Specialist
Former manager at Unity Software Inc (Unity Technologies Inc)
Agenda
- Unity’s (NYSE: U) primary Operate and Create segments and their key offerings
- Growth sustainability, noting significant TAM, gains outside gaming and macroeconomic environment
- Execution issues in Operate segment – causes and implications
- Recent and potential M&A activity
- 1-3-year outlook, noting opportunities and risks, including potential to move upmarket vs Epic (HKG: 0700)
Questions
1.
What does Unity do and how has it changed over the years to be in its current space? I think it’s evolved quite a bit since it was founded 15-20 years ago.
2.
You highlighted the couple of dozen acquisitions that Unity has made and how that’s enabled it to broaden its solution set, but I’m guessing it’s also added a fair amount of complexity to what the company does and how it’s able to execute. It seems like there are two primary business segments that Unity operates under, Operate Solutions and Create Solutions. What do those consist of? When you were talking, you oriented us very much to the Create Solutions side of the business, which seems to be where Unity started. What are the key products in the two segments?
3.
You highlighted Snap and its recent pre-announcement that over the past month or so, the macroeconomic environment has taken a notable turn for the worse. We’ve seen other companies in and around Unity’s areas of focus indicate these things in a variety of different ways, whether they’re talking about revenue outlooks or hiring plans. What impacts do you see for Unity? Obviously, the Operate segment would appear more vulnerable to some of the specifics related to advertising, as you’ve highlighted, but what about the Create business?
4.
You suggested customers will double down on Unity’s portfolio, though I’m unsure if you were talking about this broadly with respect to Unity or in terms of one of the business segments more specifically. Is your notion that because the company is a leader, it will be able to pick up share given the nature of its offerings and the broad solution sets it provides?
5.
What is the elasticity of demand for the Operate solutions? If people are seeing a more challenging economic backdrop and they’re cutting spending, where in the spectrum of priorities would you put what Unity is doing within the Operate business? Would you say that what this type of advertising represents is more or less important to advertisers? Could you see a scenario where Unity either loses or picks up market share in this segment depending on the circumstances?
6.
Unity has repeatedly said that it has prepared for and is pushing through the roll-out of iOS 14.5 and IDFA [Identifier for Advertisers] in a way that perhaps enables this category to gain overall share of advertising budgets. Is that a fair characterisation?
7.
You highlighted that given the upheaval with the macro backdrop, it would be reasonable to expect the Create segment to become more important from a revenue perspective. Operate accounted for 58% of Unity's Q1 2022 revenues and Create 36%. Do you see parity between those two? Obviously, we have the influence of the macro environment, but the company seems to have indicated a prioritisation of getting Operate back on track. Where do you see the mix going over the next three years or so?
8.
You mentioned Marc Whitten, who joined Unity a little bit more than a year ago to run the Create business after close to five years at Amazon. That’s obviously a noteworthy addition, especially when you keep in mind the acquisition of Weta, which is I think by far the biggest the company’s ever done, and it’s done a lot of deal-making. When we’re talking about the business units and products, what 2-3 things would you highlight as enabling Unity to most significantly differentiate in the marketplace? Do the answers differ between Operate and Create?
9.
One of the interesting things about Unity is that in 2021, less than one-quarter of its revenue came from the US. You’ve highlighted EMEA, 37% of revenue last year, APAC, 20%, and that doesn’t include Greater China, which was I think 15%, so it’s very diversified, as you pointed out. Would you expect the US percentage to decrease even more from this point because there’s so much opportunity and growth ex-US?
10.
You highlighted Unity’s vertical focus and how it’s broadened out. You just talked about Autodesk, which I know does a lot of different things but has a fair amount of overlap. How would you break down Unity’s revenue in percentage terms across gaming, media and entertainment, edtech and industrial? Those may be the big four, assuming there are other categories that wouldn’t fit under them.
11.
I think people were shocked when Unity talked about a couple of operational issues coming out of the Operate segment in recent months. It talked about essentially reduced Pinpointer accuracy and the loss of some important training data from a large customer. To generalise, this had a very significant impact on results, outlook, perceptions and sentiments around the company and its ability to execute. What are your thoughts on these two issues that came out earlier in 2022? What’s your take on the broader implication that Unity has been growing really fast, having done two-dozen acquisitions, and taken its eye off the ball in terms of running the business so that these issues wouldn’t arise?
12.
As I said, both of the operational issues arose in the Operate segment, which is presumably already under some pressure, as we talked about, from the macro environment, IDFA and from a lot of competition. I think it’s fair to say that that business has a lot more competition than the Create side of things. I could argue that AppLovin, Digital Turbine and IronSource are significant competitors that are more focused on this area than even Unity is. How would you say Unity stacks up and will be able to compete with this set of circumstances? Will it be very, very hard, and do you expect it to lose significant share here? How do you see the next couple of quarters playing out in particular?
13.
Unity’s major competitor on the Create side is Epic with Unreal Engine. It seems there’s a bifurcation of the market, given Epic’s focus on AAA games vs Unity’s focus on smaller games, as you mentioned. I came across a stat recently that said 72% of the top 1,000 mobile games are made on Unity’s platform, and I think that percentage has been increasing. It seems to have done a great job in A and AA games, but you mentioned the aspiration to move upmarket. How serious is Unity about that? Does it need to do more deals to make this more of a viable possibility? How do you see this playing out over the next three years or so?
14.
I imagine that big game developers and publishers don’t like paying one of their competitors, ie, Epic, to use its platform. I’m guessing they’re looking for alternatives, and it’s just a matter of whether Unity can step up and provide the platforms and tools necessary to build, scale and maintain games of this size. Is that a fair characterisation, or am I reading too much into it?
15.
Unity’s revenues rose 40-45% annually on a very consistent basis in 2019-21. What were the key drivers of this growth? Was it simply the combination of end market growth and the acquisitions? Were market share gains part of this?
16.
Unity has indicated that it will sustainably grow revenue at or above 30% per year. Last I checked, expectations are for growth in 2022 to be 25-26%. How may the company think about this? How important is it for Unity to meet the 30% growth goal? Given the macro pressures and issues in the Operate segment, is it willing to sacrifice 30% growth in 2022 to build more successfully for the further-out years? Expectations are for more than 30% growth in 2023 and 2024.
17.
I think a lot of people would be surprised about the number of deals Unity has done and that you expect the company to continue to be aggressive, especially as prices have been coming down. Are there any particular areas or types of companies that you think Unity should be looking at given the opportunities available?
18.
What are your thoughts on CEO John Riccitiello’s management approach and style given recent developments? I think he’s well-known in the gaming industry and thought of as a pioneer or leader. How do you think he’s been running Unity?
19.
Unity added a new CFO a little bit more than a year ago, Luis Felipe Visoso. What are your thoughts on him joining and what he brought to the company?
20.
Is there anyone else you’d highlight on Unity’s management team? You dropped a couple of names over the course of this Interview in terms of people running Create, for example.
21.
Given what’s gone on in the markets related to Unity, I think there are substantial questions about the company’s ability to continue to attract and retain talent. Do you see this ability being shaken, given what we’ve seen from the stock price or from how the company has executed? How could this evolve?
22.
What’s your outlook for Unity over the next three years? What do you see as its biggest opportunity and risk?
23.
Could Unity add a COO-type person, if for no other reason than to communicate externally that it’s focused on tightening up and improving operational execution? Would this make sense to you?
Gain access to Premium Content
Submit your details to access up to 5 Forum Transcripts or to request a complimentary one week trial.
The information, material and content contained in this transcript (“Content”) is for information purposes only and does not constitute advice of any type or a trade recommendation and should not form the basis of any investment decision.This transcript has been edited by Third Bridge for ease of reading. Third Bridge Group Limited and its affiliates (together “Third Bridge”) make no representation and accept no liability for the Contentor for any errors, omissions or inaccuracies in respect of it. The views of the specialist expressed in the Content are those of the specialist and they are not endorsed by, nor do they represent the opinion of, Third Bridge. Third Bridge reserves all copyright, intellectual and other property rights in the Content. Any modification, reformatting, copying, displaying, distributing, transmitting, publishing, licensing, creating derivative works from, transferring or selling any Content is strictly prohibited