Unity Software Inc. Q4 FY2024 earnings call

Management Statement and Operational Highlights

• Advertising Business: Announced migration of Unity Ad Network to Unity Vector, starting end of Q1 2025 with phase one complete by Q2 2025. Vector leverages data from the Unity ecosystem with self-learning AI models for deeper insights, improved targeting, and real-time adaptation.
• Create Business: Customers responded to cancellation of runtime fee and launch of Unity 6, with 15% y-o-y growth in subscription revenues. Unity 6 had 2.8M downloads since launch and 38% of active users upgraded. Industry segment growth strong with new customers like Toyota and Raytheon.
• Financial Performance: Q4 2024 revenue $442M (exceeded guidance), adjusted EBITDA $106M (23% margin). Full-year adjusted EBITDA $390M (21% margin). Free cash flow $286M in 2024.
• R&D and Capital Allocation: Focus on R&D for high-impact initiatives, aim for margin expansion, and prudent capital allocation with deleveraging and reducing stock-based compensation dilution.

Segment Performance

• Create Segment (Developer and Industry Growth): In Q4 2024, subscription revenues grew 15% year-over-year. Unity 6 was sampled at a higher volume, with nearly 38% of active users upgrading and 2.8 million downloads since launch. The industry segment revenue grew 50% in Q4, with significant new customers like Toyota and Raytheon. Create solutions revenue from the strategic portfolio was $139 million in Q4 2024, up 9% year-over-year.
• Grow Segment (Advertising Business): Q4 results exceeded expectations driven by strong holiday demand and improved ROI. Grow solutions revenue from the strategic portfolio was $303 million in Q4 2024, up 2% year-over-year. The migration of Unity Ad Network to Unity Vector began at the end of Q1 2025 with phase one complete by end of Q2 2025, leveraging AI for deeper insights and better targeting.

Guidance

• Q1 2025: Total revenues expected $405M-$415M, adjusted EBITDA $60M-$65M. Prudence around timing of revenue lift from Unity Vector transition. Transitioning to quarterly guidance in 2025 due to rapid change in Ad business.

Risks

• Vector Transition: Iterative nature of Vector migration means benefits won't be immediate; caution needed around time to mature the product at scale.
• Competitive: Competition in advertising and industry segments, including new entrants like Microsoft and OpenAI, poses challenges.

Question and Answer

• **Q: Breakdown of Q1 guide reduction?

A: Prudence around timing of revenue lift from Unity Vector transition, big product rollout taking time to take root at scale.

• **Q: Create subscription growth without price increase impact?

A: Prior price increases flowing through, reconnection with customers leading to more deal velocity.

• **Q: Time line for Grow Solutions rebuild?

A: Migration to Unity Vector begins end of Q1 2025, phase one complete by Q2 2025, iterative process with focus on conversion, player matching, and bidding.

• **Q: Vector addressing ML stack and data infrastructure issues?

A: New model provides more detailed insights, faster processing, real-time features, expected to outperform old model over time.

• **Q: Vector integration with data sources and verticals?

A: Incorporating 5B+ DAU player data, bullish on e-commerce and other verticals leveraging gaming audience insights.