less than an hour using a simple no code interface and adding the Lego micro game to our growing portfolio of templates that help new users start creating successfully we blues below code no code market will become a substantial part of unity business in the years ahead, and we are grateful to work with such a well regarded brand to help.
Help bridge the gap between physical products and the virtual world and for Unity, we have built a low friction on ramp for budding new game designers.
In Q4, we're launching another application specifically designed for verticals outside of gaming, it's called forma and it's an example of our ability to build technically advanced applications.
That are intuitive and easy to use.
The shift to working from home has accelerated the move to virtual common.
Meanwhile, today shoppers are more sophisticated they expect to see their visions come to life in real time.
And this is where former comes in.
One use case for pharma as an example, as an automotive manufacturer that.
It creates advertisements product guides and a car configurator that are engaging interactive and in real time through today.
This gives customers a much richer visualization for their potential purchase including colors fabrics and accessories and that way format gives marketers a tool to differentiate themselves from their competition.
We've made great progress, but we are just getting started at unity. We believe the world is a better place with more creators in it and we intend to realize this belief by making real time interactive threeg dominant form of content worldwide.
As a company we will invest for the long term to ensure we deliver for our customers the unity developer.
And through this long term investment orientation, we aim to drive significant growth for many years to come.
We welcome our new shareholders on this journey.
Now, let me turn over the discussion to Kim's your ball, our CFO to go through our financial results.
Thank you John and thank you all for joining us on our first earnings call. This.
An exciting time and I want to Echo John Thanks to the entire unity team for their hard work and dedication that has led us to this moment. We are very pleased to have started out public company light for such a strong quarter.
Let me begin by reviewing our financial results revenue for the third quarter of 2020 was 201.
And then compared to the $131 million in the third quarter of 2019.
This is an increase of 53% year over year.
Our revenue mix has shifted in 2020 towards operate solutions with operate create and strategic partnerships accounting for 60%, 31% and 9% of revenue respectively.
In Q3.
One of our key metrics dollar based net expansion rate sustained its recent high levels coming in at 144% compared to 132% as of September Thirtyth 2019.
Please do note that some of our expansion in China, China was driven by covert tailwinds and the operate business.
And this may result in a tough compare in 2021.
Drilling down into our operating groups.
Create revenue grew 45% to $63 million, while the first half of the year introduce some cobot related headwinds as game developers adapted to work from home environments and deal cycle slowed we saw a recovery.
In Q3, and our create business.
Our customers are trained to you need to help them create and build everything and real time Threed from the next generation of office buildings to self driving cars to the video games enjoyed by millions of people around the world operate solutions had a very strong quarter growing 72% versus last year.
These results reflect strong execution and product improvements alongside higher end user engagement with games built by our customers. This is driven in part by covert Tailwinds are operate solutions are aligned with the success of our customers. This is really important when our customers grow their engagement with their end users we may grow.
Their revenue is through the use of our monetization tools they grow their usage of our services and this drives our revenue growth.
Strategic partnerships revenue was flat with last year at 18 million. This reflects slower deal cycles, driven by co then as long as the sun setting of certain products within our partners portfolios.
This revenue line remains very strategic for us, but it can be lumpy from quarter to quarter in terms of growth non-GAAP gross margin was 79%. This compares to 81% in the third quarter of last year and 78% in the second quarter of 2020, the year over year decline was due primarily to higher profess.
Channel services driving growth in new verticals with the acquisition of finger food in April as well as increased hosting costs to meet the demands and growth from the operate solutions business.
Non-GAAP loss from operations for the third quarter was 8 million or negative 4% of revenue compared to a non-GAAP loss from operations of 20.
28 million or negative 21% of revenue in the same period last year.
A substantial part of the year over year improvement was driven by one time savings that we recognize related to cove, it primarily related to travel events and facilities.
And now turning to our guidance so to set the context I want.
I would reiterate that 2020 has been a pretty unusual year with lots of uncertainty related to covance, we aren't counting on our normal Q4 seasonal jobs in our operate solutions business as we believe the increase in user engagement that typically happens around the Q4 holidays has essentially already happened.
And in addition, additional uncertainty for our game development customers occurred with this year's announcement from Apple of new policies for the I'd say, which was originally slated for introduction in Q4, but is now delayed until sometime in 2021.
From an expense perspective, we are expecting to reinvest.
Of the material cobot, driven opex savings that we achieved throughout the year into incremental marketing programs and hiring in R&D and sales in order to continue to drive our revenue growth.
So for the fourth quarter, we expect revenue of $200 million to $204 million and a non-GAAP loss of operations of.
35 to 40 million are approximately 17% to 20% as a percent of revenue.
Our revenue outlook for the full fiscal year, ending December 30, Onest 2020, as $752 million to $756 million. This is up from 542 million in 2019, reflecting year over year growth of 30.
9% to 40%.
We expect non-GAAP loss from operations for all of 2020 to be $66 million to $71 million or approximately 9% as a percent of revenue down from $92 million in 2019.
We expect the weighted average fully diluted share count to be approximately 321.
<unk> cellulars for the fourth quarter I'd like to point out that Q3 free cash flow of positive 11 million benefited from strong performance within our operate solutions business alongside an increase in networking capital and although we're not guiding free cash flow you should expect it to remain volatile quarter to quarter and we expect to drop.
Back into negative free cash flow in Q4.
And that concludes my prepared remarks. So thank you again to the entire unity team for the hard work that has led us to this point and thank you to all of our new shareholders. We are honored that you desire to join US on this journey and with that John and I are now happy to take your questions.
Richard.
Great. Thank again, so what I'll do is I'm, just going to call in the analysts.
To ask the question. This is what I call on you you just settle on mute and.
And then in the interest of time could you just please that lend yourself to one question and one follow up and then once you're done does change your stat.
That affect the mute so.
So I will start today with.
Heather Bellini Goldman Sachs.
We're not.
Yeah.
There should be on EPS is obviously this as another cell phone.
Okay now you can hear me.
That her fix sorry, sorry about that.
I had a question.
Obviously, we all know that.
The iOS 14 changes were pushed into 2021, when you think about.
The impact.
For next year can you walk us through kind of how you're thinking about that and then how that might have given the delay.
How that might have impacted your guidance in in Q4 related to what you were expecting would have happened at that at the time that you guys were on the road since this happens kind of while you were.
In the middle of the road show and then the other question I would have would just be related to all of the momentum in gaming.
It's obviously happened as a result of the pandemic how are the trends looking versus normal seasonal and how should we be thinking about that as we look into next year as well. Thank you so much and congratulations on the on the IP.
Yes.
Well I'll take a high level and Kim may want to dig in a little bit.
On a high level Heather.
Our view was that.
Vis-a-vis August 14, and that change is an idea Fay.
We were not anticipating their material disruption and utilities business.
We did expect there to be and we had imagined that there would be a relatively modest very near term disruption that would have occurred in Q4.
As the demand side started to wrestle with exactly how effective each of the relative platforms was for user acquisition.
We view ourselves as a monetization platform.
A show an AD platform we.
We believe we've got a fundamental advantage.
On the data side and back that advantage on the data side means that at least we feel will be materially less impacted by issues I'd say and.
We analogy drives.
Somewhat to what happened with GDPR.
Where the anticipation was the entire market would would go at a bit of a flux and then they'd be a little bit of a reordering and market shares.
And Thats exactly what did happen and in that unit was a net beneficiary. We're not guiding you to believe that we think we're sure it's going to be a net beneficiary situation.
But.
And we'll now we we we havent seen anything material and don't anticipate something material for us.
In terms of the gaming industry.
Theres No question there is an increase of usage.
Now that affect some of our business not all of it it doesn't have a material effect on the create side for example.
And in terms of season.
Banality one of the things that came and I were talking about just yesterday.
Is we would normally see a more aggressive increase on physically monetization, but also operate and hosting in Q4.
As consumers gamers would would be home lot during the Thanksgiving to Christmas holiday.
They are already home mechanical home twice and so.
As much as we you know.
Would normally anticipate a pickup in Q4.
But in that pickup would be directly attributable to more game time because of people being home and out of school, it's hard to see how we get there.
Same.
Lift in Q4, a consumer basically can't be home twice.
And as Kim put it yesterday in a conversation with me. The analysis, we have suggested that we pulled a little bit of the seasonal benefit into Q3.
Great. Thank you so much Ken anything to add on any of that.
So.
Thank you for it.
Okay great.
Well go to Brad Zelnick at credit Suisse.
Great. Thank you. So much can you guys hear me.
Yep.
Congrats on a first quarter out of the gate. John you now have a big war chest post the successful IPO and no shortage of it.
Citing growth opportunities ahead can you just help us understand how you approach investment priorities. We are the most impactful areas of investment as you think about your your overall opportunity set and and maybe how is competition or the larger capital base change your view.
So.
I feel like I'm sorry.
Stock when one of those Abe Lincoln moments, but I know the Q our answer that question, but I'll try to give you the two minute answer.
Yes. The first thing is the money on our bank account doesnt really affect at all our investment priorities. The capital's there should it be necessary.
But when we're looking at M&A and we're looking at our PML investments.
It's in our business, they're not really affected by any sense of need to have the capital burn a hole in our pocket. It's just not all the way we think were.
We are strong believers, Kevin I and define.
Defining a pretty tight framework around where our capital should go into our expenses should go and the consideration was never we have extra money.
So how do we spend so that's just not at all what we are and I'm, a pretty fundamental believer that constrained resources generate creativity and creativity is what we run on that chart.
That's our fuel.
The second thing is when you think about how we spend our money.
You know I broadly categorize it.
And too.
Two broad ways of looking at it.
One is we are building a separate specific application or enhancing a specific application that lives on top of our platform and reflect would be an example of that but also network code.
What we've done with where collaboration what we've done with.
Our cloud content delivery network. These are things that fit right on top there is a very specific use case, that's identified enabled by that capability.
And through that we believe we generate more users and more revenue sometimes it to create revenue stream transaction operate revenue stream, sometimes it's both so we essentially status.
I think all of those ideas and we invest in the ones, where we have the right focus of talent and.
Return expectations to make us feel good about making that investment.
The second area, we invest is a broad and less easy to answer question around raw capability and that is about the under.
Were lying performance of the engine the underlying data capture capability and AI capability behind our operate services.
In a way maybe to the second one is learning how to make a new thing in a fast food restaurant. The first one is getting a college education, it's not as obvious that there is an instant return.
Yeah.
But one of the benefits at least for me and so many on our team is we spent decades on this type of technology and understand by way of example that our dots technology won't yield an immediate improvement and our near term revenue prospects that is significant on the other hand, it's exactly the way our business needs to.
To be built in sort of 2023, 24, 25 timeframe and we won't be sitting on legacy code with a material deficit in terms of what we have to take out in other words were future proofing our business.
Some of what we've done this generation we've been spending for two years by way of example to support.
R&D M part.
Hardware that that Apple announced and credited US just this week.
And supporting both Playstation five in the X. box. So the two series that are now now the ex any EPS.
Working with over 60 development studios on the console launches lots of launch titles Dope on unity.
None of that yields an instantaneous return for us what it spells for US has higher market shares next year and thereafter and so.
What we have to get right and unity always is a combination of that which drives a near term attached to new revenue streams that we can articulate.
Identify and second that whats list, a whole boat data engineering rock capability platform support that sets up market share growth two and three years out and we balance both of those two yield what we believe is the best possible outcome driven by a combination I will admit.
Financial considerations and ego around market share, we'd like to grow.
Thank you for the very thorough answer to my question Thats. It for me guys great. Thanks.
But on any William Blair Great. Thank you Congrats America that it was a really good quarter coming out of the gate there.
To all of you and the team I'd like to touch on a couple of things that tend to be more tactically usually tend to avoid technical questions, but lumped up one a little bit about.
Using a couple of the company's follow suit. So one is roadblocks and I'd love to understand how you think about roadblocks in the space and your view of where it fits.
As of either unity platform and how investors should think about it. So some some sort of high level thoughts around that maybe even some more detail thats why it would be really helpful. I got a quick follow.
So thats it.
That's probably my favorite question today, so thanks for asking that.
So.
One of the if we Didnt do in our road show and on our investment presentation. So.
So far is talk about the.
Exhaustive list of growth opportunities that we see in our business, we talked about the ones that are right in front us that we can define and.
Dimensionalize in terms of scale and we have a product fit.
That.
Pretty much proves out our case.
Second preface point.
Is there are precious few professional development tools.
Have any business at all.
Any scale business at all with consumers.
Photo shops, one of the few things that has crossed over into having meet meaningful consumer traction and it's a function of sort of a.
Connect a coal.
Got you thanks happening at all the right ways in all the right time, so in the case of Photoshop smartphone.
Smartphone sort of digital camera and everybody's pocket most of his didn't use to carry them around before we carried phones with us.
And you have social expression through tick tock and.
Instagram and Facebook and other social media snap we're focused.
Close are the currency as a day, so the consumer needed a tools.
Photoshop met the need and they have a material business. It crosses out of the professional speer with a tool started and built a meaningful business, but the consumer.
We have that exact same opportunity as we because we.
Correct.
I believe that this notion that we talk a lot about it it was a better place with more creators in it and a million and a half million into one ethylene I may use as people use our tool I believe in the fullness of time, there will be hundreds of millions of people using unity on a monthly basis and a significant complement of them will be consumers.
Bump consumers wanting to express themselves with better.
Videos on tick tock, or an Instagram or Facebook.
We're real time Treaty makes a difference in a positive difference to help them drive more eyeballs and more users.
We recognize that opportunity, it's incremental to the path that we have.
Played out for all of you with our investment thesis and I think it's something that you will see us do more and more against that consumer opportunity in the quarters and years to come now vis-a-vis roadblocks.
Roadblocks is one of many indicators that this thesis is right.
Theres a lot of 810 and 12 year old.
Freighters that are actually mostly to actually create an reduction probably older than that but the users are younger.
They are using.
Create side of roadblocks and no code environment to create things within the robots universe Minecraft is similar.
I can name a couple of dozens a couple dozen games that have done.
I'm not and or.
Mmm always and others that were content creation was at the core of one of the gameplay mechanics.
That's an indication that that opportunity is real so I guess to answer your question I don't feel at all that we have this isn't being ignorant of it I don't I don't believe we're going to see them.
The minecraft in the in the.
Roadblocks will come after us so much as to identify a new marketplace that we can build into and I think we have massive natural advantages and it's one of the reasons, we release things like reflect five buttons for content creators and architect.
The recent Lego released that we did on line that I highlighted in my prepared comments.
Which is bringing that no code environment to users getting good traction there so expect us to do more to build out an entirely new user base within the create side of our business in months and quarters ahead.
So forth worth my 10 year old is a customer of unity. So.
With that I'll ask my.
Next question really quick follow up on ASP, you increased price for the first time leftism or customer thought about it was there any push back and then I know you really.
That's sort of said, we don't want to do it again, but for the value add that the opportunity to increase price given what you provides a ton of value. How do you think about that strategically thanks.
Pennsylvania, the honest truth is I think we've got.
Situation, when we can probably double price and lose 235% of our users.
If my number one priority was to serve our investors first that we do just that.
And but thats not my first priority.
My first priority is to serve you in.
The long run and my strong view it was real time through today is going to be without doubt the largest form of media on the planet.
Its most games are built that way today, but very few of the movies that you watch very little of the social media.
Go to your Doctor.
And look at a real time Treaty model of your heart you should.
I can give you dozens upon dozens and dozens of use cases that will move into the arena of real time, three d. and if I start framing for you what I see on the horizon with some of the hardware you will believe me even more so I believe we have a market that will double double and double again as.
And I believe we have an opportunity to establish for unity north of 75 or 80% market share in the form of time and that the best use of our mind time and the best use of our.
Investment is to build towards that outcome, yes pricing is easy and yes, we will do it at some point.
But I've watched short term greedy lead to lesser long term outcome and I want to focus on the right long term outcome.
To best serve our customers our employees and our shareholders.
So those are very helpful. Jon Thanks for the color. Thanks.
Ryan at Bank of America Merrill Lynch you on.
Okay.
Okay, well, we'll circle back to Ryan Mario would do the MHRA fluids are you guys Jeremy Okay, yes, okay, yes.
Hey, guys.
Guys. Thanks for taking the questions and congratulations on the first quarter out of the gate.
This is more longer term one for John and then I have a shorter term one for Tim.
So you need to really kind of stands out in the gaming space with the seat license business model and I definitely appreciate those benefits, but one of the most common questions. We get is why doesn't unique command a larger share the.
The economics from.
Mobile games as you think about endgame transaction I know can touched a little bit on this in our prepared remarks.
But how much consideration to you and the board give to a business model that will allow you to capture.
It just unity AD revenue, but perhaps total revenue by developers.
So.
You should have been in my last board meeting.
Yes.
It was a central point and this parts of that Bourbon that can share with you in parts of it that I can't.
So yes.
You are correct in saying that our take rate in gaming overall is not high.
0.4%.
When I talk to people in the industry. They have a mental picture that it must be at least 235, 10% I.
I don't think Theyre wrong.
Am I tell you I can get there tomorrow.
I have the benefit of having been involved in publishing.
North of $40 billion it again.
My life and I'd say, the one thing I hate it more than anything.
Was a royalty model our revenue share to accrual maker.
In fact, I blew every deal if that ever look like that and I was on the buy side as you heard from many years ago for their first commercial customer and incurred them not to do that.
It's a particularly unfriendly model.
When it comes to.
Names that are creating tools.
You don't want to give.
Photoshop, a royalty on your photo could as up in there.
And some large social media.
The election is over 100%.
But suffice to say.
If you take a look at what we're trying to do now cloud content delivery, what we're doing in hosting what we're doing.
On monetization, what we're doing and you'll see many more tools that will allow us to generate new users within our development teams to bring more revenue onto the platform I have every ambition to do exactly what I said in the roadshow as I said I believe we can increase our business in gaming.
As much as 10 X.
And that's what we're after so for clarity.
100% agree with the sentiment and I want to get there one brick at a time over.
Over the course of the next handful of years.
Yes, Thats very helpful insight there and then just a quick follow up here I believe in the S. One you guys talked.
About how a good percentage of your operate solutions revenue comes from create customers can you speak to the overlap during this quarter, how that trended versus maybe some of the disclosure you guys gave.
And your IPO filings thanks.
Sure I can take that lets you know we're not going to.
Re publish this.
Vick metrics every quarter, so I would direct you to the S. One in which the overlap was 55% of our customers over 100, K. that are using both create and operate and I can just say that that really will be that will continue to be a growth driver and it's tied obviously to the expansion rate, which as you saw.
Came in really healthy this quarter I think you should assume that the power of the platform here and the real growth driver is that expansion of our customers across create and operate whether they start with great and then expand to operate or vice versa, and we continue to see this behavior into Q3.
Appreciate it thanks guys.
Okay now Mario if you around that.
Thanks, Ed.
Great Congrats on the quarter and thanks for taking the question. So the first one going daily. So unity. We all know you guys are pretty strong with their mobile and more casual titles like among us and full guidance.
Let those two titles, reaching the top of the Twitch charts in recent months.
With that being said the next gen titles, but just five wash today, Xbox launched two days ago.
Can you frame what your thoughts are around and next gen console, whether unity as better position within gaming.
Within this cycle compared to the last.
So yes last cycle.
If you broke the market down into revenue.
Xbox Nintendo and Tony's platform.
Our respective market shares were up 30 to 40 on Sony and Microsoft and.
70 on Nintendo in terms of the content that was built for the platform. If you further added dimension to.
Market share graph and fifth split out the AAA from the double line split out the network titles or the live titles from the start that has its own television budget in terms of.
Market, so splitting out the titles, we know of those titles the AAA, but you know the Grand theft auto is that the world assassins Creed battlefield FIFA call of duty.
These titles that then with dominate the charge and console.
Console the vast majority of them.
At about 90% or so are built on first parties or in this case third party tax money. It's the game engine from Activision again measured from take to the game engine from will be soft or electronic arts.
Against that backdrop neither.
Our competitor.
Their epic with Unreal, nor we have a material business on the AAA on.
And they were ahead of us in this cycle probably.
Reacts our position and neither of them in double digits and so we're both rounding errors the AAA, but they were bigger rounding error than we are.
We've been working with Sony and Microsoft for more than two years on the next generation.
We're working with them, we don't have contribution rights for all of this because some of the stuff isn't announced that.
On X MCCSR is exenatide.
Seven of the titles that were announced as quite titles.
Were built in unity on the Playstation side were not a lot even give you a number but I can tell you that over 60 studios.
Jorge over 60 studios released titles for Playstation five.
And if you included class, which I am now starting to see the early innings of the beginnings of a AAA title.
It's almost 70% to 80%.
The quest titles were made with unity.
And I think we're in a position on console to gain materially in this cycle.
But I don't think its going to be over now I think this is michael intellectually or emotionally as skilled defined by the AAA.
My sense is that AAA, we'll probably finish this cycle with.
With a principal title.
Kind of time, working six and seven out of 10.
Being homegrown tech and the ballot split between unity and on rail and.
And while that May not sound like the most optimistic thing in the world.
You wouldn't have put us in the sentence last time around.
So.
We're gaining.
On all fronts.
And we expect to continue to gain on all fronts, but when you are coming from no AAA in a good position on the Wi to a much stronger position on Wi Fi and the beginnings of a meaningful position on AAA. That's good progress.
Got it Thats very.
Very helpful. And then just as a follow up on the fourth quarter guidance.
I believe on the high end.
Revenue its guidance for 9% sequential growth versus 20%.
Historically in the fourth quarter. So I think Kevin you mentioned this.
In your prepared remarks that player engagement is expected to fall.
Fall of in fourth quarter.
And they might have been a pull forward of demand, but I guess when you consider the second wave of co that potentially in the west.
Why do you think that will be the ace is there anything else embedded in there and then any additional color you can provide on the fourth Q guidance by segment. Thank you.
Yes, John let me take that on.
So a couple of things that play so first when you look at Q3 to Q4 Q3 was one of our strongest quarters. So it's a bit of a tough compare and what you noted is slightly off.
But important to understand which is that we don't expect user engagement to decline.
But normally we would be projecting very strong seasonal uptick within operate because of end user engagement and as John noted in his.
I think in an earlier question actually.
Users our R&D at home and so they are already engaged at levels, we've never seen before and so on.
Projections for Q4 are assuming that is that normal seasonal holiday uptick has already happened. They are already at levels of engagement that would normally be seasonal increase and so that's what we baked into our Q4 guidance other than to keep in mind is that were in the quarter were in the middle of a built in our guidance.
Reasonably so as best we can guesstimate estimate.
Console cycle when they first hit.
Are often very additive to the industry as a whole and they often take.
The same the heavy spender and mobile is also a council user.
And so we'll probably see some shift in on.
Hours of gaming player game consumption towards console since quarter, if they can get combined I still don't have a playstation five.
Got my ex FX Mike.
My place say has been theory on the way.
Our R&D team get some first but.
No. These are these are really well articulated.
And.
And really smart launches from from Sony and Microsoft.
I think they've done an amazing job of learning from cycles fast I've never seen launch slates, the strong and so.
I mean, I remember Playstation two where you had pretty much a fire.
Fireworks CEMEA later nothing else to do.
You bought it.
For because it looked good under the TV, where we are right now I think they've pulled out all the stops are brilliant launches in the fullness of time, we'll benefit from that because of our larger physician there.
Very near term I expect there to be the.
The noise around the cycle the noise around this holiday is likely to be AAA console.
Got it thank you.
Fair enough.
Andrew Eric what's that.
Oppenheimer Your hey, thank you.
Johnny If you have a 30 80 altria Thirtyk monthly season, I can't find those anywhere.
I got it I don't have a better contact for that I would be embarrassed.
I'd, rather not go into a retail store and who would have a chance I mean around all that.
Just my question was you.
You, obviously there were several big gains this last quarter.
Using build on unity, but oddly a pound on the strangest some weren't using all of your operate tools I just kind of curious why.
Somebody would use your create tool, making life service game and not use like unity B box or.
Some of your other operating tools.
I mean I wish it were the way you imagine it and it will be the way you imagine at any time so.
Life to the game development studio.
Hi described this.
There are different chief responsible for virtually every one of the decisions today around hosting voice analytics.
Game development, whether you plug in the special tools for to augment.
Piece of a game engine and the no.
Those chiefs in terms of a titles that are being introduced now made their decision on game engine.
And hosting probably two years ago.
So the strength of our push to get people to buy.
Against the full platform.
Is lagging indicator of how well were doing when you look at the titles being released today.
So I would argue that what we're getting in terms of.
The cross sell.
On.
On the titles released today is less than we're getting on what we're selling now for titles that will come in the future.
So I see the progress and of course two years ago, we didn't have both cities other services.
And so.
To answer your question if were gaining but again is on something you can't say sure and Thats.
Frustrating to me.
But it doesn't go faster.
Now there are some things that they were going to do that I think will give you a better understanding of why I have confidence in that working.
So.
Using by way of example, our our hosting.
Service.
Our hosting service.
For no product release in the market today has ever been achieved as a consequence of building the game and unity signing up for hosting and launching the game on unities backgrounds, but hasn't happened once had.
We're in the same shop, we sell them and they buy our hosting server.
Thanks.
We're starting to get sales on just that model now.
A big part of our articulated in public roadmap is networking code and.
And we have a very rich strategy, our networking him that I will not dive into today, but trust me. It is a very complex subject.
That networking code is the ban of most game development studios. It is hard it is irritating ill buildit custom with a rambling set of tools available from a variety of suppliers.
That will be a push button in the editor and for many use cases, and the 2021 timeframe that push button will.
We'll make it incredibly easy for testing one to 510 15 people on your team using multiplay hosting by.
By the time anyone sees native you asked the GCP or whoever else, we might be competing for.
The back end of that particular game by the time. They are aware of this came exists there they've already been running on unity for a long time.
And so we have a lot of advantages coming from our position on the editor and being able to pull them together in one service and that's exactly what we're doing is we're setting up an end to end service to support our customers. Because we think we can do it better than us that kind of set of solutions that they might pick.
One of the time from different shapes on on different team.
Okay.
So.
Thank you for thinking of us as the platform that we are but have yet to prove as much as I know, we can and will in the coming years.
And I guess my my follow up question because I appreciate the idea of everybody's creator so as I think about games in society, I think metal versus how it was.
The monetization opportunity there is it just on the street side is it on operated is on both how should we think about though.
The the future the future of platforms.
Well.
You mentioned metro versus I am going to start by putting a little pin and not.
The how much I believe on the matter.
First Im also a giant labor and it's already here.
You know today.
I played a couple of games.
I read the news about the political environment.
A lot of some news that's going on and.
Some of our markets around the world.
Communicated on zoom slack email.
Yes.
I got Whatsapp notices from notes from a bunch of my folks in Asia made a cell phone call and I've visited a couple of dozen websites I am already in the middle of them as a matter of course, what's going to change in years to come is that members will be increasingly realtimes reading and I saw some of these future roadmap products for showing exists.
Actually how youre members can collide with my members and in an environment that I think will yield.
The answer to your question, which I will now finally give you.
The answer to that question is where we're going to generate revenue.
We have a lot of growth on seats.
In ties with teams that are building and.
Exactly.
The opportunity is born of the fact that in a typical team. If it has a couple of hundred people, we might have 70 seats and we have the opportunity to grow with that team up to 200 seats in our press there as we get network engineers, we don't have with a networking code. We got harness as we put out more on the side of visual scripting.
Our collaborate software.
Peter will encourage people to get to 100% of their seats on unity and those teams are growing and then there's the other half the change we don't have so there is a lot in seats. We're also creating something that I'm not going to take a ton of time to dive into in a moment, but runtime applications built on top of unity think of reflect for game developers that would be incrementally.
We sold to them on a per content creation.
And so we have more tools coming to support the content creators and if we are at an off quarter penetrator.
PPIF penetrated against the current opportunity that.
That we have realistic achievable near term.
On the create side.
We're a couple of percent or 5% penetrated on the amalgam of all things operate and so we expect a lot of market share growth on the on the operate side can start my sense that we can still tenex, our business and gaming.
Got it. Thank you so much guys.
Okay.
Brent Bracelin.
Good afternoon, and thank him I'll start watching with Kim and quick follow up for John Kim on the current subscription revenue side. It was surprisingly strong pretty healthy acceleration or what 46% growth.
How much of the acceleration was driven to.
Seat expansion in the gaming side of the business or some new gaming Big plans long was it predominantly tied to beyond gaming and some new wins there just any color on what drove acceleration in that subscription component of the business. So.
Sure So I think.
Probably worth stepping back a minute and remembering that you know on the create side. We did have a modest impact we had kind of a headwinds at modestly in Q1, starting in Q1 in Asia, and then falling into Q2, and so you know when we look when we go from Q1 to Q2, you see an improvement.
And some of that also was as we added significantly to our portfolio and that helped to drive growth within verticals.
And then you go from Q2 to Q3, we really saw a recovery and to answer your question. It was both it was both gaming and new verticals.
We just saw this sort of slowdown in Q1 and Q2 across the board where Laurie.
Larger more complex deals were slower to close and particularly on the gaming side. There was an adjustment you know as developer has had to figure out how do they get all these you know pretty high performance machines into their homes and there was that there was a period, there where developers were a bit adjusting to the cove in world but into by.
At the time, we get to Q3, we really saw the recovery in seat growth in our pipeline and that applies to both gaming and article I think also the products that John mentioned, we had two releases that reflects in the quarter. So that helps on the on the vertical side and we're going to continue to be rolling out these apps to drive the growth and vertical very specifically.
Glad to answer your question. It really is across the board that we see that growth that the acceleration growth in Q3. Good to hear is this the new normal or do you think this is just a bit of a catch up to or a little too early to say.
Well I think were good we believe we will continue to have strong growth. So I am not sure exactly how to answer that question, but it is some of.
It is yes catching up from you know maybe delays that we had in Q1 and Q2, but it's also continued strength and for all the reasons that John actually just spoke about on the gaming side as we build out across teens use cases artists.
Working code and then on the vertical side as we continue to expand across different protocols.
Adding new customers.
And and developing these products. These these applications that are really helping to drive the growth in verticals.
On that just a little bit pivot.
Kevin I always like to articulate is we see long term long growth.
Sometimes in our business, it's a little tougher to tell you whats going to.
Happen next quarter is coming next but it's easy, but three quarters out exact and part of the issue is when your businesses got as much opportunity as we are.
We've never guided you to think of us and I know, we haven't got into that long, but to think of us as being.
Incredibly predictable we've got.
Thats some aspects of our business.
We'll move a little or they continue to expand.
But we have a lot of new product growth driven and we expect that to carry us forward and long term super robust growth long term.
Challenge going to tell you exactly the nuance of it day to day.
That's helpful. John just a quick follow up here, Mike My ex pasta dry grocery as well too but.
Doubtful that my 10 year old offices, Minecraft and roadblocks and now this new among US show among an app that.
Very poppers as friends my questions asked to do.
With downloads 3 billion monthly to application downloads I think in June now you're talking about $5 billion application downloads in September that suggest downloads are accelerating faster than revenue and I think you touched on this a little bit of a whole ore, but how should we think about app download momentum.
Lee.
Leading indicator that were ceding the market with few term long tail opportunity to monetize analysis on you to figure out how to monetize it just help us understand that acceleration and downloads. What we're seeing is growing faster than revenue and and the opportunity to monetize the long term. So first of all I'm going to pressure chole.
If you don't mind.
So I can remember.
Wandering around Disneyland with my daughters, when they were in.
Dan element, which will.
And they could recognize all the characters and from seemingly a thousand yard spot of Princess and named them.
Well too and they could sing the song of all the Princess movies.
That's not where they are today.
Graduated from them.
And I believe it's your kids are engaging in.
In the side of life wrapped in roadblocks that has an engaging and content creation. They are exactly might be to a consumer.
Sure.
They will want to graduate to something that is not as complex as the current unity editor, but take a look at what we've done with Lego taken what we've done with with reflect these are a handful of buttons on your contract creator and Mike.
My sense is there is something there or something.
Something sizeable.
Well there so.
You don't have to agree with make that's not my forecast. So we can debate, whether it's there or not but I have high confidence that it is there and that we will tap into it and in the years to come there will be a point that they want to graduate and move on to things that are more powerful and more capable or less childlike.
Your question about.
About the 5 billion downloads.
It as much as that may be a shocking number that's the average this year.
So we've seen some sharp increases.
I think a lot of that is.
It's covered related people are been downloaded more applications and discarding more applications we havent.
Seen as much growth in monthly traffic as we've seen a number of downloads. So my sense is a big chunk of that is an indication that users are trying more times I.
I think thats good its a reasonably healthy indicator. It's also a really great indicator for unity, but no one is really getting into our space or in our grille.
Frankly, a stunning number.
It it dwarfs, even the mega caps in terms of how much there are applications are downloaded on a monthly basis. So we're sort of in a league on our own in terms of.
How much our ecosystem as being planted the problem is it's not valuable up its plant at 15 times on your phone it doesn't get incremental.
It's just much more valuable but.
But it just an indication that.
From a market share perspective, if you define it as the principal games being downloaded on a global basis.
No there's really nothing out there like entity.
Thank you.
And.
Last but not least Tom Roderick.
Hi, Hi, John Kim.
Great to see a great great to hear from me and Richard If no one else is going to stay and I'll be the one.
The gaming shares electric just like that yeah.
Earnings calls would have been more companies.
Well done.
John I wanted to just briefly.
I will address the commercial side of.
Of of create really I know form it's very early but I think it's an excellent sort of use case add on that kind of creates yet another element of what threed brings to the table.
Automotive has been a great early starter for you guys on the commercial side and would love.
Sure a little bit more about how the E commerce.
Topping angle of commercial might be sort of changing the use case for three D. I saw of course, where carvana is changing the nature of the game car buying a car selling.
And there are incorporating a lot of threed themselves talk a little bit about it maybe its auto maybe it's a very good.
And how the use case might be changing as part of what's helping create to gain traction outside of gaming.
So.
First a form up there theres a version of form of ascend development now I guess I'm, putting on another new product releases I speak about this but that is designed it to augment format and another version so.
A backup Hum.
It's staggering how many companies sell things to other people right, so and that used to be done by showing up what your briefcase at hand, and or demo and or.
You know some way of brochure some way of of convincing somebody that they ought to buy some.
Begun and showing them, how it works and giving a better sense of its benefits.
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My core belief is that that face the market of selling stuff to other people is massive and it's not going away.
And the next aspect of selling stuff to other people is I don't think we're ever going to go back to the days.
For all of US has done in person and we believe unity entity can be used in pharma and then a companion product that will come out later.
To essentially make it so that you can sell by way of Xoom or through our application better.
Better than you could in person and you can still use it in person if you want that.
Human to human War.
So I think Thats just not it's just another example, where you really can replace the brochure that to the demo. The video we can replace the entire package and I don't care for yourself in a hospital bed or a car and you want to configurator tractor or surf porch.
Presenting it in a real time.
Really interacting and interactive environment is better.
No I think the opportunities there and frankly, it's it's amazingly little energy on our engineering side and my engineers with Great engineers, so they get a lot on efficiently.
But.
It's not an enormous amount of work compared to the size.
Which market that we see so that's why we did form out why we're adding to it and that thing that somebody you guys missed is like it's also for the backend screaming ammonia that we get paid for it well when people build some of these things on CCAR Configurators are an example, so it's a two way is to win model.
Outstanding that's really helpful. Thanks.
Great.
Ken if I go back to operate so totally understand and angle that end user engagement is not going to accelerate next year. The way that it did this year, just logically experts can't but I'd be interested to understand how some of the add ons operate, particularly if I think about buybacks multi play.
Hey, Howard how does the adoption of some of those sort of add ons working as end user engagement goes up and as your customers are leaning into the operate side a little bit more should we think about those components of operate accelerating next year, even if end user engagement does not.
Yes, so we're not giving guidance for next year, but I think at.
Absolutely we have a lot of.
Optimism in the strength of the other parts of the operate platform sale monetization is currently the biggest that's because it was the first that we see really strong growth in multi play in vivo and there's interesting opportunities you know as we go into other verticals.
Operate solutions within verticals and those are just really getting started so I would say that yes. The.
The correlation between end user engagement and the monetization business is there is that there is a direct correlation there I would say it's a looser.
Certainly when you look at multi.
Hi, just.
To some extent in that Theres, an opportunity there to continue to grow that set of solutions with an operator to continue to grow our customer base right outside of the actual end user engagement and Thats. The case for monetization as well right. We are continuing to add new customers were continuing to.
Span because we're growing market share right. So so and user engagement is one piece one driver of growth, but then you have our customers continuing to use our solutions more and more and more taking two we're taking market share and then we're adding new customers. So that those are other vectors of growth and then.
Importantly, continuing to build out that portfolio of products and operate at it but I guess the waste and we're getting some good early traction around content cloud delivery as an example.
We also continue to dimensionalize as with new services.
Our in large markets and Thats. Another example of a large market.
And what we think what competitive lead them.
I think what current outage time or were not to close yes.
But.
Thank you very much John if you want to include that'd be great and.
I'll see you guys in a three month.
Thanks, all its great for you all.
Thank you.
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