Q2 2023 Unity Software Inc Earnings Call
With new platforms as they come out and a great example of that is what Apple just announced just recently.
The second is the <unk> cloud.
We put that in market in a closed beta recently I would expect to go general availability. Later. This year. This is a platform that connects all of our services to our product.
You want to think about this in a way.
The go to market motion just collapsed from people getting on a plane.
In a cab or nuber, knocking on a door.
To a click inside the editor we like that.
It makes it easy makes it simple we think it is going to drive increased adoption and for US. This is substantial it is going to lead to increases in consumption and ratable revenue in addition to subscription.
The artist seats and usage and all that goes with that you've seen lots of announcements from us on <unk>.
<unk> speed tree.
We expect that's going to continue and drive increased artist picking up that number of ours is picking up our platform and again net new revenue net new SaaS revenue net new consumption revenue.
Digital twins acceleration. This is really important and I hope you listen carefully we're getting great traction in the market and we're now focused on delivering repeatable solutions high margin solutions that deliver ratable revenue streams and consumption revenue streams. We have made a decision to deemphasize our growth on the prefer.
<unk> services side, a lower margin business, and we're really thrilled to be able to rely on partners like cap Gemini and boobs. So.
This is a great move for unity it adds significantly over time to our our bottom line a little bit less professional services growth, but it's a good strategic trade for the margin and for the business on a strategy perspective for how we're going to build our position in the marketplace.
One platform. This is the synergy story. This is why unity create generally grow are together in a way that delivers better for our customers and better for our investors.
Here were getting deeper integration between advertising mediation publishing UA tools inside the editor, we're working through some really important incremental synergy programs.
And we'll be sharing more about that later in the year, but you should start thinking about with all the synergy we're already getting theres more to come and there is an advantage in being the place where our customers build their product and monetize their product.
And I couldnt be more excited about the two AI products that we announced some weeks ago.
A huge amount of interest from our customers.
Were there on the creation side and the operation side for applications with Muse incentives.
We'll be looking at a business model for these is much like what Microsoft has announced with some of their AI products and again incremental revenue around SaaS and incremental revenue around consumption and here, we have a particularly specific set of opportunities because.
People forget that you already has a large number of free users. While these users are going to want to use AI because it will significantly expand their ability to build what they have in their minds off to get it on the screen you get in the hands of their customers. So we're super excited about that so the handful of reasons all product innovation driven.
And that will put us in a great position for growth both on top and bottom line.
Great. Thank you very much.
Louise we're look at the we're at.
At the halfway point in 2023, so it would be kind of great highly.
Highlight how things have played out in those first six months and as we kind of look forward to the rest of the year.
Yes. Thank you Richard we are actually very happy with our results. If you look at it and I'm sure everybody's read our shareholder letter we had a record quarter. We were ahead of expectations and have joined Justin just mentioned, we're bringing a ton of innovation to the market.
Which we believe will position us well into the future. So we're very happy overall.
Just to go a little bit deeper what we've committed and talked to several of you it's about creating shareholder value by driving three things one is revenue growth expanding margins and efficient use of cash. So if I touch on each of them on revenue growth with excellent growth to 11% this quarter so great.
Improvement quarter over quarter, and we're winning with customers in gains and in industries and frankly I would say this is still in what I would call in a challenging economic environment.
Some of our cost of game customers are not adding head count some of our sales cycles in the industry are still a little bit longer as we need to prove value China created market continues to be soft overall.
And the AD industry has been relatively stable with not much seasonality. So far this year and very importantly, we're winning in this environment and we estimate that we are growing faster than the markets in which we compete so overall on revenue side, we feel pretty good but that's not it Brian we deliver all the success.
<unk> significantly improving our profitability.
With strong progress on our GAAP and non-GAAP basis, EBITDA was 99 million.
We need to get a few.
100000, more to get to 100, but we're very close to rounding to that magic number 18, 5% margin is a good place to be particularly when we look at where we were just four quarters ago. In Q2 of last year. We were minus 13, so from minus 13 to almost 19% just in a year and thats.
Bye bye choices, we've made nor their portfolio choices, we've talked about before will reduce hierarchy, we're driving cloud efficiencies, we're reducing our office footprint.
A lot of decisions, we've made to really make us a sustainable and profitable company.
And as John mentioned, we're reducing our reliance on professional services as we build that scale to be a profitable business.
And third on cash flow. We are now positive now we delivered $33 million in the quarter, but more importantly, we're now where we believe to be sustainably on the positive side on the cash generation.
There will be normal quarterly fluctuations based on payment schedules on those type of things, but we're clearly now on the positive side.
So with all of this I am actually.
Very optimistic about the year, if you look at where we guided at the beginning of the year for the mid point of our revenue guide for the full year that number was $2 125 billion.
Last quarter, we added another $15 million to the midpoint of our guidance range and now we're adding another 20. So we're now guiding the midpoint of our revenue guide at 216, right. So we're making progress we're feeling more confident about where we are in the in the full year and thats encouraging.
So before I turn it back to you let me just talk a little bit about creating growth.
<unk> creates.
One key number is our core subscription growth, excluding China, 22%.
That is a very healthy number our actions are working our price increase has been is clearly flowing through so very happy with where they are.
Our core subscription excluding China.
The industry is 30% of total create despite our reduction of our reliance on professional services that Joe mentioned and there is just a ton of innovation. If you look at the letter industry SKU Unity 2022, Lts unipolar spatial unity cloud AI pricing opportunities I mean, just.
A lot going on which gives us confidence that we will be able to sustain these growth for the foreseeable future.
But we're always is just as exciting we are seeing some of the industry leaders such us Super sale, Sega joining level play no theyre, making the choice to move to level play because they believe that's a better play for them supersonic continues to do very well, we're adding new titles to our to our portfolio.
And remember supersonic has published some of the most downloaded game in the U S and key markets. So very very strong performance there.
And we talk about AI, we've been created by AI is also helping us on growth no. We are using AI and machine learning to strengthen our algorithms to deliver better ROI for our customers.
And frankly I think we're just getting started there is more to come more synergies to come over the next few quarters and years.
Overall, the integration between <unk> and unity is going well, so Richard if I had to summarize.
Two question I would say, we're very happy with where we started now in the year and we look forward, our strong Q3 and Q4.
Great. Thank you very much so as we did last time.
Remember we will.
<unk> panelist raise your virtual hand and.
We will on mute you and call on you and also we'd ask that you on mute yourself and turn on your video as possible. So we'll do some Q&A for about 20 minutes here.
So at this point.
See who is in the queue and we can pick on.
Whoever wants to talk first and ask a question.
So Thomas do we have our people here that I want to ask questions.
Clark go ahead.
There you go. Thank you Hey, guys. Good evening I've got two the first one is for John a second one for Luis.
John I'm going to pull it back a little bit.
And.
Talk about AI I guess as we think about some of the tools that you announced intra quarter being commercialized or those ones that are designed towards the lower end of the market that maybe doesn't monetize as you were talking about a little bit earlier.
And I guess as these tools start to permeate the market how do you think about.
Either potential growth in the developer community overall or the volume and velocity of creation impacting the market and some of your existing customers.
Luis I just wanted to clarify I guess on cost cutting trajectory last quarter, we talked about I think half of the cost synergies are so you initially identified being realized would it be possible to give us a rough update of what's where we are today.
Thank you.
Okay. Thanks for the questions and let me try to address them first off on AI.
We've introduced products on two sides of the larger on one side is to help people create content.
And then the second asked that's called news in the second that we put out there is centers, which allows games in real time applications to do things they've never why another been possible before.
Non player characters and games to feel alive, almost like they're supporting their own chat GPT interaction, but that can be physical to the way they move around and walk around or interact with one another and I think the players but also is super relevant inside of digital twins, where an agent inside of a digital twin can predict what's going to happen next to run scenarios.
We are on stimulation, we feel great about that that's ratable and consumption revenue, but that's actually not what you asked about what I wanted to make sure I got that out there. So you didn't think my focus on mirrors was exclusive and that's all we're doing meals.
<unk> content creation I think it does it really addresses and wait three audiences.
Now what it allows you to do.
By way of example, with zero can use your finger to if you've got a touch devices input to draw something it might look like.
Anything from a bunny to our wagon to a car and that.
The engine can understand that and turn that into professional art. If you could also be worn pumps and like a large language model My digester generative art, where my data and also might be code and so for our developers and again, we're training against unity data. So when it produces code it could generate the right kind of see sharp scripted right for.
<unk> use inside of <unk>, no one else can train against that.
Now.
That's the professional developer in and for the second group kind of talk about this is going to make them more productive and being more productive and of course I'll be using servers. There will be some cost that we're quite confident we can price above our costs on a consumption or subscription basis, but the key there is more revenue out of existing users.
The second group of people out there are those that are small enough and they're large in number but small enough. So that they qualify for a personal edition and or Azure users and there's millions of them.
These users are presently using our assets sure.
<unk> digital assets online just sort of create content. It is a very hard thing to do to find the assets or draw the assets are creative but what will you do if you wanted to an environment, where the river maybe a stream coming off the side of it a mountain clouds et cetera that could take somebody weeks, if not months to create in a real time <unk> digital asset collection.
Guess, what you can use the words I just used to describe that and it will show up in your sale hugely valuable to them.
So for these users. These these customers that are not presently paying us theres, a reason to pay off and it's a really important reason.
They may not want to pay us 10, or 20, or 30, or 50 or whatever amount of money is over a period of time, but it might be better than spending two months on something it is a huge value for the value we can bring to them.
And then the last group.
Are those that are presently not using unity, because it's too complex, we get several thousand people per day. The company already downloaded look at the editor and say Wow. This looks like a 747 control panel.
Auto pilot it is complicated real time three D is complicated.
Dan.
Need art assets or lighting assets or other things to advances in the game or scripts. They can just asked them.
It radically will simplify and bring new users onto the platform now do I expect that inflection point of new users just because of AI like in December now.
But I believe over time will capture a much larger portion of the people that hit the top of the funnel for us and begin their journey on real time three D. <unk>.
Creation and for those of you know the reference point getting their own literally logo tattooed on their elbow or somewhere else. So we think there's a great invitation to the the large mass of people that want to be creators and up until now that was a little bit beyond their counter capability.
Hey, Clarke to the second part of your question.
We've captured about two thirds of the benefit in Q2. So you should expect a little bit more to come just keep in mind that we also had a merit increase and a few other things. So it's not as easy and straightforward to do the forecast that but to answer your question directly it's about two thirds of the benefits are in Q2.
Great. Thanks.
Well, we have one of our newer analysts covering us Brian Fitzgerald.
We'll talk to you in here.
Thanks, guys.
It looks like industry grew in line with broader create segment. So just curious about how you're defining industry give me only recently introduced an industry shift skew north of that definition may change in a follow on to that is and any early read on the adoption of of industry by online.
Customers since its launch.
Or.
Perhaps the use cases that those online customers, maybe looking at you've spoken before about automotive, but we're curious if there are any new emerging use cases, you're starting out are beginning to see traction with.
Okay. So let me step back a little bit and Luis feel free to add onto what I'm talking about so.
In general, we generate revenue and digital twins from three activities.
We generated from professional services engagements that enable our customer to get that real time digital twin and this can be an airport or a city manufacturing facility for high end watchers or for automotive or for any other number of things that could be for a retailer and.
We are seeing strong demand from all of the sectors that Jeff mentioned and so the first step for many of them is to get up and running on unity and for that we often have a professional services engagement the second component.
<unk> also now.
It's at scale as well, which is the seats that they consume.
And.
Originally they consume the same professional or the proceeds that a game developer would use but what we've done with our industrial SKU is married to that all of the tools or many of the tools that they would need for their specialized use cases.
Around changing file sizes and level of detail and stuff that are super important and somebody might want to step down.
3 billion, partly model into something that is a trip that footprint. So it can be edited or moved or carried on something like a hard drive smaller than <unk>.
Small pickup trucks.
That level of transformation is super important, but there is a number of other things that are certain are important to this this customer base that is not important or as important to game customers. So that's why it's a premiums grew with added value to it the third and this is really more nation for US is ratable revenue once they've got there.
Sure.
They are digital twin up and running where they're using us for simulation or they are using us for rendering or they're using us for computer vision, where it's essentially a cloud model and hence the importance of the cloud platform that I mentioned earlier in the call today.
Now.
Where we are right now is a situation where our largest revenue stream as professional services. Our next largest revenue stream.
Seats, and our third and more nation as ratable.
The reason that we brought customer partners like cap Gemini and boost of the platform.
<unk>, our own professional services business, our own capacity on that front.
It's something that we did not want to increase and in fact, we might want to decrease it a little bit and rely more on our own services for lighthouse customers and once the model is proven to partner with third party systems integrators, like Booz and light cap Gemini to scale more rapidly.
That would result in less professional revenue professional services revenue more seats, obviously with more customers and more as they get to their operation more ratable revenue streams. So we've been transforming our business from a.
Business model perspective sort of under <unk>.
Under the covers to make sure that we're scaling makes a huge amount of sense for us longer term now.
Now in terms of demand frankly.
Frankly, we've been supply constrained not pushing a lot for demand and its the sectors that you are now.
We're very keen on government, there's a lot of interest there and I'll get into that if you want to another area, where there is large interest is manufacturing, particularly the automotive industry, but also a specialty manufacturers in the watch marketplace, which Ive mentioned there is a fair amount of interest on the retail side.
And there is a lot on architecture engineering construction.
What we're working to do between now and the end of the year is to bring it down more so to a handful of turnkey solutions that we can scale rapidly. We think that's the best way to scale this business into a very high margin.
Contribution of unity, because it leads to the two high margin businesses, we like which is SaaS revenue and consumption revenue so thats the evolution.
We always mentioned customers as we did this time in our shareholder letter.
We typically don't go beyond the ones we listed in our letter because a lot of these are work in progress where their customers havent given us.
Their IR permission to reference to them on a call until the products delivered.
And Brian just to add a few business.
You probably don't have all the background here. So when we if you think about created were splitting it into when we talk to you one is gains and the rest is industries, we used to call. It a non games, but frankly, that's not a good name. So whenever we talk about industry represents 30% of total create that's where we're talking about everything.
It has nothing to do with gains holiday customers that John West Joe's referring to so just from a definition point of view, that's that's what industries refers to the industry Skus specifically.
Defined for these customers and as you saw in the letters the fastest SKU ever.
And very importantly, it's a little bit over two times the price of the games equivalent SKU.
So got it very helpful guys. Thank you. Thanks, Rob Thanks, we'll go to Tim Nolan.
Great can you hear me, yes when.
When we go thanks very much two questions I think kind of.
A clarification or a bit more color on some previous points you made.
John I heard what you're explaining about.
The kind of shift away from professional toward.
More seats and more ratable services.
Things in your in your slide deck or interesting you talked about an AI marketplace and about unity cloud, which you also referred to I'm just wondering how much are these.
Like new significant upsell opportunities can you charge incremental fees for these the way I think you were saying you were looking to be able to charge more for AI services in your various businesses. So is it kind of like.
Incremental charge points that you can add onto your subscription levels.
And then another question for Luis to be I heard that you are talking about your comments around the grow business you had a pretty good swing from minus 7% in Q2 to plus 9% pro forma in Q3 could you talk a bit more about where this is coming from is this volume or price or market share gains or growth, maybe perhaps beyond gaming into other.
Industries. Thanks.
So on the AI side, but I've addressed so far is subscription plus ratable for the tools we use incentives.
<unk> will likely be more subscription, but also ratable because they're obviously there'll be some volume levels, where we need to charge more.
<unk> will be largely incremental ratable revenues the marketplace.
A fairly large number of partners here.
And I am sure its missed by no one on this call.
That's a market frenzy around new AI startups.
<unk> one of the things I find Super interesting is they have.
A huge number of people that want to write them checks for 100 times the year after next year's revenue and.
And they don't have any customers.
<unk>.
Which makes estimating the year after next year revenue, a little more challenging than it might otherwise be and thats actually a obviously an exaggeration of lot of our partners do have customers.
But you understand my point, what unity does with marketplace as we take the universe by far the largest universe of real time, three D creators and connects them to the people that make AI tools, whether it be for creation or any other purpose.
A huge believer in this idea.
We think we've got the right products and used incentives, but this augment us augments that.
And these are mostly Rev share deals for us so if the if the partner is.
We're working on a per seat basis, and it's some share of that for a defined period of time.
And these are typically negotiated and my sense is that AI providers that are out there they're going to move around a lot.
Have years of doing this with the App store or the assets of our excuse me, where we generate a revenue share based on whats transaction inside the store, we expect that will continue longer term here.
Yes, I think Tim to your second question first of all Q1 of 2022 was huge right.
That is still one <unk> were very high and inflated. So so we're comparing against a very high Q1 of last year. When you look at that minus 9% for grow.
For Q1, so I think the most important metric to look at is the quarter over quarter growth, which is about 13%. So we're very happy with the improvement we're seeing quarter over quarter, and therefore year over year with Q2, where is that coming from I think overall the market. We're seeing good engagement by the ECB EMS are lowered.
And they were at their peaks right. So the flat market is good engagement, but a little bit lower <unk> and therefore, our growth is clearly ahead of the market no. What we're seeing is is as I said earlier, some customers migrates to level play.
And that's driving our growth. So we believe we based on our analysis that were growing faster than the market.
<unk> units in our steel toffee CPM environment.
You guys for those of you that haven't been tracking our our commentary on the ads is carefully on the outside is carefully but Louis said was correct as we entered and exited the COVID-19.
The last boom quarter.
Was Q1, although Q2 last year was really strong as well.
And the market.
Slowed down in the second half of last year and our guidance. This year was based on the expectation that the market could level out based on trend lines. We saw at the end of Q3 and Q4.
And thats been borne out.
Although we've seen some modest oddities around seasonality there wasn't as much positive seasonality when kids got out of school.
And I think it's going to take a little bit of time for us to completely read the market, but we based our guidance on the market leveling out basically being in a stasis mode for a period of time.
We have all expectations that the market will turn north again Ronny cpm's.
There's a lot of interest or developers for launching new products, that's usually what drives it but we based our full year on modest seasonality impact around the holidays, but.
Stasis for the year and that's proved to be approximately correct.
Our growth in Q2 was very pleasing for us to see against the strong prior year comp and the sequential growth was very good for us to say.
So we have a quick question from Dylan Becker.
Yep.
Hopefully you guys can you hear me.
Maybe another way to kind of ask the question too and as it pertains to kind of the idea of the tethering between creating operate I wanted to focus on the lunar offering and maybe the importance of creative management automating kind of within the actual creation tool itself.
I can augment the capability to provide you with more tailored experiences and engagement for campaign management.
Okay.
As you know we don't break out Luna is a relatively small business.
We are very pleased around a couple of aspects strategically of slowdown.
And for those of you don't know what Luna.
As user acquisition platform that a developer can use not only to identify opportunities to build their business inside of gaming inventory. So other game ads, but also within social networks or within the App stores and other other.
At opportunities opportunities to see so what this tool does is that allows a developer to test creative against specific audiences and outside of game inventory.
In a way, it's sort of like a more strategic version of a DSP, except that what it aggregates theres just one sector of game developers, but there are a few outside of gaming, but it's primarily game developers.
And part of the business model is we get paid by the targeted media and so by way of example, we are very much a favorite partner to Apple, which makes us feel great can be a favorite partner Apple in this ecosystem.
So.
I didn't quite discern a question.
You brought up so I'm just framing what the.
How this works and why we feel good about it we've been successful to add new AD inventory over which we generate revenue share when people place through Luna until we feel very good about that business model transformation that we've been introducing subtly was you pay per Luna versus <unk>.
Basically pays for itself and Thats what.
We think that's a more scalable model has been introduced and it is working well for us.
Still relatively small.
But it's got good trend lines. The other thing I would throw in there for you if you're 100% right on the notion of AI will facilitate more opportunity to create more diversity in the AD offerings testing different types of ads over time and that will lead I think to more optimized spend opportunities our UA.
And really for our customers, which is why we built it to begin with.
Great.
I'll switch over to Brent bracelet.
Hey, Brent how are you.
Can you hear me okay, yes.
Now we can great Hey, why I really wanted to maybe start with Luis here, obviously grow was really strong $27 million sequential increases.
Certainly above normal seasonality for you how much of that do you think is maybe an industry recovery or are you seeing evidence of share gains.
Yes, I mean, I would say same that's what I said earlier I think we're growing faster than the market known we're seeing key customers move to level play and Thats a great sign of our growth will look at we really have this ability to a portion of the market obviously ramp up whenever when do we see is encouraging and would point to market share.
Games.
We can see mediation, we can see level play and we're performing very strongly there.
And one of the reasons is the AI efforts that we've put in place as I mentioned earlier, which are driving better return for our customers investments and as I also said, that's just getting started it will get better over time.
Helpful color there and.
If you recall when we did the acquisition or the merger with Iron Horse, We said that the combination of the entity and iron towards can lead to market share growth.
<unk> combined mediation or not to revenue growth for us that's exactly what's happening currently.
John for you.
Double clicking into large deals like Sega.
Leaning in and embracing level play.
What's driving that can you maybe double click on why the interest is picking up here and just talk a little bit about in a bit.
Bidding I'm not sure if that's a material.
<unk>, what seems to be resonating and level of play where youre, attracting some of the larger cities.
Well look I would say that.
Okay.
There is a strategic argument and then there's a lot of noise so to be perfectly Frank a lot of noise is there are incentives that go back and forth for people to move from one platform to another.
And that is hard to discern which way that's going on at any given moment in time, it's a competitive marketplace, where he is one of the leaders, but there are a few other players of the market that are also out there competing to win.
What I think is driving the trend line towards unity in the larger gains. It's a consequence of the fact that I think it's fairly obvious that unity was a major player on the data side.
<unk> was a major player on the data side the gap on unity is data with no visibility on the mediation component, which is a very important part we're advantaged because we had a very strong ROE is 12.
And so we took two large datasets and pulled them together under one roof, which allows us to target users better both in App purchase standards, which are very important if you will whales within the ecosystem of gaming that developers very much want to target, but also those that are going to quit.
On ads and ultimately do installs because the AD business is about generating not just installs, but high value and stuff.
And so.
I think our marketplace, our customer base recognizes that strategic argument I'll admit partly because we keep reminding them that data.
The reason they should believe in us, but then we show them data and case studies and they buy into it. So we believe we're on a on a long term trend line, that's favorable free entity in this space.
Helpful color. Thank you great.
Gili.
At the Goldman.
Hey, guys. Thank you.
Taking my question congrats on the quarter, John I think you touched on answered that earlier I was hoping maybe you can elaborate on a flywheel between creating value and how that triangle, maybe said in another way are you seeing more customers leveraging both sides of the platform at any given time, whether it be create user engagement I think first of all I'm setting guidance.
You guys adopting <unk>, but yeah, youre seeing traction over the last six or so months.
I had one follow up please.
Okay. So.
First off we've achieved a lot in the way of synergy and I would say, we're just scratching the surface and so there is something sort of chocolate and peanut butter about having the content creation platform and the data that that spits off of customer relationships that <unk> and.
And the opportunity for those users to consume or purchase other servicers from us the cloud platform as an example.
When we're trying to sell UGI use you asked before the cloud platform. It literally required us to get in a plant and talk to somebody and show them a demo it's literally it can literally be a checkbox for so many of our services, including our growth services.
And so.
At first level the synergy we're getting I don't know how to measure it but were probably getting 10 or 15% of whats potential as we do deeper integration deeper business model integration deeper.
<unk> technical integration more one quicker no collect product integration, so that our customers find the one platform thesis high ROI for them.
And we've been pressing on that for years talking about it making it happen.
The introduction of a mediation platform is a big step up because people developers didn't directly embracing AD network generally without mediation in front of it so that was a big step in the right direction.
And.
This quarter, we announced some wins.
And they go go in both directions.
And I expect in the balance of this year for spot next year. The things we're working on that I would like to share with you, but won't on this call will be.
Well described in.
And later.
Orderly calls and door.
Publicly released announcements, but we feel really good about.
How one and one is three and a half year.
The value of our platform probably the most overused word in Silicon Valley our platform.
It's mostly a powerpoint thesis for most companies that describe it.
Here. It is substantive it is real matters to our customers and we're building more value in it. So yes, we are seeing customers come to the platform because of the combination as they move from a growth service to create or create service to grow service.
Okay very helpful. I appreciate the response and one thing Luis around full year guide I mean, given the strength this quarter and the potential upside from new products, such as vision and some of the others that you highlighted today how much revenue are you currently incorporate annual for you guys in the services, how should we think about the cadence in which they'll start being layered.
Into the growth algorithm, yes, not too much gili I mean, I think there are huge I think they can make a very significant difference for us on an ongoing basis, but I think they will ramp.
In 2024, so I don't have too much in 2023, but we should be getting some traction and as John said customers love them, we're getting good traction on our newest contractual incentives.
And they should be spending next year.
Yes, we are giving you more visibility on things that.
In prior versions of unity talking to investors look like the next two year revenue ramp product drive model and they're all available now. So we're we're sort of at a great spot where we've got more reason to believe in the tailwind than we have in <unk>.
Here's path.
Great well, thank you very much.
And for the closer here will have.
We'll connect with all of you that had additional questions subsequently too as well, but Matt cost if youre available we'll.
Let you come in and close the session Hey, Matt.
Matt you may need on mute yourself, perhaps.
Get the AI bot to stand up and say.
Okay.
Yeah.
We cannot hear you minutes.
It looks like that might be having some issues with its Mike.
Okay can you hear me now out there and go Oh got it.
I pulled out of the fire on I'm here to close okay. So I guess just starting on the pro services side. I mean, you talked about how there is a margin sort of differential between pro services in the rest of the creative business. So understanding that what is the strategic reason why operationally is it better not to do.
Services.
And then is that something thats going to have an ongoing impact for a couple more quarters in terms of like weighing on create growth or is that something like more or less seen and then I have one follow up thank you.
Well.
As a starting point I never intended to scale professional services to a large business.
It was definitely a need.
I need to do.
But till we were approving things partners like a cap Gemini or abboud foreign interest at a loss. So we needed to pay with the way we needed to show the way and we will continue to pave the way and show the web.
But.
I find.
If we as we pull off the transition of prescribing with business model.
I believe that.
SaaS seats, plus ratable revenue can scale faster than I could hire people to build low margin products.
And honestly from a manager who will focus perspective.
It is an enormous amount of energy that goes into each one of those projects and it's.
I don't know if I've got a good a good way to.
In Alagoas, but.
I don't think a lot of the German St.
UK tailors, it make custom suits have great margins.
And never doing one offs.
That's not division I have for unity I want to scale and we have a couple of cities. For example that are running digital twins and year to date.
I want to get all of them on unity not just the three I could build city twins for.
Are the five that I might be able to do next year I want to scale with partners.
Cap Gemini and booze outnumber us by a wide margin and so I want to leverage that infrastructure to deliver for more customers and at the same time.
Allow us to transform our P&L towards higher margin sufficient isn't driven by primarily at least by our cost of capital perspective.
Driven by the complexity of business, we want where our value add is at its best now having said that.
We did restructure our professional services business in the last couple of quarters anticipating what we wanted to do.
And yes, we could have generated more revenue this quarter. If we hadn't have done that we would deliver a little bit more money more revenue next quarter, if we didn't do that and in the fourth quarter.
My sense is we plough through 2024.
There'll be more revenue from this decision not less in one of the things that managers get paid to do.
Sometimes it's Mike.
It's always fun to talk about top line revenue and the growth number and bringing it down a point or so or whatever that impact would be in order to transform our business in the right way for long term profitable growth. That's the right decision, but sometimes it's made with a jealous side to a little bit more growth that would make.
The minute to minute feel better, but we're not here for tomorrow, we're here for the long term and.
Hey, Matt just a few additional points of clarification. One is we're not walking away from professional services right, we're reducing our reliance on professional services, which is a very important distinction. We continue to believe that professional services to the degree that they are scalable as John mentioned are important right.
Because some customers come in they say I need a digital twin but I have no clue, how to do it and in some cases, where as John mentioned, we can be less scalable unprofitable business, we will be there and but the end game is to move those customers to a subscription business with consumption element Super Super important so I don't want you to.
Saying that.
Professional service is going to go to zero. It remains strategic we just would need to do it right in a way that is scaled to subscription and consumption.
Consumption models Super important.
Great.
But.
That wraps up the Q&A session. John if you want to close I appreciate it but thank you all for being on the call for sure.
So first off thank you for listening to us for 46 minutes. We appreciate it.
The second thought I'd give you is we're very pleased with the quarter.
We're really sort of.
Please as we can be about our long term perspective and of course, it's our job district in the short term and the long term together in a way that works we're.
We're happy to see the strong margin growth hitting 18, 5% EBIT margins in the second quarter. I think is ahead of most people's expectations and frankly.
If I could ask me six months ago, even my expectations. So we feel good about what we're able to do there so all in.
We like our print we like our guide we like our future.
And we genuinely love world with more creators entered into our job to deliver for them.
Thank you everyone.
Yes.
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