Welcome to Unity's Fourth Quarter 2023 and Year-End Earnings Call. My name is Daniel Amir, VP and Head of Investor Relations. After the closing of the market today, we issued our shareholder letter. That material is now available on our website at investors.unity.com. Today, I'm joined by Jim Whitehurst, our Interim CEO; and by Luis Visoso, our CFO. But 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. And you can find more information about these risks and uncertainties in the Risk Factors section of our filing at sec.gov. Actual results may differ, and we take no obligation to revise or update any forward-looking statements. Finally, during today's meeting, we will discuss non-GAAP financial measures. These non-GAAP financial measures are in addition to and not a substitute for or superior to measures of financial performance prepared in accordance with GAAP. A full reconciliation of GAAP to non-GAAP is available in our shareholder letter and on the sec.gov website. Great. What we'll do now is similar to what we've done in previous quarters. We get a number of inbound questions during the quarter, and we will start with two key questions. The first to Jim, and then the second one to Luis. So, the first question is to Jim. After five months here, can you give your take on Unity and kind of provide us also an update on the CEO search?

Sure, I can't believe it's been almost five months. I'm even more excited now about the opportunities ahead than when I first joined. We're in the midst of a reset, but I want to share why I'm optimistic before addressing the CEO search. First, I believe we're making the right moves to benefit our customers today and in the long run. We've significantly streamlined our portfolio to focus on products where we provide unique value, and the feedback from our games customers indicates they appreciate this focus in our product roadmaps. Similarly, on the industry side, our emphasis on repeatable software and our new partnership with Capgemini have been well received by clients. Additionally, we've implemented a leaner cost structure that supports healthy growth potential. We're also enhancing our user acquisition through improved data utilization and stronger models, which I believe will lead to accelerating growth in our business. The second reason for my optimism is that despite the challenges of 2023, we've seen evidence of the resilience of our franchise. For instance, after the pricing change, our core subscription business, excluding China, grew 18% in Q4, proving that we're vital to the games industry. Our industry segment has been our fastest-growing area, showing significant potential for continued growth, particularly with the Capgemini partnership. Our engagement with our editor remains strong, as demonstrated at Unite in November, and we aim to surpass customer expectations with the upcoming editor releases this year. Finally, even though the reset process has impacted our financial performance for the first quarter, we anticipate a strong financial turnaround in the latter half of the year. Regarding the CEO search, I don’t have a lengthy update, but the Board is diligently working to ensure we find the right leader to guide Unity's next chapter, and I am fully committed to supporting their decision.

Thank you. Luis, this question is for you. Can you provide additional perspective on the company's direction following the reset?

Hey, Daniel, thank you. Yeah, absolutely. We actually feel very proud of what we've accomplished. We've accomplished a lot in a short period of time, and we believe that as Jim just said that this intervention positions Unity for success going forward. If you look back at the end of last year, we started a two-phase company reset that we expect will enable us to sustainably win with both customers and shareholders. The good news is that Phase 1 is mostly behind us. This first phase was all about resetting our portfolio, resetting our cost structure so that we can refocus on our core businesses, the engine, the cloud, monetization while narrowing our investments on new businesses. And as a result, we're focusing on businesses where we believe we can sustainably create value for customers and generate a return for the company. The unfortunate consequence of this first phase is that we had to let go of about 25% of our colleagues. That's super hard. These employees made many contributions to Unity and helped customers achieve their goals. We thank them for all their work and are really sad to see them go. Now what's exciting is actually the second phase of the reset. This is about reigniting revenue growth with healthy financials. And the good news is that that starts this year. We expect revenue growth to accelerate in the second half of 2024, and to maintain attractive levels of revenue growth thereafter while maintaining and extending our profitability.

Thank you. So, now we go kind of the second part here for Q&A. So, just for housekeeping, if anybody wants to ask a question, you need to hit the Raise the Hand button on the bottom of your screen. So, we will take a couple of seconds here for people to now put in questions. Okay. So, the first question comes from Jason Bazinet from Citi.

Thanks so much. I was just wondering if you could unpack a bit just sort of the recast 2023 numbers after the portfolio review. I think the revenues came down $450 million, but the EBITDA came down $174 million. And then I tried to read the text to understand if some of the things that you divested were EBITDA loss-making, and it said they were, but then in some of the footnotes, there was no real number in there. So, can you just talk a little bit about the recast 2023 base and those adjustments?

Yeah. We know it's not easy to follow all these numbers so we put up table on our shareholder letter. I think the first thing is, we had this one-time gain from Weta FX, right? We show that as $99 million in revenue, for example. So you'll see that in the table, which had a $102 million benefit in EBITDA. So, you have to take that into account because that's a one-time gain. The second thing is the portfolio changes that you alluded to, that's $283 million in 2023. Most of that is in Grow. A small portion to be precise $15 million is within Grow, which is the Luna business. So, you have to take that into account. That operated at a significant loss, which is why we're exiting these businesses because we could not create a return for us while providing value to our customers. We did not quantify that for you because it's not audited, but it's a very significant number that we're getting rid of. And third, you have this customer credits that we explained in the shareholder letter, and which we mentioned in the 10-Q last quarter, which was $72 million in revenue and $72 million in EBITDA. So, if you really look at the comparable base for '23, you should start with $1.7 billion in revenue and $274 million in EBITDA. And that's what we're building from.

Thank you, Jason.

Yeah. Thank you.

Thank you. Next question is Dylan Becker from William Blair.

Yeah. Thanks, guys. Two, if I could squeeze in. Maybe first combination for Jim and Luis here. You're kind of nearing the end-of-the strategic review. Wonder how you're thinking about to, maybe the earlier point, Luis, on getting rid of some loss-generating businesses, but also kind of catching-up investment as we think about kind of doubling down around the core. Kind of what's the right way of thinking about some of the trade-offs of the two, and how that layers into kind of the growth and margin outlook in the business over time?

Yeah.

I'll start by emphasizing that our focus throughout this reset has been on creating a portfolio where we believe we can succeed and ensuring that we allocate the necessary resources to that portfolio. I made it clear internally that this process is not about maximizing our 2024 EBITDA but rather about streamlining our operations and fully supporting the areas where we see potential for success. We believe there is significant growth ahead for the company. Luis, perhaps you can elaborate further on this.

No, I totally agree, Jim. Dylan, the way to think about it is we fully funded the priorities that we had in mind, and those are funded to the right levels. And those that we just didn't think we could generate a return for us or for our customer, we totally defunded. Being half pregnant, if you wish, just doesn't make sense. So that's why we feel confident about our ability to reaccelerate growth because we're funding those things that really matter.

Okay. Great. Super helpful there. And then maybe one...

I guess what I would say on that, Dylan, is that as we approach the end of the year, we generally believe we should be a Rule of 40 company and maintain that status for quite some time, which gives you an idea of where we see ourselves.

Absolutely. Yeah, okay. Appreciate that color there, Jim. Maybe you mentioned some of the platform investments too and Unity 6 upselling. I guess how should we think about the pricing and maybe conversion? How you're kind of incentivizing new features within that platform as well? It's probably more of a 2025 kind of type of story, but how that kind of fuels the commentary around kind of accelerating momentum throughout the back half of this year as well, and kind of thoughts on Unity 6? Thanks.

I will start by stating that we are allocating resources to both Unity 6 and Unity 7, though I won't delve into too many details right now. I encourage you to attend GDC where we'll share more information. We believe we are significantly investing in our roadmaps related to our core product offerings, and we'll provide further insights on that in a few weeks at GDC. Regarding our pricing strategy, you're correct that it's primarily a 2025 matter, so it won't impact the figures you see this year. I will note that we see considerable organic growth potential in this portfolio, so we are not solely dependent on raising prices. There is more value in our offerings than ever before. However, when we assess our position in the gaming industry and discuss long-term growth, it relates more to our existing product suite and future offerings rather than pricing leverage, which we haven't fully articulated for 2025 and beyond in a way that would provide clear expectations.

Dylan, I'd like to highlight a couple of points that align with what Jim mentioned. Our core subscription business, specifically the Editor excluding China, is experiencing an impressive growth rate of 18%. This indicates very healthy levels of growth. Additionally, when we examine engagement levels or the initiation of new projects, the interaction with the Editor remains very strong. We are genuinely optimistic about this. There's also significant interest from our customers in our AI tools, and with Muse now available, they are actively using it. We are pleased with the progress we've made, Dylan.

Great. Thank you, both.

All right. So, our next question is Brian Fitzgerald from Wells Fargo.

Thanks, guys. In the shareholder letter and maybe this follow-on to Dylan's question, you unpack growth reacceleration in the second half of the year. Can you parse that out a little bit? Is that just primarily from run-time fees? Is it the release of Unity 6? Or is there something else feeding into that, maybe the growth of industries like you talked about? Thanks.

Yeah. Reality is run-time fees does not have an impact in the second half or nothing meaningful. So, the reason why we are excited about and confident that we'll see some acceleration is really back-end innovation that we are bringing across all our product lines. Jim talked a little bit about some of the innovation we're bringing on Grow to make our product more competitive, data, performance, return on ad spending. So, we're making a ton of interventions then there so that our business can accelerate. And it's really that. It's the innovation across both businesses, both in games and across industries where we expect to accelerate growth.

Yeah. The only thing I would say I would add is we're in the middle of a reset and so we were pretty conservative in the first half of the year because obviously, when we are especially dealing with people, right, that gets to be very distracting. And so, we were pretty conservative in the first half of the year. But when you just kind of look at kind of the market and where we expect as we go forward is another reason you're seeing that. It's both, we have confidence in the back half, but it's also, if you look at first half to back half, there's also an assumption around a little bit more distraction right now that we will get behind us here as we finalize the reset.

It seems there is growth in the Grow segment of the business as well. When you mentioned the sequential decline, was that primarily due to dissatisfaction among developers regarding the rollout of the real-time runtime fees? Or is it more aligned with your plans to enhance the tool sets to make the Grow side of the business more data-driven and competitive?

Yeah, we didn't really see as much of an impact. There was an impact, as you mentioned, but it was not very meaningful in Q4. We are not guiding by segment going into 2024, but yes, you're right, we're expecting an improvement in both businesses throughout the year for the reasons that Jim mentioned.

Appreciate it. Thanks.

Yeah. Just a little bit more on that. Just to be blunt, last year we were doing a lot of kind of integration with ironSource and Unity. And frankly, when that happens, you become maybe a little less focused on driving feature velocity. And so, I do think that level of distraction kind of put us a bit behind. That's now behind us. We have the team integrated and we have a plan that I think we're very confident in, closes any competitive gaps that we have. And that's somewhat reflected in the growth numbers in the back half of the year.

Great. Next question is Tim Nollen from Macquarie.

Great. Thanks. Actually, perfect segue into my question from the last bit there, which is about the ironSource integration. Could you just talk a little bit more about, I guess, what was not an immediate integration when the acquisition was made? Now it sounds like you feel like you have completed the acquisition. I've noticed some fairly big-name departures from ironSource. If there's anything you could talk about that? And then, could you just clarify about the $72 million in credits? Is this something that was done to roll people onto the LevelPlay platform back in the day? And then, why is that being unwound now?

Let me start by discussing our integration efforts. When two companies merge, it's crucial to retain the right talent and ensure business continuity, and then gradually combine operations. We focused on this throughout last year, leading to a comprehensive integration by the end of the year as we entered January as part of our restructuring efforts. We have now created a more functional organization, with one leader overseeing the commercial side of the ads business for both Unity and ironSource, along with a single leader for product and technology. We previously had two separate data science teams; now we have consolidated to one. The same goes for data engineering teams. This integration takes time, but we believe that having unified teams will benefit us going forward. Additionally, the founders of ironSource were ready to step back, allowing others within the company to take on new roles. They've decided it was time for them to take a step back, but I still communicate with many of those leaders regularly. They remain committed to the success of their company, ironSource, and to Unity as we move ahead.

To address the second part of your question, Tim, we've been clear about this for a while. Prior to the merger, ironSource offered some incentives to their customers, and we received a portion of those integration fees as revenue throughout the year. We wanted to ensure you had complete transparency regarding those amounts, which is why we included them in the table showing quarterly revenue for Grow. The primary difference between that figure and our reported number is attributed to the integration fees returned to us. The only other difference is $15 million from Luna, which is distributed consistently across the year, approximately $3 million to $4 million each quarter. The remainder relates to the integration fees returned to Unity, and we wanted to provide that exact figure for your awareness.

Okay, great. All very helpful. Thank you.

Thanks. So, next question is from Michael Funk at Bank of America.

Thank you for the questions. I have a couple of them. Looking at the revenue and margin guidance for the year, you mentioned a projected EBITDA margin of over 25% by the end of the fourth quarter. It seems that the trajectory could suggest a higher margin by that time. I'm curious if this might be due to the headcount reduction benefits disappearing in the second half or if there are plans to reinvest back into the business. My first question is regarding the EBITDA margin.

Yes, Michael. We will provide our guidance as Jim mentioned. We also want to ensure that we are making the right investments back into the business. We're aiming for the right balance. Our goal is to be a Rule of 40 company, and we believe we can get close to that by the end of the year. We clearly see a pathway to achieving this. As you have noticed, we are focusing on improving our margins and cost efficiencies, but we will not compromise growth to do so.

Okay. So, the comment was hopefully Rule of 40 company by the end of the year. Was that correct?

Yeah, that would be our target.

Okay. And then the last one, if I could, on the competitive environment you mentioned in the shareholder letter, competitive intensity impacting the business. Can you expand on that comment, please?

We're experiencing a more intense competitive environment on the Grow side. Some of our competitors have reported numbers that are better than ours, which has made it more challenging. They've also introduced strong innovations to the market. As Jim mentioned, we've been focused on integration work, and now we clearly understand our gaps. We have aggressive plans to address these over a short period, and that's what we were referring to in our notes.

Great. Thank you so much.

Sure.

Great. So, next question is from Chris Kuntarich at UBS.

Great. Thanks for taking the question. Maybe the first one on the multiplayer business, you guys talked about shifting the service to orchestration and managed solutions. Can you just unpack this a bit? And then maybe just how we should be thinking about this margin profile going forward?

If you consider our multiplayer business, we focus on two aspects. One is the hardware component, which is not our strength. We can't achieve good returns in that area, and we lack the scale to offer competitive prices. Therefore, we are not pursuing that. However, our unique value lies in the orchestration layer for hosting multiplayer games. We will continue in that software business, which is profitable and allows us to provide unique offerings to our customers. We are exiting the hardware business since it's not a unique value proposition for Unity in serving our customers.

Got it. And maybe just one follow-up on China. I know you had talked about growth ex China within the engine, but just curious. We've heard it across the space that the Chinese gaming ad spend has been a source of outperformance. Can you just talk a bit about how this performed in 4Q for you and just kind of the opportunity for Unity on a go-forward basis? Thanks.

Yeah. So, you have to think about China in different ways, right? The Create business is mostly our customers in China developing games in China. That business has been tough, as we know, there are some restrictions in the Chinese market and that continues to impact our growth in Create, specifically. On Grow, our growth in China, which reflects two things again. It reflects business in China, but also Chinese-based customers doing business outside of China. That has been performing well just like any other region. So, we've been seeing good growth there.

Got it. Thank you.

Great. Next question is Andrew Boone from JMP Securities.

Great. Thanks so much for taking my questions. Can you talk about the slimming down of the portfolio and whether that changes the trajectory at all for non-gaming your industries business? And then, for my second, how do we think about professional services following the Capgemini partnership? Is there any change in strategy, or anything else we should note there? Thanks so much.

Sure. I'll begin there. As you can see, revenue has declined due to the significant costs associated with professional services. This is why we presented an adjustment in the figures. My background is in enterprise, and I am truly impressed by the level of interest and patience our customers have shown us as we work towards getting this right. Our solution stands out as the most compelling option available. This spans from visualization, which enhances how we connect with end customers through a more detailed view of products, to configuration and distribution, all the way back to design elements. There is also an essential education and training aspect with AR/VR. As I review these components, it's clear that visualization plays a critical role in our solution, whether it's improving customer engagement or creating educational content. Typically, infrastructure software companies are heavily reliant on partnerships for market entry, as developing those solutions isn't our strength. Therefore, we have chosen to focus on software development and enhance our roadmaps for delivering outstanding software while collaborating with partners like Capgemini, who can build solutions based on our software. I am very optimistic that by concentrating on software and forming partnerships with organizations that have greater scale and expertise in delivering solutions, we will significantly boost that part of our business. This shift also leads to a higher margin profile because it's all about the software sector. Furthermore, most infrastructure software companies that incorporate visualization are highly partner-driven. Thus, our strategy is to head in that direction for improved distribution and outcomes by teaming up with experts like Capgemini, who can offer substantial resources that we lack in professional services. We firmly believe that entering non-gaming enterprise markets represents a remarkable opportunity for us going forward. However, we recognize our identity as a software company, and we aim to establish an efficient and effective go-to-market strategy that provides infrastructure as solutions for our customers, with Capgemini being a key player in this effort. Our discussions with customers have been encouraging, as they appreciate our strength in creating interactive 3D software rather than in developing specific industry vertical solutions.

Hi. Thanks for taking the question. Maybe I'll just start by following up on industries. I think that you said in the opening paragraph of the shareholder letter that you think it can be a bigger business than gaming. So, I guess are there specific use cases or industry verticals that you're seeing really strong uptake in that you feel you can have that level of confidence in it, that it can get from, I think you said, 23% of the subscription business to the majority of it over time? And then I have a follow-up. Thank you.

Sure, I'll begin by sharing some insights on a few use cases. I won't mention any company names for confidentiality reasons. Firstly, there are several luxury retailers who don't have all their inventory available in every store, but they aim to provide rich experiences for customers to view their products in detail, from jewelry to clothing. We have multiple clients using our technology to equip stores with iPads that offer immersive real-time experiences, allowing customers to spin the product around, zoom in, and examine it closely. According to these clients, our solution is the only effective way to achieve this performance on an iPad. This concept extends beyond luxury retail. On the industrial side, clients are expressing a need for a unified visualization layer that can aggregate data from various PLM or CAD/CAM systems, making it accessible for both end customers and engineers throughout the organization. While it may be possible to interact with 3D models on high-end workstations, our solution excels in enabling demonstrations on web browsers, iPads, or phones, making us the preferred choice across industries such as automotive and aerospace. Additionally, in the realm of education and training, particularly with AR/VR, I spoke with a major construction company utilizing our technology. Workers on site can use VR headsets to visualize how something should appear, making this application especially valuable for high-stakes training environments, like nuclear power facilities. The recent launch of the Vision Pro has garnered significant attention for its consumer applications, but we are eager to collaborate with Apple on industry-specific use cases as well. These are just a few examples, but my enthusiasm stems from the fact that we are not just another player in this space; we essentially stand out as the only provider capable of delivering real-time interactive 3D experiences on lightweight devices such as web browsers, iPads, and phones. This has sparked considerable interest from enterprises in these use cases. As the world continues to adopt more digital twins, particularly in products and supply chains, we see even greater opportunities ahead.

Great. Thank you. And then secondly, on the Grow side, I think it's been addressed a little bit already in the Q&A that there's a pretty big disparity between a public competitor and how fast they're growing their ad network versus what Grow has been doing recently. But it strikes me that it's actually a very big opportunity for Grow to catch up. So, I guess are there specific investments or go-to-market strategies that you're seeing have changed in the competitive landscape, maybe new technology that you're specifically focused on to try to close that gap that you would call out?

I’ll begin by saying that we are indeed making significant investments in technology, particularly in our data infrastructure and data processing capabilities. We are also enhancing our product offerings to ensure that we provide the best data possible to support our monetization customers in improving their data science efforts. These investments consist of additional funding. However, as we integrate ironSource and Unity, instead of just adding these synergies to our profits, we have directed those teams to reinvest them in order to accelerate feature development, enabling us to address gaps and take the lead in key areas. I share your perspective that there is substantial opportunity ahead. Our customers frequently express their desire to partner with multiple ad networks for long-term benefits. This strong demand reinforces my confidence that there is a genuine interest in our continued growth and improvement in this area, and a willingness to collaborate as we move forward.

Thank you so much.

Great. So, last question is Jonathan Kees from Daiwa.

Hi. Can you hear me?

Yeah.

Very well.

Thank you for taking my questions. I'll keep mine straightforward. In the previous call, you mentioned the importance of identifying the right KPIs and measuring them going forward. Can you discuss what you have agreed upon in terms of better KPIs? Are we still considering previous metrics such as the number of customers generating over $100,000 in yearly revenue and the dollar-based net expansion rate? Will these separate metrics continue to be provided? Thank you.

Yeah, I think there are several options. Go ahead, James. It seems like you want to...

No. Go ahead.

I think there are several important metrics that we've shared with you over time. The percentage of our business across different industries is significant, considering the size of the opportunity we've discussed and that Jim has elaborated on. The number of customers and the net expansion rate are also useful indicators. However, it's a challenging metric as it represents the total company, making it less indicative. We've consistently mentioned market share, specifically the percentage of the top 1,000 games made with Unity on both platforms, which is a good measure of community engagement. We will continue to provide these metrics and will introduce more as we make progress across industries. That would be my view, Jonathan.

Great.

Great. Thank you so much for everybody dialing into the call here. We're looking forward to seeing some of you at kind of our upcoming conferences this quarter. Thank you, and have a great day.