Q4 2020 Unity Software Inc Earnings Call
We just reported strong Q4 with revenues and $220 million up 39% to prior year, and 2020 routes and 772 up 43% for us.
<unk> 2019.
These strong results were a result of a combination and strong execution and the great work of our teams delivering innovation across the board for our customers and.
And we also recognize that we benefited from some COVID-19 related tailwind and estimate this contributed a net of about $25 million or total revenue in 2020.
And our shareholder letter we included some statistics will speak to the growth of our ecosystem, including introduced market share among the top talents and games. The number of monthly downloads of hospitals with unity and the number of monthly active users and and engage with content built with our operated by unity all of these metrics hit record levels, but our market share.
And of the top 1058 countries, reaching 71% down.
Download average 5 billion times per month, and Q4 and May use reached an average of $2 7 billion per month in Q4 and 2020.
These record results don't directly translates to revenue many cases, but theyre indicative and the strength of our franchise and the ecosystem we support.
Tankful that our amazing customers are realizing great success and the marketplace.
Now on unity, good metrics and outcomes come from one source innovation and.
And unity, we expand the expand the boundaries of innovation and 2020, we delivered hundreds of improvements for our core create platform and our <unk> team helped studios optimized for lifetime customer value with new services like game growth, we upgraded and introduce applications for our customers beyond gaming for example in December.
Highlight a Volkswagen and innovative use of our vertical application for months to build on NK engaging virtual E commerce showroom.
We're laying the foundation for our future and which most of the world's content will in time be real time three day.
Today, we're also providing our guidance for 2021, we're projecting revenues of $950 million and $970 million for the year.
This guidance takes into account multiple factors I'd like to reference three.
One underlying revenue growth of 30% plus which is our long term goal.
Two the recognition that 2020 had somewhat elevated revenue due to COVID-19 tailwind and three the recognition that we estimate a onetime hit in 2021, approximately $30 million and revenues or just over 3%.
And as advertisers become accustomed to the new Rd, FAA approach being implemented by Apple.
We look forward to a strong 2021 net none of this would be possible without the incredible dedicated and innovative employees at unity and honor for me to be part of this world class team.
And with that I will turn this over to the operator, and Kim and Richard and we will take questions.
Great. Thanks, very much well why.
Why don't we start with a question on Ivy FAA cash.
Tim do you want to get US started on that one and the question was to say because what we did is collected all these questions specifically.
Specifically, what do we have any update on the expected timing around idea FA ILS 14 changes for you.
Changed what impact do we see on our business and is it and is that factored into our guidance.
Great Hi, everyone. Thank you for joining us today.
With respect to <unk> and this is a question I think we got by all of you got from all of you there.
And the change is really the idea for <unk> are going to require that our customers recalibrate.
Much of what they are doing related to their acquisition and their monetization and their marketing strategies and we've been working really closely and with customers to help them do that.
And I would say that we've been preparing for this for a long time, we are leveraging our learnings from GDP are from our contextual advertising product, which does not rely on and the idea and we're working hard to mitigate the risks both to unity and to our customers.
As John mentioned and our earnings release, we estimate that the idea for <unk> changes will impact our revenue by about $30 million this year, assuming a rollout and the spring and.
And this estimate is not a perfect science, but we have very detailed models that help us forecast the impact here and we leverage country by country and data, including impression levels for iOS versus Android and you look at current and historic opt out rates and adoption rates of our contextual AD products and our experience with GDP are so we feel.
Great confidence and our estimates here.
And look to add a little perspective I know this is a really important question on the minds of many investors.
When we go for count.
We're very analytical.
For example, and we're trying to estimate revenue or say create and seats and.
And we'll look at a customer level and individual publisher and we'll look at how many teams are using our product how many people on each team the job classifications for each person on the team that might or might not use unity individual features but help us understand what the uptake rate can be across those classification and users on a <unk> basis and.
On that basis that we formulate and aggregated forecast for the business.
And not <unk>.
Entirely science, but really close.
We're even better is that when it comes to the monetization and services side, because we have a lot more data.
In this case I just wanted to give you a couple of highlights and just to let you know we did build our model up and a very detailed way we have a handle on those.
Yes.
Point to start with and the beginning of the model is only about 30% of our impressions are from Iowa.
And many of these are significant portion of already opted out for limited AD tracking so we take data like the heart and take information extreme detail on our experience with our pallets. When people are presented with new user flows for a game or other application and we build it up step by step we have a good understanding now we don't.
No if advertisers are going to respond with incremental advertising spend to drive installs and that's a possibility we can't quite get every last nuance for us nor can we understand precisely what our market share offset will be but we feel confident that we're growing our advertising business with market share growth that's been going on for many years on the basis of strong day.
And sites. So net net it's an estimate but we're not guessing we've got a very detailed model in place and we think we understand where we're going.
Great. Thanks. So on the second question is the thing that all of a sudden to deal with this year is about.
Covid and about half the analysts assets, but both on serious first so he gets a shout out so and the question is how does COVID-19 impact your 2020 results and more importantly, how are you thinking about the impact.
Kind of a normalized environment on gaming as Covid receipts and then more broadly what is the impact you see from Covid on your overall business protect particularly beyond gaming.
Sure. So as you saw on our earnings release, and we called out and net $25 million of upside to revenue because of Covid.
Alongside $40 million and net expense savings after some reinvestment.
See less of an impact in 'twenty and 'twenty, one related to Covid on the revenue side, we're entering the year with lots of momentum across both gaming and new verticals.
And gaming.
We gained share and a market that experienced a trifecta of either engagement, we had new gamers entering the market, we had lapsed gamers coming back and we had existing gamers playing a lot more often and.
And so as a result.
And as John mentioned and as a on a release are on monthly active users who consumed content creator operated with unity reached an average of $2 7 billion per month, and Q4, and that's up 63% year over year and.
And interestingly new players we gained in 2020 had a 27% higher rate of and at purchase versus existing users. So these are new valuable users that are coming into the ecosystem and.
And for joining and 21, our view is that this momentum and user engagement will continue even as the world hopefully starts returning to normal historically. This is what we've seen on the gaming industry, and which is growing faster and is now larger than the film and music industries combined and we believe this is because again and so much more interactive you control the character the next frame and something.
Nobody's ever seen and now with the increasing levels of network based connectivity are also engaging with other players with your friends.
So we see we see a lot of momentum heading into 2021, and gaming and new verticals. Our year started out slowly and 2020 as company's adjusted to working in a COVID-19 environment, but we ended really strong and have great momentum heading into 2021.
And Q4 of our 793 customers with revenue over 100000, a year, 13% of those were driving revenue for us outside of gaming and this is up from 8% just a couple of quarters ago. When we filed our S. One.
The other thing I would say on the expense side and 2021, we are assuming continued reductions in travel and facilities and marketing events and with some uptick by the end of the year.
And we're generally though planning to reinvest those savings into head count and initiatives that will drive revenue growth across R&D and sales and marketing.
Last thing I'll note and interesting dynamic from Covid is that it made hiring a bit more back end loaded for some of our teams and the start dates for many of our Q4 hires slowed over into 2021. So we have a stronger than usual start and for the year on our hiring over three quarters of our projected head count growth for Q1 is tied to.
Offers that were accepted last quarter. So we have a really strong running start and this is reflected in our Q1 guidance for a sequential drop in operating margin.
Okay, let's move on to kind of business highlights.
Start with kind of create for verticals first question Theres Memorial.
Barclays and he asked.
Can you talk about unity pharma and what the opportunity set is for that product beyond kind of the future virtual auto showrooms and and that may be E Commerce site brands beyond for beyond Volkswagen.
Sure. So for those of you don't know, we created and wash unity formats, which ended last year.
And I alluded to describe what it is for those maybe not.
And as close to it.
When a creator works and unity, they're working on.
Enormously powerful tool, it's got pulled on menus and why are you to do content creation.
There is hundreds of these pulled on menus within the editor and it is for a professional developer it's straightforward for us for someone that's not familiar with real time to redo content development. It is a chore it could take a year or more to learn we create on these.
<unk>.
Runtime applications. So we can bring all that power to a user that they can get up and and they need with for a five partners easy to use easy to wall out easy to get new customers up on the platform. The first and the tools, we launched it with like Chris was reflect and we've seen really good traction with architecture and construction.
On using that tool and and we've talked about that on the last call here, we're talking about unity forma and up and to this point the state of the art for most spiritual for pure rooms for ecommerce was a few JPEG a video.
They're really nowhere near what they can be and what you really form a does it democratizes and enables business users to create engaging real time <unk> environments.
You can see pro forma for the challenges associated with manufacturing customers and consumer brands that wanted to deliver interactive marketing content, including product configurations.
Talk extensively about Volkswagen and what they're doing.
First customers are already include a luxury good manufacturer of company and Aeronautics and a leading hospitality training.
And we've really got going on verticals and this is a way to really get people up on the unity platform.
Just in the last months, we have added Newell brands' Walgreens liberate a production show studio and Nick Knight, a lot of folks who are coming onto our platform and vertical to take advantage of tools like pharma like reflect and there'll be more.
Great.
Okay. So staying on create for verticals up Brent <unk> with Piper Sandler asks the following question.
And I can take this one.
He said and some markets and it makes sense to go it alone and other markets, it's better to kind of work through channel partners or professional services companies.
How are you thinking about your go to market strategy and other verticals like manufacturing. So the response really is first off it's a good question look.
Look we try to start at the top which means that we target kind of the most innovative companies and the sector and.
And so what they become as kind of beacons and reference customers. When we shift from kind of a land to expand model on a particular vertical and so our go to market motion depends on kind of where the customer is in terms of embedding real time through the end of their business model. So that really means kind of three components direct sales.
Engage our own and house professional services or kind of work with Vars and channel partners. So for example on the direct front, we sell reflect alongside Autodesk AUC platform with every and we are providing a joint.
Go to market strategy with them with geospatial and <unk> technology to the department of defense with Continental electro bit. Our work is focused on kind of in car entertainment systems, but sometimes customers need help standing up a project. So in that case, we either bring in our in house specialists like finger finger foods, which we <unk>.
Our internal group or we tap a growing network of value added resellers or manage delivery providers.
So let's go to the fifth question back to John So a couple of you incentives questions about.
Recent hiring of Peter Moore, So maybe John you could talk about that new hire and any other announcements that we've made of late.
Sure so.
We see the opportunity in front of us and community.
Just massively significant.
We think it's on one set of generation opportunity and where once you net generation company and we've signaled many times that we're investing to realize this opportunity now I'm really proud on the payment unity. The team you saw on our S. One and the IPO is for the most part the team that I brought on five and six years ago to take this company from the <unk>.
<unk> started the founders and a small team for what we are today.
And now part of my job is to make sure that the leadership team has all the capacity and capability to realize the opportunity in front of us and some from time to time on.
But like a.
For football or soccer coach and make changes to win championships and.
And that's part of my job here at Unity now with Peter Moore, we see and a significant opportunity and the.
Arena of sports and live Entertainment, we don't have specific announcements to make today.
Many of you probably know Peter as well as storage and the and the industry and he'll have some things to talk about on future calls.
I think it's also worth noting.
We announced internally today, but not externally that'll come on a couple of weeks. So we've hired Mark Witton from Amazon to lead our create solutions business Mark is an incredible leader and the world of Tech and entertainment. He leaves a large GM team and Amazon now.
He is also essentially the founder of Xbox line, there from the very beginning.
Both the larger organization that realized everything that is Xbox live.
He brings a lot for to unity and his leadership will add to our ability to grow and grow faster and.
And the months and years to come.
No.
And there is always something going on at unity, but in this instance, what we're trying to do is map to make sure that the opportunity is Matt with the ability to realize it.
Yes.
Okay. So let's move on to create for gaming John you can take this one so Orion gate.
Bank of America Merrill Lynch asked side.
<unk> 2077 was a high profile launch that was unfortunately filled with bogs, but CD project is far from the only studio that has faced this issue. So to what extent do you think this will be kind of a wakeup call not just for AAA, but also pretty much everyone in the industry about whether or not to build bespoke game.
And.
So this is my day to day lives these days.
As a background.
I've been leading teams that build game engines going back to the.
And 1997 and been involved and creation and over a dozen game engines, including.
Leading the organization for the times with greater Boston, Frostbite and electric with lunch.
And I completely get the allure of creating new technology for gaming company.
But I think we've reached the point that.
It's probably a negative return on investment for most people that breakthrough on technology.
Spencer, it's challenging to get to the number of platforms and.
And at times, it gets and the way of what.
Consumers really want which is great content.
Well polished well finished and bunkering.
And unity.
We built the game is and it gives developers all the tools needed to create gameplay that works on a realistic visuals on any endpoint and a full suite of monetization content delivery and hosting options through our average services.
As you've watched us and our market share across all platforms has been rising dramatically in recent years and again recent quarters.
I think more publishers and developers are coming to realize and power of the unity and that'll continue.
On.
I think there is a lot of <unk>.
For shelf built engines and I think over time, we'll see durable.
Great.
So.
And we're going to add another one here for you John So Tom Roderick Stifel asked so on the creative side.
By our estimates your addressable market at least in terms of seat count for game artist is approximately double that of gaming programmers could you update us on the progress you are making here with art engine, but more broadly on penetrating this market. What's the competitive set is to replace <unk>.
<unk> sale add on sale and and who makes the buying decision.
So.
For the most part we were closing new seats on changed its artist.
And on.
And they come onto the platform.
On a pretty deliberate way so the first thing we have been investing on it.
And is better workflows and so the unity engine. The unity editor is a lot more intuitive for RBC.
And we've made great progress on that much.
I mean by intuitive is.
And years gone by and artist would go to their program and to have created this amazing bulk you imported into the game for me can you integrate into the game.
US build from this these earn out and backfill and animation and either thanks. Another words unity was too hard to use with them and as any game engine.
By enhancing the simplicity of the workflows a lot of artists are able now to use unity directly.
Second thing we do is we create specific tools that enables the developer the artist developer to create directly and unity without the complexity of invoking.
More new.
<unk> can be the editor these are tools like VFX graph shader graph some of our environmental offering systems.
You can work directly we added with the complexity for me. So here, what we're doing and art engine is among these and given them enormously powerful tools that sit on top community and they could get more.
With less complexity.
One thing we're doing is we're working hard on specialized tools to really help and artist feel like their tablets. Now art engine is also part of that but it's about allowing them to easily find and.
And it should be assets or other other services.
Assets that they can directly employ on the game with upgrading them from scratch and tools that they can use to transport nodes to be able to be correctly used inside the inside the gains from these hybrid colocation.
Applications and building. So we have if you will have three for want of salt.
On helping developers, particularly artist much more productive and be much more productive one as it workflows and make it simpler core engine other as tools to advance them without the complexity and the editor to be able to do things and our productive web and third is to bring assets directly to them. So we're not starting from scratch and if it were a baseball metaphor there.
Starting on third base and that's the notion and that's why we're seeing a lot of growth and grades.
Great. Thanks.
Let's pivot over to operate and supposed to operate for gaming So John.
On Andrew <unk> Oppenheimer asked one of the strengths.
Unity is that you all have.
Lot of data that gives you a differentiated insights into gambro behavior.
Have a strong presence and the long tail of double a and single a developers.
So the question is is how do you see the evolution of your market for monetization and backend services with AAA Studios.
So.
Cubic's first off.
If you go back four and five years unity really wasn't good choice for AAA studios to use for contract ratio that's no longer true.
And so that's one of the reasons, we've seen so much market share growth and double and triple play.
On the continent.
For Xbox and Sony Playstation and on launch date, and well before that from launch titles. So first we had to have basics and place.
And the capable they are and mobile and then make it work just as well and double and Triple line, but one of the things to understand.
AAA content is very engineering centric and a lot of engineers and the change and with that comes a very justified mentality that I can build everything from scratch.
I've seen and developers to build their own ERP systems from scratch and.
And they do it because their engineers and always imagine they can do it better.
And what unity gives them, there's really two things.
Increasing flexibility to start with unity again put you on third based on content creation and just as well.
And we bring them advantages on the monetization side as an example, some of our customers might have data on $20 million and they use a $30 million or $50 million EBIT 100, and significant scale. As you heard were $2 7 billion for data advantage is very sizable and very important.
We bring on bringing tools for them. So increasingly they don't have to create from scratch every time that they need that can use unity and on the service side, we bring scale both on the data side on the infrastructure side, if they can leverage towards noting from some.
And some of the most important games as they moved into online mode post launch and fell over products that were launched and unity apex legends and others.
Smoothed scaling and successful launches on unity is back and so.
It's a great question.
And our past Lilly has been mobile to double by the AAA on create and now we're just getting into AAA on creating a more successful way and operate as usually the apple which right behind it and were coming up for that.
Great.
So we have a question on the recently announced game growth program up and I'll take that one and that's from Yao Chew and Brad Zelnick Credit Suisse and the question is this.
You announced game growth program late last year can you talk about the origin of the concept and what is your value.
Proposition for indie developers. So first off look this is a very early days for this program, but even so we're very excited about the operate that they operate team kind of created this game growth program and the idea sprang from our view that great games, often go unnoticed, especially in the index.
Segment. So as you know unity has always been on the side of creators and it just didn't seem fair.
Creators would have to choose between their entertainment vision and tactical execution to build audiences and make money. So so think of game growth as a way to kind of bring to bear the best practices that we've seen succeed over the course of many years through the accumulation of literally petabytes of data.
<unk> from hundreds of thousands of applications and millions of tests run by our tools. So we think this is a win win model for a select group of our customers because the game growth program, let them focus on building great games, and we help them succeed on the monetization front with and enhanced revenue share.
Our model.
So let's go to the 10th question and this is operate for verticals for John So Brent bracelet and at Piper asked how would you describe the opportunities to monetize non gaming verticals within the operating system and it seems that multi play has applicability outside of gaming. So first off is that a correct assumption and more broadly at a high level how would you.
Think about the drivers for this part of your business.
So first off I would say that.
Truly excited about the opportunities for operate outside of gaming.
Starting point, though is most non gaming applications you see today, whatever app youre using there not presently realtime three and they are increasingly becoming real time, three day and what we've done with products like pharma and reflect is we've lowered the bar to take your application and a 20 <unk> century.
And if it's a architecture architecture and construction and rigor that reflect if it's many many industries, but wherever you might get involved with are configured or a real time treating website that's forma.
And in both cases, a way of example.
We also simplified the process not only for creating a site for supporting the site with our own <unk> service for delivering real time content.
<unk> new applications that are out there once and application as real time three D. It's no longer static it needs data and need streaming and need support and that's where we come in.
And if its multi play we can host it if it needs content updates and content on a streaming basis such periods.
We see a lot of opportunity and ecommerce, which is an area. We're starting to focus on increasingly now.
And again, if youre going to want to see a real time three day view of a dining table and customizing the water. The hardware those are the kinds of things youre going to need back and support for and with unity. It's literally just a checkbox you don't need to bring in and engineering team to make it work, it's because of circumstances like that and many more.
We feel really good about the upgrade opportunity outside of gaming.
Great. So, let's pivot over to kind of R&D and kind of core technologies.
John So above on Siri at William Blair asked.
Big part of your competitive strategy is our focus on R&D led innovation could you talk about what progress you've made in 2020.
Where youre headed particularly in regard to some projects that you've talked about in the past such as net code and dots.
So that current thoughts for example.
Super important innovations and unity, but they take a different form and let me address them separately.
So net code. This is the code that a developer needs to bring multiple players and the same instance of the GAAP.
The networking code that brings people from and RPG and Fps for sports game into the same environment. So that they are playing the same game and everything's synchronized effectively.
Now what many people probably don't realize is what is important for a first person shooter game.
Is different than what actually might support and architecture and engineering and head office.
You worry about 10 milliseconds of latency on and Sps with and application might reflect you don't it's up 10 milliseconds wouldn't be noticed and it also wouldn't be noticed that and RPG are a puzzle game.
What we noticed and and RPG game is.
Bandwidth can you get all that beautiful are all those beautiful textures onto the screen fast enough, but its really about a bandwidth issue and how it managers that the point that I'm, making is you need different types of net coder different specific execution, depending on the application that you're supporting.
And we've already put some of our net new net code product and the market will be adding a lot with this year 2021, and sort of our gear of net code.
And it is complex and this is one of those situations for virtually every game makes it from scratch and.
So it is a very difficult and for developers to do and we're going to make that go away and this will enable them to be successful with multiplayer games. It will get around leases of lag and cheating and other things because that's what's built into our product and will enable them to scale more we also connected directly to multiply and making it very easy for <unk>.
Appreciate you and or operate services, it's literally one continuous proposition inside the unity editor now.
Now that's a very different thing.
DOCSIS, our data oriented technology stack, it's a handful of technologies that has you have the developer thinking fundamentally different about how data is organized and.
Let me be clear, what I mean by data.
Every character or the art behind them every.
Every code set and our script that supports animation every environment all the physics all of that is content and.
And if you think about some of the larger AAA games or if you look at the content behind a car configure rater.
Talking about is the work of sometimes hundreds of people for a couple of years, creating all of that content and.
And so there's a lot of content out there and traditionally and object oriented programming.
It's bound by how much of that content can go through and individual core and and individual GPU and to be honest with you for a high performance, it's a mess and.
And so by getting out of object oriented and spicing everything and defense place for the data. We can see 10 to 100 times more performance for rich environments that have a lot of content and lots of interactive objects lots and real time, three D objects and it's our intent over the course of the next two to three years to continue to build.
Lead into our core technology sort of easy to use versions of <unk>, where you can offload something to us adopt system. So you can get all of that performance without having to work for it.
It's the future of the way most games and work in years to come and it's certainly a massive horsepower addition to the unity technology sales.
Alright.
So we got a M&A question from and work with the Oppenheimer. So you acquired <unk> and mid December but you also on the past and made a series of tuck in acquisitions and today.
And you have a bit of a cash war chest, but as we know sellers also have high valuation expectations could you just talk at least at high level. How you think about M&A as a means to accelerate go to market strategies and your technology roadmap.
Yeah sure so as a starting point going back from the beginning we spent approximately $300 million eliminate so it's not been a gigantic investment on our and we've been acquiring companies, mostly and and Aqua hire orientation to get capability that we think we want onto the platform and it's been mostly a.
A build versus buy tuck in and orientation.
Now.
And this idea of a war chest.
And I'm a believer that most M&A is a bad idea.
And so we've got really high hurdles for clearing on strategic criteria tacked on Prairie execution culture, It's all got to match.
And.
The bigger the price more.
More hurdles, we're going to put it in front of it.
And obviously aren't having specific to say I wouldn't rule something out, but our notion is that M&A to get us something that we can't get another way cheaper more and more effectively.
And I feel really good about what we've done so far when we do reviews for our board on the M&A, we've done so far that.
It's almost all worked and worked very well we want to keep on that.
But think of us as primarily organically oriented.
But we look at things take advantage of where we can go on the market.
Great.
And this is.
And on my opinion and the best written question, we've cut it all through all of US all of you guys, sending and stuff from you out you and Brad Zelnick of credit Suisse, and so I had to set for read this word for it because it's too good not to so.
So John do you have a pretty quotable and as it relates to your comments on XR Im not sure, which I like more GAAP of disappointment, our analysts are idiots.
Being a former analyst I'd like that line anyway, but what are your latest thoughts here beats.
Between the bear camp because of Covid didn't bring <unk> to the forefront and nothing well and the <unk>.
Holekamp, which says this time is different what's different today, one of the key moves and the landscape and what other platforms that you are watching.
So.
And.
And my first presentations on XR unity and go back five years at the time.
Products.
Oculus.
Winning CES and other rewards and pay the product of the show.
And it was then that I was coming out of this GAAP a disappointment when I was explaining is and the market.
A lot of the analysts were projecting the staggering growth.
Off really the next year that youre after that and what I was explaining what's that wasn't going to happen.
The GAAP of disappointment was I expected a much slower growth and the initial years.
And the reason I felt is successful consumer platforms need to meet a number of criteria.
The hardware needs to work its starting point it needs to be simple if it if it's as challenging as programming of VCR back on the day, it's not the kind of thing Thats kind of.
Yield mass adoption and I can remember trying a number of these devices early on.
And I'm pretty familiar with our space and it would take me hours to set it up and sometimes hours to get it going the second time and I'm running around with a cable on the back of my head and that's not an easy thing to do so I felt that it was wanting at that level. It's got to have a consumer price that works.
Probably more than anything and people need to remember that.
People don't buy hardware for hardware, they probably hard for what for what you can do with it the software that you can plant so there needs to be a vibrant.
And a rich.
Ecosystem of content and.
And for that to work.
And so need to have developer economics that bring people on the platform.
So those are a handful and there are other.
Criteria.
And I haven't seen the combination yet.
It's all brought together and on Facebook has made really good progress with quest II, it's an impressive device.
Announced it.
More than 60 titles generated over $1 million and revenue, but for people who develop content, that's really going to be beautiful.
And I think caught it needs to be 100 million or multiple hundreds of millions and that will happen and I'm highly confident now think about this for a minute.
And I owned and early M. P. Three player and many of us that global for the iPhone.
And that didn't make me think when I got back that low penetration products that were produced by a number of manufacturers.
Vuzix wasn't going to make it to my pockets all day.
I was pretty sure it was going to make it through my pockets from day, just that wasn't the right product and if you remember one of the big innovations from Apple and Steve jobs was getting all the music publishers on into the Apple platform, which is what ignited the massive growth in that arena the point that I'm, making is simply this.
I'm highly confident that the experience and spectacular with XR devices I've seen.
I am highly confident that the.
Larger players that are operating and the ecosystem see what we see and theyre going to get it right.
And if I were to give that same presentation around the GAAP of disappointment and I gave five years ago with no real endpoint and site for when all this was going to come together I'd say I can start to see that it is going to come together so.
Thank you for all the early investors and XR to get it off the ground you made the industry possible.
I think now we're going to find that there's more opportunity and the year.
To come I feel good about it but it's still tomorrow for scale.
Great. Thanks, well finish up with a couple of finance questions. So first.
Let's start for for Kim Tom Roderick Stifel asked.
Can you provide some detail around which areas you're focusing your sales and marketing investments on between gaming and verticals and more broadly how should we think about operating leverage versus revenue growth.
Sure. So thanks for the question, we see huge opportunity needs in both gaming and and new verticals and so we are definitely investing aggressively and boats.
Currently the majority of our sales and marketing investments are selling gaming, particularly if you look across both create and operate but we're actively growing our investment and other verticals, especially on the credit side as we did and gaming, let's start with create and expand to operate on talk about some of the opportunities for other verticals with and operate.
And so we built out and multichannel go to market model that enables us to push the right products to the right channel to optimize sales and marketing effectiveness. We have a direct sales team and addition to inside sales we have a lower cost sales development team, we have indirect reseller channels and we have strategic partnerships that any.
Demand Gen and we have our online store. So we're moving quickly to grow both in gaming and verticals with this approach.
In terms of operating leverage we're very focused on meeting our revenue growth and maintaining our gross margins. So that we can both and that's and THR growth revenue growth as well as increasing operating leverage and one thing I should point out that's important to understand is that if we exceed our revenue expectations, we will reinvest.
And a disciplined way the upside into revenue driving initiatives, rather than accelerating our path to profitability, which we hope to achieve on a free cash flow basis by the end of 2023.
Great. Thanks, So I'll take the last kind of tactical question, So Frank Frank.
D. A davidson S. So hey, you've increased prices by about 20% on pro plus tiers and last January.
And what has been the reception of this pricing hike by users and the first year, how should we think about the percentage of accounts that now fall under the increased pricing plan in terms of upside for 2021. So as you pointed out yes, we raised prices just over a year ago and the large majority of the price increases roll through our numbers and those fab.
<unk> are embedded in our guidance now for context, just so you know we've got very little pushback from our customers on the price increase and that's a good sign because it says that our developers see a lot of value and our technology and more even stepping back further our view is that you earn your way to market leadership and.
And you do that by delivering better functionality at lower cost of ownership. So our goal right now is to focus on those factors rather than kind of getting some sort of short term pop that we would get from raising prices. So now we're going to open it up to open Q&A, let me help and up.
Yes.
And I think we can do this right. So the first person who will be out shoe at credit Suisse.
Thank you.
You can ask a question there and Jimmy Yeah, that's great Hi, and thanks, everyone. Thanks for taking my question and congrats on a great close for the year.
And particular, thanks for helping breakout to Covid and <unk>.
It impacts on my question is on that $30 million, either John or Kim.
Really wanted to double click here and two parts number one is this $30 million number consistent with or better with the way you were thinking about approaching the situation 90 days ago. A lot has changed there's been a lot of and your announcements from key players in the space and just trying to understand the cadence and your approach to that and second question is how are you thinking.
About the shape.
Of the recovery and the impact on that is this a one year issue and most of it goes away, but you ended the year or should this lag a little bit more into 'twenty and 'twenty two at this point. Thank you.
Johnny Robyn and start and you can jump in.
Yeah. So I don't think a lot has changed in terms of our thinking around the impact on.
We were planning potentially for some impact in Q4 and that was delayed but in general I wouldn't say a lot and changed from the last 90 days, we have been working on this honestly for years and we meet and preparing for this we knew that this risk and that this is a risk and at this moment could come we've dealt with this with GBP are and so I would.
I'd say that that that things have materially changed and the last 90 day.
And we mentioned earlier, we feel very confident and our ability to forecast our business. This does certainly entries and uncertainty, but we feel confident that now we're able to predict predict the impact for our business and.
In terms of the shape of the curve and John I'll, maybe let you take that one and I would just say that there will be a short term and partly initially as advertisers adjusted to the changes we feel that they will certainly been impacted on a year and that playbook and we've articulated the 30 million and.
But we do believe over time, there is a real opportunity for us to gain market share.
Yes, just a little color I would say, obviously, we 'twenty 'twenty and 'twenty one.
Two unusual impact.
He's a pretty big deal and Covid related deal.
Deep analysis on Covid tells us.
Consumers and <unk>.
Celebrated the future people came into the present.
We'll probably see some declines or at least slowing and growth on engagement, but I don't think we're going to be impacted by that much and of course 2021.
Likely to be home for another six months for snow was just not the way any of us want to debate.
And we can validate that with China, So China gives us a really good early read so we don't really see anything there, particularly disruptive to us going forward.
On <unk>.
There is.
It is important as it is and it's certainly made a lot of profit from our perspective.
It's one of 300 and think about it one of three factors one is overall growth and the industry around.
User acquisition driven.
Engagement and growth I don't see that go on and game industry is very robust, it's growing and feel confident and that within that world, we're gaining market share and have been growing market share based on a better product.
And better service and within that.
And there is.
A bit of a shift and the force with by the FAA and we've quantified for that and as you can tell it's on a major part of our revenue strength in terms of its impact.
So we feel pretty confident that we're on the right place on the right price.
Great. Thank you very much.
Hey.
Tom Roderick Stifel, you're up next.
Alright can you hear me Richard Yes.
Victory Alright, thanks for your thanks for taking my question here. So congratulations everybody great year, a lot to work through and fantastic finish.
Kim.
I think the net dollar retention number was 138% for the year and I was hoping you could kind of help us square that with some of the positive benefits you saw from.
And from Covid during the year and other words, maybe give us sort of a level set for how that might play out on a normalized year I know, it's not metrics and necessarily guide to but.
But perhaps you could set the table for us with our withheld for thinking about what some of the onetime benefits for this year and that number yeah sure. So overall and yard and a very strong metric for us and you've seen it spend and mile over 120% for the last two years.
And what we saw this year, if you look at the sequential trends and and Q2 and Q3, we saw a pretty healthy jump and NTR and the shelter and place orders drove that higher end user engagement that we talked about it and so within our operations solutions business in particular, it really drove that metric and Q2 and Q3 and then what you see is it coming down a bit in Q on Q.
For.
Some of that had to do with a tough compare over shoot for 19, and which we had a more typical seasonal lift we benefited from a number of.
And algorithm enhancements with and operate solution. So that's some of what's going on within that trend throughout the year and then to answer your question thinking about next year, we do expect that metric to moderate, particularly given the tailwind that we had in 'twenty and 'twenty and the impact of <unk> and 'twenty 'twenty, one and so a moderation.
And we expect that metric to have some volatility, but we really believe it will be a very strong metric for us as we just continue to see the growth within all of our customers across both great and operate.
Excellent that's it for me. Thank you thanks, Dan.
Franco Granda at D. A davidson.
Hi, Yes, good afternoon, and thanks for taking my question.
Two very quick ones, if I may one for Diane I'm on for Ken.
The first one for John really Theres been a lot of questions about user engagement as we enter 'twenty one right. There's two big trends that could potential impact user engagement, particularly on the mobile side of things, one obviously being COVID-19 and what you talked about and detail on then to the launch of the new consoles. So my question on really it's on the ladder have you seen a slowdown and <unk>.
<unk> from it and across your platform as a result of the net console launches are the supply issue is acting as a small benefit today since a lot of people having gotten their hands on one and then really the second one on for Ken.
Can you break out what percentage of your total revenues our advertising revenues and then perhaps if you. If you do that what are the margins associated with those.
So the answer to that somewhat lengthy first question is no hey, you might want.
On some color on that so just the starting point when we do monthly engagement.
On.
It's most mobile because most of the world's players on mobile and let me just give you some way to think about that in aggregate, adding all the consoles together in any given month you might have 100 million players out there, obviously very engaged players and they spend a lot of money a lot of us and $60 for titles upcoming 70.
<unk>.
Seven.
Tom and per title and with my videos on it.
And so those are very important customers, but engagement is over $2 7 billion users most of the mobile so I would say that the console launches has relatively little effect.
What typically happens and is happening now.
And those that were able to get on Xbox and Playstation and the new generation and products and end of last year as they shifted themselves from prior console for the new consoles.
There's definitely always a big kickoff and engagement for those users that managed to get the new hardware, but if you look at the numbers and the scheme of things.
We're talking about something that was already.
<unk>, three and 4% of the total user base and then of those a tiny portion of them managed to get and upgrade to the new hardware.
What I expect to happen and I think this is important.
And is not.
The market for console and PC has been losing market share at the hands of mobile for quite a while now and in dramatic ways and typically around.
Around a new console launch new hardware Theres, a reinvigoration of console and I fully expect that to happen.
I'm looking forward to find more on a console games on their new devices.
But no we haven't seen any sort of net reduction and engagement.
Yes in terms of the advertising revenue. So we don't break out our revenue by product, we have a mix of product and services products and services within both create and operate I can say that it is the largest piece of our operating solutions business, because primarily because it was the first and.
And building that business for several years now and some of the other products and services and then operate are just relatively newer and.
So certainly you know so it is it is a larger portion of that business, but we're not breaking it out on the question around margins and that's also something we're not disclosing we actually as a company and don't really look at our margins by business line and we look at the total company margin and we do look at product by product margin profile and we're not.
Breaking that out, but I can say that when we look across all of our products and services to have the highest gross margin products or our subscription product and our monetization service on one.
I had one last nuance on me.
Engagement.
People buying higher end phones definitely correlates to the increased engagement and mobile gaming.
And most people install more applications around.
Hardware and we get you bolt on it you get a new pond, and we installed a bunch of new stuff.
The numbers on the new Samsung.
And the new Apple phones are numbers that are orders of magnitude bigger and console launches are on term game user households, So don't forget what we've just witnessed is not just in the world of console. It's also in the world and mobile.
Okay.
Yes.
Brent <unk> with Piper Sandler and used to be Piper Jaffray, but now Piper Sandler.
Good afternoon casino's team here.
No.
And I had one question I wanted to kind of drill down into a little bit more and it's really around the beyond gaming segment now and then and you saw there I mean six months ago and this was one 8% of the credit mix is now 13% that puts it by my math on a year over year basis close to triple triple digit growth so accelerating growth.
And kind of beyond gaming why now is this a formal reflect product Bob one quarter is.
Is this auto configurations, just taking off.
<unk> be through what are the drivers of this what looks like sharp inflection point on around momentum for <unk>.
And beyond game.
So let me and we start with some initiation point Joe.
We happen and.
Non gaming verticals as we start by thanking allow and color on what we do for a living.
And that often leads to curiosity and the technologists and their they already know how to you generate and so it's a few of them around because they make games on weekend or whatever they start messing around and the project what happens after that as we engage and some level of professional service and support.
Because they can't quite figure out how to use it at scale to get them, some sort of meaningful application underway.
And then they start scaling schemes and now this is what we talked about two years ago, and we were private and that was a model and we take a while to develop.
And in a way and we sort of warning about the GAAP and disappointment and if you want to think about it that way, but it was great idea. It takes awhile to get through the process.
Format and lacked.
Our runtime and patients, meaning you're not engaging this 747.
Control system, and this giant airplane with a million buttons and.
And labor is in front of you you are dealing with for five six buttons and you can get the benefit of real time per day and that leads to people buying more seat because you need to see to get the apps and services behind it.
And I fully expect that we will how we only talk about true now.
A big chunk of verticals come faster because of real time applications.
Dramatically reduce complexity to getting up on the platform.
And I think that's going to be our path forward for some time.
And then sometimes what we might work on a custom basis with a developer will turn into a real time for runtime application and we can provide for developer.
By way of example for.
<unk> started with initiating conversations with the auto manufacturers about helping them build car configuration and of course tractor configure and remote configuration and client configuration God knows that and bigger apparel Levi's. These days.
And on.
On the point is we realize it was the same thing over and over and over again, so what's enabling simplify and take the speed bumps.
And really it's that insight that made me a lot more comfortable believing that we had long term very rapid growth and protocols that trend again.
Great well certainly good to see and now for.
And the color. Thank you.
And last but not least Mario Lu Barclays.
Great Hey, guys. Thanks for taking the questions.
So I guess I'll ask the blurring lines on on guidance.
So in terms of the <unk> guide.
If we assume a sequential growth for the credit segment and <unk>.
Believe that implies mid to high single digit growth sequentially for the operating segment versus historically is growing around 20%.
So that's currently assuming $2 million to $3 million hit from IBSA and <unk>.
Are there any other factors to kind of call out.
Regarding this lower sequential growth versus historical.
Kind of give you a really high level and maybe cam can come and with more high level.
We saw an acceleration of our business on create afterwards.
The COVID-19 transition and we're actually well, we're not giving specific numbers, we expect creative grow faster and operated wisely. So.
All in and that's a function and the fact that we saw a slowdown and the middle of the year and now we're seeing things light on.
A really robust pipeline and verticals and and gaming for growth of revenue products that we have been announcing obviously the the roadmap on how to get back.
Typically to operate so those are enough to tip the balance.
Create for 2020 was on operationally.
I think thats and I don't have anything to add.
Okay, great. So just one more on the full year guidance.
The operating income margin guide at the midpoint and temporary negative 10% versus this year and now.
<unk> and then I think Kim you mentioned that head count is particularly stronger and the early in the year is it evenly distributed between sales and marketing product development G&A how should.
Should we think about that and what are your updated thoughts on long term Oi margins for the company.
Yes.
I think I may have mentioned earlier, we do have our profitability goals for 2023, we're going to keep moving on that path.
Keep in mind that last year, we had all of those COVID-19 savings that really drove our operating margins and so you know this.
And this year, we thought very carefully around that balance between investing and continuing to drive profitability and.
And on to.
Answer your question, we are we aren't investing as much and as fast as we can first and foremost always and R&D youll continue to see that.
And then kind of sales and marketing and we're continuing to work on driving leverage in G&A as we scale as we find efficiencies and.
And company.
And we've been focused on growth and where we're at we're shifting now to get more leverage out of our G&A line and continue to drive those investments in R&D and sales and marketing so.
In terms of the first quarter, Yeah, I mentioned that the the head count growth is coming really strong and the first quarter and that will moderate throughout the year.
But like I said, we are balancing and and and we are we are focusing on maintaining our gross margin. So that we can both make these investments and continue to move towards profitability in 'twenty and 'twenty three.
Thanks Kim.
Alright, well.
And on a 602 eastern time for those eight minutes shorter than last time. So we've tried to help you guys out. So thank you very much for everyone and really appreciate all your great.
Great questions and insight and support and so we will talk to.
Soon and hopefully again during the quarter and then and the next quarter. Thank you so much.
Thank you.