Q4 2024 Unity Software Inc Earnings Call
But although the results exceeded our expectations. They are clearly not enough to satisfy our ambitions.
We firmly believe that we have the assets and the capabilities to grow much faster and.
So today, we're excited to officially announce the migration of the unity AD network to our new AI platform, which we're calling unity vector.
The migration begins towards the end of Q1 with this first phase of work slated to be complete by the end of Q2 2025.
Ongoing efforts to expand our scale and our quality of our offering will of course continue thereafter.
Vectra is designed to leverage data from across the unity ecosystem integrating self learning artificial intelligence models that will provide deeper insights optimize performance and deliver better results for customers.
Vector enhances targeting precision and increases audience scale through a sharper analysis of Richard datasets, and it's also able to adapt in real time.
Helping customers navigate an increasingly competitive mobile marketing landscape.
Although our enthusiasm around this plan transition is very high.
We do want to highlight the iterative nature of the work and to cautious and patients around the time, we'll need to mature the product as it begins to operate at scale.
Uni vector is a significant undertaking and we won't see the benefits immediately.
The caution in our Q1 guide reflects improvements with respect to this.
With that as context, we remain confident that the introduction of vector will establish uni as a fundamentally stronger competitor in the years ahead.
I also do want to know how proud we are that we've been able to move unity vector in production at this philosophy and to thank everyone involved.
It speaks to a significant enhancement in our operating capabilities.
As well as to the passion and dedication of the team.
The same appetite for rapid change increased growth and delivering more product value is also very much present in our create business. So lets turn there now.
Customers have responded immediately to the cancellation of the runtime fee and the launch of <unk> six.
And we're now closing new deals and booking revenue booking renewals at a rapid pace.
This is reflected in the 15% year over year increase in subscription revenues that we experienced in Q4.
Nearly six is being sampled at a higher volume than our other recent releases and nearly 38% of our active users have already upgraded.
Additionally, <unk> has already been downloaded $2 8 million times since launch.
In 2024, usually maintain its position as the top game engine in the world with more successful games being built in unity across more platforms than any other engine.
We've known about 70% of the top thousand mobile games worldwide were made with unity, including the top three grossing mobile games and.
And 30% of the top 1000 PC games on steam are made with unity as well.
As new kinds of devices and introduced unit continues to show strength and flexibility and its platform.
For example.
We are leading the way in mixed reality and spatial computing.
<unk> Arkham Shadow are made with unity title launch exclusively on <unk> three in October and one of the best AR VR game at the 2024 game Awards.
<unk> seven out of the top 10 games in 2024 were made with unity.
In Q4, we also announced a significant co development partnership with Google that provides what day, one support of the new Android XR platform.
This collaboration reinforces <unk> position as the leading real time, three D development platform and highlights the growing investment and XR from major industry players.
<unk> XR grows uni will grow with it.
And this growth will not just be limited to gaming.
Beyond gaming Uni adoption continues to accelerate across important markets like automotive and retail where our cross platform <unk> visualization tools are very much in demand.
We had a stellar quarter in our industry segment with revenue growth of 50%, making it once again, our fastest growing subscription business.
We also recently announced several significant new customers, including Toyota who selected unique to power all of its next generation human machine interface.
Enhancing the in depth driving experience for all customers.
And our T X company, Raytheon, who is using <unk> to create <unk> simulations for facilities planning and factory layouts.
In conclusion I'd like to thank all of our teams for their relentless effort as we continue to transform unity and Anna and earn our customers' trust each day.
Together, we're shaping the future of interactive content creation building, a new platform that will enable the next generation of developers to innovate and move from prototype to profitability faster and more efficiently than ever before.
<unk> is the only company, we know of that can deliver value to developers of games and interactive experiences across the entire lifecycle from prototyping to live service operation right through user acquisition monetization.
That capability and its connection to the 3 billion monthly downloads of applications created with unity positions.
Positions us well to become the global platform of choice for creators of interactive content.
As the quality and the integration across our product portfolio continues to improve.
AI continues to advance and true platform advantages begin to manifest we're confident we'll be able to deliver significantly more value to customers and in the process transform our business.
Thanks again for your time and attention this morning.
Jarrod <unk>: I'd like now to extend a warm welcome to Jarrod <unk>, our new CFO.
Speaker Change: Sure. It's an outstanding addition to our leadership team and we're all really looking forward to working closely with them.
Speaker Change: I'll turn it over to Sharon now for an overview of our financial performance charts.
Sharon: Thanks, Matt.
It convinced of unity is extraordinary potential based on our truly global scale and unique end to end customer value proposition.
Sharon: Uavs.
Sharon: Taking to our business in terms of how we're allocating capital and delivering returns for shareholders.
Sharon: We plan to focus R&D towards the highest impact initiatives in order to accelerate revenue growth.
Sharon: The joint goal of capitalizing on the largest and fastest growing market opportunities, while fulfilling the promise, we make to customers and developers who use unity everyday.
Sharon: We intend to complement revenue growth with ongoing margin expansion and drive operating efficiencies over time.
Sharon: And we're committed to driving growth of adjusted EBITDA and free cash flow in order to maximize return for shareholders.
Sharon: Lastly, we expect to be prudent stewards of shareholder capital, we have a robust balance sheet with excess cash and solid free cash flow.
Sharon: Our near term expected uses of capital will be to focus on organic innovation at the company and gradually delever to ensure our conservative balance sheet.
Sharon: Turning to the fourth quarter I am pleased to report that unity meaningfully exceeded our guidance for both revenue and adjusted EBITDA.
Sharon: Revenue from our strategic portfolio was $442 million up 4% year over year or $15 million above the high end of our guidance.
Sharon: Both businesses outperformed solidly.
Sharon: Create solutions revenue from our strategic portfolio was $139 million up 9% year over year and up 6% sequentially.
Sharon: The year over year increase was driven by another quarter of strong with 15% growth in subscriptions revenue combined with accelerated growth in industry revenue up 50%.
Sharon: Investors should note that the strong fourth quarter growth in subscription revenues does not yet reflect the positive impact from the recently announced price increases.
Sharon: Lowest price increases will roll in Ratably from our pro and enterprise customer tiers over the course of 2025 and 2026.
Sharon: Gross solutions revenue from our strategic portfolio was $303 million up 2% year over year and up 2% sequentially.
Sharon: This was the best quarter, we've seen in the past year and the solid results were driven by better execution combined with seasonal demand.
Sharon: Supporting the strong revenue results <unk> experienced sequential improvements in terms of both dollar based net expansion, which improved by 2% to 96% and customers over $100000, which improved to 1254 customers.
Sharon: During the fourth quarter revenue from our non strategic portfolio was $15 million down 92% year over year as a result of our portfolio reset.
Sharon: We expect that in 2025 this revenue will be approximately $30 million for the full year and remained stable thereafter.
Sharon: With the hard work of winding down the non strategic portfolio now behind us.
Sharon: Going forward, we will report and guide to total revenues and provide total revenues for each of create and grow simplifying our disclosures for investors.
Sharon: Turning from revenue to non-GAAP profitability adjusted EBITDA for the quarter was $106 million, representing 23% margins.
Sharon: Adjusted EBITDA exceeded the top end of our guidance by 26%.
Sharon: And for the full year units delivered adjusted EBITDA of $390 million at 21% margins.
Sharon: Adjusted EBITDA benefited from improving gross margins and operating leverage in the platform combined with solid cost management across expense lines.
Sharon: Adjusted gross margins improved from 82% in 2023% to 83% in 2024.
Sharon: While adjusted G&A sales and marketing and R&D expenses were down by a combined $235 million in 2024.
Sharon: There are still untapped operating leverage in the platform and we are poised to improve profitability as we grow.
Sharon: Unity had exceptional free cash flow in the fourth quarter and for the full year.
Sharon: Free cash flow was $106 million in the fourth quarter up 74% from $61 million in the prior year.
Sharon: Free cash flow for the full year was $286 million up 60% from the prior year.
Sharon: Cash at the end of the quarter was $1 5 billion and debt was $2 2 billion with significant free cash flow generation in the past year, we took the opportunity to delever repurchasing $415 million of debt, while maintaining a robust cash balance.
Sharon: Based on our free cash flow profile and the excess cash on our balance sheet unity has a clear opportunity to gradually delever over the next several years.
Sharon: Going forward as we focus on per share returns will also aim to reduce shareholder dilution from stock based compensation.
Sharon: Share count dilution from stock based compensation has gone from just under 3% in 2023 to just under 2% in 2024, and we believe it has the potential to come down further.
Sharon: Stock based compensation expense is also expected to fall by 30% in 2025 with the lapping of M&A related vesting and a sharper focus on minimizing dilution.
Sharon: With that I'd like now like to turn to guidance for the first quarter.
Sharon: We're expecting total Q1 revenues of $405 million to $450 million and adjusted EBITDA of $60 million to $65 million.
Sharon: Revenue guidance takes into account our expectation for reduced revenues from our existing AD models in the first quarter and the gradual nature of our transition to unity vector.
Sharon: Our revenue guidance also takes into consideration seasonal demand and additional working days in the fourth quarter as compared to the first quarter.
Sharon: Our adjusted EBITDA guidance factors in our expectations around the first quarter revenue as well as normal increases in payroll related expenses and incremental cloud costs associated with ongoing investments in unity vector.
Sharon: One final note, while we have typically provided annual guidance during our fourth quarter call, we'll be transitioning to quarterly guidance in 2025, given the rapid change and transformation taking place in our AD business and.
Sharon: And with that I'd like to thank you for joining us on <unk> first quarter 2025 conference call and let me turn the call over to Daniel So that we can take your questions.
Thank you and with that we will open it up to questions. If you're interested in asking questions. Please click on the raise hand button.
Sharon: At the bottom of your screen at that point, we will allow you to on mute the microphone. So I'll take a couple of seconds here.
Sharon: Alright. So the first question is from Matt costs that Morgan.
Sharon: Family.
Speaker Change: Hey, guys can hear me.
Sharon: Yes, we can.
Sharon: Awesome all right. Good morning, Thanks for taking the question I guess I just wanted to start with with the guide just to make sure. We can break down the pieces here. So I think you know it is a step down of like $40 million to $50 million.
Sharon: Quarter on quarter, how much of that is reduction in the strategic revenue.
Sharon: Which I think was $50 million in <unk>, how much of that is driven by shutdowns and kind of the legacy ad product.
Sharon: In grow and is there any offset in there from the new AD model are stepping in and then I have one follow up thank you.
Matt: Hey, Matt. Thanks, Thanks, very much for your question I will I'll let.
Jared: Jared take.
Jared: Most of this question, but I just want to reiterate.
Jared: Where we opened which is there.
Jared: The at the end of the day. Most of this is just driven by some prudence about.
Jared: Precisely the timing of the revenue lift we're going to get through this transition.
Jared: It's a it's a big product rollout and one that that takes time to take root as we operate the models at scale and that's the that's the really the principal driver, but I'll leave to Jarrod to go into a little bit more detail on that just a couple of comments number one I think we gave some disclosures around our non strategic revenue for the quarter of being 15.
Jared: For the fourth quarter wed expect that to roll forward.
Jared: The majority of the Prudence and the conservatism is really around the transformation that's taking place in the AD business as you would've seen in the fourth quarter, we've seen great strong growth and creativity and the growth in our subscription business, we feel good about that.
Jared: Our existing models performed well in the fourth quarter were proactively deciding to make a shift. We think this is a necessary shift where we can be more competitive and ultimately accelerate the revenue growth of the company.
Jared: Okay.
Jared: Great. Thank you and then on the on the creative side.
Jared: 15% growth in subscription kind of and I think you've called out no impact from the price increases that were announced in September what are the drivers that that subscription growth are you seeing some step up in <unk>.
Jared: There are some other pricing tailwind like what are the moving pieces to have 15% without the September price increases kicking in yet, yes, Matt Youll remember that we had a prior round of price increases that have been flowing through on a reflected there.
Jared: And I would say that the other main driver is just stay on some real velocity and reconnection, we've had with our customers.
Jared: <unk> not literally.
Jared: As much because we're seeing the pricing the new pricing increases flow through but because we were we were effectively.
Jared: In a little bit of a frozen mode. Prior as you recall the looming price increases were tied to the upgrades <unk> six and had sort of again, it's sort of frozen conversations we had with folks lots of ongoing conversations about new deals and expanding relationships. So this reconnection, we've had with our customers is just related to more deal velocity.
Jared: <unk>.
Jared: And and put us in a much better place.
Jared: Okay. Thank you so much.
Speaker Change: Thank you Matt. The next question is Gili.
Gili: <unk> from Goldman Sachs.
Gili: Alright, thanks for taking the question.
Gili: One Atlanta at Y on Y Guyana bottleneck right now on the competitive landscape. If I may on the first you know you mentioned, 38%.
Gili: In Asia, <unk>, six already or are part of the integration.
Gili: Facing while against your prior model updates I'm curious to know how that's tracking versus your initial expectations and maybe how that may affect the way of pricing, maybe a more material contributor to growth in Canada was 25.
Gili: Absolutely well <unk>.
Gili: Nice to hear from you, yes, indeed, it is tracking really well on it.
Gili: We do think it is.
Gili: We're tracking more positively than than prior new releases, we had so we're really really encouraged about it youll recall that that when we launch <unk> six again in addition to what we thought was more customer friendly pricing.
Gili: We also really helped our customers understand that we want to focus on core values that are really really important to them still.
Gili: Stability.
Gili: Performance and ease of upgrade.
Gili: And we want to really kind of lean into those values. While also of course.
Gili: <unk> the pushing the binary forward, adding additional features but really really making sure that we're delivering on the core.
Gili: And I think that message is has.
Gili: It has really.
Gili: Landed in a positive fashion for our customers.
Gili: And that again keep in mind that our big live service customers can be operating on unit six for many many years so.
Gili: Making this transition in the right way.
Gili: And leaning into some core values that have or make it easier and better.
Gili: For customers, who use unity than ever before is just a really important and we're seeing a lot of really positive velocity from it.
Gili: Understood. Thank you.
On that thread. The second question I have is at that more on the competitive landscape. You know we've heard Microsoft's scientists video gaming development offering yesterday and I've been I has suggested that AI tools like sorry, I can be used for game creation in the future.
Gili: Shutting these seemingly a lot more console and web based today, if we get to get more color around your initiatives.
Ed: Hi, Ed.
Ed: Taking this on I'm thinking kind of in in the forefront of innovation and market leadership with any sex and many future leases beyond that.
Speaker Change: It's a great question.
Speaker Change: Because the most important thing to remember and understand about unity, we are a platform and our greatest strength has always been our extensibility. So we're gonna be the assembly point for building interactive experiences and deep systems.
Speaker Change: Around three D assets, both free to assets can be created outside our tool can be created insider tool as long as we can.
Speaker Change: Ingest those assets and then begin to build experiences and systems around them, we're going to be in really great shape I have no doubt that and we're all really excited by the advances in generative ire AI that we're seeing across our.
Speaker Change: Across the world right now but builds.
Speaker Change: Building a major live service game. That's played by millions of players is not just about creating assets, it's creating deep online systems optimization systems that engage players over the long term and it's our position to want to be the platform that creates all those systems.
Speaker Change: And to ingest any and all assets as we go out that makes sense.
Speaker Change: Yes. Thank you.
David Mack: Great. The next question is David Mack from RSA.
David Mack: Hi, Thanks for taking my question.
David Mack: Just trying to get a sense of the fundamental rebuilds of Gro solutions.
David Mack: And the timeline involved in that you mentioned being a strong competitor over the years ahead.
David Mack: What is the expected timeline between where you are now and the new products hitting the market and we would also be great to hear what the key personnel are working on specifically thank you.
Speaker Change: Hey, David.
Speaker Change: Nice to hear from you. So you know as we've talked about before over the past two quarters, we've been been doing the fundamental work of building out.
Speaker Change: The vector system and I think we talked about last quarter, how we began testing online data so effectively the our progress on testing and isn't really rapid.
Speaker Change: And we're so pleased with the progress that.
Speaker Change: We wanted to communicate the fact that we'll be beginning a full migration.
Speaker Change: To our new system at the end of this quarter.
Speaker Change: And that the first part of that work will be complete by the end of Q2.
Speaker Change: And it's important to understand I know you understand that this is an iterative process, it's going to go on for some time.
Speaker Change: We're going to be building and scaling and creating more velocity and quality in the system forever. So this is just the first.
Speaker Change: Part of the work.
Speaker Change: <unk>.
Speaker Change: The system is really based around improving sort of three core attributes or at least we should we should begin to feel the impact.
Speaker Change: Of real time adaptive self learning models, most acutely in three areas. The first one is around better conversion. So the idea that we can more accurately predict what new game of player would like to play.
Speaker Change: Secondly.
Speaker Change: Somewhat less importantly, but still crucially, we want to be able to match. The most valuable players with the right games and finally, we want to enhance our ability to bid effectively into competitive auctions for those players. So those are the three significant pieces. We've been working on three significant kind of the core values of the system and we are.
Speaker Change: Excited over time, we believe there is no reason not to believe that that's going to really enhance the ROI that we're delivering to our customers.
Speaker Change: Thanks, very much and just a quick follow up if I may.
Speaker Change: You mentioned, improving conversions am I right in thinking that user acquisition tools and demand side platform revenue is a relatively small part of growth solutions today and so if you do.
Speaker Change: Launch and effective products. This is effectively a new business for you and it will be more impactful to resolutions as opposed to just a slightly higher growth rate over the years ahead. Thank you.
Speaker Change: No I wouldn't I wouldn't put it that way I think we have a substantial user acquisition business today.
Speaker Change: But it is one that hasnt been as competitive as it needs to be so.
Speaker Change: I think about this is that it's a good business today, we hope and expect that over time, it will become a great business.
Thanks, Ken.
Speaker Change: Thank you David. So next question is Parker Lane from Stifel.
Speaker Change: Hey, guys can you hear me okay.
Speaker Change: Yep.
Speaker Change: Great.
Speaker Change: Looking at some of those deals and the industry's business Toyota Raytheon during the quarter and the overall growth rate. It seems like a lot of things are going well. There wondering if you could talk about.
Speaker Change: Pipeline development and what you see for that business into 2025, and how competitive are some of these large enterprise deals on the industries business today.
Speaker Change: Hey, Parker Thanks for the question Yeah, we're really.
Speaker Change: Excited about the growth, we're seeing in our industry business.
Speaker Change: And you know really the continued growth in Q4, and what we expect and we expect that to continue as I mentioned, it's it's our fastest growing subscription business and for it to grow 50% year over year was was was really encouraging.
Speaker Change: Listen all of them.
Speaker Change: All significant deals with major players are going to be competitive and.
Speaker Change: So.
Speaker Change: We do see competition in the marketplace, but having said that we have a pretty unique offering in the marketplace. So focusing on this three D view visualization and creative.
Speaker Change: And creation of interactive experiences around it focusing really narrowly on that is starting to really show results for us.
Speaker Change: And we're going to keep we're also focusing very hard on auto retail and manufacturing in particular.
Speaker Change: So.
Speaker Change: We are seeing the benefits of focusing both sort of on the product offering as well as in our go to market efforts we are very.
Speaker Change: We don't see we don't see lots of offerings that can really that can really deliver the kinds of value that we can the only thing we have going for us is that a lot of our business historically has been.
Speaker Change: Pull rather than push so because our tools are so popular across different industries, we often get.
Speaker Change: Groups of developers inside an entity adopting tools without even ever speaking to us.
Speaker Change: And then we become aware of it they reach out to us and we grow relationships that way so, but we want to do is complement that with a more effective.
Speaker Change: Go to market mechanism or kind of push mechanism. If you will as well. So we're working really hard to expand our partnerships with.
Speaker Change: With resellers.
Speaker Change: With other large systems integrators, so that we can really kind of an and high volume began to close the scale and size of deals that youre starting to see now with what with much more effectiveness and efficiency and we don't see any reason why that shouldn't happen. So we're feeling very good about it.
Speaker Change: Got it one quick circle back to the vector significant undertaking it will be an iterative process through the years, just wondering how much of the R&D groundwork has already been laid here versus some incremental investment that we're going to be the manifest in the bottle throughout 'twenty five.
Speaker Change: Yes, the vast majority of the R&D.
Speaker Change: Ground.
Speaker Change: It has been late to your point so the the the investment Youll see going forward will likely mostly be in the kind of cloud area, where we're where we're continuing to train models as they expand but even that should become more efficient over time and is something that's done more efficiently with our new milestone that was done with our old model. So.
Speaker Change: We're feeling pretty good about about the how it will play out through our P&L over time.
Speaker Change: Understood. Thanks again. Thanks Parker next question is Tom jumped Daniele <unk> from Piper Sandler.
Speaker Change: Okay.
Speaker Change: Good morning, everyone Matt.
Speaker Change: <unk> been very candid about competitive challenges and grow.
Speaker Change: So.
Speaker Change: Just curious how vector addresses some of the issues with.
Speaker Change: The MLR stack deficiencies in data infrastructure.
Speaker Change: And then secondly, how should we think about the iron source.
Speaker Change: Network in the context of the transition to.
Speaker Change: Two Victor Thank you.
Speaker Change: Yeah, Hey, Tom Thanks for the question.
Speaker Change: Again, as we talked about many times before it was our view that in order to compete over the long term we needed a fundamental change in our tech stack and how we're approaching this business in and I think maybe when we first began talking about a couple of quarters ago. It was maybe a sense that you're sort of who knows as a science project is.
Speaker Change: It's going to take years, how long is it going to be is it going to have massive impacts on margins and I think that's what sort of really exciting about where we are now is that we're starting to see this come into the real world and for US and we were going to start seeing it have impacts and that's just I'm really really pleased and proud of the team for being in position to do this.
Speaker Change: Build out and make this major transitions so quickly.
Speaker Change: And to your point, we do expect us to we do expect that to put us in a better position compelling over time, but.
Speaker Change: Understanding that the work here is just getting.
Speaker Change: And that there is there is much of it is still ahead of us, but the you know.
Speaker Change: Having a new model that provides more details and consistent on.
Speaker Change: Understanding of the implicit preferences of gamers at the game level.
Speaker Change: It gives us a more granular view on a better prediction of what gamers will respond to.
Speaker Change: This is really important.
Speaker Change: And we do believe over time, it is going to create a lot of value.
Speaker Change: We are new models of fast input processing, the iterate more quickly in a more timely way then we're accurate we've incorporated more realtime features so that the moluccan dynamically reflect gamers preferences. So these are these are all fundamental shifts.
Speaker Change: But again lots of work to do but put us in a position to be able to compete for the long term.
Speaker Change: Thanks, Tom Our next question is Andrew Boone from JMP Securities.
Andrew Boone: Thanks, so much for taking my questions.
Speaker Change: I'll stick with advertising.
Speaker Change: Matt can you talk about the opportunity to better integrate data sources into the <unk> how much does vectra incorporate in terms of just taking additional information that you guys have available as unity versus kind of what was the previous model.
Speaker Change: And then looking at some of your competitors there has been an expansion of <unk>.
Speaker Change: Gaming advertising category enter into other.
Speaker Change: Kind of verticals can you talk about that broader opportunity of what may ecommerce look like or other kind of industries that may be available over time. Thanks. So much.
Speaker Change: Absolutely. Thanks, Thanks for the question.
Speaker Change: Yeah, so listen of which as we said before we believe the unique platform has seen some unique value and that ultimately our deep understanding of player behavior globally as an asset.
That through incorporation.
Speaker Change: Got you into our data models is going to have a meaningful impact.
Speaker Change: Again keep in mind that we have nearly 5 billion da you have players that interact with our runtime globally and historically have not leveraged. This connection. This first party casual players at all.
And that's a connection that dwarfs the size of other networks in the world.
Speaker Change: And we were working really hard to change this and to building these capabilities in a privacy safe manner, where.
Speaker Change: Where we're getting after and permission wherever that's necessary.
Speaker Change: And.
Speaker Change: And all the fundamental work we're doing is designed to create an environment, where we can incorporate more and more of that data over time. So it's very much.
Speaker Change: Part of our plans and.
Speaker Change: And part of the work that we're doing.
Speaker Change: As it relates to sort of e-commerce and other verticals.
Speaker Change: I'm I'm really bullish on the opportunities that we have there I think that what what folks are waking up to is that the quality of the relationships that that we and others have in the space and the scale of of our audiences are going to be really valuable.
Speaker Change: Across other verticals and and other AD types and that's because.
Speaker Change: Gamers are basically everyone and to the extent, we've developed really detailed understanding of consumer behavior and really good systems, that's going to that's going to benefit.
Speaker Change: US and the industry in lots of different ways for us.
Speaker Change: <unk> focused primarily in the near term here in the gaming vertical and fundamentally improving the way we address our core customers, but we're also really bullish over time. The theory that there is expansion there and an exciting that the sighted that the market's waking up to that.
Andrew Boone: Thanks, Andrew next question is.
Ross Sandler: Ross Sandler from Barclays.
Ross Sandler: Great.
Speaker Change: Can't let you get off the hook here without asking.
Speaker Change: Our cost and margin question on his debut here. So I guess, the overall comments about improving margins in 2025 and beyond.
Speaker Change: You guys mentioned increased cloud costs for vector model rebuild could you just put some numbers around that and maybe around like your.
Speaker Change: Go to market once vector has launched and I guess broadly as we look out over the next couple of years.
Speaker Change: Effector revenue does start picking up should we see the kind of high incremental margins that we see broadly in the in the digital AD market starting to show up here. Thanks a lot.
Speaker Change: Sure Ross and I really appreciate Youre not letting me off the hook on my on my first call.
Speaker Change: We have done a great job as a company in driving margin and really making sure that we have the right cost structure for where we are as a business. Today. If you look at the EBITDA margins in the business EBITDA is up by 1% year on year, while we've done a good job in bringing down G&A costs, we've done a good job in bringing down.
Speaker Change: Bringing up gross margins for the business. So we feel really good about what we've done and we've done that all the while making the requisite investments are in vector.
Speaker Change: If you look over the past couple of quarters and you look at cost of goods sold where a lot of our cloud costs reside and you look at R&D costs those have gone up by about $10 million a quarter over the past couple of quarters evidenced some of the investment that we've been making so we've been at the same time driving margin expansion and making the.
Speaker Change: And investments in vector, which we think is the right thing to do for the business.
Speaker Change: This is a business with 80% plus adjusted gross margin, there's a lot of leverage ability in our model and a lot of operating leverage in that model and so as you would expect it's going to become even easier for us to expand margins as our business starts to grow and as that acceleration takes place obviously, we're going to get that benefit.
Speaker Change: <unk>.
Speaker Change: Vector both in terms of revenue growth, but also in terms of operating leverage and margin expansion and I think we look forward to that right now our near term priority is to make the required investments in vector to get back to a pace of revenue growth that we're comfortable with and we're pleased with so that's going to be the near term focus, but we think we can walk and chew gum.
Speaker Change: We think we can continue to drive margin plus also make those investments.
Speaker Change: Thanks, Ross next question is Chris <unk> from UBS.
Chris: Great. Thanks for taking my question I just wanted to.
Chris: Touch on vector here for a second and really focused around <unk> and the migration, that's going to be kind of unfolding here.
Chris: How should we be thinking about this in more tactically or certain advertisers going to be seeing this earlier in the quarter and it can be rolled out more so on a regional basis or should we be thinking about some of this functionality and your ability improving.
Chris: And improving around conversion and matching the right user with the rate game and the efficiency of the.
Chris: Of your bands within the auctions, just kind of improving through the quarter and and all advertisers will be seeing thats really a kind of a startup to care. Thanks.
Yeah, Hey, Chris Thanks for the thanks for the question, Yes, the way to think about it is this.
Chris: The integration.
Chris: First we will.
Chris: We will take first iOS traffic.
Chris: Then later Android traffic so the there's a step.
Chris: There's kind of two steps there.
And in the first part of the the first part of the work focuses really hard on on on our conversion models to create better conversion the second part of the work.
Chris: And that that spins out over time.
Chris: <unk> works on kind of user value so matching the most valuable players with the right games and the bidding models.
Chris: And in aiding us in effectively bidding and in these competitive auctions for players so.
Chris: That's the sense in which were.
Chris: We're kind of taking that one step at a time and why it grows over time.
Chris: Got it thank you.
Speaker Change: Thanks, Chris next question is Michael Funk from Bank of America.
Michael Funk: Yes. Thank you for the questions guys on the first point of clarification on factor on and the timing of the rollout you are now, saying migration and of <unk>. I think previously you said you said mid year Mountain first part and then second the first quarter guidance.
Michael Funk: How much of that incorporates disruption to the grow business due to the migration versus say seasonality.
Michael Funk: Yeah. Thanks, so thanks, Nicole for the question Michael.
Michael Funk: Yes, we are.
Speaker Change: The rollout is.
Speaker Change: It has gone much more quickly than we anticipated. So the work has gone really well it's got more efficiently.
Speaker Change: We're really pleased to be doing it to be.
Speaker Change: To beginning the rollout about kind of a quarter before we expected.
Speaker Change: Although as I said, it's an iterative process so.
Speaker Change: You are right about that.
Speaker Change: And as it relates to the kind of the prudence in our guide for the first quarter.
Speaker Change: Yes, it is anticipating some.
Speaker Change: Some disruption.
Speaker Change: In our existing and our existing AD business as we transition from one to the other.
Speaker Change: And can you share any performance comparison, new versus old model, maybe you Shawn rose Geos, where devices why you're saying yes.
Speaker Change: That work is kind of ongoing and not something we're talking about this yet.
Speaker Change: But at a high level.
Speaker Change: This is a brilliant flash the obvious our goals for the new miles to outperform the overall house over time.
Speaker Change: Great. Thank you again.
Speaker Change: Alright, and the last question will come from a clerk lamping from BTG.
Speaker Change: Thanks for taking the question I just wanted to make a.
Speaker Change: Just clarify.
Speaker Change: Some of the questions and I guess sort of answers that we've gotten around the vector transitioned so essentially what we're seeing happen right. Now is a consolidation of a couple of different operating assets previously I guess, if we're thinking about like iron source tap Joy and unity adds independently, they're getting consolidated down to one asset is there.
Speaker Change: Is the expectation now that maybe as part of that migration.
Speaker Change: Some customers might not fully by great budgets I'm just curious if you're seeing one if that's correct and to if youre seeing any evidence of either less than 100% migration or any sort of pause on a like for like basis, along the way so far.
Speaker Change: Yes, thanks for the question so.
Speaker Change: The work around Uni vector is principally work that's being done around the Union network.
Speaker Change: We are excited and supportive and continue to be bullish about the opportunities we have for the iron source.
Network as well and we will remain in the market very aggressively selling that.
Speaker Change: Selling that network as well.
But to your point the overall in the migration, we are taking several assets, we have including top toy and others and consolidating the.
The data.
Speaker Change: Around each of those what have been prior been vertical businesses and migrate them into one central data source, which we think improves all the products, but isn't the same as collapsing those products in understood.
And if I can just ask one more sort of clarification around <unk>.
Speaker Change: Create performance this quarter.
Speaker Change: I think Matt.
Speaker Change: Sort of at the top of the order asked a question around sort of what's embedded here.
Speaker Change: Maybe to put a finer point on that was there a plus to prowl migration benefit in <unk> and as we're thinking about sort of organic growth and the trajectory of the non gaming editor business.
Speaker Change: Any directional commentary you can give us for 25 or the contribution for the farmer item.
Speaker Change: Yeah. It's my pleasure. Thank you, yes, there was some impact of the <unk> plus the pro migration to your point, there was definitely impact and increased velocity in our industry business, which we're really really excited about.
Speaker Change: As well as the impact as I said of just resetting our relationships with our customer base.
Speaker Change: Spending more positive time with customers.
Speaker Change: We think all of those all three of those trends will continue and then we will see in 2025. In addition to those three trends is the beginning of the rolling in of the of the major price increases around the subscription business, which will youll see in addition over 'twenty five 'twenty six.
Speaker Change: Understood. Thank you Yannick. Thank you thanks Mark.
Speaker Change: So with that we'll wrap up so thank you for dialing in today, we look forward to seeing you at one of our upcoming investor conferences that we're going to have this quarter and have a great day.