$U
Unity Q3 2024 earnings call: the CEO decided to take a long road to Ad segment growth.
IMO this was the main reason why shares fell after the first pop: Shareholder letter already provided some clues. Short-term investors decided to exit the train at the Q3 24 station.
As I originally planned to hold Unity long-term, I am holding my shares and will add more this quarter as I liked all the other aspects.
Unity will go the Applovin way with Ads: bringning top people in the field, investing in Machine learning, their own neural network, and testing. Maybe we’ll see the first results in H1 2025 but these things are unpredictable.
CEO in prepared remarks:
Game monetization will not be a winner-take-all market. I can tell you for certain from personal experience that customers don’t desire that outcome.
Strategic vision for the Create segment remains: building a platform, where Unity will sell its game engine, additional tools built by Unity, and third-party plugins.
CEO:
The opportunity to sell consumption-based products, whether they be multiplayer tools, live ops services, tools for data management, asset management, consumption-based pricing on AI-enhanced tools or other things, those are all going to be outgrowth of platform adoption and those customer relationships.
…in the past, we have built a lot of these products and have acquired some of them, but haven’t always validated our work in real-world production environments with real customers. So what I mean is, quite simply, sitting with customers to design tools that deliver the value they need and want so that we can then abstract those solutions and sell them to many more customers.
CEO also gave some anecdotal evidence about how termination of runtime fee will bring more customers:
at our Unite Conference in Barcelona, where literally 50 customers came up to me and said, hey, I had said — I told everybody internally, no upgrade in Unity 6. And now that we’ve — you’ve repealed it and you’ve reverted to the subscription, we’re a green light. So those dynamics change really radically.
Some numbers about the Unity 6 launch:
Unity 6 has been downloaded a little more than 500,000 times now, which is really quickly and pretty significant numbers for a product that’s really just starting and compares really favorable to some of our historical numbers in that regard.
Comment about Industries (in addition to KLM and DB from Shareholder letter):
we’ve seen in healthcare, this like incredibly moving product that was launched by children’s hospital that was a no-cost 3D model that for pediatric care, where the viewing software allowed clinicians at any hospital anywhere in the world to interact with virtual 3D reconstructions of patient anatomy. So it’s just — and by the way, not to mention like most of the automotive businesses globally are using Unity for human machine interfaces in their cars. So incredibly broad-based adoption.
But no Industry numbers were asked by analysts or provided by the management this time.
CFO on price increases:
we think this does give us the opportunity to drive double-digit growth. A few things to bear in mind. The price increases don’t go into effect until January 1. So this starts to roll out through 2025 as customers come to renew or upgrade at the level they’re at.
So it’s something that we see impacting us over the next couple of years as we make our way through that renewal cycle for customers. And then as we get out into the future, we mentioned that we’re going to get back into a more consistent practice on annual price increases, which again helps us drive that double-digit growth [in subscriptions] that we see the opportunity to achieve.
And an interesting gen AI question from the analyst (this one will be long and it will be last, so you can easily skip it).
Analyst:
there’s a bunch of start-ups that are building asset creation tools for gaming, and there’s even new like entire environments like Google DeepMind launched this thing called Genie a few months ago that attempt to replicate elements of the Create stack.
And admittedly, a lot of this is still pretty crappy. But if you look at the pace of improvement of these diffusion models and of AI in general, it gets pretty good pretty quickly.
CEO:
we know that AI has a fundamental role to play with our customers in terms of, as I mentioned earlier, making the process of building video games faster and easier and more engaging and innovative.
So we are a platform and an assembly point for games and other applications. So — and our extensibility is really our greatest strength. So we feel perfectly positioned to help developers integrate these tools. Keep in mind that from our perspective, we’re agnostic as to where and how the 3D assets get created.
We’re about being an assembly point, providing close control, the pipelines you need to build, helping your team collaborate to do that building and then ultimately, cross-platform distribution through the runtime. So the explosion of Gen AI from our perspective, if it helps our customers, then we’re going to kind of benefit from a seamless integration of the best first-party and third-party AI functionality inside our editor. And we’re going to offer that to customers. So we feel very good about that, and we’re not kind of fighting that at all.
In fact, we’re really excited about it. I think the second piece that I mentioned a little bit is we really believe that our focus should be on using AI to obfuscate some of the complexity in our tool to help unblock and accelerate difficult time-consuming tasks and workflows that our creators are already doing in our tool. That’s why — and that is just — we can have a massive impact, again, on the equation that game companies make that they’re working through this equation on how many new starts can I have every year, right? I’ve got a certain amount of dollars, a couple of points of EBITDA I’m going to use to make new games. How many games can I make? The more efficiently and the more quickly they can make games, the more starts we’ll have, the more innovation we’ll have.
I believe it really at the core of the next stage of growth of our industry, and we mean to play a really important part in that. The last thing I’d say is, interestingly, to your DeepMind examples, DeepMind is a Unity customer, and much of that work is — leverages our technology. So we do have a really fundamental role to play here really throughout the AI ecosystem. And it’s one I think we can get smarter and better at over time, and it’s one we’re spending a lot of time on.
Transcript quotes from here –
Unity Q3 2024 earnings – impressive. (Disclosure – I'm long)
Strategic portfolio sales: $429M (-2.5% YoY) vs $418M guidance.
Mid-point guidance for Q4: $424M or +0.5% YoY. This finally looks like a real turnaround 🙂
Free cash flow (FCF): $115M. Much better than expected.… https://t.co/Aft4tdEVqS pic.twitter.com/ajkUE8SQhy
— Dmytro Petryna 🇺🇦 (@dmytro_petryna) November 7, 2024
