Welcome to Unity's First Quarter 2024 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 filings 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. So what we'll do now is similar to what we have done in previous quarters. We get a number of inbound questions during the quarter, and we will start with kind of two key questions here. The first is to Jim, and then the next is to Luis. So the first question to Jim is, with the recent announcement of the new CEO and your new role as Chairman of the Board, how do you see Unity going forward?

Well, let me start off just saying I am thrilled to have Matt Bromberg joining us as Unity's CEO. He starts next Wednesday. We conducted a super thorough search and I am really thrilled with him. He has a great combination; he is super strategic; he really has a sense of the industry, what are the trends? What are the subtleties? What are the disruptions happening? So I think he'll be a great strategic steward of the business. But in addition, he is a down-in-the-weeds operational leader who I think can continue to drive improvements in our execution. And finally, he knows the business extremely well, both the development side and the monetization side. So I think he will be a great leader for the company going forward. Secondly, I'm not going anywhere. I'm remaining as Executive Chairman. And what I'm really excited about working on is the industry side of the business. I have obviously spent a lot of time there, and I continue to be super excited about the opportunity we have. I'm probably biased, but I still think that's a bigger opportunity in the long run in the gaming business, and I'm looking forward to partnering with Matt to help in any way I can and to ensure the success and growth of that business. In terms of how I see the business today, let me address that in the short-term and the long-term. I'd say in the short-term, I am even more confident in our ability to deliver the plan this year. The reason I say that is several-fold. First off, we are seeing customers who were a bit ruffled at the end of last year feeling much more confident with us. We've gone from what and why of the runtime fee to I think a recognition that the industry wants to make sure that we invest in the runtime. So it's a matter of how, and let's kind of work through that. So we're having super productive conversations with our large customers. We had a phenomenal GDC—really, really great engagement across the board. So it also makes me feel good about our relationships with developers and where those are moving. On Unity 6, obviously that doesn't release until later this year, but if we look at the leading metrics, both the downloads and usage, but importantly, our measures around quality and our timelines, it's the highest quality release at this stage that we've ever had. And the timelines have pulled in. We're not necessarily saying we're going to pull the release date in yet, but the timelines are coming in. That's generally a really, really good sign of good execution. And finally, we talked a lot about interventions we're doing on the data and analytics side on the monetization business. Obviously, those have not manifested in the numbers yet. We've done a lot of the work. We're starting to get the results of the testing. It looks very encouraging. Those will roll out through the quarter, and you'll start to see that in Q3. So you put all that together: I’m highly confident in our plan for the remainder of the year. We obviously were confident last quarter, but all of the indicators over the last three months make me even more confident in our ability to deliver. In the long run, again, I continue to be super optimistic about the business. We are essential to gaming. There are a number of trends in gaming where I think our position can help our customers be even more successful, which makes us essential, and we'll continue to obsess over our customer success. I feel really great about that piece of the business. And frankly, on the industry side, as I said, it is still a relatively nascent opportunity for us, but the more I'm out talking to customers, the more opportunity I see there. So overall, both the short-term, I feel much more confident in, and the long-term I remain super excited about.

Great. Thank you, Jim. So the second question is to Luis. What is your overall take on Q1 and what are the plans to accelerate revenue growth here in the second half of the year?

Hey, thank you, Daniel. I believe that we accomplished a lot in Q1. If you think about it, we delivered in line with expectations with strategic revenue growth of 2%, creating particular growth in strategic revenue of 17%, with our core subscriptions growing at 13%. We're making very good progress expanding profitability. EBITDA was up $50 million year-over-year. And if you look at our like-for-like net income improvement, it is close to $100 million year-over-year. So great progress on profitability, as we continue to drive revenue growth. Very importantly, these results were achieved while successfully completing a very large and complex cost and portfolio reset that will position us much stronger going forward. As Jim mentioned, customer engagement with the engine is healthy and retention rates are strong. The industry continues to be our fastest growing business, and we continue making progress with our AI tools, particularly with new incentives. So I would say we had a very good quarter. Now, looking ahead, which is the second part of your question, overall, the plan is unchanged from our conversations last quarter. With the portfolio and cost interventions behind us, we're now focused on the engine, the cloud, and our monetization business, where we believe that we can sustainably create value for our customers and generate a good return for our shareholders. In Create, we expect the second half to continue to come from growth in subscriptions in both games and industries. In Grow, we expect the second half acceleration to be driven by improvements in the performance of our monetization solutions and better usage of data to train our models and deliver that return on ad spend for our customers. Very importantly, we continue to make progress on something we talked about last quarter, which is to integrate Create and Grow to better serve our game customers more holistically, which is something that Unity can uniquely do better than anybody else. So in summary, I would say that we believe that we're very well positioned, and our focus now is to execute to our full potential. Now before we go to other questions, I would like to remind you that our revenue guide is for our strategic portfolio only. We're doing this to help investors really focus on the business that we're driving while we exit the non-strategic business. So you will see our guide is for strategic revenue. When we report actuals, we're obviously giving you both numbers, the numbers for our strategic portfolio as well as our non-strategic portfolio. On Adjusted EBITDA, though, we're guiding for the total company. This is to avoid allocation issues, and as we know, the non-strategic portfolio adjusted EBITDA is not meaningful, which is one of the reasons we're exiting those businesses. So hopefully that is clear, and we can go back to the questions.

Great. Thanks, Luis. So with that, why don't we open up to questions here? If you're interested in asking a question, please click on the raise hand at the bottom of your screen. And at this point, we'll allow you obviously to unmute the microphone. So we'll take a couple seconds here for people to raise their hand.

I wanted to go back in terms of the growth drivers that you just talked about for the second half of the acceleration. I think for Grow, you talked about the monetization of solutions and then better usage of data. Can you just unpack that a little bit more in terms of what we should actually expect and from the product perspective, what exactly are you guys doing to be able to drive that growth? Thank you so much.

You want to take that, Jim?

Well, I mean, I can start, and you can kind of break that out. It's not like you said more on the Grow side of the portfolio. As we said before, we were operating with, frankly, two different data science departments, so we weren't fully integrated in what we were doing. This year, as part of kind of completing the ironSource merger, we've kind of brought those organizations together, whether it's data engineering or data science. There was, frankly, a lot of data we just weren't fully using. We are now training our models using substantially more data. We also, by combining forces, were able to kind of roll out incremental analytics against those things. And there are multiple. There's one for iOS. There's one for Android. There's one around different sets of kind of behavior in these various data sets, data we're getting from MMPs. And so each one of these, we continue to tweak models and test and compare and run A-B tests, etc. And then as you see those results and you tweak and kind of get where you see material uplift, you then do the full training on all your data and you start to roll those things out. So that's what we're doing. Obviously, some of those things are competitive. So I don't want to go into the very specifics, but we have, with Luis, about eight or nine major things that we contemplated at the beginning of the year. Literally, I think all of them look pretty good. I think six or seven of them, we actually now have some initial results that look super positive. The others just take longer. So we will be rolling those out more at scale through the rest of this quarter, and it will bleed into July as well, which is why we see the back half of the year, which we've projected kind of sequential improvement in the back half of the year.

Totally. And maybe just to add, when we talk about more data, as we said last quarter, there are two components of more data. The first piece is just using more data that we already have. There is nothing we need to do. We just need to consume it. We need to train our models, and that's what we're doing. And the other piece is to get more data, which we think we can based on our total portfolio so that we can actually improve and create a competitive advantage. So those are the two components of the data. And we're, as Jim said, working very hard to improve our models. There are very clear interventions that are coming in. We're testing. Tests are looking encouraging, and therefore that gives us confidence that we'll see the improvements in the back half.

Thank you. The next question, Jason Bazinet from Citi.

I just had a question on the share count. Maybe I have my notes wrong, but did the share count guidance for the full year increase a bit? If so, do you mind just unpacking the drivers of that? Thanks.

Yes. Jason, it did go up a few million. It's just driven by all the changes, all the restructuring we're doing. Nothing significant. I think it went up less than 1%, 0.5% or something like that. So that's the increase you see there.

So I thought maybe my numbers are wrong. I thought it went up like 3%, 492 versus 476 or something. Maybe I have the wrong notes.

Yes. I'll come back to you, Jason. I think it was a small increase driven by all the restructuring we're doing on the year, but that's really the change. Nothing else.

Jim, you mentioned interventions on the modernization side and not in the numbers yet. Can you give us more clarity, maybe some quantification on what you're seeing in initial testing and expectations for return on ad spend relative to the industry standard today? AppLovin commented last night that they believe they have an insurmountable advantage on the modernization side. I would love to hear your thoughts on what you're seeing with the initial testing and where you are, or believe you are, in terms of return on ad spend and where you believe that you can go and close that gap.

Well, I'll give you two observations and then, Luis, if you want to kind of add in here. So first off, some of these tests, as we've then talked to partners, they have been extremely positive, and we've actually had some people moving some more to level play with the results of some of the things we're doing. These are large max customers. And so that leads us to believe that the interventions actually close much of the gap versus AppLovin. These things are kind of relative share. So a lot of share is moving back our way. Are we equal to them or not in ROAS? It's hard to exactly say on these, but the customer feedback has been actually extremely positive. We are seeing share shift, and we think when we roll these out, we will continue to see that. The other thing I would say just broadly is, look, nothing against AppLovin. I think they're doing an amazing job. They are executing on all cylinders. I think one of the benefits, as we look at ourselves right now—and we hear this over and over again—no one wants to have one partner, right? That scares people. You don't want to be reliant on one partner, especially given the ability, if you have a lot of share, to just increase your margin, i.e., what you pay a publisher versus what you charge. And so people want competition there. We've had a number of customers just say, we're being patient. We're expecting you to catch up. We're here for you. You got to deliver, but we're here for you. It’s not a situation where a company can run away with this and everybody's excited, but people are wanting us to close gaps and win. There's a lot of patience there. As we're working through these, again, where we've worked with a couple of partners specifically on these things, we've seen really good results against those things. So, whether we close the gap to 100% or to 70% or 80%, it’s really hard to say as we're kind of running through because you don't actually see the ROAS numbers across. But what we're seeing is a very positive trajectory, which will impact spend with these various advertisers. So that much I can say; it’s hard to compare benchmark to benchmark.

Thank you for that color, Jim. And by the way, very nice speaking with you the last few quarters, and good luck to you in the new role.

Thank you. So the next question, let's open the mic for Clark Lampen at BTIG.

Hey, thanks for taking the questions. Jim, I wanted to start with the plus to Pro transition that's underway. Anything that you could tell us around early signals with customers sort of moving up to more expensive Pro plans? Have you seen that sort of happening the way that you expected? And then, Luis, a bit of a micro question on 2Q, but understanding that you guys don't guide at the segment level, I was curious if you could give us some directional commentary around both Create and Grow. Should we expect both segments to be up with one sort of up and one flat? Just curious if there is any one bucket that's going to be driving more of 2Q than the other. Thank you.

And on the plus to Pro, Luis, if you want to add some commentary, I honestly couldn't tell you versus our expectations of where that stands. I think we're pleased with it, but I'm not sure how that plays out versus Luis, what you would.

Yes. No, we're very happy with how customers are migrating. Particularly, we're seeing some of our customers migrate all the way to enterprise, which is obviously better for us, better for our customers. So we're seeing a good migration of customers up, and that comes on top of the price increase we took about 18 months ago. So we're seeing all of that flow through to the bottom line. I think to your second question, I really want to be careful and not to guide in between the two businesses. I do expect Create to do better than Grow on the quarter and also on the year. So Create should be growing faster as you would expect, but Grow will be sequentially improving, particularly in the second half as we fix some of these gaps that we have.

Thanks. Our next question comes from Parker Lane at Stifel.

Perfect. Jim, how significant or material has the Capgemini partnership been in delivering successful projects around industries? I know this is something that you guys really wanted to emphasize with a third party. So is that shortening the time for people to deploy industry products, improving the scope of those projects? What is that looking like?

Well, we closed April 30. So in the last nine days, I mean, honestly, we haven't had a chance to see a lot there. What I will say is having kind of lived this movie before, I think if you look, most infrastructure companies accelerate their business when they have partners who take that infrastructure and deliver bespoke solutions for customers. I don't think it'll be any different for us. We offer an extraordinary solution to visualize real time your kind of interactive 3D, whether that's creation through viewing. The use cases, there are a few standardized ones, taking all your PLM tools and having a common viewer. That's more of a true product thing. But the vast majority of this will be kind of custom applications delivered by SIs. I have high confidence in it. I think we're excited about it. But literally, we just closed April 30, and so, again, beyond high confidence, nothing's changed in the last nine days enough to kind of give you an indication on deal sizes or links and those things. But we continue to be optimistic.

Thank you. So next question, Josh Tilton from Wolfe.

I just want to follow up on a question I think that was asked a few different ways in the beginning, but just very directly. What I'm just trying to understand is, is your confidence around the second half acceleration in Grow coming strictly from the improvements that you're making and your expectation for these improvements to help improve growth? Or is it because you've made these improvements and you're already seeing it somehow change customer behaviors today? If it's the latter, can you just help us out and give us a sense, give us a flavor, just an example of how these improvements are already changing customer behaviors to use these products?

Yes, I mean, at the end of the day, they're not yet showing open revenue, right? Otherwise, you would be seeing it in Q1. And what we're telling you is that it's not going to happen until the back end of the second half of the year. So our A/B testing is encouraging. We continue to show particularly, we're improving the sophistication of our complex machine learning models and infrastructure and using more data, as I mentioned just before. So we're seeing those benefits, but they're just not yet at a scale that is showing up in our revenue.

Yes. I'm trying to give you just an example. Yes. And it's a lot of little things. We did some work on the performance of our Playables ads, and made a tremendous improvement. So we have a couple of customers in particular who are really excited to see that and are working with us to want to scale this out much more broadly. So it's those things where they're small, but they're real on real data, live experiments that we've done or figured out things, kind of trials that we've done that have shown real material results. We have no reason to think that that won't continue when we roll these things out at scale. Playable ads would be one. I want to be a little cagey because we don't want to talk about details of the various areas where we're working relative to competitors. But it's areas like that where it is real things, real tests run for multiple weeks where you see the results. The reason I was just running a test and saying, oh, let me throw it out there, you run a test and you tweak because you want to get it as optimized as possible before you roll it out at full scale. But what we're seeing in several areas like Playables has been extremely positive. We expect that as we roll these out, we'll see material positive results from them.

So next question, Matthew Cost from Morgan Stanley.

Hi, everybody. Thanks for taking the question. You're obviously having a lot of conversations with customers right now. One thing that Unity as an institution has talked about historically is how your customers are paying you less than 1% as a take rate of their revenue. Mathematically, given how much value you provide, they should be able to pay more. I imagine you're probably in those conversations with advertisers right now, testing and going back and forth about what they are willing to pay you, kind of along the lines of what you're saying. They understand that it's important for Unity as a product to invest for the good of the industry. How should we in the financial market think about what your customers are willing to pay you? How are you dimensioning that in the conversations that you're having with them right now? And how should we think about it? Thank you.

I'll start on that. Look, I've been frankly trying to stay away from those conversations. To talk about a fixed pie and the fact that we're not getting our fair share in a fixed pie is a really lousy conversation to have because that means you're talking to your customer about giving some of their pie to you. I think the better and broader way to think about it—and Luis alluded to it before—we're not talking about Create and Grow internally; we’re not talking about with our customers. We're talking about what can we do and what is a very difficult market for our gaming customers. How can we help drive their success by what we can bring to bear? Whether that's about how to build games that are more immersive, so better games; how to build games faster; how to build games with lower development costs; how to accelerate the ability to monetize against those games. When you have conversations around that, where you start talking about how do we improve your success, how we get paid becomes a little bit less important in that. I think it's an area where, because we cut across development through monetization, we have a unique ability to talk to them. So, Matt, I know I'm not directly answering your question because we're not asking it that way, but I'm very confident about how positive the conversations have turned in the last few months. I think, partly, bluntly, the runtime fee having sunk in and gotten behind this, but I think part of it is people seeing us talking in a much more productive and proactive way, not saying, oh, we're only getting 1% and we deserve more, but hey, how do we make this industry more profitable? In doing so, yes, we'll find a way to get a little bit of that, and that helps overall. But I really do feel like the conversations are so much more positive than they were coming into this.

Great. Thank you.

And that helps overall, but I really do feel like the conversations are so much more positive than they were kind of coming in with that attitude.

No, no, that makes perfect sense. And then, I guess in terms of those conversations with customers, one thing that you've mentioned over the course of the past quarter is the idea of maybe more data sharing with customers as a means of providing inputs for the Grow business. How are those conversations going? Are you seeing any uptake or even any early testing with that right now?

We actually have a product launching called CroStats this summer. Frankly, we want to solidify that before we start having some of those conversations. So I personally haven't had a lot of those conversations because we didn't want to make it too theoretical. So I don't know, Luis, have you had any of those? Do you have any color there? No.

I agree with what you're saying.

But our belief just in our broad conversations is, again, when you start talking about how do we make you more profitable across the portfolio, obviously doing a better job of identifying users that will be profitable is a part of that. I think of it less as somehow giving data to Unity as much as how do we work together to, whether it's improved ad spend or improved monetization. Data is a part of that. But I think of it as more how we're helping them use that data for their benefit. I think when you articulate it that way, it makes sense to people.

Thank you, Matt. Next question, Martin Yang from Oppenheimer.

My first question is regarding the runtime fee and its implementation. Do you still intend to use that fee to help the growth segment in any way? In the past, I think using the runtime fee to offset some of the advertising expenses was part of the plan. Do you still have similar designs by the time you launch a runtime fee later?

Yes. That's still part of the plan. I don't look at it that way. I look at it as more, we need to make the runtime sustainable, and that requires a revenue source. Whether that revenue source is, I'll call it direct, kind of pay us based on usage, or indirect—use our monetization, our ad stack—and therefore we get some degree of monetization on that. I don't really care, right? But I think the key is to first be able to continue to invest and build the runtime to be extraordinary and long-lasting, etc. We need a revenue stream. Again, whether it's direct or indirect, I don't think we care as much. So I don't think of it as much as subsidization, but more as choose the way you want to help ensure that we make the runtime sustainable for all our customers.

Got it. Thanks.

Yes. I guess in the sense that if you're using level play, yes, you don't have a runtime fee.

Makes sense. Next question is on CroStats. Can you give us more information on that? Is that going to be a product that sits in Create or Grow or something entirely different?

Well, it is in Create because it is, I would call it more of a service than a product that we offer to help our customers better understand how users are engaging with their games. It's anywhere from crash data all the way through to kind of various measures around engagement. Of course, that data can also be valuable on the ad side as well. So it's, I guess you could argue it's a product feature that can be enabled, but it's not like a separate line item or something we're charging for. It's kind of a benefit to customers if they're willing to engage with us to see that data to help also help them better monetize their games.

I think this is a great example where we're no longer thinking about Create and Grow, but we're thinking about the game customer, right? How do we create more value for them and more value for us by thinking about these customers more holistically?

Our next question is Gili Naftalovich from Goldman Sachs.

I have one for Jim and a follow-up for Luis, if I may. This is really off of Luis with a comment that you just made. Are you guys seeing any different trends around customers that are using both Create and Grow? Or is it something that we should expect more in the second half on the back of the rollout of Unity 6 and your new monetization engine?

Yes. I would say it's really going to come together in the second half on how we create the synergies between the two. We're not seeing a lot of that yet, but we think that we have unique assets where we can actually do that. That’s something that only Unity can do, so we should expect that to come in the back half and continue to increase in the years thereafter.

Yes. And it's not just around Unity 6. It's just time, right? We literally just did history org and started acting this way in January. We're starting to engage. Again, I hear positive feedback, but engagement to behavior will take a bit of time. By the way, otherwise, I got a slack from our marketing people. We actually feel very good about being ahead of plan on the migrations to higher-priced versions of Unity.

That's great to hear.

I mean, I guess on that line of thought too, as it pertains to EBITDA, Luis, you came in very strong this quarter. How do you evaluate investment opportunities and get comfortable with the allocation of capital in each one of the business initiatives and business line items that you have in the pipeline?

Yes. I mean, we're being very choiceful on where we invest. We're particularly investing in things that make—this is going to resonate because it's in line with everything we're saying. So where are we investing? We're investing in data. That's one of the—I was expecting you guys to ask, why is our EBITDA kind of not improving significantly in Q2? One of the reasons is because we're investing in cloud consumption to drive that data that will help us on our growth side. We see the benefit of the savings, the benefit of the restructuring on cost on the portfolio, and it flows through to the bottom line. But then we're investing particularly in two things, cloud consumption to drive more data and data scientists because that's an area where we need to continue to improve, and that just pays out very quickly. So that's kind of where we're going. On capital allocation, as you know, we've been buying shares. We also reduced our debt significantly at a good discount, by the way. We had a $61 million gain, as you saw. We'll continue to evaluate what we do based on whatever the market is going. So we're constantly looking at that, Gili.

The last question is from Bernie McTernan from Needham.

Jim, can you just impact some of the comments you made about the runtime fee? Just thinking about why customer sentiment has improved so much? And then also on Grow, just any impact on, or any thoughts on macro impact on the business and how you expect it to progress throughout the year? Thank you.

A couple of things. I think in the cold light of day, when you sit down with customers and you're talking about kind of our existing contracts and what this really means and where those dollars get spent, I think people have realized, A, it’s not as dire as they thought it was depending on the game and how it monetizes. It varies around whether it’s a net purchase or ad or whatever. I think people now are moving from worst-case to a realistic view of what a runtime fee would be because we can sit down and work that through with them. It creates an opportunity. I actually saw this a lot even as far back as Unity about let us talk about the engineering effort that goes into the runtime. Forget about the engine, the runtime, and building the most performant runtime, keeping it performant and continuing to drive value into that as we go forward. People start to say, okay, I get it. A, I'm not like immediately saying, oh, it’s 2.5% of all of my revenue; it depends, right? And you kind of work through that. Then you work through, but here’s the value and what we can drive with that. People kind of calm down, and you start to have more rational conversations. I wish I could say it's more than that, but I think some of it's just from knee-jerk reaction about oh my God, it’s not a great time in the market. You want to charge me more. To, well, here's what we're doing, here's the relationship, here’s the value you're actually getting and what it looks like it's really going to cost you. The conversations soften, and they become much more productive for how we work together.

Great. Thanks a lot. So with that, we're going to wrap up the call. Thank you for dialing in today. We're looking forward to meeting you during the quarter at various investor conferences. Have a great day.

Thank you.

Thank you.