Q2 2022 Unity Software Inc Earnings Call
10 of our filings with SEC Dot Gov.
And the press release, we issued this morning.
Actual results may differ and we take no obligation to revise or update any forward looking statements. We will also be discussing non-GAAP financial measures today and reconciliations between our GAAP and non-GAAP financial results and a discussion and limitations of our non-GAAP financial measures can be found in our earnings press release, which was issued earlier today.
And it is available on our website under the Investor Relations tab on the appendix to this call's slide deck.
On July 13th we announced a definitive agreement to merge with Iron source, which we expect to close in the fourth quarter of this year. We also pre announced that our second quarter results were slightly higher than the top end of our guidance and reduced our full year revenue guidance today, we will go deeper into our results and projections.
Joining me today are our CEO , John <unk>, our CFO Luis the so-so, Mark Witton or create solutions leader and Ingrid less steel of our operate solutions later with that let me turn the call over to John .
Thank you Richard before we dive in I want to address with everyone is aware of the Apple oven proposal.
I acknowledge we received a proposal and I want you to know that we arent going to make any comments at this time.
I'd like to start this call by reminding us have you introduced Northstar.
And that is our belief that the world is a better place with more creators in it.
It is this belief that has guided us over the years and continues to guide our decisions across the company.
Through years of innovation investments and hard work by everyone at Unity Unity has become the world's leading platform for real time three D content creation designed to enable creator success and ultimately this led to unity, having two main lines of business create help creators make real time trading cop 10, and operate where we help these creators find out.
Operational and business success with their contract.
The second quarter of 2022 came in consistent with our last update but well below the standard we have set for ourselves for growth and value creation.
We can and will do better.
Revenue of $297 million is up 9% year over year, and slightly above guidance of $2 $90 million to $295 million.
<unk> by the sustained growth and create as we strengthen our relationships with customers and while we are also pleased with the crop progress, we're making and operate our underperformance in monetization remains disappointing.
Several product and engineering efforts in place to get our monetization business back on a stable footing.
We have fixed the data challenges that we discussed last quarter and are launching new features we're seeing improvements in our products with lead indicators such as Rguest pinpoint accuracy, showing our innovations are effective.
Despite the progress we lowered unit full year revenue guidance to $1 3 billion to $135 billion in.
Revenue uptake is slower than modeled we.
We attribute this to a combination of recent negative macroeconomic factors and the complexity of accurately forecasting the timing of the change in revenue trajectory of the modernization business.
Now, let me start with create creep.
Create delivered another strong quarter with revenue of $121 million up 66% year over year.
We were building a large create business fueled by innovation and market tailwind as the world transitions from linear and Judy to real time, three D, which is more engaging and interactive experience.
Our games business continues to strengthen as we improved tools and features which are used by creators will watch amazing and successful games and we are seeing an acceleration of our business outside of games with big wins across industries and geographies.
We're adding new customers and expanding our business with existing customers that are building their business on our digital twin capabilities.
Our focus on creators and solving their toughest challenges has enabled us to more than double our create business from $55 million in the second quarter of 2020.
To 121 million in the second quarter of 2022.
We're approaching a half a billion dollars yearly run rate and growing at a healthy pace and I believe that we are just getting started.
We are encouraged by the performance in the games business.
The second quarter of 2022, with our biggest games quarter ever.
Our strong performance included record adoption of our 2021 long term stable or healthy S version and the 'twenty to 'twenty, two tech scream and expansion of data oriented tech stack or <unk> capability.
Unity is much more than games now as our growing success outside of games the tests.
Our business outside of games represented 25% of our total create business for the full year of 2021 and 33% for the fourth quarter 2021.
At the end of the second quarter of 2022, our business outside of games represented 40% of our total create business and remember this mix expansion is within the context of having our best revenue quarter ever for our gaming business.
I want to acknowledge the amazing games made by creators on year to date and the inspiration that it is to us.
Their dedication and commitment to the craft and game development pushes us to constantly innovate and evolve our products.
Unity is aim is to provide creators with the complete set of tools they need to be successful.
And with that let me hand, it over to Mark to bring some of this to life.
John the investments that we make in our platform and tools are reflected in the wins that we've achieved quarter over quarter. Our customers are leveraging the advancements in unity platform to realize the vision for their games.
Unity 2021, Lts comes with significant additions and improvements for visual scripting editor X and stability seemed you overlays for artist driven tools and asset ingestion.
It also adds editor support for Apple's Silicon and target platform support for Chrome OS Android App bundles as well as expanding our adaptive performance support so that you can launch quicker and manage mobile device resources for better performance.
It supports new functionality for <unk> in treating the workflows as well as new feature functionality for our rendering pipelines across both our universal rendering pipeline and our high definition rendering pipeline.
We develop these new capabilities first and our tech stream releases.
And after we receive sufficient input and validation from our community of creators we land those capabilities is the next long term stable release.
This year is <unk> 2022 Tech stream focuses on significant improvements in several major systems, including refining our user input framework and a focus on developer and artist productivity through features like better flying tooling better material variant productivity and significant performance improvements as long as well as connectivity with other creation.
<unk>.
But what's most important to us is seeing creator success and bringing their experiences to life.
We continue to see a large share gains released across all gaming platforms made with unity and these run the gamut from the largest game publishers in the world to indie developers moving some of their very first game the massive success.
And we believe the players to be able to find and play games on any platform.
<unk> enables developers to build their game for any destination platform from the first mile to the last our partnerships with platform and hardware creators enable games to be deployed across mobile console PC AR VR and web.
So for starters millions of mobile game developers around the world are using unity to build the next generation of successful games today.
Today, Uniti powers more than 70% of the top mobile games. Our engine is optimized to create highly performing games that work across a huge variety of devices and specs and have the tools to make it easier to deploy games and manage their ongoing lifecycle.
They are great examples here across the board.
Kabam launched Disney's nervous to much fanfare and mobile in June and subway surfers by <unk> celebrated their 10th anniversary in May 2022, topping 3 billion downloads demonstrating the longevity of mobile games developed on unity.
Second dinner also launched Marvel snap into several global markets and another success is made with unity.
Beyond mobile unit continues to perform superbly on other platforms nearly half has been games for PC were made with unity in 2021, and those games continue to breakthrough to the steam charts, where this quarter 13 of the top 20 and gains in May alone were made with unity.
And we've seen a fantastic new experiences here like D rising from stem lock, where the performance from Das enables <unk> to scale up the world size and the number of players. It was a key factor for them their choice of unity neon.
Neon White developed by Angel matrix and published by <unk> is another excellent example of how a small development team can punch above their weight using unity.
And from these newest game studios to something along the story, we saw great new console games, including little no buy side games and the Centennial case from square Phoenix.
<unk> also enables creators to take their content to long established a newly emerging growing platforms, such as VR and AR.
And VR on Oculus Quest Unity games made up 80% of the most popular games in July and 72% of the top selling games.
These are very small sets of data points on the scale and scope of gaming with unity.
Wherever you find a platform device with usage around the world from the largest scale mobile platforms PC and console to the latest in VR devices.
To find an active and committed community of creators and theyre going to using unity to create compelling games to entertain those users.
Now I want to turn to our create business outside of games, which includes media and entertainment and Commerce, industrial and manufacturing architecture and engineering construction and many other industries.
I want to share some customer highlights I'm going to start with <unk>.
One of the top three construction companies in Japan.
In the second quarter, we expanded our relationship with them to help them develop a digital platform to drive major efficiencies in their construction process specifically their internal users we use real time <unk> as a foundational tool for the design and construction work.
Obviously chose unity because they see our solution is the most extensible and scalable solution available.
Also in the second quarter, we signed our single largest digital twin agreement to date. This is a deal with one of the U S government's leading it service partners through this relationship unity will help the government defining human machine interfaces are HMA for the aerospace applications and beyond these applications demand and interactive robust user experience very much.
One game.
Now the ultimate goal of this program is to create a reference architecture based on unity that all U S government agencies used for system design and HMA development.
Also during the second quarter, we signed our first agency customer EG, plus EG plus as a world class content and creative production company based out of long Beach, California.
And in addition to providing EG plus with the technology required for the internal development teams to create real time three D content, we're going to be working with them on many projects such as designing the next generation real time, three D product configuration for a leading auto manufacturer.
And we continue to strengthen our partnership with Mercedes Daimler This quarter, we announced that from 2024 forward all Mercedes Daimler cars will be equipped with an HMA made with unity.
With this agreement Uniti is now an integral partner of one of the world's leading and most storied automotive Oems together Mercedes Benz and unity are taking next generation user interaction such as maps avatars in AI concierge is an in car entertainment to a new level by implementing on a real time three D engine.
We are proud to have found a new partner Mercedes Benz to equip their vehicles with our visual fidelity and performance, including our years of experience in mobile gaming.
These are great examples of the power real time, three D to help companies drive innovation efficiency and engagement across their business in new ways from building more efficiently and safely to operating complex physical machines to helping customers discover new products and services to our relationship with something as personal as your car.
The growth of digital twin technologies in these industries and many more is large and it's accelerating.
And we're continuing to invest in functionality and partnerships to ensure that we can meet our customers' needs and capture value in this space.
This includes investing in product innovation like neural radiant fields, our nerf rendering for visualizing zero touch up object captures to make it possible for everyone to build their own digital twins and.
In advanced synthetic data creation, so that future algorithms and machines can be trained more effectively and efficiently.
It also means working with the world's best partners to broaden our cloud strategy and thereby our ability to service even more customers. We have a longstanding relationship with Google cloud and have seen incredible results through our customers. In addition, yesterday, we expanded our cloud capabilities by announcing a strategic partnership with Microsoft.
This partnership brings the Azure cloud with the community of unity developers around the world to power real time <unk> experiences across industries.
We are working together to make it easier for game developers to reach their players across windows and Xbox through improved tools and more.
I am also Super excited about a breakthrough partnership with cap Gemini, we will jointly define and execute sector specific solutions and professional services to deliver tailored platforms for our customers.
This new global partnership will focus on sectors and use cases, where digital customer employee experience will benefit most from consumer goods and retail telecommunications energy and utilities and much more.
Now real time <unk> has one challenge that we must continue to work to address and that is the enormous need for <unk> content <unk>.
<unk> content creation is complex and it's expensive with large file sizes and complicated rendering techniques required debt in order to deliver results that are tuned to a specific device and platform.
It requires specific expertise in a variety of highly trained and technical artists in order to be successful.
Thats why our democratization mission includes the needs to provide powerful artist tools that make artist significantly more effective and productive.
And that makes it possible for more people to create and <unk>.
This is necessary given the long term growth of real time, <unk> and it's also a significant opportunity for Tam expansion for unity by serving the needs of these creators this.
This is why we acquired <unk> last year, and we're on track and making strong progress to deliver these extraordinary tools that power some of the world's most amazing content into the hands of creators and both VFX and realtime fields.
Today, we have more than $20 million cloud based vendor hours on avatar, two and other productions.
And this quarter, we completed our full mirror environment for the <unk> tool chain, a first ever outside of Wellington New Zealand.
Are we the digital team is also defining and evolving the universal scheme descriptor or USB standards. So that we can represent procedural content, such as hair and bird rooms vegetation and much more and also things like physical camera lighting and materials and deliberate consistently across unity with a digital and other artist tools.
Our ultimate goal is to evolve the USD schema standards for industry at large.
Now to bring wheat as tools to real time, Here's an example, where we've implemented our first version of clustered <unk> simulation into unity as a novel GPU tile based software restoration with analytic anti aliasing and improved advanced physically bear based hair lighting model for film quality here strained rendering in real time.
That's a mouthful.
What this really means is that we can efficiently hindered millions of individual hair strands, all moving independently and uniquely without artifacts, while accurately preserving the hare highlights in the beautiful way that life science through soft here in short we can make it look and feel real let's take a look at an example.
Okay.
Yes.
Alright.
This is what happens when you connect these powerful art tools with unity.
No longer the domain of <unk> and film this is the lion and it's running in real time on a Playstation five through <unk> high definition vendor pipeline. The Lion features advanced machine learning and procedural art tools, including character that formation from Veeva procedural vegetation and train from <unk> and more.
<unk> capabilities to readers with tooling, which bringing these characters to life.
We told you that our goal is to drive up creative productivity capability and I want to focus on this quote by one of our artists working with digital wig tool and how much it speeds up the time to awesome.
With the different way of working it's actually the fastest growing tool that ive ever used a high quality hero groom that would take several months to do for production and another grooming package is much faster to do and wig and Amir couple of weeks with higher fidelity and many groups go from weeks to one or a few days at far better quality levels and artists.
Controls throughout even when you have to react to detailed art direction and feedback notes like adjusting a specific strand from a reference shot it's easy to author and wig, Sarah Hansen Tech artist Zebra technologies.
I'm very excited to share that we expect this work to be in preview with customers. This year and for our first weeded tools to be released early next year well ahead of our initial M&A integration schedule with that let me turn the call back to John .
Mark.
Ally on demo with absolutely groundbreaking in my 25 years in gaming and entertainment I've had the great graphics. Many times your team has set a new bar.
For the Lion I'd always compared what I was saying to the best Ive seen before in a game or a film.
The first time by comparison is to the real world.
<unk> team for an amazing achievement.
Let's now cover the progress on operating.
We have fixed the data challenges and have strengthened our products with new features.
We've also put in place monitoring mechanisms that allow us to more closely track our performance. So that we can react faster when something goes wrong.
And as a result of our work, we're seeing leading indicators such as audience pinpoint your consistency and accuracy improve showing that our interventions are effective.
And we continue to innovate we.
We will continue to launch customer meaningful features in the back half of the year that aim to improve our customers' return on ad spend.
As mentioned at the beginning of the call.
The revenue uptick is slower than modeled due to a combination of recent negative macroeconomic factors and the complexity of accurately forecasting the timing of the change in revenue trajectory with the monetization business.
Operating revenue of 100 $159 million is down 13% year over year.
This compares to $113 million in revenue in the second quarter of 2020 and $183 million in the second quarter of 2021.
When we grew 63% year on year.
Let me turn it to and grit to give you a more detailed status update.
Thanks, John .
Last quarter. In addition to external factors such as the competitive landscape.
Identify two separate interrelated issues that impacted our monetization business.
One data quality issue and the other our audience pinpoint dairy products accuracy.
Starting with the data quality issue. This one behind US we have removed that data that was inadvertently ingest from interacting with any of our models.
Furthermore, we have fortified our monitoring capabilities and observe ability for our machine learning models to mitigate these types of events should they occur again in the future.
In this process. We also improved our data incident response time to address issues more comprehensively and promptly.
We have added significant investment in our audience pinpoint a product.
<unk> on our models and customer experience to address our Pos scaling challenges.
As a result, we have seen performance and accuracy improvements at scale.
Particularly in our contextual product that is most meaningful for our customers impacted by privacy changes.
We are seeing a progress reflected in customer success.
Next for example, it's a studio responsible for the creation of the hit title loss in Pi.
<unk> of the best casual games and <unk> games industry Awards.
The studio collaborated with unity from early stages, all the way up to global release.
<unk> targeting <unk> and scale up their user acquisition efforts.
Using audience pinpoint or the team was able to pass the target audience and accelerate that growth journey. After global release, keeping strong engagement metrics, showing 60% retention by day, one S whilst retaining players than in passive.
90% by Dave <unk>.
We remain confident in our long term outlook for monetization in games. In fact, we are not shying away from making bold moves. During this time, we see an opportunity and announce our intention to merge with the iron source to leapfrog, our roadmap and accelerate value creation for our customers unity.
And our shareholders, which John will touch upon in a moment.
Let me close with an update on your anti gaming surfaces, our unity <unk>.
Yes, it's a suite of tools and services to belt to simplify every developers ability to create <unk>.
And managed.
In the cloud in a single dashboard experience today.
Today, more and more games, a multiplayer social experiences that are connected in the cloud we design new ges to be modular so let's try to select the best tool for their use case, whether the game was dealt with unity unreal or any other game engine.
With <unk>, we provide the platform that hosts many of the world's most popular games with multi play and able to fund and robots voice and chat with V box, while simultaneously measuring that game performance and engaging the players with unity analytics.
All within one UBS platform.
<unk> supports cleaners.
Assumption pricing model. So they can work the way they want and only pay for what they use.
That's a powerful business proposition and we plan to take more of a platform in that direction in coming years.
Today, we are simplifying the surfaces, so small and large developers alike can launch experiences at the scale of that choice.
Self serve functionality allows developers to access and explore our products on their own increasing our market reach.
A few weeks ago.
Keith study with excellent <unk> studios for stand off too.
First person shooter with millions of players.
Trading how they self serve integrated voice chat from the box four years after their mobile games launched to supercharge their in game community and gain a 63% increase in day 90 player retention.
And this quarter, we are excited to launch a marketplace games server hosting and matchmaker self serve functionality to bring battle pass the triple a multiplayer services to developers of all sizes.
Market play our games are amazingly fun, but highly complex to develop and often require large teams and investment.
Since our beta in October last year, and becoming generally available in June the signs are promising for UBS.
We have seen more than 50000 games game developer has signed up with 2300, new customers added since RGA launch in June .
While it is early days, we are optimistic that <unk> will become a meaningful part of unit these technology offering.
We look forward to sharing more customer success and performance metrics from across the U S platform next quarter.
With that let me turn the call back to John .
Thanks, Heng Ren as I said at the top of the call. The Appleton proposal was received and we will not comment at this time.
A few weeks ago, we announced unity and iron source intend to joined forces and will combine creation and growth with single platform to increase creator success today.
Today I want to spend a few minutes framing the key messages and how we together will help creators find success consistency based on science and not just intuition and mark.
As a reminder, the key message is shared when we announced the intent to merge with irons horsepower.
First we intend to accelerate our path to becoming a leading end to end platform combining creation and growth in a way that creates great value for our customers game companies and companies and industries beyond gaming will be able to produce better contract.
<unk> superior user acquisition.
Greater customer success, we expect this will propel their business and ours.
Second.
We expect to capture synergies from combining our platforms driving greater customer success, and enabling the new unity to deliver $1 billion adjusted EBITDA run rate by the end of 2024.
And third our.
Our combined company is expected to reflect a roughly 50 50 revenue mix between our creation and growth technologies and surfaces.
Are intact.
Nice to work of creating content engaging users in one iterative process, where data flows from the growth platform and the creation process and makes the game better.
It will start with a piece of content, perhaps a single level for a mobile game that level, we'll be married with sophisticated tools for user acquisition creative testing to enable a creator and their growth experts, who understand and learn from very early indications of user engagement monetization and the cost to acquire a user and the engaged.
And where relevant the LTV of that user.
This is with game developers have done for years with AB testing and learning from soft launches, but we can make it easier smarter and more effective.
Based on this learning creators iterate chain change aspects of the content the advertising and user acquisition strategy is driving more financial success.
And it's most experiences my future will be live experiences and the content will change over time.
Process will continue.
Customers creation and growth teams will be in a continuous process of learning and improvement or greater data scale will make the feedback look more powerful for all games created with unity.
Net together unity and orange for our strive to bring unprecedented value to our customers.
We aim to provide every customer needs whether that customer is a mobile game console or PC game, and whether that developer seeks to monetize or simply create for their own and their friends enjoyment.
With that let me turn the call to Luis to go through the numbers.
Thank you John .
In the second quarter of 2022, we delivered revenue of $297 million up 9% year over year and at the high end of our guidance range create performed strongly with revenue of $121 million up 66% from a year ago as expected.
<unk> was impacted by the issues discussed last quarter.
Revenue of $159 million declined 13% year over year strategic partnerships and other deliver $18 million in revenue down 2% from a year over year as.
As we have seen over the years distribution partnerships and other business quarterly results are impacted by the timing of key platform arrangements.
At the end of the second quarter, we had 1085 customers with trailing 12 months revenue of about $100000.
This compares to 888 customers at the end of the second quarter of 2021, an increase of 22% year over year.
This lower rate of growth in our customer count above $100000 is driven by operator.
Our 12 month trailing net dollar expansion rate came in at 121% down from <unk>, 42% last year the drop in our net dollar expansion rate is driven by upgrades.
Our second quarter non-GAAP gross margin was 74, 1% down from 81% a year ago.
The year over year gross margin decline is mainly due to lower makes for monetization, which has a higher gross margin than the average as well as the impact of weather as engineers supporting the business are charged to cost of goods sold.
The non-GAAP operating expenses in the second quarter increased 19% as compared to the second quarter of 2021.
On a year over year basis, R&D sales and marketing and G&A expenses grew 26, 18, and 4% respectively. Both three line items, so favorable expense trends due to slower hiring lower professional fees and favorable exchange rates, we closed the quarter with 6246%.
Louise.
non-GAAP loss from operations for the second quarter was minus $44 million or minus 14, 9% of revenue.
This compares to guidance of minus 62 minus $64 million, we beat guidance as we're making strong progress against a $100 million cost savings program that we announced last quarter.
Cash flow from operations was minus $43 million, we have 296 totaling $298 million outstanding and $360 million fully diluted shares at the end of the second quarter.
Moving on to guidance.
For the full year, we're providing guidance of one $3 billion to $135 billion as mentioned when we announced the intention to merge with iron source.
This is a reduction from the $1 35 to 1.4 dollars 5 billion shared during our last earnings call.
The full year guidance reduction is driven by our recent negative macroeconomic factors and the competitive compete complexity of accurately forecasting the timing of the changes in trajectory of the monetization business.
We believe that the $50 million range in our full year guidance is appropriate given the uncertainties in the AD market.
We continue to invest to strengthen our products with additional features that we expect will get our third and fourth quarters with stronger footing.
For the third quarter, we expect revenue between.
$315 million to $335 million, which implies fourth quarter revenue of $368 million to $398 million.
Mid point of these numbers, we expect the third quarter to grow 14% year over year, and the fourth quarter to accelerate to 21% year over year as we expect strong performance increase throughout the year and improving performance and operate.
We continue to be committed to achieving non-GAAP breakeven profitability in the fourth quarter of this year, despite the lower revenue expectations.
As mentioned, we're making strong progress against a $100 million cost savings program that we announced last quarter, while preserving their most critical investments in innovation that will drive our growth.
For Q3, we're forecasting a non-GAAP operating loss of $35 million to $50 million.
For the full year 2022, we expect our non-GAAP operating loss between 95 and $1 15 billion.
The higher losses for the full year reflect a more gradual recovery ramp in operate partially offset by additional cost savings.
We expect to.
301 million primary shares and 375 million fully diluted shares by the end of the third quarter and 376 million fully diluted shares by the end of the year.
Excluding the issuance in connection with our pending iron source deal and any related stock repurchases.
We continue to believe that there is a very large opportunity in front of US and then we are very well positioned to capture it.
<unk> business is performing strongly and we expect sustainable growth going forward.
Fueled by our innovation and market tailwind.
We continue to innovate on our operated business by delivering products that enable our customers succeed success.
By delivering performance and resiliency at scale with.
We're confident that the <unk> merger will make us stronger as we offer our customers an end to end platform, there will benefit creators and shareholders.
Ali.
As you May have seen we're also working to accelerate innovation and growth in key markets China.
Recently, we entered into an agreement with some of our leading partners in China to form a new joint venture and work on a unit to China to form this venture unity will contribute all of its operation in China other than unit at the.
The business deliver approximately $50 million in revenue in 2021.
We created debenture with investments from a number of leading technology companies, including Alibaba, China Mobile <unk>.
<unk> PCI tag Indulging group at the post money valuation for unity, China of $1 billion.
Uniti will retain majority ownership and control over a year into China.
Which will operate solely with integrated China region, and we cover by governed by a board consisting of unity executives and major investors.
Such we will continue to consolidate the China financials.
Actually subject to customary closing conditions, which we expect to complete within the next few weeks.
With that let me turn the call over to Richard for the Q&A section.
Great. Thank you very much.
So as as before.
We will.
Promoted to a panelist and you can ask some questions here so.
Kenneth and Eric if you can promote the team.
Panelists that'll be great.
There we go.
First one.
Digital hand, as Stephen Ju at Credit Suisse. Okay. Thanks, So John and Mark.
AWS, you know exactly who you're calling at any given company, but for you to be able to not always clear to us.
<unk> dot call into on a create side. So as you talk about creates non gaming revenues now accounting for 40% of how has the selling motion of particularly <unk>.
To those companies outside the game industry evolves over time thanks.
Mark I'll take the top of that and I'll, let you built on it with some examples of that works.
<unk> seen a couple of thoughts to one.
Onto our pattern over the last few years, where we were originally doing things that were they didn't know who we were that didn't know how to use real time treaty and the deals were very very small.
Now what we're seeing is a continued.
Inbound from the top of the funnel and we got a good go to market strategy, Mark will talk about that and we're seeing second third deals with the same customers. So we got a land and expand going and we're also writing larger deals as we continue to progress because people are understanding what they can get with real time to really for immunity. So.
The reason, we're saying the gain as a percentage of our business more customers larger customers land and expand and smartphone that's one yes.
Yes.
Thanks, John and the other part there is certainly over the last.
Years, we've been building unique solutions that are helpful for all sorts of different industries as they look at how they can take advantage of real time, three D and <unk>.
Can see that in tools like format, which is used for a lot of product configuration and auto and other spaces to reflect individual lives which are used around.
Architecture engineering and construction too.
Other tools that we have like Pixies, which is about how do we manage large amounts of <unk> data, which is extraordinarily common problem in that space. So as we understood. The needs of these customers. We've also built the parts.
That works in conjunction with the core unity engine, an editor to make it easier for them to work and then the last part that I'll just sort of add on top of what John said is this is a real place where our accelerate solutions team has been incredibly powerful because many times, we have companies coming to us just getting started in their journey.
Formation around real time, three D and together as a professional services organization, we can build something together help them learn and then often leads to repeat business both in.
Kind of continuing <unk> and in future professional services support and it's one of the Big reasons. We went after other partnerships like cap Gemini because we see more and more opportunities to enable a broad ecosystem of channel partners to help in similar ways.
Just one last point on this.
If you go back a couple of years when we are prepping for a road show in the IPO I think a number of investors kind of looked at me when I said that we expect that it would be three to five years, where are we would catch up with our games.
But games would grow strongly.
It has actually happened exactly like that and frankly I just there's so many more industries out there for whom.
Real time <unk> is the answer.
Theyre doing is theyre, creating essentially digital twins.
Real time, digital twins, where they're using them to simulate the future and understand the present, where the mixture business is stronger and our customer relations more robust and more engaged.
So, they're winning and are coming onto the platform in a bigger way than they were a year ago or a quarter ago, we feel great about the trend line.
Okay.
Thank you.
Okay.
And Kash Rangan at Goldman Sachs. Please.
Hey, guys. Thank you so much wondering if you can.
Third power supply.
First of all thanks for all the detail John .
<unk> and the tremendous progress on the credit side on the operate probably probably butcher. The question since I'm not an expert in mobile gaming and advertising, but as Johnny talked about how you have a good handle on the data.
Data versus macro versus competitive in fact, I mean, how much better informed as the company on all of these three potential contributors to the issues that caused the shortfall in <unk> and going forward. What are the I know you mentioned a little bit about the guardrails that you have in place to ensure that you won't have this issue.
If you wouldn't mind elaborating on that that would be great as well. Thank you once again for all the detail you shared with us today.
So again, I'll talk to us and asking ready to join.
Bye Bye Kash, thanks for the 11 part question.
I'll try to keep it to a REIT.
Sure.
So first off on macro and the App right chart. The majority of our business the vast majority of the business and operators within gaming.
And as I said, a few times before the only thing that has been larger number than games as pundits talking about the game industry in a recession and all the rest of it I just start by saying that.
The gaming industry remains a very robust industry and it's a growth industry.
You can look back at the last five or six recessions I've looked back all the way to the <unk> in a prior life and over almost any three year time period to see double digit growth typically averaging out in the teens or better. Yes. There is short term headwinds that occur from time to time and in the present period, we're sort of dealing with extremely high engagement when people say.
Covid together now that we're looking into a little bit of a headwind with <unk>.
Driven by macroeconomic factors and you've seen that reported out by a number of game companies were a little bit less revenue, bringing down some forecasts. So we understand there are near term.
Headwind and the game industry relative to that mid teens growth or better than we've seen for so many years.
And we expect that will persevere through that as this is a long term growth space.
So we feel very very good about that now in terms of the issues around our own platform.
At a very high level I can tell you what one of the things Ingrid that and I'm really proud of the work fishing entertainment altogether here they pulled together.
A task teams literally worked seven day weeks on everything from resiliency and redundancy to the data side, because the engineering issues, but wanted to focus on to new products and features.
It has been a magnificent effort on their part.
And what they've been able to shale may is really strong kpis around some things that are pre revenue, but you need accuracy around pinpoint for the revenue to ultimately grow.
Expand on that but.
It's tough coming from.
<unk> had some misses but it's great to see the team rebound on top of their game and really start to execute which is what I'm, saying from my vantage point, and where do you want to add to that.
Yes, Thank you John .
On our part just to build on what John .
Set about the task forces.
And a significant investment in audience standpoint there.
And across the board one of the things just connecting your macro question to death, if that <unk>.
Constrained drive focus and the best innovation. So during this time, we've become really disciplined and our resources and double down on those ads product and surfaces that drives the most value to our customers and unity and without the luxury of excess spend this is really an exercise to drive.
Performance with last for our customers.
Such as finding more installed the pure dollars right. This means that we need.
No wait and find new ways to increase the velocity of our model development. For example, pushing the boundaries of machine learning digging into every part of our system optimization opportunities and making sure that our systems are all resilience.
To anticipate further incidents that happens and we really expect all off lease option to buy it to provide resiliency both in the system Thats loss performance in the current challenging environment. So we expect to emerge.
Emerge on the other side when a product is stronger than ever that enables us to best capture the market opportunities.
<unk>.
Cash we're measuring a lot of things, we didnt use to measure and we've built redundancy and resiliency around it.
I see datasets that I wasn't saying around data accuracy.
A variety of things that give us an early warning for things that we would otherwise wanted to deal with no data driven business is without errors and now we're in a position to catch them fast and fix them as we go along and not Saar for the kinds of challenges we had earlier in the year.
Okay.
And next is Clark Lampern BTG.
Hey, guys. Good evening I had two if I may so the first I guess, recognizing what you were talking about John with sort of the cross currents with macro.
Visibility relative to I think based upon the comments last quarter Youre in the second 90 day phase right now where you need to kind of rebuild data and I'm I'm curious how you guys think about maybe potentially offering customers additional incentives to drive platform usage.
What seems like.
Maybe a difficult AD market and then separately as the solutions and range of products is becoming larger and more compelling for your gaming customers. I'm curious if you guys think you have flexibility or added flexibility now with the approach to sort of bundling products in a way that you could still sort of maximize dollar general.
<unk>, but maybe push your take rates and monetization in a way competitively where the platform becomes more compelling. Thanks.
So one I can't say that we would never do incentives, but thats generally very short term solution.
And it doesn't really yield long term returns and so that's not high on our playbook.
And it never will be hiring a playbook again it is part of the portfolio and companies like ours do.
But we're very cognizant of focusing on the long term and I know this can be frustrating for investors at times, a little less focus on the quarter.
The NPV is higher that way so.
So that's important to us the second thing.
We're in the very early I think it was a few geos and ucs as a very powerful portfolio of tools and products and features.
Every customer needs as they go to market with a game or application.
One of the things that I.
I learned when I got into mobile that's now goes back 20 years, but.
You build the site and then suddenly there is like.
The casualty to implement and it covers the gamut of things and there's a bunch of services needed to address and I think we've all watched game companies go online for the first time or mobile for the first time, it just falls flat around the ecosystem and at Teekay.
All of the things we need to bring on board.
Enbridge team brought really sharp focus to that and took all of these services and built a system that basically you set it up once it works across all of this portfolio of services. It's a huge advantage. It's one it's one source of truth now this isn't completely plumbed to every level.
But we've seen good uptake in and take on this one of our customers like it getting good reports back in I think.
I think it's actually a huge opportunity for us in the years to come because we're really the only company out there in a position to do what we've done.
They start with us and create 74% of the time, that's a good starting point.
When you take whether its matchmaking are hosting.
<unk>, our analytics voice and the other systems that we pull together, it's a really strong offering.
Thank you.
Okay.
And then.
I think we have.
Matt cost at Morgan Stanley .
Hi, everyone. Thanks, Thanks for taking the questions.
On operate just zoom in a little bit here, if the data quality and pinpoint or issues hadn't occurred earlier in the year.
Would operate revenue have been at the $1 60 level you reported this quarter just because of macro.
And if not how much work is left to do there in terms of improving the tools and scaling spend and then secondly on the China JV I think greater China was about 15% of your revenue last year, so already a decent sized business what will the JV allow you to do that you can't do today.
So Andrea do you want it when you want to take that on the operating question.
Or I can pick up and that will be helpful.
Yes, I think in terms of the specific numbers.
Look it's a combination of all of those things thats hard to to this.
Kind of divide up like what component.
Attributed to two tobacco versus audience standpoint, or any other issues that absolutely I think that.
<unk>.
Obviously, the data issues and audience movement at the beginning of the year impacted our performance, but now we are we.
We are.
At a place where the data incidents are fixed and behind us and the audience.
It's strengthened day by day.
So right now, we're seeing kind of a slower uptake and an advertiser spend just because they're more judicious due to macroeconomic factors. So thats slots on what we're seeing right now.
Youre right, Matt to recognize both in there.
For clarity on our last earnings call.
We talked a little bit about the macro and we talked a lot about the self inflicted aspect of this.
And that's just basically a philosophy of ours as we we would rather focus on things that we did wrong or right or sort of in the macro environment when it's working against us.
We didn't want to give too much of a mixed message as last time, we had things we needed to deal with them with Delta.
On China first of all I want to congratulate beliefs and some members of his team and jumbo and kind of incredible work here, but at a very high level. We think this sets us up for.
On a more sustained higher level of growth for years to come in what otherwise would have what we managed to do was take most of the leading technology companies in and around our space. It made them partners.
In doing so they stand behind us on <unk>.
Gaming, but they stand behind us and industries beyond gaming.
And it also allows us to take advantage of the opportunity to invest in a market where the engineering capabilities are really strong and build tooling that supports very specific use cases in China now it may it may seem like everything is the same but.
It is not the case both in the digital Twins arena and in the gaming industry. There are a number of things that operators in that part of the world do in terms of business practices that development practices that are different by way of example, a lot more outsourcing and so that involves a different way of interfacing with the product more cloud centric more web issues.
So.
By doing this I think we strengthen our business and set ourselves up for path.
More sustained higher level of growth, but just want to add on that one at all.
The only thing I would add John is that the 15% Matt that you quoted the total China business as a percent of our revenue.
Not all of the businesses earnings call, but just the creative business and that's 5%. So that's the $50 million I mentioned in my prepared remarks.
Great. Thank you.
Okay.
Our last question is.
Jason Bazinet Citi and then we'll try to get fit one more in after that.
Thanks for triangle fast just to clarify on the on the China JV.
Am I right that theres going to be an inflow of about $1 billion of cash and then we're going to be modeling noncontrolling interest on the income statement. Once this deal closes. Thanks.
Yes, we would still consolidate China.
Forming a joint venture and we will get $220 million and that will stay within the JV. So there was no cash flow coming into.
And we remain.
Majority shareholder and control of the board and there is a number of operating relationship agreement is put in place between our our enterprise globally on the China operation. Thank you. It's also worth noting that the.
The leadership team is led by an executive I've worked with here around at my last company for.
Well over a decade, now exceptionally well and trust jumbos.
Pretty strong leader ex Microsoft.
Now.
Really almost a decade now at year to date, so we feel really good about the team we have there.
Alright, and then.
Closer question is Dylan Becker at William Blair.
Hey, guys. Thanks for squeezing me in here, maybe once we didn't touch as much on I'd love to get them, the strategic Si partnerships, but maybe for mark too.
A bit of incremental color on the partnership with Azure with the release yesterday can you talk about kind of some of the expanded capabilities. What this can mean for creators and potentially enabling unlock that further kind of create an operate combination of tools for the masses.
Sure.
Sure very excited to deepen our relationship with Microsoft obviously.
We're at the very strong partners, especially on the <unk> side and with <unk>.
When you go and do you think about.
We're real time <unk>.
He is going we've talked about all these use cases around digital twins.
And when you talk about just the size of the games and the amount of content. One thing Thats clear is that <unk> has a unique set of needs often the file sizes are very large you can be talking about trillions of points and appoint cloud billions of polygons.
An extraordinarily high needs for compute power.
Whether it's on the creator side, when it's being created or on the side when it is actually being consumed and so we're excited to work with.
Azure in order to build out the set of services that we believe will most help our creators whether it's in games or digital twins or professional art.
In the near term I think some places where youll see it first our areas like Dev ops.
We're doing a lot of work around solid build around source control again, it's a space that is very different when you're talking about <unk> assets versus non <unk> assets.
Digital twins, and it's a place that we've already actually been working closely with Microsoft on the sell side and integrating with their digital twin platform as well as our services together as we build out more cloud services is a very powerful thing and as you've heard us talk about in professional art with things like digital <unk>.
The ability to have access to cloud power is actually a critical component of how we think we can deliver these productivity increases.
For artists around the world. So it's the start of the start of our partnership there is a lot of work to go to sort of be ready for those but it will impact.
Sort of soup to nuts, the things that we're doing across create.
Alright, well, thank you very much.
We really appreciate all of your interest and questions good stuff.
We look forward to connecting to all of you.
<unk> weeks and either at conferences or follow up phone calls you can always reach out to.
Steven Palm tag or myself, and we'll try to help you out kind.
Kind of navigate this these exciting water. So thank you very much and John if you want to close it up that'd be great.
So.
Exciting times, everyone. Thanks for being there for us.
We couldnt be more excited about the opportunity in front of us and we're prosecuting on that front as best we can aggressive as always excited thanks al.
King.
Yeah.