Unity Software Inc. Q4 FY2021 Earnings Call

Started Abruptly … operate business. This call will have a similar structure to past calls. John and Luis will provide a business overview. Then we’ll answer the three questions that we’ve received the most from investors and analysts. And then we will open up the call to panelists to open Q&A and we plan to wrap the call up within an hour. Now before we start, I will run through our Safe Harbor statement. As you know, during this conference call, we will be making 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 at sec.gov. We remind everyone that our actual results may differ, and we take no obligation to revise or update any forward-looking statements. We will also be discussing non-GAAP financial measures today and reconciliations between our GAAP and non-GAAP financial results. A discussion of the limitations of our non-GAAP financial measures can be found in our earnings press release, which was issued earlier today and is available on our website under the Investor Relations tab. Now, with that, let me turn the call over to John.

So, thanks, Richard, and good afternoon. We delivered another really good quarter, October to December to close out 2021 with great momentum. For the quarter, revenue grew 43% year-over-year to $316 million and our non-GAAP operating margin was minus 3.8%, expanding 530 basis points from a year earlier. Underpinning our growth is our healthy net dollar expansion rate of 140% and the addition of 259 customers, each generating over $100,000 of revenue in the trailing 12 months, reaching 1052 customers at that scale at the end of the year, up from 793 a year before. For the full year, revenue of $1.1 billion grew 44% from a year earlier and non-GAAP operating margins were minus 4.6%, an improvement of 200 basis points from a year ago. We’re committed to continuing to improve operating margins as we continue to gain scale. We expect to grow revenue to be between $1.485 billion and $1.505 billion for the year, representing growth between 34% and 36% from 2021. We believe Unity is very well positioned in a fast-growing market. We expect to grow revenue above 30% for the long-term and expect to expand operating margin sequentially, breaking even on a non-GAAP basis within 2023. What makes me optimistic about Unity’s prospects is first, we participate in a massive market with significant tailwinds. Our estimated total addressable market was $29 billion for Create and Operate; our best estimate now is $45 billion. This expansion is driven by growth in the markets where we compete and the addition of new markets. The transitions from 2D to 3D, from non-real time to real time, and from non-interactive to interactive create massive growth opportunities for decades to come. Second, Unity is a leader in real-time 3D and we’re well positioned to capitalize on these trends with a growing market share across multiple industries. Third, we’re expanding our addressable market with innovation around new products and strategic acquisitions. With our acquisitions including Parsec and Weta Digital, we're addressing customer pain points and increasing our addressable market. We believe our unique platform will endure the test of time, offering significant and increasing value to creators. Lastly, Unity has an amazing team of innovators focused on consistently improving player experience. We are executing with excellence in a large and growing market that keeps getting better. Now, before we turn over the call to Luis, I want to share with you the magic of Ziva and Unity. This is our latest acquisition which I believe has huge potential.

Hi. I’m a virtual human created by Ziva Dynamics. I’m powered by state-of-the-art biomechanical simulation, and I’m running in real-time in Unity. I’m excited to announce that Ziva, my creators, are now part of the Unity family. Together, Unity and Ziva share a vision of making realistic lifelike character creation accessible and scalable for all artists regardless of skill level. We want to thank you for all of your support over the past seven years. Ziva has learned so much, and we couldn’t have done any of it without your passion and dedication to incredible digital art. It’s been a whirlwind journey, but I’m certain it’s just the start.

Thank you, John. Let’s begin with the key financial highlights. Revenue for the fourth quarter of $316 million increased by 43% compared to the prior year’s fourth quarter. These results include $4 million in license fees from Weta FX; excluding this revenue, the quarter would have increased 41% year-over-year. Resource for the quarter beat guidance again. In the fourth quarter, Create accelerated growth, and Operate continued to perform strongly. Revenue for the full year of $1.1 billion increased 44% year-over-year, significantly above our initial guidance of revenue growth of 23% to 26%. Our dollar-based net expansion rate for the fourth quarter was 140%, up from 138% in the fourth quarter of 2020. We generated non-GAAP operating loss of $12 million in the fourth quarter, an improvement from a non-GAAP operating loss of $20 million in the fourth quarter a year earlier. Our non-GAAP operating margin for the fourth quarter was minus 3.8%, compared to a prior year margin of minus 9.3%. Acquisitions continue to advance our strategic priorities, and we will report this revenue stream on the Create side. We expect non-GAAP operating margins to improve by 200 basis points year-over-year, expecting to break even in 2023 and continuing to grow revenue.

Okay. Thanks very much. We’ll open up the call to live questions in just a bit, but before we do, we received some thought-provoking questions from analysts that we will answer now. The first question comes from Kash Rangan at Goldman Sachs regarding the transitions happening in the software world and Unity’s position in capitalizing on these trends. John, could you provide a brief overview on this?

It’s a great question. My expectation is the use of real-time 3D interactive technology is going to expand many-fold. Industries will be launching real-time 3D experiences, and we’re seeing that in many sectors. Unity is involved in providing the underlying technology where most of these real-time 3D experiences are built. We generate revenue both from creating those products and from helping them operate. Unity’s role is to serve all the various companies that are developing products in the metaverse and web3 application.

We believe that growth, margin expansion, and free cash flow efficiency are the primary drivers of shareholder value. We are focusing our investments on areas that create the most value. Revenue growth has been the biggest driver for us, and we plan to continue focusing on driving that growth while also improving our operating margin.

Our contextual approach provides numerous advantages. Even the largest game companies have limited reach compared to us, as we reach over 3 billion devices with our technology. Our deep contextual understanding of gameplay informs our advertising, which has proven to be the most relevant data for effective advertising in gaming. We continue to execute and gain market share, and we are excited about our future.

Can you provide an update on the Weta acquisition and the potential synergies between the core technology and how Weta can enhance Unity’s Design and Operate business?

The interest in Weta’s tools is substantial. The democratization of these tools opens up opportunities across various industries, enabling creators to produce high-quality content more easily. Integrating Weta’s tools with Unity will simplify processes for creators, enabling faster and more efficient content production, and adding tremendous value to our offerings.

Can you elaborate on how you think about providing venues for creators to monetize their digital creations through Unity?

There’s a significant opportunity for monetizing creations in real-time 3D, especially with the acquisition of Weta and Ziva. It’s important to understand that creators will want dynamic assets rather than static ones, and Unity’s platform will enable that dynamic creation and monetization while helping avoid potential pitfalls in the market. We are committed to supporting our creators and helping them realize their visions.

Thank you all for joining us today. We enjoyed having you, and we hope you found the call insightful.