Unity stock surged 30% on Thursday. CEO Matthew Bromberg emphasized Unity's strong Q4 performance, with revenue and adjusted EBITDA surpassing guidance. He highlighted the 15% year-over-year growth in subscription revenues and the 50% growth in industry revenue, which is Unity's fastest-growing subscription business.

Management View

• Bromberg introduced Unity Vector, the company's new AI-powered ad platform, designed to improve targeting precision and audience scale. The rollout will begin at the end of Q1 2025 and is expected to be completed by the end of Q2 2025. He noted the iterative nature of the rollout and urged patience in seeing its full impact.

• The cancellation of the Runtime Fee in conjunction with the launch of Unity 6 has driven customer reconnection and accelerated renewals. Unity 6 adoption is progressing well, with 38% of active users already upgraded and 2.8 million downloads since launch.

• CFO Jarrod Yahes reported Q4 revenue of $442 million, exceeding the top end of guidance by $15 million, and adjusted EBITDA of $106 million. Yahes noted the sequential improvement in dollar-based net expansion and customers generating over $100,000 in annual revenue.

• Yahes outlined plans to prioritize R&D for high-impact initiatives, expand margins, and improve free cash flow. He highlighted the company's robust $1.5 billion cash balance and the reduction of debt by $415 million during the year.

Outlook

• Q1 2025 revenue is projected between $405 million and $415 million vs. consensus of $440.07M., with adjusted EBITDA guidance of $60 million to $65 million. This reflects prudence regarding potential disruptions from the Unity Vector rollout and seasonal factors.

• Yahes highlighted that Unity will now focus on quarterly guidance due to the rapid transformation in its ad business. He confirmed that price increases in the Create segment will roll out gradually through 2025 and 2026.

Financial Results

• Unity Software Inc press release: Q4 GAAP EPS of -$0.30 beats by $0.07.

• Revenue of $457.1M (-25.0% Y/Y) beats by $23.63M.

• Revenue from strategic portfolio was $442 million, compared to $423 million, up 4% year-over-year.

• Create Solutions revenue was $152 million, compared to $290 million in the fourth quarter 2023.

• Grow Solutions revenue was $305 million, compared to $319 million in the fourth quarter 2023.

• Adjusted EBITDA was $106 million, with a margin of 23%.

• Net cash provided by operating activities was $112 million.

• Free Cash Flow was $106 million.

Q&A

• Matt Cost, Morgan Stanley, questioned the Q1 revenue guidance and the split between strategic and non-strategic revenue. Bromberg clarified that the guidance reflects prudence surrounding the Unity Vector transition. CFO Yahes added that the majority of the conservatism is linked to the ad business transformation.

• Gili Naftalovich, Goldman Sachs, asked about Unity 6 adoption and pricing contribution in 2025. Bromberg stated that adoption is tracking better than expected, with a focus on stability, performance, and customer-friendly pricing.

• Parker Lane, Stifel, inquired about the industry segment growth and pipeline. Bromberg highlighted the 50% growth rate and emphasized Unity's focus on auto, retail, and manufacturing verticals, supported by reseller partnerships.

• Andrew Boone, JMP Securities, explored advertising opportunities beyond gaming. Bromberg noted the potential in e-commerce and other verticals, citing the scale of Unity's audience as a key advantage.

Sentiment Analysis

• Analysts expressed cautious optimism, with recurring questions about the Unity Vector rollout and its impact on the ad business. Concerns centered on the transition timeline and potential disruptions.

• Management maintained a confident tone, emphasizing product innovation and operational improvements. Bromberg frequently highlighted Unity's unique platform capabilities and long-term growth prospects.

• Compared to the previous quarter, analysts appeared slightly more focused on the competitive landscape and the execution risks associated with Unity Vector. Management's tone remained consistent, with a focus on transparency and strategic clarity.

Quarter-over-Quarter Comparison

• Revenue guidance for Q1 2025 reflects a more cautious approach, compared to the raised full-year guidance provided in Q3 2024.

• Strategic focus shifted further toward AI-driven innovation, with Unity Vector now positioned as a key growth driver.

• Analysts maintained their focus on pricing, adoption metrics, and the competitive landscape, similar to Q3. However, questions about non-gaming opportunities and cross-vertical expansion gained prominence.

• Management's confidence level remained steady, supported by strong financial results and progress in product innovation.

Risks and Concerns

• Management acknowledged potential short-term disruptions in the ad business during the Unity Vector migration, emphasizing the iterative nature of the rollout.

• Analysts raised concerns about the competitive landscape, particularly regarding AI advancements and new market entrants.

• Seasonal demand fluctuations and incremental cloud costs for Unity Vector were highlighted as factors affecting near-term margins.

Final Takeaway

Unity's Q4 2024 results underscore strong execution, with revenue surpassing guidance and subscription growth accelerating. The launch of Unity Vector and Unity 6 represents significant strategic steps to enhance long-term competitiveness. While management has expressed confidence in these initiatives, the iterative nature of the Unity Vector rollout and the competitive environment present short-term challenges. Investors should monitor adoption rates, advertising revenue trends, and the impact of price increases in the coming quarters.