Unity Software Inc. Q2 FY2022 Earnings Call

I'd like to remind participants that during this conference call, we will be making forward-looking statements, including those regarding goals, business outlook, industry trends, market opportunities, and expectations for future financial performance, all of which are subject to risks, uncertainties, and assumptions. More information about these risks and uncertainties can be found in the Risk Factors section of our filings at sec.gov and the press release we issued this morning. Actual results may vary, and we are under no obligation to revise or update any forward-looking statements. We will also discuss non-GAAP financial measures today, and the reconciliations between our GAAP and non-GAAP financial results, as well as the discussion and limitations of our non-GAAP financial measures, can be found in our earnings press release issued earlier today, available on our website under the Investor Relations tab in the appendix to this call's slide deck. On July 13, we announced a definitive agreement to merge with ironSource, which we expect to finalize in the fourth quarter of this year. We also pre-announced that our second quarter results were slightly higher than the upper range of our guidance and adjusted our full-year revenue guidance. Today, we will delve deeper into our results and projections. Joining me today are our CEO, John Riccitiello; our CFO, Luis Visoso; Marc Whitten, our Create Solutions Leader; and Ingrid Lestiyo, our Operate Solutions Leader. With that, let me turn the call over to John.

Thank you, Richard. Before we dive in, I want to address what everyone is aware of, the AppLovin proposal. I acknowledge we received the proposal, and I want you to know that we aren't going to make any comments at this time. I'd like to start this call by reminding us of Unity's North Star, which is our belief that the world is a better place with more creators in it. It is this belief that has guided us over the years and continues to guide our decisions across the company. Through years of innovation, investments, and hard work by everyone at Unity, Unity has become the world's leading platform for real-time 3D content creation, designed to enable creator success. Ultimately, this led to Unity having two main lines of business: create, to help creators make real-time 3D content, and operate, where we help these creators find operational and business success with their content. The second quarter of 2022 came in consistent with our last update, but well below the standard we have set for ourselves for growth and value creation. We can and will do better. Revenue of $297 million is up 9% year-over-year and slightly above guidance of $290 million to $295 million. We are encouraged by the sustained growth we create as we strengthen our relationships with customers. While we are also pleased with the progress we are making in operations, our underperformance in monetization remains disappointing. We have several product and engineering efforts in place to get our monetization business back on a stable footing. We have fixed the data challenges that we discussed last quarter and are launching new features. We're seeing improvements in our products with lead indicators, such as Audience Pinpointer accuracy showing our innovations are effective. Despite the progress, we lowered Unity's full-year revenue guidance to $1.3 billion to $1.35 billion and the revenue uptick is lower than modeled. We attribute this to a combination of recent negative macroeconomic factors and the complexity of accurately forecasting the timing of the change in revenue trajectory of the monetization business. Now, let me start with Create. Create delivered another strong quarter with revenue of $121 million, up 66% year-over-year. We are building a large create business fueled by innovation and market tailwinds as the world transitions from linear 2D to real-time 3D, which provides a more engaging and interactive experience. Our games business continues to strengthen as we improve tools and features used by creators to develop amazing and successful games. We are seeing acceleration in our business outside of games, with significant wins across industries and geographies. We are adding new customers and expanding our business with existing customers that are building their business on our digital twin capabilities. Our focus on creators in solving their toughest challenges has enabled us to more than double our create business from $55 million in the second quarter of 2020 to $121 million in the second quarter of 2022. We're approaching $0.5 billion yearly run rate and growing at a healthy pace. I believe that we are just getting started. We are encouraged by the performance in the games business, which was our biggest games quarter ever. Our strong performance included record adoption of our 2021 long-term support version and the 2022 tech stream, along with the expansion of our data-oriented tech stack feature. Unity is much more than games now, as our growing success outside of games tests. Our business outside of games represented 25% of our total create business for the full year of 2021 and 33% for the fourth quarter of 2021. At the end of the second quarter of 2022, our business outside of games represented 40% of our total create business. This mix expansion is within the context of having our best revenue quarter ever for our gaming business. I want to acknowledge the amazing games made by creators on Unity and the inspiration that it provides us. Their dedication and commitment to the craft and game development pushes us to constantly innovate and evolve our products. Unity's aim is to provide creators with the complete set of tools they need to be successful. And with that, let me hand it over to Marc to bring some of this to life.

Thanks, John. The investments that we make in our platform and tools are reflected in the wins that we have achieved quarter-over-quarter. Our customers are leveraging the advancements in Unity's platform to realize the vision for their games. Unity 2021 LTS comes with significant additions and improvements for visual scripting, editor extensibility, scene view overlays for artist-driven tools, and asset ingestion. It also adds editor support for Apple silicon and target platform support for Chrome OS, Android app bundles, as well as expanding our adaptive performance support, so that you can launch quicker and manage mobile device resources for better performance. It supports new functionality for 2D and 3D workflows as well as new feature functionality for our rendering pipelines across both our universal rendering pipeline and our high-definition rendering pipeline. We developed these new capabilities first in our tech stream releases. After we receive sufficient input and validation from the community of creators, we land those capabilities as the next long-term stable release. This year's Unity 2022 tech stream focuses on significant improvements in several major systems, including refining our user input framework and a focus on developer and artist productivity through features like better spline tooling, improved material variant productivity, and significant performance improvements as well as connectivity with other creation tools. But what’s most important to us is seeing creator success in bringing their experiences to life. We continue to see a large share of gains released across all gaming platforms made with Unity, ranging from the largest games publishers in the world to indie developers releasing their very first games successfully. We believe that players should be able to find and play games on any platform. Unity enables developers to build their game for any destination platform from start to finish. Millions of mobile game developers worldwide are using Unity to build the next generation of successful games. Today, Unity powers more than 70% of the top mobile games. Our engine is optimized to create highly performing games that work across a huge variety of devices and specifications and have the tools to make it easier to deploy games and manage their ongoing lifecycle. There are great examples across the board. Kabam launched Disney's Mirrorverse to much fanfare in mobile in June, and suddenly Surfers by SIBO celebrated their 10th anniversary in May 2022, topping 3 billion downloads, demonstrating the longevity of mobile games developed on Unity. Second, MARVEL SNAP was launched by Second into several global markets, another success made with Unity. Beyond mobile, Unity continues to perform superbly on other platforms. Nearly half of Steam games for PC were made with Unity in 2021. These games continue to break through to the Steam charts, where this quarter, 13 of the top 20 games in May alone were made with Unity. We’ve also seen fantastic new experiences such as V Rising from Stunlock, where the performance from DOTS enabled Stunlock to scale up the world size and the number of players, which was a key factor in their choice of Unity. Neon White developed by Angel Matrix and published by Annapurna is another excellent example of how a small development team can punch above their weight using Unity. And from these newest of game studios to some of the longest standing ones, we saw great new console games, including Little Noah by Cygames and the Centennial Case from Square Enix. Unity also enables creators to take their content to long-established and newly emerging growing platforms such as VR and AR. On Oculus Quest, Unity games made up 80% of the most popular games in July and 72% of the top-selling games. These are just some data points on the scale and scope of gaming with Unity. Wherever you find a platform or device with usage around the world, from the largest mobile platforms, PCs, consoles, to the latest in VR devices, you will find an active and committed community of creators, and they will be using Unity to create compelling games to entertain those users. Now, I want to turn to our create business outside of games, which includes media and entertainment, e-commerce, industrial and manufacturing, architecture and engineering, construction and many other industries. I'm going to share some customer highlights. I’ll start with Obayashi, one of the top three construction companies in Japan. In the second quarter, we expanded our relationship with them to help them develop a digital platform to drive major efficiencies in their construction process. Specifically, their internal users will use real-time 3D as a foundational tool for their design and construction work. Obayashi chose Unity because they see our solution as the most extensible and scalable option available. Also in the second quarter, we signed our single largest digital twin agreement to date. This deal with CACI, one of the U.S. government's leading IT service partners, will enable Unity to help the government define human-machine interfaces for aerospace applications and beyond. These applications demand an interactive, robust user experience, much like games. The ultimate goal of this program is to create a reference architecture based on Unity that all U.S. government agencies will use for system design and HMI development. Additionally, during the second quarter, we signed our first agency customer, EG Plus. EG Plus is a world-class content and creative production company based out of Long Beach, California. In addition to providing EG Plus with the required technology for their internal development teams to create real-time 3D content, we are going to be working with them on many projects, such as designing the next generation real-time 3D product configurators for a leading automobile manufacturer. We continue to strengthen our partnership with Mercedes Daimler. This quarter, we announced that from 2024 onward, all Mercedes Daimler cars will be equipped with an HMI made with Unity. With this agreement, Unity is now an integral partner of one of the world's leading automotive OEMs. Together, Mercedes-Benz and Unity are taking next-generation user interaction such as maps, avatars, AI concierges, and in-car entertainment to a new level by implementing them on a real-time 3D engine. We are proud to have Mercedes-Benz as a new partner to equip their vehicles with our visual fidelity and performance, drawing from our years of experience in mobile gaming. These examples showcase the power of real-time 3D, helping companies drive innovation, efficiency, and engagement across their businesses in new ways—from building more efficiently and safely to operating complex physical machines, to assisting customers in discovering new products and services, to our relationship with something as personal as your car. The growth of digital twin technologies in these industries, and many more, is significant and accelerating. We are continuing to invest in functionality and partnerships to ensure that we can meet our customers' needs and capture value in this space. This includes investing in product innovation like Neural Radiance Field rendering for visualizing zero touch-up object captures to make it possible for everyone to build their own digital twins, as well as advanced synthetic data creation so that future algorithms and machines can be trained more effectively and efficiently. It also means working with the world's best partners to broaden our cloud strategy and, thereby, our ability to service more customers. We have a long-standing relationship with Google Cloud and have seen incredible results through our customers. Additionally, we expanded our cloud capabilities by announcing a strategic partnership with Microsoft. This partnership brings the Azure cloud to the community of Unity developers worldwide to power real-time 3D experiences across industries. We are working together to make it easier for game developers to reach their players across Windows and Xbox through improved tools and more. I'm also thrilled about our breakthrough partnership with Capgemini. We will jointly define and execute sector-specific solutions and professional services to deliver tailored platforms for our customers. This new global partnership will focus on sectors and use cases where the digital customer and employee experience will benefit the most, from consumer goods and retail to telecommunications, energy, utilities, and much more. Real-time 3D faces one challenge that we must continue to address: the enormous need for 3D content. Creating 3D content is complex and expensive, often involving large file sizes and complicated rendering techniques necessary to deliver tailored results for specific devices and platforms. It requires the expertise of highly trained technical artists to be successful. That's why our democratization mission includes providing powerful artist tools that significantly enhance artist effectiveness and productivity and allow more people to create in 3D. This is essential for the long-term growth of real-time 3D and presents a significant opportunity for TAM expansion for Unity by serving the needs of these creators. This is why we acquired Weta last year. We are making solid progress in delivering extraordinary tools that will enable some of the world's most amazing content into the hands of creators in both VFX and real-time fields. Today, we have more than 20 million cloud-based vendor hours dedicated to Avatar 2 and other productions. This quarter, we completed our full mirror environment for the Weta toolchain, a first outside of Wellington, New Zealand. Our Weta Digital team is also defining and evolving the Universal Scene Descriptor standard so that we can represent procedural content such as hair, vegetation, and other aspects consistently across Unity, Weta Digital, and other artist tools. Our ultimate goal is to advance the USD schema standards for the industry as a whole. Now to bring Weta’s tools to real time, we have implemented our first version of clustered hair simulation into Unity as a novel GPU tile-based software restoration with analytic anti-aliasing and an improved physically-based hair lighting model for film-quality hair strand rendering in real-time. This means we can efficiently render millions of individual hair strands, all moving independently and uniquely without artifacts while accurately preserving the highlights and the beautiful way that light shines through. In short, we can make it look and feel real. Let's take a look at an example. All right. This is what happens when you connect these powerful tools with Unity. No longer confined to VFX and film. This is the Lion, and it's running in real time on PlayStation 5 through Unity's high-definition render pipeline. The Lion features advanced machine learning and procedural art tools, including character deformation from Ziva, procedural vegetation and terrain from SpeedTree, and more, with powerful capabilities that bring these characters to life. We told you that our goal is to drive up creative productivity and capability. I want to focus on this quote from one of our artists working with our Weta Digital wig tool and how much it speeds up the time to deliver high-quality content. Weta is a different way of working. It's actually the fastest wig tool that I’ve ever used. A high-quality hero wig that would take several months to create using another grooming package can be done much faster using our tools, in just a couple of weeks with higher fidelity. Even for detailed art direction feedback notes, like adjusting a specific strand from a reference shot, it's easy to author and manage the wig. Cara Hansen, tech artist at Ziva Unity Technologies. I'm excited to share that we expect this work to be in preview with customers this year, and for our first Weta tools to be released early next year, well ahead of our initial M&A integration schedule. With that, let me turn the call back to John.

Marc, the lion demo was absolutely groundbreaking. In my 25 years in gaming and entertainment, I have seen great graphics many times. Your team has set a new bar. Before the lion, I compared what I was seeing to the best I've ever seen in a game or a film. This is the first time my comparison is to the real world. Congratulations to your team for this amazing achievement. Let's now cover our progress in operations. We have fixed the data challenges and strengthened our products with new features. We’ve instituted monitoring mechanisms that allow us to track performance more closely to react faster when something goes wrong. As a result of our work, we are seeing leading indicators, such as Audience Pinpointer consistency and accuracy improve, which shows that our interventions are effective. We continue to innovate and will launch meaningful features in the back half of the year that aim to improve our customers' return on ad spend. As mentioned at the beginning of the call, the revenue uptick is slower than modeled due to a combination of negative macroeconomic factors and the complexity of accurately forecasting the timing of the change in revenue trajectory with the monetization business. Operate’s revenue of $159 million is down 13% year-over-year. This compares to $113 million in revenue in the second quarter of 2020 and $183 million in the second quarter of 2021 when we grew 63% year-on-year. Let me turn it over to Ingrid to provide more details.

Thanks, John. Last quarter, in addition to external factors like the competitive landscape, we identified two separate yet interrelated issues that impacted our monetization business: a data quality issue and the accuracy of our audience pinpointer products. Starting with the data quality issue, that one is now behind us. We have removed the bad data that was inadvertently ingested from interacting with our models. Furthermore, we have fortified our monitoring capabilities and observability for our machine learning models to mitigate these rare types of events should they occur again in the future. In this process, we also improved our data incident response time to address issues more comprehensively and promptly. We have invested significantly in our audience pinpointer product, innovating on our models and customer experience to address our past scaling challenges. As a result, we have seen performance and accuracy improvements at scale, particularly in our contextual product, which is most meaningful for our customers impacted by privacy changes. We are seeing our progress reflected in customer success. For example, Trail Mix, a studio responsible for the creation of the hit title Love & Pies, which won the best casual game at the TIGA Games Industry Awards, collaborated with Unity from the early stages all the way up to global release. They refined targeting, tested creatives, and scaled up their user acquisition efforts. Using audience pinpointer, the team was able to test the target audience and accelerate their growth journey after global release, achieving strong engagement metrics with 60% retention by day 1 and retaining players at an impressive rate of 20% by day 30. We remain confident in the long-term outlook for monetization in games. In fact, we are not shying away from making bold moves during this time. We seized an opportunity and announced our intention to merge with ironSource to leapfrog our roadmap and accelerate value creation for our customers, Unity, and our shareholders, which John will address shortly. Let me close with an update on Unity Gaming Services, or UGS. UGS is a suite of tools and services developed to simplify every developer's ability to create, host, and manage their games in the cloud through a single dashboard experience. Today, more games are multiplayer social experiences connected in the cloud. We designed UGS to be modular to let creators select the best tools for their use case, whether the game was built with Unity, Unreal, or any other game engine. With UGS, we host many of the world’s most popular games, enabling proven and robust voice and chat solutions with Vevox while simultaneously measuring game performance and engaging players with Unity analytics, all within one UGS platform. UGS supports creators with a consumption pricing model so they can work how they want and only pay for what they use. That’s a powerful business proposition, and we plan to take more of our platform in that direction in the coming years. Today, we are simplifying these services so that small and large developers alike can launch experiences at the scale of their choosing. Self-serve functionality allows developers to access and explore our products autonomously, increasing our market reach. A few weeks ago, we published a case study with AXL Bot Studios for Standard 2, a first-person shooter with millions of players, illustrating how they self-served integration of voice chat from Vevox four years after their initial mobile game launch, enhancing their in-game community and achieving a 63% increase in day 90 player retention. This quarter, we are excited to launch multiplay’s game server hosting and matchmaker self-serve functionality to bring battle-tested AAA multiplayer services to developers of all sizes. Multiplayer games are exceptionally complex to develop and often require large teams and significant investment. Since our beta in October last year and becoming generally available in June, the signs are promising for UGS. We have seen more than 50,000 game developers sign up, with 2,300 new customers added since our GA launch in June. While it is still early days, we are optimistic that UGS will become a meaningful part of Unity's technology offering. We look forward to sharing more customer success and performance metrics from across the UGS platform next quarter. With that, let me turn the call back over to John.

Thanks, Ingrid. As I said at the top of the call, the AppLovin proposal was received, and we will not comment at this time. A few weeks ago, we announced that Unity and ironSource intend to join forces and combine creation and growth into a single platform to increase creators' success. Today, I want to spend a few minutes framing the key messages on how we, together, will help creators achieve success consistently based on data rather than just intuition and luck. The key messages shared when we announced the intent to merge with ironSource are as follows: First, we intend to accelerate our path to becoming a leading end-to-end platform combining creation and growth in a way that creates great value for our customers. Game companies and industries beyond gaming will be able to produce better content and enjoy superior user acquisition and customer success. We expect this will propel both their business and ours. Second, we expect to capture synergies from combining our platforms, driving greater customer success and enabling the new Unity to deliver $1 billion adjusted EBITDA run rate by the end of 2024. Third, our combined company is anticipated to have a roughly 50-50 revenue mix between our creation and growth technologies and services. Our intent is to unite the work of creating content and engaging users in one integrated process where data flows from the growth platform into the creation process to enhance the game. It will start with a piece of content, perhaps a single level for a mobile game. That level will be linked with sophisticated tools for user acquisition and creative tests, enabling creators and their growth experts to understand and learn from early indications of user engagement, monetization, and the costs associated with acquiring users, alongside the engagement metrics and, where relevant, the LTV of those users. This is what game developers have done for years with A/B testing and learning from soft launches, but we can make it easier, smarter, and more effective. Based on this learning, creators can iterate and change aspects of the content, the advertising, and user acquisition strategies targeted at driving greater financial success. As more experiences in the future will be live, the content will evolve over time, and this process will continue. Our customers' creation and growth teams will be in a continuous feedback loop of learning and improvement, where greater data scale will enhance the process for all games created with Unity. Together, Unity and ironSource strive to bring unprecedented value to our customers. We aim to provide what every customer needs, whether that customer is a mobile game, a console game, or a PC game, and whether the developer seeks to monetize or simply create for enjoyment.

Thank you, John. In the second quarter of 2022, we delivered revenue of $297 million, up 9% year-over-year and at the high end of our guidance range. Create performed strongly with revenue of $121 million, up 66% from last year. As expected, operate was impacted by the issues discussed last quarter. Revenue of $159 million declined 13% year-over-year. Strategic partnerships and other delivered $18 million in revenue, down 2% from a year earlier. As we have seen over the years, the strategic partnerships and other business, quarterly results are impacted by the timing of key platform arrangements. At the end of the second quarter, we had 1,085 customers with trailing 12 months revenue around $100,000, compared to 888 customers at the end of the second quarter of 2021, an increase of 22% year-over-year. This lower growth rate in our customer count above $100,000 is driven by Operate. Our 12-month trailing net dollar expansion rate came in at 121%, down from 142% last year. The drop in our net dollar expansion rate is mainly due to Operate. Our second quarter non-GAAP gross margin was 74.1%, down from 81% a year ago. This decline in year-over-year gross margin is primarily due to a lower mix from monetization, which has a higher gross margin than the average, as well as the impact of Weta, as engineers supporting the business are charged to the cost of goods sold. The non-GAAP operating expenses in the second quarter increased 19% compared to the second quarter of 2021. Year-over-year, R&D, sales and marketing, and G&A expenses grew 26%, 18%, and 4%, respectively. All three line items saw favorable expense trends due to slower hiring, lower professional fees, and favorable exchange rates. We ended the quarter with 6,246 employees. Non-GAAP loss from operations for the second quarter was $44 million or -14.9% of revenue. This compares to guidance of $62 million to $64 million. We beat guidance as we're making strong progress against the $100 million cost savings program that we announced last quarter. Cash flow from operations was $43 million negative. We had 298 million outstanding and 360 million fully diluted shares at the end of the second quarter. Moving on to guidance, for the full year, we're providing guidance of $1.3 billion to $1.35 billion, as stated when we announced the intention to merge with ironSource. This is a reduction from the previous guidance of $1.35 billion to $1.45 billion shared during our last earnings call. This reduction in full year guidance is driven by recent negative macroeconomic factors and the complexity of accurately forecasting the timing of changes in the trajectory of the monetization business. We believe that the $50 million range in our full year guidance is appropriate given the uncertainties in the ad market. We continue to invest to strengthen our products with additional features that we expect will produce stronger performance in the third and fourth quarters. For the third quarter, we expect revenue between $315 million to $335 million, implying fourth quarter revenue of $368 million to $398 million. At the midpoint of these figures, we expect the third quarter to grow 14% year-over-year and the fourth quarter to accelerate to 21% year-over-year as we anticipate stronger performance throughout the year and improving performance in operations. We remain committed to achieving non-GAAP breakeven profitability in the fourth quarter of this year, despite the lower revenue expectations. We are making significant progress against the $100 million cost savings program announced last quarter while preserving essential investments in innovation that will drive our growth. For Q3, we forecast a non-GAAP operating loss of $35 million to $50 million. For the full year 2022, we expect a non-GAAP operating loss between $95 million and $115 million. The higher projected full-year losses reflect a more gradual recovery ramp in Operate, partially offset by additional cost savings. We expect 301 million primary shares and 375 million fully diluted shares by the end of the third quarter, and 376 million fully diluted shares by the end of the year, excluding any shares issued in connection with our pending ironSource deal or related stock repurchases. We continue to believe that there is a substantial opportunity in front of us and that we are very well positioned to capture it. Our Create business is performing strongly, and we expect sustainable growth moving forward, fueled by our innovation and market tailwinds. We are also innovating in our Operate business by delivering products that empower our customers to succeed, providing performance and resiliency at scale. We are confident that the ironSource merger will strengthen us by offering our customers an end-to-end platform that benefits creators and shareholders alike. Recently, we formed a joint venture with leading partners in China to operate within the Unity China space. This venture will allow us to consolidate our efforts and investment while taking advantage of opportunities within the Chinese market. This is a very strategic move for Unity, and we expect it to contribute positively to our growth in the region.

Great. Thank you very much. As before, we will proceed to the Q&A section. Kenneth and Eric, if you can promote the team to analysts, that would be great. Our first question comes from Stephen Ju at Credit Suisse.

Okay. John and Marc, if you're AWS, you know exactly who you're calling at any given company. But for Unity, it was not always clear to us who you're placing that call with on the Create side. As you discuss how Create's non-gaming revenues now account for 40%, how has that selling motion, particularly to those companies outside the gaming industry, evolved over time?

Marc, I'll take the top of that, and then I'll let you build on it with examples of our work. So Steve, a couple of thoughts here. One, we've gone through a pattern over the last few years where we were initially doing things that were at such a small scale that companies didn’t know who we were or how to use real-time 3D. The deals were very small. Now what we're seeing is a continued inbound from the top of the funnel with a solid go-to-market strategy. Mark will elaborate on that. We're seeing second and third deals with the same customers, so we’ve developed a 'land and expand' approach. We’re also writing larger deals as clients understand what they can achieve with real-time 3D. So, the reason we’re seeing the increase as a percentage of our business is due to more customers, larger customers, and successful 'land and expand' initiatives. Marc, do you want to build on that?

Yes. Thanks, John. Over the last several years, we've been building unique solutions that are helpful for a variety of industries as they explore how they can leverage real-time 3D. We see this in tools like Forma, used for product configurators in automotive and other sectors, and Reflect, which is utilized in architecture, engineering, and construction. We have also developed tools like Pyxis for managing large volumes of 3D data, a common problem in that domain. As we've identified the needs of our customers, we've also built resources that work alongside the core Unity engine to make their work more manageable. The Accelerate Solutions team has been instrumental in assisting companies at the onset of their journey towards real-time 3D. Through our professional services organization, we collaboratively build solutions, helping them learn during this process, which often leads to repeat business in ongoing arrangements.

One last point on this: if you reflect on a few years ago when we were preparing for our IPO, several investors questioned me when I indicated that we expected it would take 3 to 5 years for our business outside gaming to catch up. Well, that has happened exactly as anticipated, and there are numerous industries where real-time 3D can have a significant impact; companies are creating real-time digital twins to simulate future scenarios and understand their current operations, thus strengthening their businesses and enhancing customer relationships. The overall trend is encouraging, and we feel positive moving forward.

Next is Kash Rangan at Goldman Sachs.

Thanks for all the details, John and crew, regarding the immense progress on the Create side. On the Operate, I’d like to pivot the question since I am not an expert in mobile gaming and advertising. John, you mentioned having a better handle on data—data vs. macro vs. competitive impact. How much better informed is the company on each of these three potential contributors to the issues that caused a shortfall? Furthermore, what are the steps you are taking to ensure that similar issues do not arise in the future?

Kash, thank you for the multi-part question. I'll aim to keep my response concise. Firstly, on the macro side concerning Operate, the majority of our business—specifically in gaming—remains robust and a growth sector. We can look back through the last five or six recessions, and historically, the gaming industry has shown growth during those periods. Yes, we’re currently dealing with short-term headwinds, primarily due to macroeconomic factors, which have been echoed by various game companies exhibiting muted revenue and forecasts. However, we feel confident we'll prevail over these challenges as this is a long-term growth market. Regarding our own platform issues, I want to highlight the excellent work Ingrid has led; they established eight focused task teams working diligently on various aspects, including improving data integrity, engineering challenges, and innovation in product features. It has been a comprehensive effort, and they've presented strong KPIs for corrective measures which should mitigate these challenges going forward. Ingrid, would you like to elaborate?

Absolutely, John. Building on your points, we made substantial investments in our audience pinpointer products and have become far more disciplined in our resources during this period of constraint. This focused approach has driven our innovation and how we optimize our models to drive better performance for our customers. As we eliminate excess spending, the goal is to create value for our clients by achieving more incremental installs with reduced spend, which motivates us to innovate continually. We're also exploring new ways to increase the velocity of our model development and optimize our systems further to reinforce resiliency against future occurrences. We expect this proactive approach will enhance our performance and systems overall.

Exactly. We are now measuring more and have built the necessary redundancy and resilience. We monitor datasets that were previously overlooked to ensure early warnings for any issues arise, which allows us to address them promptly without repeating past challenges.

Next, we have Clark Lampen at BTIG.

Thank you. I have two questions. Firstly, acknowledging your comments about the crosscurrents with macro conditions and the visibility for the second 90-day phase where you need to rebuild data. I’m curious if you’re considering offering customers any incentives to drive platform usage, especially in what seems like a challenging ad market? Secondly, as your array of products expands and becomes more compelling for gaming customers, do you feel you have any flexibility with bundling your products to maximize dollar generation while making monetization more competitive?

While we cannot say we would never consider incentives, that typically falls lower on our priority list since it does not yield improved long-term results. This realization is a fundamental part of our approach. Also, we are still early in the development of the Unity Gaming Services. UGS is an extensive and powerful suite of tools and features that every customer requires when launching games or applications. When companies develop a new game, we’ve noticed they hit a wall with multiple SDKs to implement, alongside investing in various required services. I’ve witnessed how game companies face challenges when first integrating online functionalities or mobile gaming. Ingrid’s team has carefully focused on this issue and developed a comprehensive solution that eases the onboarding of different services, providing a solid foundation for customers. This is a substantial competitive advantage we offer.

I think our last question comes from Matt Cost at Morgan Stanley.

On Operate, to zoom in a bit more, had the data quality and pinpointer issues not occurred earlier in the year, would Operate revenue have reached the $160 million level you reported this quarter, or was it mainly macro driven? And what work remains to improve your tools and scale spend? Additionally, about the China JV, seeing that Greater China accounted for about 15% of your revenue last year, which contributes to a sizeable business, what will this joint venture enable you to do that you cannot accomplish today?

Ingrid, would you like to address the first part regarding Operate? I can jump in thereafter.

Sure. In terms of specific numbers, it is challenging to attribute accurately to macro conditions versus audience pinpointer and data issues. However, it's clear that the data issues at the start of the year significantly impacted our performance. Now, our data incidents are resolved, and the audience product continues to strengthen. Currently, we observe a slower uptick in advertising spend since advertisers are more cautious due to macroeconomic concerns.

You're correct, Matt, in recognizing both aspects at play. In our last earnings call, we acknowledged macro factors alongside internal challenges, as we prefer to focus on our operational issues rather than the external environment. There were clear areas we needed to address, and we moved to resolve them. Regarding China, I commend Luis and the team for their hard work. This initiative uniquely positions us for sustained growth in the coming years. We've partnered with several leading technology companies to foster technological development across gaming and beyond. This relationship allows for targeted engagement and investment opportunities in China, tailoring our strategies to fit the unique market landscape.

To clarify what John mentioned, the 15% figure you quoted represents the total China business as a percentage of our revenue—not all segments are in scope—specifically reflecting the Create business, which stands at around 5%. That equates to the growth of $50 million I referenced previously.

Our closing question is from Jason Bazinet at Citi.

Just to clarify on the China joint venture: Am I correct that there will be an influx of approximately $1 billion in cash, and will we account for non-controlling interest on the income statement once this deal concludes?

Correct, but we will still consolidate the China results. For the JV, we will receive $220 million, which will remain in the venture, so no cash inflow will be reported. We retain majority ownership and control the Board. Additionally, there are multiple operating agreements between our global enterprise and the China operation, bolstering our confidence in the structure. Meanwhile, our leadership team in China is led by an executive with whom I’ve collaborated for over a decade. I have full trust in the leadership we have there.

Thank you all very much for participating in today’s call. We look forward to connecting with you over the coming weeks at conferences or follow-up calls. If you need assistance navigating our journey, feel free to reach out to Stephen Palmtag or myself. Thank you, John, and if you would like to close, feel free.

Exciting times, everyone. Thank you for your support. We couldn’t be more thrilled about the opportunities ahead, and we continue to pursue these with the same drive as always. Thank you all.

Thank you.