Unity Software Inc - biggest opportunity for the game industry and the metaverse?

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Alright, let’s update this thread after a long time. Unity’s Q1 results are due next Tuesday, and I’m eagerly awaiting to see how the beginning of the year has fared. I found at least one consensus estimate that expects the loss to slightly deepen from the last quarter, with EPS going from -0.39 to -0.4.

It’s also worth noting that the realized EPS in recent quarters has been somewhat more loss-making than expected, which, if it materializes in this market environment, could still lead to a further decline in share price.

The stock’s valuation has melted down significantly, and I, for one, would potentially plan to shift into the next gear in my buying program if the Q1 results (and especially the future outlook) are good.

I’m particularly looking forward to these points:

  • Overall revenue development, but especially the development of the industrial sector. I would see that rising inflation could, to some extent, even benefit Unity. Particularly, various digital prototyping solutions, sales configurators (e.g., cars, boats, etc.), and similar solutions that reduce the need for physical demo products will become increasingly popular as production costs rise and component shortages plague the industry. Unity offers these solutions (although especially in the design sector, Autodesk and similar companies are still bigger names).

  • Are there price increases planned for licenses (e.g., rising labor costs could affect profitability if prices aren’t raised)?

  • How have recent acquisitions progressed (especially the large Weta Digital acquisition in November 2021)?

EDIT: As an addition, the latest Google trend data has apparently shown that interest in games has not diminished at all with the reopening of the world. This could also be a very positive thing for Unity’s advertising revenue.

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Yep, I’m also really interested to see what numbers appear on the board next week.

I’m curious about how much loss we’ve made this time; I’d really like to see the direction turn positive from the previous report. Nowadays, positive cash flow is a pretty big deal. :slight_smile:

What’s a bit concerning are the insider sales, at least if you look here. It’s hard for me to see anything positive in this.

https://finance.yahoo.com/quote/U/insider-transactions?p=U

There haven’t been any earnings warnings, so I would assume that the development has been in line with guidance and no surprises are expected. If the numbers are even slightly below guidance, the slide might continue quite steeply.

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I’m afraid the same thing might happen here as with many other loss-making companies – as soon as the next report comes out confirming that the “profit” stage in the multi-phase plan has not yet been reached, institutions will dump shares hand over fist. And at that point, it doesn’t seem to matter how well forecasts were met or how revenue develops.

For those playing the long game, naturally a potential buying opportunity if we get an OK but still loss-making earnings report, and a nice -20% on the board as a thank you.

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I agree with Jarnis. In the current market, money is being pulled from loss-making companies and those that only promise returns in the future. Only a truly big, surprising hit could prevent massive sell-offs.

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Alright, the results are out and it was a tough ride, at least in the aftermarket (Jarnis’s guess was even on the low side, and it looks like about -29% is coming from this :D). On the other hand, this opens up some pretty good buying opportunities if you believe in the case in the big picture. I plan to add more based on this in the near future, as soon as my cash situation allows, because I think the reaction is relatively overblown (considering the recent share price drop).

This year’s result will take a big hit, but the things I’ve been expecting in the big picture are progressing, and the case looks really good for a long-term investment (assuming the ad system issue can be fixed).

Option compensation continues to be a major drag, and there was a loss (though this was expected):

  • Revenue was $320.1 million, an increase of 36% from the first quarter of 2021.
  • Basic and diluted net loss per share was $0.60, compared to basic and diluted net loss per share of $0.39 in the first quarter of 2021.
  • Basic and diluted non-GAAP net loss per share was $0.08, compared to basic and diluted non-GAAP net loss per share of $0.10 in the first quarter of 2021.

Large accounts are growing well:

  • There are already 1083 customers generating over $100,000 in annual revenue (+29% YoY).

A major product bug impacts this year’s results:

  • An estimated $110 million impact on this year’s results due to a product issue (60% of which will come in Q2) - more on this below. This also lowered Q2 growth forecasts to 6-8 percent and full-year forecasts to 22-28 percent.
  • As a result, a $100 million savings program will also be implemented, with the first profitable quarter expected in Q4/22.

Unity’s advertising system apparently had a massive bug, which prevented ad targeting from working as it should. On top of this, bad data from a large customer’s system apparently got in, which made optimization and so on difficult.

  • Although the revenue impact is significant, not a single customer has been lost!
  • Ad revenue has only been lower because the system could not meet the customer’s target numbers (cost per install, etc.) due to the bug.
  • This has at least a temporary significant impact on results, and I would say that the hit the stock took was specifically due to this.

Below is a quote from the conference call (transcript link).

Following years of rapid growth and working through the challenges of Apple’s privacy changes, we got hit hard by two issues. The first was a fault in our platform that resulted in reduced accuracy for our Audience Pinpointer tool, a revenue expensive issue given that our Pinpointer tool experienced significant growth post the IDFA changes.

The second is that we lost the value of a portion of our data, training data due in part to us ingesting bad data from a large customer. We estimate the impact to our business of approximately $110 million in 2022 with no carryover impact to 2023

The Create side is doing great: growth of 65%.

  • Especially the growth I was expecting in industrial digital twin, etc. solutions now seems to be progressing very well, and use cases outside of games are opening up more and more.
  • Analyst questions also mentioned that discussions about these solutions are already taking place with customers at the management team level (not just with a small developer team). This speaks volumes about a bright future.

This quarter we closed 34 deals above $100,000, up 126% year-over-year and up 13% quarter-over-quarter. Unity is being used in construction, commerce manufacturing, advanced simulation and much more. We are seeing broad-based adoption of these tools from companies like Mercedes-Benz.

  • In addition, these expand (at least with large customers) very effectively once implemented:

Lockheed Martin is a model example of land and expand in action. Our first project with them started in 2017 when they bought a few seats for design visualization. Within 12 months, they had deployed 132 licenses to develop more interactive experiences for product development. Five years later Lockheed has nearly 500 licenses across nine business units for multiple use cases including simulation, training and guidance and collaboration.

EDIT: here are some other highlights:

  • Unity’s new cloud solution (I’m not familiar with this in more detail but it allows games to be run from Unity’s cloud) has seen REALLY strong demand. Over 90% of beta customers registered for the program have adopted it.

Unity’s Gaming Services or UGS going into general availability by July. UGS is our self-serve cloud platform that enables developers to operate and optimize their games and includes our multiplay business. Since its beta launch in October, we’ve seen more than 74,000 organizations sign-ups with over 68,000 completed, which is more than a 90% conversion rate. And we already see that 30% of those new users, are leveraging multiple products within the system. We are encouraged by these early adoption signals and feedback from our customers.

  • Weta Digital (Weta digital) integration is progressing, a cloud solution for more efficient rendering is also under development.
  • Ziva Dynamics’ (Ziva dynamics) beta (Ziva Faces) has seen really strong demand.
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Yeah, that -20% hit was rough and didn’t predict the 100+ million in extra losses from a software bug in the advertising systems… But fundamentally, the main reason people are dumping the stock with a backhoe is that the first profitable quarter is now only predicted for Q4 2022. “Loss-making software company” is currently akin to nuclear waste in the market… :grimacing:

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Unity is making acquisitions and the market doesn’t seem to be taking it well.

https://www.marketwatch.com/story/ironsource-rallies-on-deal-to-be-bought-by-unity-software-2022-07-13

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I wonder if the decline is due to the full-year revenue forecast being lowered at the same time.

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Do you have news about this, as I haven’t come across it. That would explain the reaction well.

Edit: Well, I found it when I really looked

https://www.cnbc.com/2022/07/13/unity-stock-down-on-lowered-2022-guidance-merger-with-ironsource.html

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The Q1 report mentions monetization issues and lowers guidance.

Now, a company specializing in monetization is being acquired, and guidance is being lowered even further. :thinking:

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Just one opinion from a Barrons reporter, of course, but good observations. And at least according to this, the developer side was not excited about the acquisition:

https://twitter.com/firstadopter/status/1547335497160204288?s=21&t=ZYwRK2u9CYRXJMWO9Y9m0g

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Here are some cautionary notes from Motley Fool:

And a short interview where Riccitello comments on the IronSource acquisition in his own words.

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IronSource has skeletons in the closet that don’t seem to bother investors much, but among developers, there’s been a lot of talk about it: Unity is merging with a company who made a malware installer | PC Gamer

It’s a bit difficult for me to understand the logic behind the acquisition. Unity already has similar technology integrated, and now it seems it’s being scrapped (and the developers were apparently fired just in case?) to integrate a new system in its place. It might succeed, but the growing pains are guaranteed.

The inconsistency and the CEO’s track record are not convincing.

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What news is the basis for the stock’s recent spectacular rise?

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Regarding guessing when interest rate hikes will subside? Someone could also expect a de-IPO (Ping Identity) or for Microsoft to buy the entire company?

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kuva
kuva1170×1327 112 KB

When you put a massive surge into context.

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What a prediction from me :sweat_smile:. Honestly, it’s not funny. Avg purchase price 126usd. I bought it on MotleyFool’s recommendation a while back. Their (paid) tips haven’t quite hit the mark :roll_eyes:

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