Unity Software Inc. Q3 FY2022 Earnings Call

Thank you, and welcome to Unity's Third Quarter 2022 Earnings Call. After the close of the market today, we issued our earnings press release and earnings presentation. These materials are available on our investor website at investors.unity.com. Today, I'm joined by John Riccitiello, our CEO, President and Chairman; and by Luis Visoso, our CFO. Now before we begin, I want to note that today's discussion contains 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. Actual results may vary and we take no obligation to revise or update any forward-looking statements. As in prior quarters, we are providing both GAAP and non-GAAP financial measures. Unless otherwise noted, we will be speaking to non-GAAP financial measures when describing our results. The earnings presentation and press release are available on Unity Investor Relations tab as well as sec.gov and they include full GAAP and non-GAAP reconciliations. And in the fourth quarter, we plan to present at investor conferences with BTIG, Credit Suisse and Barclays. Full details are also available on our website. With that, I will turn the call over to John.

Thank you, Richard. I want to start the call by welcoming everyone at ironSource to Unity. The merger closed on Monday as expected. We will report consolidated results starting in the fourth quarter of 2022. Together, Unity and ironSource will write the next chapter of Unity's journey as we capture the large real-time 3D opportunity in front of us. In fact, we feel more positive about the merger now than we did when we announced the deal on July 13th. Today, only a fraction of creators succeed in the creator economy. We are passionate about changing this reality, because we believe the world is a better place with more creators in it. By combining forces, we believe Unity and ironSource will transform the industry and increase creator success by replacing luck with science. We expect to achieve this through an end-to-end platform that enables creators to build better games and better user acquisition and everything in between by solving our customers' toughest problems. As a result, we expect to be a highly profitable company operating with positive cash flow. Moving on to the financial performance of the third quarter. Unity delivered a good quarter with revenue and non-GAAP operating income in line with guidance. Create posted a strong quarter, and our internal performance challenges in Operate are behind us. Total revenue for the third quarter was $323 million, up 13% year-over-year. Create delivered $129 million in revenue this quarter, an increase of 54% year-over-year. Operate delivered $172 million, down 7% year-on-year and up 8% as compared to the previous quarter. Strategic partnership revenue of $23 million this quarter is up 28% year-over-year. Non-GAAP loss from operations of a negative $37 million came in at the better end of the guidance range, as we continue to make progress with our cost structure on our way towards breakeven by the end of the year. Now, let's dive into Create. Q3 was another strong quarter for Create Solutions. We continue to see strong customer demand in our core Unity Engine and our newer segments of Digital Twins and Artistry. We are enabling our customers to create extraordinary real-time 3D experiences in games and across industries, which we believe will accelerate our growth. Innovation is the foundation of everything we do at Unity. A great example of this is our Data Oriented Technology Stack, or DOTS. DOTS allows creators to get more performance and more scene density on any device they target, by optimizing real-time 3D experiences in ways that take better advantage of modern chip architecture. This quarter, we released our Entities 1.0 experimental release. This release includes critical functionality to allow creators to achieve native code performance with the ease of C# development, support massive data streaming through all Unity rendering pipelines with significant improvements in rendering performance with our updated Occlusion Culling System. It's encouraging to see compelling examples of creators using these tools to deliver spectacular games of all types, from Open World MMOs to Strategy to Racing. Some recent games that use DOTS include V Rising by Stunlock Studios, Zenith: The Last City by Ramen VR, IXION by Kasedo Games, and Detonation Racing by Electric Square. Another good example of the end-to-end focus on enabling creators to build, launch, and scale terrific games is IXION, our work with MARVEL SNAP, developed by SecondDinner. SecondDinner developed their game using Unity, and they are also using a Unity Games Services Customer. We love the success they're seeing in their new launch, currently number one on iOS and Android app stores in their category. As Aaron Brunstetter said, the Senior Director of Software Engineering at SecondDinner, 'Unity is a very close relationship for us. It feels like we're one team with a shared purpose, taking on challenges together.' That's thanks to everyone here who has joined us on this journey, which in all reality is only just getting started. We couldn't agree more. Outside of games, we are seeing similar results. This quarter has continued our strong momentum in Digital Twins. A few examples: Tilbury Douglas just launched their Connect Configurator. This enables them to bring forward insights and better decision-making with their clients earlier in the construction process, eliminating delays, material waste, and rework. The Orlando Economic Partnership is working on the initial phase of the world's first immersive 3D regional Digital Twins. This project combines 80 different existing data sources, over an 800 square mile region, to provide an immersive 3D experience, and gives companies looking to expand their businesses to the Orlando region a much more effective and engaging way to understand the region, infrastructure, and demographics. I also want to talk about our progress with Parsec and SyncSketch, which together make up our Create Anywhere business. We continue to see very strong demand as companies around the world reconfigure and make permanent investments to support creators collaborating and creating in hybrid work scenarios. The combined annual recurring revenue of the businesses in Create Anywhere grew over 100% year-over-year due to product innovations that continue to drive our product line growth and accelerate our enterprise sales. In fact, in the third quarter, we closed our largest Parsec enterprise deal to date, which was over $1 million in annual recurring revenue. In Create Anywhere, we now have 25 customers contributing over $100,000 in annual recurring revenue. SyncSketch has become the go-to collaboration tool for creators in the media and entertainment industry. Recently, Raised by Wolves, an HBO Max show from Executive Producer, Ridley Scott, who has a very high bar for visual quality in their futuristic sci-fi world, relied on SyncSketch to collaborate on nearly 3,000 complex visual effect shots with a geographically distributed team. The Raised by Wolves team was able to work with executives, vendors, and the production team for reviewing sessions throughout pre- and post-production. Putting all this collaboration online made it easy to meet deadlines and deliver a world-class production. Last quarter, we announced and launched a significant pricing and packaging change within our Unity Pro, Unity Enterprise, and Unity Industrial Collection offerings. We raised the price between 13% and 25% across these offerings, the first significant price change in three years. More importantly, we aligned these offerings to better fit the needs of sub-segments and creators. This means adding functionality like Mars, our XR authoring environment, and Havok, a high-performance physics engine often used in the creation of advanced games as well as optimizing support and customer success for Unity Pro, Unity Industrial Collection, and Unity Enterprise offerings. Unity Enterprise customers are also receiving read-only source code to enable more rapid debugging and optimization and an extra year of long-term support for enhanced stability, both highly demanded by these customers. These are foundational changes that will continue to build to improve our take rate significantly by adding value that our customers are happy to pay for. We also continue our shift towards the cloud and the predictable revenue model. This quarter, we released a private offer of our cloud-based Digital Twins solution. This platform is designed to enable the end-to-end creation and use of real-time interactive 3D Digital Twins with capabilities across any industry, all powered by cloud services. The platform is in private preview internally and with select customers in information technology, energy, and construction. We'll have more details on this platform as we move beyond our alpha stage. Across Artistry, Digital Twins, and Games, we are encouraged by the momentum we see in customer demand and the significant market opportunity across short, medium, and long-term with Create. Moving on to Operate, I want to welcome the team from ironSource to Unity. From here, we're merging ironSource and Unity, and the combined teams will come together under Tomer's leadership. Ingrid and her team will form a key part of the new team, as well as the founders and teams at ironSource. With that, I will now speak to Unity Operate in Q3. Operate delivered sequential progress in the third quarter with 8% quarter-on-quarter growth. This quarter, we increased competitiveness in our core product, and as a result, we are growing our share of spend with several of our largest customers. With increased traffic comes increased spending on our platform. We continue to improve our models and have a healthy pipeline of ongoing initiatives. We also saw an increase in new publishers partnering to integrate advertising placements with Unity. Looking at 2022 as a whole, there's no doubt that the ad side of Unity Operate has experienced a challenging year. Between 2019 and 2021, the team navigated essentially flawlessly through complexities that have tripped up many others, and they grew revenues at a 55% CAGR. We undoubtedly benefited from COVID stay-at-home mandates. However, in 2022, we experienced the operational challenges we have well described in prior calls. These problems have been addressed and are now in our rearview mirror. Our teams have rallied and executed well to begin the process of regaining market share and position. Moving on to Unity Game Services or UGS. We are pleased with the uptake for UGS since going general availability this summer. UGS unifies in a single suite more than a dozen analytics tools, cloud orchestration, and embedded voice and multiplayer functionality. UGS is an example of how we address acute needs, reducing complexity for our customers. We price these services on a consumption basis, so studios only pay for what they use, and we scale as they succeed. UGS also unlocks added synergy in our model. Create, Operate, and UGS working together solve more of our customers' key challenges. A great example is how developers at SecondDinner use our editor to build Marvel: Snap. Our editor seamlessly connects to our UGS services, which made it a simple decision for SecondDinner to self-provision our cloud content delivery and cloud-built modules that are part of UGS. The result was a blockbuster game that features brilliant design combined with an exceptional user experience delivered by UGS. This is our mission for every creator. In September, we introduced Multiplay and Matchmaker self-serve. The mobile game market is evolving and will evolve to player-versus-player multiplayer games, much like the market for console games and PC games has evolved. Multiplayer games have proven to realize much greater player engagement. Players enjoy them more. And with more engagement comes more opportunity for revenue. But until now, building multiplayer functionality for mobile games was just too complex. With the launch of these two self-serve products, we solve this difficult networking challenge and made the technology easy to provision and manage at scale for developers and studios of all sizes. With that, I'll step back and look at the games ad market overall. The current softness in the ad market weighs on my mind. I want to address this with you to put future performance and plans into context. One key question is what has happened in the games ads market overall in recent years in light of Apple's changes in privacy programs, which began in Q2 2021. While we did see some change in spend between iOS and Android, the overall ad market had an incredible year in 2021, partly fueled by higher player engagement due to players being at home during COVID. Looking at 2022, Q1 2022 was strong for the in-game ad sector, with year-on-year growth in the teens. We estimate overall in-game ads growth was up approximately 10% year-on-year in Q2 and slowed to low single digits in Q3. We currently expect the sector will be flat year-on-year in Q4. In terms of player engagement, as the first half of 2022 unfolded, we began to see some softness in overall player engagement versus the elevated COVID levels of 2020 and 2021. But it's important to note that engagement was up cumulatively a full three years' worth versus pre-COVID. And when we look at daily active users, or DAUs, we're actually seeing an increase in Q3 this year versus Q3 of last year. Despite market conditions, users continue downloading and playing games, proving the sticking power of this entertainment segment. This speaks to the long-term resilience of the game business. What is new starting in Q3 is that CPMs have to slow on both mobile operating systems. The timing here is clear. The declines take place as the world's banks increased interest rates and the narrative of recession has been prevalent in the media, not earlier when privacy changes took place. When we talk with our advertisers, the sense we get is clearly one of caution and reluctance to commit to aggressive campaign spends that would crowd out competition at the bid and elevate CPMs. In this context, we remain confident. The market for ads is experiencing recession sentiment. While we don't know when it will end, strong consumer engagement will ultimately bring back growth in this dynamic ads market. With ironSource, we become the leading end-to-end platform in the market, supporting the developer throughout the entire development cycle, from opening a project in Unity Editor all the way through making a successful business supported by our data science. As such, we are positioned to lead the market and be the main beneficiaries of a market recovery. While market conditions are challenging, we have a unique opportunity to gain market share and invest in positioning ourselves to grow rapidly once macro conditions improve. Our end-to-end platform will be a critical enabler in helping creators thrive, even in a challenging market. By enabling more game creators to build successful businesses, we will ultimately grow the market overall. LevelPlay becomes Unity's mediation offering, delivering unparalleled reach to creators and helping them tap into a combined global network of more than 3 billion monthly active users. Unity LevelPlay will have plug-in integration to the Unity Editor and deliver superior performance for the Unity Ads and ironSource ads networks, while SuperSonic adds critical publishing capabilities to our offering, helping even more developers successfully launch and scale their games. We believe the new Unity Growth platform can and will materially outperform the industry, gaining share through our ability to drive success for our customers. Before turning the call over to Luis, I want to reinforce a few points that we've made before. First, Unity is well-positioned to capture what we believe is a very large opportunity as the world moves from linear 2D to real-time 3D. We have a strong position in games and are making strong progress across industries. Second, we believe that Unity with ironSource provides a unique end-to-end platform that solves more of our customers' toughest challenges, enabling us to accelerate our revenue growth, making Unity cash flow positive and adding new capabilities and amazing leaders. We believe the new Unity Growth platform can and will materially outperform the industry, gaining share due to our ability to drive success for our customers. Third, advertising is an integral part of the games business model. Gamers are highly engaged, and only a small minority pay directly for the games they play. Advertising and in-app purchases are the way creators monetize their games. Most players welcome ads as a way to discover new games to play. While we are in an advertiser sentiment recession, we believe that the ads market will remain resilient, even with last year's changes to privacy. We expect Unity to sustainably grow at a 30% growth rate. As we've said in the past, this will not be the case every single year, but is the compounded growth rate that we expect to deliver. We will guide 2023 in our year-end earnings call when we have a better view on the economy and, in particular, the in-game ad spend trends. At that point, we will have a much better handle on advertiser sentiment. We have clear plans for Create to continue to deliver strong growth and for Grow to outpace any ad market we experience. Finally, what about profitability and cash flow? Luis will delve into this in more detail. But in the fourth quarter, we expect to be positive. This has always been important to us. It's even more important in challenging times. This strong financial position is further testament to our ability to capitalize on the opportunity ahead of us. With that, let me turn the call over to Luis.

Thank you, John. The third quarter came in line with guidance for revenue and non-GAAP operating income. Create continues to perform strongly, and our Operate challenges from the beginning of the year are behind us. In the third quarter of 2022, we delivered revenue of $323 million, up 13% year-over-year and in the middle of our guidance range. Create continues to execute well with revenue of $129 million, or 54% year-over-year. Despite the challenging economic environment, Operate delivered $172 million in revenue, up 8% quarter-on-quarter, and down 7% year-over-year. Strategic partnerships and other delivered $23 million in revenue, up 28% from a year earlier. At the end of the third quarter, we had 1,075 customers with trailing 12 months revenue above $100,000. This compares to 973 customers at the end of the third quarter of 2021. The lower rate of growth in our customer count above $100,000 is driven by Operate. Our 12-month trailing net dollar expansion rate came in at 111%, down from 142% last year. The drop in our net dollar expansion rate is driven by our operating business. Our third quarter net non-GAAP gross margin was 74%, down from 81% a year ago. The year-on-year gross margin decline is mainly due to the lower mix from monetization, which has a higher gross margin than the average, as well as the impact of Weta, as engineers supporting that business are charged to cost of goods sold. Non-GAAP operating expenses increased 16% versus last year's third quarter and 4% sequentially as our cost containment efforts continue to take hold. We expect to significantly exceed our $100 million cost savings plan discussed at the end of the second quarter. We closed the quarter with 6,244 employees, compared to 6,246 employees at the end of the second quarter. Non-GAAP operating income for the third quarter was negative $37 million or negative 12% of revenue. This compares to a guide of negative $35 million to $50 million. Cash flow from operations was negative $70 million, which includes an $18 million payment to a publisher that had not collected their payout for several years and a $10 million M&A cash payment that is excluded from non-GAAP operating income. Unity had 301 million basic shares outstanding and 403 million fully diluted shares at the end of the third quarter. The difference in fully diluted shares compared to our Q2 guidance of $375 million is entirely driven by the lower share price, which impacts the conversion of the convertible notes. Moving on to the fourth quarter, our guidance includes ironSource financial results as of Monday this week and our best estimate of the impact of the economic environment. For the fourth quarter, we expect revenue between $425 million to $445 million, an increase of 35% to 41% year-over-year. We expect full-year revenue between $1,365 million and $1,385 million, an increase of 23% to 25% year-over-year. Let me break down the details. First, this is down approximately $60 million from the time-adjusted prior guide for the combined companies. Second, within this, we expect Create to continue to perform strongly. Regarding ads, we have taken a conservative view this quarter given that we have not yet seen the seasonal rise in CPMs that typically happens during the holidays. We have reasons to be optimistic given our recent gains in mediation and the expectation that this can result in share gains. For the fourth quarter, we're guiding non-GAAP operating income between $5 million and $15 million. Implied full-year non-GAAP operating income is between negative $88 million and $98 million. For perspective, we expect Unity to break even and be cash flow positive by the end of this year. We will build from that base in 2023. With the ironSource merger, we issued approximately 113 million shares. Additionally, we issued $1 billion of convertible notes with a 2% interest rate and a $48.89 conversion price. We expect to have 416 million basic shares outstanding and 562 million fully diluted shares at the end of Q4, which includes 46 million shares to convert convertible notes and 29 million shares to convert the PIPE investment. We will provide full-year guidance for 2023 with Q4 earnings. Our guidance will factor in the very large opportunity in front of us, the synergies from the ironSource merger, and the near-term impact of the potential economic recession. We remain committed to our $1 billion EBITDA run rate goal by the end of 2024 and to deliver significant EBITDA and free cash flow progress in 2023. Near-term, we're cautious given the potential for recession. While we expect to expand market share in 2023, as long as the ad market sentiment remains in recession, we expect to guide revenue growth lower than our sustainable growth target.

Great. Well, thanks very much, everyone, you all know the plan and raise your virtual hands, and we'll answer questions for the next 20, 25 minutes. I guess, our answers are so good.

Thanks. Hey, guys. A lot of information to digest. Could you maybe—I may have completely missed this, but could you give us some indication of ironSource results quarter at least what the revenue growth was? And then could you speak a bit more about the mediation platform and the market share gains and kind of a multipart question here. Given the issues that you had earlier in the year and you see that problems are behind you, were you indicating that you are already regaining market share from that, or are you saying you can gain market share now with the mediation platform that ironSource brings in? Thanks.

Look, I'll take a little bit of that and ask Luis to add to it. So first off, we didn't provide independent and separate ironSource results. Luis may want to speak to the why and explanation on that. Secondly, what we would say is, from this point, we're combined. On the network side, we're seeing really strong growth on the Create side. I think we just reported 54% growth in the third quarter, and things have been going well all year for us with strong gains across the portfolio in gaming and Digital Twins. The recent launch of the Digital Twin platform adds ratable revenue. In terms of the ad network side, our expectation because now we do mix these things and work them together, is to be slightly up in combined network year-over-year in a flat market, implying a little bit of market share gains. What we're seeing in the market is that a very large number of customers are excited by the combination of Unity and ironSource coming our way.

Yes. Tim, just—we closed the transaction this Monday. So we are not reporting Q3 together as companies. We will guide together for Q4, and we will report Q4 as a combined company.

Okay. So no ironSource standalone Q3 revenue number to share?

That is correct, Tim.

Okay. And I know you've only owned it for two days or three days or whatever it is now. Anything you can tell us that you actually got the cover off the new merger now?

Yes. I'll tell you, I'm super excited. Super, super excited. I think that getting the two companies together is going to be super helpful for us, and I'm very optimistic about the value we can create for our customers and our shareholders.

Yes. Just to build on that, I'm super excited as well. The management teams have come together very well, with positive energy and synergy really at the executive level and all the way through the organization. The second thing is just a reminder of how complementary the offering is. Our biggest gap was mediation. We now have a leading and, I think, best-in-class mediation solution with LevelPlay. Secondly, their skill set and offering in products like SuperSonic on the publishing side, which leads to ad revenue growth but is also an independent business unto itself, and is profitable. And then on top of that, businesses that we don't spend a lot of time talking about, like Aura, which has a strong position and good growth. Those things are part of the combined strength.

Thanks a lot.

Great. Jason?

I just had a question for Luis. Before everything slowed down in the mobile ad market, if I just looked at the consensus numbers for where the Street was on ironSource and for Unity and add in the synergies, the Street wasn't at $1 billion of EBITDA by 2024. Yet, if I heard you correctly, you're sort of standing by that sort of outlook for the year after next, 2024. Is that accurate?

Yes. Just to be super clear, Jason, the $1 billion is our run rate at the end of 2024, not a forecast for the full year. So what we're saying is, at the end of the year, we'll be at that rate.

Okay. And we continue to believe that that's the right place to be for us. We believe there’s a significant revenue opportunity between the two companies as we've talked back in July, and there is a significant cost opportunity that we'll be driving, and will create a lot of value, we believe. So yes, we're standing by the $1 billion by the end of 2024.

It's really important just to keep in mind rapid growth on Create, very confident in our business there. What we're seeing across ProArt and Digital Twins and the gaming sector makes us feel really good. I mentioned in the prepared comments, our everywhere strategy, and what we're getting with customers in a remote hybrid model is very strong as well. Drivers on the network or ad side are also very strong. We think we can gain share in virtually any market and we feel good about that combination. The gap in our network for locking mediation is a big part of our strategy. The data combination is a new combination that yields upside for us and our customers. We feel quite good about the combination and I don't see any reason to walk away now. Of course, we will be giving guidance in the early part of the year; we'll have a much better fix on the economy at that point, and we'll be ready to talk.

Okay, super helpful. Thank you.

Great. Clark Lampen.

Hey, guys, can you hear me?

Yes.

All right. Wonderful. So I...

We lost him.

We lost Clark.

There we go. He'll probably pop back in, hopefully. We didn't quite get enough of the question, I think, to answer that one. There we are. Clark's back.

Am I back now?

You're back.

Can you hear me?

Yes.

Okay. Sorry about that. So John, earlier in the call, you were talking about the value for developers in a tougher operating environment with an end-to-end platform. I'm curious if you could give us a sense for although it's only been three days now, the undertaking with integrating all of these sort of pieces together and bringing a solution for building pre-launch optimization and monetization together, is that something that is really kind of Herculean, and then sort of bringing everything together, or is this more think about the opposite end of the spectrum, basically just a reskinning and can come to market pretty soon? Second question I have is on the pricing adjustment that was made this quarter. I know that sort of just started to take effect, but is it possible you could give us a sense for how much that's contributing to Create in the quarter? And bigger picture, you guys talked about the way that there are new features being bundled in to provide some value alongside that uptick in price. Should we expect that going forward, price hikes could become maybe a more ordinary course of business? Thanks a lot.

Luis and I will take that 17-part question. We will do our best to remember it as we go along. So first off, the combined synergies, if you will, from Grow to Create. There are multiple layers to this, but think sooner than later. The vision isn't long out there. It's in front of us. We've been talking about this for a long time, and there is a high level of coincidence of opinion between our Create team and Grow team on this, and there's effort on that front. The second thing is I gave you an example today of what we're doing, just that with the new Marvel game, but is indeed doing just that across the Unity portfolio but not yet in the ironSource portfolio. I'll also mention something as simple as a plug-in. So we can do things like a plug-in for our LevelPlay mediation into the editor. When a customer is up and coming and they're trying to figure out what tools and what SDKs. It may not be obvious to everybody in the investment community, but a creator makes a game and then they're faced with what feels like a grocery aisle full of potential SDKs. What do they want to integrate? One of the massive advantages we have with UGS and multiplay and why we know this will help us do better is that a lot of these choices are made pre-launch. There isn't a commercial application. They're testing things. They test on Unity more often than not when they're building on Unity. And of course, most of this takes place in mobile. We've indicated multiple times that we have over 70% market share. We'll be talking a lot about synergy. I think it's easy to imagine that we did this merger to make up for a gap in mediation. There is so much more to this. When we talk to our Board, literally all we talk about is the synergy across the ecosystem and how we're going to realize it. We have a board meeting in December. We'll be hitting on that point again. We'll be sharing more with you in the next call. Now, on that side of the business, Luis, you want to pick up some piece? I’ll come back.

Yes. On the pricing question, we think that this is the right move. We have not seen any financial impact in Q3. As you may remember, we announced the pricing at the end of Q2, and it will take some time until we ramp and get new contracts into the new pricing. So you should expect an impact in 2023, not in 2022.

We explained how for game developers, Digital Twin customers, and others, we refined our offering to better meet their needs. Essentially, what that really means is more enterprise-scale solutions for them and more cloud solutions for them, including the Digital Twin platform. Our customers appreciate our SaaS model, and there was literally no resistance to the price increases. They felt the value was there. The mold from here is to save our customers money by connecting to them solutions that take out more costly approaches they have on their own, either through other third parties or developed on their own. The Digital Twin platform, for example, supports a number of things from hosting to data manipulation and calculation work, build processes, etc. These are all really expensive when unbundled, and we can bring them together and generate ratable revenue for Unity while saving our customers both big headaches and big money.

And Clark, as you alluded to, we're going to be innovating for each of our customer groups differently so that they get more value and therefore, we can charge a fair price, so that they gain and we gain as well. That's kind of what we are trying to do, as John mentioned in his prepared remarks.

Thank you. I apologize for a little background noise; I'm in the airport here. But I wanted to talk a little bit about the great business. I get that the games ad market has a lot of controversy, a lot of moving parts, and it will continue to be probably controversial well into next year. But the Create business crossed over $0.5 billion for the first time this quarter on a run-rate basis, with triple-digit growth in the Anywhere Create segment. It looks like over 30% organic growth. What's the durability of this business kind of heading into a recession? What's the pipeline opportunity look like? Talk a little bit about the Create potential, particularly going into recession, where it looks like things are really strong, but how durable is that strength? Thanks.

I'll take the start of that, and Luis may want to add. But look, Brent, we have strong conviction that this is a multibillion-dollar opportunity, and it's probably not just a single-digit billion-dollar opportunity. Second point is, while gaming is the majority of the business now, there are multiple sectors out there that look like they have the opportunity equal to or possibly greater than gaming. So, while we are gaming heart and soul, we love the application outside of gaming. One of the reasons we invested in Pro Art tools and Anywhere was to capitalize on that. Third, as much as I love a SaaS model, I love even more the ratable model. We’re solving some really important problems for our customers, both in gaming and digital twins and across various customer types. My belief, frankly, is that in the fullness of time, two to three years out, that ratable revenues will probably exceed our SaaS revenues.

Maybe it was not clear in my prepared remarks, but I also think that the investment in our platform in digital twins is a massive investment and enables us to build scale. This allows us to require fewer people to be able to build a digital twin business, which I think is going to enable us to grow much faster in the future.

Helpful. One quick follow-up, Luis for you. Any sense around the combined cash and investment level you have now post the PIPE, post the notes? And maybe your appetite to do the buyback here? How aggressive is the governor? Are there limitations? Just trying to understand the scope of the cash and investment position, and then the appetite to buy back?

As we talked before, the Board has approved a $2.5 billion share buyback program, and we'll be executing when we think it's appropriate, right? But we have all the authorizations to do that.

Thank you very much. Dylan Becker, are you on? There we go.

Yes. There we go. You can hear me, right?

Yes.

Cool. Hi. Maybe starting with John, you made a comment around the elevated player engagement and download trends you're seeing, and I'm curious how you think about this speaking to the importance of the monetization piece within the mobile ecosystem? And maybe your long-term confidence in that return on ad spend once that broader sentiment shifts?

Sure. First off, it's probably worthwhile to dispel a couple of myths that are out there. One of them is that mobile gaming is down. Engagement is up. I've been paying attention, and I believe all five of the largest mobile game publishers reported on average 4% growth in the third quarter, revenue growth against our in-app purchase business. And of course, the ad business, most believe, is outperforming that. I don't know if there's something about the dog ate my lunch in a world where the recession is on the front page every day, and you hear a lot about that. But I think the underlying facts support this thesis, and it's a pretty clear one. Yes, we are indexing on a period of elevated consumption with COVID that lasted a couple of years. There is no question we are holding up better than I would have thought against an incredibly challenging comp. If you look at any sort of three-year time frame, I think it's really evident we've gotten more than three years of growth in that time frame. So gaming is a very healthy business. You asked about ROAS. On a relative basis, it appears that eCPMs are suffering a little bit more than ads on a relative basis. That purchase is a major part of the ROAS model in terms of what actually makes the numbers work the way you want them to on user acquisition. Advertisers are generally more cautious than they have been, and focused more on near-term returns than long-term returns. A year ago, it was very easy for a publisher or a creator to say to themselves, 'Yes, I have a nine-month or a 12-month payback, and it's the second thesis, and it's half of the year, but I'm going to invest in spend for the long-term because the market is rewarding that.' The market doesn’t seem to be rewarding that quite the same way they did when the next year is the return and this year is to spend. The commitments have come down on ROAS commitments versus where they were. This is reflected in our comments on eCPMs. Essentially, eCPMs are driven by competition for an opportunity to see. It's pretty straight pressure-driven math. We've got this near-term challenge, but we expect the fourth quarter to be flat. We haven't assumed any recovery in eCPM in our forecast. eCPMs typically rise in the Thanksgiving timeframe to Christmas. It's almost as consistent as the sun coming up in the morning. But there are reasons why we’re cautious right now given the sentiment from our customers. On balance, if you look at the Unity portfolio against this, we have more data. We have strength in mediation. We think we're picking up a bit of share. We think there's a temporary lull; I don't know how long that lasts? Is it Q4 and bounces in Q1? I wouldn't bet on that. But sometime in 2023, we expect some level of recovery. But right now, Luis and I are modeling our expenses on no recovery. When we see recovery, we should see even better revenue and exceptional bottom line performance.

Got it. That's super helpful. And then maybe one more if I could. As you talked about some of the ongoing complexity across the end customer base here, obviously, dealing with macro data, live services. How are these companies thinking about positioning Unity as that business enabler to address those challenges and headwinds? How should we think about the puts and takes there from a macro perspective, as well as the increased reliance on maybe what some of that self-service capability and functionality you've called out can mean for incremental cross-sell and adoption there? Thanks.

So Dylan, are you thinking more about non-game customers or game customers with your question?

Within both, right? The ease of platform adoption, maybe more so from the self-service channel.

Okay. The big shift on the gaming side is getting to self-serve on matchmaking and setting up multiplayer gaming. That is a really hard thing to do for a developer. I can remember when games went on the PC and console side to multiplayer and single-player campaigns were deemphasized. A lot of companies in the games industry back then just couldn’t do that. If they could not pull it off, they got their lunch eaten by their competition because what was happening was we were seeing 200%, 300%, 400% increase in engagement against games that had ongoing content and multiplayer player-versus-player experiences. That is not lost on mobile players today. Most people competing in the mobile marketplace largely have single-player games or synchronous single-player games. We’re starting to see the shift to multiplayer. This is starting to happen and is going to increase over the next several years. Therefore, the people competing in the mobile marketplace largely have single-player games or synchronous single-player games. The games that do well will be those with higher engagement. Outside of gaming, I interact with customers across various industries. The truth that was valid three, four, and five years ago was generally experimental. They were setting something up because they were curious, felt it might be the future. However, a fair amount of the time, they started with one project and pivoted two or three different ways, as experimental projects do in large organizations. Increasingly, we are now seeing a focus on areas where customers are aggregating with a strong sense of 'If I don’t get there, I’m going to get beat by my customers.' In high-end fashion, for example, that’s digital trials. For cities and airports, it’s straight-up digital twins. In architecture, it’s for visualization. These are big compute projects, which is one of the reasons we like our digital twin platform. We built the platform because it solves real needs. It connects customers infrequently and effectively without confusion. We’re in the process of close testing that with a handful of customers. But I believe that will actually create a significant share of our revenue in years to come because, frankly, there’s much more business in compute and transforming data uniquely married to the Unity tools for rendering and animation.

Sorry, all right. So for almost the entirety of this call, I think we've been talking about the ad spend from the game sector, but there's a wider group of advertisers Unity can be talking to. So is there a way to characterize what percentage of your ad dollars is coming from, say, the non-gaming companies, and what you may need to do to onboard, say, the large CPG or other performance-oriented advertisers to become large customers on your platform? Thanks.

Stephen, that's a really great question. It's still a small minority of our business as non-performance-based advertising. You're speaking to brand advertising. Winning this share is one of the major priorities for us as we look forward to the combined resources of our two companies in building out more meaningful brand advertising within the context of gaming. We typically track just within Unity, well north of 3 billion MAUs a month. There is no larger audience that can be accessed through paid media. We know these are highly engaged consumers, so we talk about brand advertising. They definitely are there. A lot comes in through various DSPs. We need to work on the types of ad units that I think will attract that audience. It’s been game-centric because it's where we've generated the most revenue on ads. That seems likely to change. We’re working on innovations in that front, but think of it as a single-digit share.

Great. Matt Cost, are you on? Here we go. Matt is off. Okay. Any other follow-up questions? Gal Munda?

Can you hear me?

Yes. Got you. Thanks.

Just wanted to follow up on the digital twin. What is the timeline coming out of the alpha to beta test potentially or like figuring out what the different industry looks like, which industries could be the first when you for real due to GA? And then maybe monetization perspective, how are you thinking about digital twin and the ability to monetize that in light of all the business models you have today?

On the last call, we—and we don't update the statistics every quarter. We have like 40 reporting segments. If we did—you'd see it. We pointed out that the digital twin side of our business across professional services and license revenue was 40%. So it's obviously been growing rapidly to get to that number. At the time of the IPO, we said we would hit 50% within five years. We're moving ahead of schedule. The second point is there's a process for the digital twin platform: first bringing it to private beta and then broader availability before there's general availability. That will likely take place, probably, in the first half of next year. I will update that on the next call so everyone has it. The platform is not necessarily captive to a specific industry. I would give you back the same industry sector I said we’re seeing current traction in as likely first users. Visualization in architecture, construction, and manufacturing lines is where we see the continued pipeline, and where we're working quickly to launch.

Thank you.

That's great. Go ahead. You had another question, Gal?

Yeah, I had another one if that's okay. Just on the core Operate. John, you mentioned you backed yourself to kind of go out there and win share again. How much of that is because of the tie-up now with ironSource? I'm just thinking this machine is very, very powerful versus how much is it just thinking about the core, let's call it, pure heritage Operate business on its own, even if you didn't have ironSource going out there today and grabbing some of that share back?

Look, I'm not sure I got all that question. It's a little garbled on my end. But ironSource is definitely a strength to our portfolio, and it adds a significant amount to us with a wonderful team led by Tomer, planning that, and with a great team from Ingrid, putting us in a much better spot. IronSource is additive to us at literally every level, not just on what you thought of as Operate, just what you thought of as growth. They have tools that can integrate deeply into our company. This can help us realize the vision we've talked about from the first time we announced the deal with ironSource, which is helping people build more performance games and applications.

And Gal, that question will be even more difficult to answer going forward because we plan on integrating the two businesses. That's where we see a lot of value.

So Gal, I mean, a good point. Let me give one example. The data from LevelPlay supports both networks now. The data from both networks supports LevelPlay now. We are consolidating those teams. It would be—I know it sounds like people would love to see independent reporting, but it’s going to be just one singular example dependent on the integration and the benefits we see from the data integration. What drove these numbers? We want to win, Gal. We want to win in this market, and that is our intention.

Thank you.

Well, thank you all very much. We really appreciate it. We look forward to seeing you at various conferences over the coming months and years. But we appreciate your interest and support. Thanks a lot.

Thank you.

Thanks, all.