Q2 2021 Unity Software Inc Earnings Call
<unk> replace standard definition in the coming years 5 G by Friedrich <unk> and real time, 3 D replace linear on flat to the desert in Congo.
We expect more of the world's contract to be treaty real time in Iraq.
We believe the cycle will create an addressable market that presents us decades of opportunity on unity.
Now from me the word meta versus plural when I'd say this I'm trying to make an important point.
I think that 1 company will represent the matter burgers as say for example, it was imagined and ready player..1 we believe there's going to be hundreds of thousands of destinations in the meta versus games like roadblocks creation destinations from companies like Nvidia Unity Adobe social community communication destinations.
Great.
<unk> Facebook on new companies.
Usually we believe in interoperability and open internet, even if the internet becomes more <unk> more real time more in Iraq and more like the metaphor we imagine.
<unk> mission and Worldview centers on our belief that the world is a better place with more creators.
Unity, we intend to support and shaped the meta force.
Emphasize content creation cross platform access and narrowing the distance from reducing the friction between creators and consumers.
Let's drill down on the quarter.
In gaming on the creative side, we enjoy a share exceeding 50% overall of the year ending 2020.
As you know our market share is even higher on the fastest growing sub segments of mobile gaming and VR AR.
Each month people in more than a 190 countries around the world download over 5 billion applications built with unity, we're growing faster than the industry, which we compete and we're gaining share on our key markets.
We sometimes get the question that if more than 50% of all games are built using unity is on our growth prospect limited.
No.
We believe we can 5 ex our penetration again.
Growing our penetration with artist has created this effort, let me pause on explain.
When I worked in gaming a ratio of artist technical personnel on gaming machines. It was about 1 to 1.
Today artist shop number technologists at least 2 to 1 and its quickly heading a 5 to 1 or more.
The gaming devices become more powerful more powerful gpus more memory fiber network developers compete by making bigger richer more artful.
<unk> games.
The war among developers and publisher to win with consumers is over the best content in this war the Amazon nation as apart.
This quarter, we won new customers on non gaming industries, we added 3 new automotive manufacturers and 3 leading consumer product companies and this quarter. We also offered added 3 leading aerospace and defense manufacturers looking at this from a geo basis, we had some nice wins in Asia on a second point on another in Korea.
Yeah.
As we look forward to the future with create our view is that the creative process will evolve from on premise devices, the flexible and cost effective cloud architectures. There are 3 major trends driving this change.
Workplaces, becoming more flexible teams are getting larger.
Creators bring a myriad of new devices to the creation process, including tablets, chromebooks and even smart pumps.
This is why we're investing in collaboration and moving more of our capabilities to the cloud.
Now, let's turn our sights of the operate business if I had to distill the business challenge most game developers face every day, it's 1 equation it would be how to ensure that the cost of a user the cost of user acquisition is less than his or her lifetime. Prior to the game. That's cost acquirer has got to be built.
Low LTV.
This is not an easy equation from a master or.
Our operation solutions helps developers solve this equation, we offer an end to end platform for content creators to deliver the best player experience and the robust and profitable business.
We provide a growing suite of services that content creators can use to acquire new users optimize user engagement and LTV by our monetization platform <unk>.
Additionally, our multi play services continue to reliably support some of the most notable cross platform game launches, including knockout setting in Maryland.
What is most important in our operated solutions on the connections between these components foundational elements such as privacy controls identity payment billing security are embedded in our offerings to make sure that each of these products seamlessly with each other.
Another critical part of its integrated systems is about our ability to leverage context and data insights effectively true ml driven optimization from a reshaped 3.4 billion monthly active users as of June 21.
Over the best ROI for our customers. This combined with the tight linkage to our create platform have enabled us to gain share across these important markets.
Unity, we have we have durable we have a durable business designed to deliver many years of exceptional growth. We enjoyed fundamental advantages on our scale on gaming or ease of use on our extensibility for non game verticals from massive scale every day to footprint and the linkage between our creating operating platforms. These advantages have led to a 11 consecutive.
Orders of greater than 30% growth and as the play growth exceeding 40%.
We're proud of our performance this year on the years prior and I want to thank all of our customers are held on helping us get where we are today and we look forward to returning to together and I very much want to thank entities 4600, plus employees, it's an honor to work with such a dedicated talented and amazing team.
And speaking of teams today, where take great pleasure in announcing the addition to unity Kaisha Smith, Jeremy as a new board member Keisha brings decades of experience in human resources and talent management.
She is the chief people officer, a Tory Burch.
Iconic American lifestyle brand and frequently served as a chief human resource at news.
Human Resource Officer at News Corp, and the global co head of talent management at Morgan Stanley.
He will serve on our compensation committee, having cash on our board as a reflection of our understanding introduced unity innovative hard working problem solving people are in fact, our most important competitive advantage keisha welcomed the team unity now let me turn the call over to Luis will bleed free run through our financial results.
Thank you Jan.
We delivered another strong quarter with excellent execution by the unity team.
In both guidance and street expectations.
With strong momentum and health of our business is enabling us to raise revenue guidance for the full year by another $45 million.
Q2, 'twenty, 1 revenue of 274 million increased by 48% year over year.
While we saw strong performance across the board I want to especially call out the outstanding work from the operate team as I mentioned last quarter, we were well prepared for the apples privacy changes and as a result of excellence in execution, we build market share. This quarter, we're proud to help customers thrive during the uncertainties.
Plus we changed our advanced analytics context, and insights are proving to be a competitive advantage.
<unk> also had a strong quarter with revenue of $72 million up 31% year over year.
<unk> revenue of $183 million was up 63% year on year and strategic partnership revenue of $18 million was up 9% year over year.
We continue to add new customers during the quarter with 888 customers each generating more than $100000 from revenue in the trailing 12 months as of June 32021 up from 716, a year earlier and our dollar based net expansion rate.
June 32021 was <unk>, 42% equal to last year.
Unit as customer base is becoming more neighbors as we expand from games into other verticals on a fast pace.
We expect to continue to see good progress in bringing <unk> into new industries.
Non-GAAP gross margin of 81% was up 300 basis points on a sequential basis and on a year on year basis, as we operate more efficiently and benefited from product mix.
We remain confident in and we can sustain gross margins above 70% for the long term.
Q2 of 2021, non-GAAP operating loss was $3.2 million compared.
Compared to $8.7 million last year as we benefited from strong revenue growth.
We will continue to invest in our business with emphasis on R&D as we have many attractive opportunities to go after.
We generated Q2, 'twenty, 1 free cash flow margin of -12% compared to -43% in Q1. This quarter includes a onetime cash outlay for the termination of a lease agreement for previously planned on <unk>.
<unk> CEO of new office space.
We had 4.6 on ramp 30 employees at the end of the quarter up from 3379, a year ago.
This brings me to guidance given.
Given the strong business momentum, we are again, raising our revenue guidance for the full year from a range of $1 billion to 101.5 billion to a range of $1..2 of 4.5 to 1 <unk> billion, which represents 35% to 37% revenue growth year on year.
This is up $45 million increase from prior guidance.
With the offsetting revenue.
We are also increasing our non-GAAP income as we're reducing our fiscal year loss guidance from a range of $90 million to $100 million to a range of $55 million to $65 million. We will continue to invest in driving the business. We are focused on long term value creation.
For Q3, we expect revenue of $260 million to $265 million, which represents 29% to 32% revenue growth year over year.
This year's Q3 comparison against the 2020 quarter 3 of which are in place orders boosted engagement more than in prior years.
For Q3, we expect non-GAAP operating loss for the quarter to be between 15% and $20 million, we remain committed to reaching non-GAAP profitability in 2023, while we continue to invest to extend our technological lead and reach more customers.
In terms of shutdown, we're forecasting 327 million fully diluted shares outstanding for the quarter and 3 going on $28 million for the full year.
With that I want to work on Pyxis and <unk> III to unity, we closed the acquisition of meta versus technologies providers of Pyxis at 3 D data preparation on optimization software in Q2.
Acquisition means professional creators can more easily and quickly <unk> beta into unity and optimized models for real time development.
And we closed the acquisition of interactive data visualization, Inc. A popular SKU tree environment creation, Sweden July.
The acquisition enables and deeper integration of <unk> to be in unity ecosystem enhancing artist authoring workflows environment creation capabilities.
These and other great staff to enable rfps with unity.
In summary, we're very pleased with our performance on prospects. We are building a sustainable business with massive scale opportunities. The strong first half gives us confidence to raise our guidance for the year and make us optimistic about 2022.
With that let me turn it back to John who will announce another addition to the unity primarily to enable creators, which is now pending customary closing conditions that we expect to close in Q3.
This acquisition will not have a material impact to our fiscal year results.
John.
Thanks Louise.
Im excited to announce that we have reached a definitive agreement with the intent to acquire <unk>.
I'll tell you on on what <unk> does in just a minute, but an important reason we are optimistic and confident about the combination of the parser as debt.
It had become truly viola viral inside of our development organization and when we looked at some of our largest customers is all the same rapid adoption curve with <unk>.
It found something special.
Now for those of you who are not familiar with parser there are remote desktop and streaming company. There's a lot of individuals and companies to work together from anywhere, but <unk> dot is deeply innovative because they have built a platform that can support the rigorous requirements of creative professional applications.
If you'd like we can imagine the work of game development and creative professionals is incredibly complex. It's high fidelity, it's immersive Richard detail its interaction with <unk>.
To get going to get more complex as greater shift more and more in a real time 3 D create.
Creators need low latency ultra high definition desktop streaming and PARSEC delivers this in spades delivering variable lightning suite streaming at <unk> 60 frames per second.
But they also need more protect provides rich feature with the same sampling range for all images like for color space and privacy security quality of life management tools needed for companies to support fleets of computer resources for all of their creators.
And with companies and their employees collaborating and working on fundamentally different ways, whether it's hybrid remote or distributed work environment. <unk> has addressed unique requirements to support this top of high performance processing no matter, where they are so perfect and their founders and leaders Benjy box from a KRYSTEXXA has been both highly innovative <unk>.
With their technology.
<unk> also focuses on simplicity on access you can get started with a full professional grade greater cash remote desktop link with just a push of a button.
And as individuals and companies use parts that they can drive a sort of incremental virality and further reduction with coworkers peers and partners.
As a result of their unique capabilities on the shift to new ways of working.
<unk> for teams subscription business is growing over 150% year over year with aggressive plans to accelerate even further next year.
<unk> growth was driven by strong net dollar expansion rate of nearly 200% to have a loyal customer base.
Even before we entered into this agreement from <unk> as I mentioned, our own internal developers, we're adopting perfect, but we're hardly alone price.
Our strong relationships with gaming companies like EA will be soft square at ex and many of the industry verticals, where we sell solutions, including media and entertainment architecture design and more.
We see on opportunities to drive shared momentum with these customers through targeted cross selling and bundled solutions.
<unk> is a key step towards unity has expanded cloud vision based on our shared understanding of creators expect to be able to work from anywhere on any device and require rich and powerful tools cloud infrastructure to deliver real time <unk> experiences on the future.
When we think about the futures of the lens of creating our view as a creative process will evolve from on premise devices to flexible and cross cost effective cloud architectures.
Why we are investing in collaboration and moving more of our CAGR companies from the cloud.
I'll share more details after we close the transaction and with that I'll turn the call over to Richard who will run us through our questions.
Thanks, very much so we'll move on to the Q&A section and so as we did lay on the last call, we collected and sorted questions from analysts and this allows us to get through almost twice as many questions as you get on normal telephone call ups than at the end, we're going to open it up for open questions and stuff.
You guys might have air force as well so as we approach the open questions section just raise your hand on the virtual.
System and we'll call on you guys. So first question, we'll start with financials.
So this caused about earning so let's do some financials to start with so we've remained as you've just heard active on the M&A front during the quarter and Mario Lu with Barclays honed in on this with a couple of good questions. Specifically do you see potential for further M&A to drive growth.
Announced on any updates on recent acquisitions with regard to rest. They arent automatics and then also you asked about Pixies software partnership with Nvidia and Microsoft.
Is there a possibility to expand there and then finally, Brent bracelet at Piper asked.
With regard to kind of how we're doing on pixies as well. So how are we doing cross sell and things like that so Luis if you want to roll with the M&A questions that'd be great. Yes. Thank you Richard and thanks for the question Mario Lu on brand, we believe that M&A will continue to play a role in our future. We use a disciplined approach to evaluating opportunities through what I would say.
3 lenses first those acquisitions significantly accelerate our capabilities in our key city focus areas to strengthen our position in the market.
Second can we generated an attractive return on our investment and third can we execute with excellence.
We track the performance of our expectations. In fact, we completed the last update about a month ago overall, our acquisitions are inaccurate gate performing in line with expectations. We set when we signed the deals and we believe that many of these acquisitions have potential to accelerate our growth even further.
As you would expect there are some opportunities where we can do better and we have plans to do so.
On the point on Pyxis fix this has been part of our offering for many years and as I mentioned in my prepared remarks, Pyxis enables professional creators to more easily and quickly <unk> data into unity and optimize models, where we have done development.
Said differently Pyxis offers best in class tools to digest and optimized <unk> data from a real life. This is a great capability that enables creators both in games and other verticals with strong customers across several industries and to your point, we look forward to strengthening our partnership with Microsoft on India.
Great and then another question for Luis Gal Munda at Barron Berg is a good question.
His quote now that you've been on the job for more than a quarter.
What are some of the early observations of the low hanging fruit that you've seen and you can focus on in the near term either from a purely financial or strategic.
Perspective.
Yes. Thank you it seems to have been here for a little longer than that but it's been a lot of fun and very happy to be at unity as I've said before I believe that this is what I would call a once in a lifetime opportunity. The team is outstanding technical debt mastery deep business expertise.
The culture is really unique and fantastic and the passion for winning is as high as high.
They were seeing.
Successful unity is to enable more creators as the meta versus evolves and as a result, we believe that we can sustain revenue growth at or above 30% per year for the long term.
And we will do so while creating leverage to improve our operating margins on free cash over time.
This requires us to upgrade with Peter strategies, and discipline and allocated with courses resources to those ideas and projects that can generate businesses on scale.
Great.
So now we are.
On the monetization and as usual we have several questions on <unk>. So we're going to turn this over to John So we have a handful of questions. So we'll start with Stephen Ju over at credit Suisse asset. Following what is unities relative advantage and making sure that publishers are well and are better compensated over time versus other.
Networks.
So thanks Stephen.
Look we started on monetization business 7 years ago thesis that the whole legacy buy low sell high model.
Advertising.
<unk> delivered short term success in reality and reality kind of a broken business model.
Our monetization.
Program is based on a deep deep understanding of user of our LTV on engagement.
And we succeed when we deliver superior ROI for customers.
It's really about data, we leveraged 3 billion, you've heard me announced earlier with its $3.4 billion again last quarter.
<unk> 3 billion <unk>, producing petabytes of data from Unities, SDK and integration with our Android.
And we apply advanced analytic analytics and machine learning algorithms to create and manage a true.
Roy on behalf of our customers.
What we're optimizing for is engagement LTV not frac.
Really different business now.
Now, there's more going on out there its complicated and reading the media lately.
It seems like well, maybe moving on to more of a close and firewall platform based on first party data.
Here, we have advantage, we've got our own proprietary data, but I believe creators want options. So they can choose a tools services and monetization partners that are best for that it's important to note that our monetization tools are open we have over 50 partners on our unified auction and we have the goal of maximizing revenue for publishers, that's our North star.
We believe more choices are better than a lot better than fewer and ultimately if we optimize for the success of our creators publishers will be rewarded for their business and growth. We saw that this last quarter in the last several years, our near and long term results are proof that it's true so far and we continue down that path.
And another question John.
This 1 comes from Matt cost over at Morgan Stanley, who asked about industry wide trends in AD spending because if you listen to different conversations in press releases and things. Some people say it was pulled forward.
While other people say that it was reduced because of difficulty over attributions. So.
What's going on there it seems like Theres a lot of cross currents.
Well, we're definitely hearing from confusing stories from individual publisher of each has their own truth and I'm sure they're loving their own true up.
Look if there's anything that's constant gaming our constant on monetization it's changed.
Sometimes the changes are small sometimes your bag, but they happen every quarter every year.
What I would say really.
On this.
Yeah.
Longer term investment in advertising can't go a different direction that revenue in the industry.
Attrition is a reality in the videogame world and people need to invest on user acquisition in order to continue to have successful private game businesses.
If all of the things I'm confident on the gaming is going to continue to be a successful thriving businesses companies based on North America, Europe and Asia now our view is advertisers publishers are going to continue to spend as long as they're getting quality players at a positive ROI, that's what we do.
In fact, we've got tools like Oregon's pin count point on it allows advertisers to find what railways it like to target or based on retention or IAP or AD revenue. So they can get a guaranteed return regardless of what's happening where changes in attribution. That's what we're delivering on our results reflect continued increase in on spending on the unity network.
We've been consistent but again I.
I don't think there can be maybe a quarter or 2 at a time that there can't be material divergence between user acquisition spend on industry growth. They go hand in hand.
Great and then 1 last question on monetization so Bob on CRE at William Blair asks how big of a factor is conversion post backs now that advertiser level.
With the iOS 15 update this fall.
To what extent does that impact <unk>.
Like Facebook it seems to have a big impact on them, but how does that play out from firms like unity.
Well look I wouldn't want to get.
If it goes to try to step into the Facebook executive team's view as to what how this affects them but.
It's a good question and I'll give you my point of view, we've always been a proponent of open attribution ecosystem supported all attributions providers from day, 1 and monetization for unity, adding another provider of protocol as a normal course of business and when it comes to Scott Postbox or other systems were there and ready to go by and we're pleased to see a more level playing field.
And then move away a shelf retrofitting networks.
We believe content creators and advertisers should have choices on what services. They use and that includes having an open ecosystem of attribution per rather rather than a single standard Rockford you should authority, but that's consistent with who we are we believe an open system.
On competition.
Choice.
No surprise, we worry about here.
Okay, well now move on to kind of some macro discussions and kind of returned to normalcy. So we got similar questions or at least thematic Lee from off your Gottlieb.
Net from capital markets laboratories, and mbabane over at William Blair and it was basically the comment was can you talk about overall engagement trends that you see some people have concern expressed concerns about how reopening might impact gaming and other anecdotal people say the shift is sustainable maybe you could just give some color on what youre seeing.
What you expect over the next few quarters and maybe Luis if you could run with that 1 sure.
Sure. Thank you for your and <unk> for the question.
We're actually very pleased with the engagement metrics that we see globally, we're seeing more unique active users than ever before and if I look back and look at 2020, the pandemic spiked that started to decline a little bit in the fall of 2020 debt then quickly ramped backed off over the winter time and lead to 2020.
1 having all time high unique user accounts globally.
And.
What we're seeing year to day. This monthly active users have continued to grow somewhere in excess of 20% year on year, We're seeing particular growth in APAC, Japan Korea. During 2021 Europe is also doing Great America is a little bit behind but also growing very nicely. So we're seeing good growth across the board.
Great.
Question on ESG ESG has become an important topic of late and in fact.
William Blair's a section on every reported about ESG and began Siri asked about kind of what we're doing on the ESG front. So maybe Luis if you want to run with that 1 sure. We're committed to ESG to have a positive impact on the communities employees creators customers' environment, our shareholders and we have to recognize worthy.
On the early stages on building our ESG program, we are conducting our materiality assessment and aligning with the global reporting initiative and sustainability accounting board frameworks. So that we can better understand our current position on opportunities to reach our goals.
We have on an internal team dedicated to measuring and coordinating our efforts and we have a full list of programs listed on our Investor page.
Let me highlight a few just before this call. So on the environmental side. We are currently conducting our greenhouse gas assessment. We're also supporting unity customers to become more sustainable and thus make them more sustainable with the power of our technology.
On social impact, we empower employees and creators of all backgrounds to foster a more inclusive sustainable world. In fact, we have donated time technology am shares now valued at over $75 million to enable positive change in education and economic opportunities sustainability on health.
On governance, we're committed to an inclusive workplace and governance approach grounded in our values of empathy respect and opportunity. We know that there is a lot more work to be done, but we continue to be committed on this front and we will be sharing more details at a later date.
Great why don't we move on to operate.
Beyond monetization so on.
I forgot Lee, but capital markets labs picked up on the theme of social gaming and how that might play out in the broader addressable market. His question is.
Is can you comment on the progress of social games as it relates to multi play remarks on Delta DNA and more broadly how should we think about the opportunity as you evolve and extend multi play so that that becomes a backbone of a broader cloud product offering from both games and industry verticals. John why don't you take that 1 so first off just a little sort of backdrop.
If you go back.
On the order of.
20 years, you'd see that most PC and console game for single player games you play it against the machine on later play socially on accounts sports games are at the forefront of act, but gaming was largely a solo activity has console and PC games got ready for other capabilities get any multiplayer products.
That took over and it's the dominant force gameplay from most gaped out there and it will the PC or console mobile has lagged that partly because theyre not on.
Broadband networks and they Havent had the CPG peers on to the technology to support it that's changing social games and mobile games are becoming multiplayer and with that we see very substantial opportunity for unity, because we're a leading provider of back end resources to operate resources enable multi player in multi.
User gaming.
These services as you mentioned include multi play we box ash banker and we're seeing healthy growth on this front with more casual games knockout sit economically super Bomberman and many many others and they tend to you hosting matchmaking voice services.
But theres also a lot of tricky bits.
1 area in particular is networking code is a very difficult thing to master for many mobile game developers sudden traffic spikes because they get they find themselves to have a hit.
And then.
10, 15.20 ex.
Hosting capacity than they planned for and then there's management of toxicity.
We see that everywhere in our environment, but it's also true in cash and gaming is placebo from together and so we are building new tools on top of what we have at multi play to make it just as easy for 2 person team to create these types of games to succeed as it has been 100 person studio.
It's a great question, because social and mobile are becoming.
A much bigger multiplayer experience they've ever been before I think it's an unstoppable trend ex.
The opportunity on the operating side.
Right.
We've got to pivot over to create for games. So we have another question from Matt cost over at Morgan Stanley and he asks quote a.
A large competitor recently took their game engine open source, how is the competitive landscape with other engines changing in gaming and do you believe the market will continue to consolidate to a small number of players John you have some obvious good perspective on this 1 so maybe if you could play this 1 out.
I'll start by saying what do you mean by large the company that on them or both of the games that we're using that came on.
So I'm not sure that I would call that a large competitor, but I appreciate the opportunity for humor I hope you take it that way, but almost source has been our business model and the technology and its always going to be around.
<unk> been around forever and Thats, what percentage of the reality is K managements are really hard scalability stability requires ongoing investment commitment to QA.
Another key bet is.
We're often working with builders of new platform or existing platforms on.
On hardware innovations are going to take place next year or the year. After in New York from that we master those now so that when software creators our game developer show up with product was supposed to be up from the new hardware. It works on the new hardware, that's really hard for an openness force player.
<unk> to really get in front of that were embedded in these companies and it's nearly impossible for 12 months or they opens force side to do that they have a role to play but.
But I think it is it's really it's really tough and then the competitive context.
The landscape in gaming, it's been tough we saw King externalizing, our engine several years ago Autodesk used to be a direct competitor I believe youre, referring to Amazon a little while ago with lumberyard.
It's not an easy industry and we think that our investment goes such that we believe we can continue to gain.
We told you we got a 71 share on the top thousand games on mobile our next largest competitor far behind we have a very strong position and tango on all the consoles PC ARV R and we keep upping our R&D efforts. So we think we're in a really good position to deal competitively on the market.
I believe we're going to see continued market share growth great.
Great.
We have a question from.
Brent based on the Piper Sandler he has done some good fundamental work and asks.
Based on new hiring intentions for unity developers that Apple Facebook and Walmart to build new <unk> applications that we've picked up on could you spend some time articulating the opportunity for unity within the <unk> space and the pace of adoption you are seeing John if you could run with that 1.
Yes, I mean look I.
I'm going to I'm going to step back in time, a little bit.
Several years ago I gave a presentation on.
Pulp a GAAP, a disappointment, which basically said that analysts were projecting stagnant growth in the world of <unk>.
On VR, particularly on the consumer side I don't know if that was going to happen because we didn't really have the right combination of hardware ease of use content library killer apps.
See that's starting to change and you see that starting to change as well and the confidence that companies like Facebook and other she mentioned Walmart all sorts of companies across many of our verticals. We're getting really excited about <unk>, because we're starting to see traction on the selling of hardware.
This book has announced some great numbers around.
Around quest too.
I know there's been some setbacks at different points in time and.
And based on what I see coming from from hardware players I think I think this is about the app.
Not tomorrow, but over the course of the next 3 to 4 years, we're going to see a sizable market and on our beer and there's nothing that makes me happier as a sizable market, Virginia, where on an area, where we have a very very very strong share position. So.
Our hiring this time, it's real.
For years this is really fun to watch.
Right.
We have a question.
On new entrants in cloud opportunities both.
On serious Microsoft Cloud gaming, Microsoft recently announced the extension of their ex cloud offering we'd love to get your thoughts on the cloud gaming opportunity, especially because theres been several attempts from the past with mixed levels of success on what that could mean for unity with project project tiny et cetera, and in a similar vein Mario Lu asked how do we look.
At the entry of Netflix into the into the market. So maybe I'll run with this 1 so I think thank you both sub of on <unk>..2 good questions. So look first of this at a high level. We will start and then we'll drill down into context first off we benefit when new forms of connectivity to games emerge more people come into the March.
That means more games need to be built to fill on the new entertainment needs and so that's generally good for unity because they build they build games, we do better so when we see a company like Netflix entered the market, we view that as a good thing that double clicking down on the subscription question game subscriptions have scaled out slower than we've seen in music.
<unk> streaming services.
So, let's think about why that would be the case.
Going too far into the weeds, we believe theres really technical hurdles that have made it difficult to cost effectively deliver great user experience to consumers that evolve their consumption patterns. So as opposed to right. Now what you have is basically delivering the same games to play in the same way so think about how the way you consume movies.
And music differently now than the days when you had bought a CD at a store and went to the movies. So far we just have not seen that evolution in game consumption, but at unity. We believe we have a lot of other technological tools that solve those challenges and subsequently we will give game developers opportunities to change how they how games are consumed in if we.
Do that we will unlock new business models and consumption patterns for millions of more people. So for example, our portfolio as you know includes <unk> tiny purion dots on several other modules that among other things that make streaming game less CPU and GPU intensive so the big answer. The question is basically takeaway as it were.
<unk> optimistic about the rise in gaming subscription services and the ability for unity to help on that area.
And then create for verticals and as always we saved the best question for last and that comes from the team of Tom Roderick and mass.
<unk> at Stifel.
You often get asked about wind verticals are.
We're going to be bigger than gaming.
If you have an update on that trend line. This will be great, but maybe a more interesting question is what revenue model. We will get you there right now because you have create which is seat count based growth subscriptions.
But you also have operate which is chugging along with a usage based model like we see from snowflake stripe and others. John that's kind of I think a good question right up your alley and that'll be our last question before I open Mike sure. So.
It's a great question because it really speaks a lot of what we're working on working on internally.
With several of our initiatives.
You heard me earlier announced several new customer adds significant number of major new customers on the vertical side. So we're seeing the uptake.
Today, we generate outside gaming, primarily a SaaS business and professional services business. You are right. We saw seat licenses and we sell a onetime applications like format can reflect to our customers.
These companies also typically need.
Help getting up and running with their new applications.
So with companies like Walgreens and lows of the nature Conservancy and many many others we are from professional services.
Prior question, we've talked about other hiring unity developers a lot of these companies as they are.
But they often need professional services from unity to augment or more.
<unk> scale team that they have internally to build what it is they want hence they engage with us on professional services.
But I think that you hit on a really important thing when it comes to.
These vertical.
They're not like the scale in the same way that game companies are with thousands and thousands of developers.
And here, you'll see more usage based models.
We already work on a consumption model with furious.
Pretty much all of our operating services are based on a consumption model.
When we price and this is early stages around stimulation.
Or visual twin parts of our business.
We tend to focus on thinking about on an individual server as a seat that makes it a consumption model on the basis of compute applied to the problem.
I would say that as we continue to evolve and grow and scale.
We're going to continue to see strong growth on the vertical side, and we will see a shift over time.
From professional services from seat licenses to consumption models that will be based on a variety of metrics, sometimes how many servers are being used for something and other would be for streaming.
And there'll be a series of advisory, but think of consumption models being significantly additive verticals on top.
Okay now, we'll open it up to.
Direct questions I mean, I guess, we could start with Matt cost at Morgan Stanley If youre going to open up your video ask question number relative to other folks as well too.
Great. Thanks, a lot for the question guys. So I guess.
Obviously it came in came in very strong for the quarter.
You mentioned share gains that you picked up on that side of the business to do with monetization I was just curious what were the drivers in your opinion of those share gains and what trends did you see over <unk> and can you give an update kind of quarter to date in Q3 on how those trends on the monetization side are going thanks.
So I'm going to reset my speakers on Luis you want to take that because I came across pretty jumbled from me. So Luis can you pick that up on all open and close by audio drivers here about how sounds good.
Yes.
Great question on we've talked about I'd say last quarter and if you. If you remember what I said back then is that we prefer for IV <unk> for over 2 years and I also mentioned that our operator organization captures and analyzes 50 billion in nap events. Each day, non that's whatever 35 million.
Every single minute, so that's pretty amazing and we do that across these 20 platforms, but.
And I mentioned that in our spending across our platform was really strong and I expect that some market growth and really the reason for that is our contextual models, which actually do not rely on <unk>, we're working very well.
Our scale and depth provides us access to vast amounts of data, which is really based on end users engagement and platform performance data.
On the feedback we were getting even back then was very strong from our customers. So I think some of our customers were saying things like Hey, we partnered with every single network out there on unity is readiness on guidance on far above anybody else and that on that allowed us a quarter ago to raise our guidance by about $50 million.
And really what we continue to see exactly the same thing as we saw last quarter. The same advantages and as John mentioned, <unk>, clearly, having an impact in the industry, but it is impacting different players from different way now some of them are accelerating some of them are decelerating we are.
Fortunate to be prepared and to have the data on all of this.
<unk> audience pinpoint there being 1 on Q1.
We're actually accelerating and that is again, allowing us to raise our guidance by at least $45 million that we talked earlier since the same message that we talked Matt a quarter ago. We just continue to see it play out and needs.
We're performing very strongly in this environment.
Yes, just to build on the Oasis point now better understand the question.
Earlier, we got the question about.
On the advertising business connected advertising revenues to the industry the gaming industry.
I really think the best way to think about this and we have deep experience from what happened in Europe, where on JD PR.
Is.
Disruptions.
Relative market share.
1 publisher different than another or a proxy on an industry, while gaining market share.
So I think at the aggregate level.
Doubtlessly on my mind that we're going to see growth on the as market.
That will affect every publisher this time now because the the CAC to LTV calculation is different not just for every publisher refractory game within every publisher and often in every major geography for every game and every publisher the aggregate is there.
The harsh reality is when you change some of the monetization mechanisms that are out there as far.
As GDP our debt before.
It affects the relative portions who's on the top of the stack from second to third.
I'm happy to say true this.
Whether it was <unk> <unk>.
We've anticipated well enough to be net winners in those equations, but I do expect to see some shuffling on.
Some other networks.
On net we're having more difficulty adapting to these rules and on a relative basis different publishers are going to end up with different.
Different stories.
Great.
Great, Thanks, guys and sorry for any audio issues.
If I can just add Matt just to complement our unique context on inside are really the competitive advantage for us developers come to unity <unk> when they are making their games not to other platforms are run time. It can be at in addition to many of other operate services. So we have this scale and that's all coming together range.
Nicely.
Great.
Hey, Tom Roderick you on it.
Robyn.
Outstanding Okay can you hear me okay.
Hey, Tom I can hear you perfectly.
Wonderful alright away we go so.
John on Luis and Richard.
I think maybe I'll try to put on and even finer point on Matt's question, because I think it's a great question and there's all these crosscurrents that everybody's trying to figure out.
And when I weigh what's clearly a monster quarter that you just put up really just tremendous trends there.
And then sort of measure that against the forward guidance, where youre looking at a sequential down number and so I guess the question youre going to on data to get a.
A finer point on it from a lot of people is should we be nervous about that is that a reflection of sequential trends on engagement.
Tougher is it a reflection of just uncertainty around the advertising ecosystem or is it just hey, we just put up on monster quarter don't kill us, we're going to be a little bit conservative and keep the horse in the barn, a little bit so I'm going to wait for 30 seconds have an answer to give luis time to prepare 1 but I can assure you Tom we are not nervous.
And if were not nervous I would not encourage you to be nervous but feel great about our business. There is nothing about sequential guidance that has the feel any less good.
About where we are where we're going on a long term growth trends in our short term growth opportunity so with that free mumble Luis might want to speak to seasonality and sequential quarter Reagan how guidance works, yes, I mean, if we were nervous Tom we would not be raising $45 million again after doing that just a quarter ago.
So we're not in their growth we are very bullish on the business.
If you look at 2 years ago on you look at Q3 relative to Q2, Youll see that there'll be on seasonality last year seasonality was heavily impacted by COVID-19. So it's a little bit misleading. So we just we know that that's how the business operates.
Some are on holiday seasons have traditionally been peak month for us, particularly in the operating business, which is more of a consumption based model. So that's what's impacting us by day, but we.
We're very we feel very good about the help from the business as we've said many times in the call.
Yes, so on to add.
Tom.
The lower months for summer vacation months.
For a bunch of different reasons, but.
It's.
We've seen such true.
Aromatic growth, but it's sometimes hard to parse seasonality from sequential growth.
Very fair, Okay, and then a really quick 1 Luis you touched on it just.
On <unk>, there's probably a millennium Falcon jokes, making there I'll, let Richard make it later, but.
You mentioned, it's not material, which again, but materiality has a lot of different levels is there any revenue associated with it at all inside of the guidance. It. So can you just kind of give us a sense of that or is it strictly a product company that you are bolting on to the vision here.
There isn't very very little revenue this year, Tom nothing nothing material in any way so no I wouldn't.
Question is is that why you were raising our guidance absolutely.
No. It's a great company, we love the technology Amazing as John explained we think that the future is is very is great, but the impact for this year is very very small to put a point on it.
Discuss price, whereas we.
We're working on our guidance.
Also we don't.
We try not to include in the guidance the name it's not closed.
All right excellent. Thank.
Thank you all I appreciate it.
Hey, Brent bracelet you up.
Hey, guys. Good afternoon. Thanks for taking the question 2 quick ones here.
I'll start with operate obviously crushing numbers here for 3 consecutive quarters in the phase <unk> pretty impressive.
I just wanted to ask given the guide which is pretty consistent here in the last 3 quarters over 30% and actuals are much stronger but.
What was linearity monthly linearity in the quarter did you see kind of.
The operate business start to trend on a year on year basis down in month, 3 or was it kind of stronger in month, 3 any sort of color on linearity as we just think about kind of how it performed in the quarter on.
<unk> kind of started to be implemented.
Yeah, what what.
I would say brand is while we don't disclose that we are very.
The linearity was good during the quarter no I mean, we feel very good about the linearity and again if it was not we would not have raised.
Guidance for the year by as much as we did right. So we feel good about the health of the business, we looked at it by Geo by business by month.
If you look at it and we feel good about it so not not a concern on their brands.
On your credit card or gaining share kind of price.
My last question for you John on <unk> as you think about that opportunity do you think that's going to be part of the subscription offering and functionality of the base package you plan on kind of operate that.
On a separate kind of subscription offering what are your initial thoughts I'm sure it'll change over time, but what other initial thoughts on packaging and bundling our parser well first off let.
Let me, let me trace back to that question you remember.
About half hour ago, I'd mentioned, we certainly can 5 ex R. R cover on side of the gaming industry in pickup artist.
Boatload of artists that are using protect now.
Where do we end up I think with a lot of customers. They can draw unity into the seat more than the other way around.
30 Bucks a month, that's an easy.
It's an easy and essential.
Component.
Or a game developer to have remote system. The other thing is.
A lot of developers are at Arthur they need something like price that could be able to come in and use our tablet to do any sort of creation parse act provides for that.
And so my sense is that this.
This is 1 of those.
Goldilocks field, where we can pull them into customers that can philosophy into customers and we can bundle and gaining penetration with customers that we both share with significant penetration.
And with.
With Benji and Chris.
I mean, I wish I was half as smart as they are when I was there a fair theyre.
They're just killing it with deep insight and.
Execution that I stand back and Marvel on I feel really really good about this 1.
Well it sounds encouraging thank you so much.
As Stephen Ju are you available.
Yes.
Yes, Sir Alright, hi.
Hi.
So I guess following up on the questions on route around the advertising business.
The marketing spend from the video game developers, but there is also the larger opportunity from a broader set of advertisers across more vertical. So can you talk about what youre doing to onboard more of modern dynamic non videogame advertisers. Thanks.
Yeah sure so.
First off we're experimenting.
But the margins on the supply side for non game advertisers.
Think of us as being <unk>.
Supply side game industry and demand side anybody.
But mostly.
On the game side, and then we've got big partnerships with a number of.
Aggregators of Binder network, most notably Google and they bring a lot of brand advertising among other things.
So.
I, frankly expect and based on what I see out there is that we're seeing more and more sophistication.
On non game advertising is buying into game industry network from 2 we'll probably see more there but.
<unk>.
It's still the lion's share of the fulfill game advertising on both sides of that equation.
But again, we're open to both sides does that get to your question Steven.
He went mute on me.
Okay.
Alright, yes, just thinking about the longer term opportunity because I think the longer term debt.
Yeah, let me be really clear I think the longer term.
For unity, a bigger box from where operating western monetization, where experiment and constantly.
We have a more data centric client advertising that all but a few other players you learned to love and admire like a go on a Facebook there are precious few companies anywhere with our sophistication around advertising and data and those are skills that we want to acquire more broadly and well.
But when you're approaching 60% quarters Youre focused on the core and that's what we're doing now with that side of our business.
Gotcha, Thanks, John Great.
On.
Fair Gottlieb.
Hi, there thanks for taking my question and thanks for the format.
Welcome.
I wanted to I was hoping you guys could talk about DB NAR and I ask because in Q2 and Q3 of last year. The COVID-19 quarter. As we saw this sort of spike right low 100, <unk> mid $1 <unk> and it didn't seem sustainable per se here, our Q2, 2021% to 142% again can you talk a little.
About what's driving that maybe an update on Q3 or even longer term guardrails on on that metric.
The issue on Mac.
Do I go John.
Sure.
1 other thing that helps.
Fuller price not select calibrate that on cash and I always look at these things a little bit like.
Whenever it is more than 2 numbers involved and youre doing multiplication and division you have to understand what some of the underlying trend lines are.
It's helping us keep that number up as we keep.
Graduating customers from.
Below the 100 threshold above the 400 thresholds that make can bring a lot of growth and then the second thing that's happening is we are <unk>.
Our larger customers and continuing to grow them. So we're seeing growth at the bottom of the fact, the top of the fact that we keep bringing people into the stack.
To be honest with you.
1 when we set up the guide for this year, we were guiding materially lower than we're currently realizing in our revenue number.
A lot of that is our continued success with our customers above our plan on above our expectations and so.
It's what you want to see as a CEO.
It's kind of pleasant to wake up in the morning, and you see something on its usually good news on <unk>.
It's always good and are bringing new customers on our platform rapidly and 1 that gets on the platform we're growing them rapidly.
It's a good time to be at unity, It's why we're as bullish as we are.
Alright, thank you.
And then we're just about done cash do you have a question or do you want to.
When we do the call backs, which better for you.
On the chart on the call back. Thank you so much maybe all perfect alright, great well that wraps it up.
We did it in 61 minutes. So that's not too bad. So we appreciate everyone being on the call and we definitely look forward to seeing you either at conferences or on our next earnings call, but thank you very much and we appreciate your interest and support.
Thanks, everyone.