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The following is$Unity Software(U.US) 2024 Q2 earnings call minutes, financial report comments can be reviewed in "》

1. Overview of Financial Indicators

II. Management Report

1. CEO’s speech: Recent situation and strategic goals

In this next chapter of Unity’s history, we’re committed to innovations that have a meaningful impact on our customers and communities.Our next-generation engine, Unity 6, will be released this fall.We are confident that this will be the most stable and best performing version yet. Our debut in May has already attracted a lot of developers, and Unity 6 will be the driving force for our growth for many years to come.

As for the advertising business, we have been told by customers that there have been some improvements in our products, including affiliate advertising and mediation platforms. We plan to rebuild the machine learning stack and data infrastructure to achieve better product results. We are designing a more agile, more conducive to continuous innovation and lower cost infrastructure, while also making it easy to integrate data from our different products to unlock greater value for our customers.

We are also bringing in more global talent to help accelerate the transformation of our advertising business.Today we are pleased to announce that Jim Payne has joined as our new CPO for our advertising business. He is familiar with product design and advertising business, and understands how publishers can expand their revenue better than anyone.

In July, another senior advertising expert, Alex Blum, will also join Unity as SVP. We still have great growth opportunities in the field of mobile marketing, and the addition of these two people will help us seize this opportunity.

Our entire team has faced challenges from companies with the best technology from all over the world. But we play a unique role in the entire ecosystem, with a place in mobile interaction, 3D, games, AI, data and digital advertising.

We will deliver our long-term value through better execution, faster product innovation, and a renewed focus on our customers and communities.

2. CFO Speech: Financial Performance

(1) Income:Strategic portfolio revenue in the second quarter was $426 million, down 6% year-on-year, compared with the previous guidance of $420 million to $425 million.

a. Create revenue was 129 million, up 4% year-on-year. The growth was dependent on the 14% growth of subscription revenue, mainly benefiting from price increases and package upgrades. It decreased by 2% month-on-month, mainly due to the decrease in strategic partnerships and professional services.

Non-gaming revenue is our fastest growing revenue business, growing 59% year-on-year in the second quarter and contributing 18% of overall Create revenue, up from just 12% in 2017.

b. Grow's revenue was 296 million, down 9% year-on-year and up 1% quarter-on-quarter. We are quite satisfied with the quarter-on-quarter growth after two consecutive quarters of decline, mainly due to product improvements and seasonal characteristics.The decline was still due to pressure from the monetization business, which offset the strong growth of Aura.

(2) Profit:Total GAAP net loss was 126 million, a 35% improvement from 193 million in the same period last year. Adjusted EBITDA was 113 million, a 29% increase year-on-year, and the guidance was 76.5 to 80 million. This was mainly due to our continued reduction of operating expenses and expansion of gross profit margin. Non-GAAP gross profit margin in the second quarter increased from 81% last year to 84%.

The increase in gross margin comes from cost control and changes in product structure, as well as adding more cloud capacity to train our machine learning models.

We will continue to strategically manage operating expenses, deciding which expenses need to grow, which remain stable, and which continue to shrink. Ultimately, Non-GAAP operating expenses decreased by 21% year-on-year, and the proportion of revenue decreased from 63% to 59%. Adjusted EBITDA margin reached 25% this quarter, an increase of 850bps year-on-year.

(3) Cash flow:Free cash flow in the second quarter was 80 million, a year-on-year increase of 137%, and cash and cash equivalents were 1.3 billion at the end of the quarter.

(4) Shares:The total number of potentially diluted shares was 476.5 million, down slightly year-over-year. Our previous guidance was 480 million.

(5) Outlook:

a. Third quarter outlook:Strategic portfolio revenue was 415-420 million, down 4%-6% year-on-year. However, engine subscription revenue in Create was able to maintain double-digit year-on-year growth. Grow business will take longer to recover.

Adjusted EBITDA for the third quarter is RMB 75-80 million, including the need for additional investment to strengthen the Grow business.

b. 2024 Full Year Outlook:Strategic portfolio revenue was 1.68-1.69 billion, down 2%-3% year-on-year, and the original guidance range was 1.76-1.8 billion. This was mainly due to the recovery time of the Grow business, so the impact was carefully considered. However, the engine subscription revenue in Create was able to maintain double-digit year-on-year growth.

annualAdjusted EBITDA is 340-350 million, and the original guidance was 400-425 million. In order to reduce the impact of reduced revenue, we will save another 5-15 million in cost expenditures to ensure higher overall monetization efficiency.

c. Share Outlook: The total diluted share count is expected to be 488 million shares by the end of the year, a decrease from 492 million shares at the end of last year, reflecting an annual dilution rate of 2%.

3. Analyst Q&A

Q1: Regarding the advertising business. You mentioned in your shareholder letter that you want to rebuild the machine learning and data stack. Can you describe to us a clearer growth blueprint and framework? Is the reconstruction a potential long-term and continuous process? What are the priority investments?

A: We have been accelerating the development and launch of advertising-related products. We have integrated multiple advertising support units on the intermediary platform. We have also made many revisions to the model and received positive feedback from customers, which encourages us to move forward.

At the same time, we also feel that we need to do more basic work, such as the machine learning and data infrastructure stack mentioned in my letter. Because if we have differentiated basic technical capabilities, it will help us win in the long run, so we are very excited about the opportunity, will put it into practice soon, and look forward to the positive impact it will have later.

Q2: Regarding Create's growth guidance, can we assume that Create's business growth can also achieve double-digit growth in the medium term?

A: I'm talking about the double-digit growth in subscription revenue in the Create business. As you know, Create consists of three businesses: subscription, professional services, and strategic cooperation.

Professional services and strategic collaboration will continue to be volatile, with strong Q1 and weaker Q2, subject to fluctuations in our collaboration agreements.So you should expect continued strong growth in subscription revenue.

I think,It’s too early to tell what 2025 will look likeWe should give Matt (the new CFO) more time (to formulate and estimate this goal). Once we have completed the evaluation, we will come back in time to share with you our expectations for next year.

Q3: Regarding the growth of Unity 6 and Create. Runtime charges will be launched with Unity 6 next quarter, which includes the potential price increase effect of Plus to Pro. How should we consider the boost to Create's revenue growth?

A: The price growth trend takes time to manifest, and it does not simply follow the package upgrade cycle.We wouldn't expect it to happen immediately in the short term, but price growth will definitely happen over time.We are currently mainly benefiting from the impact of the unified price increase two years ago, followed by price increases brought about by customers upgrading their own packages.

Q4: Regarding the Rule of 40. I saw that you used the Rule of 40 a few quarters ago. Do you still use it to evaluate business development now?

A: The Rule of 40 (the sum of the absolute values ​​of revenue growth and profit margin exceeds 40) is a very correct goal, reflecting a business with great growth appeal and good profitability, which is also the goal we have always wanted to focus on achieving.

We are focused on achieving long-term sustainable growth, both in terms of revenue and profit.But it is too early for us to predict exactly where we will be., but this is indeed what we need to focus on.

Q5: Regarding the competition with Applovin, do you think you need to modify the model to make your product more competitive? What assets do you think your advertising business lacks that will qualify you to return to the table?

A: Regarding competition, we are in a special position. We are the only company in the world that can provide technical service support for the entire life cycle of games. Customers also prefer that all aspects can be integrated into a complete solution.

In fact, we are constantly updating our models and launching new products, but at the same time, we need to make sure that we have the most modern and best performing data and machine learning technology.

Being able to respond in real time and having data advantages to take advantage of is not only reflected in the engine, but also in our ad network and three or four ad products. We have the largest database in the world and the most knowledge about videos and customers. We can use these to achieve greater value for our customers. This is very important in the long run. It is a rare and important asset and an opportunity for us.

Q6: Regarding the application of the engine in the industrial field. You said that Create is growing very fast in the non-game industrial field. How will this affect your resource investment?

A：We attract world-renowned experts to join us, and Jim is a good example. Secondly, we focus resources on accelerating product innovation, are committed to rebuilding deep partnerships with customers, and listen to the needs of partners and customers.

Q7: Regarding the adjustment of guidance. Is the downward adjustment of guidance out of caution? Is this a temporary consideration at the moment, or is it a linear development trend based on some changes?

A: As you said, we are mainly more cautious. You can see that in Q3 and Q4, we actually guided a relatively stable trend, and the difference between seasons was only a few million, which is very stable.

Mainly because we did not see much seasonal changes in the second quarter. If there were any, it would definitely be good. But we are still cautious about the recovery of the Grow business.。

In comparison, our main task at the moment is to restore our reputation and credibility in the hearts of everyone in the ecosystem, so it is more important and more correct for us to take a prudent approach to making predictions.

Q8: Regarding the growth of Create in non-game areas. You mentioned that the industry outside of games has grown by 60%, and the proportion in Create has increased. I know Jim has talked a lot about the opportunities in Industry, but I want to know if you see the continued increase and penetration of partners? Have you built a broader ecosystem by selling the Professional Services department of Digital Twins to Capgemini?

A: Thank you for your question. Yes, we are very excited about the opportunities in the industrial space and we continue to see real progress there, focusing onAutomotive, Retail and ManufacturingBut really, more broadly, 3D asset visualization across devices and platforms wherever it's most valuable - these are very broad applications. So we're seeing very strong demand.

We added a number of new customers in the second quarter, including Audi, Diageo, and the German engineering company, Bosch Rexroth. So we continue to see growth and velocity there. I'm very, very excited about it, and I know Jim is very optimistic about it, and we're fortunate to be able to leverage his expertise and continue to do so. But this business is a real opportunity for us, and we're working hard to capture it.

Q9: From the shareholder letter, it seems that the management has a new look, but I am not sure if there will be any changes in the future. So what is Unity's script to return to excellence? Do you have some confidence in the specific execution?

A: We are establishing aExecutable and responsibleThis is not the same culture that we have presented to the market in the past. We are rapidly adding top global talent and introducing new leaders to the company. We will listen better to customer needs and be more responsible. You will also see us launch more product innovations soon, and we will share our experience with you at that time.

We have been going through the restructuring process for 90 days, and we do not expect this process to take too long. However, as I said in my letter, we firmly believe that we are the only company in the world that can occupy such a significant position in such a huge market.

So, we are in a good position and I see all the elements are here:Talent, technology, assets。

Our partners want us to win in both businesses. In the advertising business, people want us to be a strong competitor. In our engine business, the same is true. We have customers who support us, we have all the parts, all we have to do is execute, and we have the confidence to execute.

Q10: Everyone is interested in Create's non-game market, and non-game revenue grew fastest in Q2, reaching 60%. But at the same time, you also mentioned that the focus should be on repairing the relationship with game customers and investing in improving advertising products. So how do you view the future development investment in non-game market business?

A: Non-gaming industry business is a natural extension of our gaming customer development capabilities. I think the two businesses are not contradictory, and some of the product improvements and infrastructure we are currently investing in can also bring benefits to the industry.

So from our perspective, I don’t think we lack enthusiasm for industry business. We have discussed industry a lot in the past.But now the focus is on execution, execute the process from product to go-to-market.

Of course, we currently have enough resources to invest in our second task, namely Industry, because this is a natural extension of our business.