Unity Software Inc. Q3 FY2024 earnings call

Management Statement and Operational Highlights

• Grow Business: Unity Ad network migration to Unity Vector completed ahead of schedule. iOS traffic on Vector provides 15%-20% lift in installs and in-app purchases. Android migration is on a similar positive trajectory.
• Create Business: Unity 6 has over 4.4 million downloads; 43% of active users migrated to Unity 6, with over 80% intending to upgrade. Launched Unity 6.1 with new production testing methodology and expanded platform reach to include Nintendo Switch 2, Meta Quest, etc. Games made with Unity won multiple awards. Subscription business grew in non-gaming verticals with new customers like Philips, Siemens, and Toshiba Elevator and Building Systems.

Segment Performance

• Grow Segment: First quarter revenue was $285 million, down 4% year-over-year. Revenue upside was due to acceleration of Unity Vector rollout. Revenue contribution: Not explicitly stated as a percentage but was a key driver in exceeding guidance.
• Create Segment: Revenue was $150 million, down 8% year-over-year. High-margin Subscription business now represents nearly 80% of Create revenue. Subscription revenues in Create grew double digits year-over-year.

Guidance

• Second Quarter 2025: Total revenues expected to be $415 million to $425 million; adjusted EBITDA $70 million to $75 million.
• Grow Segment: Steady sequential revenues from Unity Vector, offset by declines in select legacy ad products.
• Create Segment: Continued momentum in Subscription business, but slight sequential decline due to nonstrategic revenue runoff.

Risks

• Transition Risks: Uncertainty around the timing and full impact of the Unity Vector rollout on revenue and performance.
• Market Risks: Competition in the advertising and gaming software spaces could impact growth and market share.

Question and Answer

• **Q: Break down Q2 guide, impact of legacy ad products and Unity Vector's offset.

A: Mostly driven by prudence in timing of revenue lift from Vector rollout; nonstrategic revenue to roll forward, majority conservatism from ad business transformation.

• **Q: Subscription growth in Create: driven by pricing or subscriber growth?

A: Prior price increases and reconnection with customers driving deal velocity, not just new pricing.

• **Q: Non-gaming opportunities: excitement and execution?

A: Excited about broad-based adoption, focus on core strengths in 3D visualization and asset manipulation, disciplined go-to-market with systems integrators.

• **Q: Plus to Pro transition impact on Create results?

A: Price increases play out over time tied to upgrade/renewal cycles, will see tailwind in future quarters.

• **Q: Gen AI impact on business?

A: Agnostic to AI tools, focus on using AI to simplify workflows and accelerate tasks, DeepMind is a Unity customer leveraging its technology.

• **Q: Vector integration costs and margins?

A: R&D and cloud costs up ~$10M/qtr for Vector, expect margin expansion as Vector revenue grows with operating leverage.

• **Q: Vector rollout timing and performance comparison?

A: Migration completed ahead of schedule, iterative process; performance comparison ongoing, goal is new models to outperform old.

• **Q: Vector migration and customer budgets?

A: Unity Ad Network migrated, ironSource ad network remains active; migration consolidates data but doesn't collapse products.

• **Q: Create performance and Plus to Pro migration?

A: Plus to Pro migration had impact, organic growth and nongaming editor business trends to continue with price increases rolling in.