Unity: Customer communication has improved, operational improvement expected in the second half of the year (1Q24 conference call minutes)

The following is the summary of the first quarter financial report conference call for $ Unity Software(U.US) in 2024. For financial report analysis, please refer to "Unity: Healing Wounds Near the End?" here 》

I. Review of Key Financial Information:

II. Detailed Content of the Financial Report Conference Call

2.1. Key Points from Management's Statements:

1. Business Highlights:

① Product Portfolio Adjustment: Unity has successfully completed a large-scale and complex cost and product portfolio reset, laying a more solid foundation for the company's future development.

② Customer Interaction: Unity's customer interaction and retention rates remain healthy, with significant progress particularly in AI tools such as Muse and Sentis.

③ Strategic Focus:

a. Plans discussed in the previous quarter remain unchanged, with current focus on engines, cloud services, and monetization business.

b. The company is committed to integrating Create and Grow businesses to better serve game clients comprehensively.

c. It is expected that growth in the second half of the year will be driven by game and industry subscription growth, and by improving the performance of monetization solutions and enhancing advertising ROI through more effective data utilization.

1. Future Outlook:

① Short-term Outlook:

a. Very confident in achieving this year's business goals as planned, based on good relationships with major clients and positive market feedback.

b. Although Unity 6 has not been released yet, it has shown unprecedented quality and signs of early launch.

c. Improvements in data and analytics are beginning to show results, with specific monetization effects expected to be seen in Q3.

② Long-term Outlook: The company's technology and services are crucial to customers. From an industry perspective, although still in the early stages, there are increasing opportunities through continuous customer interactions.

2.2. Q&A Analysts' Questions and Answers

Q: Can you provide more details on modernizing solutions and better utilizing data? What can we expect? From a product perspective, what measures are you taking to drive growth?

A: Well, in the past, we actually had two separate data science departments, which led to our work not being fully integrated. This year, with the completion of the ironSource merger, we are integrating these organizations together, including data engineering and data sciencePreviously, we did not fully utilize a lot of data, but now we are using more data to train our models. By merging, we are able to conduct incremental analysis for different datasets, including different behavioral data for iOS and Android. We have started adjusting and testing the models, and have seen some positive preliminary results. These efforts will continue until the end of this quarter, and even extend into July, in order to achieve sequential improvements in the second half of the year.

In terms of better utilizing data, there are two aspects: utilizing our existing data and obtaining more data through integrating our entire investment portfolio to enhance our competitive advantage. We are working on improving the models, implementing clear intervention measures, and the test results look encouraging, which gives us confidence in the improvements in the second half of the year.

Q: Has the total number of shares increased slightly for the full year? If so, could you briefly explain the reasons for the growth?

A: The total number of shares has increased slightly, mainly being driven by all the changes and restructuring we are undergoing, with no significant changes. The increase is less than 1%, approximately around 0.5%.

Q: Regarding monetization, could you provide more specific information, especially about the results of preliminary tests and expectations for return on advertising spend? Could you share your thoughts on the preliminary tests, the current return on advertising spend, and how you are narrowing the gap with industry standards?

A: Firstly, some test results are very positive, discussions with our partners indicate that our initiatives are having a significant impact, and some major clients are starting to collaborate with us more. These changes are influencing the shift in market share, and we are seeing some market share returning to our side. As for whether we can match AppLovin in terms of ROAS, it's hard to say, but the feedback from clients is very positive, and we believe that as we continue to promote these initiatives, we will continue to see this.

Additionally, one of our current advantages is that everyone wants to have multiple partners rather than just one, in order to maintain competitiveness. Some clients have expressed that they are willing to wait for us to catch up, and we will have their support, but we must deliver on our promises, so everyone is looking forward to us narrowing the gap and succeeding. Although we have not seen specific ROAS data yet, what we are seeing is a positive trend that will impact spending with advertising clients.

Q: Regarding the transition to the professional version, can you tell us if customers have started transitioning to the more expensive professional plans? Have you seen the expected scenarios unfold?

A: Regarding the migration from Plus to Pro, I cannot confirm if it aligns with our expectations, but the migration of customers is satisfactory, especially as some customers have upgraded to enterprise-level products, which is a better choice for both us and the customers. Therefore, in addition to our price adjustment 18 months ago, this migration of customers has also helped our net income.

**Q: About the second quarter, although we understand that you do not provide segment-level guidance, could you provide some general insights on the Create and Grow segments?Q: Can we expect growth in both parts, or will one grow while the other remains steady?

A: I do not provide specific guidance on these two businesses. However, I expect that in this quarter and for the full year, the growth rate of the Create business will exceed that of the Grow business. Although the Create business is growing faster, the Grow business will gradually improve in the second half of the year, especially after addressing some issues.

Q: How significant is the impact of the Capgemini collaboration on successful projects? Has this shortened the deployment time of products? Improved the scope of projects? How is the situation?

A: We closed the deal on April 30th. In the past nine days, we have not seen too much impact temporarily. However, I believe that, similar to other enterprise software and infrastructure companies, our business will accelerate as our partners provide our infrastructure to customers and offer customized solutions. Our solutions can visualize interactive 3D content in real-time, suitable for various scenarios. While we are confident and excited about this, because the deal just closed nine days ago, there is currently not enough data to measure factors such as the scale or duration of the deal.

Q: Is your confidence in accelerating growth in the second half purely based on the improvements you are making, or because you have seen how these improvements have changed customer behavior? If the latter, can you give an example of how these improvements have already changed how customers use the product?

A: We have not yet seen these improvements directly translate into revenue. The A/B tests we conducted show some positive signs, but the scale is not sufficient to directly impact revenue. For example, we made some improvements to the performance of playable ads, which resulted in a significant boost and sparked interest from some customers who wish to adopt this technology more widely. Although these improvements have already achieved substantial results on a small scale, we need more time to scale them up and observe their impact on revenue.

Q: I would like to know how much customers are currently willing to pay for your services, and how you consider this in your conversations with them? What does this mean for the financial markets?

A: I have been avoiding discussions about revenue sharing ratios because such discussions make customers feel like they have to give us a portion of their earnings. A better approach is to discuss how we can help customers succeed in adversity, such as by providing better games, faster development, lower costs, and faster monetization capabilities. Conversations in recent months have become more positive, as people see us engaging in a more proactive manner, rather than just talking about getting a larger share.

Q: In the past quarter, you mentioned the idea of sharing more data with customers to promote the Grow business. How have these conversations been going? Have any customers adopted it, or have there been early tests?

A: We are about to launch a product called "CoreStats," planned for release this summer. Before the product launch, we hope to stabilize it first, so I personally have not had many conversations about data sharing. However, in broad discussions, we emphasize how to help customers become more profitable, including improving ad spend and increasing monetization capabilities, where data plays a role, but more importantly, how we collaborate with customersUtilizing data for mutual benefit.

Q: Regarding Runtime fees and their implementation. Is this revenue recognized in the Grow business? I remember the company's previous plan was for customers to use Runtime fees to offset some advertising expenses. When you launched Runtime charging, is there still a similar design in place?

A: Yes, that is confirmed, this is still part of the plan. We need a source of revenue, whether it is directly based on usage fees or indirectly through the advertising platform. The key is to ensure that we can continue to invest and build an outstanding and sustainable runtime platform, whether the revenue is direct or indirect. This is not a subsidy, but a choice to ensure the platform's sustainable development for all customers.

For example, if you choose to pay for LevelPlay (formerly IronSource's ad aggregation monetization business), you do not need to pay runtime fees.

Q: Can you provide more information about CoreStats? Does this product belong to Create or Grow, or is it completely different?

A: It belongs to Create, as it is more like a service we provide to customers to help them better understand how users interact with their games, including crash data and various engagement metrics. If customers are willing to work with us to view this data, it is a benefit to them and can help them better monetize their games. We are no longer just focusing on creation and growth, but are considering game clients more comprehensively, thinking about how to create more value for them and for ourselves.

Q: Do you see different trends among customers using Create and Grow?

A: We expect to achieve synergies between the two in the second half of the year. Currently, we have not seen too much of this, but we have unique assets to achieve this goal. This is something only Unity can do, so we should expect growth in the second half of the year and in the coming years. We only reorganized in January and started to take this approach, so it will take some time to see changes in behavior. We have received feedback from the market team, and they are very pleased with Unity's move to higher-priced versions, progress has exceeded expectations.

Q: How do you assess investment opportunities? Are you satisfied with the capital allocation for each business initiative and project in the project pipeline?

A: We are very cautious in terms of investments, especially in areas that can bring returns. Our focus is on data, driving growth through investments in cloud computing and talent (data scientists). As for capital allocation, we have been buying back stocks and significantly reducing debt at a discount, gaining more capital flexibility. We will continue to evaluate our capital allocation decisions based on market conditions.

**Q: Could you elaborate on your comments on runtime fees and why there has been such a significant improvement in customer sentiment? Additionally, in terms of Grow, what are your views on the macro impact or progress of the business?**

A: Objectively speaking, sitting down with clients to discuss our contracts and runtime fees in detail, as well as the actual allocation of costs, gradually makes people realize that the situation is not as bad as they initially imagined. They begin to look at runtime fees rationally and realize that the costs depend on the type of game and monetization method. In addition, we emphasize the engineering effort we put into runtime and its importance for game performance and value. These factors help clients understand the reasonableness of the costs and lead to more positive discussions on cooperation.

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