Q3 2023 Unity Software Inc Earnings Call

Welcome to <unk> third quarter 2023 earnings call. After the closing of the market today, we issued our shareholders letter that material is now available on our website at investors <unk> unity dotcom today I'm joined by Jim Whitehurst, our CEO and by Luis <unk>, our CFO, but before we begin I want to note that.

Today's discussion contains forward looking statements, including statements about goals business outlook industry trends market opportunities expectations for future financial performance and similar items, all of which are subject to risks uncertainties and assumptions.

You can find more information about these risks and uncertainties in the risk factors section of our filings and SEC Dot Gov.

And actual results may differ and we take no obligation to revise or update any forward looking statements.

Finally during today's meeting we will discuss non-GAAP financial measures. These non-GAAP financial measures are in addition to and not a substitute for or superior to measures of financial performance prepared in accordance with GAAP.

A full reconciliation of GAAP to non-GAAP is available in our shareholder letter and on the SEC Dot Gov website.

Great. So let me turn the call over to Jim to kind of make some opening comments.

All right well, thank you and let me say good afternoon to everyone and thank you for joining us on today's call. We released our Q3 earnings today as well as the shareholder letter that describes our results I assume you've all read that so let me just highlight three quick points before we get into Q&A if first off.

I've been at Unity now for about a month and I have to say I'm. So impressed with the passion.

Inside the company and more broadly in our community and that is unquestionably a good thing that we elicit so much passion from our community. It shows the level of engagement that we have and the importance.

The role of unity in our community.

Job now to focus that on up the most important task, which is to build a best in class platform that help makes creators more successful from start to finish from design to monetization.

Second the World has changed so we're changing with it we've taken some good first steps to bring expenses down changing entity from a money losing to a cash flow positive company in less than a year. That's a good first step, but frankly, we are examining the company from top to bottom ensuring that we transform unity into an even more nimble and focused.

Business and I'm sure, we'll talk more about that and third once we position unity to succeed we need to accelerate growth, we will get there by focusing on large growing markets, but most importantly by doubling if not tripling down on building amazing technology that helps our customers succeed if we do that growth and profitability.

Naturally flow from that.

So with that let me turn the call over to Richard.

Well, thanks, a lot so maybe what we'll do what we've done in the past as we kind of get inbound questions during the quarter and things like that and maybe what kind of hit that like the two most common questions. We often get well, let's start with Jim and then we'll go to the lease and then we'll go to open Q&A and things like that so for Jim.

If you kind of step back what do you see and I know you've been.

Short term here for a month, but it.

Maybe it's fair or not but what do you see the company looking like in three to five years, what would you what's your vision.

Yes sure.

Let me start off saying.

Had experienced in a company building a business as part of a broad community. So naturally come back and focus on how we think about community. So if I just put that simply in five years I want us to be the trusted leader of a community of creators building on our technology and because of that will be an indispensable partner.

For game creators to build operate and profit from their creations that alone is a.

Hundreds of billions of dollar market Secondly, our technology and this is one of the things coming from enterprise I've been so impressed with is incredibly relevant to enterprises and so the second piece of that is I'd like to see our technology SB default choice for enterprises and individuals to create and to interact with.

<unk> content.

Again that is a tremendous untapped potential as well and so if we can do those two things being independent defensible partner kind of as a leader in helping game developers and being the <unk> visualization technology that the world comes to that's a really exciting business great.

Great.

Then Luis it's addressed to some degree in the shareholder letter, but could you kind of explain some of the key interventions that are being considered.

Sure. Thank you Richard.

We started a comprehensive assessment of our product portfolio of several weeks ago, and we're evaluating every product in our portfolio through I would say three lenses.

First are we meeting our customer needs in a unique way that differentiates us from others.

Are we able to grow revenue expand margins and generate free cash flow at attractive levels and third is the opportunity large enough and sustainable to be of meaning.

Meaningful business over time, and while we're making great progress in this evaluation and planning it is still early to share more specifics.

Now when you can expect is that we will be making changes to our product portfolio. This quarter in Q4, and we expect the full implementation of the changes to be completed by the end of Q1.

As James said, we're also continuing to adjust our cost structure to improve margins and this will lead to a reduction in force a reduction in office locations, which we will be announcing over the next few months.

Back to you Richard Great. Thanks, very much okay. Now we can open it up to.

Q&A from the analysts.

Thomas if you can see the people that are in the queue and we can drop them in there.

Maybe we answered all the good class.

Okay.

Hey, Rick Dillon, Yes, Dylan Becker at William Blair. Thank you very much hey, guys. Thanks.

Maybe starting with you I think in the <unk>.

Your holder letter I would say theres a lot of focus on narrowing scope and the focus here.

Looking at it a month and maybe theres some initiatives underway, but how youre seeing the business relative again to maybe some of your past experiences and the opportunity to drive that efficiency that you've done maybe utilize some of the prior playbook you've seen.

Yes. Thank.

Thank you John Great question.

I want to always be careful that too much drawing.

<unk>, but frankly, there is a lot of parallel to this and frankly when I first got to Red hat, which is red hat had a industry, leading product with red hat enterprise Linux, but we're spending a tremendous amount of time doing five or six or seven other things and it's not just the expense associated with it is the <unk>.

Management time and attention and more broadly the clarity of focus throughout the organization that you get from doing fewer things.

Frankly, where you are winning and have a right to win and so I do see parallels there just very very simply we're doing a lot of things and we obviously have a.

Leading share product that's growing very nicely.

So and then there are extensions off of that which are actually fit in well with good synergies, but frankly, we're doing a lot of other things and so one is just I think there is very similar to red hat, let's start off narrowing down make sure. We are on our path to achieving the full potential of our core business before we get too busy doing other things that arent directly.

To that and then number two is just sharpening our execution I think obviously there is a.

A natural evolution of companies, where you start off you get kind of product market fit you are trying to experiment and so you're running a lot of experiments around your less focus on driving effectiveness and efficiency and I think we're to the point where markets voted we got a couple of really leading products, whether that's the engine and run time, whether thats our core.

What kind of monetization stack and we need to focus down and put the right kpis in place tightened our belts and execute into those things.

And as we do that we have a solid profitable business that we can scale.

From these leading positions and so it is a little similar to red hat both in terms of.

Leading product, but doing a bunch of other things and losing focus and just naturally not being at the point until now of really looking to kind of build in effect efficient and effective operating model around those things and so I think those are the two big ones that feel very very similar also equally incredibly passionate brilliant people who are <unk>.

Deeply dedicated in a day.

Deeply mission driven company and so when you have that your ability to execute when people are alive and passionate about what you do is just so much easier and that definitely shared with red hat sure awesome. Okay. Helpful color. There and then maybe to I think you guys called out a lot of the synergies you're seeing within the grow.

Solution base and the importance of iron source and level of play there and maybe it's a little early to call out from a product perspective, too, but you did mentioned tightening the integration between kind of create and grow but how you think about that synergistic value coming together across our platform overtime.

Yes, I'll start and Luis if you want to add so first off really working too.

Built an operating model that drives value in both kind of data.

But across create and grow I think we can do a better job of doing that we've been working on the integration of <unk>.

Kind of people and things, but really building that flywheel.

There is an area I think we can kind of double down our focus on which has a lot of value. The other is just together those two things are what drives.

Developer game developer success.

And we're still a little bit because we're still in the middle of the integration disjointed and having a single view of our customers. So we can go talk about how we can help them best create value from development all the way through to monetization and we have the kind of those two pieces and it's just time to get those.

Fully pulled together to have single view of customer ability to engage and talk about how we can create value across that lifecycle with our kind of portfolio of offerings. So theres kind of the operational data ish I want to say stuff and then there's the broader single view of customer and be able to act that way set of stuff.

Yes, I agree Jamie and if I were to add something I would just say this is unique to US right. We are the only company has both create and operate our growth businesses and that's very valuable to us and to our customers and remember we have over 70% market share on the heavy door, particularly on mobile so that gives us a very strong base to build upon.

John.

Great very helpful. Thanks, guys.

And then.

Yeah, Michael Funk.

Bank of America.

Yes. Thank you. Thank you Richard.

And Jim I really appreciate the brass tacks.

Opening letter today.

Today as well.

I'm just wondering you did mention that there was limited impact from the pricing change Aman bled over into the fourth quarter or what have you been doing to reach out to the game developers and rebuild that trusted relationship with them.

Well a couple of you obviously have been talking to a number of them and it's one of these I think almost all of them.

I've talked to others.

Talk to you in unity, you've talked to them start off with game developers, who are upset by the first action. Once you actually get people to focus on the next set of things. We did the first thing you hear is like Oh, Okay, well that all makes sense I am actually good with that so the changes. We then went back and tweaked I think helped a lot, but honestly the biggest thing that helps us.

When we talk about the future feature velocity, we're driving.

Talking with.

Someone here, who had just met with the game developers start off very very negative, but as soon as we started getting into some of the features we're driving all of a sudden they went from we don't want to deal with you too who can we be in early beta customers can we actually potentially get in there and helped drive some feature set into that Thats right. What we're trying to do so I think the most important thing as we can.

I've been saying this internally.

Unity quite a bit having dealt with communities in the past is we can talk all you want but our behaviors of what will rebuild trust in the behaviors are how we make decisions going forward and how we are taking those dollars and reinvesting them efficiently and effectively to build extraordinary product and so unite next week, we will have.

A number of product launches and I think really kind of focusing on the value we're delivering.

We will kind of.

Get that buzz, replacing kind of noise around or what are they doing.

And one more if I could I think a lot of investors are wondering about the decision to pull guidance for for the year.

What was that based on your view of best practices as a new CEO coming out in assessing the business.

I'll tell you my view.

The numbers, yes, no. There's a lot of people are grumpy about that.

Yeah.

Look.

The problem when you are looking to.

While we wind down or get rid of some businesses, which is part of what we'll do is the longer you wait to do it the better your revenue looks in the short run and I want zero incentive for anybody here to slow anything down we need to move and we need to move fast and the faster we move the better shape. We are so we will plummet all out after the fact.

For you you'll know exactly it will be completely transparent, but what I don't want to have happen is people say well, we kind of guided this and so if we just wait another month before we do that maybe we don't close that till January one instead of November 30th you.

You can make the numbers look better, but I want to emphasize we got to move fast and we got to be decisive and we're going to emerge I will say I think we're sandbagging when we say by the end of Q1 I am hoping we can do it a lot faster than that the faster. We can get these things done the faster we have kind of reset and we're focused at the better and I want to zero in <unk>.

And for anybody to do anything but that so it was not a popular move I can tell you that to say, we weren't going to do it but I think it's better to move fast and then be transparent after the fact and I promise you. After that we will be reset will be confident in our numbers and we will provide guidance for Q1 in the year and give you all the color and clarity you want I just in this period of time I think.

It's important that we have no barriers to move to SaaS great. Thank you for that.

Alright.

And then next is.

Brian Fitzgerald at Wells.

Thanks, guys had a couple if I could.

New GFS.

Letter noted crop year over year comps, just hoping you give a sense for how that business performed relative to expectations for the quarter and whether there was anything waiting on that part of the business and maybe the second one follow up to that is can you comment at all on <unk>.

Iron source cross sell opportunity and where you think the business stands right now.

When you say in the shareholder letter that the company is not achieving the sale synergies that exist across the portfolio or are we right to assume that.

That's what you're talking about there are or maybe that's where the softness in GFS comes from.

Yeah go ahead Jim.

You got to start if you want to kind of give performance versus expectations I will give you a sense of what I meant by that not performing across.

Yes, I mean, we don't want to single out any business, we're not ready to share specifics on whether our business safety inside or outside of the portfolio choices, but I will I will address your question EDG at frankly, we didn't have the quarter, we expected on the business right and therefore, I would be very transparent about that and we need to continue to drive our business and grow faster.

So.

I'll give you that piece.

I'll just I'll use that as an example, when I say that I actually mean broadly across the portfolio, but I'll pick out <unk> I think <unk> has been quite successful selling into gaming, but if you actually look at the correlation between.

Say something like multi play and unity made with unity games, it's actually quite low and so what I want to make sure that we're doing is when where we had the right to win which is around our unity ecosystem. So I'm not saying, it's awful revenue to go sell multi play in.

A.

Unreal based game, but fundamentally the place where we have the right to win and should win as things around unity and so when I'm looking at across our portfolio is making sure. The things that we do are self reinforcing the things that we do make unity games, better and people using unity and make it really really easy to use or other things and get that flywheel going so if you look at our.

Correlation between some of our other services in the engine, they're not as tight as I would like to make sure we make it really easy for our desk to use our things and make our things, making unity made with unity games, even better and that extends across again, we talked a little bit.

We've made progress in integrating iron source, but a lot of that is getting the core stuff together now getting the flywheel that we think we can do with the real synergies between the editor and the run time and.

The grow business is something we are just getting kicked off in.

I'm the type I don't have a weekly meeting on what's the progress what do we do and why was it going to be done and we've been more focused on the integration and on really getting the synergy flywheel going and so that's something we're kicking off in earnest yeah, Brian as we've talked before we're seeing a good synergies of grow within grow Uniti and iron source, So thats working well technology capabilities.

That data, that's growing well, but as Jim is saying they create to grow is where we need to sharpen the pencil and do a better job going forward.

Got it thanks, Thanks Louise Thanks, Jim.

Great.

Next is that Clark Linton BTG.

Thanks very much.

I've got two please Jim maybe we can start big picture with sort of a view of the yadkin market understand you've only been with unity for a short period of time, but one of the big questions. We get from investors around that piece of the business is how you start to close the gap between.

Really high end fairly dominant developer share in your revenue share at present is a variable rate model like Rotten time really the key to unlocking that upside or are there other adjustments that as you look at that business, you think need to be made to ensure it can grow.

Theres a lot and by the way we haven't even started on the industry side, which I would actually argue is a larger market than the gaming market for us, but we can come back around on that so first off.

No.

The gaming market is a lower margin market. So when you started at one price point and you want to change it youre, obviously going to get some.

Some backlash so the way I'd, rather think about it is if you think about development all the way through to operating a game is 100 billion dollar market right.

A very very very small less than 1% share.

Of that.

Our ability to do things like whether it's driving to Dev ops or automated testing or do you think about other things that fit that a developer shop, especially teams of developers do thinking about kind of security thinking about compliance identity management, there's a whole set of things, where we're not raising price on what we're doing but we are.

Looking at the costs around what someone does when they're working with us, but he has a tremendous opportunity just on the development side and then obviously on the operate side.

Finally to look for places, where frankly, we have a right to win because of the strength of.

Our editor in run time, and our ability to understand what people are doing and how.

And the uniqueness around that.

I think the run time fee is important for multiple reasons one is internally.

People recognize theres value in the run time, right and so if nothing else. It makes it much easier interning internally manage early thing we need to drive more velocity into the run time in the feature functionality around that.

I know you can kind of conceptually say you do it but it's much easier when theres actually revenue associated with it and frankly, I think it's easier to explain to customers.

That you are paying for something but look at the value and now we can accelerate value around that so I think.

Making the runtime not like.

Kind of a second order citizen and how we think about monetization.

As important going.

Going forward thinking about especially on the industry side.

Were run times themselves, whether it's exact run time or more broadly what that looks like and feature velocity and that having a price around that and how you think about that as you scale out.

Important so.

We can get into the specifics around the runtime pricing and kind of what model and what types of games et cetera, et cetera, but I think the concept that the run time has value and so we have a price on the run time is healthy all around for how we run the business.

Understood and I guess.

There's a lot in flux I guess as you guys are exploring sort of interventions as he mentioned in the shareholder letter one of the things that does seem to be <unk>.

<unk> moving forward in terms of focus is AI I'm curious if you could give us an update on the music Santos product.

How is the closed beta gone so far when do you think realistically those tools could exit data. If you have any thoughts around commercialization that you'd be willing to share on this call would be appreciated also thanks.

Well my first reaction will be how about coming to Amsterdam next week, the Tonight, and you will hear a whole lot about that.

And kind of the things we're doing more bright up more broadly I mean honestly I mean, I'll, let Luis if you want to comment, but I think given everything we're saying unite and we don't want to front run that here today, so stay tuned in.

Come join Us in Amsterdam, Yes, the only thing I would say is while Jim didn't say March you can see he is tone kind of how excited here. So you can take something away from that so it's very exciting.

Understood. Thank you guys.

Okay next is kash rangan.

Cash Goldman.

I don't know if you can see me Jim but.

I guess bigger picture I can't see you. It's good to hear from you. It's been a while I know it's been a while it's been a while.

I don't know what is it that you use.

Keep your parser exactly.

Unchanged in the past.

You look exactly the same as you did.

Matthew I think it was 2008, we need to cover.

We had a good filter on the camera.

It definitely helps.

I can see that I can see that so clearly a lot to digest coming into the company.

One is is what are the chances you would take the job permanently in the next six months or so.

It's a tough question.

Or maybe it is not an easy one and secondly, you hinted at tighter integration and tighter synergies between the two.

Create and grow businesses.

Can you expand a little bit more.

On that particular talking to where where do we go with that increased synergy and how does it manifest itself. Thank you. So much yes. So on the first question I want to be respectful of the board the board running a process. So I think as they said they want to run a process.

So I want to be careful about anything I say because.

Say on Mccanna at that kind of screws it up but they are not that kind of mess up so I'm, just not saying anything on it so sorry cash.

I really just want to respect the board of the process.

That they are going through so.

Hate to Duck your question, but I'm going to duck that one not because I'm not willing to answer but I want to respect the board the process, they're going through.

In terms of more tight integration like look we have a lot of information about how games work in how engagement works. So we start thinking broadly what what we're trying to do is help game developers maximize their success and I know for some that's just great art, but for others, it's making money.

And thats kind of where the monetization and the AD piece comes in and we actually think with what we kind of understand about how people play games in the analytics that we already provide to some extent to developers.

Use our analytics products on how the engine works and how engagement works and how people are using games.

We think if we can get a flywheel going with that to do a better job of helping them monetize their AD space and obviously, we profit from that so we think theres quite a bit there that we can continue to build on.

And we're like literally early early early days in that with with a long roadmap of things we're excited about.

Awesome. Thank you so much and all the very best. Thank you, it's great to chat look toward a beating alive again soon.

Okay.

Great and then just Hilton at Wolf.

Amazing can you guys hear me okay.

Sure.

I got two actually my first one is can you guys, maybe give us a sense or a flavor for what is left to cut at the business. Since I know, we already did some layoffs previously.

And maybe how do you like what gives you guys the confidence or how do you guys plan on maintaining that passion internally that you just talked about.

As you look to become a more leaner business.

Well I mean I'll start there.

I came from the airline business so.

Very much.

Kind of focus on making sure that we're kind of operationally optimized.

I actually feel like when when you actually get efficient effective and part of that is just building operating model and organizational structure to support the core business that you're in.

Naturally get much more efficient doing that and so while it is painful in the sense that we will have fewer people I think that people will here will be very inspired by the mission and what we're going to do is.

Is all around kind of our mission and our values and you get engaged FCC success and profitable and growing.

I feel very very good that yes, because we come out of this phase people are going to be both inspired by what we're doing and proud of the success that we're able to generate.

It's a different model.

<unk> versus <unk>.

Spend a lot and hoped revenue ultimately passes that you make money, it's a little bit more let's get efficient and effective and optimize our business and then scale from there and so.

I'll call. It a reset is a bit of that like let's get efficient and effective let's build an operating model that fits the businesses. We're in and then the business that we're in Luckily we have a lot of growth in them and so we scale from there so while it's painful in the reset I think very soon coming out of that I think people will be able to see we are better able to deliver against our core <unk>.

And we're winning.

Yes.

Question, what I would say.

Which one you remember your question was how do we keep on finding opportunities to optimize our cost structure. So I would say number one we're making different portfolio choices right and as you focus the portfolio then OSB as you exited businesses you can continue to drive efficiencies there.

One thing we're doing is we're continuing to drive synergies between organizations within internally and drive efficiencies across two different teams looking at spans and layers and levels and everything else and last we're taking another very sharp look at G&A and how do we continue to drive G&A. So that most of the dollars can drive the product at all.

Customers Robyn will drive our revenue margins on cash so that's that's what we're doing.

And if I could just sneak one more in from an investor perspective, there has been a string of some interesting news releases.

Obviously the decision not to guide.

The next quarter or the full year is another I guess piece of interesting news that we have to grapple with.

There's still the still the how do I say this youre still going to guide for 'twenty for next year, which will be another important catalyst for the stock I understand that there is a lot of moving pieces and a lot of excitement around opportunities going forward, but is there anything you can just give us in terms of timeline of expectation for when you expect growth to kind of accelerate.

Be helped.

As investors.

I don't know worries around the lack of where.

Where the numbers are going in the near term.

I'll start with some comments and Luis Youre, probably better equipped to be able to answer specifically I think that even as we get into next year more focused execution generally.

It leads to.

Success in the marketplace and so you know.

I'm thinking 24 already just being more focused youll see kind of improved gross performance.

And then again, we have a whole series of growth drivers that we need to go execute against those we are working through as we kind of do the portfolio work. So we'll have to really talk about that more in 'twenty four but.

Yes.

We're in February I guess, the next time, we speak with you will be able to give you a lot more detail around that but I am confident both seeing the size of the markets and our position in those markets and.

And I'm also just confident without having all the plans laid out.

For it they're just more focused execution.

All the time in all of my experiences I've seen leads to better performance on the revenue side. So.

Without the full numbers kind of ready to talk about him I am confident in next year thoroughly agree will give you more flesh mark visibility with our Q4 earnings so in a few months.

Jim mentioned the opportunities portfolios is right that we already have we just need to be more focused on as Jim said, we just need to execute but we think we will we are doing everything we can do have a very strong 2024, but that's our goal.

Super helpful guys. Thank you.

Okay.

And our last question will be with Jason Bazinet at Citi.

Thanks, so much.

I appreciate you coming in and making these changes so quickly I just wondered.

There's obviously a wide berth that you have in terms of how.

The magnitude of the changes that you might pursue in terms of pruning the portfolio are there any guardrails.

As you're going through these changes I E. No matter what happens we don't want free cash to go negative or no matter. What happens we don't want EBITDAR to go negative or is it really we may have to go through a period thats.

More difficult on some of those.

Key financial metrics that the street cares about.

Because it will paint a better picture in 'twenty four 'twenty five.

I mean, I'll start I mean, frankly, the good news and the things that we're looking at it's not like we're peeling off businesses that are highly EBITDA positive because they don't fit right.

I think in a good way we are investing in a lot of things and so this is more about looking at kind of peeling off some things that we were doing that.

That frankly are profitable so I don't think youre going to see a real dip at all even this quarter.

And certainly not as we get into next year, but Luis you are right.

I think the only the only other thing I would add is we're not thinking about a long transition right. Once decisions are made which should be this quarter. We will start implementing this quarter will be 100% Don next quarter and that's it it's not like our business model transition that takes a year or two years from three years to complete this or.

Things, we're planning to do on executing now.

And so the Q1 might be a little because we haven't finished it but I'll, let howard that wouldn't think our margins in Q2 would be that different in Q4 next year right. I mean, this is a rip off the band aid reset and then we are going.

Okay Super helpful. Thank you.

That wraps it up Jim if you want to add some closing.

Two or three say Hello, and then we'll be done.

Yes.

I really appreciate your time.

I just want to emphasize again.

There.

I want upfront bluntly, what I first.

Agreed to come in when we kind of got the call I thought okay.

This company has some opportunity and I'm sure like a lot of companies.

<unk> too much and there is some some focus but I have to say I have become more and more convicted in and excited about the long term growth opportunities of the company.

Today than I was a month ago I mean, this really is a very powerful very defensible moat of technology, we didn't get a chance to go into that this valuable in so many places and it's a matter of really kind of picking it.

What is the pathway to focused execution deliver results on one add another deliver on that add another so it's but the good news is because of just the nature of the technology and the fact that as a platform business.

Very highly defensible.

And again real time, <unk>, which one could argue is interactive three D. We're really the only way to do that across a myriad of platforms at scale and when you kind of think about the number of areas that makes sense, whether it is consumer products companies whether thats.

Industrial companies and visualization, obviously in gaming.

Feel like we have a number of opportunities are key is not that the key is making sure that we build a pathway to profitable growth by executing each of those in the appropriate order. So we can continue to deliver results that you can see and be transparent about it but clearly that opportunities there.

Alright, Thank you all.

See you in <unk>.

Future weeks and months.

Over time, thank you very much. Thank you. Thank you.

Goodbye.