Earnings Call
Unity Software Inc. (U)
Earnings Call Transcript - U Q3 2021
Operator, Operator
We are live. Okay, great. Well, thank you, everyone, and welcome to this call to discuss our Third Quarter earnings results and the acquisition of certain assets of Weta Digital. With me today are John Riccitiello, President and Chief Executive Officer, and Executive Chairman, Luis Visoso, Senior Vice President and Chief Financial Officer, and a new participant to our calls, Mark Witten, Senior Vice President of Create solutions. As you've seen from the press releases, we have a lot of good news today and we will go through our updates and then straight into Q&A after that. But before we start, I'll run through our Safe Harbor statement. So I'd like to remind participants that during this conference call, we will be making forward-looking statements, including statements about goals, business outlook, industry trends, market opportunities, expectations for future financial performance and similar items, all of which are subject to risks, uncertainties, and assumptions. But you can find more information about these risks and uncertainties in the Risk Factors section in our filings at sec.gov. And we remind everyone that our actual results may differ and we undertake no obligation to revise or update any forward-looking statements. And we will also be discussing non-GAAP financial measures today, reconciliations between our GAAP and non-GAAP financial results, and a discussion of limitations of our non-GAAP financial measures can be found in our earnings press release, which was issued earlier today and is available on our website under the Investor Relations tab. Now, with that, let me turn the call over to John.
John Riccitiello, CEO
So thanks, Richard, and thank you everyone. We are really happy with our third quarter results and we have great news to share. We reported another strong quarter with results well above our expectations, we delivered 43% revenue growth as revenue hit a record $286 million in the quarter. We continue to invest to drive future growth resulting in a non-GAAP operating margin of a -4%, flat to the same quarter last year. Since we went public in September last year, our revenue growth has averaged 45%. We're encouraged by the execution across all of our business clients and geographies. And as you will hear later from Luis, we're raising our revenue guidance again this quarter. We have even more exciting news. We've entered into a definitive agreement to acquire Weta Digital, specifically its award-winning engineering talent, artist pipeline tools, and technologies. Weta Digital will become part of Unity Create Solutions led by Marc Witten and will focus on bringing dozens of artists' tools inside of Weta to a much broader world of VFX artists across many companies onto the gaming industry and to users across many industries. The academy award-winning VFX teams of Weta Digital will continue as a standalone entity called Weta FX and is expected to become Unity's largest customer in the media and entertainment space. We are thrilled to democratize Weta's industry-leading tools and bring the genius of Peter Jackson and Weta's amazing engineering talent to life for artists everywhere. By combining the power of Unity and Weta Digital, the tools and technologies that build characters and scenes from the world's most iconic films such as Avatar, Lord of the Rings, and Wonder Woman will enable an entirely new generation of creators to build, transform, and distribute stunning real-time 3D content. Until now, Weta's tools were used exclusively in-house at Weta VFX. We plan to take these tools to artists and creators across the film industry, the gaming industry, from end-users to AAA games and into other industries such as automotive, architecture, and e-commerce. We plan to offer a cloud-based version of Weta for the millions of consumers who generate content every day on social and gaming platforms and on the web, or to use the current term, the metaverse. In addition, Weta has created thousands of digital assets such as fully formed characters, skins, trees, houses, and automobiles. We plan to offer these objects as a content library where creators can import these digital assets into our editor and apply physics, volumetric lighting, and sound. In summary, we plan to do what we do best, create and develop amazing technology and tools that can easily be used and available to a wide spectrum of users from technical experts to consumer hobbyists. You've heard me say this many times before: we believe the world is a better place with more creators in it. Luis and Mark will provide additional details. Here, I'll provide a summary highlight picture. We expect the purchase price of $1.625 billion to be immediately accretive, and we will be even more so as we bring these tools to our customers. Our acquisition of Weta is expected to open new markets and accelerate our product rollout for artists by years. Based on internal models, we estimate that this transaction expands our total addressable market by over $10 billion, while meaningfully increasing the percentage of the addressable market that Unity can serve. I would like to welcome everyone at Weta Digital on behalf of everyone at Unity. I believe you'll feel at home at Unity. I also want to thank the Weta VFX team for the partnership to get this deal done this year. We are honored to have Weta FX, Peter Jackson, Prem Akkaraju, Joe Letteri, and the entire organization as a key customer. We love your work. I look forward to many years of strong partnership. And with that, let me turn the call over to Luis.
Luis Visoso, CFO
Thank you, John. Definitely an amazing quarter. I will start with our earnings results and then share additional perspective on the Weta acquisition. The Unity team delivered another strong quarter in which we exceeded guidance and street expectations. Here are some of the key financial highlights for the quarter. Total revenue of $286 million increased by 43% as compared to the third quarter of 2020. Operate delivered another very strong quarter with 54% year-over-year growth. Create accelerated in the third quarter and delivered 34% year-over-year growth. We delivered another strong non-GAAP gross margin of 81%, up from 79% last year. We generated a non-GAAP operating loss of $12 million compared to $8.4 million the prior year. Free cash flow was $34 million for the quarter, bringing our year-to-date free cash flow to negative $100 million, which includes approximately $50 million in charges from legal disputes that we reported last quarter. We continue to expect to break even on our free cash flow basis within fiscal 2023. We're encouraged by strong continued customer success this quarter. Our dollar-based net expansion rate for the quarter was 142%, and customers generating more than $100,000 annually expanded from 739 a year ago to 973. Here are some of the key highlights for the quarter. Operating performance was very strong across multiplayer services, which includes hosting service, voice, and community tools. This quarter, Unity has supported partners like Warner Brothers Games, Jam City, and Miniclip, and games such as CrazyLabs, Super Stylist, and Dream Games Royal Match, where we delivered outstanding results at scale while navigating the challenges from iOS 14 and in multiplayer with supporting the launch of some exciting new games such as Team17's Worms Rumble and Amazon Game Studios' New World. In addition, we announced some important additions to make our Operate platform even more compelling. We launched Unity Game Services, or UGS, this quarter, with more than 5,000 sign-ups in the first 10 days. This is a new platform experience for developers that unifies Unity's existing operating solutions for games and introduces new tools and services that are designed to simplify developers' ability to launch cross-platform multiplayer games. We also launched Unity Mediation, which includes waterfall and bidding within Unity Ads. The Mediation offerings are designed to help developers create additional strong revenue streams by easily optimizing demand for their best-performing ad performance and network partners. Within the same editor and interface, they build and manage their game experience. Create delivered 34% revenue growth for the quarter as we accelerated from the prior quarter. Our games business continues to perform strongly with growth across geographies and customers as we continue to add seats. We won several deals in the industrial machinery space. A good example is a deal we closed with a manufacturer of commercial-grade farming equipment, where our more immersive and interactive real-time 3D capabilities enabled us to win their product configurator business. And there is much more to come. We're working on several digital twin projects that span from large objects, think cities and buildings, to small objects, think shoes, watches, and other consumer goods. We'll keep you posted as we make progress. And finally, we officially announced that we're going live with Medicare. This is Unity's first real-time 3D sports platform for creating and delivering interactive content directly to the consumer, launched in partnership with the UFC, the leading mixed martial arts organization. Together, Unity and UFC, we collaborate on research and development of potential applications for Unity's work within UFC. We are encouraged by this partnership and its long-term potential. We do not expect meaningful revenue in the short term from this partnership. Now onto guidance; we're entering the fourth quarter with very good momentum. We're guiding revenue of $285 to $290 million, which represents 29% to 32% year-on-year growth. For the full year, we're again raising our guidance, this time to $1.08 billion to $1.085 billion, or 40% year-over-year growth. This represents an increase of $25 million on the high side of the range from our previous guidance. We expect a non-GAAP operating loss from operations of $20 million to $25 million for Q4 and $59 million to $64 million for the full year. We're forecasting 329 million fully diluted shares. I will turn it all over to Mark Witten to go into the Weta acquisition in more detail. Mark runs Create Solutions at Unity. As you know, Create Solutions includes the Unity engine and LiDAR, the tools and services we use to deliver digital twins for other industries, and our worldwide sales and professional services. Create is also our home for artist tools including ArtEngine, Pixyz, and SpeedTree, now foundationally anchored by Weta Digital. Marc joined us nearly a year ago from Amazon, where he oversaw product execution and the delivery of entertainment to over 100 million active users on Fire TV, Fire Tablet, Kindle, Luna, and Amazon App Store. Prior to that, Marc was one of the creators of Xbox and Xbox Live, ultimately serving as the Chief Product Officer for Xbox and leading Xbox Live for many years. Marc, over to you.
Marc Whitten, SVP of Create Solutions
All right. Thanks, Luis. And thank you, everyone. It's a pleasure to be on this call with you. Before I start, I want to welcome everyone that's listening from Weta Digital TV. Welcome to the Unity family. And everyone from Weta FX, it's an honor to partner with you. It's an exciting time for Unity, even more so today with new markets that Weta opens for creators. I'll walk you through some of the things that make us the most excited about bringing on-board the Weta team and the amazing technology they built. But as the saying goes, a picture, or in this case a brief video, is worth a thousand words. The new era of creativity is really something bigger than it's ever been before. Unity has really been focused on this mission that the world is a better place with more creators in it. But what we see now is that there is a new generation of creators that are going to want to imagine even more in rich 3D experiences. Avatar, Lord of the Rings, or Wonder Woman wouldn't have been possible without Weta's tools and the great artists behind them. We knew that digital effects offered so much possibility for us to be able to create the worlds and the creatures that we were imagining. Now, we're taking those tools that we have created and handing them over to Unity to market them for the entire world. Altogether, Unity and Weta Digital can create a pathway for any others from any industry who will now be able to leverage these incredible creative tools. Now those tools will escape the Weta world, and they'll be available to everyone. We see them being used in just about every industry you can imagine from retail to medicine, to film and TV, and gaming of course. I think for a generation to come, Weta is going to be one of Unity's most important partners and probably our greatest source of inspiration. Offering aspiring creators access to Weta Digital's technology will be game-changing. We're incredibly excited to continue that deep partnership where we work with them as they are working on their next movies, as they continue to create. The real magic here is what both of us are each also independently great at. What we do best is create incredible VFX shots and animation clips for film and TV. And we're going to be great at taking all of that innovation and making it accessible to a much broader set of creators around the world. So beauty editor, which the core of our create business has historically focused on, serves two broad categories of users: developers who code, and artists who can code. One of our key strategies is to bring more artists to our platform by making our editor easier to use. Integrating machine learning-based productivity tools like automatics and operating specialized tools like SpeedTree is critical. We're entering a period of what we believe will be unprecedented growth in demand for great 3D content. This starts with movies, TV, and short-form video. Thanks to the rise in streaming, we are in a golden age of content. And with this content comes the need for deep VFX capabilities. Take Marvel, for instance, and their growth from a couple of movies a year to the addition of dozens of hours of amazing quality television. We see no end to this hunger for great content. In games, 3D has been the standard for years, but on every platform, the capabilities to deliver higher and higher-quality content are only increasing. And of course, there's the need for 3D content in every industry: in AR and VR, in virtual worlds, and much more. Whatever the term 'metaverse' means, it will be built by millions of content creators, and we're on a mission to give them the easy-to-use and high-performance tools that will bring their visions to life. Weta Digital accelerates this mission by years, bringing an incredible team to join ours. This is a cohesive pipeline powered by dozens of amazing tools. Each of these tools is impressive on its own, but as a consistent pipeline, they represent the most complete toolchain for 3D visualization ever created. As we've spent time working with Weta Digital, we were consistently blown away by these tools. Manuka is a revolutionary, physically-based renderer that delivers unsurpassed visual fidelity. Lumberjack and Totara enable building unprecedented environments that feel lived in, all through intuitive artist controls. With Barbershop, artists can groom hair and fur with the ease of a hairstylist, all while creating powerful hierarchies of guide hairs scaled out to hundreds of thousands of individual hairs, resulting in the most artist-directable grooms. Loki is a simulation engine par excellence, able to perform vast, stable, controllable, and predictable simulations with outstanding complexity and results. Whether you want to create intense explosions, turbulent oceans, flexing muscles, or anything else that you can dream up, these tools exist. For every type of content creation need, Weta Digital has created tools that help artists be productive quickly. Hair Barbershop, feathers, ATRIX, cities, and environments, City Builder, and scene designer, vegetation, Lumberyard and Totara—on and on. Even when we look at the production management tools, HiDef and ShotSub, for instance, we found them to be built with capabilities beyond other tools that were available. This is an incredible collection of tools in which Weta's top engineers invested more than 500 person-years of engineering time to develop; they are unreplicable in any reasonable timeframe. But again, each of these tools is part of an integrated pipeline, which is key for us as we work to productize the collection as a cloud service. By being deeply integrated, an artist can move from tool to tool and get consistent, coherent results. More importantly, groups of artists can collaborate together across different tools, all with one source of truth. These tools have been pressure-tested by hundreds of productions and are capable of producing great results predictably, no matter the complexity. This approach has powered Weta Digital's success, and why we're so excited to welcome them to Unity and enable millions of other creators through this pipeline. Going forward, we'll continue to provide these tools to Peter's creative teams at Weta FX, as the customer, and at Unity, we will learn and benefit from the years of experience that these close to 300 Weta Digital engineers bring with them. We believe this deal is a massive win-win because Unity will be able to leverage the expertise to package and bring these tools to artists around the world, meaning not just the VFX industry, but games and real-time 3D verticals, and over time, consumer creators. We don't have enough time on this call to give you the full sense of the power, sophistication, and forward-thinking that Weta's engineers put into building this suite of tools. I want to double-click on just one tool, City Builder, because it's a template for what we plan to do with several other Weta tools. City Builders require scale and an immense amount of detail. Yet, humans have resolved to quickly sync patterns to create an interesting and believable cityscape. This means you can't just repeat the same object every fourth house. Real cities also have an organic life and evolve based on unique circumstances such as geology over time. That's where City Builder comes in. City Builder procedurally generates rules and provides artists directable, easy-to-use controls that let them shape the resulting cityscapes. An artist can drag a river through or along the city and immediately see how that river would impact the layout of markets or buildings and entire sections of everyday life. Any change an artist makes impacts how the rest of the city behaves. This approach streamlines the work of many artists, modelers, layout artists, and more, helping them be more productive. Many of Weta Digital's design tools, City Builder included, require cross-disciplinary models that span light, sound, heat, and motion physics, while also embedding advanced algorithms from computational fluid dynamics, finite element analysis, and machine learning. That's a compelling value proposition for anyone creating this type of content. Of course, Weta operates within an ecosystem of other developers. We're excited to continue to work with companies like Autodesk, Adobe, SideFX, and more. We plan to launch a suite of our tools as plugins directly into the creation suites that artists use every day, making it easy for them to access the full power of these amazing tools. We'll also be populating our content library with some of the content created by the masters at Weta FX. Use the canvas you already know and love, get access to incredibly powerful tools used in films like Avatar and Avengers, along with incredible content from our library to fulfill your vision. Parallel with those efforts, we will work to make Weta Digital technology more applicable to a broad customer base. Upgrading the user interface and workflows, while evolving Weta tools into the Weta cloud, will bring them to real-time use cases like games, including leveraging Parsec's incredible streaming capabilities to drive low latency, high fidelity, and rich input on any device, anywhere. We believe that these enhancements will open new markets for us, not just thousands of artists, but if we expand into the prosumer market, millions of creators. With the great teams already at Unity, the great teams from Parsec, SpeedTree, Artomatix, and now the team from Weta Digital, we plan to win with artists at scale—high and low, VFX games, industrial use cases, and more. Let me turn the call over to Luis, who will provide the financial details of the Weta transaction. But before I do, I can't help myself, there's one more quick video speaking to the power of Weta tools and how they enable the incredible VFX we have come to expect. I'm thrilled to welcome the incredibly talented engineers, scientists, and graphic experts at Weta Digital to Unity. I'm honored to work closely with the amazing artists of Weta FX.
Luis Visoso, CFO
Wow. Thank you, Marc. That was amazing. As you have heard, Weta is a very strategic acquisition for Unity. Bringing artists to the Unity platform is fundamental to Unity's vision. We plan to provide professional users with a collection of tools and link them deeply into the Unity platform while also bringing to market a set of extremely easy-to-use tools for the growing consumer audience. By doing so, we estimate that we will expand our addressable market by over $10 billion. Specifically, with this transaction, Unity will acquire the technologies and tools, and the 275 engineers that create and maintain those technologies and tools. The purchase price is $1.625 billion. Weta FX will operate independently from Unity and will continue to develop some of the world's best movies and shows. Weta FX will be our first customer. Weta FX will license back the technologies and tools that we're acquiring from them. We have signed a 40-year license agreement worth $50 million per year. We expect this relationship between both companies will last much longer than this initial term. In addition, Weta FX has a contract with Unity for commercial services that we will provide to the engineering organization joining Unity as a result of this transaction. The value from this contract is expected to exceed $20 million next year. We also expect this relationship between both companies will last much longer than this initial term. We expect this acquisition to close in the fourth quarter of 2020 as we work through customary closing conditions. The business will be reported under Create Solutions going forward. We do not expect any material revenue or operating impact in 2021. We will include this transaction in our 2022 guide, which we will share with you in our fourth quarter earnings. For now, I would say that we expected transaction to add over $70 million in revenue next year and have no material impact on our non-GAAP operating income in '22. If the transaction does not change our goal to break even on a non-GAAP operating income and free cash flow basis within fiscal 2023. We will fund the transaction with $1 billion in cash and $625 million in equity issued through our shareholders. As of September 30, we had $1.28 billion in cash, cash equivalents, and marketable securities on our balance sheet, and we have ample access to capital markets. To close, let me reinforce our stance on M&A. We do not see M&A as a strategy per se, but as a way to execute our business strategies. At Unity, we constantly evaluate build versus buy alternatives and make decisions based on the impact to creators and customers, the time to market, and cost. While we expect our acquisitions to be significant contributors to our business, we have not acquired businesses with significant revenue at the time of closing. Instead, we have acquired technologies with great potential. For perspective, in our third quarter, less than 0.5% of our revenue came from acquisitions completed over the last 12 months. With that, let me turn the call over to Richard, who will get us organized and take your questions.
Operator, Operator
Great. Thanks very much, Luis. So as with past calls, I see some of you have already done that, but raise your virtual hand and I will call on you as time permits. Please turn on your video when you are called on and then you can turn it off afterwards. Thank you very much. We'll start with Kash.
Kash Rangan, Analyst
Sure. Thank you so much, Richard. John, Luis, and Marc, congratulations on this spectacular quarter, and what an acquisition. John, I'm curious to get your thoughts on the total addressable market that is available to Unity as a result of this transaction. Can you talk a little bit more about that target market? What are the new opportunities that are accorded to Unity that you could not pursue before? And a follow-up for Luis. Luis, I know that you've not given guidance beyond the $50 million or $70 million obligated revenue, but can you give us some historical perspective on what the revenue generation was like for a movie studio? How should we expect the synergies in this transaction to materialize beyond the contractually obligated $70 million? Conceptually, that will be great to wrap it up. Thank you so much.
John Riccitiello, CEO
I have to say that, thanks, Kash, and I appreciate that question. We'll do our best to navigate through that. I'm going to ask Marc to bring up a couple of examples because I think examples actually, like a picture, are worth a thousand words. We estimate that what Weta brings to us—what Weta Digital brings to us—is about $10 billion in incremental total addressable market and increases a portion of our total TAM that is more instantly addressable. The reason for that, that sort of more instantly addressable form, is that artists typically make up, on most game teams, 7, 8, or 9 out of 10 people, if you follow me. On average, 60%-70% of the teams in film are dominated by artists. They need tools like these. It's easier to draw them across to the Unity platform when we offer something that is basically the hidden treasure of the artist world. It's what we have with Weta Digital. I believe we can pick up a lot of users inside of the VFX industry beyond Weta or beyond Weta FX. There is huge demand for tools like these that are directly applicable today to the gaming industry, as well as applicable to a number of our verticals outside of gaming. I'll let Marc pick up on that.
Marc Whitten, SVP of Create Solutions
Yes, thanks, John. So imagine that you are building a helicopter crashing in a snowy forest after it's been shot down by some armed monkeys. The complexity of the simulations involved in making that happen are enormous and it's what is enabled by these tools. You could imagine Lumberjack and Totara can build the trees and simulate the biome. Loki can simulate the snowdrifts covering everything ready to be knocked off. It's massively parallel—elements and simulations literally have you covered. It can even do the flowing water in the creek, and the smoking flame that came down as part of the helicopter scene. Then you think about the characters that are covered in red hair, built from skeletons. You've got Kaoru for past multi-character performance, tissue for the muscles, Barber Shop for the hair, and then you've got a composite that you've got to be able to coordinate it all; you've got to get it done with a set of tools. But the interesting thing is that same scenario with that helicopter also can be used in the game. The same tools will be used to create both simulations, effects, and the ability to use them. Now, in the past, that meant two different pipelines and two different sets of tools targeting two different levels of detail, and you'd actually rebuild the effects. But what we're going to do with Weta Digital is build that into a consistent pipeline that allows you to output at the highest fidelity for both offline or rendered movies, as well as at multiple levels of detail that lets you target the highest-end gaming rigs all the way to the highest scale mobile devices—all with one set of tools. But it goes much further than that. Imagine that you want to check whether the HVAC system that you're installing in the digital twin of a high-rise building is going to work. Well, it turns out that Loki is tailor-made to do that level of simulation, and tools like Eddie can actually be used to visualize airflow and simulate it throughout that space. Even when we think about artists and content creators, it's actually a very broad set of people who have never had access to these tools. They've been in the domain of experts or inside very specialized tool suites. Suddenly, we're going to make those accessible across all of those different types of industries.
Luis Visoso, CFO
As to the other side of your question, it's a little difficult to give you historical revenues because they are not as relevant. So let me just repeat a little bit of what I said. We're going to operate as two independent companies, and Weta FX, as you know, is a private company. They are the best in the market. They are actually having an amazing year with new films that we're not disclosing their historical revenues. The revenue that we will get comes from two parts. One is we licensed it back to them, for as I mentioned, $50 million per year for this four years, which we expect that we'll continue after that. Then we will provide them engineering support worth $20 million per year, which again, we expect to continue to expand. How should you model this $70 million? I would expect that number to continue to grow. As Marc mentioned, we see huge opportunities for us in media and entertainment, and in games by having more seats with artists. We believe there are opportunities in architecture and automotive, so many different industries where we'll continue to see growth. Historical revenue growth of Weta is less relevant to answering that question.
John Riccitiello, CEO
Just one additional thought to toss into the mix. For those of you that have been listening to me from before we went public, or if you listen to our roadshow, one of the points I made was we believe that we can increase potentially our revenue inside of gaming by an order of magnitude of 10X. How is that possible when half the world's games or 70% of the world's mobile games are already built in Unity? The answer to that question has always been, in large part, that we don't have all the artists on our platform. This is one of the answers to how we access that marketplace. The artist has the largest audience of creators in the world. As 3D becomes the norm for consumer creators, it will be a staggeringly large marketplace for users. Now, we don't count all that in our new TAM because we have to bring those consumer creators into the world, but that is happening now. This is the first really important step in that direction. Now, SpeedTree helped us, Automatic helps us, Parsec helps us. This is another step in that direction.
Kash Rangan, Analyst
Fantastic, thanks for the detail, John.
Bhavan Dylan, Analyst
Hi guys. Thank you for taking the question. I guess first, and I think you touched on it, maybe John too. But thinking about this more holistically, there has obviously been a lot of talk about what the Metaverse could look like. This really seems like the key enabling technology, at least the development of those types of environments. Maybe can you guys expand upon the thought process and investment around that opportunity?
John Riccitiello, CEO
Sure, I'll start with that. My colleagues can add a few details or another perspective. First off, I want to point back to my reading of Snow Crash when it first came out; I guess some of you could see the gray hair. I've been fascinated about the metaverse for a long time. However, the point I want to make here is that it's only been about nine months or so that people have been meme-ing about the metaverse. Go back and re-address one key observation: relatively small percentages of content in the world are truly real-time, truly 3D, and truly interactive. What we've said is that the majority of content by the end of this decade will be. My definition of the metaverse is pretty straightforward. We've gone from Web 1 to Web 2. Web 1 was static. Web 2 enabled dynamic interactions, like Uber—where satellite data sell data, track information, and nap on your phone. It's magic; the car shows up. Web 3 involves transitioning to real-time, interactive, and often spatially-aware experiences. Facebook calls that presence—the sense that you're there, or what's there is in your living room. We've been showing lately to folks, 'Hey, we can pour a sports event on your dining room table.' It's breathtaking. The answer to your question is essentially this: Unity expects to be the industry standard as industry after industry moves into the metaverse or becomes real-time 3D interactive, whether it's a car configurator or a shopping experience. We want to ensure that, 60%, 70%, or 80% of the content created by all of those industries and customers is built in Unity. The second element is ensuring that, more often than not, it's operating in Unity, or on analytics monetization hosting, voice toxicity issues, or other services. What we've said, and I would say if there's been a weakness on our part, it's the fact that the lion's share of the people creating the metaverse will be artists. While you can use Unity for a lot of things, it's not the best tool for certain artistic creations. Other tools are better. The most important collection of tools on this planet has just been revealed to us, and I’m frankly stunned that we were able to come to an agreement around something as complex as severing a company in two and acquiring the tools. But we managed it.
Bhavan Dylan, Analyst
Fantastic, thanks for the detail there, John.
Marc Whitten, SVP of Create Solutions
I'll just add one quick point on top of that. The magic of the power to create has a far-reaching impact that will enable creators to imagine and bring their visions to life, often before they even lift a paintbrush. For millions of people, this is about democratizing access to incredible visualization capabilities. The metaverse will be built by lots of creative people, each imagining and crafting the future. These tools will become foundational for that effort.
Stephen Ju, Analyst
Right. Great. Thank you so much. You talked about the build versus buy decision for Unity, but do you think the buy versus build decision that Weta presents to creators in the movie industry will be similar to what the video game industry faces, or are there other nuances that we should be aware of? Do you think also that this acquisition will help to skew the decision toward Unity for the games industry, particularly for those who might have made a decision against you? I guess more of a product integration question. John, maybe this question is—maybe it's too early, but there is an explicit link between create and operate for the mobile games industry. What do you think that link between what Weta brings to the table and operate could be outside the games industry if there is one? Do you think you can help creators monetize their content? Thanks.
John Riccitiello, CEO
Before I start, Stephen, thanks for the question, and you've somehow captured the essence of what we've been discussing internally for the past nine months. First off, I think that not only will we bring the artist onto our platform, but this is also going to serve as a way to build our net expansion rate because when artists come to our platform, they are going to bring their friends, and they'll start utilizing the rest of the Unity tools as well—including our analytics and monetization tools. We’ve always been explicit about this; I think I explained it in the last call. We built net code, and while it's free, it's a checkbox for hosting your game. That could be a multi-million-dollar endeavor if it's the right title. We do many long-term decisions that could be considered short-term generosity with our user base. There’s nothing better that exemplifies our investment than $1.6 billion of bringing these tools to a hungry collection of millions of artists on the platform, all wanting to be a part of building this metaverse—using tools they’ve fantasized about and kept trapped in one amazing company.
Marc Whitten, SVP of Create Solutions
No, I believe that the key here is we're going to make artists superheroes by supercharging their productivity. They will use those tools in various ways, sometimes with the Unity engine and sometimes without. That being said, we will also integrate these tools more deeply into the Unity engine, providing deep cross-services. I believe this will make Unity itself an increasingly attractive opportunity for people to build great content, whether that's a game, something for digital twins, or in movies and entertainment. I believe that adds to expansion, as well.
John Riccitiello, CEO
And there is wonderful financial math behind it. You are right, there are many explicit linkages between our create and operate tool sets, and there will be numerous explicit connections between this collection of tools, the core Unity engine, what we have in SpeedTree, what we have in Parsec. What we've been trying to build is a platform—it's largely there now—where we can hook them with Parsec on a communication service, linking them to voice, multiplayer functionality when running a game. We can connect them to the engine, even while they work on their first visual representation of their project. We can integrate them in many different ways. At Unity, it almost always seems the same: they start as experimental customers doing not a lot, then we get them inside, they do a lot more, and then they do even more by writing larger contracts or moving more of our services into play. It’s a common strategy we have—land and expand is endemic at Unity. There's so much information here around common data formats, which may not sound like a big deal, but to our customers, it's a massive deal.
Matthew Cost, Analyst
Great. Thanks everyone for taking the questions. I guess just thinking about these tools—what is the level of investment in time and R&D that's necessary to get the tools ready to license out? Also, how will those tools work on real-time and interactive applications since those are so core to what Unity brings to the table? Second, on the operate side, it's obviously a tumultuous time in the ad markets. Anything you can add about the puts and takes driving the slight uptick in growth sequentially in Q3? Thanks.
Marc Whitten, SVP of Create Solutions
Yes, there are two factors there. First off, obviously, it's the intent to acquire. We're getting through closing, getting the teams together, and doing a lot of planning. So we'll have a lot more to discuss about our future roadmap upcoming. One of the most fundamental discussions we've had internally regarding our creation strategy was the fact that we have a pipeline. Each artist’s definition is overloaded—it depends on different types of artists, their sophistication levels, and the specialties. Individual tools do not function appropriately if they do not work together—if they don't share common data models, it can be very complicated. However, the win we achieve from starting with a foundational technology like Weta Digital is that all of these tools are already well-integrated, working within a common data model. This makes it ideal for cloud migration. We've invested a lot of time understanding what moving it to the cloud entails and how we can ensure the right detail management and decimation, as well as other technical aspects to ensure these assets can be used on mobile platforms. More to come on our plans as we proceed, but this offers an incredible foundation to build on with a consistent pipeline.
John Riccitiello, CEO
So on the Operate side and particularly related to monetization, it would be remiss of me not to tell you that outside of monetization, the rest of our Operate stock is working extremely well, representing a broad spectrum of our Operate portfolio. So we feel really good about our business there. However, specifically about Operate, something topical right now for investors is that you've seen some quarterly results where certain companies pop up as winners and some don’t, based on the roll-out of changes introduced by Apple through IDFA. Something I've highlighted for a long time is that Unity benefits from a very unique dataset driven by over 3 billion Monthly Active Users in our analytics platform and hundreds of millions in our in-app purchase platform. I want to introduce a point that most of you might think is obvious, but I want to emphasize it again: Most ad networks are driven by the identity of individual users interacting with applications. Ours is not; it relies on understanding contextually where they are, what they've done, and predicting their next steps based on AI models driven from the 50 billion-plus data points we adjust per day. We've implied this in our call almost a year ago: When we were discussing the early impact of IDFA, we believed it would give us a relative competitive advantage thanks to our alternative approach to monetization. It has played out as we expected—the changes negatively affected businesses dependent on individual identity while we became relatively stronger based on our approach. So I would argue that the puts and takes boil down to this simple thesis: ours is a better way to monetize even absent the changes introduced by Apple regarding IDFA and privacy. On a relative basis, we gained an advantage over all those who utilize personal identity and connection.
Matthew Cost, Analyst
Great, thank you.
Brent Bracelin, Analyst
Thanks, Dave. The question here, I guess, John, I wanted to go back to the discussion we've had in the past regarding the technical product and thinking about addressing a larger consumer opportunity—a prosumer opportunity. My questions here are whether SpeedTree, Parsec, and now Weta Digital put you closer to the artist and thus to the consumer. Is there an opportunity to democratize some of Weta's functionalities into the consumer space, or should we think of Weta more as a more technical up-market solution?
John Riccitiello, CEO
You've spoken to my id, my inner secret mind with that question; thank you for that. I'll do my best to answer. Yes, there's a massive opportunity there. While we are not going to disclose everything we have planned today, we have many plans here. We are firm believers that Unity has a future with 100 times more users than we have today. We work step by step, inch by inch to prepare ourselves. Think about what Unity Reflect is or Unity Forma. One is a construction application, and the other targets shopping and configurators. If you want to build a car configurator with Unity, you needed to find a team of people who've spent years learning Unity, and our pull-down menus are nested within a dense complexity that has a level of fidelity brilliant enough if you'd studied at Carnegie Mellon. We own that market due to this fidelity. What we refer to as Runtime Applications consists of five buttons, and with those buttons, you get most of the features that high-fidelity programmers would otherwise require some time to achieve. Our future lies in balancing simplicity with performance. This simple understanding will remain the guide on the other side of my pillow; we strive to achieve this relentlessly. Now, the gap in our portfolio is something we've recognized for a while; we just didn’t have an answer for it. The world changed when we went home in February 2020. All of us ended up home. The biggest change seen in how we work since the 1950s caused this shift. Parsec brings us extreme high-fidelity capabilities, enabling people to work from anywhere, achieving their targets seamlessly. Watch this space. Unity, power, simplicity, and a much larger user base—all stitched together through our platform, driving net expansion on the back-end. I feel like I could easily rewrite our S-1 around that!
Brent Bracelin, Analyst
Already, John. It sounds great. Rich, you've clearly conveyed interesting ideas, and it seems like you have some plans here for the future; it's good to hear that Weta is part of the consumerization opportunity in the longer term. Thank you.
Operator, Operator
Thank you, all. We'll go to Tom for the last question.
Tom Roderick, Analyst
Okay, perfect. Happy to ask the last question. I guess I will give you all a gold medal in controlling your narrative. It took 51 minutes to even talk about IDFA. I applaud the big picture here. But I think that also speaks to the interest in the bigger picture from investors and from everybody on this call, right? It's not about what happens next quarter or even in 2022; it's really about what's happening beyond that. So John, if I take a step back and think of some of the big statements you've made—that only 2% of the world's content is made in real-time 3D today, and that 50% of all that's built on your platform—the idea that 2% can rise to a 50% number within 10 years in terms of content. I'd love to hear your large-picture thoughts on what will create those accelerators. It doesn't seem like just a linear function. Perhaps Weta is a big part of that, compiling more tools onto your platform. But maybe it’s a forcing function, with VR and AR driving the next iteration of what those tools should look like. Or perhaps it's really just consolidating more tools onto your platform that create this adoption factor that suddenly takes off. Can you give us your sense of when we get to this point of critical mass and what's the big-picture forcing function?
John Riccitiello, CEO
The more tools on our platform doesn’t change the trajectory of moving from 2% or 3% to 50%. What that does is change Unity's take rate. We've doubled our revenue in 24 months, but we haven't doubled our market share in the same time. We're increasing our take rate as we progress, and there's an incredible amount of take rate in front of us. I could elaborate on that another time, maybe with a postcard. But to speak to your question on the catalysts for moving that 2% to 50%, it requires two conditions we successfully met. The first was the necessary hardware infrastructure globally—the available compute, transport capacity, which aligns with 5G networks supported by strong players like Gen Center and NVIDIA. The required hardware that can deliver high-fidelity, real-time 3D at scale is now available. Interestingly enough, a year ago, we were one of the few hyping up the transition to becoming real-time interactive. Now, there's an eco-system away of companies allocating massive budgets toward the metaverse—who isn't embracing it? If you're a mega-cap company, your investments likely reflect that. The second factor required was the simultaneous emergence of a herd seeking to capitalize on opportunities—many industries and companies are now generating excitement around this concept. I couldn't be happier that they are joining us in shaping what the future will look like. We are organized to step forward, and it has been my pleasure. I've never had more fun at work than in the present moment. I'm incredibly optimistic about the prospects for Unity as we ride this rising tide linked with the shared infrastructure these companies will continue to erect around us.
Operator, Operator
Thank you, everyone, very much. Sorry we couldn't get to everyone. We're calling you all back later on tonight, so you'll be able to chat with us directly. We tried to get through many, but we had so much good news to talk about that it used up a lot of time. We'll see you on our next earnings call. Thank you very much, and have a good rest of your week and the next few months.
John Riccitiello, CEO
Thanks, all.
Operator, Operator
The recording has stopped.